Earnings Call: Q4 2021

May 20, 2021

Good morning, ladies and gentlemen, and welcome to Advanced Drainage Systems 4th Quarter Fiscal 2021 Results Conference Call. My name is Crystal, and I am your operator for today's call. At this time, all participants are in listen only mode. Later, we will conduct a question and answer I would now like to turn the presentation over to your host for today's call, Mr. Mike Higgins, Vice President of Corporate Strategy and Investor Relations. Chris. You may begin. Good morning, everyone. Thanks for joining us today. With me here, I have Scott Barber, our President and CEO And Scott Cottrill, our CFO. I would like also 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 ks 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 this morning is posted on the Investor Relations section of our website. A copy of the release has also been included in an 8 ks submitted to the SEC. We will make a replay of this conference call available via webcast on the company website. I'll now turn the call over to Scott Barbour. Thanks, Mike. Good morning, everyone. Thank you for joining us on today's call. We delivered another quarter of record financial performance in the Q4 of Fiscal 2021. Sales grew 20% year over year driven by 21% residential sales growth an 11% non residential sales growth as we continue to execute at both ADS and Infiltrator in a favorable demand environment. The residential market remains strong. Both ABS and infiltrator residential market sales grew over 20 Chris. In the Q4 driven by favorable dynamics in new home construction, repair and remodel and on-site septic, Accelerated by our material conversion strategies at both businesses. Residential market sales have increased to 39% of our domestic sales As compared to 23% prior to the Infiltrator acquisition. The market indicators show that homebuilders continue to acquire land for future development and that there's an overall shortage in available homes, which drives the front end new community development sales at ADS And the on-site septic system sales and infiltrator are driven during the home completion stage. In addition, the repair remodel business remains robust. ABS participates in the repair remodel segment of the residential market through retail, which is about 40% of the legacy businesses residential sales. Infiltrators repair remodel business in the residential on-site septic market accounts for roughly 1 third of their business. Growth in our non residential end market was broad based throughout the United States. We continue to benefit from growth in horizontal construction Such as warehouses, distribution centers, data centers, as well as the developments that follow the residential build out. About 2 thirds of our domestic Allied product sales are in the nonresidential market where sales increased 13% 50% this quarter driven by strong demand as the spring selling season got off to a good start. The agriculture economy remains favorable And we continue to benefit from the programs we put in place around organizational changes, new product introductions and improving execution. We experienced strong demand in the Midwest region, particularly in Minnesota, Ohio, Iowa and Michigan. Further, we are expanding our presence in key strategic areas like Missouri and parts of the Southeast to drive increased market share. International sales also increased 49%, primarily driven by sales growth in our Canadian business, which nearly doubled compared to last year. Canada is doing well across both the construction and agriculture end markets with similar trends to the United States. Additionally, this quarter we continue to leverage our pipe manufacturing facilities in Mexico To help service the strong demand we experienced in the United States. Finally, Infiltrator continues to exceed expectations With 23% sales growth in the 4th quarter against a very tough comparison to the prior year and broad based growth Chris with strong growth in Florida, Tennessee, Alabama and Indiana among other states. This was led by our material conversion strategy of displacing concrete septic tanks with plastic tanks and the economic advantages of Septic Chambers and Leach Field Systems. The infiltrator business is benefiting from strong distribution presence in the Southeast and Midwest As well as rapidly growing micropolitan areas, which typically lack the sewer infrastructure needed to support rapid housing development. Moving to profitability, we achieved record 4th quarter adjusted EBITDA during the period. Adjusted EBITDA margin increased 190 basis points. The increase in profitability in both businesses was driven by leverage from the strong sales growth, Favorable pricing as well as contributions from our operational productivity initiatives which help to offset inflationary costs. I'm very proud of our employees and management team at both ADS and Infiltrator for bringing fiscal 2021 To a close with strong financial performance this quarter. I would like to highlight our fiscal 2021 financial performance Compared to the 2018 Investor Day plan, now that we have finished out the year. We communicated a 3 year plan in November 2018, About a year after I got to ADS and I'm very pleased to have exceeded the targets we laid out. The ADS legacy business grew sales at a 7.7% CAGR driven by the sales programs we laid out in November 2018. We continue to execute our proven market share model, converting traditional materials to our plastic pipe products in the stormwater market to drive this outperformance. Our sales team is going after the significant growth opportunity For large diameter HCP pipe, which has grown at a double digit CAGR over the 3 year period. We are focused on growth in key states, Maine with Florida, Texas and California as well as additional priority states where we find attractive market opportunities. We continue to penetrate the Allied product market through our existing portfolio as well as through innovation and acquisitions. Allied Products sales have also grown at a double digit CAGR over the time period. Finally, our Agriculture and Canada businesses Fiscal 2021 with a margin of 24.3 percent significantly outperforming our plan. The outperformance was driven by execution, top line growth, favorable material cost, fixed cost leverage as well as improved efficiency in our Supply Chain, Operations and Distribution. The improvement in profitability as well as execution of our working capital initiatives And the acquisition of Infiltrator drove the improvement in free cash flow conversion to 66% of adjusted EBITDA, Significantly better than the 45% in fiscal 2018 and above our target of at least 50%. Our performance over the last 3 years coupled with the acquisition of Infiltrator changed the growth and financial profile of the company. The acquisition of Infiltrator was a great addition to our business. Through Infiltrator, we increased our exposure to the residential market, diversifying our end market exposure and gained a very high quality management team, set of engineers and operators We continue to execute the Infiltrator's proven business model. We believe executing on the strategies and plans laid out in 2018 Increases the value of our business as evidenced by the significant increase in our stock price since issuing this plan in 2018. We will continue to focus on driving top line growth, improving our profitability, and converting profitability to cash at a high rate, In turn creating additional value for our shareholders. We will continue to pursue these proven strategies and we'll issue our next 3 year plan this fall at our next Investor Day. In summary, we did a great job executing this quarter and fiscal year and are pleased to continue our track record We're generating above market growth across our key end markets. In the past, we've shown our growth relative to the market. However, market statistics are a bit distorted right now due to the pandemic, making it more difficult to measure. That Regardless of how you measure the market growth or decline, we handily outperformed the market giving us confidence that our material conversion story is intact or even accelerating. Our success in growing above market is a function of our unique advantages. We continue to have success in gaining market and wallet share through our material conversion and water management strategies. We are more vector to key states where construction activity remains high and we're making focused bets in others where we see opportunities for growth. We are benefiting from broader market trends including rapid growth in micro positive areas and higher exposure to suburban development. And since the acquisition of Vifeltrager, we are more exposed to the residential construction market, which now represents nearly 40% of sales. And within the non residential market, we are also benefiting from our outsized exposure to horizontal construction, which was far more healthy than vertical construction this past year. In other words, we're an evolving and a stronger ADS today at any point in our history and we look forward to the future. As we look to fiscal 2022, we will build on our strong market position, execution And new levels of profitability. I want to thank our employees who were the bedrock of our success over this past year. We will stay focused on employee health and safety And on delivering the needs of our customers. We're well positioned to capitalize on market demand while continuing to generate above market Chris. With that, I'll turn it over to Scott Cottrill to further discuss the financial results. Thanks, Scott. On Slide 7, we present our 4th quarter Fiscal 2021 Financial Performance. I'll be brief on this slide as Scott covered a lot of the details already, but I do want to highlight a few key points. Our strong top line revenue growth of 20% was driven by both volume and pricing with strong growth across our ADS and Infiltrator businesses And we expect these dynamics to continue as we move forward into calendar 2021. The 31% growth in consolidated adjusted EBITDA was driven by strong top line growth in addition to favorable pricing, operational efficiency initiatives, as well as our synergy programs. In addition, due to the strong results for fiscal 2021 and to reward the incredible service and dedication of our employees this past year, We've decided to pay a one time bonus to employees who are not part of our annual incentive compensation plans, resulting in approximately $4,000,000 of additional Our ability to deliver in the face of a uniquely challenging year and a strong demand environment Would not have been possible without their hard work and dedication. Moving to Slide 8, we present our full year results. Revenue this year increased 19 percent to $1,983,000,000 coming in above the high end of our guidance range. This was the result of strong demand we experienced this year, growing double digits in both the domestic and international businesses. Our adjusted EBITDA increased $205,000,000 to $567,000,000 Driven by strong volume growth in both Pipe and Allied Products, favorable pricing and material costs and operational efficiency initiatives that offset Strong volume growth, favorable price cost performance as well as continued benefits from our synergy programs. We also had the benefit of owning Infiltrator for the full year as compared to 8 months in fiscal 2020. Finally, our adjusted EBITDA margin increased 700 basis points to 28.6%, A company record. Moving to Slide 9. Our year to date free cash flow increased $134,000,000 Precious free cash flow results were driven by our strong sales growth and profitability as well as execution on our working capital initiatives. Our working capital decreased to approximately 18% of sales, down from 21% of sales last year. Further, our trailing 12 month leverage ratio is now 1.1 times. We ended the quarter in a favorable, very favorable liquidity position with $195,000,000 of cash and $339,000,000 available under our revolving credit facility, Bringing our total liquidity to $534,000,000 And finally on Slide 10, we have our fiscal 2022 guidance. Based on our performance to date, order activity, backlog and current market trends, we currently expect net sales to be in the range of $2,220,000,000 to $2,300,000,000 representing growth of 12% to 16% over this past year and adjusted EBITDA to be in the range of $635,000,000 to $665,000,000 Representing growth of 12% to 17% over this past year. As we look to fiscal 2022, We are confident in the demand environment across our end markets. In our largest domestic market, non residential, forward looking indicators are robust And our backlog of open orders are at the highest levels in recent memory. Our residential end market growth is also expected to remain strong, particularly in those key Southern Crescent states we are focused on, including Florida and Texas. In addition, our agricultural market remains robust with strength in crop Pricing, driving investments in land productivity through better field drainage. And finally, the international outlook is turning more favorable, driven by our business in Canada, which is our largest international market. Our Mexican business has stabilized and we will continue to leverage our Mexican manufacturing assets to help service the strong demand coming from the U. S. Lastly, the exports business is expected to rebound as COVID-nineteen restrictions continue to ease. This strong demand outlook gives us confidence in our revenue guidance. We have also executed several price increases since our Q3 call across all of our end markets at both ADS and Infiltrator. Chris. On the cost side, we are seeing inflationary pressure in materials, labor and transportation as well as some issues with labor availability. Within transportation, the 3rd party market availability is tight and there is inflationary cost pressure on diesel, wages and commentary rates. In this type of inflationary cost environment, we are also able to control our transportation costs better than most due to our large internal fleet And we are working to leverage such to offset the rising costs we are seeing through payload efficiency, route planning and other programs to more efficiently Given our strong balance sheet and leverage position, strategic capital deployment remains one of our top priorities. We will continue to execute a balanced and disciplined capital deployment strategy, focusing on organic investments as our highest return, lowest risk option. In fiscal 2022, we plan to spend between $130,000,000 $150,000,000 on capital expenditures to support growth, recycling, innovation, productivity and safety initiatives at both ADS and Infiltrator, basically doubling our commitments to CapEx year over year. In addition to organic investments, we continue to actively explore M and A opportunities that are aligned with our strategic vision. We are extremely excited about the M and A opportunities we are pursuing and see this as a key component of our capital deployment strategy in both the near term and longer term. In addition to investing in the business through deploying capital organically and through M and A, We today announced a 22% increase in our quarterly dividend as well as a $250,000,000 increase in our share repurchase Corrigan. We previously had $42,000,000 available under this program and the increase announced today brings the total authorization to $292,000,000 With that, I'll open the call for questions. Operator, please open the line. Chris. Queue. Your first question comes from the line of Mike Halloran with R. W. Baird. Hey, good morning everyone. So let's start on the pricing, the inflation side. So at the end there, Scott, you mentioned a handful of price increases across all your product categories. How are you seeing that layer in as you look through the year? How should we think about price cost by quarter, probably a little tougher in the front half of the fiscal year, a little more balanced, maybe even slightly positive in the back. And how you're cumulatively thinking about what price cost looks like for the year? Yes, Michael, Scott here. So you're thinking about the right way. So Our revenue guidance range up 12% to 16%. Think about that as more Pricing than volume is the way I would talk to that for the full year. The other part on the phasing, I think it's really important for folks to understand Based on kind of what we're seeing have seen over the last couple of months and recently, we look at the first half as being kind of that more narrow price cost Spread environment, we'll stay in front of it on a dollar perspective, but as we talk margins, we see that as kind of The tightest period and then when you get to the second half, then that obviously eases up and leads us to our guidance of flat to up 30 basis points from a margin perspective for the year. So the first half will be the tightest part for us of our fiscal year. And then the follow-up is, can you put that then in the context of how you think about margins over time here? It certainly felt like from Scott's Original prepared remarks that this is the new baseline that you think you can expand margins off of over time. Just help understand the levers as we sit here, Even if inflation or the cost of the inputs remains at an elevated level. Good morning, Mike. Scott Barber. And I think the way we are thinking and working this is The game has changed a bit on us this year with these really high inflation Environment. So it's now about getting pricing, getting productivity, but mainly pricing to offset those kind of that inflation. And it becomes a dollar gain, get enough dollars to offset that. We'll try to get some SG and A leverage. And that'll be the game and the dials that we work here until the kind of a rapid rise of inflation levels out Or begins to go back the other way. And then over the long term, the programs we've been working on around productivity, capital investment, operating the businesses better are still intact and they're still going on underneath All of this messiness of inflation and then we'll begin to be on this margin expansion again Once the environment, I would say, kind of returns to normal or we get all the right things in place. And we feel very confident about that. It's also driving a lot of the capital spending that we're doing. And we spend A lot of our time and energy making sure we got the right resources to execute on that kind of expansion. Thanks, Scott. Thanks, Scott. Appreciate it. All right. Thank you. Your next question comes from the line of Matthew Bouley with Barclays. Chris. Good morning. Congrats on the results. Thanks for taking the questions. I wanted to ask actually on that last point there, Scott, The CapEx and the big uptick this year. You guys have sort of day lighted the past couple of quarters around potential growth investment to come and clearly coming to fruition here. Could you just outline a little more of the specifics around Chris. Where are you investing? What of your product categories needs additional capacity? And just maybe any elaboration around the amount of capacity you're adding in dollar terms or however you want to frame that? Thank you. Hey, Matt, Scott Cottrill here. Yes, I'd say when you look at these two businesses right now, I'll break it down between ADS and Infiltrator. We've talked about Infiltrator, kind of in that reinvestment cycle, if you will, that they go through every 3 to 5 years. Chris. I'll start with demand. The demand that we're seeing across those businesses is significant. So as you look through the Acceleration in investments, it's to stay in front of that, right? It's not that we're out of capacity or that we can't handle the growth. It's to make sure that we can handle it efficiently and serve our customers as best we can and get our inventory held where it needs to be. So a lot of what you see on the infiltrator side is to By and large, that's the bulk of what we're spending on that side. On the ABS side of the house, again, that's still a big piece The increase that we're seeing year over year is the support that demand is coming our way. Now we're doing it, but lead times are moving out on us and we need to kind of continue to stay in front of it and better serve our customers. So it's capacity and to support that demand and that growth that's coming our way. But I'd say also on our side and we've talked about it, we've got a lot of productivity initiatives that are in flight, right? Our ops excellence initiatives, A lot of those are still early innings and we got to invest in tooling and molds and so forth to get Those assets where they need to be to be more efficient as we move product around the network or to start reducing the amount of moving around the network That our product does before it gets to the customer. So you've got that and then automation, we've talked about it, but that downstream automation, if you will, is Key within our businesses. And again, you know our network, 48 plants in the U. S, a lot of opportunity to get more efficient, make it a safer for our employees. So a lot of things that we're doing there. And again, we spent close to $80,000,000 this past year, big increase year over year. So we're getting in front of it. And then the 150 is not insignificant, but it is the best use and top priority of our capital deployment Options and we know that, so a big effort there. And we're also investing in internal resources to make sure that we can deploy And accelerate that CapEx organically. Great. That's really helpful color there. Second one, I wanted to ask Non res, because obviously for the past two quarters here, I think your own non res performance has been relatively decoupled from I think what a lot of us see is kind of the underlying non res market. I'm curious what if any areas of your own business Do you think there was some negative impact from the sluggish market over the past year? Because The question is going forward as we think about nonresidential indicators inflecting positively, are there still areas of your own business That have yet to sort of rebound with the rest of the non res market. Thank you. So this is Scott Barber and I would answer that more geographically than product wise Lucas, we certainly had geographies, the Northeast and Northwest are good examples of that, That we're not robust at all in the non residential over the past 12 months. That said, they are rebounding pretty rapidly right now. So you're getting that pent up demand impact From those regions, which are big regions for the ADS piece of the business. We might have had 1 Allied product line that grew a little less than the others because it was a little tougher For us to get in front of people in kind of a high touch sales environment there. So we did see that In a couple of them now it's rebounded here as the pent up demand in non residential has popped and we've been able to get out and see people And do that high touch selling again. But we had some pockets. We definitely had some pockets, but not many, not many. It was pretty good year. Your next question comes from the line of Garik Shabaugh with Loop Capital Chris. Thank you. Just to piggyback on the non res question, just Chris. Curious, just with respect to your observation that you've got record backlogs and it seems like the backlogs have increased. Is the backlog something that you started to see really accelerate in the 4th quarter? Or was it a function of being hot and coming into COVID and then maybe you had a delay in servicing some projects or some regions and then We're just kind of seeing a catch up. So any color on the kind of how the backlog has been evolving would be helpful. Scott Barber again and our backlog did accelerate at both businesses over the past 3 months, Both pretty robust. As Pat Cottrell said, our lead times have gone out a bit Across our businesses because of that backlog increase, that rapid backlog increase. In certain regions, it's pent up demand, a catch up. I look at the Northeast and Northwest in that category. I think in other areas that like the Crescent, the Sunbelt, they kept going Through the year, they're continuing to grow pretty rapidly and have contributed to that backlog increase. And I think it's all the same things you've been hearing. People moving to the Sunbelt, people making the choices to live Different areas that more favorable to these micropolitan or the suburbans and you get that kind of spread. We're seeing all those trends and I think have been at the forefront of those. We're also seeing some catch up in Texas by the way, which has had a heck of a year, hurricanes last fall, The winter apocalypse in February, it's raining like heck down there the last 2 days. So I mean, big COVID outbreak in Houston, which is a big market. So it's trying to bounce back pretty good also. And when a place like Texas gets going, it runs pretty hard. So all those factors are at play right now and kind of that acceleration of the backlog that you were hearing about and Great. Thanks for that. My follow-up question is, I was hoping you could unpack some of the underlying assumptions behind your sales guidance a little bit more or whether it's a little bit more granularity on price mix or expectations by segment and end markets. And then also just around the seasonality, I think last year sales were a little bit closer to fifty-fifty front half versus back half. And I think historically you've had maybe about 55%, 57% of your sales in the front half of the year. So anything that we should be Take attention to as we model out the front half back up. Yes, I think seasonality, Derek, will be about where it's historically Ben. I wouldn't think about any significantly different than that this year as you go into it. I think that might be getting too exact if you will, if you go through it. I I think on the revenue guidance, we're not going to give it any more granularity than kind of where we're at. Obviously, we'll kind of as we go through the year kind of revise that as we see kind of where all the pricing ends up and everything else. But based on where we have line of sight today, This is kind of where we're at at that. That 12% to 16% up on the top line again, just think about it as more on that pricing And on the volume side, is kind of the best way to talk to it right now. Yes, I think, Eric, if you think about the seasonality in that kind of shift this year, the If you go back to Q3, remember lots of the country kind of restricted from COVID. As we got into our Q3 that opens up, Right. And that kind of phenomenon probably isn't going to happen again. And then Q4 tends to be heavily Reliant on weather and it was pretty favorable this year. It's very favorable. Who knows what's going to happen next year, but one question and only one related follow-up. Your next question comes from the line of Josh Pokrzywinski from Morgan Stanley. Hey, good morning guys. Good morning. Just to dig in a little bit on price cost here, or I guess kind of the commodity in general. Are you guys seeing anything on the availability side that has given you concern? I know that Shortages are kind of the center square in bingo these days. Residents get called out from Time to time, anything that you guys would flag there on that front? Yes and yes. We are I think the best way to describe it Josh is in February early March Probably was our most impact. It gets better all the time. And I would say we're down to managing very isolated, but real resin problems on occasion. It's very material and supplier specific right now versus pervasive in February and through March. But essentially The winter apocalypse hit the Gulf. It took 4 to 6 weeks. By the time those plants started back up, the transportation got cleared And then we were kind of then puts us in the mode of managing spot stuff. And now as they try to catch up And restock their inventory and supply chains, you end up managing what would be spot Shortages, not pervasive things where you can't run for 3 or 4 days. Now through that, it kind of running on my answer here. We pivoted to running more recycled in February March, so that we could keep production going, Not always exactly the mix of products we wanted, but we thought that was the right thing to do because we could go back and adjust our production schedules. We're still doing some of that, but not near as much as we were in February. But I bring it up to highlight this really nice advantage we have with these recycling operations we have, Our visibility into that supply base of bales and recycled material And it's both at ADS and Infiltrator that this happens. So a big work item for us to keep our eye on that sucker. Got it. And then just given that so much of the top line is sort of price driven, Chris. Clearly, you guys have good pricing power. I understand a lot of it goes in dollar offsetting that even on a dollar basis. But To the extent that a lot of what you just mentioned seem more supplier related than necessarily just demand related, Presumably at some point in the not too distant future, we get a little bit of relief on the resin side. Do you think you hold that price? Do you think you'd give it back on a sort of a dollar for dollar basis? Like how does that evolve on the other side? I would imagine you guys are able to retain most of it outside of maybe some particularly Acute situations. Yes, we'll work to retain. We'll definitely work to retain and thread the needle on continuing our market share gains and conversion from traditional materials to plastic materials At both Infiltrator and ABS. So we'll that's how we'll do it and we have a good history of doing it that way And we'll continue to kind of work it along that strategy. Great. Thanks for calling. Chris. All right. Thank you. At this time, I would like to turn the call back over to Chief Executive Scott Farber for closing remarks. All right. Thank you for your questions. We really appreciate them And thank you everyone for joining us today. We'll continue to focus on our health and safety of employees As well as providing the essential stormwater management and on-site septic wastewater solutions to our customers and the communities they serve, As we ramp up our fiscal 2022, we're focused on production to meet the strong demand across both the ABS and Infiltrator businesses. We will continue executing our strategies in these fast growing states throughout the Southern Crescent of the U. S. Thank you again to all our employees for their hard work. And again, thanks everyone for joining the call today. Operator, that concludes our call. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.