Advanced Drainage Systems - Q3 2020

Transcript

Operator (participant)

Good morning, ladies and gentlemen, and welcome to Advanced Drainage Systems' third quarter fiscal 2020 results conference call. My name is Amy, 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. If you would like to ask a question during this time, you will need to press star, then one on your telephone. 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 (VP of Corporate Strategy and Investor Relations)

Good morning, everyone. Thank you for joining us today. With me, 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 the 8-K submitted to the SEC.

We will make a replay of this conference call available via webcast on the company website. With that said, I'll now turn the call over to Scott Barbour.

Scott Barbour (President and CEO)

Thanks, Mike, and good morning, everyone. We're happy to have you all join us today on our call. Our third quarter financial results were very strong, building on the momentum from the first half of the year as we continued to execute on our growth and strategic priorities. There were a handful of performance drivers this quarter, which I would like to hit right up front. First, the legacy ADS business continues to outpace the broader market, and we are confident that our business is positioned to continue to outperform as we move into calendar 2020. The traditional ADS profitability levers of strong growth, favorable pricing and material cost, as well as disciplined execution, drove margin expansion and improved profitability during the quarter.

The Infiltrator Water Technologies business is performing ahead of initial expectations, driven by double-digit growth in chambers and tanks and strong volumes in the South, Midwest, and Eastern United States. The strong growth across both businesses, in addition to improved profitability, resulted in a record third quarter adjusted EBITDA margin. When combined with effective working capital management, we were able to generate $133 million more in free cash flow compared to the prior year period. This allowed us to pay down an additional $50 million in debt this quarter and rapidly deleverage. We ended the quarter 2.5x levered on a pro forma trailing 12-month basis and 3x levered on a reported basis, approximately nine to 12 months ahead of our previously stated expectation to reduce leverage to 3x by the end of calendar year 2020.

Overall, the performance of both the legacy ADS business and the Infiltrator Water Technologies business positions us very well as we move into the last quarter of the year and into our fiscal 2021. Given our outperformance on all fronts in the past nine months, we are currently tracking to the high end of our revenue and adjusted EBITDA guidance range. With that, I'll provide a bit more color on our performance for the quarter, starting with sales. Top-line growth at 24% was driven by strong organic growth at 5%, as well as the meaningful contribution from Infiltrator Water Technologies. Turning first to the legacy end markets, core domestic construction market sales grew 4%, driven by successful execution of our conversion and water management solution strategies, as well as our focus on our key growth regions of the U.S.

We continue to expect favorable tailwinds, such as low interest rates, favorable housing trends, and healthy consumer confidence to support the domestic construction markets through the balance of fiscal 2020, reinforced by the strong backlog and order activity that we see. Domestic agriculture sales were up 29% in the third quarter, due to the same favorable market dynamics we saw last quarter, including the prevent plant acres and the pent-up demand, which we were able to capitalize on through our organizational changes, new product introductions, and focused execution. Overall, domestically, we generated broad-based growth across the United States, with strength in key states such as Florida, Indiana, Utah, and Wisconsin. We also experienced strong growth in Allied Products, particularly in our StormTech retention detention chambers and Nyloplast catch basins, as we focused on getting more products specified and sold as a solutions package.

Turning quickly to international performance. Our international business finished the quarter just marginally down. Sales in Canada were strong, up 8% this quarter, primarily due to robust growth in Ontario agriculture market and partially offset by a softer-than-expected Quebec construction market. I was in Canada last week, visiting with our sales and operations teams in both Ontario and Quebec. We're focused on building a solid plan for fiscal 2021. Our profitability has improved in Canada over the last two years and we'll work together with our Canadian team to drive our water management solution strategy and our agriculture business to profitable growth in this important segment of our business. Moving on to Mexico, we believe the market has stabilized. While sales in the country were still down this quarter, order pace has improved against easier year-over-year comparisons.

However, we still think that there is some uncertainty in the condition of the local market. Finally, Infiltrator Water Technologies had a very good quarter, with revenue ahead of our initial expectations as we capitalize on the strengthening domestic housing market. Third quarter revenue was $72 million, with strong growth in plastic tanks and chambers, as those products continue to drive conversion from traditional materials and on-site septic systems. From a profitability standpoint, adjusted EBITDA grew 89% in the third quarter, and margins expanded 800 basis points, driven by strong organic margin improvement, as well as margin growth for Infiltrator Water Technologies. Organic profit growth was driven by the traditional ADS levers of strong top-line growth, disciplined pricing, as well as favorable resin and recycling costs.

We are also gaining traction on our transportation and operations initiatives, with better payload efficiency and lower manufacturing costs in the third quarter. On a standalone basis, the legacy ADS adjusted EBITDA margin increased 440 basis points. Coupled with the incremental benefit from consolidating Infiltrator Water Technologies, this improvement in organic profitability increased our margin to 23.2% on a consolidated basis. Higher profitability, along with better working capital management, drove another quarter of significant free cash flow generation, which we used to pay down debt and allowed us to delever ahead of schedule. We will continue to prioritize debt paydown, as well as our organic investments in our businesses. Today, we announced a $0.09 quarterly dividend to shareholders, payable in March.

Upon payment, our total cash return to shareholders will be just north of $100 million in fiscal 2020. Our consistent quarterly dividend demonstrates our commitment to returning value to shareholders, as well as our confidence in the strength of our balance sheet to be able to return this cash without impacting our other capital deployment priorities. All in all, we did a great job executing this quarter, meeting our commitments and exceeding our targets in some cases, and positioning ourselves for a strong finish to the year. We remain focused on mitigating inflationary pressures and delivering continuous improvement across our manufacturing and logistics activities to drive improved and sustained profitability. Finally, we will continue to execute on our strategic capital deployment plan with a focus on executing the working capital initiatives and the rapid debt paydown.

Lastly, I'd like to note that, as always, we will not provide fiscal 2021 guidance until our first quarter call. However, based on what we are seeing in the market, the outlook of our representatives in the field and the confidence of people we do business with, we do expect to continue to leverage the current favorable market environment next year. We expect the legacy ADS business to continue to grow in line with our long-term growth targets and Infiltrator Water Technologies to grow at a similar rate to our Allied Products portfolio. Based on our progress today, the legacy ADS business is well ahead of the long-term plan we presented in November of 2018 at our investor conference.

While we have made significant progress to grow our profitability margin over the last two years, we still have many initiatives in place to grow sales, expand margins, and generate cash. We're excited about the fundamental strengths that Infiltrator Water Technologies adds to the company for sales growth, margin expansion, and cash flow generation. Additionally, the recycling scale, material science, and engineering capabilities of Infiltrator is exciting when combined with Advanced Drainage Systems, and we continue to reveal opportunities for the go-forward enterprise. With that, I'll turn the call over to Scott, who will further discuss our quarter performance.

Scott Cottrill (CFO)

Thanks, Scott. Good morning, everyone. Moving to Slide 6, we present a snapshot of our third quarter fiscal 2020 financial performance. Organic net sales were $335 million, representing an increase of $17 million, or 5% from the prior year period. Infiltrator Water Technologies contributed an additional $72 million, bringing consolidated net sales to $393 million, an increase of 24% over the prior year. Organic Pipe sales increased 6%, driven by strong domestic construction and agricultural market sales. Organic Allied Product sales increased 8%, driven by strength in both domestic and international end markets. Consolidated adjusted EBITDA increased $43 million, or 86% to $91 million from the prior year, and our consolidated adjusted EBITDA margin increased 800 basis points to 23.2%.

Organic adjusted EBITDA increased $17 million from the prior year, and our organic adjusted EBITDA margin expanded 440 basis points to 19.6% in the third quarter. The improvement was driven by sales growth in both Pipe and Allied Products, favorable material costs, and disciplined pricing, as well as our effective cost containment initiatives. Additionally, we are beginning to realize benefits on our manufacturing and transportation initiatives, which were modestly favorable in the period. This improvement was partially offset by an increase in selling, general and administrative expenses, resulting from investments in our sales team to drive our growth initiatives, as well as higher compensation expense due to our current and expected outperformance for the year.

During the quarter, Infiltrator Water Technologies contributed an additional $26.5 million to adjusted EBITDA and delivered an additional 360 basis points of improvement to our consolidated adjusted EBITDA margin. On a standalone basis, the adjusted EBITDA margin of the Infiltrator Water Technologies business was 36.8%. Moving to Slide 7, we highlight our very strong year-to-date free cash flow performance. Year-to-date, we have generated $250 million of free cash flow, an increase of $133 million over the same period last year. This was driven primarily by higher profitability as well as our favorable working capital performance. The favorability in working capital was driven by improved receivables performance through better enforcement of our collections policies.

That's resulted in a significant reduction in late payments by our customers, as well as continuing to work to reduce terms where possible with our customers. Improved inventory performance, driven by greater inventory turns and a reduction in slow-moving inventory, as well as lower resin costs, was also a factor. And finally, we've been able to extend payables through negotiations with our vendors. While we have made great progress year-to-date, we have more opportunities in front of us, and we'll continue leveraging our working capital initiatives to drive free cash flow in the future. Moving on to Slide 8. Although we shared this slide with you last quarter, we thought it was important to include it again, given our continued focus on free cash flow generation and debt reduction and the resulting reduction in leverage.

Our pro forma trailing twelve-month leverage ratio was 2.5x, down from 2.9x at the end of the prior quarter. On a reported basis, our leverage ratio was approximately 3x, almost one year ahead of our expectations, as you heard Scott mention. As we have stated previously, we will continue to prioritize organic investments and debt paydowns for the foreseeable future. Finally, on Slide 9, you will see that we are reiterating our fiscal 2020 financial guidance, which includes eight months of Infiltrator Water Technologies results. Based on our order activity, backlog, current market trends, and performance to date, we are tracking to finish the year at the high end of both our revenue and adjusted EBITDA guidance ranges. With that, I'll open the call for questions. Operator, please open the line.

Operator (participant)

As a reminder, to ask a question, you will need to press star, then one on your telephone. To withdraw your question, please use the pound or hash key. Your first question today comes from the mic, sorry, from the line of Michael Halloran of Baird. Your line is open.

Michael Halloran (Analyst)

Hey, good morning, everyone.

Scott Cottrill (CFO)

Hey, Michael.

Michael Halloran (Analyst)

Thanks for the Wisconsin shout-out. I don't hear too many of those in prepared remarks. So, a couple questions here. One, really great job on the debt paydown. Obviously, way faster than any of us were thinking. You know, does it change your what your approach is to capital allocation at this point? Or are we still in debt paydown mode for the foreseeable future?

Scott Cottrill (CFO)

Hey, Michael, Scott Cottrill here. No, it does not. I mean, we've talked about our guardrails of two to three times. We're a cyclical company. We really like being in that low twos area. That being said, we're not sitting on our hands. We're looking at other options as we get there, which we plan on getting there here in, as we go through next year. So, right now, it is organic investments, which we have plenty of those in front of us, as well as looking at paying down debt and getting into that low two times area pretty quickly.

Michael Halloran (Analyst)

Certainly appreciate the commentary on next year. You know, I think the kind of commercial residential pieces make sense to me. Could you maybe touch on the ag piece? Obviously, pretty dynamic so far this year, in part because of what the planning trends look like, and how farmers are going about insurance and everything like that? Maybe just talk a little bit about what you think the sustainable trend looks like underneath from here, how you guys are thinking about it, and anything to augment if the comps kind of come up and catch you a little bit next year?

Scott Barbour (President and CEO)

Good morning, Mike. This is Scott Barbour, and, I'll take this one. And I think you're kind of dialing it in, like we think about it. We had two favorable events over the past year. We had a reorganization and some new product introductions, which were very favorable. We had the prevent plant acres, which were really centered where we were strong in Northwest Ohio, in Southwest Minnesota and Iowa. So we did definitely prevented from those things. The prevent plant acres is not gonna repeat in that same way, but the organic growth and investments that we're making, we will continue to see growth call it off of that base.

Michael Halloran (Analyst)

Mm.

Scott Barbour (President and CEO)

We did a lot of work in this market over the last year, and it's what I call a live market. It's not saturated, it's not overbuilt or anything like that. It's still a viable activity for farmers to go and do. There are new territories we can open that we should be opening aggressively. So while we might print lower as the comps get worse, I mean, harder in the coming year, I think fundamentally, we'll be growing, you know, better than the market next year. That's what we're gonna bake into the go forward.

Michael Halloran (Analyst)

... Makes sense. And then, on the margins, as we look forward from here, anything that happened in the third quarter that you don't view as sustainable? Obviously, the legacy ADS business had some pretty robust year-over-year margin expansion. Anything in that that you don't think is sustainable as we move into the fourth quarter and beyond? Obviously, adjusting for seasonality. Yeah.

Scott Cottrill (CFO)

I mean, obviously, we're benefiting from the lower resin cost environment. But that being said, we're taking full advantage of that, right? We're holding on to our pricing and our construction end markets. We're getting pricing up on our Allied Products. Allied Products is growing, you know, at that nice high single digit, low double-digit rate, very profitable product line. So as you look at that incremental margin performance and so forth, is it gonna be difficult to repeat that going forward? Yes, but we're very happy with what we're doing there, and it's not all being driven by resin. So very good margin performance as we move forward.

Michael Halloran (Analyst)

Great and then last one for me, and then I'll turn it over. The synergy side of things, maybe just talk about the specific things that you guys are working on now, what you're executing on, and then, you know, what the cadence looks like on a forward basis as far as what the activities look like?

Scott Barbour (President and CEO)

Scott Barbour again, and if many of you probably recall that the synergy program is really built on our raw material buy and recycling activities between Infiltrator and ADS. You know, it's a synergy plan, very focused on those activities, kind of back end. This isn't a kind of smash the two things together. And we're on pace from a run rate basis on that plan. We are revealing additional opportunities as we get into this. Some of them are gonna require some investment, which we're well prepared to do.

I summarize it as on pace and probably more excited about it, the future of it, today than I was six months ago, and I was pretty darn excited six months ago as we were getting into this.

Michael Halloran (Analyst)

Hey, appreciate it. Thanks, everybody.

Scott Cottrill (CFO)

Thanks, Michael.

Scott Barbour (President and CEO)

All right. Thank you.

Operator (participant)

Your next question comes from the line of Matthew Bouley of Barclays. Your line is open.

Matthew Bouley (Analyst)

Good morning. Thank you for taking my questions. I wanted to ask a bit about the domestic construction markets, because I think the organic growth, I guess, in both non-residential and residential, decelerated a bit relative to the second quarter. But, you know, obviously, I guess, particularly on the residential side, you know, some of the leading indicators would suggest that market is getting a lot stronger. So maybe, I guess, between those two markets, can you just speak a little bit about what you're seeing there and how you're expecting the market growth to play out over the next couple of quarters? Thank you.

Scott Barbour (President and CEO)

All right. This is Scott Barbour. And we feel that the market is very solid right now. You might have heard me talk kind of earlier in the year that we had this nice kind of, you know, 3% market going along, and our conversion would add one or two points to it. But early in our year, you had riding on top of that, pent-up demand that didn't get executed in the prior year, from weather and all kinds of other stuff. So that was kind of riding on the market through, let's call it, the first six months of our fiscal year.

I think what we saw in the third quarter was that stuff get cleared up, and, you know, we were kind of riding at that, you know, market of 3%, converting at one or 200 basis points, the Allied Products stuff growing at high single digits. So I think as we deconstruct the third quarter, that's the kind of the conclusion that I see. And on residential, on the ADS side, which these exhibits are kind of heavy on, recall that we are really involved heavy in the front end land development piece of residential on ADS, and that is coming along stronger now than perhaps it was in the third quarter. You look at all the home builders, guys reporting, I mean, they're kind of ramping that up.

So we're kind of excited about that segment as we look forward. But the past quarter, we kind of feel that we were right in line, maybe even gaining a bit on that on the Pipe business. Now, if you look at Infiltrator, very, very levered to new housing starts. That has accelerated in the past, let's call it four to six months, and is gonna continue to go well. So, you know, we really like that greater exposure to residential right now that Infiltrator has given us for the consolidated business. Yeah, Mike, go ahead.

Mike Higgins (VP of Corporate Strategy and Investor Relations)

Yeah, Matt, this is Mike Higgins. I would say inside of that residential piece, to what Scott said about this new kind of subdivision construction, multifamily construction, we had a very strong quarter. We were up over 20%. What muted that mutes it down to 5%, the residential, is we were a little slower in our retail markets with Home Depot and Lowe's and customers like that, which is mainly due to timing of them bringing in product for inventory. So you know, what you're talking about in terms of home builder strength, we're seeing that same strength. So, you know, that's continued-

Scott Barbour (President and CEO)

That's a good point.

Mike Higgins (VP of Corporate Strategy and Investor Relations)

from the second quarter into the third quarter. You know, I don't, you know, when you look at that new subdivision construction, we're not gonna apologize for north of 20% growth for the quarter.

Scott Barbour (President and CEO)

Yeah, that's, that, that's a good point. I'd forgotten that. And, you know, overall, just looking at pace of orders, talking to our distribution, looking at plans and designs that are kind of coming into our funnel, we feel like, you know, the coming calendar year is a lot like the prior year with regards to our, our non-residential commercial construction.

Matthew Bouley (Analyst)

... Okay, appreciate, all the detailed color there. Thank you for that. And then I wanted to ask on, on the price cost side, because, you know, it seems like it was favorable again in the quarter. I believe some of the commentary you guys mentioned that you are maintaining, pricing discipline, kind of coupled with the, with the lower material costs. So I'd be interested to hear you guys talk a bit about what you're doing on the commercial side, that kind of allows you that ability to maintain, commercial discipline, in light of what you're seeing around, lower material costs? Thank you.

Scott Barbour (President and CEO)

That's a really, you know, good, good question. I think you kind of nailed the dynamics of it. And I would give kind of two pieces. I want to add two things to that. One is, it's a good demand environment. And you need to be disciplined around your pricing in a good demand environment. And I would say both ADS and Infiltrator have good demand environments with good price execution and discipline there. And oh, by the way, we both provide a heck of a product and service to our customers that I think are well-positioned against competition. Number two is, you know, we're not a commodity-based product or a company. You know, we don't ride up and down with plastic and resins.

We ought to ride up. We're going to ride up and down based on demand, the quality of our service and products there. And we've worked over the last couple of years to make sure that that gets separated and that we reinforce that because we're just not making stuff out of plastic here. I mean, we're making a fairly technical, specified sale, that's you know, a fair amount of engineering into not only the product, but the application of that product. And on the case of the ADS side, we're providing a heck of a service by transporting this product to job sites in a very big activity with that dedicated, specialized fleet we have. So that's worth a lot in the market, and we're going to make sure that we're fairly paid for doing all of that.

Matthew Bouley (Analyst)

Got it. Very helpful, and then just lastly, the manufacturing and transportation side with the legacy business, it looks like you're, you know, continuing to make good progress there. Seems like there was a small tailwind in the quarter to EBITDA. So I guess, as we go forward and start thinking about, you know, fiscal 2021, obviously, not looking for detailed guidance there, but just wondering how some of those kind of, you know, initiatives you've got going on might phase in, in terms of the cost side, you know, in fiscal 2021. Thank you.

Scott Barbour (President and CEO)

So, good insight, and we are working very hard right now to continue to put plans and organization in place around that manufacturing and transportation. I think what we call kind of the right side of that bridge, you know, we want to see the right side of that bridge green, as we move forward and execute crisply around both what we call the four-wall manufacturing of what we do and in that transportation logistics. And as you probably recall, you know, we made a little bit more progress on the transportation logistics than the four walls, but the four walls are, you know, on a nice path and catching up in many areas.

That is how we will look forward. You know, you kind of got to earn it the hard way on the right side of that chart, and that's what we're doing. We're making sure all that's kind of put in place now. Now, no plan comes together perfectly like you want it to, but that's how we are driving our plan for next year.

Matthew Bouley (Analyst)

All right, got it. Well, thanks for all the details, and congrats on the quarter.

Scott Barbour (President and CEO)

Thank you.

Matthew Bouley (Analyst)

Thank you.

Scott Barbour (President and CEO)

We appreciate it.

Operator (participant)

Your next question comes from the line of John Lovallo of Bank of America. Your line is open.

John Lovallo (Analyst)

Hey, guys, thank you for taking my questions. The first one, it appears that your outlook would imply a fourth quarter EBITDA margin that's up, you know, call it two hundred basis points year-over-year versus, you know, somewhere between 600 and 800 basis points in 2Q and 3Q. So just curious if there's, you know, some conservatism in there, or was there something in the 4Q 2019 margin that was somewhat inflated?

Scott Barbour (President and CEO)

No, John, you're spot on. I think what you'll see there is the fact that March is pretty much can be about half of the quarter, and given kind of the variability that we can have, given the significance of that month to the quarter that's coming up, you see us being a little bit wary as we look at our guidance and so forth. So nothing in there that's unusual or that we see draconian coming at us from a margin perspective or from a inflationary cost pressure performance. So I think it's just being a little bit wary that March is such a big driver for the quarter and wanting to embed that into our thinking. So we thought right now, leaving the guidance ranges as they were was the prudent course right now.

Mike Higgins (VP of Corporate Strategy and Investor Relations)

And we raised them last, you know-

Scott Barbour (President and CEO)

Prior.

Mike Higgins (VP of Corporate Strategy and Investor Relations)

Yeah, prior we raised them, and we'll be at, you know, guiding to the upper end of that, and I don't think we see any missiles out there, you know. At some point, comparisons on resin costs get more difficult.

Scott Barbour (President and CEO)

Right.

Mike Higgins (VP of Corporate Strategy and Investor Relations)

But that's not, that's not what this is.

John Lovallo (Analyst)

Got it. Okay, and then the CapEx guide, if I'm not mistaken, of $75 million-$85 million, is down from $85 million-$100 million prior. I guess the first question is: Is that correct? And if it is, is that project timing or, you know, is there something else going on there?

Scott Cottrill (CFO)

... Absolutely, absolutely right. It is down, and it's all due to progress billings with a couple of the large manufacturers and when that cash is gonna go out the door. So some of that's moved to the right, and will be going out the door in April, May, versus going out the door in February, March.

John Lovallo (Analyst)

Okay, great. And then finally, the stabilization you guys mentioned in Mexico, is that really something happening in the market that is stabilizing, or is this really just due to your efforts to shift from public to private projects?

Scott Barbour (President and CEO)

I think it's the comparisons have gotten easier in the last several months on order rates. And I think we might have, you know, we've tried to pivot to some new distribution and applications. I don't think that we're by any means up the curve on that, but it just feels a little more stable, upbeat at a lower level than prior year or what we'd like.

John Lovallo (Analyst)

Got it. Thanks, guys.

Scott Barbour (President and CEO)

Thanks, John.

Operator (participant)

And again, ladies and gentlemen, if you would like to ask a question, please go ahead and press star, then the number one on your telephone keypad. Your next question comes from the line of Josh Pokrzywinski of Morgan Stanley. Your line is open.

Josh Pokrzywinski (Analyst)

Hi, good morning, guys.

Scott Barbour (President and CEO)

Morning, Josh.

Josh Pokrzywinski (Analyst)

Yeah, just appreciate all the, the color on kind of the market, you know, progression through the quarter there, Scott. Anything that you can tell us in terms of kind of the, the outgrowth phenomenon that you guys see or anything that, that changed on that front? I know it's probably hard to calibrate in the short term, but anything that stuck out to you, you know, with some regional, you know, share gain or, you know, based on the Pipe business or, you know, anything on the, on the allied side, you know, just with new products that, you know, that would speak to kind of an accelerating share gain environment?

Scott Barbour (President and CEO)

This is Scott Barbour, Josh. Let me, let me take that one. And then Higgins will probably have a couple of comments. You know, we have this Nyloplast product line, which is a catch basin, a plastic catch basin. And that team, you know, both the leader and the sales team that surrounds that, I think they've been outpacing the market very nicely. And it is an investment in a new product that kind of extended our range. It's an investment we made in Texas to be able to do close to the customer assembly of that product line. It's the leader being out there in the field, you know, working that very well. So, you know, if I look at something that kind of... You know, we're really pleased with performance.

Don't get us wrong. But those guys have even kind of come above the curve in many ways and have been a really pleasant surprise, how that's occurred. So I would say that, and then again, you know, Florida. You know, Florida is just a really good market for us. And our team down there is, you know, they're out selling like heck. Every day, we have products that are well aligned and manufacturing capacity well aligned to serve that market. And can we do better? Absolutely. You know, we're not, we're not stopping. But I think about things that get above the curve, Michael, you got it, California's come back nicely this year.

And then, you know, I think I've talked a lot about the agriculture business earlier, and, you know, sometimes, I would say, we got a little lucky on these prevent plant acres and them being centered on our regions where we have good manufacturing facilities. But yes, it's sometimes good to get lucky, but our teams responded very strongly with production, delivery, capacity to serve that rapid uptick. Wasn't easy, but they did it. And then the organization that we've got going on there in marketing and sales, really focused on our customers and finding new ways for us to grow in that segment. And a lot of discussion two years ago is the relevance of that for our business.

And I think something that we've learned over the last year is it can be highly relevant. It is highly relevant, and when it pops, it's highly leveraging to our facilities and to our network. So, you know, in the past, someone told me, "Hey, I view you as this option on the ag business." Well, I think that option paid off this year, and we got really nice contribution from that. Now, do I have to repeat because of the market phenomena of the prevent plant acres? But I would repeat myself that the fundamentals underneath that will grow off of that, and that's what we wanna do, is kind of sustain growth and market share gain in that particular segment.

Mike Higgins (VP of Corporate Strategy and Investor Relations)

Yeah, Josh, I would agree. This is Mike Higgins. I would agree exactly with what Scott said. You know, the only kind of thing I would add to that, everybody has heard us talk about the focus on these key states, right? Primarily in what we call the Crescent. You know, that's give or take 20 states. And I think our increased focus on those states, you know, is helping drive that outsized performance. And, you know, those states are very construction advantaged. That group of states is, like, 70% of the construction activity in the U.S. There are areas where we have large opportunity for market share gains. And in those states, focusing on, you know, driving further penetration and participation in the storm sewer market and driving higher Allied Product sales through what we call attachment.

Those states have been performing extremely well on those two fronts, and that focus there is helping.

Scott Barbour (President and CEO)

And that was the $3.3 million of the SG&A increase-

Mike Higgins (VP of Corporate Strategy and Investor Relations)

Yep.

Scott Barbour (President and CEO)

There are people on the street in those regions, in those Crescent regions selling, which is part of our strategic plan we went through with our board of directors and are investing in that heavily. So

Josh Pokrzywinski (Analyst)

Got it, that's helpful. And then just-- Oh, go ahead.

Scott Barbour (President and CEO)

No, you please go ahead.

Josh Pokrzywinski (Analyst)

I was just gonna ask, you know, just as a follow-up, you know, obviously, with the strong resi growth, and I think prospectively for that, looking to improve further. Anything that we should keep in mind in terms of, you know, potential bottlenecks on the IWT side, you know, that could pop up here in the next couple quarters?

Scott Barbour (President and CEO)

Yeah, that's a really good question. And let me answer that in two ways. First, you know, that company has, you know, exceeded our expectations in so many ways. And that team, Roy's team, and what's going on there, I mean, ahead of their plan, you know, very good people to work with. I mean, I can't speak highly enough how that's all gone. Now, bottlenecks, you know, we've released some pretty big capital investments there very quickly after the acquisition that we knew were coming. Those take a while to get in.

So the way that team has traditionally handled, you know, demand, supply things is level loading, building their inventory in the off-season, making sure that they are very careful of how they plan that mix there. So that's how we're addressing some of that. You know, what we might think of as supply bottlenecks in the future is through that level loading and that careful inventory building. And given the sharp execution they have and the high uptime they have on those presses, I think that's a very well-known playbook that Roy is executing right now as we speak. And we've also been very careful to make sure we've got enough material ahead of that.

So while we're, you know, we're really thrilled with the cash flow, frankly, we're using some of that balance sheet to buy material, to make sure we have enough recycled material ahead of both Infiltrator and ADS, because of a pretty favorable environment now. So we're trying to balance all that stuff, but that's how we'll deal with the bottlenecks right now.

Josh Pokrzywinski (Analyst)

Got it. I appreciate the color. Thanks, guys.

Scott Barbour (President and CEO)

All right.

Operator (participant)

As a last reminder, ladies and gentlemen, if you would like to ask a question, you can press star, then one on your telephone.

Scott Barbour (President and CEO)

Okay, I'll wrap it up now. Thank you all again for joining us today. As we move into the end of fiscal 2020, we expect to build upon the strong momentum of the year and capitalize on pretty favorable industry environment as we just discussed. We're focused on our strategic initiatives to grow sales and profitability, in addition to continuing the work to integrate the Infiltrator business and realize those synergy plans. I wanna thank again our employees for all their hard work over the past, you know, nine months. But a good quarter, a very good quarter, and they're all working very hard to get us ready for the season as we move into April.

You know, something we've been talking a lot about, where, you know, you win in the off-season, and now's the time we're laying down a lot of solid plans for next year. So we look forward to another good quarter, and we appreciate everyone being on the call today and look forward to seeing you all as we move forward. Operator, that concludes the call. Thanks.

Operator (participant)

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.