Good morning, ladies and gentlemen, and welcome to Advanced Drainage Systems' Fourth Quarter and Fiscal 2019 Results Conference Call. My name is Lindsey and I’m 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 and good morning. 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 Web site. 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 Web site. With that, I'll turn the call over to Scott Barbour.

Thanks, Mike, and good morning, everyone. I’d like to begin with a few highlights for the quarter and the year. We had a strong finish to fiscal 2019 achieving our financial targets for the second year in a row. We’re making good progress executing on the programs outlined at our Investor Day last November, including sales growth, margin expansion and cash flow generation. As Scott will discuss in a moment, our fiscal 2020 financial guidance reflects continued progress at each of these areas. Our strong performance and healthy balance sheet give us financial flexibility to return capital to shareholders which we will do through the special dividend we announced this morning. We’re excited about where we’re headed and the opportunities we have in front of us and intend on continuing to execute against them. With that, I’ll start out with our fourth quarter performance. We had good line of sight coming into the quarter and our team did an excellent job executing our plan to meet our commitments. Our fourth quarter revenue increased 9% driven by strong growth in both Pipe and Allied products as well as favorable pricing. Sales in our core domestic construction markets increased 13% and our team did a great job managing the business through the start of the spring selling season. The top line strength in January we discussed last quarter continued into February and March, particularly in the Southeast, Texas and Arizona. We had very good coordination between our sales, manufacturing and logistics teams to line up demand with operations including having products and drivers in the right place and better loading utilization of our trucks. International sales were down 12% this quarter driven by a slowdown in Mexico caused by the transition phase of the new government which resulted in lower infrastructure investment…

Thank you, Scott. Jumping right into profitability, our fourth quarter adjusted EBITDA increased $10 million or 37% year-over-year to $37 million and our adjusted EBITDA margin increased 270 basis points to 13.5%. This margin improvement was driven by volume growth in our Pipe and Allied products, favorable pricing and effective cost containment. Manufacturing and transportation expenses were flat overall marking the expected relief from the inflationary pressures we saw on diesel and common carrier rates that persisted throughout fiscal 2019. We had good visibility coming into the quarter on how we would achieve these results and our pleased to have delivered on our guidance for the second consecutive year. Moving to Slide 9. Our fiscal 2019 adjusted EBITDA increased 10% to $232 million and our adjusted EBITDA margin expanded 100 basis points to 16.8%. This year’s margin expansion was driven by favorable pricing and top line growth of our Allied products as well as lower manufacturing costs year-over-year. Another year of double-digit growth in some of our key higher margin products such as our StormTech retention/detention chambers, Nyloplast catch basins and water quality products gives us confidence in our ability to continue to sell the complete solutions package and grow our top line profitably. Regarding our operating costs and expenses, we had to deal with high input costs and higher transportation costs in the form of elevated diesel prices and common carrier rates throughout most of fiscal year '19. That being said, we were able to effectively offset these headwinds throughout the year with our pricing strategies. Overall, we are confident in the actions we took this year to grow our adjusted EBITDA margin by 100 basis points and we continue to plan to deliver profitable growth as we move forward into fiscal 2020. Moving to Slide 10. Our cash…

[Operator Instructions]. Our first question comes from Mike Halloran with Baird. Your line is now open.

Hi. Good morning, everyone.

Hi, Mike.

Good morning.

So let’s start on the demand cadence through the quarter and into the fiscal first quarter here. Was weather an impact in the quarter? Help kind of give some context around it. Obviously growth rates were robust, but wondering if there’s any spillover? And then also can you put some of the guidance commentary and context about the excess inventory coming into the first quarter if that’s demand or it’s just a conscious decision on your side? In other words, kind of help with that cadence as we look back over the last couple of months and what it means for the first part of the fiscal 2020 year?

All right. So, Michael, this is Scott Barbour. So cadence, you might recall when we were with you 90 days ago we had good line of sight on the quarter and January did pretty good after kind of a disappointing December. February and March continued at a nice pace and we’ve seen that kind of continue right along. You ask about weather impact, there was certainly weather impact but we – negatively, but we focus very hard in February and March in doing two things. One, in the Southern regions, the Southern crescent, we made sure that we had great delivery capabilities there. We prepositioned that delivery. We kept those plants running hard. So when demand began to materialize we could quickly grab it. And our teams did a nice job of positioning ourselves that way and that kind of continued in April and into May. So I would say demand cadence is right on target, right on line. And I think your inventory question might be related to kind of how it’s flowing through into the first quarter of our fiscal year and Scott’s comments around how that’s affecting our costs. And quite simply we usually take our labor down in December, January, February, March. We had such a difficult time getting labor a year ago that we held extra people through that period of time and we held those extra people but our volume kind of normally came down because we don’t start building up yet until really March. That caused some cost dislocation. Now we looked at that very hard but we feel like holding onto that labor gives us a better ramp up in late March, April, May, June because those people are trained, they’re in place, they’re retained and if you will we try to use some of this what we saw coming in terms of our working capital and our cost positions to make a smart tradeoff and keep that labor, and we’re glad we did. So I think that’s kind of the unpacking of that particular issue.

So the inventory piece was solely on the cost side and not a reflection of kind of swings in demand any which way or form, there’s still pretty consistent momentum?

Correct.

Okay, good. So the follow up then is just on the margins cumulatively for fiscal '20. Could you just help kind of directionally with how you’re getting to some of the expansion? Obviously volume leverage is a piece of it, but some of these transportation costs has been a headwind. How are those tracking? Resin, what’s the thought process there? And then also what kind of contribution on the internal initiatives or anything else I might have missed?

No. I think, Mike, you’re basically answering the question for me here, but that’s basically it. On the manufacturing side we’ll have this first quarter headwind, but net-net with the CI and other initiatives that they’ve got going on there it will be favorable as we look at Q2 through Q4. We look at transportation with the initiatives that they have there. Again, you look at diesel, again we think it will be relatively flattish this year but that compares to us being up 15% last year, 10% to 15% last year. So again on a relative basis that’s good with the common carrier rates also coming back down more in line with what we expect, so more flattish to favorable. So again, when we look at the margins that we expect and unless I remiss in not mentioning resin which we also think will be favorable year-over-year kind of a low-single digit type of basis, we get excited by that trajectory. And you got to look at the top line growth where it’s coming from. It’s going to be good growth on the Pipe side, but Allied continues to grow at that high-single digit rate which their profitability gives us nice leverage as we move forward.

Can I add one thing to that? I would just add. This is Scott Barbour, Mike. I just want to add one thing. The resin environment is a tough environment and difficult to predict. So we’re not packing a lot of – we have some favorability in there but we’re not banking our whole year on hugely favorable resin or input costs environment there. We’re going to be very cautious and manage that in our pricing very closely.

Thank you, gentlemen. I appreciate the time.

Okay. Thank you.

Thanks, Mike.

Our next question comes from Matthew Bouley with Barclays. Your line is now open.

Hi. Thank you for taking my questions. Congrats on the quarter. I wanted to follow up on the last point around the margin side within the guide and specifically on the continuous improvement initiatives that you guys called out. Are you able to kind of frame a little more detail around the impact or the benefit I guess from those initiatives this year? I think what we’re trying to figure out is basically I guess just like a baseline for what’s most under your control relative to kind of industry volumes and price cost and all that? Thank you.

I’ll start. Our intention every year is when you look at the inflationary cost pressures we’re under, whether that’s labor rates or resin or anything else that we’re looking at, we look at these excellent initiatives to offset those inflationary cost pressures we have. We really looked to get the leverage from the top line growth to come through all the way down through the income statement. So that’s our going into it approach. But then when you look at it and you look at the new folks we have and some of the initiatives that they’re bringing and what they’re bringing to the table, it’s really what’s the investment, how quick is the payback and how do we prioritize such? Really exciting items that are coming to bear, but we want to be really reasonable in how we phase the benefit of those as well as the cost. So I would say we look at it very detailed. There’s – on the recycled resin side of the house, there’s initiatives there that get looked at. The manufacturing supply chain procurement side of the house, definitely a lot of initiatives there that get looked at and on the transportation side of the house, a lot of initiatives there. So we look at them, we prioritize them and again it’s all about investment and return. So we’ve talked about our CapEx process and how we look at and prioritize CapEx and the hurdle rates we use. We look at the same thing here when we look at these SPP initiatives and prioritize those. So I hope that helps.

It does. Thank you very much for all that detail. And then for my follow up I wanted to ask about the resin side again just because we have seen some different trends in the different resins; polypropylene, polyethylene. Are you able to I guess kind of remind us of your proximate exposures to the different materials but then more importantly what’s the implication to pricing across the different product categories as a result of those different trends? Thank you.

This is Scott Barbour. I’ll take this one. And you’re correct. We do look at these differently, polypropylene versus high-density polyethylene. On the polypropylene we’re more exposed to virgin material costs because it’s basically 100% virgin material. Those prices versus a year ago, those input costs have come off some. It’s probably the majority of kind of what we put into our plan is those coming off. That said, we’re being very cautious about things that are in the back half of the year in particular around polypropylene, any volatility there that comes up we’re more than prepared to address that in terms of pricing of our product into the end market. Right now I’d say through the first six months we have line of sight and we think that that’s going to be a favorable thing year-over-year. But again, we certainly absorbed a lot of polypropylene cost last year, responded with pricing and other initiatives to offset that and I think that’s why we were able to expand our margins some last year. Polyethylene, a little bit different story. Obviously we have a lot of recycling material in that part of our product line. We endeavor to use more recycled product or input there so that kind of is going up year-over-year. The polyethylene virgin cost I described them as kind of stubbornly sticky and in a very narrow range and a lot of work we’ve done talking to that industry and that supply base I think it’s going to be more of the same in a relatively narrow range this year on the virgin high-density polyethylene that we buy. That said, again, we kind of got visibility on it through the first couple of months and it’s going to be in that narrow range. But I don’t anticipate any big change in that in the back half of the year due to supply or really demand. It’s going to be pretty stable I think. And the producers there have done a very nice job on their part of metering in and bringing in the capacity that they’ve added down in the Gulf Coast. So they’re very effective in doing that on the supply side.

All right. Thank you for all the details and congrats again.

Okay. Thanks.

Thanks.

Our next question comes from Scott Schrier with Citi. Your line is now open.

Hi. Good morning and nice quarter. First question, I’m curious and I understand seasonally it’s a light quarter but we saw that Pipe outperformed Allied which I only saw one time a couple years ago. So I’m wondering if there’s any reason for that or if there’s any trends emerging or how we should think about the cadence on both Pipe and Allied products?

So that’s a good catch. This is Scott Barbour. That’s a really good catch. I think that is primarily driven by the hard work we did in the quarter just ended on our retail and residential space. That’s a Pipe heavy space. It’s a space that is geographically at this time of year centered in the South and we worked very hard to make sure that we were lined up on that demand pursuing – lined up on that demand and logistics and trucking available to meet that. And we did something new this year with an initiative in our logistics and transportation around servicing that region and the retailers and national accounts, think of Home Depot and Lowe's and those kind of guys, they spike up. That tends to put a little pressure on our trucking and delivery to construction sites. It tends to be Pipe dominant, the national accounts and the retailers, the big retailers. So we did a lot of planning. I called it our Christmas season, like UPS or FedEx getting ready for Christmas. And we beginning last fall we began to kind of plan that battle for February and March and I think that’s what sprung that change in mix that you noticed between Pipe and Allied.

Great. Thanks. And then I wanted to ask you how we should be thinking about free cash flow generation in '20? Working capital was fairly even in '18, '19. Is that a good run rate for '20? Is there anything else that we should be thinking about in terms of your free cash flow conversion rate for '20?

We’re excited about the free cash flow generation that we’ve had and the opportunity. So we’re targeting north of 50% conversion of our EBITDA as we go into fiscal year '20. But if you take the midpoint of our guidance range of EBITDA of 255, that would insinuate a number north of 130. We have line of sight to that. It’s obviously going to come from our EBITDA and our profitability year-over-year --

And working capital --

Scott, where [ph] is the biggest area for improvement that we need to do year-over-year and that’s working capital. So everywhere from receivables to payables as well as inventory we have rededicated effort here. We’re not very happy with our performance in fiscal year '19 to be honest and we’re doubling down on that here on working capital and expect to get that. We also – based on the CapEx guidance we’ve given, we’re very much aware of how our future performance and earnings and growth are dependent on getting that CapEx spent. So again, doubling down our efforts there to make sure that we’ve got the resources and the projects in place on the time horizon that we’ve committed to. So again, a lot of effort on the cash flow side of the house to make sure that it performs as well as what we’re seeing on the EBITDA and the top line growth perspective. So doubling down.

So just to add to that because I can’t help myself. This is Scott Barbour. Cottrill’s right. Neither he nor I are pleased with how we did in that dimension in FY '19 and we are really very focused on working capital improvements and that’s a measure of how good an operator you are and we take that very seriously. That said, this is one of our tougher challenges here and you’ll see as you talk with us over the next year initiatives that we have in place. We mentioned in the dialogue, the narrative there about investments in customer service, in tools, to be better in the back office. That’s all tied to that working capital initiative and what we got to go do there. So we understand that and we know we need to do a better job on that.

Great. Thanks. And if I can ask another one, it seems like 50% free cash flow conversion on elevated CapEx is pretty impressive. So I know you’ve outlined many times your capital allocation priorities, but if you’re at $125 million, $130 million of free cash flow and you had said in your prepared remarks that you’re not taking your foot off the gas on the acquisition front, what are you seeing there? Are there some good opportunities in Allied or is it slowing? Are there certain adjacent products that you’re looking to actively add to your portfolio? If you could just kind of give us the lay of the land there that would be great.

So that’s a good question. It probably takes up the majority of the discussion with our Board of Directors. As we get into that and making intelligent capital allocations, particularly in the acquisition space and we’re really focused on two things there. What’s in our core business, Allied products, Pipe products in North America and how attractive they are in that core in terms of technology, market share gain, access to customers, things like that? And when we talked about widening our aperture and having a better process, that process is bringing kind of a whole funnel to us of things that we can go and see. And I think through the discussion on the special dividend in the narrative and into things, we’re very conscious about leaving ourselves with a lot of financial flexibility to go and do things there in a very disciplined and programmatic way. And like I said, it takes up a lot of the conversation with our Board when we’re with them.

Great. Thanks a lot and good luck.

Thank you.

[Operator Instructions]. Our next question comes from Nishu Sood with Deutsche Bank. Your line is now open.

Hi. This is actually Tim Daley on for Nishu. Thank you for the time. So just quickly the first one to follow up on the weather commentary that you guys provided, the last call you noted that there was going to be some catch up in the fourth quarter from some weather delays that happened in the third quarter. And just curious as how much of this quarter’s growth was due to that? And then as well this quarter didn’t really have particularly perfect weather, so was all of that – were you able to realize all of that I guess delayed work and could there potentially even be some more from the fourth quarter that might be pushed into 1Q?

So that’s a good question. I think any spillover from October, November, December happened in January and it happened really fast in January. And you’re right. The weather wasn’t great in February and March but we really focused hard on the states that had good weather and have their earlier season in the Southern crescent. And I would say that the terms I’ve used with our team is, no one gave us anything in February and March, we went and made it happen and that’s what gave us really good year-over-year sales growth in that quarter. I don’t think the demand spillover from the quarter just completed into this coming quarter is – I don’t see it right now. You might talk about pent-up demand, people waiting for the season to start but I don’t think that’s spillover necessarily. I think that’s just people in the Northeast and the Midwest, a lot of work to do, anxious to get out there and start doing it, trying to get an early start on the year in those regions because they know labor is going to be tight. So I don’t think there’s any spillover from the prior quarter into this quarter. I think that’s kind of done for us.

All right, got it. I appreciate those details. And then just moving on to the growth outlook for the overall year, could you guys help us understand the end market growth expectations for the year that underpin that mid-single digit domestic construction growth implied into the guidance and if you could kind of maybe provide a bit of color along the three major construction end markets, that would be really helpful?

You want to do that, Mike.

Sure. Yes. Tim, this is Michael Higgins. I think when you look at it as we go back to what we said in the script, we view the construction end markets largely very similar to how we looked at – how FY 2019 performed. We see steady solid growth in the non-residential construction. I know there’s been a lot of noise around housing and housing starts, but again our activity there in the quarter and early into this fiscal year has not let us to believe that we’re going to see kind of a slowdown in our business in the residential market as far as new construction goes around subdivisions and multifamily type projects. Again, that’s an area that we have large opportunity for conversion. Our market share is lower there. HP is a great product for us in that market. It’s driving a lot of that growth and a lot of that share conversion. When you look at infrastructure, again, a lot of discussion about infrastructure. There’s a lot of states that have passed either gas taxes or other type of incremental funding that we think we’ll see the benefit from as they wait for a kind of larger infrastructure package to come out of the federal government. Again, I think we would see our growth there really hinged on again going back to the comments we made earlier, we’ve got a lot of good approvals throughout the South and some states in the West that we would expect those states to continue to grow like we saw this year. So heavy focus there. I guess kind of broadly speaking, we see kind of 2020 right now unfolding very similar to 2019. So we see very healthy demand, our customers see the year playing out that way, so there’s nothing that we see right now that would suggest any kind of major shift from kind of what we’ve been experiencing over the past call it 12 to 18 months.

Got it. And just following on that, just hoping to dig into your solid steady growth you guys are expecting in non-residential. There’s been a pretty sharp slowdown in the architectural billing index over the past few months and I was hoping that you guys could help reconcile those trends in the macro indicators with the commentary and the kind of growth that you’re providing here given non-res is your biggest end market? Just any sort of color you could help us reconcile with the kind of slowing macro indicators with the kind of things that you’re seeing on the ground and the strength in the demand?

I think when you look at their index, it’s been a little bit choppy this year. I know it went down the previous month. It just came up this past month and it was kind of back at that 50 range which is expansion. I think the way we look at that, we monitor it very closely but I believe the number where they kind of go into where kind of bit distress is below 40. So it’s not anywhere near that. It’s been hovering at 50 or slightly above 50 even given the choppiness that exists there. Again, I think we see very solid steady growth go back to kind of what our sales people see in the field, what our engineering customers are telling us, what are contractors and distributor customers are telling us is that, hey, this year looks very much like the past year.

All right, great. Thanks for the time. I appreciate it.

There are no further questions in queue at this time. I’ll hand the call over to Scott Barbour for closing remarks.

So we really appreciate all the participation today and the high quality of the questions. Thank you for joining us. We had a good year and good couple of years. We’re pleased that we kind of got back to back years where we met our plan and in some cases went slightly above it. We’re confident in our financial position. The market outlook is as we just described. As we move into the new year, we have a clear line of sight heading into FY '20 and we expect to continue the momentum we’ve built over the past year, year and a half. We will remain focused on the fundamentals and committed to executing on the three-year plan that we showed last fall, providing market leading water management solutions to our customers and maximizing the shareholder value. So thanks again to our employees for a great 2019. They really pulled it together in that last quarter in an extraordinary way. I’m quite proud of them. And we look forward to an even better 2020. Operator, that concludes our call. Thanks.

This concludes today’s conference call. You may now disconnect.