ADVANCED DRAINAGE SYSTEMS, INC. 2027 Q1 Earnings Call

Good morning, everyone. Thanks for joining us today. Here with me, I have Scott Barbour, our President and CEO, Scott Cottrill, our Chief Financial Officer, and Craig Taylor, President of Infiltrator. 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 all of that said, I will turn the call over to Scott Barbour.

Thank you, Mike, and good morning, everyone. Before I begin, I want to thank everyone who made the trip to Ohio for our Investor Day in June. It was a great opportunity to showcase our engineering and technology center and highlight what makes ADS a unique and compelling investment opportunity. At Investor Day, we focused on four key themes that continue to guide our strategy. First, ADS is a pure play water company, serving attractive end markets supported by powerful secular tailwinds, including aging and under-built infrastructure, more frequent and intense storm events, and the growing need to protect and manage water, the world's most precious resource. Second, we highlighted our differentiated growth strategy. Material conversion remains an important driver and key component of our growth, and we continue to focus on innovation, new product introductions, strategic partnerships, distributor programs, and disciplined acquisitions to further differentiate the company.

Third, we built a resilient platform that delivers industry-leading profitability and strong cash generation across a variety of market conditions. Finally, we remain committed to disciplined capital allocation, reinvesting opportunities that strengthen our competitive advantages, and create long-term shareholder value. Simply put, if we continue to grow faster than our markets, generate strong profitability and cash flow, and reinvest that capital wisely, we believe that's a winning formula for ADS and our shareholders. Shifting to the quarter, the first quarter results reflect strong performance as the team continued to execute well despite the tepid demand environment. For the first time ever, we recorded over $1 billion in revenue this quarter, an increase of 21% versus the prior year. Organic revenue increased 9%, driven by growth across both the stormwater and wastewater segments.

Adjusted EBITDA increased 29% to $358 million, resulting in an adjusted EBITDA margin of 35.8%, which is among the most profitable quarters in our history. The impressive results reflect our diversified portfolio, disciplined management of price costs, material conversion initiatives, and operational execution that once again enabled us to deliver strong financial performance. The quarter developed largely as we anticipated when we entered the fiscal year, and the first half of the year is developing as expected. We estimate there was approximately $25 million-$30 million of revenue pulled into the first quarter from the second as customers tried to get ahead of price increases. Ultimately, we expect the first half of the year to have normal seasonality, representing 55%-60% of revenue. However, the normal first and second quarter revenue patterns will be affected by this pull ahead.

If you take the $95 million of revenue from NDS and assume approximately $25 million-$30 million was pulled forward, we still reported strong mid-single digit organic growth. Sales in the non-residential market were strong, increasing 14% on an organic basis. Activity in commercial construction and large projects, including data centers and warehouses, remains resilient. Residential market sales increased 29%, primarily driven by NDS. Organic results in the residential market were flat overall. Infiltrator residential revenue increased double digits, driven by tanks and residential advanced treatment systems. On the stormwater side, we saw weakness in both retail and residential land development. The challenges in residential construction are well-documented as affordability pressures and elevated interest rates continue to weigh on homebuyers. Importantly, our diversified portfolio is working exactly as intended.

While portions of the residential market remain under pressure, our geographic and end market diversification, new product introductions, distributor programs, and product partnerships continue to provide additional growth opportunities to help offset this market weakness. I'd like to highlight the stormwater storage category within our Allied Products, which grew 18% in the quarter and is an excellent example of when we do our strategies well. We continue to introduce new products in our core StormTech chambers product line, acquired Cultec, a complementary chamber line, and we established a partnership to bring Aquabox plastic crates to market in the U.S. for applications with a tighter footprint. We wrap that with industry-leading digital design tools that easily enable engineers to design and specify these storage products. Another great example of this is the wastewater segment, where revenue increased 8%, significantly outperforming the underlying residential market.

Growth was driven by new tank products and expanded distribution, as well as growth in our market-leading advanced treatment products. We're very pleased with the performance of NDS. Their performance and the integration activities continue to progress well. We are increasingly excited about the long-term opportunities to cross-sell products, broaden customer relationships, and expand participation in both irrigation and retail channels. NDS delivered another strong quarter and continues to validate the strategic rationale behind the acquisition. We continue to operate under the strategy of recovering inflationary costs on a dollar-for-dollar basis. Transportation costs remain significantly elevated, driven by higher diesel and common carrier costs. The cost of materials procured in the quarter was significantly higher on a year-over-year basis, though the first quarter profitability reflects material procured in the prior year at a favorable cost.

Another lever we use to offset higher material costs is increasing the use of recycled materials, a strategy we accelerated in late February as raw material costs began to rise and the spread between recycled and virgin material widens. Of note, the expansion of our Cordele, Georgia, recycling facility is nearing completion. This expansion significantly enhances both processing capacity and operational capability in a high-growth region, transforming the facility into a fully integrated recycling plant capable of producing finished materials. The design of this facility reduces material movement, streamlines production flow, and enhances process control throughout the manufacturing cycle. Upon full ramp-up, we expect Cordele to be the benchmark for recycling performance within the ADS network. The facility will deliver industry-leading cost efficiency, improved quality and consistency, and superior operational performance, strengthening our recycled material supply chain, supporting our long-term growth and margin improvement.

Our operational initiatives continue to produce tangible results. Over the last several years, we have invested heavily in production efficiency, automation, logistics capabilities, and service levels at both ADS and Infiltrator. Those investments continue to improve productivity, support customer service, and strengthen our competitive position. The benefits of those actions remained evident in our profitability, cash generation, and ability to serve customers across a broad range of end markets. Overall, we are pleased with the start to the fiscal year and believe our results reinforce the strength of the ADS business models. The long-term fundamentals supporting our business are stronger than ever. As we discussed at Investor Day, we are a pure play water company operating in attractive markets, supported by powerful secular tailwinds and the growing need for advanced water management solutions.

These trends continue to play directly to the strengths of our portfolio and position us for the long-term growth. Our differentiated growth strategy continues to set ADS apart. While material conversion is a core business driver, we are increasingly creating growth through innovation, new product introductions, strategic partnerships, expanded distribution programs, and acquisitions. As we look ahead, our priorities are clear. Execute against the initiatives within our control, advance the integration of NDS, and continue to leverage our resilient platform to generate strong profitability and cash flow across a range of market conditions. We remain committed to disciplined capital allocation, reinvesting in opportunities that strengthen our competitive advantages, strategic acquisitions, and return capital to shareholders through dividends and opportunistic share repurchases. While we expect the demand environment to remain tepid, the inflationary cost pressure is dynamic.

We are confident in our team's strategy and ability to continue delivering profitable growth and sustained value to all our shareholders. With that, I'll turn the call over to Scott Cottrill.

Thanks, Scott. Turning to the first quarter financial performance, net sales increased 21% to $1 billion. Excluding the impact of NDS, organic sales increased 9%, and adjusting for the pull ahead, revenue grew mid-single digits. That mix of growth is the ADS model at work. First, we grow faster than our end markets organically, and second, we leverage strategic acquisitions such as NDS To compound such growth. Storm water revenue increased 24% to $809 million as compared to $652 million in the prior year. On an organic basis, storm water sales increased 10%, driven by growth in both pipe and allied products. Wastewater revenue increased 8%, driven by double-digit growth in both tanks and residential advanced treatment. Importantly, we continued to outperform our underlying end markets during the quarter, reflecting the benefits of our diversified product portfolio and our material conversion strategy.