Good morning, ladies and gentlemen. And welcome to Advanced Drainage Systems' Fourth Quarter Fiscal 2021 Results Conference Call. My name is Crystal, and I am your operator for today's call. [Operator Instructions] I would now like to turn the presentation over to your host for today's call, Mr. Mike Higgins, Vice President of Corporate Strategy and Investor Relations. Sir, you may begin.

Good morning, everyone. Thanks for joining us today. With me here, I have Scott Barbour, 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-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 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. 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 fourth quarter of fiscal 2021. Sales grew 20% year-over-year, driven by 21% residential sales growth and 11% nonresidential sales growth as we continue to execute at both ADS and Infiltrator in a favorable demand environment. The residential market remained strong. Both ADS and Infiltrator Residential market sales grew over 20% in the fourth quarter, driven by favorable dynamics in new home construction, repair/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 at Infiltrator are driven during the home completion stage. In addition, the repair/remodel business remains robust. ADS participates in the repair/remodel segment of the residential market through retail, which is about 40% of the legacy businesses residential sales. Infiltrator's repair/remodel business and the residential on-site septic market accounts for roughly 1/3 of their business. Growth in our nonresidential 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 2/3 of our domestic allied product sales are in the nonresidential market, where sales increased 13%, further giving us confidence in the underlying market strength. Sales in the agricultural market increased 50% this quarter, driven by strong demand as the spring selling season got off to a good start. The agriculture…

Thanks, Scott. On Slide 7, we present our fourth 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 as well as in each of our segments, markets and product applications. The demand environment for our products remain attractive, 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 onetime bonus to employees who are not part of our annual incentive compensation plans, resulting in approximately $4 million of additional compensation expense in the quarter. 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% to $1.983 billion, 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 million to $567 million, driven by strong volume growth in both pipe and allied products, favorable pricing and material costs and operational efficiency initiatives that offset inflationary cost pressures. Infiltrator contributed an additional $88 million, driven by strong…

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

So let's start on the pricing, 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 costs 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, it's 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, is 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, could 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?

Mike, this is Scott Barbour. 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&A leverage. And that will 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 we'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. That'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.

Our next question comes from the line of Matthew Bouley with Barclays.

Congrats on the results. I wanted to ask actually on that last point there, Scott. Just the CapEx and the big uptick this year. You guys have sort of daylighted 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 where you're investing? What of your product categories need additional capacity? And just maybe any elaboration around the amounts of capacity you're adding in dollar terms? Or however you want to frame that?

Matt, Scott Cottrill here. Yes, I'd say when you look at the 2 businesses, right now, 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. I'll start with demand. The demand that we're seeing across both businesses is significant. So as you look through the acceleration in investments, it's the same 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 we can handle it efficiently and serve our customers as best we can and get our inventory health where it needs to be. So a lot of what you see on the Infiltrator side is to support growth. By and large, that's the bulk of what we're spending on that side. On the ADS side of the house, again, it's still a big piece of the increase that we're seeing year-over-year is to support that demand that's 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 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 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, we have 48 plants in the U.S. A lot of opportunity to get more efficient, make it a safer place for our employees. So a lot of things that we're doing there. Again, we spent close to $80 million this past year, a big increase year-over-year. So we're getting in front of it. And then the $150 million 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. No, that's really helpful color there. Second one, I wanted to ask on nonres because, obviously, for the past 2 quarters here, I think your own nonres performance has been relatively decoupled from, I think, what a lot of us see is kind of the underlying nonres 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?

So this is Scott Barbour. And I would answer that more geographically than product line -- lines because we certainly had geographies. The Northeast and Northwest are good examples of that, that were not robust at all in the nonresidential 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 one 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 could see that in a couple of them. Now it's rebounded here as the pent-up demand in nonresidential has popped, and we've been able to get out and see people and do that high-touch selling again. But I believe we had some pockets. We definitely had some pockets, but not many, not many. It was a pretty good year.

Your next question comes from the line of Garik Shmois with Loop Capital Markets.

Just to piggyback on the nonres question. Just 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 fourth quarter? Or was it a function of being high 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 evolved would be helpful.

Scott Barbour, again, and our backlog did accelerate at both businesses over the past 3 months, both pretty robust. As Scott Cottrill 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 would put the Northeast and Northwest in that category. I think in other areas that -- like the Crescent, the Sunbelt, that kept going through the year. They're continuing to grow pretty rapidly and it 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 in different areas that more favorable to these micropolitans or the suburbans, and you get that kind of spread. We are seeing all those trends. And I think we've 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 in 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 in kind of that acceleration of the backlog that you were hearing about and seeing in us.

Great. 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 50-50 front half versus back half. And I think historically, you've had maybe about 55% or 57% sales in the front half of the year. So anything that we should be paying attention to as we model out the front half back half?

Yes. I think seasonality, Garik, will be about where it's historically been. 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 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. That 12% to 16% up on the top line. Again, just think about it as more on that pricing side than on the volume side is kind of the best way to talk to it right now.

Yes. I think, Garik, if you think about the seasonality and that kind of shift this year, the factors that we don't think will take place. 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.

Very favorable, yes.

Who knows what's going to happen next year, but from a weather standpoint in the quarter.

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

Just to dig in a little bit on price cost here, or I guess, kind of the commodity complex 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 and bingo these days. Resins 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 and 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 [ populates ] have 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 and kind of running on my answer here, we pivoted to running more recycled in February and March, so that we could keep production going, not always exclude 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. And we're still doing some of that, but not near as much as we were in February. But I bring it up to high 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. Clearly, you guys have good pricing power. I understand a lot of goes in offsetting that even on a dollar basis. But to the extent that a lot of what you just mentioned, seeing more supply-related than necessarily just demand-related. Presumably, at some point in the not-too-distant future, we get a little bit of a relief on the resin side, do you think you hold that price? Do you think you'd get 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 ADS. 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.

At this time, I would like to turn the call back over to Chief Executive Officer, Scott Barbour, for closing remarks.

All right. Thank you for your questions. We really appreciate them, and thank everyone for joining us today. We'll continue to focus on our health and safety of employees as well as providing the essential storm water 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 ADS and Infiltrator businesses. We will continue executing our strategies in these fast-growing states throughout the Southern Crescent of the U.S. as well as mitigating inflationary pressure through favorable pricing and productivity initiatives. 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.