Full Transcript: Advanced Drainage Systems Q1 2027 Earnings Call

Advanced Drainage Systems (NYSE: WMS ) released first-quarter financial results and hosted an earnings call on Thursday. Read the complete transcript below. This content is powered APIs. For comprehensive financial data and transcripts, visit View the webcast at Summary Full Transcript Caleb, Operator Good morning, ladies and gentlemen, and welcome to Advanced Drainage Systems first quarter of fiscal year 2027 results conference call.

My name is Caleb, and I am your operator for today's call. At this time, all participants are in listen-only mode. After today's prepared remarks, we will host a question-and-answer session. If you would like to ask a question, please press star 1 to raise your hand.

To withdraw your question, press star 1 again. 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.

Mike Higgins, Vice President - Corporate Strategy & Investor Relations All right. 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, 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'll turn the call over to Scott Barbour.

D. Scott Barbour, President and Chief Executive Officer Thank you, Mike. 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 underbuilt 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, a 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. And finally, we remain committed to disciplined capital allocation, reinvesting in 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. Now 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 a billion dollars 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.

8%, which is among the most profitable quarters in our history. The impressive results reflect our diversified portfolio, disciplined management of price/cost, 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 to $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% to 60% of revenue. However, the normal first and second quarter revenue patterns will be affected by this pull ahead. So if you take the $95 million of revenue from NDS and assume approximately $25 to $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 home buyers. 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. S. for applications with a tighter footprint, and we wrapped 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 remain 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 model.

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 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 to strengthen our competitive advantages, strategic acquisitions, and returning capital to shareholders through dividends and opportunistic share repurchases. While we expect the demand environment to remain tepid and the inflationary cost pressure to be dynamic, we are confident in our team's strategy and ability to continue delivering profitable growth and sustained value for our shareholders. With that, I'll turn the call over to Scott Cottrill. Scott Cottrill, EVP, CFO and Treasurer Thanks, Scott.

Turning to the first quarter financial performance, net sales increased 21% to a billion dollars 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.

Stormwater revenue increased 24% to $809 million as compared to $652 million in the prior year. On an organic basis, stormwater 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.

5% in the prior year, an increase of 230 basis points and the second highest in the company's history. Several factors helped drive the strong performance during the quarter: strong organic volume growth, especially relative to our underlying markets; the contribution from the NDS business, which also grew year over year in a challenging market; the $25 to $30 million pull-ahead from customers trying to buy ahead of price increases; as well as good execution on our commercial strategies, including the timing benefit realized from implementing pricing actions ahead of higher material cost. Moving to cash flow, free cash flow for the quarter totaled $203 million.

Cash generation remains a core strength of the business and reflects both earnings performance and disciplined working capital management. We ended the quarter with net leverage of approximately one and a half turn, below our target of two times, and had available liquidity of approximately $901 million. We expect to spend approximately $200 million in capital expenditures this fiscal year as we close out the Cordele expansion and invest in automation and additional capacity at our Infiltrator business.

Our capital allocation priorities remain unchanged: invest organically in areas such as growth and new products, material science and blending capabilities, as well as automation and productivity; pursue strategic acquisitions; and, finally, returning excess capital to shareholders through our quarterly dividend and share repurchase authorization. We remain extremely well positioned financially and continue to maintain significant flexibility. Moving to guidance, we continue to expect net sales of $3,350,000,000 to $3,550,000,000 and adjusted EBITDA of $1,000,000,000 to $1,050,000,000.

While our first quarter performance was strong, we continue to operate in a challenging environment characterized by inflationary cost pressures and fluctuating raw material costs. From a market demand perspective, the non-residential market is performing modestly better than we had anticipated, while our residential end market demand is performing modestly worse. As we look to the remainder of the year, we still expect normal first-half to second-half revenue patterns, with 55% to 60% of revenue in the first half of the fiscal year. In addition, while material costs were a benefit in Q1, they will be a significant year-over-year headwind for the remainder of the year.

We also expect the higher transportation costs we experienced in Q1 to remain significantly elevated throughout the remainder of the year. And finally, we continue to expect our pricing initiatives to offset inflationary cost pressure on a dollar-for-dollar basis for the full fiscal year. In summary, we delivered a strong start to fiscal 2027 through disciplined execution and effective price-cost management.

8% EBITDA margin and $203 million of free cash flow we delivered this quarter; and finally, our disciplined approach to capital allocation as we invest in the highest risk-adjusted return opportunities available to us while maintaining a strong balance sheet and creating long-term value for our shareholders. Taken together, these four pillars give us confidence in our ability to continue delivering profitable growth, strong cash flow generation, and compelling shareholder returns over the long term. With that, operator, please open the line for questions. Caleb, Operator We will now begin the question and answer session.

Please limit yourself to one question and one follow-up. If you would like to ask a question, please press star-one to raise your hand. To withdraw your question, press star-one again. We ask that you pick up your handset when asking a question to allow for optimum sound quality.

If you are muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. Your first question comes from the line of Matt Boulay with Barclays. Your line is open.

Please go ahead. Matt Boulay, Analyst at Barclays Morning, everyone. Thank you for taking the questions. I'll start off with a question on the guide, picking off there where Scott C finished.

So you mentioned the cadence of revenues. My question's on the cadence of EBITDA. I think I heard you say that raws were a tailwind and they're going to become a headwind moving forward. So could price-cost actually become sort of temporarily negative as a result, and kind of thinking about how that occurs and the timing of when price and costs would match?

And so is there any kind of resulting cadence to the EBITDA and EBITDA margin specifically that you can speak to? Thanks. Scott Cottrill, EVP, CFO and Treasurer Hey Matt, Scott C. Yeah, absolutely, you should think about it that way.

So normally, based on seasonality and product mix, our Q2 is normally 300 basis points EBITDA margin-wise below Q1 on a sequential basis. I would expect this year to be worse than that. So that is exactly the right way to think about it. If you look at the EBITDA bridge that we had in the first quarter on a year-over-year basis, again, as we mentioned, you had favorability in that price-cost bar from both pricing and that FIFO roll of our inventory costs.

So we still had favorable resin costs that we experienced on a year-over-year basis in the first quarter. That will flip on us as we go into Q2.