Ladies and gentlemen, thank you for standing by and welcome to ADS' Fourth Quarter Fiscal Year 2020 Financial Results Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions]I would now like to turn the conference over to your first speaker today Mike Higgins, Vice President of Corporate Strategy and Investor Relations. Thank you. Please go ahead, sir.

Thank you and good morning. 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 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, I'll turn the call over to Scott Barbour.

Thanks Mike, and good morning, everyone. Thank you for joining us on today's call. I hope you and your families are healthy and safe during these difficult circumstances. Both ADS and Infiltrator, our essential businesses as part of the construction supply chain. So, in that sense, we were very fortunate to have demand for our products and services.To be able to deliver to our customers, we must be able to provide a healthy and safe environment that our employees are able to work and want to come to work in. The people that are factories and distribution points, the drivers and loading personnel and the transportation and logistics network or customer service, financial and engineering personnel, all have done an extraordinary job in adapting to the new health and safety protocols and changes in the location and processes they use to execute their responsibilities each day.So, I connect the thoughts with our organization all the time in this way. We're fortunate to have a stable demand environment, right now. We are providing a safe and healthy work environment for our employees to execute their jobs. We must deliver products to our customer sites in a healthy, safe, and on-time manner. And by doing these things well, we are navigating our way through this very unusual set of circumstances is.Scott C. and I will discuss in more detail, we've been able to execute pretty well and deliver good performance in a very strong fourth quarter in fiscal 2020. Despite the regional differences in state or provincial directives and pace, demand for our products has been relatively stable through April and May, allowing us to continue executing on our long-term strategic initiatives to drive sales, margin expansion and cash flow generation.While various markets may weaken in the future, we feel we have…

Thanks, Scott. On slide six, you will find a summary of our results for the year as compared to our most recent guidance ranges. Net sales adjusted EBITDA and adjusted EBITDA margins for the year all exceeded the high-end of our guidance range.Our outstanding financial results for the past year allowed us to hit our long-term adjusted EBITDA and cash conversion targets one year ahead of plan, while also keeping us on track to achieve our long-term revenue growth targets.On slide seven, we breakdown our sales growth by end market. As shown on the slide, our sales grew substantially above our domestic end markets. This above market growth was driven by continued execution on our conversion strategy and our focus on growth in key states. We also saw sales in our domestic agricultural market increased by 35%, as we capitalize on favorable industry dynamics by successfully implementing organizational changes, introducing new products and better execution.Sales in our residential construction end market increased 76%, which includes the results from Infiltrator, as well as 16% growth in our legacy ADS business. Though, we expect housing starts to decline in calendar 2020 due to the impact from the COVID-19 pandemic, we believe the residential end market could recover more quickly than our non-residential end market and is well-positioned.Moving to slide eight. As Scott has already discussed the revenue performance, I will go right to the drivers over year-over-year profitability. Our organic adjusted EBITDA increased $11 million from the prior year quarter, resulting in 160 basis points of margin expansion. The improvement was driven by sales growth in both our pipe and allied products, favorable material costs and disciplined pricing. This favorability was partially offset by an increase in manufacturing overhead costs related to building out our operational excellence programs and an increase in…

Thank you. [Operator Instructions]Your first question comes from Mike Halloran from Baird. Your line is open.

Hey, good morning everyone. Hope everyone's doing well. So, let's start with some of the commentary around April and some of the forward commentary, just so I can understand the perspective you guys have here. So, seeing pretty stable trends in April and May here, the commentary in the prepared remarks, press release, talked about more concerned a couple of quarters out. I just want to try to understand what the genesis of that? Is that just chalking this up to COVID-19 and just the broader market uncertainty, or is that customer commentary, customer thought process and maybe a typical cycle dynamic as you work through things? Just a little bit more color on what that -- what the implication there is from your perspective.

Good morning, Michael. This is Scott -- Scott Barbour. I would say that colored more about that more on the economic uncertainty and how I think things will change as we roll the non-residential and housing start forecast over the next couple of months. And versus customer commentary or anything specific, like project cancellations or anything like that.Essentially, right now, I think what we're experienced is two things. Some states very much pre-COVID-19 behavior, and a pretty good backlog ahead of those states. Other states, the ones that went down hard, Washington, Pennsylvania, Texas, the Northeast, that pent-up demand is now coming back at some kind of pace, right now. So, we're executing on that. And there's probably a backlog behind that too, once you get through some of that pent-up demand.And it's just not clear to me when we get through all that. And then once you chew through that, how long that might take, then you begin to experience whatever the ramifications are from projects that are pushed out or canceled. And that visibility has not developed yet.So, we -- so, just kind of summarize, we focus a lot on forecasting -- like I said, we're doing our S&OP twice a month, now to really make sure we have complete fidelity between now and September. And then once we go through a couple of spins on the economic forecast, I think we'll be able to get a better look at what might be developing in terms of projects that go forward, projects that might be downsized, projects that might not go right now, but go in a couple of months because of one reason or another or things that are just canceled. That's not clear at all right now.

Perfect. That was the color I was looking for it. So, you also talked about mitigation measures to address the environment, maybe some context on what those might be, how much is structural in nature versus more traditional, temporary? And thinking more broadly, what do you think you would need to see to really go after some of the broader structural changes, whether it's footprint or some other things on a forward basis?

So, the $10 million today is what you would call temporary, delaying hiring, no merits, all that kind of stuff. Probably there -- yeah, there is probably very little of any structural in there. So what Scott and I are working on with our team now is what would be those structural things you would launch in the second half, if you saw -- say deteriorate really, really bad. And so, we got that playbook. We know what we're going to go to on that. Frankly, right now, I need all the capacity I can get there kind of service. So, we're running pretty hard to tell you the truth. So, I would have to take any structural work into that second half when the demand really fell off and allow me to go do that.If I could just add one thing to that, which I think, you'll appreciate. We've really taken this as an opportunity to execute more sharply on a lot of things in the four walls of manufacturing, and in that transportation, logistics. And while those things are process related and day-to-day management related, I would put those as permanent types of capabilities that are gong in place, which we will continue to see benefits from. Now that's not in those mitigation actions, but I think they're ringing the register right now, along with the synergy programs that we're working on and are going pretty well with IWT -- with Infiltrator, excuse me.

And last one for me. When you think about the Infiltrator piece, maybe just some commentary around -- similar to the first answer where maybe just talk about how that cycle plays out, because it's probably going to be a little more quick turns, less projects that are forward facing or out facing. So, maybe just thoughts on how that cadence would look both today and in some variability as you look forward?

Yeah. It's definitely a shorter cycle business that, that Roy and the Infiltrator guys operate than the more project based business of ADS. So, we kind of think of it as more of a V or maybe a little bit of a U and in accordingly void pulled back pretty quick and he's beginning to see some things better than he anticipated. I wouldn't call it the V yet, but that's why we want to get through a couple of cycles of that housing. And probably the way I kind of talk about it, Mike, is if residential might be more of a V, I think non-resi might be more of a smoosh, because of just all the different segments that ABS projects activate in. some will be good, some won't be so good. And that will make that more of a smoosh versus a V, as we go forward.

Thanks for the context. Appreciate it.

All right.

Thanks, Michael.

Thank you.

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

Hey, good morning, everyone. Thanks for taking the questions. Hope you guys are all well. The comments you made, Scott B about the kind of longer term disruptions in non-resi and some of those verticals better off than others. I guess, number one, could you remind us how much of your non-resi exposure is specifically new non-resi versus R&R?And number two, I guess, is there any kind of difference in product mix or product intensity, I guess, for some of those stronger verticals that you mentioned relative to the weaker ones? Thank you.

Okay. So, good morning. Good to -- thank you for participating today. And we all -- we are all well here. We all got masked and things like that, but we're doing pretty well. So, I think on the ones -- you take the first one Mike Higgins on the non-residential.

Yeah, Matt, non-residential construction, we pretty much view everything as new. And so, it's going to be heavily weighted to that new construction, whether that's breaking new ground or taking any existing site redevelopment.

Yeah. It all looks new. And then on the intensity, I think, the way I would answer that is, our non-residential has a very high allied product intensity. Most of our allied products are sold into the non-residential commercial construction segments, various degrees around that. But that is something that we are looking at is how that intensity could affect us in those different segments as they go through this smoosh pattern that we think is going to develop over the next months or year, a couple years. The pipe is very heavy and the infrastructure, very few allied products in that, obviously the agriculture very heavy, pretty much pipe on like. So, that is something that we continue to analyze and peel back.

Okay. Got it. That's helpful. Thank you for that. And then secondly, I guess, asking about detrimental margins is a little premature if you're still running positive revenue growth quarter-to-date, but I guess just wondering if you could provide any additional framework on that, just given you are providing some cautious commentary around second half of fiscal 2021, just how we should think about perhaps detrimental margins in an environment where revenues potentially turn negative? Thank you.

Yeah, Matt, Scott C here. It's a little bit dangerous to do that absent resin and mitigation actions. But generally probably something in the 45% to 50% range is probably the right way to look at that from a detrimental margin perspective. Again, though, that would be pre-mitigation and/or any benefit we'd get from lower diesel, lower resin or other of those costs pressures we normally see when things are going the other way. We likely see those -- we get some relief from those as it goes back the other way, but that's the way I think about it. Absent, whatever assumptions you'd put into your model for those items becoming favorable.

I would just add on that, that the way we've been doing this, it's painful and it hurts. So, we bring it down to 50% and we started working like, heck to pass back, to that 40% to 35% to 30%, depending on how many things we can go and grab quickly, which is part of the reason we did the $10 million mitigation actions early, even while business is good, so that we're able to put a little bit a way when the detriment comes, we're already on a head-start with that along with the things we're putting in our playbook that I answered on the previous question.

Got it. Thanks so much and stay well, everyone.

Thanks, Matt.

[Operator Instructions]Your next question comes from John Lovallo from Bank of America. Your line is open.

Hey guys, so thank you for taking my questions as well. First question is, appreciating that you're not giving official guidance here, but typically we would see your business accelerate sequentially fourth quarter to first quarter. As we stand today, is there any reason other than the $20 million of pull forward sales that this shouldn't continue this year for both the legacy business and Infiltrator? And along those lines, what segments did the pull forward sales impact?

So, this is Scott B. So, the pull forward was $10 million of agriculture that was weather related and then $10 million basically non-residential construction business, because guys wanted to get material on jobsites before all hell broke loose. So, it kind of came in those segments, John. And I would tell you right now, given what we've seen in April and May, our normal sequential seasonal top line is behaving as you would expect.

Okay. Great. That's helpful. And then, on slide seven, you guys calculate 2% year-over-year market growth through residential construction. Just curious how you're coming up with that number. It seems like starts may have been a little bit higher than that by our calculations. And maybe more importantly, how were you able to so handily beat the market during that segment

You were talking about resin, sorry, residential, right? John, correct?

Correct. Yes. Correct.

Yeah. So, a couple of different factors there. We really kind of look at total housing starts, which were kind of relatively flat year-over-year, but there's a bit -- there's a lag there too. So, a lot of the activity we're seeing is kind of pre that house going up on lot. Or you said before they do a new subdivision or a new community, they need to come in and put in kind of the roads and streets, so they're able to access that.And then on the Infiltrator side, they're really on a kind of a six-month lag, right? The housing start happens and then kind of roughly six months later is kind of when an onsite septic system would get installed.

Got it. Okay. That's helpful. And then finally, I think there were $5 million of COVID related expenses in the quarter. Is that a reasonable run rate over the next couple of quarters? And just where in the P&L did those hit?

Hey, John. This is Scott Cottrill here. Mostly in cogs and related to a program we put in place with our hourly workers that allowed them up to two weeks pay for any kind of leave for childcare or illness or any reason to be honest with you. And we accrued for those that entire program here in the fourth quarter, but most of that was in cost of sales.

Great. Thanks a lot, guys.

Yeah.

Your final question comes from Josh Pokrzywinski from Morgan Stanley. Your line is open.

Hi, good morning all. Hope, you're all well. Just wanted to start off, I guess, first on you kind of the nature of the business on the non-resi side, I would imagine that you guys participate more and I guess for lack of a better term horizontal construction. So, kind of bigger plots of land, the 50-story building doesn't matter so much as -- maybe the horizontal square footage. Does that tell us anything about kind of the verticals that would be most -- most prominent in the portfolio? I guess, I think of like big box retail and warehouse as being bigger drivers there, but anything that you guys can point to that that may be -- some helpful parameters around some of the verticals within non-resi.

Yeah. So, I think, your assumption there about where non-resi is better for us when it's horizontal versus vertical, that is accurate. In terms of the various project types, we -- in a normal situation, we would do very well with all of those -- going back to the comments we said earlier, I think where we've seen strength has been in kind of warehouses, distribution data centers. Those have been strong in the past couple of years. Those are expected to stay relatively strong kind of through this pandemic. Where we would probably see more weakness and they would probably be smaller type developments or smaller type structures would be around kind of restaurants, kind of small retail centers, maybe hotels, obviously, are going to take a hit, and that's going to take some time for them to come back. But also too, we do very well in institutional project. So, think about education and other types of business, healthcare, community centers, nursing homes, things of that nature.So, I think there's a balance. I'd probably say kind of on the kind of trade commercial side, which would be restaurants and retail and hotels. Those are going to have some struggles as we move forward. On the flip side, the things around distribution, data centers, education, healthcare, those should remain strong. So, our sales team and engineering team will work hard to identify those projects in their individual geographies. And they're going to work like heck to get our product specified quoted and sold.

Got it. That's helpful. And then, just following up on the comment made earlier about some of this kind of backlog of activity of things that need jobsites, pre-open states, pre-open. How large do you think that is? And what -- when does that kind of get work through the system? Is it a month or two or perhaps something longer?

I thought -- this is Scott B. I thought about it this way. So, you have many states that didn't work or work at greatly reduced pace for 30 to 60 days, but that that work has to get completed. And then the market was running pretty well before all of this, call it, up until the middle of March, and our customers were telling us they had 30 or 60 days of backlog of work out ahead of them.So, it's not going to be perfect. But I kind of do all that math and I see it and I see things kind of running, muscling through it like we are right now to an extent. And I'd say that because of not, we muscling through it from execution, but just how the demand is highly variable across the states that we look at every day. And I think that kind of takes us maybe through the summer. And that's why we have such intense focus on that twice a month sales and operations planning cycle. So, we're just kind of keeping on top of that right now, because I know we got to execute and make our money right now. Because that I really don't know what's going to happen in that second half.So, that's what it kind of looks like to me right now in terms of that kind of, call it, level of activity for awhile. And we spent a lot of time and resources and analysis time looking at it, but I I'd be less than really frank if I didn't tell you, it could be cloudy some days to try to figure out what's going on. But all that said, I think we're operating pretty well right now.Your question around horizontal construction and the segments that are moving, I mean, we're talking with our sales team every day about pursuing the right jobs. Spend our time pursuing the right jobs, all segments aren't created equal right now. I think this is where our high touch national footprint really helps us a lot as a company, because we're really spread out nicely geographically. I don't think that's always the case with our competitors, in stormwater management, whether they be plastic or alternative materials. So, we have some nice, I think, cards to play here and that's what we -- that's what we're going to continue to work on, given some of this uncertainty.

Got it. That's helpful. And if I can just sneak one more in on some of the market outgrowth. The 600 basis points this quarter, obviously pretty impressive and higher than I guess what you would normally do. How should we think about that as being something that you has to do is kind of structural and repeatable versus maybe something that would be -- perhaps more of a one off or a big project, something like that, that maybe we go back to the normal rate.

Yeah. Our normal rate is to gain one or two points of market share. I think this year was kind of extraordinary. Don't sign me up for another 600 basis point gain in market share. But we will continue to kind of pursue that 100 to 200 basis points a year. I think that’s the right way for us to think. When we go through this, there wasn't one big job that drove it. There wasn't just one state that drove it. I really think it's this focus on priority states that drive most of the construction work in the country. You've heard me talk about the crescent, is that focused on allied product attach rate, where we want to sell more dollars of allied products on every job. We could fill holding up assigned to me saying, don't forget our HP product line, which is the polypropylene product line focused on the large diameter, which has been a strategic focus for us for the last two and a half years. And we had really nice gains in that in many geographies. So, I kind of think it's that program of just -- some years is going to go better than others, but consistently it's going to grind out 100 to 200 basis points.

Got it. That's helpful. Appreciate it. Best of luck to you guys.

All right.

We have no further questions. I would like to turn the call over to Scott Barbour for closing remarks.

All right. Thank you. Thank you all for those questions and very helpful for us to be able to provide some color, because I know it's not easy out there right now. And we appreciate you taking the time.And as I said and believe we talk about this every day. We will continue to focus on the health and safety of our employees, because if they're healthy and safe, they feel good about coming to work. We have demand, we can service that essential stormwater management and onsite septic wastewater solutions for our customers and our communities, that they serve, I mean, that's what we do. We'll continue to protect our profitability, the balance sheet and the cash flow, even through this economic uncertainty from COVID-19, and we feel confident we will come through this as stronger company. I think the initiatives that we're working on right now, some of them, as I mentioned, are structural and we'll carry that forward.So, I want to thank our employees again for all their hard work and dedication. They've done a great job over these last eight weeks in a very difficult environment. And we appreciate all of your participation today. Operator, that concludes our call.

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