Good morning, ladies and gentlemen. And welcome to Advanced Drainage Systems, First Quarter Fiscal 2023 Results Conference Call. My name is Brika, 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. 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, everyone. Thanks for joining us for our call today. 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 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 will turn the call over to Scott Barbour.

Thank you, Mike and good morning. Thank you for joining us on today's call. We achieved a record $914 million in sales in the first quarter, an increase of 37% compared to the same period last year. Sales growth was primarily driven by strong demand across our geographies and construction end markets, supported by continued strength in our priority states. We saw attractive volume growth in Allied Products, Infiltrator and within our residential end market, driven by share gains from our storm sewer pipe and on-site septic products. Pipe volume in our nonresidential and agriculture end markets started slower than anticipated due to a wet spring for agriculture, job site delays, production limitations and difficult comps relative to the last year. However, volumes improved month-over-month through the end of June and into the second quarter. And working closely with our distribution partners, engineering partners and contractors to monitor market demand, we collectively remain bullish on activity through fiscal 2023. Infiltrator sales increased 31%, driven by favorable pricing and strong volumes of septic tanks and Storm Tech chambers. Growth was strong in the southern and western regions of the US. The new production equipment installed during the fourth quarter of fiscal year 2022 at both Infiltrator and ADS is producing to expected rates and helping to bring down elevated backlogs. Although housing growth has slowed from the previous levels, Infiltrator has a good line of sight is continued if somewhat moderated growth for the remainder of fiscal 2023, given its healthy backlog and the impact of new capacity additions that will accelerate share gains. Looking beyond Infiltrator into the legacy ADS residential business, performance was strong overall. ADS residential sales increased 62% compared to the first quarter of fiscal 2022. Growth was robust in both our residential segments with growth related…

Thanks Scott. On slide five, we present our first quarter for fiscal 2023 financial performance. From a topline perspective, we generated significant growth year-over-year across our business. Legacy ADS pipe products grew 36%, Allied Products sales grew 5.4%, and Infiltrator sales increased 31% with double-digit sales growth across our domestic construction end markets. Consolidated adjusted EBITDA increased 80% to $299 million, resulting in an adjusted EBITDA margin of 32.7% in the quarter. As Scott mentioned, favorable pricing continued to cover inflationary cost pressures related to our material input costs, transportation, and labor. As we do not expect these cost pressures to abate this year we will continue to work all of the levers in our playbook in addition to pricing to improve efficiencies and optimize costs. From a resin perspective, costs have moderated a bit but they remain at elevated levels from a historical perspective. Price cost continues to be favorable due to the pricing actions we've already taken and as we move through the year, we expect price cost to remain favorable. Moving to slide six, we generated $214 million of free cash flow year-to-date compared to $79 million in the prior year. Strong growth in adjusted EBITDA coupled with improvements in working capital helped drive significant free cash flow generation, which was approximately 71% of our adjusted EBITDA for the quarter. Our year-to-date capital spending increased 42% to $36 million as we continue to make investments to grow capacity and increase the efficiency of our operations. From a capital allocation perspective, our priority remains focused on investing organically in the growth of our business to increase our competitive position and accelerate market share gains. For the full year, we continue to expect between $150 million and $180 million in capital expenditures with our largest investments focused on future…

Thank you. We will now begin the question-and-answer session. The first question we have comes from Matthew Bouley of Barclays. Your line is open, Matthew.

Hi. Good morning, everyone. Thanks for taking the questions. So a question on that I guess the last point you made there Scott C. The -- sounds like the second half expectations haven't changed in your basically what you saw in Q1 and to-date in Q2 I don't want to put words in your mouth, but it sounds like that's the bulk of the change. Can you maybe sort of bridge from the prior guide to the new guide just in terms of the components around volume price over cost sort of what's coming in better than what you expected versus the prior guide? Thank you.

Yes, Matt. Scott here. I think if you look at the EBITDA bridge in the earnings presentation for the first quarter, it gives you kind of that sense of the trends that we're seeing. Again, as we've often talked about we have really good visibility as you go out three-plus months. So really as we looked at kind of the guide and the performance, we kind of looked at again that first quarter performance that we had those favorable trends kind of, what we're seeing through July into the second quarter. And then right now we felt it prudent just to leave the second half consistent with our initial expectations. So again a little bit of wait and see there. But again, some very favorable trends that we're monitoring as we go through. I think it's important to highlight again, price cost we see that covering that as we go through the entire year quarter-over-quarter -- I'm sorry year-over-year as we do that. So again I think those dynamics prove out. And remember the second half of the year the comps get a lot more difficult as we go and still dealing with some of the labor transportation and manufacturing costs as we look through kind of those trends in the back half. But again, very favorable trends, line of sight and kind of just leaving it for kind of a 1H, 2H look right now.

Got it. No that's really helpful. Thank you for that color. And second one just taking a step back on, sort of, the longer-term profitability. So now I mean you're guiding this year to 350 basis points of margin improvement at the midpoint and the long-term guide was, I believe, 400 to 500 basis points. So just given where the, I guess, starting point is this year, does that at all change sort of the longer-term view to margins? And/or is there any more perhaps price cost tailwind that is now showing up relative to what was in that prior long-term guide? Any kind of thoughts on that would be great. Thanks, everyone.

Yes, Matt, it's Scott here again. You're correct. If you remember at Investor Day, for three-year, the planned horizon that we put out there, we did say 400 to 500 bps margin expansion. We did talk about the opportunity for that to be more front-end loaded than back-end loaded and that's what we're seeing right now. So are we ready to kind of call the ball and basically say that, we'll be -- we'll overshoot those numbers? We'll wait as we go through the year and issue next year's guidance and so forth. But suffice it to say, the management team is very happy with the trends in performance that we see, so I'll just leave it at that.

Scott Barbour here, Matt. I would just say, it's the first quarter of the first year of that plan. So I'm kind of not ready to do that. But I do recall this conversation in the past where we said it would be front-end loaded potentially. Yes. And we kind of had some line of sight on that price cost, as we came out of last year. We didn't think it would be to this magnitude, but we did have an idea that we could front-end load that, which we view as good, front-end getting ahead of the plan.

Absolutely. All right. Well, thank you both and good luck in the next quarter.

Okay. Thanks.

Thanks.

Thank you, Matthew. The next question comes from Michael Halloran of Baird. Your line is open.

Hey, good morning, everyone.

Hey. Good morning.

So not to belabor the front half back half thing, because I certainly understand the messaging. But on the margin side, obviously, exceptional margins in the quarter. You run rate those margins out and you get something meaningfully ahead of where you are right now from a guide perspective. Certainly, understand the conservatism part. And so, maybe the way I'll just ask it is, is there anything in this quarter that you thought was one-time in nature, not sustainable, that shifts on a forward basis? I certainly understand all the price cost commentary you've been making, Scott. So is there anything else in there I should be thinking about?

Good morning, Michael, Scott Barbour here. No. There's no -- nothing extraordinary that occurred there. It was a good quarter. I think, we said it in the commentary. But as we got through the quarter it got better. So kind of the volume got better, the leverage got better, our performance, particularly in deliveries got better. We're really delivering a lot better for our customers than a year ago. But there was no kind of one-timers or a big job or anything like that that we would point towards in there.

No, that makes sense. And then, from a capacity perspective, obviously, you're doing more work in the Infiltrator campus right now. On the legacy side, do you think the capacity, is at the point where you're meeting that underlying volume, or do you think there's still some more catch up to do to be at that -- I wouldn't call, fully optimized, because that's a journey, but towards something a little bit more optimized? And also, I might have missed this you might have said it. Were volumes positive in the quarter on the legacy side? Any thoughts on that side?

So, Scott Barbour here, again. The work in Infiltrator is going great. I mean, the equipment there has meaningfully impacted the Allied product and the Infiltrator tank sales. The new equipment in the legacy business is performing well. But you are correct in that, there is additional capacity needed outside of just the Southeast and the Eastern seaboard where most of that new pipe equipment went that would allow us to get volumes up better, or more aligned with when the customer wanted it. So I kind of think of it as like, peaking capacity of pipe and our ability to kind of produce that more on demand is something we can improve upon, will be further investment, gives us upside potential as we go forward. Is that kind of -- I think, that was the question. Did I get it?

Yes. I know, it was the tail-on added at the end. Remind me if volumes were positive in the quarter or not.

So pipe volume is positive in everything, but the retail shipments and agriculture shipments.

Okay.

And the Allied Products.

And Allied Products is very positive.

Infiltrator and Allied were positive.

I mean, that small negative of $3.3 million in the bridge is really driven by a wet spring, which impacted agriculture some northern markets of non-res and we saw that recover late in the quarter and in July.

Year-over-year comps so. We had a really good April last year.

Yes, April and May. And Michael, it's Mike Higgins. I go back to the comments made in the opening commentary. As we went through the quarter the year-over-year volume performance improved.

Right.

And we saw that trend continuing in the month we just completed July.

So that's a good segue to the next question then. So the leading indicators, that you guys talked about, obviously part of it is the trend you're seeing through this July time period. But maybe just a little more depth on, what you're seeing on the leading indicator side. Why the competency of the year is this? What you've booked already, customer conversations what distributors are saying? Any more detail on that would be great.

Scott Barbour, here again. So the way we look at that is we look at, when we start working with a contractor or a developer on a project, that's a project formation. We then quote that job. We then take an order on that job. And then we ship it within 30 to 60 days. And all of those are up positive year-over-year. And I'm talking about the pipe side right now, which is driving the Allied Products, which is driving the residential pipe, which is driving the nonresidential pipe. In addition, the agriculture segment is going to be pretty good. We saw good order increases in that over the last 30, 60 days and that will mature in October, November. At Infiltrator, the order pace has flattened out. We're still working off of a pretty good size backlog. And we don't think that kind of manifests itself into a headwind until we get into next fiscal year. So we're mindful of it. We're watching it, but it's too early to call. And right now we are very confident that -- let's call that residential piece tied to starts and completions that drives the on-site septic, it's right on plan. I mean, it's falling right in there nicely where we wanted to. And as Roy and the team have said, it would.

Great, really appreciate it. Best quarter guys.

Thanks Mike.

Thanks.

Thank you. The next question comes from Josh Pokrzywinski of Morgan Stanley. You may proceed with your question, Josh.

Hi. Good morning guys.

Good morning, Josh.

Scott just for -- just first question on, kind of, how you're shaking out price-wise in the marketplace? Obviously, you're not really competing a lot with other folks who have resins and input. So price cost is good but maybe relative to some folks, who are looking at it a bit differently. How would you square up I guess particularly in the pipe business? How do you see that relative price today? And how has that trended over the last maybe quarter or two?

So our relative price for the pipe products continues to go up. And this is really the pricing work that we started a year ago and consistently kind of went through the year with price increases a year ago. We had a price increase in March, also that's stuck. That one was largely based on elevated diesel and transportation costs. So it's still -- we're still kind of getting some of the benefits from that, Josh. That levels off as we go through the year in this plan. Not that we're not taking pricing down. It's just we're not further increasing their prices, unless something happens and we feel we need to go do that. We also believe we remain very competitive with traditional materials. I think perhaps -- and we've talked about this in the past that they were a bit behind and catching up with their inflationary input costs. So they've been raising prices pretty aggressively. I think you guys have probably all read and seen that in other -- kind of other guys related to the industry. And that -- and we believe that's helpful to us continuing to maintain our pricing in the market or do what we have to do to cover our cost and pressures. But we punched and probe on that in a lot of different ways. And we feel very good about where we are right now on our price levels, and our ability to be competitive, and win what we want to win in the market.

Got it. That's a good segue to my next question is, obviously you guys are benefiting immensely right now from what's going on, on price cost, and the good volume and all that kind of stuff. The -- I guess mix within that, what's the aperture or appetite to, maybe realized less of that margin benefit and go out there and try to take more share? Like, how do you balance that? Is there any toggle that you guys are thinking about?

Yes, there is a toggle there. Absolutely there's a toggle there. But -- and I would say right now we think that toggle is appropriately set and we are gaining in areas where we have available capacity. Think of our focus states. And we might talk -- well honestly, we haven't had to toggle the pricing much to go win what we want to go win. But I would say that versus a year ago Josh, where we were actively staying on the sidelines particularly in the agriculture market because, we didn't have material, we didn't have capacity, we are not in that situation now. So we think we want to toggle to get something we'll do it, but we're not going to do it to the extent where we compromise this bridge on a price cost right now…

I would add one comment. Yeah. I was going to add one comment to what Scott said. Yeah, I was going to say versus using pricing as a toggle I think what we've kind of learned through the demand environment with the strong demand in these inflationary cost pressures is you can get share by improving service and availability.

That's a good point.

Just as easily as you can with price. So, I think really what we've been focused on so far is let's not use price to do that. Let's just be better value proposition in the market versus who we're competing against.

Yeah, it makes sense to me.

That's clearly what we've done in agriculture. Clearly, what we've done there, where we like I said we really haven't had a toggle much, if at all. And use better inventory builds better quality of inventory our production planning processes our fleet guys are doing a great job right now upturning our fleet capacity and multiple runs in a day to service the agriculture market. I mean, it's astounding the number of trucks we're rolling every day right now. So that's a very good point, Mike.

Thank you. We now have the next question from the line of John Lovallo of UBS. Your line is open, John.

Hey, good morning guys. This is Spencer Kaufman on for John. Thank you for your questions. Maybe the first one just piggy backing off of Josh's question there You guys have obviously put through a tremendous amount of price into the market. I'm just curious, what your current realization on price increases is and what was this on a pre-COVID world? How much more price even do you guys can get? And what typically happens to price in deflationary environment?

Go ahead Scott.

Yeah. So again, as you look at our EBITDA bridge and you see that volume again different – based on the different segments we have Allied and Infiltrator up pipe down. But still getting a lot of pricing year-over-year, we look at it sequentially as well as that year-over-year trend. So again, I'll answer the last part of your question first. When you go back and look, I've been here seven years, I've been in different resin environments resin going up, resin going down. ADS consistently holds that spread, if you will and holds that pricing. So I would tell you that, again, it's going to be market dynamics. We'll continue to look at it. And it's the value proposition. Everybody always defaults to resin, it's much more than that. It's transportation, it's labor, it's that value proposition and as Mike and Scott were just talking about that ability to serve and that availability of product in the right place at the right time. It's such a regional business that all matters so much. So when you talk about pricing and keeping it, it's much more than just talking about resin. So the history of the company proves out that, we can keep that pricing as we move forward and that spread if you will. And we're highly confident as we move forward. We talked in our prepared remarks about that price cost being favorable in the first quarter and the fact that, we see it being favorable as we move through the rest of the year. So a high confidence level there, again, it's a key part of our playbook, if you will, but we're also not letting up on productivity initiatives, CI initiatives lean. The capacity that we've added, we always said that, Infiltrator was going to add that capacity first. And we've seen it really and Scott mentioned, it as well on the tanks, on the Storm Tech product that they make that goes into Allied Products. Having that inventory being out there to service the demand that, we've had we've really seen that come through in a powerful way. And that's one of those favorable trends that we mentioned that, we saw in the first quarter that, we're looking forward to as we go into Q2 and beyond.

Okay. Yeah that makes sense. And I appreciate the color there. Maybe for my follow-up any update on Texas in trying to improve your hold there?

Yeah. This is Scott Barbour, and we continue to make a lot of progress in Texas in a public approvals, I think our sales in Texas were up like 49% or something like that. So very strong quarter in Texas, we're not through the whole approval process yet. It's not a short process. But I would say that we feel very good about where we are. And ultimately we believe we will have a big win there.

Great. Thanks, and good luck, guys.

Thanks.

Thank you, John. We have no questions registered. So I would like to hand it back to Scott Barbour for some closing remarks.

All right. Thank you very much and we appreciate the questions today and everyone who participated. It was certainly a good quarter. Lots of hard work by the people in the company at ADS, Infiltrator, Cultec unbelievable kind of journey that we're going through together in this year. It's turning out different than last year, but a good start. I think we've given some very good guidance here and we look forward to the next time we all meet. Thank you.

Thank you. That does conclude today's call. Thank you all for joining. You may now