Good morning, ladies and gentlemen, and welcome to Advanced Drainage Systems First Quarter Fiscal 2020 Results and Infiltrator Acquisition Conference Call. My name is Jason, and I am your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] Thank you.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. Sir, you may begin.

Thank you. Good morning, everybody. Thanks for taking the time to join us. With me today I have Scott Barbour, our President and CEO; and Scott Cottrill, our CFO.We have quite a bit to cover today, so first, we’re going to discuss this quarter's results and then we'll move on to discuss the Infiltrator acquisition that we announced this morning. And then, finally, we'll wrap it up with – open up the call for Q&A.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 that, I'll turn the call over to Scott Barbour.

Thanks Mike. There's really three things I want to make sure we communicated today. One, ADS standalone had a very solid quarter and a start to our fiscal year; two, the Infiltrator acquisition and our excitement about this opportunity we have; and three, the guidance for ADS FY 2020 and the combined basis of ADS and eight months of Infiltrator.As I said and I think you saw, we're off to a strong start in fiscal 2020, with continued strong sales growth and profitability. Our topline was driven by strong growth of both pipe and allied products. Domestic sales increased 9%, driven by our core domestic construction business as well as our agriculture business. Construction market sales growth of 9% was driven by non-residential, residential and infrastructure market sales.In addition, our agriculture business grew 15% this quarter with very strong volume growth, despite poor weather and uncertain agriculture economic conditions. We experienced another quarter of strong sales growth in our allied products, where growth was driven by double-digit sales increases in products such as our Storm Tech retention/detention chambers, our Nyloplast catch basins, and our water quality products. We will continue to drive our water management solution strategy with this portfolio.On a regional basis, we experienced broad-based growth across the U.S., especially in the Southeast, the Atlantic coast, and Western regions. Florida, California, and Virginia were our top performing states this quarter as we continued to apply our market share model and realize favorable conversion trends. These states where we have seen very nice double-digit growth trends, and along with other key crescent states as I have described in the past, are focused investment geographies for us for both pipe sales and allied product attachment increases.Internationally, our sales declined primarily due to sales in our Mexico business, where we experienced a…

Thank you, Scott, and good morning, everyone. Jumping right into our quarterly results adjusted EBITDA increased $5 million, or 6.9% year-over-year to $80.3 million, and our adjusted EBITDA margin was 19.4% flat to the prior year.The adjusted EBITDA growth was driven by sales growth in our pipe and allied products, variable material costs and pricing, as well as effective cost containment. Additionally, transportation expense was modestly favorable in the period due to improved efficiency, as well as a decrease in diesel and common carrier rates that we saw last year.As expected, we faced a headwind from higher inventory costs this quarter primarily as a result of our strategic decision to retain experienced employees and line operators despite a decrease in production pounds late in fiscal 2019. All this higher cost inventory was consumed during the first quarter and is fully reflected in our margin guidance for the year.Recall, the midpoint of our guidance range assumes 80 basis points of margin expansion, which we continue to expect, will come in the second, third, and fourth quarter of this year.Moving to Slide 7. We generated $53 million of free cash flow in the period, an increase of $50 million over the prior year, driven primarily by improved working capital performance and higher adjusted EBITDA year-over-year.As a result of this strong performance, we ended the period with $40 million less in debt than the prior year. Note that this is after the special dividend net impact of $63 million, which is the total $75 million special dividend payment to all shareholders less the $12 million the ESOP paid back to the company to pay down its loan. We also ended the quarter 1.5x levered, favorable to our position last year of 1.8x levered.The impact of the special dividend was approximately a quarter-turn of…

Okay, thank you. So the chart before you now is a chart that we used in our Investor day last November, and I think it shows a framework of how we were going to look at the uses of capital relative to acquisitions. If you start with the left, strategically, this combines two leaders in markets that are highly adjacent and aligned, and really both of us drive our business based on conversion from traditional materials to plastic materials.In the middle, qualitatively, Infiltrator is a high-margin, world-class operating platform. We have had a successful partnership with them for over 15 years. They are a team and a company that we're well familiar with. And then on the right side, the financial, it's an accretive acquisition to us. You'll see that it improves our last 12 months EBITDA margin by 360 basis points. That's without the synergies. So from a financial standpoint, it really mixes up the overall business.Turning the chart, you can see the three priorities that we laid out at our Investor Day, sales growth, margin expansion, and free cash flow. And in each of these categories, the combination of ADS and Infiltrator is a stronger company than where we started or what we described to you at the Investor Day.At the end of this deck, we'll provide guidance on the go-forward for ADS plus eight months of Infiltrator, and we'll try to narrow in for you all at that time. You can see that this has been a long-lasting partnership as you look to the next chart. We've been doing business in many different ways over several years. We were in a joint venture together on Storm Tech.We had transactions between the companies in and that period of time, and we've obviously been working with these folks very…

Thanks, Scott. On Slide 23 we have identified substantial synergies that are summarized here. We expect to capture run rate synergies of $20 million to $25 million within three years driven mainly by improvements in manufacturing, procurement, and SG&A costs, including savings from our joint recycling initiatives. We also expect to realize benefits from cross-selling broader services and product capabilities over the long-term.On Slide 24, finally, the combined business is expected to generate significant cash flow, which we may use in combination with equity funding to rapidly deleverage our balance sheet. As outlined on Slide 24, we expect our leverage ratio to be under 3x within the next 18 months, which will put us in line with our long-term target leverage ratio of between 2x to 3x that we discussed with you during our Investor Day last November.From a financing perspective, we've taken out a new $1.425 billion credit facility to fund this transaction and refinance our existing debt. This structure gives us sufficient flexibility to operate our business while we plan to transition to a more balanced permanent cap structure in the near-term. This will likely include refinancing a portion of the loan in the bond market, as well as issuing up to $250 million of new equity.Finally, I would like to walk you through our outlook for the year for the pro forma company. We expect net sales to increase 14% to 17% year-over-year to $1.575 billion to $1.625 billion in 2020. We expect adjusted EBITDA to improve to between $310 million and $330 million, and year-over-year margins to expand 290 to 360 basis points to be in the range of 19.7% to 20.3% based on Infiltrator's strong profitability and our combined commitment to operational excellence. We are excited for what's to come and look forward to working with the Infiltrator team as we combine our two great businesses.With that, I'll turn it back to Scott.

All right, thanks. So in closing, this acquisition builds on our existing water management solutions platform, expanding our adjustable market opportunity and enhancing our sales growth, margin profile, and cash flow generation. We believe this acquisition will create the nation's foremost water management solutions company, with leading positions in both the storm water and onsite septic markets.Importantly, with this acquisition, we have a very clear strategic blueprint for the next several years. We will continue executing the market share model, with a particular focus on convergence in key high-growth states. We will improve our performance in delivery and costs across our manufacturing and logistics network, and we will focus on executing an exciting new product portfolio and growth plan with Infiltrator that also adds to our overall growth and margin profile.Now, we will have to do this while returning our agriculture business to growth and being a more consistent performer in our international activities in Canada, Mexico, exports in our Tigre-ADS joint venture in South America. So while we have a lot of work to do, our priorities are clear to us as a management team, including paying down debt and getting to the point where we will be less than 3x levered within the next 18 months.So a lot of work to do. We're excited about it. I like the clarity and simplicity of our plan, going forward, and knowing what to go and execute on. And we look forward to getting on with that.So we'll open it up, operator, for any questions.

[Operator Instructions] Your first question comes from the line of Michael Halloran from Baird. Your line is open.

Hey. Good morning, everyone.

Good morning, Mike.

So congratulations on the transaction, obviously a lot of moving pieces going on here. So on the acquisition, maybe talk about what you look at the relative outperformance versus market. You certainly have talked about those statistics in your core non-residential markets historically. The slide deck gives a 9% CAGR over the last couple years for that business itself. How does that business typically track from a growth perspective relative to its core markets? And maybe some statistic around how penetrated their materials are, the plastic sides are, as a percentage of the overall market and what the opportunity set looks like, longer-term.

So, good morning, Mike. And Higgins is going to look up the penetration piece of plastics in there. But I'd like to give you that flavor on kind of how they grow and what happens there between sales and their margin improvement. So, one, it's a conversion story, just like ours.We convert from traditional materials, like concrete to plastic. We work on approvals and acceptance to do that. They're playing that very same game, and area by area getting approvals from the local authorities, going out and working with their distribution and the local onsite septic contractors to drive preference for plastic because of its better performance cost, installation time all those kinds of things.On the margin expansion, these guys have done a great job incorporating recycling material, and they're very sharp operators. They have the one facility in Kentucky. It's a pretty good size facility. And being on that one area gives them a lot of – let's call it scale and leverage the advantages there.And they've done a nice job in their operations in a continues improvement, automation, their ability to kind of track, what's going on in a moment-by-moment basis there. So that's how they've expanded the margins, is really just kind of executing well there and below the surface. That said, they have good spread in distribution. They cover a lot of territory with Carl's sales force, and it lines up very nicely with us. And Mike what's the…?

Yes. So, Michael, this is Michael Higgins. If you look back at the presentation at 2019, so it suggests that today plastic and septic tanks and septic chambers for the leach field would be 47%, close to 50% of the market. The tanks have a much lower market share in their space, so think of that as something less than 30%, so call it 25%, where the plastic chambers have a little more penetration. But there's still significant upside we believe in both, whether that be the chamber part of that $1.2 billion or the tank part.

And the growth in the tank part's really been accelerating, so.

Yes.

And the limitations that they've had from a penetration perspective historically, have those kind of mirrored yours, regulation, distribution, expanding geographically, anything else behind that?

I don't think so. I would say the dynamics that we face in terms of converting from traditional materials are very similar in this business as well, another reason why we like it. We know how to go and do that through our market share model. They know how to go do that through their market share model, so really the same market drivers. It's gaining that acceptance from the regulators and the contractors.

And what I would add to that is we speak the same language about gaining in the marketplace through that market share model. And that's been very helpful for us.

Makes sense, and then can you help me a little bit with a two-pronged geographic question? One, splits domestic versus internationally, and then, secondarily, when you're thinking domestically in the States here, how does their footprint overlay with yours when we think about it on a regional basis?

So their footprint in the United States would be national. It's concentrated in areas that have higher onsite septic. Sales are concentrated in areas that have higher onsite septic, which might be places like the Southeast, places in the Midwest, but they have distribution in every area. I think their international sales, it was?

It's less than 10%.

Yes, less than 10% primarily in Canada. And yes, I think that's about it

Good. And then from a synergy perspective, you guys laid out some pretty decent timelines, or detailed timelines around the ability to move forward. How are you guys prioritizing that relative to some of the other things? Does this change what you guys are – some of the internal initiatives you're working on the legacy piece of the portfolio? Do these kind of combine together?And how should we think cumulatively about what the opportunity set is just on the internal improvement category for the overall portfolio when you take these synergies and you layer on what you're doing for the existing portfolio already?

So here's how I think about that, is the most important thing we can do is let Roy and his team execute their plan. And so, we'll really operate this as a separate company with Roy as its leader. And I think if they go and execute that plan, we're going to be pretty happy.There are a few very high-impact synergy programs that are underneath that $25 million in the third year, and they're really around material conversion, recycling scale, and then some cross-selling opportunities around products through our respected distributions, which will remain separated.And Roy and I talked about this a lot. We'll focus on the high-impact few synergies with very focus teams, highly motivated to kind of go out and execute against those plans. And as far as what we have to do within the ADS core business and what you saw at the Investor Day, those things remain right there at the top for the ADS team.And Darren Harvey, our Supply Chain Chief, is rolling along on that hard, and we're already seeing some of those things come along. Now, as you know, that is a journey, where we have a lot to go and do in that area. But we have in our plan, in the models that we've built, we can fully support from a capital and resource perspective, those internal ADS things.

Last one from my perspective. Could you just talk about the momentum that you saw in the legacy business through the quarter? Obviously, really healthy trends, but any signs of change from the underlying demand perspective of the consumer, anything the distribution's saying at this point?

So I really appreciate you bringing that up, because in all of this a lot going on, as you said. We didn't want to lose the fact that we had a pretty darn good first quarter. And I would say that there we see things moving at paces equal to or better than what we saw in the first quarter. And our order rate is good. Our backlog is good. We are very busy, very busy, and we continue to see that in quoting levels and in our order releases.

Great, I appreciate the time and congrats again on the acquisition.

Thank you, Mike.

Your next question comes from the line of Matthew Bouley from Barclays. Your line is open.

Hey, good morning, everyone. Congrats on everything. So I'm going to focus here just on the legacy business. So, on the guidance you guys have on the sales side, obviously looking at the quarter, the domestic construction markets, ag, both nicely outperformed I think what you initially laid out in terms of market outlook. Maybe international was a little softer. But given that performance, and from what you can see today in the end markets, are you suspecting that perhaps we could remain ahead of expectations this year, or is it too early to say that with enough confidence? Thank you.

Yes, that's a very leading question, Matt. I appreciate it. No, I think I'd echo Scott's – I don't think, I know I'll echo Scott's points. We're very encouraged by what we're seeing here in the first quarter in our order book and so forth. But I think that helps us firm up. It's the first quarter, right? It helps us firm up exactly our guidance ranges and where we are in them.Again, if we keep trending the way we are, then we could go to the upper end of that range, and we'll look at that as we get into the next quarter or two. But right now, we're very encouraged by what we're seeing, but, hence, the reaffirming of the guidance that we went out with.

Okay. Perfect. Appreciate that. And then, secondly, on the margin side, again I'm sticking with the legacy business here. You guys are guiding to about 40%, or perhaps a little north of that in terms of incremental margin for the balance of the year, looking kind of towards the midpoint of the EBITDA guide. Is that mostly volume, or are you guys anticipating price versus cost to remain positive? I think Scott C., you mentioned transportation costs have started to turn favorable. How does that play into it? Just any kind of color on the bridge there. Thank you.

Yes. I think it's volume, especially when you see kind of the growth rate that we're seeing on the allied products and the high margin that you have there. So that sales is definitely helping with that incremental margin. But it's more then that spread, is that favorability we saw in the first quarter. We expect that to continue. And then as well, Scott hit on it, right, the transportation. It's not just the inflationary cost pressure's ebbing on transportation from diesel and common carrier rates.It's the fact that the guys have, under the ops excellence model, a 5% targeted payload improvement and other metrics that they're working on that we're starting to see the benefit of, and we expect to see more of that as we go through the year. And on the manufacturing side, Scott talked about what Darren and team are doing. We're starting to get traction there, right. And we had line of sight to this headwind related to this elevated inventory cost from keeping and retaining our workforce.We expect to get a benefit from that as we go through the year, but we had perfect line of sight to that. It came in exactly like we thought. But as we go through Q2, Q3 and Q4, we expect to get a lot of traction there and improvement, especially on a year-over-year basis. So things are lining up really well as we look to the rest of the year and, hence, where the legacy ADS guidance and our reaffirming there.

All right. Perfect. Thanks again and congrats.

Thank you.

[Operator Instructions] There are no further questions at this time. I turn the call over to Scott Barbour.

Thank you all again for joining us today. That was pretty easy, two questions. We're off to a good start in the new fiscal year. And as Scott said, we expect to continue the momentum as we move forward. We're focused on our strategic initiatives and the integration of Infiltrator. As a combined business, we remain committed to the execution of our three-year plan as we continue providing best-in-class water management solutions to our customers and maximizing shareholder value.I want to thank our employees for all their hard work over this last quarter, last couple quarters, with really good execution. And we look forward to another strong quarter and momentum throughout the year and an expanded enterprise. So we appreciate your participation, letting us go a little long today, but we had a lot to cover. We recognize there's a lot of moving pieces right now, so we appreciate your questions and interest in the company. Thank you.

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