Good morning, ladies and gentlemen, and welcome to the Advanced Drainage Systems Third Quarter Fiscal 2022 Results Conference Call. My name is Katrina, and I will be 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. I'm here today with 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 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.

Thank you, Mike, and good morning, and thank you all for joining us on today's call. We achieved a record $715 million in sales in this third quarter, an increase of 47% compared to the same period last year. Sales growth was driven by both pricing and volume at ADS and Infiltrator. Construction market Pipe volume increased double digit in the third quarter, with particular strength in the nonresidential, new residential and infrastructure end markets. Agriculture sales were down just slightly, driven by the strategic decision we made earlier this year to service commercial markets in areas where we experienced material and labor shortages. This came at the expense of growth in the agriculture market, but importantly, we achieved favorable pricing in this market. The material availability issues are now behind us, and we can again begin to start the work of growing our agriculture market share as we successfully did in FY '20 and FY '21. Infiltrator sales increased 51%, primarily due to favorable pricing as well as a slight volume increase with strong growth in the Southeast and southern regions of the United States. Roy Moore and the entire team at Infiltrator are doing a great job managing record levels of demand, working through material price and availability issues, while achieving record production levels in their factories, installing new capacity and executing the Jet Polymer acquisition this past quarter. Additionally, international sales increased 23% this quarter with growth in each of the businesses, Canada, Mexico and exports. Not only were we able to execute price and volume gauge in these markets, but we also began importing large volumes of Pipe products into the Northeast from Canada and into Texas from Mexico to improve service levels to customers and reduce our backlog levels. This past year is the first…

Thanks, Scott. On Slide 5, we present our second quarter fiscal 2022 financial performance. From a top line perspective, we generated 47% growth year-over-year driven by price and volume at both ADS and Infiltrator. Legacy ADS pipe products grew 53%, Allied Product sales grew 33% and Infiltrator sales increased 51% with double-digit sales growth in both tanks and lease field products. We continue to demonstrate our pricing power with significant year-to-date price increases across each of our segments. In addition, our Pipe segment experienced double-digit volume growth in the construction markets this quarter. Our consolidated adjusted EBITDA increased 27% to $176 million, resulting in an adjusted EBITDA margin of 24.6% in the quarter. Importantly, we hit the full run rate of our previously announced pricing actions in the third quarter and not only covered resin increases year-over-year, but also covered incremental labor, manufacturing and transportation costs as noted on Slide 5 of our Q3 earnings presentation. It is important to note that our manufacturing and transportation costs remain at elevated levels. But I want to reiterate Scott's comments. Our employees continue to work hard and do a great job despite the day-to-day labor shortages we are facing. Moving to Slide 6. We generated $94 million of free cash flow year-to-date. In addition to the growth-oriented capital investments we're making, working capital was a significant use of cash year-to-date as we purchased raw materials and built inventory at a much higher cost compared to last year in order to support the demand we are experiencing. While we spend a lot of time talking to investments in CapEx to support growth, productivity and drive improved service levels, it is important to highlight that we view our investments in working capital this year the same way. From a capital deployment perspective, we are…

[Operator Instructions] Our first question is from Matthew Bouley with Barclays.

This is Ashley Kim on for Matt today. So just first with the capacity plans that you have coming on, how do you plan to maximize utilization on that new capacity, just given, one, the shortages in manufacturing labor? And then two, if you can get the product made getting the transportation capacity to deliver it?

Well, I think -- this is Scott Barbour. So that's a good question. And I think the job 1 will be to the staffing. And you're right, you bring in new capacity you got to have people to run that. And we have been recruiting ahead of that equipment. I would say that is coming on fastest at Infiltrator because some of the investments we've made there come on first. Those machines are up and running now and staffed. Some cases, Ashley, you might move people from older, less productive equipment to newer, more productive equipment. But net-net, we're adding people there. Same is happening in a couple of the ADS pipe plants. We're a little fortunate in that the first 2 machines we're bringing in, which are going into Florida, labor is a bit more available there than in some of our other areas. But once you get that done, you push the bottleneck to the transportation. And I think the transportation kind of works itself out. On any given day, you could probably be shipping more you can get a few more trucks. But I think it kind of tends to even out a bit. It just comes at a cost, an inflated cost versus prior years, which is what is the most painful. So...

Great. And then just for my follow-up, on your longer-term view with your plans to grow recycling, just appreciating that target for 1 billion pounds of recycled material that you kind of put out there in that ESG report. But could you just help us bridge the gap to getting there? What would it take between scaling up material sourcing or any kind of regulatory hurdles? And then maybe just some color around the eventual margin impact that you could see there?

So we'll talk a lot about this at the Investor Day, but it's really going to come from 3 different things in our program that we think about. One is, you got to get the supply of the raw materials and expanding relationships with expanding the [indiscernible] expanding the way -- the material you'll go after to kind of bring into that input stream. The Jet Polymer acquisition is a great example of an acquisition that was driven by a company that had a really nice supply of material that we knew we could grow. Roy and the team at Infiltrator knew they could grow that source of supply. And we said -- I think over the last what year, we sent our people out much more aggressively looking for that supply. And that's number 1, is you've got to increase it a lot. And that's feet on the street, it's acquisitions, it's a lot of stuff. Number 2 is you got to add capacity. And that capacity is going to come through acquisitions like Jet Polymer or probably new facilities that we'll have to do. Similar to what we do in Pennsylvania and Iowa, we have smaller one in Ohio, a smaller one in Georgia, that do the processing of this material for us and then feed into the pipe plants. And then number 3 is in the existing places where we do recycle Pennsylvania, Iowa, Ohio and Georgia, we'll do add-on capacity debottlenecking of those operations to try to incrementally add their capacity. So you add that all up, and that's how you get to the extra 500 million pounds. That's the logic that we're using.

Our next question is from Jake Jarnigo with Baird.

Hopping on for Mike this morning. So first question here, I guess, just I'll give you the opportunity to expand a little bit on the forward-looking comments specifically on underlying demand. Just an update on what you're hanging on the ground, our new projects continuing to come in, are conversations getting a little more tense around inflation and price points and things like that? Any incremental color there would be helpful.

Okay. Well, I would say that -- let's just talk about the commercial and what we would call the nonresidential. We see a pace of quotes and orders coming in that are on par, if not, maybe, slightly better than what we saw over the past 6 months. I mean it's really quite robust in that area. I would say new residential for both pipe and Infiltrator remain very strong. Now we're -- we continue to work off backlog that was pretty high for that. And so the shipment rates are pretty good, but the incoming orders in that, again, remain good. And recall that on the Pipe side, we're at the very front end on land development. On the back-end side, we're kind of at the home completion, which I saw some stuff from the Infiltrator guys the other day where that's lengthened out due to labor shortages that used to be kind of home completions occurred 6 to 9 months. Now that's kind of 9 to 14 or 16 months. So we're pretty -- we feel pretty good about that demand and working off that backlog. As the previous question was, it's a matter of being able to run your lines and get all those positions filled and absenteeism has not been easy here as the COVID variant has hit us. Transportation is -- can be a bottleneck. We tend to be able to work our way through that. But the color for the demand side, I would say, is pretty good, if not a little bit better than what it was. The agriculture business is -- it's been horrible weather, cold in our regions, it's kind of shut down now. We made some choices last year not to grow that business at the rate it had been growing. We think we got material and capacity to kind of reignite that this year. So that team is very anxious to get out there. And as is our Infiltrator team with some really good initiatives around some new territories and sales things, particularly in some of their active on site septic products like the Presby product line in particular. So we feel good about that.

Great. That was very helpful, Scott. Secondarily, and maybe just to level set us a little bit. Obviously, now we're at realizing kind of the full rate of price increases that came in, it sounds like the expectation is for incremental capacity to start coming online at the start of your fiscal 2023. So in theory, does that mean maybe we see some -- in terms of your top line, some added seasonality relative to the normal just because those things are going to lay in, and you're going to start to catch up on your backlog a little bit. Am I thinking about that the right way?

Q4 is a little bit difficult, right, to kind of make that assumption, but directionally, you're thinking about it the right way. I would say more as we round the corner into the construction season and kind of that March, April turning into Q1 of next year, you'll kind of see that the bullishness come in and we'll talk a little bit more about that at Investor Day as well. But you're thinking about it the right way as we progress.

The way we're thinking about it, this is Scott B. That was Scott C. The way we're thinking about it is, we got a -- the way we discuss it right now is fourth quarter has a lot of variability in it for us. We're really pleased with the third. We got line of sight. We say you can -- we can lose the game in January and February. We can't win it. We got to win it in March, but we believe that thing is going to really kind of take off as we get into late March and April from all the activity we've been seeing. So our normal seasonal and shipping it on and profitability stuff is a little wacky now. We think it will kind of return more normal next year, perhaps, perhaps. But I just think we had to deal with what the cards we were dealt this year and getting that pricing up in those first 6 months, experiencing this inflation, figuring out programs to combat it. And we got on top of it in the third. And we'll be on top of it in the fourth.

[Operator Instructions] Our next question is from Spencer Kaufman with UBS.

Nice results. Maybe just starting on the first question from a prior analyst. When you guys are building out your revenue assumptions for next year and fully appreciating that you haven't given that out yet. But I guess I would expect probably somewhere in the mid- to high single-digit range, but I don't want to take those words out of your mouth. But I guess, what percentage of topline growth for next year would you expect to be from pricing versus volume? And how does that compare to "normal" time for you? And if raw materials come down as we hope they do, do you expect to be able to hold on to most of your pricing?

So I'll talk -- Scott, this is Scott Cottrill. I'll talk to the last part first. Yes. It's more than resident input costs, right? It's the whole paradigm around the value that we provide. It's also when you look at labor, manufacturing, transportation, we don't expect these inflationary cost pressures to go away. So we're going to continue to provide outstanding service to our customers and get a good return there. Will there be some run rate benefit from the price increases we've got this year, next year? Absolutely. Will there be some volume increases next year as well due to capacity, demand backlog? Absolutely. We'll get into more of that here as we move forward and talk to how things are lining up for next year. But you're absolutely correct, and we'll provide you more guidance with that at the Investor Day as well as when we provide our guidance for next year. But directionally, you're absolutely spot on.

Okay. That makes sense. And maybe for my follow-up question, EBITDA margins were obviously pretty challenged this year despite inflation and supply chain disruptions and whatnot. And also 2021 -- fiscal year 2021 was a really remarkable year for you guys. I guess the question is, how are you guys thinking about the path to getting back to sort of those high 20% EBITDA margins? And would you expect to see the largest improvement in margins next year? I guess what's sort of the glide path there?

Yes. So the way I'd talk to that as well, this year was about dollars, right? We've talked about that -- and as you saw in Q3, our pricing got in front of resin, labor, manufacturing, transportation, like we've been talking about it. So very happy with that. When you look at our Q4 guidance, and you look at that implied Q4 performance to get to the midpoint of our ranges, you also see the margin story and expansion coming in on a year-over-year basis, again, like we've been talking about it. So is there the opportunity to expand margins at a clip that would be greater than the 100 basis points we normally talk to? Absolutely. Is that next year? Is it the year after that? Don't know and don't want to pigeon hole it there. But again, a lot of hard work from our employees, a lot of strategies that have been effectively implemented and a lot of things still coming our way that are lining up, and we expect next year to be a good year. So yes, there could be a year or a period of time where we have some really nice margin expansion coming.

That concludes the Q&A session. I would now like to turn it back to Mr. Scott Barbour.

All right. Thank you. And we appreciate the people participating today and the questions. It's probably not great weather where a lot of folks are today. And I know we're kind of watching our phones and stuff. We got a couple of plants that won't be -- won't have great shipments today because of the weather and a couple of distribution yards. But we'll find our way through that. But we do appreciate your participation. Many of you, we look forward to talking to over the next couple of hours. And we're now preparing for our Investor Day in March. Again, we're very excited about doing this again. We thought the one we did in FY '18 or late 2018 was really good for us as a company and good for our investor base. And I think there's a lot of things that we've built on since that time and a lot of things that we'll be talking about that, I think, are relatively new to the company. And honestly, we had a lot of work over the last couple of days with our board to kind of not only report some good results and confidence in our year, but then the wind down of the ESOP and a $1 billion share buyback, which I'm surprised no one asked us about, but we'll execute that over a different couple of -- over several years. But we do appreciate it. We look forward to talking to you here in the future. And stay well.

Thank you, presenters. This concludes today's conference call. Thank you again for participating, and have a wonderful day. You may all disconnect.