Good morning, ladies and gentlemen, and welcome to the Advanced Drainage Systems First Quarter Fiscal 2021 Results Conference Call. My name is Ian, and I am your operator for today's call. [Operator Instructions].

I would now like to turn the presentation over to your host for today's call --.

[Audio Gap].

Thank you, and good morning. Thanks for joining us today. We appreciate your patience while we work through some of the technical issues. As you know, there's a new process and procedure for calling into these calls, and the vendor and the operator were working through that. So again, we appreciate you being patient during the delay..

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..

Lastly, the 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..

With all of that, I'll turn the call over to Scott Barbour. .

Thanks, Mike. Good morning, everyone. We appreciate your patience and for joining us on today's call..

Fiscal 2021 started off strong as demand and business activity in the first quarter remain stable at the top with some underlying variability by state and end market. Organic sales grew 3%.

And recall that we communicated to you in May that customers bought approximately $20 million of product in the fourth quarter of fiscal 2020 due to pre-buying in our construction end markets and favorable weather conditions in our agricultural end market..

Absent this dynamic, first quarter organic sales would have increased 8% and nonresidential would have been flat year-over-year.

Domestically, we had strong performance in key growth states like the Carolinas, Florida, the Southeast and Utah, and we were able to offset sales in states that reduced construction activity due to the COVID pandemic early in the quarter..

As a whole, we benefited from our national presence as well as our geographic and end market exposure, including the increased exposure of the Infiltrator and ADS' focused homebuilder programs provide to the residential end market and our strong presence in the agricultural market..

We had another strong quarter in the domestic agriculture business where sales grew 36%. This growth was primarily driven by actions previously taken to increase our focus on performance in this end market as well as positive underlying demand in this market and what was a strong spring selling season..

A lot of good work is being done in the sales and operations initiatives we defined as part of the renewed focus on agriculture at ADS, and the fall season is shaping up favorably..

International net sales decreased 9% in the quarter. Sales in our Canada business did well, but it was not enough to offset weakness in Mexico in our Exports business. We have recently hired a new Senior Vice President of our International segment, Tom Waun.

Tom comes to ADS after a successful career at Emerson, and we are excited to have him as a member of our team. Tom has decades-long experience in executive management, strategy and sales, and I look forward to working with Tom to improve the performance of our International segment..

Infiltrator once again exceeded revenue expectations with sales growth accelerating as we progressed through the first quarter. Infiltrator sales increased across their product portfolio with a strong underlying demand in the residential and repair-remodel end markets.

Roy and his team believe, and I agree, that the favorable trends for single-family housing brought on by the pandemic are quite favorable for Infiltrator, so we are making additional capital and resource investments there..

As we get into the second quarter, demand looks very similar to what we experienced in the first quarter. Our order book, project tracking, book-to-bill ratio and backlog are all positive, and we feel good about the first half of our fiscal 2021.

We expect the normal seasonal patterns to apply to the business, which only sharpens our focus for this first half of the year..

As mentioned previously, our national presence, distribution model and end market exposure enable us to capitalize on growth and activity across the U.S. As you can see on the chart on the screen, our residential end market exposure has increased to 38% of domestic sales, our second largest domestic end market behind nonresidential.

We view this as favorable, given current market trends and the uncertainty in the nonresidential market. The residential market should benefit from single-family housing undersupply and potential future suburban trends as people look to spread out in the aftermath of the COVID pandemic.

This dynamic should also benefit horizontal, nonresidential and infrastructure development as developers look to support the increase in single-family homes and communities..

I think in the first quarter with the residential portions of ADS and, of course, Infiltrator growing to double digits, the success of our renewed focus on the agriculture market and the uptick in the sales to the retail segment, driven by the DIY and stay-at-home project activity, demonstrated to us the power of this end market diversity and we've initiated several programs to increase success across these markets so we can be prepared for changes in demand across our business..

From a profitability standpoint, we achieved record adjusted EBITDA in the first quarter.

Organic adjusted EBITDA margin increased 830 basis points, driven by favorable material costs, lower manufacturing and transportation costs driven by our operational initiatives, contributions from the proactive cost mitigation steps announced in March and leverage from the growth in Pipe and Allied Products..

Infiltrator also has record profitability in the quarter due to favorable material costs, the contributions from the synergy programs and continued execution of their proven business model. The synergy programs are right on track to achieve the run rate synergies we've previously communicated..

Similar to my comment earlier on the second quarter revenue, the second quarter profitability trends continue in much the same way as the first quarter at both ADS and Infiltrator. We are making good progress on our operational improvement initiatives within our manufacturing and distribution network.

Material pricing remains favorable to the prior year, though the comparison will become more difficult as the year progresses..

We will continue to watch our spending very closely as we deal with many of the same issues that other companies are dealing with. Reopening is presenting challenges, including recruiting and retaining production workers, absenteeism, and all of these challenges we have to deal with on a daily basis.

We've had roughly 80% of the salaried workforce, including sales, pretty much working from home since late March. So there are a lot of issues you would expect that we're dealing with daily.

We have made adjustments and proven to ourselves that we know how to run the business in these conditions, and that's what we'll to focus on as we manage through this period of unique circumstances..

There's no doubt that uncertainties exist for future demand. We will be focused on disciplined execution and doing the basics well as we move forward through fiscal 2021 and build on the strong start at both ADS and Infiltrator..

With that, I'll turn it over to Scott Cottrill to further discuss our financial results. .

Thanks, Scott. On Slide 6, we present our first quarter fiscal 2021 financial performance. Net sales increased 23%, with 3% organic growth plus the contribution of Infiltrator. Within ADS, domestic sales increased 4%, driven by sales growth in both the agriculture and construction end markets.

Importantly, sales increased 4% in both Pipe and Allied Products. Construction sales accelerated at the end of the quarter as states with more stringent restrictions for the pandemic began to open back up..

From a profitability standpoint, our adjusted EBITDA increased $79 million or 99% compared to the prior year. Our organic adjusted EBITDA increased $38 million, with strong performance from our sales, operations, procurement and distribution teams..

ADS is very well positioned to capitalize on the current stability in our end markets as well as lower input costs, given our market-leading position, breadth of products and services, geographic and end market diversity as well as our national relationships.

These attributes [ or modes ] make us the premier partner and leader in the industry and led to the margin expansion and financial performance in the quarter..

Infiltrator contributed an additional $42 million to adjusted EBITDA and has many of the same benefits as ADS in this market environment.

Infiltrator achieved a record adjusted EBITDA margin this quarter and is in a very good position to grow as a result of the underlying demand in the residential market as well as their material conversion strategy..

Moving to free cash flow on Slide 7. We more than doubled our free cash flow in the quarter, increasing from $53 million in the first quarter of fiscal 2020 to $124 million in fiscal 2021.

The very strong free cash flow results were driven by the strong sales growth and profitability we achieved in the quarter as well as execution on our working capital initiatives..

Our working capital as a percent of sales decreased to about 21% as compared to about 25% last year..

Finally on Slide 8, we present our current capital structure. Our trailing 12-month pro forma leverage ratio is now 1.9x below our target range of 2x to 3x levered we've previously communicated and well ahead of our original target to achieve a leverage ratio of less than 3x by the end of this calendar year.

This performance was achieved as a result of our working capital initiatives as well as the strong profitability performance we demonstrated both in fiscal 2020 as well as in this quarter..

We ended the quarter in a very favorable liquidity position, with $235 million in cash on June 30, 2020 and $289 million available under our revolving credit facility, bringing our total liquidity to $524 million. It is also important to note that we have no significant debt maturities until 2026..

Further, we paid down the remaining $50 million balance on our revolving credit facility this past Friday, bringing that balance to 0 as of today..

Our capital deployment priorities remain to invest in our business with a focus on safety, capacity expansion, productivity and efficiency improvements as well as our innovation initiatives.

In addition, we will continue to assess bolt-on acquisition opportunities through our discipline process, staying close to our core and focusing on adding products to our water management solutions package..

Lastly, due to the uncertain market environment, we are not providing guidance on the call today..

With that, I'll open the call for questions. Operator, please open the lines. .

[Operator Instructions] Your first question comes from the line of Mike Halloran of Baird. .

So let's start on the nonres side. The commentary in the short term points to a little decline but stability overall. Maybe specifically how you're thinking about backlog.

But more importantly, once you get past the next couple quarters, what's the current thinking internally for how resilient that business could be given your various exposure points in that channel?.

This is Scott Barbour. We do feel like we understand and see for the next couple of quarters a very stable nonresidential environment. We look at all of those high frequency metrics and they're pretty good. And I think, when I think just about nonresidential, it's going to be a couple things.

One, it's going to be segmenting that market and understanding very carefully those segments that will be growing, those that are not growing -- and you know all those segments, Mike -- and making sure that we've got the right people focused on warehouses and data centers and those kind of places where we know money is being spent.

We're pursuing a lot of large warehouse jobs right now. So we see that and we know who the big developers are in that, so we're quite focused on that..

We also believe horizontal construction, which you know we are much better in, in terms of participation, than vertical construction, we'll probably be more favored. So we're quite focused on that..

And then quite honestly, there is some, I would call it some power of incumbency where we have a large high-touch sales force. We're out there seeing all the jobs. So when things are being bid, we're going to see them. And I think that gives us a nice advantage, that and this kind of national footprint we have versus a lot of competitors.

So we can move around to the right geographies within that nonresidential..

But there's definitely going to be change and I think we're proving to ourselves that we're pretty good at flexing and moving resources to the point of attack even when we can't really be out in the field like we've not been able to over the last couple of months from a selling perspective. .

And I guess the flipside of that is the residential piece, which, given the Infiltrator acquisition's, coming in at a really nice mix for you guys. That serves as a mitigation point when that change point comes and if weakness hits that market.

How much of an offset do you think of that? How sustainable is the underlying trend from what you see? And is there any reason that you would participate more or less in that recovery curve on the residential side with your core businesses?.

I think we'll participate more, for 2 reasons. One is the Infiltrator market share -- model. It's a proven business model. It's a material conversion model. They have all the right distribution to reach the touch points out there. It's a very consistent grower, market share gainer. And again, they will be benefited from the move outside of the cities..

Number 2 is, we have had several initiatives in ADS to pursue residential developers, residential homebuilders, infrastructure. And as you saw, those grew pretty nicely in this last quarter..

So the way we kind of look at it is, if we can kind of grow at better than the market rates with Infiltrator and those residential initiatives on ADS, we've got a really good chance of offsetting whatever market declines might occur in nonresidential.

So that's how I'm kind of thinking about it and making sure we're allocating resources both sales resources and capital..

You heard me mentioned in there we're going to step up some capital. We've already stepped up some capital. We're going to step up some more capital to Infiltrator to make sure they've got all the capacity they need. We're moving some selling resources from nonresidential to this residential homebuilder and development and infrastructure pursuit.

So we're definitely trying to be agile to understand the dynamic you asked the question about. .

That makes a lot of sense. And certainly a well-timed transaction. Last one for me. .

I was waiting for someone to say that. .

Yes. Yes. Last one for me. Help me understand the sustainability on the margin side. Obviously resin a tailwind for you. The Infiltrator inclusion helped a lot as well, but resin a tailwind.

How sustainable do you think that is? And what are pricing dynamics looking like in the market right now?.

Pricing dynamics are pretty favorable. I mean, I think, I mean favorable in the sense that we're able to hold price in the market today across the board, really, between Infiltrator and ADS. There's always a few skirmishes going on and we'll deal with those..

And I think we've taken somewhat of a step change. Resin will go up and down. There's tools we'll use to mitigate that of pricing and operational initiatives.

But overall, the improvements you saw in transportation and the manufacturing of the 4-wall manufacturing here, I think some of the things we've done and learned how to do kind of, in this cost structure we have today, will benefit us long term.

But I don't think we're going to go all the way -- we're not going to go back to where we were, let's put it that way. But we will have seasonal and different factors that we'll have to deal with..

That said, we have a lot of tools in the toolkit and a lot of different initiatives that we can continue to push ahead on that I think will demonstrate that we've got more in the tank relative to margins. .

Your next question comes from the line of John Lovallo of Bank of America. .

The first one, maybe we can dig in just a little bit deeper on the organic EBITDA margin expansion, 830 basis points. And you listed, I think 4 kind of drivers were on that - slower manufacturing, cost mitigation and leverage.

Is there any way you could at least dimensionalize the impact from each of those?.

Scott, you want to take that?.

Yes. Hey, John. The way I would talk to it is, when you go to the EBITDA bridge and you look at kind of that boxed-in area, it highlights those areas. And again, I'll walk the left to right a little bit. But again, the volume hung in there and was stable. And our Allied Products continue to grow.

So you get really good leverage there on kind of that volume side of the house..

Scott just hit on kind of that lower input cost environment. And much like we continue to talk to, we're able to hold on to most of our pricing on a year-over-year basis, even given that lower input cost environment. So that's why you see that great leverage on that $17 million that was indicated there as well..

On the manufacturing and transportation, I think that's where we get the most excited. That's where you see kind of that operational improvement we've been talking about for the last 12 to 24 months. We've got our operational excellence initiatives that are taking flight. And you saw those starting to come in.

We talked about we weren't really very happy with our performance and our absorption of fixed costs back in January, Feb and March of last year. This year, we did a much better job around that, so you saw that come through as well.

And then the synergies that we're getting related to the Infiltrator acquisition, we're getting those fully on schedule with the run rate synergies that we talked about..

As to the mitigation actions that we took, I'll tell you that in the quarter, probably around $5 million from mitigation actions that we took that you can call temporary if you want. But we'll continue with those as we go here into Q2 and as we work forward.

But there was not a lot in the numbers and in the ADS legacy margin performance that was other than good operational performance. .

Could I add one thing to that? John, you recall we talked quite a bit that the big lift with Infiltrator was around materials work, material science, materials, buying materials, things like that. And I think those are kind of woven into what Scott said. And those are things that aren't going to come back out. Those initiatives, those kinds of things.

So we're really happy with how those synergy programs and the leadership of those synergy programs and the digging in on those has gone so far..

So not all of it is synergy, but I think that's an important thing and one of those things in the toolkit we have going forward that we haven't had in the past, was that that synergy work with Infiltrator, particularly on the materials. .

And I'll hit on it just one more time, because it's worth it. Those operational initiatives and excellence initiatives, again, multiple, some are in flight now, some are hitting our results, some will be hitting here as we move through the next 3, 6, 9 months. So that's where we're getting good traction and very pleased with our results. .

Yes. Perfect. That's exactly what I was getting at. Thank you..

And then in terms of the comment on demand being similar to what we saw in the first quarter.

I mean, quarter-to-date, would you say that organic volume is running up sort of mid-single digits? Is that a fair way to think about it?.

Year-over-year or sequential?.

Year-over-year. .

Yes, it's probably doing that. Sequential is slightly ahead. July was slightly ahead of June on a daily basis. And after 2 or 3 days of August, it's kind of the same. But I kind of go back to our experience of April, May, June. What we see happening right now looks a lot like June. When I say now, I meant really July and the first couple of days.

And given the backlog and the pace of orders, the book to bill, all that stuff is lining up for a very similar type of sales performance, I think. .

That's great. And then finally, nice cash position and liquidity position.

Any updates on your thoughts around capital allocation and anything around the ESOP that might be able to take place?.

Nothing on the ESOP. No ESOP questions today. No, nothing new on that. I'm just, I'm joking with you. Nothing new on that..

We had our board meeting this week and we talked a lot with them about capital allocation and deployment and both capital investments we need to make at Infiltrator and ADS, things that we've been working on, we continue to kind of bring to fruition. And then we're going through a very disciplined process.

We've spoken in the past with you all about establishing a good process to look at acquisitions and be very thoughtful and deliberative. And we started that back late last year after we got comfort with how things were going with Roy and the team at Infiltrator. And we saw this cash position building. We saw the liquidity coming forward.

We didn't think it would be quite as good as it is, but we knew it was going to be good. So we've started down that path.

There's nothing really new to report on that besides that probably Scott, Mike, myself, a couple of others spending quite a bit of time thinking and working on that with our board, and we had a good discussion with them yesterday about that. .

[Operator Instructions] Your next question comes from the line of [ Eric Schmois ] of Loop Capital. .

On the last call, you indicated that you had visibility out through September.

Just curious did visibility improve just given what you're seeing in the macro? Has it returned to more seasonable levels? And just how far out do you think you have it right now?.

Morning. This is Scott Barbour. And welcome. We do have, I think very good visibility into September. Kind of driving my comments around this quarter will look a lot like the last quarter. I think I would -- our bet right now is that things are going to be fairly stable. There'll be some noise underneath it.

Don't know exactly what's going to happen with all the reopenings and schools and the election and those kinds of things. But pace is pretty good, and I think that could extend through our construction season..

And we look at the macroeconomic data just like you guys do. We were hoping it would settle down with a, let's call it a smooth reopening. It didn't. I mean, the smooth reopening didn't really occur, so that we still -- we thought there would be a little more clarity on the long term. I don't think that it's really developed that way.

But we know how to operate in this environment and we will continue to watch that very closely. But I feel pretty good out through the end of this quarter and through our construction season..

And I said it in the comments, but I would reiterate that the fall for our agriculture business is shaping up pretty nicely, which is good to see. And that's an important piece of our business as we move into September, October and November. Now it can vary with poor weather conditions as we get later in the year, towards November and December.

And we had a very good year last year. But things are shaping up nicely for us now. And our renewed focus on that as well as the bet towards residential with Infiltrator and some of the ADS initiatives, I think have paid off well for the company, and I'm glad that we took those initiatives on a year and a half ago. .

Got it. And then you talked about some of the capital infusion into Infiltrator as you're looking to add some capacity, it sounds like.

Should we anticipate any step-up costs or startup costs or any potential inefficiencies as you look to bring some extra capacity on?.

So that's a really good question. And that capital is not on the ground yet. That's equipment that's still kind of in process of being built and not delivered. And there are always difficulties when you start on major capital equipment like that..

That said, that's a pretty profitable well-run, very solid operational and engineering group there. We'll have some issues. I mean, there always are. But I have a lot of confidence in that team that we'll find ways through that. And it might dent us for 1 month or 2 months, but it's not a crippler, if you know what I mean.

I mean, it's just you're going to have to go through those things. There's a bit of birthing pains on those. And in a company like that, I think the scope and profitability of it we're very well positioned to absorb that. .

Okay. Thank you. Last question.

Just looking at inventories, the sequential drop, was that, in your opinion, seasonal or a little bit more than seasonal? Or did you see any destocking and distribution? Just curious, if so, could you end up seeing a restocking here, if you aren't already?.

It's more seasonal. Neither business, ADS nor Infiltrator really relies on a big stocking up of distribution and drawdown. So you don't get some of those inertial forces in this company that I know you're asking about and looking for.

That destocking you saw on the inventory is really demand-driven, A; and then, B, somewhat input cost driven, because when we procure at lower pricing, we get an inventory dropdown. .

[Operator Instructions] There are no further questions over the phone lines at this time. I turn the call back over to the presenters. .

All right. Thanks a lot. We appreciate the questions and I'm sure we'll get a lot more here as we go through the day. And we really appreciate you all joining us..

It was a good quarter for us and we're quite happy with how things are going at both ADS and Infiltrator. As you know, we've all got challenges. So it's kind of a unique set of circumstances. But as I said earlier, we've proven that we know how to operate in this environment..

We'll continue to focus on health and safety of our employees; it's very important to us. We continue to provide various central products for storm water management and on-site septic waste water solutions to our customers and communities they serve.

We'll continue to protect our profitability, balance sheet and cash flow through the economic uncertainty arriving from COVID-19 and we hold confident we'll come through this and we'll come through it as a stronger company. We're learning things every day..

I want to thank our employees. They've done a fantastic job here over these last 4 or 5 months in a very unusual set of circumstances and I'm really proud of how they've come through this.

I wish I could tell them it's all over, but it's not and we're going to have to continue to operate in this way for a longer period of time than we had originally thought. But they've done an outstanding job kind of top to bottom. So I really appreciate all that. And we look forward to the rest of the day..

And operator, I think that's all for us here. .

This concludes today's conference call. You may now disconnect..