Q2 2023 Advanced Drainage Systems Inc Earnings Call

[music].

Good morning, ladies and gentlemen, and welcome to advanced drainage Systems' second quarter fiscal year 2023 results Conference call. My name is Jay saw it and I am your operator for today's call. Currently all participants are placed in listen only mode. Later, we will conduct a question and answer session I would.

Now I'd like to turn the presentation over to our hosts for today's call Mr. Mike Higgins, Vice President of corporate strategy and Investor Relations. Please go ahead.

Thank you and good morning with me today, I have Scott Barbour, our president and CEO and Scott Cottrill, 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.

The press press release, we issued earlier. This morning is posted on the Investor Relations section of our website a copy of the release has also been included in an 8-K submitted to the SEC.

We will make a replay of this conference call available via webcast on the company website.

Now I'll turn the call over to Scott Barbour. Thank you, Mike and good morning. Thank you everyone for joining us on today's call.

We achieved another very strong quarter of results with second quarter sales of $884 million and adjusted EBITDA of 263 billion.

Importantly, this is the fourth quarter in a row that we have covered cost pressure due favorable pricing in the third quarter in a row of margin expansion.

Sales growth of 25% was broad based across geographies in both the construction and agriculture end markets supported by continued strength in our priority states and allied products.

The strongest volume growth occurred in the 80 S residential and agriculture end markets.

And the a D S agricultural business, we did a good job level loading deliveries and that is shaping up for a fall season with year over year growth.

The avs residential business grew as homebuilders continue to develop land despite market uncertainty, we expect homebuilder land development to continue on previously acquired land and over the long term the lack of available homes supply will continue to drive growth in this market.

<unk> participation in the residential market is still early in the material conversion story. So despite the pullback residential remains a large growth opportunity for the company.

What we see being on the land development side is the sales are choppy some areas remains strong like the Atlantic coast to southeast and Texas.

And the other areas like the northeast sales orders and project identification are beginning to slow.

We are focusing our business development efforts.

Those geographies, where land development is continuing in addition, we continue to develop programs with national and regional homebuilders, where the <unk> value proposition of faster safer installation.

Fewer trucks to deliver the required linear feet to the job site.

<unk> installed cost and sustainability as a proven winner.

Infiltrator revenue increased 3% this quarter.

The septic tank business grew double digit as plastic tanks continue to gain market share against traditional materials that we add distribution points. We are still working down that backlog leveraging the new capacity investments that have come online this year.

In the Leach field products backlog is normalized and lead times are now customary with historical performance that infiltrator customers expect.

The better lead times as well as residential market uncertainty led to distributor destocking over the second half of the second quarter as our distribution partners are less concerned about product availability and lead times.

It is important to note the impact of Destocking is larger in the infiltrator business when compared to the ADM business because onsite septic products are delivered from distributor stocks, whereas the ABS products are delivered directly to the job site by Aes trucks.

Both companies are well positioned to maintain price and leverage the material conversion story to drive above market results.

And Florida Hurricane impacted sales in the central and southwestern parts of the state as.

As the threat of the Hurricane became more significant during the last week of the quarter shipment volume in these portions of Florida decreased 70% and are slowly rebounding.

Other portions of Florida are normal in terms of shipments. This is important to note since Florida is the largest state in terms of sales for the company.

We expect contractors in southwest, Florida to prioritize recovery efforts in the near term as opposed to the storm water project installations as we move through the fiscal Q3 importantly.

Importantly, a D. S employees were minimally impacted in the ABS, Florida facilities were back up and running with minimal downtime and raw material supply was not disrupted.

If I take a step back and look at how the second quarter played out overall sales volume was strong and according to plan in July and August the.

The first week of September started slowly this second and third week strengthened to July and August pace.

In the fourth week of September when it became apparent that a hurricane Ian would hit Florida shipments slowed down considerably. So we did see an overall volume degradation in September after a good first two months of the quarter.

October shipments are on pace was on with September .

Let me provide some more details and context on this demand inflexion that we are in the midst right now.

First there is variability by geography, we.

We had difficult year over year comparisons in areas like the northeast and northwest where activity was elevated last year due to reopening.

We believe that particularly in regions like the northeast and Pacific Northwest, which had more dramatic pauses during the pandemic.

One and a half years of activity was compressed into a 12 month period that began in the second half of 2021 through late this summer.

In other areas like the Atlantic Coast, and the southeast, including Florida construction activity remains favorable and on track.

Second the Destocking of the Leach field chambers at Infiltrator distribution was more dramatic in quicker than we anticipated in this past quarter.

We believe that we are approaching the end of the Destocking impact AD infiltrator as of the end of October .

Next we've been systematically working down backlog levels at both <unk> and infiltrator and in most products and geographies. The backlog is now in a normal position.

The normalized backlog and the shorter lead times, we can provide.

Due to the result of the capacity that we put in place.

Has resulted in a slower order pace and less inventory build at infiltrator distribute distributors.

In addition customers are uncertain about market conditions, and a rising interest rate environment and this has slowed order rates for products that are stocked by distribution.

As we move into the second half of the year, we are seeing a market inflection point.

Demand is uncertain and interest rates continue to rise. Additionally, we are seeing a normal seasonal pattern of activity more like pre pandemic conditions, we adjusted the second half revenue guidance and accordingly, and due to improvement in raw material costs favorable pricing and cost control, we were able to hold adjusted.

That EBITDA guidance.

We will continue to manage costs and stay focused on investing in initiatives that provide the greatest returns and support the growth programs.

As such we are moving forward with capital spending planned for fiscal 2023, especially in high demand regions like Florida, and the southeast and those high return high growth areas of the company such as recycling and infiltrator businesses.

Finally in October we broke ground on our new industry, leading engineering and Technology Center, and Hilliard, Ohio near the Aes corporate headquarters. This expansion brings together in one location product development materials science and manufacturing engineering, a two one world class purpose.

<unk> facility.

This engineering and Technology Center will be the most advanced storm water engineering and material Science center in the world, enabling our team of engineers scientists and technicians to design sustainable solutions that utilize recycled plastics to improve quality quality of life in communities across North America.

We will also be utilizing lead building techniques supporting the avs commitment to sustainability.

Though demand is uncertain, we are making the necessary pivots to manage the business through this inflection point, we are leaning into areas of the business where demand remains strong such as the residential land development as well as the data center and warehouse construction.

We expect price cost to remain favorable, particularly as an inflationary pressures begin to level off.

We will also continue investing in the business to ensure we exit the current environment in a stronger competitive position.

We do this with confidence and the strength of both the ABS and infiltrator business models.

The conversion story related to competing materials remains intact, and we have an extremely healthy balance sheet and cash generation profile. We are in a very good financial position to execute on what we need to do both and both organically and Inorganically should the right opportunities arise with that.

Now I'll turn the call over to Scott Cottrill to further discuss the financial results.

Thanks, Scott on slide five we present, our second quarter financial performance from a top line perspective, we generated 25% growth year over year, primarily driven by favorable pricing at both Ats and infiltrator.

Legacy legacy <unk> pipe products grew 28% Allied product sales grew 37% and infiltrator sales increased 3%.

Holidayed adjusted EBITDA increased 60% to $263 million, resulting in 650 basis points of margin expansion to 29, 8% in the quarter.

As Scott mentioned favorable pricing continued to cover in place very cost pressures related to labor manufacturing and transportation costs from an input perspective raw material costs have moderated sequentially, but remain at historically elevated levels. We expect this favorability to continue as we move through the second half of this.

Year.

Moving to slide six.

We generated $361 million of free cash flow year to date compared to $31 million in the prior year strong growth in adjusted EBITDA, coupled with better working capital helped drive significant free cash flow generation and conversion, which was approximately 64% of our adjusted EBITDA year to date.

Given the current market uncertainty it is important to highlight the strength of our balance sheet and financial position as of the end of the quarter, we had over $1 billion of liquidity, including nearly $460 million of cash our trailing 12 month adjusted EBITDA to debt ratio sat at one times.

And we expect to convert over 50% of our adjusted EBITDA to free cash flow for the full year.

In addition, we recently received an upgrade from S&P on our debt and credit rating, we remain committed to our leverage targets of two to three times net debt to adjusted EBITDA, but we are currently focused on the low end of that range at this time given market conditions.

<unk>, 68% of our outstanding debt is fixed rate debt and therefore, not subject to further interest rate increases.

Through September 32022, we repurchased one 9 million shares through our share repurchase program for a total of $195 million as of last Friday October 28 that number now stands at $2 1 million shares for $227 million, leaving $773 million.

Remaining under our previously announced $1 billion share repurchase program.

Given our strong financial position, we plan to continue our balanced capital allocation strategy of investing in our business. While also returning capital to shareholders through our dividend and share buyback program.

Year to date, our capital spending has increased 19% to $76 million as we continued to invest in capacity efficiency and automation for the full year, we now expect our capital spending to be around $175 million.

Finally on slide seven we provide our updated fiscal 2023 guidance.

Just on our order activity backlog and current market trends, we now estimate revenue growth of between 12, and 16% or $3 1 billion to $3 $2 billion were.

We are not changing guidance for adjusted EBITDA, which is expected to be in the range of $900 million to $940 million representing growth of 33% to 39% and translating to an adjusted EBITDA margin of 29, 2% at the midpoint.

We will continue to monitor the market and take actions as we deem appropriate to make sure. We're right sized for the demand environment in front of US. An example of such as adjusting our future production schedules as needed to right size, our inventory and better aligns such with our forecasted demand demand environment over the coming quarters. In addition to cost control measure.

Others like the inventory right sizing initiative I just mentioned, we also intend to continue investing in the business ensuring that we exit a market slowdown in a stronger competitive position than when we entered it.

With that I'll open the call for questions operator, Please open the line.

If you would like to ask a question. Please press star followed by one on your telephone keypad if for any reason you'd like to remove that question. Please.

Press Star followed by two again to ask a question it is star one.

Our first question is from Michael Halloran with Baird. Your line is now open.

Hey, good morning, guys.

So my questions here first splits.

Let's start on the inventory side.

Obviously that seems to have caught you guys off guard a little bit as you work through the quarter.

Was there how quickly were you able to react to it once you saw the challenges.

And maybe provide some context for why you think that by the end of October the inventory levels are worked themselves out.

I think a lot of people or other kind of.

Product categories that touch your market share.

Looking at the last a little longer so I think some comfort and understanding what you've done with the levels look like how they compare to normal and what kind of demand environment, you're assuming in what youre, calling the normal kind of run rate would be super helpful.

Alright.

Good morning, Mike This is Scott Barbour.

So I think that's probably start with the infiltrator inventory Destocking, which is really focused on the leach field products recall that theres really two major product lines, there the bigger being the leach field.

The newer one being the tank.

And the tank really isn't experiencing that destocking.

It's still in kind of that work off the backlog mode.

And what we saw I would say.

Kind of starting to midpoint in the quarter is.

Inflection and and the reduction of that backlog in other words, it was getting steeper on the lease fuel products.

Started to be worked out very quickly.

And then just not that kind of a reorder point.

Mean by that is you know.

The demand of the Leach field products started to kind of really wane as we got halfway through the quarter and we have now gotten to this point where.

The lead time on the Leach field products.

And.

The kind of open orders behind it the backlog or in a way that's kind of what we saw pre pandemic.

That leads us to believe we're towards the end we don't we don't know that for sure we need to continue to watch, but I believe around that particular product, which was the most dramatic in the quarter.

What's in front of US is really kind of demand uncertainty by home home completions and it starts and completions, we think the distribution inventories kind of getting to the right level. There. So we don't expect another big event of Destocking It will be more.

<unk> driven that.

Does that kind of clear what you were asking around the inventory levels and destocking.

Yeah that was one question what percentage loosely of your organization actually is beholden to these inventory pieces because a lot of your business just doesn't really have channel inventory.

Right right.

Mike What's the figure we've given on it's really the infiltrator products that are mainly stopped correct retail on the retail and media side, but that's kind of been lower for a while yet.

You think about the avs business somewhere between 70% to 80% goes directly to a job site with the infiltrator business pretty much all of that is going to go from an infiltrator facility two of distributors yard.

So youre thinking somewhere around 25% to 35% is what the piece of that would be the old Linde inventory then yes, yes, yes, yes in that neighborhood, yes, it would be it would be in that neighborhood, depending on the season.

So that's helpful.

Didn't give me the gross Martin go ahead sorry.

No I was just going to kind of reiterate Mike debt.

We believe the bigger thing to kind of watch out for is demand driven.

From here forward.

We think this.

Didn't hit us faster than we thought there's no doubt about that.

<unk>.

But we believe we are more towards the end.

That we are at the beginning of that phenomena at any of the stocking locations for particularly infiltrator.

That's helpful and then two more bucks the questions first on the commercial construction side of things you mentioned some regional slowing is that mostly just alluding to Florida and more broadly could you just talk about what the trend line, you're seeing is an and.

Any areas of concern in the commercial construction side outside of expectations for a slow recovery in that specific region taller than was hit by the Hurricanes.

Sure.

Well as.

As we kind of Peel it back and we look at the northeast.

And the Pacific Northwest.

Those areas with down pretty hard in the pandemic.

So starting last summer to until <unk>.

Last year until this summer.

Elevated levels of activity.

That appears to have been.

<unk> worked through and now we've kind of come back into a more normal seasonal pattern, there, which is below where we were a year ago, but compares well to a prepaid debit.

In terms of commercial demand.

Those regions.

Florida, if you got it.

Take aside the hurricane impact in southwest, Florida, I think things are going along pretty normal as we have seen over the last several quarters in terms of construction activity.

But southwest Florida is important.

High growth part of the state and we're going to we're going to feel some impact from that but it will get worked off. These these things do theres no destruction of demand is just kind of pushed out for.

For right now.

If we look at quoting activity and project identification things like that in the commercial space.

It's above prior year.

Not I mean, just not double digit, but it's above prior year and it kind of good healthy levels.

We talked the warehouse business remains good for us lots of projects in that funnel I know theres a lot of concern about that but that's really remains pretty good.

The data center piece. These onshoring projects, we have a lot of business development activity. There we've done a really nice job, we stood up that business development a couple of years ago before the pandemic, we layered the residential and the warehousing into that now we're layering into that these onshoring projects.

And some of them are here in Ohio somewhere in Texas, we see them across the country. So we we get we're getting a lot of quote activity in that kind of space.

That said, we're in this inflection points.

And how these things are going to impact us, but for right now that appears to be doing.

Okay.

Alright helpful for that and then last question.

Didn't see gross margin commentary by.

The usual three things in the press release today the pipe.

Allied in the infiltrator any help on that side and then when you look at the back half of the year margins I think one of the Scotts alluded to normal sequential patterns.

From a seasonality perspective in the second half of its always worst than the front half reduced in a normal year worse than the front half on the margin line.

But just help provide some context to how much.

The price cost capturing seeking to maintain.

And any help with how to think about what we're really good first half margins and your ability to carry through that kind of goes through on a seasonally adjusted basis moving forward.

Yeah, Mike Scott Cottrill here, so I'll try to unpack a couple of those points sequential margin performance that Scott and I said in the script, we see this year kind of returning to more of our normal sequential kind of seasonality patterns. So you're absolutely right.

It'll anywhere from two to 300 basis points or greater is normally kind of that deterioration from first half. The second half margin performance just because of the winter months, the lower volume that absorption and leverage piece. So.

We'll see that again and that's what you've seen in the second half.

On the drivers of price cost.

So you'll see that now we're starting to lap a lot of the pricing year over year, we're keeping it at these high levels, but on a year over year basis, Youll see more of that resin benefit coming in on a year over year basis as we go through the second half and that's been embedded in our guide.

As to the margin performance in the quarter and year to date.

EBITDA bridges are in the earnings release as you said and then the margin piece of that by segment will be out as part of the 10-Q filing later today.

I.

Thank you.

Appreciate it.

Our next question comes from Matthew Bouley with Barclays. Your line is now open.

Hey, good morning, everyone. Thank you for taking the questions.

If I could kind of zoom in to the volume outlook.

The guide.

I mean, obviously your ear.

Guiding to second half revenues, I guess down 3% year over year.

I'm curious if you can kind of unpack what the volume assumption is in that and if I take you know residential weakening some kind of near term destocking and in Florida getting pushed to the right or activity in Florida.

I'm curious if you can kind of size up the volume impacts from some of these kind of more discrete items. Thank you.

Hey, Matt It's Scott here, so again youre right. So a.

A little bit of pricing benefits still second half year over year, it'll be mostly a volume play which is what we saw in all of the key dynamics that Scott covered here, a little bit ago via the script as well as.

Answering Michael's question here a little bit.

Go as well, but you're going to see most of that impact that volume impact on kind of that infiltrator side of the house first which is how we've always been talking about it but that's exactly what we're seeing so you're going to see a lot of that.

Allied is still going to be strong a year over year. So we will still see some nice volume growth as well as pricing there on the pipe side on the a T. S legacy business again, some of those dynamics that we talked about come into play there.

There as well, but most of that volume coming off will be infiltrator and as Scott mentioned, Yeah. We knew based on single family housing starts and the lag times kind of it was coming at us.

We just it.

It happened probably about a quarter ahead of when we thought and the impact in September was was pretty dramatic and pretty sudden so.

Leading to all the actions we talked about before but it's fair to look at a lot of that volume is being infiltrator related.

Got it okay. That's very helpful. Thanks for that.

And then secondly on the margin outlook.

I just heard you, saying you said several times around that Theres, some raw material benefit starting to flow into the second half there.

I mean, if I, if I kind of just high level. So you took your revenue guide down by a $150 million at the midpoint, but the but the EBITDA margin.

EBITDA dollars are unchanged.

You know what I'm trying to get to is I guess, how much of you know.

The deflation that you're now starting to see is incorporated in that.

In that second half guide and sort of what are the expectations around I heard you say operational.

Cost control things like that I'm, just trying to get at how much of actual declines in raw material prices are included in that second half guidance.

Yes, Matt the way I'd think about it is those decreases are embedded in our guide.

Again based on the resin procured in the month of September October by the time that it goes from raw material is converted into a pipe finished good product and then sold.

You know that could be 90 days. If you will so we have three months of visibility to those costs that are on our balance sheet today.

So.

Again, we've embedded that Oh.

Or are considered that favorability as well as pricing I mean, it's really important to also look at kind of where our pricing has been and where we've done it to and the fact that sequentially. We expect to hold onto most of that as we've talked about in the past, but again that resin and what we are currently procuring. It at is included in our forecast.

And the Guy that we went out with.

Got it and then just.

On that point can.

Can you can you kind of speak to the resin.

The resin themselves sort out to what degree have they come off peak, if you can give any color on that.

Not I mean, directionally again, it's it's off sequentially as well as year over year.

But again the absolute level when you go back historically and look over the last five plus years or greater.

Still at a very elevated level as compared to historic levels that that we've seen but again sequentially year over year.

It is providing a nice benefit and offset to some of the volume challenges that we're seeing and again we.

We kind of knew that but the magnitude of such to your point helps us offset some of the volume declines that are coming at us that again came out just a little bit faster than we thought they would they would.

Gotcha, alright, well thanks for the color.

Our next question comes from Josh Korean ski.

With Morgan Stanley . Your line is now open.

Hey, good morning, guys.

So just following up on on the price cost commentary I mean, I guess first is last quarter, you had a little bit less of a benefit in the EBITDA Bridge I don't think the year over year comp.

Does a lot better and I sort of get that you have more deflation showing up in the second half, although I think.

Kind of a downward trajectory, it's been fairly stable. So I guess, maybe what I'm trying to say here as.

I would've thought that would've been more this quarter is there anything going on with either mix or price flowing back to the customer in some instances like can you just talk about how how that has gone kind of at the customer level in terms of managing that price cost is that does that change at all versus the last.

Or is it really just a function of.

Yes more of the improvement on RASM that we've seen is kind of times itself into next quarter and beyond rather than this one.

It's timing.

The only thing I would say Josh looking at the EBITDA Bridge, I mean that price cost was $169 million favorable in the quarter.

Again, when you look at the magnitude of what we saw in the first quarter. Yeah. It's not the same on a year over year basis, but that's because of the price increases.

That we're lapping last year. So when you get to Q3 Q4 of this year again, youre not going to have as much pricing benefit on a year over year basis, but what we're going to see as a nice resin benefit year over year that'll be in that price cost bar and is embedded in our guidance. So that's the interesting thing when you look year over year, but when you look.

Chile, which is again, how we look at it.

We're holding on to most of that pricing like we thought we would obviously with some of our plastic pipe competitors in certain regions, we gotta be smart about it.

But again, we're holding on to most of that pricing and we track that we look at it monthly weekly daily.

And we're holding onto it and then to some of the points. We've talked about earlier. We're also starting to see on a procured basis, some really nice resin benefits that'll start coming through the P&L here over the next couple of months.

Got it and then I apologize if I missed this in some of the earlier comments, but on the kind of lost revenue or deferrals coming out of Florida.

With the with the Hurricanes.

What time frame are you expecting to catch up on that obviously not imminently, but like is this a two quarter phenomenon is it really into next year.

How do we think about the catch up.

Hey, Josh This is Mike Higgins I would say kind of that area talking southwest, Florida that was hit the hardest that's you're probably looking at potentially two to three quarter phenomenon. I mean, obviously people have seen the damage of the devastation that occurred.

You know a lot of the activity clearer that clearly are shifting to that too.

See some sales related to that but kind of your everyday cut.

Non residential residential construction projects that we saw that those are going to get pushed for at least a couple of quarters.

Yes.

It's coming from our guys on the ground talking to their customers talking to our distribution down there.

Got it and then I apologize if I could sneak in just one more.

The way that you guys are sort of describing the end market environment right now, especially on the resi side.

Maybe non resi closely following in most end markets are most macro environment.

How does that kind of 8% CAGR.

Long term target look today is that something that still feels kind of achievable over the next several years or does that need to come down. If we if we have kind of a more pronounced slowdown here over the next call. It 12 to 18 months.

Yeah, I mean, obviously, if its more pronounced so you got to look at things, but again, the long term trajectory and value proposition and model that Scott talked about earlier.

No change so for over the long term absolutely that growth trajectory that material conversion story all of that holds true so that the a T. S model. The infiltrator model that conversion story is intact.

Yes, I think the way we talked about Josh is.

Clearly there is something going on to the market its inflection point, there's uncertainty, but our business model is not broken right. The conversion story the value proposition that we bring.

Executing on that every day, and we'll be very resilient and we can pivot.

Based on kind of where opportunities are presented in the end markets.

Understood.

We're thinking John this is Scott Barbour.

No I was going to say this is <unk>.

Scott.

I think.

This is really where in that period of inflection and you don't really know where it's going to end up I mean, we know theres something common the depth or length of it we don't know.

We can read the signals and watch the fed and all that other kind of SaaS, but we just don't know yet so we're not going to change our long term growth.

Plans around any of this until we get a better a better handle on what.

The depth and length of what we're entering is there.

I think as I tried to describe I mean, we were saying along in July and August .

<unk>.

That was a lot different than July and August .

October has kind of been the same.

We're trying to figure out exactly these different impacts of Destocking.

Slowdown in core demand in the end market all of these things and what well sorted out.

And we won't we won't know until we're past it but we're going to stay on top of it every day and this is not unlike when the pandemic began when we there was a couple of months of sorting things out.

Sure we were lined up right then you go.

And that's where we are.

Josh the only thing I'd add to that you heard Scott and myself mentioned it multiple times, but we're continuing to invest heavily in the business.

Obviously certain regions still need to be invested for growth, but a lot of automation and.

Inefficiency type of spend that's coming that way and again as we talked to at our game plan here is to continue investing in these areas. So that we're even more competitive when we come out of this downturn.

And again, we've got the balance sheet.

To do that and we see that as a great way to not only invest organically in the business.

But again look and be positioned for any kind of M&A opportunities that might come our way down the road as well.

Understood appreciate all the color guys best of luck.

Our next question comes from Garik <unk> with loop capital. Your line is now open.

Oh, hi, Thanks for taking my question, you kind of alluded to this a little bit on the pricing.

<unk>, but just curious if the pace of the competitive behavior is accelerating at all over the course of the last couple of months or is it more of a normal pipe pricing environment. When you when you start to see.

Cost start to come down.

Okay.

Yes.

Good question Garik. This is Scott Barbour.

So it differs by market.

And I would say to you that in the regions.

Tight RCP reinforced concrete pipe supply high demand for that stuff, maybe a little lack of capacity in those products. The pricing is very steady.

And maybe with some opportunities.

In our more competitive markets like agriculture.

Some days there is a daily fight other days, it's pretty steady.

It's not anything that we don't experience.

Sure.

Normal course.

And like Scott said, we're going to protect our market share, but it's not at any elevated level.

Over normal and I think thats, what youre kind of asking is is there any unusual activity because of the decrease in material prices.

So every now and then you see one you see a hot one but it hasn't been above what I would call <unk>.

Normal type of activity.

Got it.

A.

Follow up questions just on <unk>.

Material conversion.

Pace.

That could could look over the next several quarters.

I don't know if you can widen back maybe in other periods of economic slowdown have you been able to maybe accelerate the pace of material conversion and maybe speak to the spread now between.

You know HCP pipe.

Pricing versus maybe some of the other competitive materials.

Seeing some more inflationary pressures moving forward.

Yes.

Yeah, Hey, Eric Mike Higgins, so to the first part other periods, where we've seen economic slowdown I would say.

It's more geos geography base, where youre able to kind of kind of accelerate that share gain right. So clearly things become more competitive guys are looking to protect margins on a slowdown. So if you have a contractor who maybe you have on the edge.

Kind of converting to your product you're able to kind of push them a little further because of that competitive need in an economic and an economic slowdown.

So I would say the pace accelerates in certain geographies, maybe more than others, but I think we're running at a pretty good clip right now that conversion and specifically in the residential.

End markets and I'm, sorry, I forgot what the back half of your question total installed cost.

Yeah, I think where we've seen over this year.

The kind of the spread the total installed cost advantage of our products versus the traditional materials has come into that more normalized level.

15, 20, 25% versus concrete pipe.

As they've had to kind of take prices up.

Around inflationary pressures in demand or supply constraints related to the demand I think we've seen those geographies, where there were some parity may be evolving that that advantage has come back in line with what we typically see.

Understood. Thanks for the help.

Our next question comes from John Lovallo with UBS. Your line is now open.

Hey, guys. Good morning. This is actually Spencer Kaufman on for John Thanks for fitting me in here.

Maybe just a first one.

And given Amazon announcements on pausing warehouse distribution capex as a REIT for the industry.

How are you thinking about the sustainability of warehouse and distribution end markets and sort of along the same lines just given all the economic uncertainty out there you mentioned that we're sort of in this inflection point right now what type of visibility do you have into the entire business right now.

We have to check on that.

Yes, Spencer, Mike Higgins again on the warehouse distribution center part of that question.

I'd say broadly overall the activity level remains strong specifically on the coasts, there's a real kind of acute shortage of warehouse space. There. So we still see pretty strong demand up the east coast are.

Up and down the west coast as far as the Amazon piece I know that gets a lot of headlines.

But you know there are roughly 15% of the market.

So there's still a lot of other development a lot of other activity that goes out there. So the market is not solely reliant.

Kind of on Amazon.

And you know.

Kind of wanted to go kind of viewpoints that we happen here is.

Amazon typically overinvest early into things and this might be one of those things and then in April right. So get over invested in this type of space. They are kind of pulling back on that a little bit and then the other thing we hear from other kind of real estate professionals are the real estate industry is when you pull a couple of those layers back.

Amazon.

Sub leasing some of the space out is older stock. So there are older buildings that they've been in.

They're trying to consolidate operations into these newer facilities, they built which are much larger heavily automated to deal with the labor challenges.

And.

Theres takers for that old stock that old warehouse space. So we feel pretty confident in that type of activity.

Through through the end of the fiscal year.

Okay. Thanks, Mike appreciate the color there.

My follow up question just on the raw material costs that are improving down both quarter over quarter and year over year.

Still element is how you guys are describing it I mean, when you couple that with some of the demand weakness you're seeing.

How are you thinking about price moving forward would it be unreasonable to see potentially some came back here.

I think the <unk>.

Give back is is just so localized.

It's difficult for I think you if you guys do.

Do it I mean, it's pretty minimal within the context of how much price we have gotten over the past.

Last year.

When we give when we have to give back price.

To be on.

One project and one and one.

Very regional type of thing.

It doesn't tend to be across one whole class of distribution or customers.

It is very rightful rifle shot.

And the experience of the company as those rifle shots don't kind of pile up into some kind of tsunami.

We're pretty good at keeping them extremely localized.

And we offset that.

With when we compete against reinforced concrete with our with our polypropylene or HP products that are a bit tighter than supply.

Here demand environment that we're competing against those guys.

And we also have the pricing that we do on our allied products, which tend to be highly highly differentiated and highly highly specified.

Yes.

So you kind of roll all that together Spencer and we feel like it's very manageable.

Very manageable.

Variable for us.

And when you look at some of the other inflationary cost pressures you look at it's not just all about RASM, but when you look at labor Youll look at transportation. Those are all costs that are still with us at elevated levels. So.

So again understand the question, but again not not a big item is as we look at it.

Okay I appreciate the color guys. Thank you.

There are no further questions. So I'll pass the call Vancouver, just Scott Barbour for closing remarks.

Okay.

I really appreciate everyone's participation and the good questions today, we anticipated a lot of.

These lines of questions, we look forward to kind of follow ups.

And I just conclude.

<unk> continues to work extremely hard.

On execution.

You guys know me I mean execution is the first thing we think about in.

In our business all the time, that's going to be really.

Important is always important it's really important in times of inflection we remain very focused on kind of our end markets and customers in those programs that we can drive growth, we will manage through it. It's an inflection point in the market. There are a few things that we've got to continue to figure out we feel good about kind of holding the EBITDA guidance.

And well positioned on that and the cash flow generation.

Of the business that I think gives us a lot of options on things that we can do in the future.

So appreciate it look forward to talking to you all soon or seeing you all.

<unk>.

That concludes the conference call and thank you for your participation you may now disconnect your lines.