Advanced Drainage Systems Inc (WMS) 2015 Q3 法說會逐字稿

Good morning and welcome to the ADS third quarter fiscal year 2015 financial results conference call.

(Operator Instructions).

Please note this event is being recorded.

I'd now like to turn the conference over to Mr. Mike Higgins. Please go ahead.

Thank you. Good morning. With me today is Joe Chlapaty, our Chairman and CEO, and Mark Sturgeon, our CFO.

On today's call, Joe will summarize our results for the third fiscal quarter. Mark will then provide detail on our financial results for the quarter, and a look ahead to the full fiscal year 2015 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 S-1, filed with the SEC.

While we may update forward-looking statements in the future, we disclaim any obligation to do so. You should not place undue reliance on these forward-looking statements, all of which speak only as of today.

Lastly, the press release we issued earlier this morning is posted on the Investor Relations section of our website. A copy of the release has also been included in an 8-K we submitted to the SEC.

We will make a replay of this conference call available via webcast on the Company website.

With that, I'll turn the call over to Joe Chlapaty.

Thank you, Mike, and good morning to everyone. Welcome to ADS's third fiscal quarter, 2015 earnings conference call. We'd want to thank all of you for joining us this morning.

During the third quarter, we generated net sales of $278 million, a 6.4% increase compared to the prior year. Our top-line growth was driven by continued solid performance in our domestic construction markets for both pipe and allied products, and improved sales from our international operations.

For the third quarter, we generated growth in our non-residential and residential end markets of 10.4% and 8.8%, respectively. We remain encouraged by the strength we are seeing in our core domestic construction markets, which we view as sustainable. Our leadership position in the markets we serve allows us to take advantage of this market recovery by driving conversion opportunities from traditional materials, as well as upselling our allied products.

Growth in non-residential and residential construction markets offset weakness in our infrastructure and agricultural markets, which declined roughly 1% and 5%, respectively. As we mentioned last quarter, there was a delay in crop planting in the spring, which pushed back the fall harvest, and ultimately delayed the installation of our products in a number of projects.

For two weeks in November, severe cold weather conditions occurred in the Midwest and Northeast, slowing shipments in all markets, and ending the agricultural season in the northern Midwest ag geographies.

Weather conditions did improve in December, and, as a result, sales jumped sharply, reflecting a number of projects coming back online. This trend continues into January, where we saw strong activity and healthy orders, which we expect will continue through the remainder of the fourth quarter of fiscal 2015.

However, given the seasonally low sales environments in our fiscal fourth quarter, we do not anticipate capturing all of the sales that were deferred during the remainder of the fiscal year. In other words, we simply do not have a long enough runway in the fourth quarter to make up the difference.

We would anticipate that what we do not capture in the fourth quarter will resume in earnest as we enter the first fiscal quarter of 2016 as seasonal activity resumes. Mark will be reviewing our updated guidance, which reflects these dynamics.

We generated adjusted EBITDA in the quarter of $28 million compared to $30 million in the third quarter last year, a decrease of 6%. We faced an unusual situation with respect to resin prices in the quarter, which is the main component of our product costs.

During the third quarter, resin prices increased sharply, which drove a nearly 14% increase in our raw material cost, as compared to the prior year. We had anticipated moderation in raw material prices in the quarter, but prices for virgin and non-virgin resin spiked to record levels due to unforeseen equipment problems and capacity outages with the major resin producers.

Beginning in mid-December, raw material prices for both virgin and non-virgin resin have steadily declined. This volatility in our raw material cost put pressure on our gross margins in the third quarter.

That said, as we look ahead to the fourth quarter and into fiscal 2016, we believe the outlook for raw material relief is very favorable, as costs moderate and additional resin production capacity begins to come online in late 2015.

In addition, the impact of the improved commodity cost environment for oil began favorably impacting our diesel fuel costs. As you know, we maintain a large fleet of over 625 tractor-trailers that we use to ship product directly to customers across the country, as well as between our own facilities. The rapid decline in diesel prices will help keep freight costs moderated, which should positively impact our gross margins.

Now let me turn to our recently announced acquisition of Ideal Pipe of Canada, a manufacturer of high-density polyethylene pipe and related accessories. Through this acquisition, we increased the size and scale of our business in Canada, while enhancing our manufacturing, marketing, and distribution capabilities.

In particular, we increased our Canadian manufacturing footprint from two to five facilities, in addition to gaining a strong management, field sales, and engineering team. Working together, we will be able to pursue new and exciting opportunities in the Canadian market and expand our already extensive product and solutions offering for our customers, while strengthening our competitive position against manufacturers of concrete, steel, and PVC pipe.

Ideal Pipe of Canada had sales of Canadian dollars of approximately CAD43 million for the trailing 12 months, and EBITDA over the same period of CAD7.8 million. Given the timing of the transaction's close, the bulk of the financial impact of this deal will show up in our fiscal 2016 results.

Importantly, this acquisition also underscores our commitment to a balanced capital allocation strategy that is focused on investing in growth opportunities, both organically, and through strategic acquisitions, as well as returning cash to our shareholders through a quarterly dividend.

In summary, while volatile resin costs and weather adversely impacted our performance during the quarter, the underlying fundamentals of our business and markets we serve remain strong. I am encouraged to see favorable sales trends in January, and, weather permitting, I am confident we will continue to see momentum throughout the fourth quarter and into fiscal 2016.

We continue to innovate and lead our industry in both the quality of our products, and our ability to deliver unique water management solutions. We believe there are significant opportunities ahead of us to continue delivering above-market growth, while driving significant operating leverage, over time.

Now I'll turn the call over to Mark Sturgeon to discuss our financials in more detail, as well as provide guidance for the full fiscal year 2015. Mark?

Thank you, Joe. For the third quarter of fiscal 2015, we reported net sales of $278 million, an increase of 6.4%, or $17 million, compared to the prior year period. Pipe revenue increased to -- increased 6.3% or $19 million to $213 million compared to the third quarter of last year.

The increase continues to be driven by domestic growth in our N-12 and our N-12 high performance product lines, which offset lower pipe sales in the agricultural market due to the factors Joe mentioned earlier. We also experienced improved pipe sales in both Canada and Mexico.

International net sales for the third quarter increased 5% or 14% compared to the prior year. Growth was driven by strong sales in the Canadian agricultural markets, despite the negative impact of a softening Canadian dollar in the quarter.

In Mexico, improved public spending and positive sales momentum in our electric conduit product line continued the strengthening of our sales volume during the quarter in Mexico.

Third quarter allied product revenue increased 6.6% to $66 million, with strong growth in StormTech and Nyloplast, as well as other storm water management product lines. Excluding $1.8 million of allied products sold during the third quarter of last year, allied product sales increased nearly $6 million, or 10.7% this quarter, as compared to the prior year sales of continuing products.

Gross profit increased 0.6% to $50 million for the third quarter of fiscal 2015. As a percentage of net sales, gross profit totaled 18% compared to 19% for the third quarter of last year.

Domestic margins were pressured by a 13.6% spike in raw material cost in the quarter, as compared to the prior year. International margins were hurt by the sharp decline in the Canadian dollar versus the US dollar, and its negative impact on overall Canadian market selling prices, offsetting the higher sales volume.

Total selling, general, and administrative expenses for the third quarter of fiscal 2015 increased $3.4 million to $39 million. As a percentage of net sales, SG&A expenses increased to 13.9%, compared to 13.5% for the same period last year. The increase in SG&A expenses was primarily driven by higher variable selling expenses, costs related to our secondary offering, and investments we made in our field sales and engineering team to improve our sales coverage with contractors, engineers, and distributors.

Adjusted EBITDA in the quarter totaled $28 million compared to $30 million in the third quarter of last year, a decrease of 6.1%. As a percentage of net sales, adjusted EBITDA declined to 10% in the fiscal quarter, compared to 11.3% in the year-ago period.

Interest expense was $4.1 million in the third quarter, up slightly versus the prior year. Miscellaneous expenses in the third quarter of fiscal 2015 were negatively impacted by $6.2 million in unfavorable mark-to-market adjustments for changes in the fair value of derivative contracts, primarily diesel fuel hedges, and, to a lesser extent, raw material derivatives.

Our effective tax rate on a GAAP basis for the first nine months was 36.6%, compared to 61.9% in the first nine months of fiscal 2014. $1.9 million of favorable provision to return adjustments were realized in the third quarter of fiscal 2015 after the filing of all our federal and state income tax returns for the prior year.

Taking all this into consideration, net loss attributable to ADS for the third quarter of fiscal 2015 was a loss of $367,000 compared to a net loss of just over $10 million for the third quarter of fiscal 2014. Net loss per diluted share for the third quarter of fiscal 2015 totaled $0.01 per share, based on average weighted shares of 53 million shares of common.

Adjusted earnings per share for the third quarter of fiscal 2015 was $0.03 a share, based on a total diluted common shares outstanding of 73.3 million. This was up from a net loss of $0.12 per share in the prior year.

In terms of capital expenditures, CapEx for the third quarter was $5.8 million. For the fiscal year 2015, we continue to expect capital expenditures to be approximately $35 million for the year.

We ended up the quarter with long-term debt obligations of just under-- or just over $326 million. We repaid almost $60 million of long-term debt in the quarter. As of December 31st, 2014, our leverage ratio was 2.24 times our trailing 12-month EBITDA.

Looking forward, our highest priority for uses of cash continue to focus on supporting growth, primarily in investing in our business and making strategic acquisitions to complement our product lines and geographical footprint, such as the recently announced Ideal Pipe acquisition Joe talked about earlier.

In addition, on February 4th, 2015, our Board of Directors declared a $0.04 a share dividend to common shareholders and common share equivalents for shareholders of record on March 2nd, 2015.

Now for our financial guidance for fiscal 2015, which reflects our views and outlook as of today. Based on current visibility, backlog of existing orders, and business trends, the Company updated its financial targets for fiscal year 2015.

Net sales for the fiscal 2015 are forecasted to be in the range of $1.185 billion to $1.2 billion, while the outlook for adjusted EBITDA has been lowered to a range of $156 million to $160 million.

Let me provide a little more color on the updated top-line guidance. As Joe noted earlier, we experienced softer conditions in the agricultural market than we had previously anticipated. When we initially developed our forecast, we assumed relatively flat growth in the agricultural market.

Ag summer work was slower, and the harvest delayed due to a wet spring. The cold weather in November slowed both ag and commercial construction work, delaying shipments, in spite of strong incoming order volume. Fourth quarter volume is expected to be solid, overall, but northern markets will be slow until spring breaks, sometime in March.

The adjustment we made to our net sales guidance reflects these dynamics. The lowering of our guidance in adjusted EBITDA directly reflects the negative impact of the spike in raw material prices in the third quarter, based on the factors that Joe discussed earlier.

The positive impact of recent reductions in raw material prices will be realized beginning in the April to June 2015 quarter.

Now we'll be happy to take questions. Operator, please open the line for questions.

Thank you. (Operator Instructions). The first question comes from Stephen Kim with Barclays. Please go ahead.

Hi. It's actually John, filling in for Steve.

First off, I wanted to get an idea, could you maybe help quantify the level of deferred sales in the agricultural and the infrastructure end markets due to the weather that you cited?

Yes, I would probably put that number -- because we were having orders that kind of supported where our -- we had anticipated our sales being. That number's probably today in the $20 million to $30 million range, and, as I think we talked earlier, order volume, incoming order volume, remains -- remains solid.

John, this is Joe Chlapaty. We -- during this whole period of October, November, and December, we continued to take orders in excess of shipments. So, our backlog is building. That continued in January, and still continues today in February.

So, order activity, design activity, future sales opportunity as we get into more of a normal weather pattern are very good.

Got it.

Thanks, guys. I was actually muted. It's Steve Kim. So, you talked about the fact that you were impacted by ag, and you sort of gave a little bit of color on that.

I was curious, though. You also mentioned, though, I thought you said Canada ag, actually, was pretty decent. I was curious as to why the dynamics in Canada would be different from maybe what you saw in your US agricultural market? And if you could -- yes, if you could just give a little color on that, that would be helpful.

Yes, I think, Stephen, the markets where the harvest was delayed and what that did was it shortened the season before the ground freezes that agriculture contractors can put pipe in. What occurred in early November, we lost a couple weeks that people would be putting pipe in, because the temperatures got to highs in the 20s and got down to single digits.

December it warmed up, except up in the Dakotas and Minnesota, where literally they were done for the year. The biggest agricultural markets in Canada are in Ontario, which is basically due east of Michigan, and up in Quebec, but those areas remained open, so we were picking up additional volume, and compared to the prior year, when they froze out early, we had a longer -- longer drainage season in that particular area.

Okay, great. And when you talk about recovering this in the spring, I would assume that if March actually turns out to be quite warm, you might actually be able to pull that back in earlier, and I think you quantified that just now as about $20 million to $30 million. Is that all right?

It is, and, Stephen, a part of our problem is, when you take a look at ADS's annual performance, if you go from April through October, you can pretty much anticipate there's volatility in weather, but it tends to balance out.

The last five months of the year are so weather dependent. March is a very swing month. If spring breaks a little bit earlier, we'll pick up business at the end of March. If it doesn't, it just kind of flows into the next year. But that is so difficult to predict.

Got it.

The other thing, Stephen, we've been talking to people, as we talk to investors and to yourselves, we had anticipated that when winter occurred that the markets in the South and the West and in Mexico would be stronger this year, and they are. And everything else, other than this situation from a top-line standpoint is still, as Joe articulated, is still -- the trends are still exactly the same.

Got it. Right. And this is just going to be an ongoing thing. You're going to have this every single year, and it's important that people understand that, I guess.

Turning to the resin cost, I was curious if you could talk a little bit about the spread there, or actually, the lag. I know there's a lag between what you see, sort of in the spot market, and when that actually impacts your margins. Can you give us a sense for how long that lag is, and be a little more specific about what you're seeing, and maybe give some numbers around the trajectory of those resin prices through the quarter, and looking forward?

Well, I'm going to have Mark help me out here, Stephen, but it normally will take us about 90 days to work through the inventory we have, so to speak, in storage, keeping in mind, again, that as resin has started to drop now in a meaningful way, starting in December, it's our slow sales period. So, you don't work through your inventory as quickly as you would if you were talking about a reduction in April, May, June or something like that.

But roughly a 30-day window would be there. So, resin spiked at its high point in October, and then modestly went down in November, and then started to accelerate as we got into the back half of December, and continues today into January.

The numbers are out there. You can find -- go to Plastics News. They'll talk about what base virgin material is down where we've had good recovery and relief with our polypropylene, which is incorporated into our N-12 product line and our StormTech product line, and the price of non-virgin, post-consumer material also spiked in November.

And I didn't realize this -- what happens, oftentimes, you have a tremendous amount of material comes over from China for the Christmas season, toys, gadgets, whatever. At the end of the year, they load up and bring back those empty containers with bales, non-virgin bales, and ship them back over to China, just not to go back empty.

We had a spike that I didn't anticipate. It jumped up. Our bale price went up significantly for about six weeks. It's right back down, down on a normal basis.

So, as we go forward, not the trend, the absolute cost that we're paying today for virgin material, non-virgin material polypropylene is down significantly from the peak in October.

If I could just add, I think if you at upfront what occurred is with -- we're not tied to oil. Our raw materials are tied to natural gas. But the whole dramatic movement there has created a lot of turmoil in the commodity markets, and, unfortunately for us in the near term, our price actually spiked up, and it went up to record levels. And it held through a good portion of this quarter, and, as Joe described, it moved down. It's moved down significantly.

Our tactics in this period was we thought the price was too high, so we bought as little as we could, but we still have inventory. Until we go through that, we took a short-term hit to our earnings, but we feel that over the next 12 months the net impact of this is, if the trends continue, it's going to be very positive for us.

Stephen, one concern I have, and I'm glad you're on the phone, and perhaps we have some other analysts on, we don't want to get tied to oil, because oil is not our feedstock. It's natural gas.

And that, as we were on the road show for the IPO in July, I specifically referenced our optimistic outlook for base virgin cost, not because of oil, but because of the natural gas phenomenon in this country. Natural gas now is at or below $3 per million BTUs, and the fact that there was very significant capacity additions coming on within the petrochemical complex down in the Houston area.

That is a fact, and when you read about rigs being shut down, and they're cutting capital spending, not the petrochemical guys. These are multi-billion projects that have been permitted. They're underway, and we, by the end of calendar 2015, will have new capacity coming onstream, and then going forward for the next three years.

So, the optimism that we see or saw back in July and in December for base virgin cost, I don't feel as good about today, I feel better about. And I think all we've had happen with the oil drop is we've got some icing on the cake now.

Okay, thank you. That's very helpful.

The next question comes from the location of Rob Hansen with Deutsche Bank. Please go ahead.

Thanks. I just had a -- I have one kind of related question. You guys just provided some really great detail about the resin costs. Just kind of two quick related ones, actually. You mentioned that it's generally down significantly since November. I guess, kind of, what's the magnitude of decline?

And then secondly, as you think about the virgin versus the non-virgin material, right, I would imagine virgin kind of, especially in the spot market, drops a lot quicker, and then non-virgin kind of follows suit. What's the lag time in that respect? How long does it take for non-virgin to decline after that? And does it usually decline just as much as the non-virgin?

Yes, your comments there are exactly correct in how those move. At peaks and valleys, which we were absolutely at a peak here, the non-virgin material will lag a bit. It lags at the trough, too. Percentage-wise, they tend to move together. Actual cents per pound they're different because they're different price points. But we saw virgin material actually went up to start the quarter, and then started down in November, and it's continued down December and in January, and, as Joe mentioned, that -- those numbers have been published in public news, and from the ultimate peak they're down about 15% at the end of January.

The [non-resin] cost actually spiked up and stayed high until about mid-December and is now, for the reasons Joe mentioned and others, they have moved down very significantly along with that.

So, those tend to move together. The timing's a little different but everything right, for the last six weeks, has absolutely been moving in the right direction, and assuming that continues and goes at these levels or lower, as Joe said, it positions us well for the spring.

Got it. No, that's -- this has all been very helpful.

Rob, one other point there. I think if kind of the conservative forward-looking thinking on just base virgin cost, there is anticipation of further moderation, and until, I would say, spring, and that's when, historically, you get seasonality of demand for high-density tends to put kind of a floor underneath there. But I believe that there's still some modest or moderate dollar movement further to go in the base virgin markets, keeping in mind that we've had meaningful recovery -- when I saw recovery, reduction in cost in the non-virgin arena, and we are expanding our efforts, as we've talked about on the road show, in the incorporation of non-virgin material content, very successfully. And we've got capital plans and strategy in place to accelerate that.

Got it. Okay.

And then on the demand side of the equation, when you look at your demand trends, I guess, what are your kind of thoughts on market share in the quarter? Is there anything to believe that you lost market share or anything like that? Or kind of what are you seeing in the field, in that respect?

Not at all. I'll have Mike Higgins maybe add some color. No, in fact, in anything we continue to believe that our market share continues to grow. We've had very, very positive marketplace reaction this year to our high performance product line, and I think after nine months, sales of that product line are up --

Very significantly.

Well, yes, percentage-wise, high double-digits, guys.

Yes, Rob, I would say that we don't feel that there's been any type of market share erosion on our part, and just the quarter, really, both the agriculture and construction markets were impacted by the weather, and, as Mark mentioned earlier, we've -- the positive sign that we see strength in markets, continued strength in markets of areas that were hard hit by the recession -- Florida, other parts of the South, Southwest, California, et cetera, we had strong growth in those geographies in the quarter.

And those are areas that we've really targeted to increase our market share against traditional materials like concrete pipe and, I think, that we continue to do that.

Rob, one other thing that, perhaps, isn't getting discussed here in any detail, was that the significant improvement that we've experienced, starting in December with our operations in Mexico, where we had, for several years, been fighting an approval situation, which we successfully re-obtained. Business dynamics and improvement in margins down there is getting back to some of our historical very strong levels.

So, this bodes well, as we go forward, and our plants in Brazil are operating at a high level of volume and capacity. We also feel that the opportunity in Canada, although it may appear somewhat modest in this press release, provides significant opportunity to grow our market share up there, and there are significant synergies that will benefit both companies from a production and material cost and delivery standpoint.

And did you gain any allied products with the Ideal Pipe acquisition, any additional allied products?

This is Mark. The -- one of the potential synergies we have is Ideal has a very solid sales and distribution base up there, and we are going to provide our broad product line of allied products across there. They do have some products we currently -- product lines we currently do not sell in the US, and we are going to look to leverage those products as we have with several other acquisitions, and feel there's upside to take some of their pipe products and sell them in new markets in the US.

Got it. Okay, I'll defer to the next person. Thanks.

(Operator Instructions). The next question comes from Bob Wetenhall with RBC Capital Markets. Please go ahead.

Hey, good morning. I wanted to ask you guys, you had some -- you booked some mark-to-market losses on the hedges for diesel fuel and raw cost, and I was wondering if those hedges flipped the other way and turned into a benefit for COGS down the road, at some point.

Well, yes, Stephen. This is Mark. Or not Stephen, I'm sorry, Bob. I'm sorry.

The bulk of that is tied to diesel fuel hedges. We also have a small amount on polypropylene, and, as Joe mentioned, on polypropylene, those costs have come down dramatically, and we're actually locking in more now to put us at a very favorable cost standpoint, going forward.

On the diesel fuel hedges, we've had a policy to try to get the close to 50% hedging, and we use collars. The price of diesel, when oil came down, didn't move as quickly. The index moved quickly, but since then, the cost of our diesel fuel has dropped dramatically, and in months like this, we're closer to 50% hedged, but what that's implying is we are going to save that -- what you're seeing there times two is what we're actually going to save in dollars.

So, we're going to have to pay 40%, roughly, of our savings out in those fuel hedges, but our fuel costs are going to go down, if they stay at this level, significantly, throughout this year.

I just wanted to ask you. I know you guys have been running the Company for a couple decades now. 2008, oil went from $140 per barrel down to $40. How did that impact the (technical difficulty) resin costs? I'm just trying to understand what kind of accrues to Advanced Drainage, and also if you have to pass some of the savings on to your customers, or you can retain them?

Bob, I think you have to look at the current environment a lot differently what existed in 2008. If you remember oil -- if I'm not mistaken, oil in 2008 or late 2007 actually peaked at $143 a barrel, and the resin cost that we was paying -- it was really interesting. Just to show you the leverage the chemical companies had, natural gas per million BTUs was $15, per million BTUs.

We were paying not too much differently for resin then as we were paying today, not today, but in October and November. If you can -- and in the interim, natural gas went from $15 per million BTUs down to $3. And so, the cost advantage that the domestic producers had has been phenomenal.

You say, well, what happened? Because our cost structure was so different six years ago, seven years ago, the petrochemical industry shut down a lot of capacity because they were losing money.

There was a lot of consolidation within the industry. As I've said this before, we used to buy from Exxon. We used to buy from Mobil. We buy from ExxonMobil now. We used to buy from Chevron. We used to buy from Phillips. We buy from Chevron Phillips now. I think you get the picture.

So, as supply was tightened and costs went down, these guys had kind of a -- I'll just say it right out, kind of an oligopoly there to do what they wanted.

What is happening is greed is a good thing as, what was his name in the movie? It brings on capacity, and with the tremendous margins that have been made in the petrochemical industry over the past several years huge capacity additions are coming on stream.

Given where resin was at, even though it's down 15%, it may drop another whatever. What if it goes down 25%? The margins today at low-cost gas, even with the capacity coming on, is still a huge, huge return for the petrochemical folks. So, I don't see any deterioration in plans for that material to come onstream.

We will be able to hold on to a meaningful portion of the reduction, but I would be -- I would be remiss to say that we're going to, penny for penny, hold on to all of it. You have some markets that are more price sensitive, whether it's the ag market, the retail market through the Home Depots and Lowe's, but as material costs go down, we will hold on to that, and we will pocket a meaningful portion of the reduction.

And on our storm sewer business side we're competing primarily with concrete pipe, and forecasts for them, after several years of having very low cost and prices, they have a lot of cost pressure, and, as we've said before, we tend to price our pipe to compete with theirs. So, that's why we feel more comfortable in those markets that the impact, if resin does move down significantly, we will be able to hold a much bigger percentage of that, compared to '08, when just construction stopped, and it was a whole different situation.

I mean, the world almost came to an end, it seemed like, in October of '08. I mean, everything stopped and everything just plunged. This is a different dynamic.

The other thing, I don't want to keep belaboring, but the opportunities for synergy in terms of strategies and material formulations exist very meaningfully in Canada, too. So, there's tremendous upside there, as we go forward.

Good. That's great color.

Let me just ask kind of a, I don't want to beat a dead horse into the ground, but just from a flow and timing standpoint, it sounds like the spike in resin was an anomaly caused by a supply shortage which has been addressed. You've seen a lot weaker resin prices since the second half of December, and resin prices continue to move lower and Mark has increased his buying.

Now, I'm just trying to think about going into the calendar year as opposed to your fiscal year, how does this play through with the hedges you have in place? When do this roll off against a higher-cost inventory? And when does your inventory turn? Is it like two months of work in progress and one month of raw material? How should we be thinking about that, and when do we really start to see the benefit in the P&L of your lower input cost?

Really by the first of the fiscal year, the hedges we had at higher levels for raw materials will all be gone, and, really, because, as Joe said, January and February are slower months, you were exactly right. We have a couple months' worth of finished goods, and about one month worth of raw material, and we will start seeing the impact of those lower prices in our earnings in the first fiscal quarter in a meaningful way.

Bob, we might -- if March were a warm month and the spring started early, you could see a little bit there, but by April 1, like it's like we've cleansed the pipeline, so to speak.

Okay, and I hear that. And final question for me, versus where you were kind of December 31st, in terms of profitability and the growth trajectory both because of lower resin costs and the demand side of the equation, are you more optimistic now, based on what you know, or less?

More optimistic.

For next year.

For next year. I mean, we were -- Bob, you've known us now since the road show in July. I was always confident that, number one, we were an industrial growth company. We're a convergence story. We have a huge market position. We always felt that resin, at some point, was going to turn in our favor.

Resin went up for two years straight, month after month after month. At some point, it had to break.

We didn't anticipate what has happened in terms of the magnitude of the decline. We always felt it would go down, but not at the rate it does.

I was very confident July 25th. I'm much more confident today.

Great, guys. Good luck next year. Very helpful information. Thanks, again.

The next question is a follow-up from Stephen Kim with Barclays. Please go ahead.

Yes, thanks. I just had a quick question. You guys said that -- I think when you gave your guidance, if we were to adjust -- the top-line guidance I'm talking about -- if we adjusted that for $20 million to $30 million of sort of the impact from this weather issue, it would still leave you shy of I think your prior guidance at the top end by about $20 million to $30 million.

So, it's like you're lowering the top end of your revenue guidance by about $20 million to $30 million, even if you would adjust it for the $20 million to $30 million headwind from the weather impact. I just want to make sure I had that right, and then I was wondering if you could talk a little bit about why that is, particularly in light of the fact that your numbers, I would think, would benefit from the Canadian acquisition you just made? Thanks.

Yes, in terms of the last thing you said, the Canadian acquisition, we just made that right at the end of January. February and March are very slow months. Joe and I were up there on Monday, I mean, there's two feet of snow on the ground in Ontario, and Quebec's colder, and their other operations in Manitoba, you wouldn't want to go there, it's brutally cold. We will start seeing the impact of that, really, any material amount starting in October.

In terms of the full year, we were down in the first six months about 5% in the agricultural markets based on less summer work and a little weaker market because of crop prices, other things that we've talked previously, and then in our international markets, specifically in Mexico, things have gotten, as Joe said, very busy there, but for the first several months of the year, they were slower. So, that's picking up now, and we also had a currency situation in Canada where the dollars of the sales, while sales were up, the weakening of the currency there on a US dollar basis makes the sales look lower than they would based on the volume.

So, when you add all those little pieces, it's not really on the commercial side. It's not on the big growth factors we've laid out to everyone of non-residential growth, which is half of our growth -- half of our sales, residential, and we've had a very good year on infrastructure. It's been primarily ag and a slow start to international markets, which, again, today have picked up quite a bit of steam.

Okay, great. Thank you very much, guys.

The next question comes from [John Evans] with [Jay West LLC]. Please go ahead.

Can you talk a little bit about you alluded to your Mexican plant and that basically it was starting to run better, et cetera. Because of the currency issues there, is that a big advantage? Do you ship that product back into the US and because of the peso devaluation, should that have positive ramifications for your growth?

No. We have four manufacturing facilities in a joint venture in Mexico, and those are producing for the local market. Infrastructure spending is increasing in Mexico. The government funds a lot of this, and had withheld those funds for a significant amount of time. But, again, as I said, we had to work through an approval situation down there.

The business dynamics and the prospects for accelerated growth and sales revenue looking out the next several years there is very positive, and we are currently experiencing that. Our Mexican operation is on a calendar year, and December sales were very good. January sales are strong, and we look for that to continue for the foreseeable future.

But there really isn't a play there in terms of the ability to ship product back into the US.

This concludes our question-and-answer session. I would now like to turn the conference back over to Mr. Joe Chlapaty for closing remarks. Please go ahead.

As we move forward, we remain focused on our strategic growth initiatives and execution and gaining market share from traditional materials, and taking full advantage of recovering end markets. We are confident that we are well positioned to continue delivering above-market growth, as well as operating leverage, over time.

Now, we've been public for six months, and I get all kinds of guidance here. There's probably attorneys on the phone that are going to get mad at me, but I -- we would say, God, you guys you're volatile, you got to have consistency. All I can do is paraphrase Aaron Rodgers in September, and the Packers had lost the first two or three games. Aaron's response to the public was, relax. Things are good. I'll end this call with that statement.

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