Mike Higgins - Director, IR and Business Strategy Joe Chlapaty - Chairman and CEO Scott Cottrill - CFO.

Rob Hansen - Deutsche Bank Marshall Mentz - RBC Capital Markets Ryan O'Donnell - Baird.

Good day, and welcome to the ADS First Quarter Fiscal 2017 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded.

I'd now like to turn the conference over to Mike Higgins, Director of Investor Relations and Business Strategy. Please go ahead..

Thank you. Good morning. With me today is Joe Chlapaty, our Chairman and CEO; and Scott Cottrill, our CFO. On today's call, Joe will summarize our results for the first fiscal quarter, Scott will then provide more detail on the financial results for the quarter as well as our guidance for fiscal 2017 before we open the call up to your questions.

I would also like to remind you that we will discuss forward-looking statements as defined under the Private Securities Litigation Reform Act of 1995.

Actual results may differ materially from those forward-looking statements as a result 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 Web site. A copy of the release has also been included in the 8-K we submitted to the SEC.

We will make a replay of this conference call available via webcast on the company Web site. With that, I'll turn the call over to Joe Chlapaty..

Thank you, Mike, and good morning to everyone. Welcome to ADS's first fiscal quarter 2017 earnings conference call. We'd like to thank all of you for joining us today. Overall, our performance during the quarter was strong, particularly in our core domestic construction end markets, which grew 8% this quarter outpacing the overall market.

Our continued focus on conversion opportunities, where we can displace alternative materials like reinforced concrete, corrugated metal, and PVC pipe with our superior high-density polyethylene and polypropylene pipe remain central to our long-term growth strategy.

We are also pleased with the strong performance of our Allied Products, which grew 18% over the prior year. Allied Products not only serve as an important growth engine, but they provide us with a competitive advantage by offering our customers a complete water management solution.

We also have a long history of bringing innovative products and solutions to the market through our Allied Products, including HP pipe, which grew over 30% this quarter over the prior year.

These [technical difficulty] results were partially offset by weaker than expected sales in our domestic agricultural market, as well as in our international markets, particularly Mexico, which resulted in consolidated net sales growth of 2.4% for the quarter.

We are also very pleased with our adjusted EBITDA performance for the first quarter, which increased 34% over the prior year period to $72 million. In addition, our net income increased 96% over the prior period, to $25 million. These strong results were primarily driven by effective price management as well as lower raw material costs.

As we look ahead, we continue to believe that raw material costs will remain favorable as compared to the prior year.

Although we are facing headwinds in ag in Mexico as well as a slower domestic construction market expected for the remainder of the year, which Scott will cover in more detail, we feel very good about our performance during the first quarter and our ability to generate above market growth and healthy profitability for fiscal year 2017 and beyond.

Now, we'll turn the call over to Scott Cottrill to discuss the details of our results this quarter, as well as our updated fiscal 2017 guidance.

Scott?.

Thank you, Joe. On slide five we provide a detailed summary of our financial results for the first quarter 2017. During the quarter, we generated net sales of $358 million, an increase of 2.4% over the prior year.

As Joe mentioned, these results were driven primarily by strength in our domestic construction markets, particularly in our non-residential end market partially offset by weaker than expected results in ag and in Mexico. Our gross margin totaled 27% for the first quarter, 570 basis points higher as compared to last year.

This margin expansion was largely attributed to effective price and cost management as well as increased sales of our Allied Products during the quarter. Adjusted EBITDA for the quarter increased 34% to $72 million, compared to $54 for the prior year period.

Our adjusted EBITDA margin came in at 20.1%, which was 470 basis points higher than the same period last year. Turning to slide six, domestic net sales increased 5% year-over-year, to $313 million. This growth was primarily a result of the continued strength and sales of our Allied Products, which grew 15% in the first quarter.

As Joe previously mentioned, our core domestic construction end markets experienced high single-digit growth over last year, despite our residential end market sales only increasing 1% year-over-year. The growth in our construction end market sales was partially offset by weaker than expected sales in our ag end market.

Our domestic adjusted EBITDA improved 60% year over year to $67 million, driven by slightly higher volumes, effective price and cost management as well increased sales of our Allied Products. On slide seven, I'd like to provide a bit more detail on what is driving our domestic performance by end market.

Our non-residential end market continued to perform very well in the quarter, increasing 11% over last year. The growth was driven by strong sales of our Dual Wall [ph] and our HP high-performance pipe products, as well as our Allied Products. This growth was most pronounced in the South East, Central Midwest, and parts of the West.

As I mentioned earlier, in our residential end market, our year-over-year growth was slightly lower than expected at only 1%, primarily due to a 5% decline in retail sales. As a reminder, 55% of our residential-related sales are in the retail channel, while the remaining 45% is related to land development and subdivision construction.

We believe lower retail sales were due to the mild winter and a relatively dry spring and summer, as well as de-stocking of inventory by our customers.

That said, we did experience high single-digit growth in sales related to new development activity, which together with our lower retail sales, as I mentioned a minute ago, netted to an increase of 1%.

In our infrastructure end market, our sales grew 7% in the quarter as we continued to benefit from strong demand and acceptance for our pipe and Allied Products. In our ag end market, sales were weaker than expected, down 16% on a year-over-year basis.

This softness was largely due to mild weather conditions in the spring, which allowed for an earlier planting season. As a result, we were not able to sell and install our products to the extent we had previously expected as we got further into the summer season.

During the quarter -- turning to slide eight, during the quarter, free cash flow improved $17 million from a use of $30 million last year to use of $13 million this year. This improvement was due primarily to higher earnings and lower working capital, partially offset by higher restatement-related costs.

We also repaid $61 million in debt since June of last year, and end of the quarter with net debt of $446 million. CapEx for the first quarter was $13 million, an increase from $12 million in the first quarter last year, putting us on track to spend between $50 million and $55 million for the full year.

Our top CapEx priorities for fiscal year '17 include the completion of our new facility in Missouri as well as expanding our HP production capacity. Slide nine highlights our disciplined capital deployment strategy.

Our highest priority use of cash continues to be investing in our business, as well as making strategic acquisitions to complement our product offerings. In addition, we are committed to returning a portion of our excess cash to shareholders through our dividend program, and will consider opportunistic share purchases in the future.

Now let's turn to slide 10 for our fiscal year financial outlook. On slide 10, we have provided our updated guidance for fiscal year 2017.

We are expecting net sales to be in the range of $1.27 billion to $1.31 billion, which at the midpoint is essentially flat compared to fiscal 2016, and is down $65 million from our previous guidance range midpoint-to-midpoint.

The revised forecast is based on trends we saw during the first half of the fiscal year, particularly slower market growth in our domestic construction markets during Q2 and continued weakness in our ag end market in Mexico.

More specifically, our revised forecast contemplates consolidated net sales for the second quarter to be down 5% to 7%, as compared to the same period last year. We are also lowering our adjusted EBITDA expectations to between $200 million to $225 million for the full year.

This implies a $5 million decline in adjusted EBITDA from our previous guidance. The lower guidance reflects the impact of the lower sales guidance I just mentioned, partially offset by favorable price and mix relative to our previous expectations.

Lastly, as a result of these changes, our expectation for adjusted EBITDA margin is now between 15.7% and 17.2% or 45 basis points higher than our previous estimates. On slide 11, we have provided additional color on the end market dynamics driving our updated full year expectations.

In our core construction markets, we now expect the market to grow between 0% and 4% compared to our previous expectation of 4% to 7%. The growth in our domestic construction markets will be offset by continued softness in our ag end market, which we now expect to decline somewhere between 15% and 25% for the full year.

We are also expecting the weakness in our international markets to persist throughout the remainder of the year largely driven by continued softness in Mexico. Before we open the call to your questions I'd like to provide an update on our upcoming filings, which are detailed on slide 12.

As we continue to work toward a normal filing schedule we have provided an updated timeline for our next three quarterly filings. As noted, for the first quarter we expect to file our 10-Q by the end of October. For the second quarter we expect to file our 10-Q between late-November and early-December.

And for the third quarter we expect to file that 10-Q by the due date of February, 9. Lastly, we have provided you with our preliminary net sales expectations for the second quarter, which we expect to be down 5% to 7% from the prior year.

However, given that we are still in the process of closing our books we will not be making any comments nor responding to any questions regarding our Q2 operating performance, including adjusted EBITDA on today's call.

We intend to fully address our second quarter performance when we host our next earnings call, which we believe will occur at some point during the middle of November. We will of course alert you with specific details when the date firms up as is our customary and normal policy. Now, we'll be happy to take your questions.

Operator, please open the line..

We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Rob Hansen with Deutsche Bank. Please go ahead..

Thanks. So yes, we appreciate the 2Q sales update. So I wanted to kind of dig in to really 1Q and 2Q in terms of non-res in the United States. I think you were tracking somewhere in the double-digit range when you exited 4Q, and so you had a solid pace there.

So what did you see in terms of maybe on a trend basis throughout the quarter and into the September quarter? And were there projects being pushed out, were there any differences between large projects or small projects or the type of properties? Any color on the ground in terms of what you've been seeing from 1Q into 2Q?.

Yes, Rob, I'll take the first stab at that. Again, I think the bottom line is just in Q2 first, we just see that growth has slowed. And really that's manifesting itself on the pipe side as well as on the Allied side from what we saw in Q1.

And Q1 non-res has been [ph] up 11%, really good performance, and again, I think it's fair to say maybe a little bit of timing between Q1 and Q2 on how those sales sell, but really what we're seeing between Q1 and Q2 is mostly just related to the growth slowing as we talk about our outlook..

Yes, Rob, this is Joe Chlapaty. One of the difficulties we have in our business is trying to isolate and pinpoint the impact of weather. And one of the items that really throws into question the timing of business was the fact that non-residential construction again began earlier than normally you would anticipate.

So there were a lot of projects on the books that began earlier than we anticipated, and that strong volume continued into June. And so now they're ahead of where they normally would be by the end of the second quarter. I'll say this; the activity as it relates to request for plans, the request for designs has not decreased.

So we believe that going forward, the market [ph] remains solid for us whether it's the rest of this year or going into next year. I hope that helps..

I mean and just a little additional color as well, on the residential side, Rob, again. So let's talk Q1, we were up 8% in our construction market. And in Q2, for the total company to be down five to seven, our construction end markets again will be flat to slightly down as well in Q2 -- not as well, but down year-over-year.

So what we see there again on the non-resi side I think is a little bit of timing as well as slowing of growth. And on the residential side we saw continuation of what we saw in Q1 related to the retail and the de-stocking, and the impact there on a year-over-year basis. So that continued into Q2.

So just to give you a little bit more color there as well..

Got it.

And then just in terms of pricing, how much did price take away from the quarter? I imagine in agriculture it's obviously worse, but are you having to give up a little price in non-res as well?.

Yes, actually based on our expectations, and if you remember our -- and when we went out on June 7, we thought pricing was going to be down 2% to 3% year-over-year for the full year, and actually for the first half that was about a 2% to 3% as well. Actually, what we're seeing is really good price mix.

So on the yield side of the house pretty much flat with the prior year. So we're benefiting from what we expected and what was baked into our initial guidance, so up on that side, but flat on a year-over-year basis. And to your point, on ag it's down. So just to make sure I'm clear on that.

Ag would be down, and the other markets would be making up for that difference..

Yes, Rob, Mike Higgins, I would say ag pricing is declined with what we expected with the conditions in the market place, and then good pricing discipline on the construction markets has an in-line or slightly better than what we initially anticipated..

Got it, okay.

And then just the last question on the top line is just, I haven't had the chance to run the numbers, but the inputs in your guidance along with 1Q and 2Q sales, what are you kind of expecting in the back half, is that -- what are you kind of looking for there? Are you looking for a big rebound in the end markets or kind of a continuation of the trends you've seen?.

I think when you look at the second half, again we expect -- we had a very strong second-half last year so I think it's a little too early to call specifically what the end markets are going to do. As we said, we've definitely seen some slowing growth in the overall construction market.

But I think our expectations would be where we initially thought that Q3 would be in line with what we're anticipating. And then Q4, obviously we had a very strong winner which drove large sales growth.

So we weren't necessarily expecting to match that type of growth, that we would have more sales and look more like a normal winter, anticipating that we wouldn't have such a favorable conditions compared to last year..

Got it, thanks. So I'll defer to others..

Our next question comes from Bob Wetenhall of RBC Capital Markets. Please go ahead..

Hi, this is actually Marshall Mentz on for Bob today.

How are you all doing?.

Good..

I was wondering if you could maybe quantify the impact of the early planting seasons.

I think you spoke to delays in some projects or maybe putting off to next season? And then how should we be thinking about the impact to next year, is that comp [ph]?.

Yes, I mean ag -- I think part of the ag being 15% [ph] down in Q1 year-over-year, again we expect the ag to be down. And I think our range was 5% to 12% for the year. I think we tried our best coming out of our guidance to estimate the impact of the mild weather.

I think to be honest we underestimated that a little bit as to what that impact was going to be. And based on that early [ph] planning season a lot of what -- some of what we expected to get in during the summer has now been deferred.

Now, as to what will happen here in Q3 as those crops come off, that is something that we remain to see as we go forward. And again, to the fourth quarter impact, as you talked to, going forward again it's just -- in the ag market it does depend on the weather.

A little bit depends on farm incomes a little bit as well, and what they're willing to spend on drainage products versus other in crop prices. So a little bit of that all comes into play..

Marshall, Mike Higgins again, I think we said before that we thought the fourth quarter was a $10 million to $15 million got pulled out of '17 and into our previous year. So if you use that number ag is likely somewhere in that $4 million to $6 million range impact that fell into Q4 versus maybe would've happened in Q1..

Then maybe switching gears in the follow-up, on the gross margin you had some positive mix shift due to that growth of Allied.

Could you maybe elaborate on the drivers for that, and where you see the future of that business and the path relative to pipe?.

Yes, Allied again has just been a great -- again we use kind of a 30%-35% gross margin for our Allied products. And again, that was driven by our retention/detention products, our water quality products, so kind of the same group of products, if you will, year over year.

And again, they're not dependant on pipe growth as you could see by what we're talking about here for not only the question, but full year. But when you look at regulatory, especially on the StormTech, as those regulations change a lot more people are looking to -- and it's still a conversion story.

They're converting their ponds into the StormTech chambers. And so we continue to see that demand grow as we go forward. So, again, not contingent on pipe growth for that to continue to grow as we've seen it..

You know, Marshall, the Phase II EPA requirements are really creating significant demand for our Allied Products, specifically the StormTech, I'd say Nyloplast, and the Inserta Tee products, we don't see that slowing down or diminishing.

And what that really does for us is that has a pull along effect on pipe, because the main product going in is the chamber but all the related pipe and other things, inlets, water quality units follow that along. So we're not looking for that to slow down. We're very optimistic of where we're at with those products and the remainder of our portfolio..

Thank you, very helpful..

[Operator Instructions] Our next question comes from Ryan O'Donnell of Baird. Please go ahead..

Good morning guys, thanks for taking my question..

Hey, Ryan..

So I just wanted to touch again on kind of the slowdown you guys saw in 2Q.

Was there something maybe month-to-month or something that we can't see, what's kind of the consolidated number that gives you guys confidence that kind of the blend of the first-half will be the right run rate especially as you look to kind of get back to flat for the year on pretty tough comps in the back half?.

Yes, I think what we're seeing there is the fact that -- yes, I think Q3 we would expect to be a little bit favorable from what we had thought or it seemed last year. And I think as you look to Q4, because of the strong and mild winter that we had will be a little bit under Q4, so flattish if you will.

If you at domestically the second half will be a little bit up versus the first-half being a little bit down to get us back to that guidance range on a year-over-year basis.

And then again as International, as we talked about, that will just be continuing down and weak, but a little bit less of a drag than what we saw in the first-half as we go through the rest of the year on a year-over-year basis..

Sure, okay..

And Ryan, I think just to elaborate on that, the growth if you look on a month-to-month -- month-over-month basis in the first quarter was very consistent. And it followed a little more of an up-and-down pattern during the second quarter.

So as we said before, we've definitely seen kind of the overall demand slow, but again a little too early to call on the second half on what we'll end up seeing..

This is Joe Chlapaty, Ryan. The back half of our year is much more difficult to predict than the first-half just because of weather, and maybe getting back and talking about the very weak agricultural market we've had. One of the things that an early planting does do for us is the fact that crops go in earlier and they come off earlier.

And our fall season is typically a more robust ag season than the spring season. So the earlier crops come off the more opportunity there is for drainage to take place. So we're going to have a heck of a lot better feel here in another six-seven weeks. As long as weather stays favorable I believe we'll have a reasonably good ag fall.

It all depends on when winter comes in. But farmers have just been cautious this year. And I think the decision to put drainage in will take place as crops come off. I might add that in prior years we used to provide what we called an Early Order Program, an encouragement for farmers to take pipe early.

And we didn't do that this year because of the, I'll be honest with you; we don't like to run up too significant a credit exposure with any one customer. So we thought we would just let it run its natural course. So I mean, we're only in October 6, if the weather stays the way it is, so we'll have a solid fall..

Okay, appreciate all the color there guys.

And then on the margin side, you know, certainly a good quarter, it doesn't sound like -- but was there anything abnormal that you will call out about the first quarter and then how should we think about kind of progression through the year based on guidance it obviously slows in the back half but how are you guys looking at that 2Q and then in the second half?.

Yes, I think nothing unusual to your first question. As to the second question, as to the phasing I think a lot of the revision to the guidance we talked about will be mostly seen in Q2..

Okay.

And then lastly, any update on kind of the hedging benefit and flow-through both this year and then kind of what we can expect next year as well that kind of normalizes and they roll off?.

Yes, the propylene hedges that we have off of our polypropylene N resin purchases actually has moved and we are seeing the correlation come back in line with where it normally has been. So it's been almost like a $0.10 move in those hedges. So they have moved on a mark to market basis to a favorable place.

So we will see favorability as we go through the rest of the year, and that number right now is around $3 million based on forward pricing and forward curves..

Okay, I appreciate the time guys..

Scott, I am correct, and those will end at December [technical difficulty].

In December 31, correct. Based on our view of oil and the study that we have done as to our hedging needs and strategies, we will be layering on some additional hedges as we go through the year, but right now we are letting those just roll off..

[Operator Instructions] It seems we have no other questions at this time, so I would like to turn the conference back over to Joe Chlapaty for any closing remarks..

In summary, we are pleased with our results for the first quarter. The fundamentals of our business remain strong, and we are confident that we will continue our legacy of outperforming the overall market by driving conversion opportunities from traditional materials as well as generating significant operating leverage over time.

Thank you all again for joining us today, and we look forward to speaking with many of you very soon. Operator, that concludes the call..

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect..