Q3 2022 Advanced Drainage Systems Inc Earnings Call
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Good morning, ladies and gentlemen, and welcome.
Advanced drainage systems third quarter fiscal 2022 results conference call.
My name is schizophrenia, and I will be 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. If you have a question at this time. Please press star and then the number one key on your Touchtone telephone.
I would now like to turn depression, Jason over to your host for today's call Mr. Mike Higgins, Vice President of corporate strategy and Investor Relations. Sir you may begin.
Good morning, everyone I'm here today, with Scott Barbour, our president and CEO and Scott Cottrill, our CFO .
I'd 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.
Copy of the release has also been included in an 8-K submitted to the SEC we.
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 Scott Barbour.
Thank you, Mike and good morning, and thank you all for joining us on today's call.
We achieved a record $715 billion in sales in this third quarter, an increase of 47% compared to the same period last year sales growth was driven by both pricing and volume at ABS in infiltrator construction.
Construction market type volume increased double digits in the third quarter with particular strength in the nonresidential, new residential and infrastructure end markets.
Agriculture sales were down just slightly driven by the strategic decision. We made earlier this year the service commercial market scenarios, where we experienced material and labor shortages.
This came at the expense of growth in the agriculture market, but importantly, we achieved favorable pricing in this market. The material availability issues are now behind us and we can again begin to start the work of growing our agricultural market share as we successfully did in FY 'twenty and FY 'twenty one.
Infiltrator sales increased 51%, primarily due to favorable pricing as well as as well as a slight volume increase with strong growth in the southeast and southern regions of the United States.
Roy Moore and the entire team at infiltrate or doing a great job managing record levels of demand working through material price and availability availability issues, while achieving record production levels in their factories installing new capacity in executing the jet polymer acquisition this past quarter.
Additionally, international sales increased 23% this quarter with growth in each of the businesses, Canada, Mexico and exports not only were we able to execute price and volume gains in these markets, but we also began importing large volumes of pipe products into the northeastern Canada and into Texas for men.
Sicko to improve service levels to customers and reduce our backlog levels.
This past year is the first time <unk> has meaningfully use these international facilities at scale to supplement domestic production for U S. Customers. This is a competitive advantage for ABS and demonstrates the scale and capacity, we can bring to our distribution partners and customers.
I want to take this opportunity to also thank the avs nipple trigger employees for their outstanding work in a really challenging environment. The majority of our employees are in manufacturing transportation and sales roles I cannot say enough to give credit to these folks executing at a high level in this environment of dynamic pricing.
<unk> high production rates and high rates of transporting our goods, while dealing with all kinds of disruptions and labor shortages.
Our backlog at 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 overall the demand environment remains very favorable and our leading indicators point to continued strength for the foreseeable future.
To that end, we have continued to invest in expanding our capabilities with production coming capacity coming online at both Acs and ample trader this fourth quarter.
New equipment will modestly benefit production in the fourth quarter with a larger impact that will be realized in FY 'twenty three.
Infiltrator capacity comes online, we'll have a more significant immediate impact and these investments will allow us to bring down the high levels of backlog build back inventory levels in service. The strong demand we see in our end markets, particularly in the key growth regions like the southeastern United States.
Moving to profitability, our adjusted EBITDA increased 27% this quarter, we realized the full benefit from price increases implemented over the last several quarters covered inflationary pressure cost on materials.
Transportation and labor.
This quarter, we faced many of the same challenges around labor shortages and the elevated transportation costs.
I wanted to note that the second half plan for increased profitability over prior year that we shared in November is right on track with what we communicated the price levels have caught up with the inflationary pressures. We have line of sight on the year as we have consistently communicated and reflected in our guidance rages. We took actions this past summer.
Simplify their production processes reduce our skus decreased changeovers, all to increase our production rates and these programs are working as we anticipated.
Compared to previous quarters availability of raw materials as normalize the material costs remain a little elevated overall, we are beginning to see some modest relief of material pricing as resin supplier inventories rise and availability is robust however.
However, within the manufacturing organization, we were unable to consistently operate all of our production lines. We wanted to run due to open production positions and absenteeism.
This trend continued in January though we did see modest incremental improvement as we went through the month.
So I want to turn to some other recent announcements that we've made.
In January we issued our third annual sustainability report sustainability is a core part of a D S.
The reason is water, we protect and manage water at the world's most precious resource safeguarding our environment and communities and it's the second largest recycling company in North America, we are committed to advancing quality of life and sustainable solutions to water management challenges. This year as reported includes 10 year companywide sustainable.
The goals, including our commitment to science based targets to reduce our greenhouse gas emissions and this report we furthered our commitment to reducing our environmental impact enhancing the safety of our people pretty a diverse inclusive and equitable workforce and improving the communities we touch through these new goals we.
It will reduce our absolute greenhouse gas emissions by over 40% from our baseline year, while simultaneously increasing our use of recycled plastics by nearly 100% over this same time period.
Additionally, in December we announced the acquisition of jet polymers further demonstrating our commitment to recycling as strategic M&A jet polymers is the largest supplier of recycled polypropylene to the ample trader business.
Through this acquisition, we will gain access to more recycled material to support the growing business in the southeast.
<unk> diversified.
And gain scale in the polypropylene materials for the company.
Finally today, we made two additional really important announcements.
<unk> This week, our board of directors passed a resolution that will ultimately lead to the final allocation of the remaining aesop shares to the participants.
The company contributed $325000 to the Aesop to enable the aesop to repay the remainder of the loan one year ahead of the Aesop exploration date of in March of 2023.
Scott control will discuss some additional information on the Aesop in a moment, but to me there are three key takeaways.
Preferred shares and the Aesop, we will convert to approximately 12 million common shares in April .
After this event participants will be able to diversify and manage their retirement accounts more like a typical four one K plan.
And third this transaction does not impact our adjusted EBITDA or free cash flow and is accretive to EPS beginning next year in FY 'twenty three.
Second today, we announced that the board approved a new $1 billion open market multi year stock repurchase program. This is the largest repurchase authorization, we announced to date recall do we executed a 292 million share repurchase in the May to August timeframe. This year.
And we plan to execute this program over time.
Without hindering our ability to allocate capital to our top two strategic priorities invested organically in the business to drive growth productivity safety and automation as well as to make strategic acquisitions with.
The strength of our balance sheet, our operational excellence initiatives and cash generation profile of both Ats and infiltrator gives us confidence in executing our capital deployment priorities.
This year, we nearly doubled our capital spending to $130 million to $150 million.
Executed on the acquisition of jet polymers increased the dividend by 22% and executed a $292 million of share repurchases.
So before I turn the call over to Scott This call over to Scott I'd also like to announce we are hosting an investor day on March 10th in New York. The event is available and person in person and virtually we will issue new three year targets do a deep dive of the infiltrator business and give updates on our sustained.
Ability sales and operations programs.
You have any questions about the event please reach out to us through our Investor relations team with that I'll turn it over to Scott to further discuss the financial results. Thanks, Scott on slide five we present, our second quarter fiscal 2022 financial performance from a top line perspective, we generated 47% growth year over year driven.
Price and volume at both a D S and infiltrator legacy 80 S pipe products grew 53% Allied product sales grew 33% and infiltrator sales increased 51% with double digit sales growth in both tanks and leach field products, we continued to demonstrate our pricing power with significant year to.
Price increases across each of our segments. In addition, our pipe segment experienced double digit volume growth in the construction markets this quarter.
Our consolidated adjusted EBITDA increased 27% to $176 million, resulting in an adjusted EBITDA margin of 24, 6% in the quarter Importantly, we hit the full run rate of our previously announced pricing actions in the third quarter and not only covered resin increases year over year, but also cover.
Incremental labor manufacturing and transportation costs as noted on slide five of our Q3 earnings presentation.
It is important to note that our manufacturing and transportation costs remain at elevated levels, but I want to reiterate Scotts comments, our employees continue to work hard and do a great job. Despite the day to day labor shortages, we were facing.
Moving to slide six.
We generated $94 million of free cash flow year to date. In addition to the growth oriented capital investments were making working capital was a significant use of cash year to date as we purchased raw materials and built inventory at a much higher cost compared to last year in order to support the demand we are experiencing.
While we spend a lot of time talking to investments in capex to support growth productivity and drive improved service levels. It is important to highlight that we view our investments in working capital this year the same way.
From a capital deployment perspective, we are committed to efficient and disciplined capital allocation to drive shareholder value. Our first priority for capital deployment remains investing organically in the growth of our business as we view this as the highest return and lowest risk use of our available capital for the full year.
Year, we continue to expect between 130 and $150 million in capital expenditures with the largest investments focused on future growth followed by our productivity and automation initiatives. In addition, we continue to work an active M&A pipeline. We are pleased with the recent acquisition of jet polymers are recycled.
<unk> company located in the southeastern United States, We will remain focused on staying close to our core including regional pipe capacity Allied products that fit our solutions package and recycling capacity to support the growth of the business.
Beyond our first two priorities the share repurchase authorization announced today demonstrates our commitment to a balanced capital allocation strategy and an efficient use of our balance sheet.
Finally, today's Aesop announcement is another way to show appreciation to our employees for the great work. They have done this will allow our employees to have full control over their shares one year ahead of our original plan. This transaction will result in a noncash charge of approximately $30 million to $35 million in the.
Fourth quarter of this year to reflect the additional grant of Aesop shares to our employees. There is no impact to adjusted EBITDA or free cash flow in fiscal year 2020 to.
Beginning in fiscal 2023 next year, we will replace the current aesop compensation expense with an employer 401K match program.
401, K match program will result in approximately $8 million to $10 million of annual compensation expense. It is important to point out that despite the conversion of the Aesop preferred shares to common shares this transaction will actually be accretive to our earnings per share calculation.
We plan to issue pro forma financial statements illustrating such later today after we file our Form 10-Q .
Finally on slide seven we have updated our fiscal 2022 guidance based on our performance and pricing actions taken to date order activity backlog and current market trends. We currently expect net sales to be in the range of $2 billion $675 million to $2 billion 725.
Millions of dollars.
<unk> growth of 35% to 37% over the prior year.
Our adjusted EBITDA guidance is unchanged at a range of $635 million to $665 million representing growth of 12% to 17% over last year.
With that I'll open the call for questions operator, Please open the line.
Thank you.
Minder, if we have a question at this time. Please press star and then the number one key on your Touchtone telephone.
Question has been answered all your rest your move yourself from the queue. Please press the pound key we'll pause for just a moment.
Moment to compile the Q&A roster.
Our first question is from Matthew Bouley with Barclays. Your line is open.
Hey, Good morning. This is Ashley Kim on for Matt today.
So just first with the capacity plans that you have coming on.
How do you plan to maximize utilization on that new capacity just given.
The shortages and manufacturing labor and then go to.
If you can get the product made getting the transportation capacity to deliberate.
Well I think good morning. This is Scott Barbour.
So that's a good question and I think that.
Job, one will be to the staffing and Youre right you know you're bringing new capacity you got to have people to run to run that and we've been recruiting.
Ahead of that that equipment I would say that is coming on fastest at infiltrator because some of the investments. We've made there come on first those machines are up and running now and staff. Some cases, Ashley you might move people from older less productive equipment to newer more productive equipment, but net net we're adding people.
Their same is happening in a couple of the ABS pipe plants.
We're a little fortunate in that the first two machines, we're bringing in which are going into Florida labor is a bit more available there than in some of our other other areas, but once you get that done you pushed the bottleneck to the transportation and.
I think the transportation.
It kind of works itself out.
On any given day, you could probably be shipping more of a you could get a few more trucks, but I think it kind of tends to even even out a bit. It just comes at a cost.
Inflated costs versus prior years, which is what is the most painful so.
Great. Thanks, Thanks for that color and then just for my follow up on your longer term view with your plans take Brent recycling depreciating that target for 1 billion pounds of recycled material that you kind of put out there in that ESG report, but.
But could you help us bridge the gap to getting there what would it take between scaling up material sourcing or any kind of regulatory hurdles and then maybe just some color around the eventual margin impact that you could see there.
So we'll talk a lot about this at the Investor day, but it's really going to come from three different three different things in our program that we think about.
One is you got to get the supply of the raw materials and expanding relationships with the merged expanding.
The way you the material Youll go after to kind of bring into that input stream that Jeff polymer acquisition is a great example of an acquisition that was driven by with a company that had a really nice supply of material that we we knew we could grow ROI in the team at Infiltrator New day.
Could grow that source of supply and we've said.
I think over the last what year, we send our people out much more aggressively looking for that supply and that's number. One is you got to you got to increase it a lot.
And that's feet on the street, it's acquisitions, there's a lot of step number two is you got to add capacity.
And that capacity is going to come through acquisitions like jet polymer or probably new facilities that will have to do similar to what we do in Pennsylvania, and Iowa, We have one smaller one in Ohio is smaller one in Georgia that do the processing of this material for us and then feed into.
The pipe plants.
And then number three is in the existing places where we do this where we do recycle, Pennsylvania, Iowa, Ohio, and Georgia will do add on capacity Debottlenecking of those operations to try to incrementally add their capacity. So you add that all up and.
And that's how you get to the to the extra 500 million pounds.
That's the logic that we're using.
Great. Thanks, looking forward to more color at the Investor day.
And I'll leave it there.
Okay. Thank you.
Our next question is from Jay <unk> with Baird.
Yes, good morning, everyone happened on for Mike This morning.
So first question here I guess, just I'll give you the opportunity to expand a little bit on the forward looking comments.
Oh on underlying demand.
Just an update on what you're hearing on the ground.
Our new new projects continuing to come in our conversation is getting a little more tense Orion.
<unk> and price points and things like that any incremental color there would be helpful.
Okay.
Well I would say that let's just talk about the commercial.
And what we would call the nonresidential.
We see a pace of quotes and orders coming in that are on par if not.
Maybe slightly better than what we saw over.
Over the past six months.
It's really quite quite robust in that area I would say new residential.
For both pipe and nipple trader remained very strong network. We continue to work off backlog that was pretty high for that and so the shipment rates are pretty good but you know the.
The the incoming orders and that again remained good recall that on the pipe side. We're at the very front end on land development on the backend side, we're kind of at the home completion, which I saw some some stuff from the ample trader guys. The other day, where that's lengthened out due to labor shortages that you.
To be kind of home completions occurred six to nine months now that's kind of nine to 14 or 16 months.
So we were pretty we feel pretty good about that demand and working off that backlog.
As the previous question what was it as a matter of being able to run your lines and get all those positions filled and absenteeism has not been easy here as the Covid variant has hit us.
Transportation.
As can be a bottleneck, we tend to be able to work our way through that.
But the color for the demand side I would say is pretty good if not a little bit better than what it was.
The agriculture business has been horrible weather cold in our regions.
He's got shut down now we made some choices last year not to grow that business at the rate it had been growing.
Think we got material and capacity to kind of reignite that this year. So that team is very anxious to get out there and and as is our infiltrator team with some some really good initiatives around some new territories and sales sales things, particularly in some of their active onsite.
Septic products like the Presby product line in particular, so we feel good about that.
Great very helpful. Thanks, Scott.
Secondarily and maybe just.
To level set us a little bit.
Obviously now we're at.
Realized in kind of a full rate of price increases that came in.
Like the expectations for incremental capacity to start coming online.
At the start of your fiscal 2023.
So in theory does that mean, maybe we see them in terms of your topline some added seasonality relative to the normal just because those things are going away and you start to catch up on your backlog a little bit.
Thinking about that the right way.
Q4 is a little bit difficult right to kind of make that assumption, but directionally, you're thinking about it the right way I would say more as we round the corner into the construction season and kind of that March April turning into Q1 of next year Youll kind of see that bullishness come in and we'll talk a little bit more about that at Investor day as well, but you are.
Thinking about it the right way as we.
Progress in the way the way we're thinking.
Looking about it this is Scott Scott B that was Scott.
The way, we're thinking about it is I mean, we got it.
The way, we discuss it right now.
Fourth quarter has a lot of variability in imports were really pleased with the third we got line of sight. We say you can we can lose lose the game in January February we can't win it we got to win it in March but I.
We believe that thing is going to really kind of take off as we get into late March and April from all the activity we've been seeing so.
Our our normal seasonal and shipping it all in profitability stuff is a little wacky now we think it will kind of return more normal next year, perhaps perhaps but.
I just think we had to we had to deal with what the cards. We were dealt this year and in getting that pricing up.
First six months experiencing this inflation figuring out programs to combat it.
And we got on top of it as a third of it will be on top of it in the fourth.
Understood.
I will drop off in the queue.
Okay.
Again, if you would like to ask a question. Please press the star and then the number one key.
On your touch tone telephone.
Our next question is.
Spencer Kaufman with UBS.
Hey, guys. Good morning, Thank you for the questions and nice results.
Maybe just starting.
On the first question from a prior analyst.
When do you think you're building out your revenue assumptions for next year and fully appreciating that you haven't given that out yet.
But I guess I would expect probably somewhere in that mid to high single digit range, but I don't want to take the words out of your mouth, but I guess what percentage of top line growth for next year would you expect to be from pricing versus volume and how does that compare to quote unquote normal time for you and if raw materials come down as we hope they do.
Do you expect to be able to hold onto most of your pricing.
So I'll talk to Scott. This is Scott could trail I'll talk to the last part first yes.
It's more than it's more than resident input costs, so you're right as the whole paradigm around the value that we provide it's also when you look at labor manufacturing transportation. We we don't expect these inflationary cost pressures to go away. So we're going to continue to provide outstanding service to our customers in India.
Good return there will there be some run rate benefit from the price increases we've got this year next year absolutely.
There'll be some volume increases next year as well due to capacity demand backlog absolutely.
We will get into more of that here as we move forward and talk to how things are lining up for next year, but.
But you're absolutely correct and we'll provide you more guidance with that at the Investor day as well as when we provide our guidance for next year, but directionally, you're absolutely spot on.
Okay that makes sense.
And maybe for my follow up question.
EBITDA margins were obviously pretty challenging despite inflation and supply chain disruptions and whatnot.
Also 2021, and our fiscal year 2021 was really a remarkable year for you guys.
I guess the question is how are you guys thinking about the path to getting back to sort of those high 20% EBITDA margins.
And when do you expect to see the largest improvement in margins next year, I guess, what's sort of the glide path there.
Yeah, So the way Ed.
Talk to that as well this year was about dollars right. We've talked about that and as you saw in Q3, our pricing got in front of resin labor manufacturing transportation like we've been talking about it so very happy with that.
When you look at our Q4 guidance and you look at that implied Q4 performance to get to the midpoint of our ranges. You also see the margin story and expansion coming in on a year over year basis again like we've been talking about it so.
Is there the opportunity to expand margins at a clip that would be greater than 100 basis points. We normally talk to absolutely is that next year is it the year after that don't know and don't want to pigeon hole out there, but again a lot of hard work from our employees a lot of strategies that had been effectively implemented and a lot of things still coming our way.
That are lining up.
And we expect next year to be a good year. So yes, there could be a year or a period of time, where we have some really nice margin expansion coming.
Thanks, Good luck.
Thank you that concludes the Q&A session I would now like to turn it back to Mr. Scott Barbour.
Alright, Thank you and we appreciate the people participating today and the questions, it's probably not great weather, where a lot of folks offer today and.
And I know, we're kind of watching our phones and stuff. We got a couple of plants that won't be won't have great great shipments today because of the weather and a couple of distribution yards, but we'll we'll fight our way through that but we do appreciate your participation. Many of you. We look forward to talking to over the next couple a couple of hours and.
We're now preparing for our Investor day in March.
Again, we're very excited about doing this again, we thought the one we did in FY 2018, or late 2018 was really good for us as a company and good for our Investor base and I think Theres a lot of a lot of things that we built on since that time and a lot of things that we'll be talking about that I think are relatively new to the company.
And.
Honestly, we had a lot of a lot of work over the last couple of days with our board to kind of not only report some good results.
<unk> confidence in our year, but then.
The wind down of the Aesop.
And the $1 billion share buyback, which I'm surprised no one asked us about but.
We will execute that over a different couple of over several years.
But we do appreciate it we look forward to talking to you here in the future and stay well.
Thank you for.
This concludes today's conference call. Thank you again for participating and have a wonderful day you may all disconnect.
Okay.
Yes.
Sure.
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