Good morning, and welcome to the Advanced Drainage Systems’ Fiscal Second Quarter 2017 Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded for webcast. I would now like to turn the conference over to Mike Higgins, Director, Investor Relations and Business Strategy. Please go ahead.

Thank you. Good morning. With me today is Joe Chlapaty, our Chairman and CEO; Scott Cottrill, our CFO and Ron Vitarelli our Co-COO. On today's call, Joe will summarize our results for the second fiscal quarter. Scott will then provide more detail on the financial results for the quarter, as well as our guidance for fiscal year 2017 before we open the call up to your questions. I would also like to remind you that we will discuss forward-looking statements as defined under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those forward-looking statements as a result 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 Web site. A copy of the release has also been included in an 8-K we submitted to the SEC. We will make a replay of this conference call available via webcast on the Company Web site. With that, I'll turn the call over to Joe Chlapaty.

Thank you, Mike, and good morning to everyone. Welcome to ADS's fiscal second quarter 2017 earnings conference call. We'd like to thank all of you for joining us today. We appreciate your patience and support to the most recent restatement process, which we finalized January 10, and as we continue to work diligently to become current with all of our SEC filings. Scott will cover more details related to the restatement in just a minute. So let me now turn to highlights for the second fiscal quarter. As we indicated on our last call, market conditions during the second quarter were softer than initially expected. But I’m pleased with our overall performance during the quarter as we continue to outpace the overall construction market, while generating strong profits and cash flows. On a year-to-date basis, we’ve generated solid growth of 6% in our non-residential end market. We continue to see double digit growth of our HP pipe, and growth at our Allied products, lead by Nyloplast, StormTech and our base saver water quality units. Our second quarter sales results declined primarily due to continued softness in Mexico, lower sales in Canada and a lack of growth in our domestic construction markets, which resulted in a consolidated net sale decline of 6%. We generated $66 million of adjusted EBITDA this quarter, about 3% higher compared to the prior year. Our price management and material cost advantage continue to enable us to generate good healthy profits. On a year-to-date basis, adjusted EBITDA has increased an impressive 18% to $137 million, even though net sales have decreased 2% over the same time period. Although, we are facing greater than expected headwinds to our top line revenue, which Scott will cover more detail, we feel good about our ability to continue driving above market…

Thanks, Joe. On slide five, we have outlined the impact of our recently completed financial restatement, which impacted the annual periods ending March 31st of 2012 through 2016. To summarize, during our internal review our share based awards and related administrative procedures, we identified accounting issues with the treatment of our stock based compensation. Specifically, we gave participants in the plan the ability to net shares of financial size for tax reporting requirements at an amount greater than the statutory minimum. We also, at times, repurchased shares from employees within six months of issuance. Both of these items resulted in our conclusion that we should change the way we account for our share based awards on the equity method to the liability method. As part of our review, we also determined that additional adjustments were required for historic compensation expense associated with certain executive employment agreements, as well for some certain stock repurchase agreements in place with members of the senior management team. Importantly, as we outline on slide five, the adjustments were all 100% non-cash and did not impact net sales or adjusted EBITDA for any of the impacted periods. For further details on the restatement, please refer to our amended financial statements for the above referenced periods filed with the SEC earlier this week. With this restatement now behind us, we continue to expect that we'll become a timely filer when we file our Q3 report. For more specifics, please refer to the updated timeline on slide six. Let me now shift to our financial results for the second fiscal quarter, a summary of which is provided on slide seven. During the quarter, we generated net sales of $361 million, down 5.9% from $383 million in the prior year. As mentioned on our last earnings call, domestic construction…

We will now begin the question-and-answer session [Operator Instructions]. The first question comes from Rob Hansen of Deutsche Bank. Please go ahead.

So, your top line came in largely as expected. You gave this updated guidance, and we know we really appreciate that. What is like really changed, between last time when you gave guidance and this time, right? And why did you reduce the guidance? And I guess I am thinking, is it something that you’re seeing in January here that wasn’t good. What are your thoughts on that, and are there specific verticals within non-res that came in weaker than expected. And by verticals, I mean, like office or retail, or something like that.

I think, year-to-date through Q2, we had seen our non-res up mid single-digits. And so when we’d done the prior forecast, we were using that as the trajectory as we move forward, we did not thank and originally in the guidance we put out, we thought Q3 was going to be up year-over-year a little bit. And obviously in Q3 what we saw, again what we pointed to is continued weakness in our construction end markets, so at least weaker than what we anticipated being down. And especially that was in the infrastructure and retail end markets, as well as the fact that pricing. We had assumed, in the October forecast when it came out, we were seeing very favorable pricing versus what we had expected at the beginning of the year. We play that forward assuming that it would gradually go down, but that we’d largely leave it intact. What we saw through Q3 ended up becoming more in line with what we thought at the beginning of the year, which is when you’re in the second full year of a lower resin cost environment, you can end up getting some of that back. Now again, Ag and retail you would expect to give that back, that’s our price sensitive markets. And again, on the non-res and construction markets, they are very savvy customers are well and it’s something to be expected. So those would be the biggest changes that we saw just the weaker demand dynamic, as well as pricing.

And the pricing are, it seems like in the second half of the year, it’s kind of a swing factor, looks like it might be anywhere from flat to down to 200 basis points of sales, something like that. Is that kind of what’s embedded in the guidance?

It is, Scott, yes.

And then just on the, from an input cost prospective, what is that looking like, what our input cost up or down year-over-year, and how aggressive have suppliers been? And just lastly, if you could just give us the gross margin for domestic versus international, that would be helpful.

Let me give you kind of the 10,000 foot review of raw material, and then Scott can give you the specifics. We have maintained a favorable outlook and attitude towards material costs, and that really hasn’t changed. And we see meaningful capacity coming on stream this year, augmenting with came on last year. So, going forward, we remained, I don’t want to use the word, optimistic, but we haven’t changed our outlook on downward pressure on material costs. That looks like it is going to take place, and is taking place. So, we feel good about it. Now, Scott, can give you some of the specifics on the margins of sales.

So, again, on the resin side, during the first half of the year, we were down about 14% year-over-year, so again, great trajectory. The comps getting more difficult in the second half, so that can still be a benefit, but not as much as what we saw in the first half of the year. I guess, I’ll talk to the EBITDA margin side, Rob, on the EBITDA margin. Domestically, we're at about 19.5% year-to-date and about 17% international. And that blends us to about the 19% for the year-to-date period, consolidated.

And then just last one. What's going on in Mexico, and why do you believe that the market there has bottomed?

We are, actually, experiencing recovery in Mexico and that really started in December. And I think the outlook on there is for improved activity again in the, I'd say the construction market, so maybe it relates to residential. And we have implemented some programs to recapture market share that we believe escaped from us over the past couple of years. So, we have a new team in place down there. They're doing a good job. And as we speak, over the last say 60 days, Mexico has turned into an upward trajectory. And we're not looking for huge growth, but we’re looking for improvement over the -- than it was, let's say, over the past year and half.

The next question comes from Bob Whitnall of RBC Capital Markets. Please go ahead.

Good morning guys. This is actually Marshall Mentz on for Bob. A couple of questions for you guys looking to actually your fiscal '18. Would you talk about Missouri facility with respect to financial impact, and how that could potentially flow through in '18 and beyond?

Well, we have facility in Missouri, being completed from a couple of different standpoints. We believe there's a growing market opportunity in Missouri, and in that region out there. And we have received some meaningful approvals, improvements on our approvals out there, which give us a lot of confidence. And quite honestly, equally important was the ability to dramatically reduce our freight shipping cost to that area where we hit kind of a hole. And we were incurring a lot of freight expense delivering product to that market, so as the sales trend is up, we need the capacity out there and the ability to save freight cost dollars, becomes more meaningful.

And then, I guess, shifting gears a little bit, but still talking about next fiscal year. The agricultural end market, and given your commentary about the negative impact in the planting season for last year. How does that play out in the future, and if you anticipate any pent-up demand? I think you got some commentary, and maybe about backing away from the business a bit, just given conditions. But is there potential for some sort of recovery given what's happened?

I don’t have rhymes, but would really comment that, the comment on that in a broader perspective. But we certainly are not giving up on that market. We just think that with a company our size with soon to be 49 domestic plants, you’ll need to deploy your operating lines in those geographies where there's strong business volume. So, if we have lines in those situations that have been, stay idled, we're going to move those to areas where we need that capacity. Ag is a very variable market. And every time you think you've analyzed where it's going to go, it changes direction. And I would say that, and I'll let Ron address this. But it’s hard to ignore the weather impact that we've had over the past year and half. But we don't want to just use that as some type of excuse. The market is softer, but the year-to-year weather impact has been significant.

And just to echo, this is Ron Vitarelli. Just to echo that comment a little bit, obviously, the weather has a certain impact on the agricultural market for us. And although we don't see a very significant demand push forward or from this year's and last year, from an ADS perspective, we've been in this market for a very long time. Our market share is very stable, and our customer base is very stable, which bodes well for, just kind of continued market performance in the Ag business. So our expectations are, I think, realistic in the Ag market, but we're not expecting to see a very drastic increase based on pent-up demand.

And Marshall, it's fair to say that when we do our Q3 earnings release coming up in early Feb, we'll be giving directional additional directional look into what we think the end market performance will be.

The next question comes from Mike Halloran of Robert W. Baird. Please go ahead.

So, first to start on the non-res side, I'm just thinking back to the last update call. There was an expectation that things would get a little better in the fiscal third quarter beyond. Obviously, today you talked about how you're taking those expectations down. But maybe you could talk a little bit about how the performance has been sequentially relative to what you normally see from a sequential perspective? Was it a little bit closer to your normal sequential pattern, or worse? I mean, how would you characterize that?

I mean, I'll take a first stab and I'll let these guys add some context to it. I think the first quarter was very strong. We were up 11% in non-resi in the first quarter. And again that was the mild winter, the spring. I mean it was -- people were outside, people were working, people were getting to jump on things much earlier than what you normally see. A little bit of that was timing then. And again it's mostly impacted Ag and retail, and some of those other construction markets. But you also saw a little bit of that weaker activity in Q2 that, I think, was a little bit of that timing and phasing. To be honest with you, I look at the first half being up 5.6%; in the non-resi side it's kind of a more of normalcy, if you will, for how we did in those six months. And to me that's kind of a normal trajectory with what we thought. I think really on the pricing side, that's where we saw a little bit of a weaker activity, all that started coming in Q3. And again, that was -- I don't want to get into the months. But again, as we saw on November-December, we were picking back up, and then you had winter and weather started impacting us in mid-December again. So, I would say the sequentials -- I would just talk to it the way I just did as to the first half was in line with what we expected when you looked at it over the entire six month period. And then in Q3, I think, a little bit of weaker activity, a little bit of what we assumed at the beginning of the year on the pricing side came to fruition. And then, again, we got tough comps in Q4, but we still expected to be up mid-single digits in Q4, year-over-year, despite those comps in the non-resi side of the house.

So it sounds like you're saying basically the sequential trend, a little bit of weather headwinds, comps certainly a problem. But the sequential trend probably as you worked through the year and try to normalize everything out, not that different from what you'd see in a normal year. Is that fair?

That's correct. This is Ron Vitarelli, again. As we've talked with the greater group in detail in the past, we do -- we track the conceptual size of that business and the design side of that business very closely. And all the indications that we are witnessing would support the position that we've taken, that it is a timing issue. Certainly, cold weather, on company like us, impacts construction, because we're a 100% outside of the building. But what we’re seeing certainly supports our outlook as stated.

And then maybe a similar discussion on the resi side of things, obviously, different distribution channel, little harder distribution channel. Weather benefits, I am assuming there is well from part of the year, comps harder here as well. How would you characterize the core market there, and your performance relative to the core market and what you’ve seen, sequentially?

Yes. Again, I think as we have talked through the market, we’ve not lost any customers or market share. I think, to be honest, I think we underestimated the impact of the Q4 winter and the pull forward a little bit we just did. We said 10 to 15 it was probably close to the 20-25 impact there. On the pricing side, again, our price sensitive markets are Ag and retail, and not that you don’t have that pressure again on the construction markets. But primarily, it's in those two markets first. And they’re very savvy customers, and on the retail side of the house. So, I think that’s what you saw. You’ve got different weathering events at different geographies throughout the U.S. that didn’t help us, whether that the draught in the west or heavy rains in Texas. I mean, none of that ended up boding well for us as we went throughout the year. And then you also have, we mentioned the inventory management practices that our large retail customers put into place. Now today, don’t always have that in place, but we saw it more so this year when it came to destocking. And really having just in time inventories if you will, and keeping inventories at relatively low level. So I think those are the key driver we’ve seen in the retail side of the house.

Michael, one other, this is Mike Higgins. One of the things to add on the residential piece is there is the retail component of the business and then there has been the new residential construction, which would be related to new subdivision development, new multifamily developments. That business has performed in line. You said mid single digit growth there in the first half of the year. So that’s really where, again, that’s where the conversion story is in play for us that’s the focus, that’s where we’re competing against traditional materials. As Scott mentioned, the retail, we have the share there where we’re really focused on, and pleased with that growth that we’re seeing in the residential construction, because that means our strategy of conversion is at play, and we’re being successful.

And then last one for me, just maybe an update on the impact that you guys are anticipating on the hedging side this year?

Yes, I mean, we’ve had actually favorable movements on the monomer, the propylene monomer year-to-date. So, that’s primarily the financial hedge side in diesel. And so the best way to look at that is about $3 million favorability on both the GAAP earnings and EBITDA perspective than what we had assumed at the beginning of the year.

The next question comes from Brian Connors of Boenning & Scattergood. Please go ahead.

I wanted to -- actually I have question bit of a bigger picture angle on the pricing situation from a structural standpoint, talking about the construction market. And obviously, your markets are really regional, so even though you’re talking about pricing in the national context. Well, I understand, business is really is regional markets where the supply/demand situation would really be what dictates price. So, can you talk about your pricing situation on a regional basis with construction growth so low? I imagine there are markets where the growth is negative, and that that’s pressuring that supply and demand dynamic. And then also as it relates to the re-tasking of agriculture assets by yourself and others, whether that’s creating some original issues in terms of pricing from a supply standpoint.

Certainly, and I’ll handle. This is Ron Vitarelli. Level start with Ag, and very simply in the Ag, in a declining Ag market, it becomes a competitive environment with more people competing for a smaller piece of the pie, and I think that’s something that we’ve been exposed, doing working on for the last 50 years. As it relates to the commercial construction, and I mean of all, the heavy construction market, overall, we’re booking to regionally, by local polyethylene players and then concrete more on a national level. So we priced ourselves accordingly. We understand the concrete input pricing has moved upwards, and we’re trying to be conscious with that in the market where we’re directly converting against to reinforce concrete pipe producers. And in marketplaces where our primary competitors of the polyethylene high producers, we have to take a little different view on things to make sure that we don’t lose markets share. And one of the things, I think, that we should certainly highlight again this year is that we have -- we feel very strongly that we have not lost any market share to any of our traditional competitors, both on factory side of the business and the polyethylene side of the business. So, hopefully, I hope that answers your questions as to our regional looking at those things.

I just want to add one flavor or one context to this, right, is the fact that for the year, we expect resin costs to be, on average, down 10% year-over-year. And on the pricing side, again, it’s blended average of Ag and retail, and all of our markets. But we expect pricing to be now 1% to 2%. So, I just want to put that in context that of the majority of what we’re seeing on that resin side, we’re able to keep in and we pride ourselves and be able to do that. And the sales guys do really effective job of managing that, both up and down.

So I can just paraphrase that. You don’t believe, even though that the market growth has been a little bit below your expectations in some of the markets. You don’t believe that there is any lingering sort of oversupply issue of too many production lines out there from an industry standpoint?

Brian, in the construct markets know where you would have that overcapacity, would be in the Ag markets.

And then it's a good segway, because my other question had to do with Ag. And it does seem that where couple of few years into this down cycle, and it does seem like the negative momentum that you’re forecasting here down, you’re 20% plus, is certainly little bit more pronounced then in some of the other Ag related market, if you think the irrigation, for example, where things have stabilized. So my question is, what you think is driving that? And is there some change, some shift, I know that a lot of your products have used in tiling applications. I mean, is there some shift taking place in the way the product is used or is not used in these application that is either exacerbating the cyclical impact in some way?

I think what’s been difficult, this is Joe Chlapaty, to try the separate the actual market expectations from weather, has been very challenging; because, as Scott had mentioned earlier that the Ag season haven’t really stopped last year much in winner. And we had a four quarter in Ag last year that was probably close to a record for us. So, when you factor that into this year again you don’t know how much pull back you’ve had. I’ll say this, agriculture field drainage is a proven technique to improve crop yield by 20%. And most lending institutions, if you want to borrow money to buy farmland, often times they’ll require that the land be drained. Now we’re going through a situation here, transitional commodity prices are certainly down from where they've been. But where is the bottom, I'd like to think we're there, its where is it going next year, it's just a hard one to predict. We could, and I'm not suggesting this. But you could see a rebound in our business earlier this year. Again, if weather turn warm in March, you'd see a rebound in that business. We had a much earlier start to winter in the upper-Midwest in December which we just didn’that experienced last year. I don’t know where you're calling from, but if you were in the upper Midwest in the second third week of December, it was bitterly cold. And once installers put their equipment away, they tend not to pull it back out till spring. So, maybe that's kind of a lot of words that didn't address your question, but I hope it was helpful.

[Operator Instructions] This concludes our question and answer session. I would like to turn the conference back over to Joe Chlapaty, Chairman and CEO, for any closing remarks.

Thank you. In summary, we are happy to have the restatement behind us, and are pleased with our performance so far for the first half of the year; particularly given the more difficult than expected end market environment. Our performance in the construction market this year, including strong results in non-residential and residential construction end markets, continues to outpace the market. We're also pleased to see double digit growth in our HP pipe, as well as solid growth in our Allied products. Our gross margin and adjusted EBITDA margin improved compared to the prior year by 250 basis points and 160 basis points, respectively. And we are generating healthy profits and free cash flow, which will create additional revenues -- avenues, for shareholder value creation, including organic investments in our business, acquisitions, excess cash returns to shareholders and maintaining a healthy balance sheet. We also remain confident in our strategy to outperform the overall market by driving conversion opportunities from traditional materials, as well as generating significant operating leverage over time. Thank you all again for joining us today, and we look forward to speaking with many of you very soon. Operator that concludes the call.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.