Q1 2023 Advanced Drainage Systems Inc Earnings Call
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 Barbour.
Thank you Mike and good morning, Thank you for joining us on today's call.
We achieved a record $914 million in sales in the first quarter, an increase of 37% compared to the same period last year say.
Sales growth was primarily driven by strong demand across our geographies and construction end markets supported by continued strength in our priority States, we saw attractive volume growth in allied products infiltrator.
And within our residential end market driven by share gains from our storm sewer pipe and onsite septic products.
Pipe volume in our nonresidential and agriculture end markets started.
<unk> slower than anticipated due to a wet spring for agriculture job site delays production limitations and difficult comps relative to the last year. However volumes improved month over month through the end of June and into the second quarter and working closely with our distribution partners.
Engineering partners and contractors to monitor market demand, we collectively remained bullish on activity through physical 2023.
Infiltrator sales increased 31% driven by favorable pricing and strong volumes as septic tanks and storm Tech Chambers growth was strong in the southern and western regions of the U S. The new production equipment installed during the fourth quarter of fiscal year 2022 at both infiltrator and ABS is producing.
The expected rates and helping to bring down elevated backlogs.
Housing growth has slowed from the previous levels Infiltrator has a good line of sight is continued if somewhat moderated growth for the remainder of fiscal 2023, given its healthy backlog and the impact of new capacity additions that will accelerate share gains.
Looking beyond infiltrator into the legacy ABS residential business performance was strong overall.
Residential sales increased 62% compared to the first quarter of fiscal 2022.
<unk> growth was robust in both our residential segments with growth related to single family and multifamily development, increasing 75% year over year.
Led by share gains against traditional materials.
Pricing and demand in single family subdivision development and multifamily development.
Our retail segment increased 40%, primarily driven by pricing.
We continue to see a strong pace of orders and sales in the residential end market and are closely watching our leading indicators with the uncertainty that exists with forward looking housing construction.
We also continued to see strong growth in our non residential end market revenue growth for the quarter was 47% and driven by strong sales of pipe and Allied products, specifically, our storm tech and <unk> product lines.
Project identification quoting and order activity remains positive and the horizontal low rise type of nonresidential projects, we participate in including warehouse distribution centers commercial and institutional projects.
Rounding out our top line performance International sales increased 9% this quarter driven by sales growth and our Mexican exports businesses.
Moving to profitability, our adjusted EBITDA increased 80% this quarter favorable pricing continued to cover inflationary cost pressures on transportation and labor as well as raw material costs, which have moderated but remained elevated as compared to previous years. This.
This is our third consecutive quarter dating back to Q3 of fiscal 2022 that we have covered inflationary cost increases in the second consecutive quarter, where we have experienced year over year adjusted EBITDA margin improvement.
Overall, our backlog and cadence of orders remain favorable as well as our ability to capture price in the market.
While there is uncertainty around the current macro environment <unk> economic environment, especially in residential construction. The momentum we're seeing in project identification quoting book to Bill and order trends gives us gives us confidence in our ability to achieve the updated guidance we issued today.
Now I want to highlight some other recent announcements.
The integration of our two recent acquisitions.
Polymer and Coltec are progressing well integration activities remain on plan and both businesses are meeting expectations is.
Previously announced in May Bob Kidder retired as chairman of our board of directors effective as of our annual shareholder meeting on July 21 2022.
Ever saw was previously selected and announced as the new Chairman of our board of directors in May and was reelected as a director at our annual shareholder meeting I am excited to continue working with Bob as chairman as we execute on the growth strategies of Avs.
We also elected Kelly gas to our board of directors at our annual meeting on July 21, 2022, Kelly brings broad financial experience from her leadership positions at Bayer as well as business strategy and commercial expertise for capabilities strengthen our board and we look forward to working closely with our going forward.
Lastly, we issued our fiscal year 2022 sustainability report. This week sustainability is a core part of ABS and we were pleased to share how we are furthering our commitment to reducing our environmental impact enhancing the safety of our people, creating a diverse inclusive inevitable equitable workforce.
And improving the communities we touch in this report with that I will turn the call over to Scott Cottrill to further discuss our financial results.
Thanks, Scott on slide five we present, our first quarter of fiscal 2023 financial performance.
From a topline perspective, we generated significant growth year over year across our business legacy Adi.
Pipe products grew 36% Allied product sales grew 54% and infiltrator sales increased 31% with double digit sales growth across our domestic construction end markets.
Consolidated adjusted EBITDA increased 80% to $299 million, resulting in an adjusted EBITDA margin of 32, 7% in the quarter.
As Scott mentioned favorable pricing continued to cover inflationary cost pressures related to our material input costs transportation and labor.
As we do not expect these cost pressures to abate. This year, we will continue to work all of the levers in our playbook in addition to pricing to improve efficiencies and optimize costs.
From a resin perspective costs have moderated a bit but they remain at elevated levels from a historical perspective price cost continues to be favorable due to the pricing actions, we've already taken and as we move through the year, we expect price cost to remain favorable.
Moving to slide six.
We generated $214 million of free cash flow year to date compared to $79 million in the prior year strong growth in adjusted EBITDA, coupled with improvements in working capital helped drive significant free cash flow generation, which was approximately 71% of our adjusted EBITDA for the quarter.
Our year to date capital spending increased 42% to $36 million as we continue to make investments to grow capacity and increase the efficiency of our operations.
From a capital allocation perspective, our priority remains focused on investing organically in the growth of our business to increase our competitive position and accelerate market share gains for the full year, we continue to expect between $150 million and $180 million and capital expenditures with our largest <unk>.
<unk> focused on future growth, followed by our productivity and automation initiatives.
In addition, we are monitoring our acquisition pipeline to identify opportunities that would that fit within our solutions offering strategically increase our pipe capacity and grow a recycling capability to support the growth of the business.
Lastly, we continue to Opportunistically buy back shares as part of our share repurchase program in the first quarter. We purchased 800000 shares for a total of $67 million and as of this call that number now stands at approximately one 4 million shares for $125 million in total.
<unk>, leaving $875 million remaining on our previously announced $1 billion share repurchase program.
From a balance sheet perspective in May we increased our revolving credit facility from $350 million to $600 million and in June we issued $500 million of six and three eight senior unsecured notes due in 2030.
We issued a portion of the proceeds we used a portion of the proceeds to repay the outstanding borrowings under our senior secured revolving credit facility.
These actions provide us with flexibility and allow us to operate effectively in various economic conditions overall, our liquidity and leverage position remains strong with over $1 billion of liquidity and a trailing 12 month leverage ratio of one one times.
Moving on to slide seven we are raising our fiscal year guidance for both revenue and adjusted EBITDA net sales are now expected to be in the range of $3 billion and $250 million 233 5 billion.
And adjusted EBITDA is expected to be in the range of $900 million to $940 million.
While there is uncertainty in the market, particularly in residential construction the strength, we're seeing in our leading indicators, including project identification quoting book to Bill and order trends give us confidence in the updated guidance we're issuing today.
Our updated guidance reflects the better than expected performance, we delivered this quarter and anticipate that these favorable performance trends continue into the second quarter, but at least the second half expectations from our prior guide unchanged for now.
As always we will continue to monitor the market environment, and our leading indicators and we'll make adjustments if any to our outlook as and when appropriate with that I will open the call for questions. Operator, Please open the line.
Thank you we will now begin the question answer session.
If you would like to ask a question. Please press star followed by one on your telephone keypad.
Yes.
If you change your mind, Please press star two.
Please standby.
Okay. Thanks.
The first question, we have comes from Matthew Barney.
With Barclays. Your line is open market.
Hey, good morning, everyone. Thanks for taking the questions.
So a question on that last point, you made there Scott C D. It.
It sounds like the second half expectations haven't changed in your <unk>.
<unk>, what you saw in Q1 and to date in Q2 as I don't want to put words in your mouth, but it sounds like thats. The bulk of the change can you maybe sort of bridge from the prior guide to the New guide just in terms of the components around volume price over cost sort of what's coming in better.
And what you expected versus the prior guidance. Thank you.
Yes, Matt Scott here I think if you look at the EBITDA bridge in the earnings presentation for the first quarter. It gives you kind of that sense of the trends that we're seeing again as we've often talked about we have really good visibility as you go out three plus months, so really as we looked at kind of the guide and the performance.
We've kind of looked at again that first quarter performance that we had those favorable trends kind of what we're seeing through July into the second quarter and then right now we felt it prudent just to leave the second half consistent with our initial expectations.
So again, a little bit of wait and see there.
But again, some very favorable trends that we're monitoring as we go through I think it is important to highlight again price cost we see that covering.
That as we go through the entire year quarter over quarter, I'm, sorry year over year as we do that.
So again I think those dynamics.
Prove out and remember the second half of the year the comps get a lot more difficult as we go and still dealing with some of the labor transportation and manufacturing costs as we look through kind of those trends.
In the back half, but again very favorable trend line of sight and kind of just leaving it for kind of a one <unk> book right now.
Got it that's really helpful. Thank you for that color.
Second one just taking a step back on sort of the longer term profitability. So now you are guiding this year to.
350 basis points of margin improvement at the midpoint in the long term guide was I believe 400 to 500 basis points. So just just given where the.
Starting point is this year.
Does that at all change sort of the longer term view.
To margins.
And or is there any more perhaps price cost tailwind that.
It is now showing up relative to what was in that prior long term guidance any kind of thoughts on that would be great. Thanks, everyone.
Yes, Matt Scott here again.
You are correct if you remember.
Investor Day for three year plan horizon that we've put out there we did say 400 to 500 bps.
Margin expansion and we did talk about the opportunity for that to be more front end loaded than back end loaded.
And that's what we're seeing right now so we're ready to kind of call the ball and basically say that will be will overshoot those numbers.
Wait as we go through the year and issue next year's guidance and so forth, but it's.
Suffice it to say the management team is very happy with the trends in performance that we see.
So I'll just leave it that.
Scott Barbour here, Matt I would just say, it's the first quarter of the first year of that plan.
Kind of not ready to to do that but I do I do recall this conversation in the past, where we said it would be front end loaded potentially yes, and we kind of had some some some line of sight on that price cost.
And as we came out of last year, we didn't think it would be to this magnitude.
But we did have an idea that we could could front end load that which we view as good front getting ahead of getting ahead of the plan.
Absolutely alright, well. Thank you both and good luck in the next quarter.
Okay. Thanks.
Yes.
Thank you Mathieu next question comes from Michael Halloran with Baird. Your line is open.
Hey, good morning, everyone.
So good morning.
Not to not to belabor the front half back half split certainly understandable messaging, but on the margin side, obviously exceptional margins in the quarter.
Your run rate those margins out in and you get something meaningfully ahead of where you are right now from a guide perspective.
I understand the conservatism part and so maybe the way I'll just ask it is is there anything in this quarter that you thought was onetime in nature not sustainable that shifts on a forward basis I certainly understand.
The price cost commentary when they can Scott.
So is there anything else in there I should be thinking about.
Hi, Good morning, Michael Scott Barbour here no.
There is no nothing.
Nothing extraordinary that occurred there it was a good quarter I think we said it in the commentary.
But as we got through the quarter it got better.
So kind of in volume got better the leverage got better performance.
<unk> deliveries got better we're really delivering a lot better for our customers in a year ago. So, but there was no kind of one timers or a big job or anything like that that we would point towards in there.
That makes sense and then.
From a capacity perspective, obviously youre doing more work.
And the Infiltrator campus right now.
On the legacy side do you think the capacity is at the point, where youre meeting that underlying volume.
Or do you think there is still some more catch up to do to be at that.
I wouldn't call fully optimized because thats the journey back towards something a little bit more optimized and also I might have missed system understanding where volumes positive in the quarter on the legacy side any thoughts on that side.
So.
Scott Barbour here again.
The work at infiltrators going great I mean, the equipment there has meaningfully impacted the allied product and the infiltrator tank sales.
New equipment in the legacy business is performing well, but you are correct in that there is additional capacity needed outside of just the southeast and the eastern Seaboard, where most of that new pipe equipment went that.
That would allow us to get volumes up.
<unk>.
There are more aligned with when the customer wanted it so I kind of think of it as like peaking capacity of pipe.
And in our ability to kind of produce that more on demand.
Is something we can improve upon will be further investments gives us upside potential.
And as we go forward does that has that kind of I think that was the question I get it.
Yeah No. It was the tale on added at the remind me if volumes were positive in the quarter.
Or not so.
Volume pie volume is positive and everything but.
The retail shipments and the agriculture shipments.
Okay, and the Allied Robbins and Allied products was very mindful trader and Allied robot.
And that small negative $3 3 million in the bridge is really driven by a wet spring.
Which impacted agriculture, some northern markets of non res and we saw that recover late in the quarter and in July .
That year over year constant currency, we had a really good April last year.
<unk>.
Michael It's Mike Higgins I go back to the comments made in the <unk>.
<unk> commentary as we went through the quarter the year over year volume performance improved and.
And we saw that trend continue in the month, we just completed in July .
So that's a good segue to the next question then so the.
Leading indicators that you guys talked about.
Obviously part of it is the trend youre seeing through this July time period, but maybe just a little more depth on what youre seeing on the leading indicators side why the competence of the years, what you've booked already customer conversations with the distributors are saying any more detail on that would be great.
Scott Barbour here again.
So the way we look at that is we look at.
When we start when we start working with a.
A contractor or a developer on a project Thats a project formation, we didn't quote that job. We then taken order on that job and then we ship it within 30 to 60 days and all of those are up positive year over year.
And I'm talking about the pipe side right now.
As driving the allied products, which is driving the residential pipe, which is driving the nonresidential pipe. In addition.
The agriculture segment.
Is going to be pretty good.
We saw good order increases and that over the last 30, 60 days and that will mature in October November .
And infiltrator.
The the.
Order pace has flattened out.
We're still working off of a pretty good sized backlog.
And we don't think that kind of manifest itself into a headwind until we get into next fiscal year. So we're mindful of it we're watching it but it is too early to call and right now we are very confident that those.
So let's call that residential piece tied to starts and completions that drives the onsite septic.
It's right on plan.
It's following right in there nicely, where we wanted to and as ROI and the team.
I've said it would.
Great really appreciate it and Christopher quarter guys.
Thanks, Mike Thanks.
Thank you. The next question comes from.
Sure.
Morgan Stanley .
You May proceed with your question Josh.
Hey, good morning, guys.
Good morning, Scott.
Scott just for just first question on <unk>.
Kind of how you're shaking out price wise.
The marketplace, obviously, youre not really competing a lot with with other folks who are present as an input so.
Price cost is good but maybe relative to some folks who are looking at it a bit differently. How would you square up I guess, particularly in the pipe business.
How do you see that relative price.
Today, and how has that trended over the last maybe quarter or two.
Sure.
So our relative price for the pipe products continues to go up.
And this is really the pricing work that we started a year ago and consistently.
Kind of went through the year.
With price increases a year ago, we had a price increase in March also that stock that one was largely based on elevated diesel and transportation costs.
So it's still we're still kind of getting some of the benefits from that Josh.
It levels off as we go through the year.
In this plan.
<unk>.
Not that we're not taking pricing down it's just we're not further increasing their prices unless something happens and we feel we need to go do that we also believe we remained very competitive with traditional materials I think perhaps in.
We've talked about this in the past that they were a bit behind in catching up with their inflationary input costs.
So they've been raising prices pretty aggressively I think you guys have probably all read and seen that in other kind of other guys related to the industry and in that and we believe that's helpful to us continuing to maintain our pricing in the market or.
What we have to do to cover our costs and pressures.
But we punched in probe on that a lot of different ways and we feel very good about where we are right now in our price levels and our ability to be competitive and win what we want to win in the market.
Got it that's a good segue to my next question is obviously you guys are benefiting immensely right now from what's going on.
And the good volume and all that kind of stuff.
I guess mix.
Within that.
Whats the aperture or appetite to.
Maybe realized less of that margin benefit and go out there and try to take more share like how do you balance that in.
Is there any is there any toggle that you guys are thinking about.
Yes, there is a toggle there absolutely there is a toggle there.
<unk>.
But I would say right now we think that toggle is appropriately set.
And we are gaining gaining in areas, where we have available capacity think of our focus states.
And we might.
Well honestly, we haven't had to toggle the pricing much to go win what we want to go win.
But I would say that versus a year ago, Josh where we were actively staying on the sidelines, particularly in the agriculture market because we didn't have material. We didn't have capacity. We are not in that situation. Now. So we think we wanted to toggle to get something we will do it but we're not going to do.
Do it to the extent, where we compromise.
This bridge on a price cost right now.
I would add one element.
Yes, okay.
Yes, I was going to add a comment to what Scott said, yes, I was going to say.
Versus using pricing as a toggle I think what we've kind of learned through the demand environment with the strong demand in these inflationary cost pressures as you can get share by improving service and availability. That's a good point just as easily as you can with price. So I think really what we've been focused on.
So far is let's not use price to do that let's just be better value proposition in the market versus who we're competing against.
Yes, it makes sense to me.
That's clearly what we've done in agriculture, clearly what we've done there we like I said, we really haven't had that tahoe much.
If at all.
And use better inventory builds better quality of inventory or production planning processes. Our fleet guys are doing a great job right now Upturning, our fleet capacity and multiple runs in a day to service the agriculture market I mean, it's astounding the number of number of trucks, we're rolling everyday right now so that's a.
Very good that's a very good point Mike.
Thanks.
Thank you as a reminder, if you would like to ask any further questions. Please press star followed by one on your telephone keypad.
We now have your next question from the line of John Lovallo of UBS. Your line is open.
Hey, good morning, guys, just some sensor Kaufman on for John Thank you for the questions. Maybe the first one just piggy backing off of <unk> question. There you guys have obviously.
A tremendous amount of price in some market I'm just curious when your current realization on price increases.
What was the pre Covid world.
How much more pricing and you guys can get and what typically happens to price in deflationary environment.
Chris Scott Yes.
So again as you look at our EBITDA Bridge and you see that volume again different based on the different segments, we have allied and infiltrator up pipe down but.
Still getting a lot of pricing year over year, we look at it sequentially as well as that year over year trend.
So again.
I'll answer the last part of your question first when you go back and look I've been here seven years I've been in.
Different resin environments, rather than going up rather than going down.
<unk> consistently holds that spread if you will and hold that pricing so.
I would tell you is that again, it's going to be market dynamics will continue to look at it.
It's the value proposition everybody always defaults the resin, it's much more than that its transportation, it's labor, it's that value proposition and as Mike and Scott, We're just talking about that ability to serve and that availability of product in the right place at the right time, its such a regional business that all matters. So much so when you.
Talk about pricing and keeping it it's much more than just talking about resin. So the history of the company proves out that we can keep that pricing as we move forward and.
That spread if you will.
And we're highly confident as we move forward, we talked in our prepared remarks about that price cost being favorable in the first quarter and the fact that we see it being favorable as we move through the rest of the year. So.
A high confidence level there again, it's a key part of our playbook. If you will but we're also not letting up on productivity initiatives Ci initiatives lean the capacity that we've added we always said that infiltrator was going to add that capacity and we are.
<unk> seen it really and Scott mentioned, it as well on the tanks on the storm tech products that they make that goes into allied products, having that inventory being out there to service. The demand that we've had we've really seen that come through in a powerful way and that's one of those favorable trends that we mentioned that we saw in the first quarter that we're looking for.
So as we go into Q2 and beyond.
Okay, Yeah that makes sense and I appreciate the color there maybe maybe for my follow up any update on access in China, Tim Congrats on there.
Yes. This is Scott Barbour and we continue.
Continue to make a lot of progress in Texas, and a public approvals.
I think our sales in Texas were up like 49% or something like that so very strong quarter in Texas.
We are not through the whole approval process yet.
Not a short process.
But I would say that we feel very very good about where we are and.
Ultimately, we believe we will have a big win there.
Great. Thanks, and good luck guys.
Yes.
Thank you John as a reminder, if you would like to ask any question. Please press star followed by one on your telephone keypad now.
We have many questions registered so like how does that can you Scott for some closing remarks.
Alright, Thank you very much and we appreciate the questions today and everyone who participated.
It was certainly a good quarter.
Lots of hard work by the people in the company.
At Aes Infiltrator Coltec.
Unbelievable kind of.
Journey that we're going through together.
And this year its turning out different than last year.
But a good start I think we've given some some very very good guidance here and we look forward to the next time, we all meet thank you.
Thank you that does conclude today's call. Thank you all for joining you may now disconnect your lines.