Good morning, ladies and gentlemen, and welcome to Advanced Drainage Systems Third Quarter Fiscal 2020 Results Conference Call. My name is Amy, 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]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.

Good morning, everyone. Thank you for joining us today. With me, 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 the 8-K submitted to the SEC. We will make a replay of this conference call available via webcast on the company website.With that said, I'll now turn the call over to Scott Barbour.

Thanks, Mike, and good morning, everyone. We're happy to have you all join us today on our call. Our third quarter financial results were very strong building on the momentum from the first half of the year as we continue to execute on our growth and strategic priorities. There were a handful of performance drivers this quarter, which I would like to hit right upfront.First, the legacy ADS business continues to outpace the broader market and we are confident that our business is positioned to continue to outperform as we move into calendar 2020. The traditional ADS profitability levers of strong growth, favorable pricing and material cost, as well as disciplined execution drove margin expansion and improved profitability during the quarter.The Infiltrator Water Technologies business is performing ahead of initial expectations driven by double-digit growth in chambers and tanks and strong volumes in the South, Midwest, and Eastern United States. The strong growth across both businesses in addition to improved profitability resulted in a record third quarter adjusted EBITDA margin. When combined with effective working capital management, we were able to generate $133 million more in free cash flow compared to the prior year period. This allowed us to pay down an additional $50 million in debt this quarter and rapidly deleverage. We ended the quarter 2.5 times levered on a pro forma trailing 12-month basis and three times levered on a reported basis approximately nine to 12 months ahead of our previously stated expectation to reduce leverage to three times by the end of calendar year 2020.Overall, the performance of both the legacy ADS business and the Infiltrator Water Technologies business positions us very well as we move into the last quarter of the year and into our fiscal 2021. Given our outperformance on all fronts in the past…

Thanks, Scott. Good morning, everyone. Moving to slide 6, we present a snapshot of our third quarter fiscal 2020 financial performance. Organic net sales were $335 million, representing an increase of $17 million or 5% from the prior year period. Infiltrator Water Technologies contributed an additional $72 million, bringing consolidated net sales to $393 million, an increase of 24% over the prior year.Organic pipe sales increased 6%, driven by strong domestic construction and agriculture market sales. Organic allied product sales increased 8%, driven by strength in both domestic and international end markets. Consolidated adjusted EBITDA increased $43 million or 86% to $91 million from the prior year and our consolidated adjusted EBITDA margin increased 800 basis points to 23.2%.Organic adjusted EBITDA increased $17 million from the prior year and our organic adjusted EBITDA margin expanded 440 basis points to 19.6% in the third quarter. The improvement was driven by sales growth in both pipe and Allied Products, favorable material cost and disciplined pricing as well as our effective cost-containment initiatives.Additionally, we are beginning to realize benefits on our manufacturing and transportation initiatives, which were modestly favorable in the period. This improvement was partially offset by an increase in selling, general and administrative expenses, resulting from investments in our sales team to drive our growth initiatives as well as higher compensation expense due to our current and expected outperformance for the year.During the quarter, Infiltrator Water Technologies contributed an additional $26.5 million to adjusted EBITDA and delivered an additional 360 basis points of improvement to our consolidated adjusted EBITDA margin. On a stand-alone basis, the adjusted EBITDA margin of the Infiltrator Water Technologies business was 36.8%.Moving to Slide 7, we highlight our very strong year-to-date free cash flow performance. Year-to-date, we have generated $250 million of free cash flow, an increase…

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

Hey, good morning, everyone.

Hi, Michael.

Thanks for the Wisconsin shout-out. I don't hear too many of those in prepared remarks. So a couple of questions here. One really great job on the debt paydown, obviously way faster than any of us were thinking. Does it change your – what your approach is to capital allocation at this point? Or are we still in that paydown mode for the foreseeable future?

Hey, Michael, Scott Cottrill here. No it does not. I mean we've talked about our guardrails of two to three times. We're a cyclical company. We really like being in that low twos area. That being said, we're not sitting on our hands. We're looking at other options as we get there which we plan on getting there here as we go through next year. So right now it is organic investments which we have plenty of those in front of us as well as looking at paying down debt and getting into that low two times area pretty quickly.

So certainly appreciate the commentary on next year. I think the kind of commercial residential pieces make sense to me. Could you maybe touch on the ag piece? Obviously pretty dynamic so far this year in part because of what the planning trends look like and how farmers are going about insurance and everything like that. Maybe just talk a little bit about what you think the sustainable trend looks like underneath from here, how you guys are thinking about it and anything to augment if the comps kind of come up and catch you a little bit next year?

Mike, this is Scott Barbour and I'll take this one. And I think you're kind of dialing it in like we think about it. We had two favorable events over the past year. We had a reorganization and some new product introductions which were very favorable. We had the prevent plant acres which were really centered where we were strong in Northwest Ohio and Southwest Minnesota and Iowa. So we definitely prevent it from those things.The prevent plant acres is not going to repeat in that same way. But the organic growth and investments that we're making, we will continue to see growth call it off of that base. We did a lot of work in this market over the last year and it's what I'll call a live market. There – it's not saturated. It's not overbuilt or anything like that. It's still a viable activity for farmers to go and do.There are new territories we can open that are – that we should be opening aggressively. So while we might print lower as the comps get worse – I mean harder in the coming year, I think fundamentally we'll be growing better than the market next year. That's what we're going to bake into the go-forward.

Make sense. And then, on the margins as we look forward from here anything that happened in the third quarter that, you don't view as sustainable? Obviously, the legacy ADS business had some pretty robust year-over-year margin expansion.Anything in that that, you don't think is sustainable as we move into the fourth quarter and beyond, obviously adjusting for seasonality?

No. I don't think, so Michael. I mean, obviously, we're benefiting from the lower resin cost environment, but that being said, we're taking full advantage of that, right?We're holding on to our pricing and our construction end markets. We're getting pricing up on our Allied Products. Allied Products is growing, at that nice high single-digit low double-digit rate, very profitable product line.So, as you look at that incremental margin performance and so forth, is it going to be difficult to repeat that going forward? Yes. But we're very happy with what we're doing there. And it's not all being driven by resin, so, very good margin performance, as we move forward.

Great and then, last one for me, then, I'll turn it over. The synergy side of things, maybe just talk about specific things that you guys are working on now. What you're executing on? And then, what the cadence looks like on a forward basis, as far as what the activities look like.

So, Scott Barbour again, and if many of you probably recall that, the synergy program is really built on our raw material buy and recycling activities between Infiltrator and ADS. It's a synergy plan very focused on those activities, kind of backend.This isn't a kind of smash the two things together. And we're on pace, from a run rate basis, on that plan. We are reviewing additional opportunities, as we get into this. Some of them are going to require some investment, which we're well prepared to do.So I summarize it as, on pace and probably more excited about it -- the future of it today than I was six months ago. And I was pretty darn excited six months ago, as we were getting into this.

Great I appreciate it. Thanks, everybody.

Thanks, Michael.

All right, thank you.

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

Good morning. Thank you for taking my questions. I wanted to ask a bit about the domestic construction markets. Because I think the organic growth, I guess in both non-residential and residential, decelerated a bit relative to the second quarter.But obviously, I guess particularly on the residential side, some of the leading indicators would suggest that market is getting a lot stronger. So maybe I guess between those two markets, can you just speak a little bit about what you're seeing there. And how you're expecting the market growth to play out over the next couple of quarters? Thank you.

All right, this is Scott Barbour. And we feel that the market is very solid right now. You might have heard me talk kind of earlier in the year, that we had this nice kind of 3% margin going along and our conversion would add one or two points to it.But early in our year, you had riding on top of that, pent-up demand that didn't get executed in the prior year, from weather and all kinds of other stuff. So, that was kind of riding on the market to let's call it the first six months of our fiscal year.I think what we saw in the third quarter was, that stuff gets cleared up. And we were kind of riding at that, market of 3% converting at 100 basis points or 200 basis points. The Allied Products stuff growing at high-single digits, so I think as we deconstruct the third quarter that's the kind of the conclusion that I see.And on residential, on the ADS side, which these exhibits are kind of heavy on, recall that, we are really involved heavy in the front-end, land development piece of residential on ADS. And that is coming along stronger now, than perhaps it was in the third quarter.You look at all the, homebuilders, guys reporting. I mean they're kind of ramping that up. So we're kind of excited about that segment as we look forward. But the past quarter we kind of feel, that we were right in line, maybe even gained a bit on that on the pipe business.Now if you look at Infiltrator very, very levered to new housing starts. That has accelerated in the past, let's call it four to six months and is going to continue to go well. So we like -- really like that greater exposure to residential right now, that Infiltrator has given us for the consolidated business. Yeah, Mike go ahead.

Yeah. Matt, this is Mike Higgins. I would say inside of that residential piece to what Scott said about this new kind of sub-division construction and multifamily construction, we had a very strong quarter. We were up over 20%.What kind of muted that 5% -- muted out the 5% of residential is, we were a little slower in our retail markets with Home Depot and Lowe's and customers like that, which is mainly due to timing of them bringing in product for inventory.So, where we -- what you're talking about in terms of homebuilder strength, we're seeing that same strength. So, that's continued from the second quarter into the third quarter. I don't -- when you look at that new subdivision construction, we're not going to apologize for north of 20% growth for the quarter.

Yes. That's a good point. I've forgotten that. Overall, just looking at pace of orders, talking to our distribution, looking at the plans and designs that are kind of coming into our funnel, we feel like the coming calendar year is a lot like the prior year with regards to our non-residential commercial construction.

Okay. Appreciate all the detailed color there. Thank you for that. And then, I wanted to ask on the price cost side, because it seems like it was favorable, again, in the quarter. I believe, some of the commentary you guys mentioned that you are maintaining pricing discipline kind of coupled with the lower material costs. So I'd be interested to hear you guys talk a bit about what you're doing on the commercial side that kind of allows you that ability to maintain commercial discipline, in light of what you're seeing around lower material costs. Thank you.

So that's a really good question. I think, you kind of nailed the dynamics of it and I would give kind of two pieces. I want to add two things to that. One is, it's a good demand environment and you need to be disciplined around your pricing in a good demand environment. And I would say, both ADS and Infiltrator have good demand environments with good price execution and discipline there. And, by the way, we both provide a heck of a product and service to our customers that I think are well positioned against competition.Number two is, we're not a commodity-based product or company. We don't ride up and down with plastic and resins. We ought to ride up -- we were going to ride up and down based on demand, the quality of our service and products there. And we've worked over the last couple of years to make sure that that gets separated and that we reinforce that, because we're just not making stuff out of plastic here.I mean, we're making a fairly technical specified sale, that's a fair amount of engineering into, not only the product, but the application of that product. And on case of the ADS side, we're providing a heck of a service, by transporting this product to job sites in a very big activity with that dedicated specialized fleet we have. So that's worth a lot in the market and we're going to make sure that we're fairly paid for doing all of that.

Got it. Very helpful. And then, just lastly, the manufacturing and transportation side with the legacy business, it looks like you're continuing to make good progress there. Seems like there was a small tailwind in the quarter to EBITDA. So, I guess, as we go forward and start thinking about fiscal 2021, obviously not looking for detailed guidance there, but just wondering how some of those kind of initiatives you've got going on might phase in, in terms of the cost side in fiscal 2021. Thank you.

So, good insight and we are working very hard right now to continue to put plans and organization in place around the manufacturing and transportation. I think, what we call is kind of the right side of that bridge, we want to see the right side of that bridge green, as we move forward and execute crisply around both, what we call, the four-wall manufacturing of what we do and in that transportation and logistics.And as you probably recall, we made a little bit more progress on the transportation logistics than the four walls, but the four walls are on a nice path and catching up in many areas. So that is how we will look forward, is you kind of got to earn it the hard way on the right side of that chart and that's what we're doing. We're making sure all that's kind of put in place now. Now, no plan comes together perfectly like you want it to, but that's how we are driving our plan for next year.

All right. Got it. Well, thanks for all the details and congrats on the quarter.

Thank you. Appreciate it.

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

Hey, guys. Thank you for taking my questions. The first one, it appears that your outlook would imply a fourth quarter EBITDA margin that's up, call it, 200 basis points year-over-year versus somewhere between 600 and 800 basis points in 2Q and 3Q. So just curious, if there's some conservatism in there. Or was there something in the 4Q 2019 margin that was somewhat inflated?

No, John. You're spot on. I think, what you'll see there is the fact that, March is pretty much -- can be about half of the quarter. And given kind of the variability that we can have, given the significance of that month to the quarter that's coming up, you see us being a little bit weary as we look at our guidance and so forth.So nothing in there that's unusual or that we see draconian coming at us from a margin perspective, or from an inflationary cost pressure performance, so I think it's just being a little bit weary that March is such a big driver for the quarter and wanting to embed that into our thinking. So we thought, right now, leaving the guidance ranges as they were was the prudent course right now.

And we raised them last...

Prior.

Yes. Prior we raised them and we'll be guiding to the upper end of that. And I don't think we see any missiles out there. At some point, comparisons on resin costs get more difficult, but that's not what this is.

Got it. Okay. And then the CapEx guide, if I'm not mistaken of $75 million to $85 million is down from $85 million to $100 million prior. I guess, the first question is, is that correct? And if it is, is that project timing? Or is there something else going on there?

Absolutely right. It is down and it's all due to progress billings with a couple of the large manufacturers and when that cash is going to go out the door. So some of that's moved to the right and will be going out the door in April/May versus going out the door in Feb/March.

Okay, great. And then finally, the stabilization you guys mentioned in Mexico is that really -- is that much something happening in the market that is stabilizing? Or is this really just due to your efforts to shift from public to private project?

I think, it's the comparisons have gotten easier in the last several months on order rates and I think we might have -- we tried to pivot to some new distribution and applications. I don't think that's -- we're by any means up the curve on that. But it just feels a little more stable, albeit at a lower level than prior year or what we'd like.

Got it. Thanks guys.

Thanks John.

[Operator Instructions] Your next question comes from the line of Josh Pokrzywinski of Morgan Stanley. Your line is open.

Hi good morning guys.

Good morning, Josh.

Just appreciate all the color on kind of the market progression through the quarter there Scott. Anything that you can tell us in terms of kind of the outgrowth phenomenon that you guys see or anything that changed on that front?I know it's probably hard to calibrate in the short term, but anything that stuck out to you with some regional share gain or -- based on the pipe business or anything on the allied side, just with new products that would speak to kind of an accelerating share gain environment?

I'll -- this is Scott Barbour, Josh. Let me take that one and then Higgins will probably have a couple of comments. We have this Nyloplast product line which is a catch basin -- a plastic catch basin and that team was the leader. And the sales team that surrounds that, I think they've been outpacing the market very nicely.And it is investment in a new product that kind of extended our range to the investment, we made in Texas to be able to do close to the customer assembly of that product line. It's the leader being out there in the field working that very well.So if I look at something that kind of -- we're really pleased with performance. So don't get us wrong. But those guys have even kind of come above the curve in many ways and been a really pleasant surprise how we've -- how that's occurred.So I would say that and then again, Florida. Florida is just a really good market for us and our team down there is -- they're out selling like heck. Every day, we have products that are well aligned and manufacturing capacity well aligned to serve that market. And can we do better? Absolutely. We're not stopping.But I think if I think about things that get above the curve Michael you got -- California has come back nicely this year. And then the -- I think, I talked a lot about the agriculture business earlier. And sometimes we got -- I would say, we got a little lucky on these prevent plant acres and them being centered, on our regions where we have good manufacturing facilities.But yes, it's sometimes good to get lucky, but our teams responded very strongly with production, delivery, capacity to serve that rapid uptick. Wasn't easy, but they did it. And then the organization that we've got going on there in marketing and sales really focused on our customers and finding new ways for us to grow in that segment.And there were a lot of discussion two years ago is, the relevance of that for our business. And I think something that we've learned over the last year is, it can be highly -- it is highly relevant. And when it pops it's highly leveraging to our facilities into our network.So in the past someone told me, hey I view you as this option on the Ag business. Well I think that option paid off this year and we got really nice contribution from that.Now tough to repeat because of the market phenomenon of the prevent -- plant acres but I would repeat myself that, the fundamentals underneath that, we'll grow off of that. And that's what we want to do is kind of sustain growth and market share gain in that particular segment.

Josh I would agree. This is Mike Higgins. I would agree exactly with what Scott said. The only kind of thing, I would add to that everybody has heard us talk about the focus on these key states right primarily in what we call the crescent that's give or take 20 states.And I think our increased focus on those states is helping drive that outsized performance and those states are very construction-advantaged. A group of states is like 70% of construction activity in the U.S. There are areas where we have large opportunity for market share gains.And in those states focusing on driving further penetration and participation in the storm sewer market and driving higher allied product sales through what we call attachment. Those states have been performing extremely well on those two fronts and that focus there is helping.

And that was the $3 million of SG&A increase. There are people on The Street in those regions, in those crescent regions selling which is part of our -- the strategic plan we went through with our Board of Directors and are investing in that heavily. So--

Got it, that's helpful. And then just -- go ahead.

No. You please go ahead.

I was just going to ask just because as a follow-up obviously with the strong resi growth and I think prospectively for that looking to improve further, anything that we should keep in mind in terms of potential bottlenecks on the IWT side that could pop up here in the next couple of quarters?

Yes. That's a good -- that's a really good question and let me answer that in two ways. First, that company has exceeded our expectations in so many ways. And that team Roy's team and what's going on there I mean ahead of their plan very, very good people to work with. I mean can't speak highly enough how that's all gone.Now, bottlenecks, we've released some pretty big capital investments there very quickly after the acquisition that we knew were coming. Those take a while to get in. So, the way that team has traditionally handled demand/supply things is level loading, building their inventory in the off-season, making sure that they are very careful of how they plan that mix there.So, that's how we're addressing some of that -- what we might think of as supply bottlenecks in the future is through that level loading and that careful inventory building. And given the sharp execution they have and the high uptime they have on those presses, I think that's a very well-known playbook that Roy is executing right now as we speak.And we've also been very careful to make sure we've got enough material ahead of that. So, while we're -- we're really thrilled with the cash flow. Frankly, we're using some of that balance sheet to buy material to make sure we have enough recycled material ahead of both Infiltrator and ADS because of pretty favorable environment now. So, we're trying to balance all that stuff, but that's how we'll deal with the bottlenecks right now.

Got it. Appreciate the color. Thanks guys.

All right.

[Operator Instructions]

Okay. I'll wrap it up now. Thank you all again for joining us today. As we move into the end of fiscal 2020, we expect to build upon the strong momentum of the year and capitalize on a pretty favorable industry environment as we just discussed. We're focused on our strategic initiatives to grow sales and profitability in addition to continuing the work to integrate the infiltrator business and realize those synergy plans.I want to thank again our employees for all their hard work over the past nine months but a good quarter, a very good quarter and they're all working very hard to get us ready for the season as we move into April. Something we've been talking a lot about where you win in the off-season and now is the time we're laying down a lot of solid plans for next year.So, we look forward to another good quarter and we appreciate everyone being on the call today and look forward to seeing you all as we move forward. Operator, that concludes the call. Thanks.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.