Earnings Call Transcript - WMS Q2 2023

Operator, Operator

Good morning, ladies and gentlemen, and welcome to Advanced Drainage Systems Second Quarter of Fiscal Year 2023 Results Conference Call. My name is Jason, and I am your operator for today's call. Currently, all participants are placed in listen-only mode. Later, we will conduct a question-and-answer session. I would now like to turn the presentation over to our host for today's call, Mr. Mike Higgins, Vice President of Corporate Strategy and Investor Relations. Please go ahead.

Mike Higgins, Vice President of Corporate Strategy and Investor Relations

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. The press release we issued earlier this morning is posted on the Investor Relations section of our website. A copy of the release has also been included in an 8-K submitted to the SEC. We will make a replay of this conference call available via webcast on the company website. I'll now turn the call over to Scott Barbour.

Scott Barbour, President and CEO

Thank you, Mike, and good morning. Thank you, everyone, for joining us on today's call. We achieved another very strong quarter of results, with the second quarter sales of $884 million and adjusted EBITDA of $263 million. Importantly, this is the fourth quarter in a row that we have covered cost pressure through favorable pricing and the third quarter in a row of margin expansion. Sales growth of 25% was broad-based across geographies in both the construction and agriculture end markets, supported by continued strength in our priority states and Allied Products. The strongest volume growth occurred in the ADS residential and agricultural end markets. In the ADS agriculture business, we did a good job level-loading deliveries, and that is shaping up for a fall season with year-over-year growth. The ADS residential business grew as homebuilders continue to develop land despite market uncertainty. We expect homebuilder land development to continue on previously acquired land, and over the long-term, the lack of available home supply will continue to drive growth in this market. ADS participation in the residential market is still early in the material conversion story. So despite the pullback, residential remains a large growth opportunity for the company. What we see being on the land development side is that sales are choppy. Some areas remain strong like the Atlantic Coast, the Southeast, and Texas. In other areas like the Northeast, sales, orders, and project identification are beginning to slow. We are focusing business development efforts in those geographies where land development is continuing. In addition, we continue to develop programs with national and regional homebuilders where the ADS value proposition—a faster, safer installation, fewer trucks to deliver the required linear feet to the job site, better installed cost, and sustainability—is a proven winner. Infiltrator revenue increased 3% this quarter. The septic tank business grew double-digit as plastic tanks continue to gain market share against traditional materials, and we add distribution points. We are still working down that backlog, leveraging the new capacity investments that have come online this year. In the leach field products, backlog is normalized, and lead times are now customary with historical performance that Infiltrator customers expect. The better lead times, as well as residential market uncertainty, led to distributor destocking over the second half of the second quarter as our distribution partners are less concerned about product availability and lead time. It is important to note that the impact of destocking is larger in the Infiltrator business compared to the ADS business because on-site septic products are delivered from distributor stocks, whereas the ADS products are delivered directly to the job site by ADS trucks. Both companies are well-positioned to maintain price and leverage the material conversion story to drive above-market results. In Florida, Hurricane Ian impacted sales in the central and southwestern parts of the state as the threat of the hurricane became more significant during the last week of the quarter; shipment volume in these portions of Florida decreased 70% and are slowly rebounding. Other portions of Florida are normal in terms of shipments. This is important to note since Florida is the largest state in terms of sales for the company. We expect contractors in Southwest Florida to prioritize recovery efforts in the near-term as opposed to the stormwater project installations as we move through fiscal Q3. Importantly, ADS employees were minimally impacted, and the ADS Florida facilities were back up and running with minimal downtime, and raw material supply was not disrupted. If I take a step back and look at how the second quarter played out, overall sales volume was strong and according to plan in July and August. The first week of September started slowly. The second and third week strengthened to July and August pace. In the fourth week of September, when it became apparent that Hurricane Ian would hit Florida, shipments slowed down considerably. So we did see an overall volume degradation in September after a good first two months of the quarter. October shipments are on pace with September. Let me provide some more details and context on this demand inflection that we are in the midst of right now. First, there is variability by geography. We had difficult year-over-year comparisons in areas like the Northeast and Northwest, where activity was elevated last year due to reopening. We believe that particularly in regions like the Northeast and Pacific Northwest, which had more dramatic pauses during the pandemic, the one-and-a-half years of activity was compressed into a 12-month period that began in the second half of 2021 through late this summer. In other areas, like the Atlantic Coast, and the Southeast, including Florida, construction activity remains favorable and on track. Second, the destocking of the leach field chambers at Infiltrator distribution was more dramatic and quicker than we anticipated in this past quarter. We believe that we are approaching the end of the destocking impact at Infiltrator as of the end of October. Next, we have been systematically working down backlog levels at both ADS and Infiltrator, and in most products and geographies, the backlog is now in a normal position. The normalized backlog and the shorter lead times we can provide due to the result of the capacity that we put in place has resulted in a slower order pace and less inventory build at Infiltrator distributors. In addition, customers are uncertain about market conditions in a rising interest rate environment, and this has slowed order rates for products that are stocked by distribution. As we move into the second half of the year, we are seeing a market inflection point. Demand is uncertain, and interest rates continue to rise. Additionally, we are seeing a normal seasonal pattern of activity more like pre-pandemic conditions. We adjusted the second half revenue guidance accordingly, and due to improvement in raw material costs, favorable pricing, and cost control, we were able to hold adjusted EBITDA guidance. We will continue to manage costs and stay focused on investing in initiatives that provide ADS the greatest returns and support the growth programs. As such, we are moving forward with the capital spending plan for fiscal 2023, especially in high-demand regions like Florida and the Southeast and those high-return, high-growth areas of the company, such as recycling and Infiltrator businesses. Finally, in October, we broke ground on our new industry-leading engineering and technology center in Hilliard, Ohio, near the ADS corporate headquarters. This expansion brings together in one location, product development, material science, and manufacturing engineering into one world-class purpose-built facility. This engineering and technology center will be the most advanced stormwater engineering and material science center in the world, enabling our team of engineers, scientists, and technicians to design sustainable solutions that utilize recycled plastics to improve quality of life in communities across North America. We will also be utilizing lead building techniques supporting the ADS commitment to sustainability. Though demand is uncertain, we are making the necessary pivots to manage the business through this inflection point. We are leaning into areas of the business where demand remains strong, such as residential land development as well as data center and warehouse construction. We expect price/cost to remain favorable, particularly as inflationary pressures begin to level off. We will also continue investing in the business to ensure we exit the current environment in a stronger competitive position. We do this with confidence in the strength of both the ADS and Infiltrator business models. The conversion story related to competing materials remains intact; we have an extremely healthy balance sheet and cash generation profile. We are in a very good financial position to execute on what we need to do, both organically and inorganically, should the right opportunities arise. With that, I'll turn the call over to Scott Cottrill to further discuss the financial results.

Scott Cottrill, CFO

Thanks, Scott. On Slide 5, we present our second quarter financial performance. From a top-line perspective, we generated 25% growth year-over-year, primarily driven by favorable pricing at both ADS and Infiltrator. Legacy ADS pipe products grew 28%, Allied Product sales grew 37%, and Infiltrator sales increased 3%. Consolidated adjusted EBITDA increased 60% to $263 million resulting in 650 basis points of margin expansion to 29.8% in the quarter. As Scott mentioned, favorable pricing continued to cover inflationary cost pressures related to labor, manufacturing, and transportation costs. From an input perspective, raw material costs have moderated sequentially but remain at historically elevated levels. We expect this favorability to continue as we move through the second half of this year. Moving to Slide 6. We generated $361 million of free cash flow year-to-date compared to $31 million in the prior year. Strong growth in adjusted EBITDA, coupled with better working capital, helped drive significant free cash flow generation and conversion, which was approximately 64% of our adjusted EBITDA year-to-date. Given the current market uncertainty, it is important to highlight the strength of our balance sheet and financial position. As of the end of the quarter, we had over $1 billion of liquidity, including nearly $460 million of cash. Our trailing 12-month adjusted EBITDA to debt ratio sat at 1x, and we expect to convert over 50% of our adjusted EBITDA to free cash flow for the full-year. In addition, we recently received an upgrade from S&P on our debt and credit rating. We remain committed to our leverage targets of 2x to 3x net debt to adjusted EBITDA, but we are currently focused on the low end of that range at this time given market conditions. Importantly, 68% of our outstanding debt is fixed-rate debt and therefore are not subject to further interest rate increases. Through September 30, 2022, we repurchased 1.9 million shares through our share repurchase program for a total of $195 million. As of last Friday, October 28, that number now stands at 2.1 million shares for $227 million, leaving $773 million remaining under our previously announced $1 billion share repurchase program. Given our strong financial position, we plan to continue our balanced capital allocation strategy of investing in our business while also returning capital to shareholders through our dividend and share buyback program. Year-to-date, our capital spending has increased 19% to $76 million as we continue to invest in capacity, efficiency, and automation. For the full-year, we now expect our capital spending to be around $175 million. Finally, on Slide 7, we provide our updated fiscal 2023 guidance. Based on our order activity, backlog, and current market trends, we now estimate revenue growth of between 12% and 16% or $3.1 billion to $3.2 billion. We are not changing guidance for adjusted EBITDA, which is expected to be in the range of $900 million to $940 million, representing growth of 33% to 39% and translating to an adjusted EBITDA margin of 29.2% at the mid-point. We will continue to monitor the market and take actions as we deem appropriate to make sure we are right-sized for the demand environment in front of us. An example of such is adjusting our future production schedules as needed to right-size our inventory and better align such with our forecasted demand environment over the coming quarters. In addition to cost control measures like the inventory rightsizing initiative I just mentioned, we also intend to continue investing in the business ensuring that we exit a market slowdown in a stronger competitive position than when we entered it. With that, I'll open the call for questions. Operator, please open the line.

Operator, Operator

Our first question is from Michael Halloran with Baird. Your line is now open.

Michael Halloran, Analyst

I have a few questions. First, let's discuss inventory. It seems that you were somewhat caught off-guard as you progressed through the quarter. How quickly were you able to respond once you identified the challenges? Additionally, could you provide context on why you believe that by the end of October, inventory levels will be resolved? Many in your market's related product categories expect this issue to persist longer, so it would be helpful to understand what actions you've taken, how current inventory levels compare to normal, what demand environment you anticipate, and what you consider to be a normal run rate.

Scott Barbour, President and CEO

Sure, Mike. This is Scott Barbour. Let's begin with the inventory destocking of Infiltrator, particularly focusing on the leach field products. There are two primary product lines: the larger leach field and the newer tank, which isn't facing destocking and is still working through its backlog. Starting around the midpoint of the quarter, we noticed a significant reduction in that backlog for leach field products, as they were being processed much faster. However, the demand for these products began to decline as we reached the halfway point of the quarter. Currently, the lead time for leach field products and the associated open orders are reverting to levels we experienced before the pandemic. This suggests we may be nearing the end of this situation, though we need to keep monitoring it. Regarding this specific product, which showed the most significant changes this quarter, we face demand uncertainty linked to home completions and the initiation of these projects. We believe that distribution inventory is getting to the appropriate levels, so we do not anticipate another major destocking event; future changes will likely be driven by demand. Did that clarify your questions about inventory levels and destocking?

Michael Halloran, Analyst

Yes. One question: What percentage of your organization is actually affected by these inventory levels? A significant portion of your business doesn't really involve channel inventory.

Scott Barbour, President and CEO

Right, right. Mike, I mean, what's the figure we've given? It's really the Infiltrator products that are mainly stocked.

Scott Cottrill, CFO

Yes. If you think about the ADS business, somewhere between 70% to 80% goes directly to a job site. With the Infiltrator business, pretty much all of that goes from an Infiltrator facility to a distributor's yard.

Michael Halloran, Analyst

So you're thinking somewhere around 25% to 35% is what the piece of that would behold in the inventory then?

Scott Barbour, President and CEO

Yes, yes, in that neighborhood, yes.

Scott Cottrill, CFO

It would be in that neighborhood depending on the season.

Michael Halloran, Analyst

So that's helpful. I didn’t see the gross. Yes, go ahead, sorry.

Scott Barbour, President and CEO

I just want to emphasize, Mike, that we think the main thing to keep an eye on moving forward is demand-driven factors. It didn't catch us off guard; that's for sure. However, we feel we're closer to the end of that trend at various stocking locations, especially for Infiltrator, than we are at the beginning.

Michael Halloran, Analyst

That's helpful. And then two more bucks to questions. First, on the commercial construction side of things. You mentioned some regional slowing. Is that mostly just alluding to Florida? And more broadly, could you just talk about what the trend line you're seeing is in any areas of concern on the commercial construction side outside of expectations for a slow recovery in that specific region Florida was hit by the hurricane?

Scott Barbour, President and CEO

As we analyze the situation, the Northeast and the Pacific Northwest experienced significant declines during the pandemic. From last summer until this summer, those regions saw high levels of activity, but that seems to have stabilized, returning to a more typical seasonal pattern. This current activity is below what we saw a year ago but is comparable to pre-pandemic levels in terms of commercial demand. In Florida, aside from the hurricane's impact on Southwest Florida, construction activity appears to be proceeding normally, similar to the trends observed in recent quarters. Southwest Florida is a crucial area with high growth, and while we will feel some effects from the hurricane, we expect those to resolve over time. Demand has not been destroyed; it has simply been delayed. In the commercial space, quoting activity and project identification are higher than last year—though not by double digits—they are healthy. The warehouse sector continues to perform well, with numerous projects in our pipeline, despite some concerns. We are also making progress in the data center segment and onshoring projects, with significant business development efforts yielding positive results. We initiated this business development a couple of years ago by incorporating residential and warehousing, and now we are adding onshoring projects, which are located in various states, including Ohio and Texas. We're seeing increased quoting activity in this area. We are currently at a pivotal point in assessing these trends, but things appear to be stable for now.

Michael Halloran, Analyst

All right. Helpful for that. And then last question, didn't see gross margin commentary by kind of the usual three things in the press release today, the pipe, Allied, and Infiltrator. Any help on that side? And then when you look at the back half of the year margins, I think one of the Scott's alluded to normal sequential patterns from a seasonality perspective. And second half is always worse than the front half, at least in a normal year worse than the front half on the margin line. But just help provide some context to how much the price/cost capture you think you can maintain? And any help with how to think about what were really good first half margins in your ability to carry through that kind of goes through on a seasonally adjusted basis moving forward?

Scott Cottrill, CFO

Yes, Mike, this is Scott Cottrill. I'll address a few of those points. As Scott and I mentioned in the script, we expect this year's sequential margin performance to align more closely with our usual seasonality patterns. You are correct that there typically is a decline in margin performance from the first half to the second half, usually in the range of 200 to 300 basis points or more. This is primarily due to the winter months, lower volume absorption, and leverage effects. We anticipate this trend to continue in the second half. Regarding price and cost drivers, we're now starting to compare year-over-year pricing, which we are maintaining at high levels. However, you should observe more of the resin benefit reflected year-over-year as we progress through the second half, and this has been factored into our guidance. Concerning margin performance for the quarter and year-to-date, the EBITDA bridges are included in the earnings release, and the segment margin information will be available as part of the 10-Q filing later today.

Operator, Operator

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

Matthew Bouley, Analyst

Hey, good morning everyone. Thank you for taking the questions. If I could kind of zoom into the volume outlook within the guide. I think obviously, you're guiding to second-half revenues, I guess, down 3% year-over-year. Curious if you can kind of unpack what the volume assumption is in that, if I take residential weakening, some kind of near-term destocking, and Florida getting pushed to the right or activity in Florida. I'm curious if you can kind of size up the volume impacts from some of these more discrete items. Thank you.

Scott Cottrill, CFO

Hey, Matt, it's Scott here. So again, you're right. So a little bit of pricing benefit still second half year-over-year. It will be mostly a volume play, which is what we saw in all the key dynamics that Scott covered here a little bit ago via the script as well as answering Michael's question here a little bit ago as well. But you're going to see most of that impact, that volume impact on the Infiltrator side of the house first, which is how we've always been talking about—that's exactly what we're seeing. So you're going to see a lot of that. Allied is still going to be strong year-over-year. So we'll still see some nice volume growth as well as pricing there. On the pipe side, on the ADS legacy business, again, some of those dynamics that we talked about come into play there as well. But most of that volume coming off will be Infiltrator. And as Scott mentioned, we knew based on single-family housing starts and the lag times kind of—it was coming at us. We just— it happened probably about a quarter ahead of when we thought, and the impact in September was pretty dramatic and pretty sudden. So leading to all the actions we talked about before. But it's fair to look at a lot of that volume as being Infiltrator related.

Matthew Bouley, Analyst

Got it. Okay. That's very helpful. And then, secondly, on the margin outlook. I just heard you saying, and you said several times around that there's some raw material benefit starting to flow into the second half there. I mean, if I kind of just high-level, say, you took your revenue guide down by $150 million at the mid-point, but the EBITDA margin is—or the EBITDA dollars are unchanged. What I'm trying to get to is, I guess, how much of the deflation that you're now starting to see is incorporated in that second half guide? And just sort of what are the expectations around—I heard you say operational cost control, things like that. I'm just trying to get at how much of actual declines in raw material prices are included in that second half guide? Thanks.

Scott Cottrill, CFO

Yes, Matt, the way I think about it is those decreases are embedded in our guide. Again, based on resin procured in the month of September, October, by the time that it goes from raw material and is converted into a pipe finished good product and then sold. That could be 90 days, if you will. So we have three months of visibility to those costs that are on our balance sheet today. So again, we've embedded that—or considered that favorability as well as pricing. I mean, it's really important to also look at kind of where our pricing has been and where we've gotten it to, and the fact that sequentially, we expect to hold on to most of that as we've talked about in the past. But again, that resin and what we're currently procuring it at is included in our forecast and the guide that we went out with.

Matthew Bouley, Analyst

Got it. And then just on that point, can you kind of speak to the resin—the resins themselves sort of to what degree have they come off peak, if you can give any color on that?

Scott Cottrill, CFO

Not—I mean, directionally, again, it's off sequentially as well as year-over-year. But again, the absolute level, when you go back historically and look over the last five-plus years or greater, it's still at a very elevated level as compared to historic levels that we've seen. But again, sequentially, year-over-year, it's providing a nice benefit and offset to some of the volume challenges that we're seeing. And again, we kind of knew that, but the magnitude of such—to your point, helps us offset some of the volume declines that are coming at us that again came at us a little bit faster than we thought they would.

Operator, Operator

Our next question comes from Joshua Pokrzywinski with Morgan Stanley. Your line is now open.

Joshua Pokrzywinski, Analyst

Just following up on the price/cost commentary. I mean, I guess, versus last quarter, you had a little bit less of a benefit in the EBITDA Bridge. I don't think the year-over-year comp was a lot better. And I sort of get that you have more deflation showing up in the second half, although I think the resin kind of downward trajectory has been fairly stable. So I guess maybe what I'm trying to say here is I would have thought there would have been more this quarter. Is there anything going on with either mix or price flowing back to the customer in some instances, like—can you just talk about how—that has gone kind of at the customer level in terms of managing that price/cost? Does that change at all versus the last quarter? Or is it really just a function of more of the improvement on resins that we've seen is kind of times itself into next quarter and beyond rather than this one?

Scott Cottrill, CFO

It's timing. Well, the only thing I'd say, Josh, looking at the EBITDA bridge, I mean, that price cost was $169 million favorable in the quarter. Again, when you look at the magnitude of what we saw in the first quarter, yes, it's not the same on a year-over-year basis, but that's because of the price increases that were lapping last year. So when you get to Q3, Q4 of this year, again, you're not going to have as much pricing benefit on a year-over-year basis. But what we're going to see is a nice resin benefit year-over-year that will be in that price/cost far and is embedded in our guidance. So that's the interesting thing when you look year-over-year. But when you look sequentially, which is, again, how we look at it, we're holding on to most of that pricing like we thought we would. Obviously, with some of our plastic pipe competitors in certain regions, we got to be smart about it. But again, we're holding on to most of that pricing. And we track that. We look at it monthly, weekly, daily, and we're holding on to it. And then to some of the points we've talked about earlier, we're also starting to see on a procured basis, some really nice resin benefits that will start coming through the P&L here over the next couple of months.

Joshua Pokrzywinski, Analyst

Got it. And then I apologize if I missed this in some of the earlier comments. But on the kind of lost revenue or deferrals coming out of Florida with the hurricanes, over what timeframe are you expecting to catch up on that? Obviously, not imminently, but like is this a two-quarter phenomenon? Is it really into next year? How do we think about the catch-up?

Mike Higgins, Vice President of Corporate Strategy and Investor Relations

Hey, Josh, this is Mike Higgins. Yes, I'd say that of that area, talking Southwest Florida that was hit the hardest. That's—you’re probably looking at potentially a two to three quarter phenomenon. I mean, obviously, people have seen the damage of the devastation that occurred. So a lot of the activity clearly is shifting to that. So we'll see some sales related to that, but kind of your everyday kind of nonresidential, residential construction projects that we sell, those are going to get pushed for at least a couple of quarters. That's—and that's coming from our guys on the ground talking to their customers, talking to our distribution down there.

Joshua Pokrzywinski, Analyst

Got it. And then I apologize if I could sneak in just one more. The way that you guys are sort of describing the end market environment right now, especially on the resi side, with maybe non-resi closely following in most end markets or most macro environments. How does that kind of 8% CAGR long-term target look today? Is that something that still feels kind of achievable over the next several years? Or does that need to come down if we have kind of a more pronounced slowdown here over the next, call it, 12 to 18 months?

Scott Cottrill, CFO

Yes. I mean, obviously, if it's more pronounced, you got to look at things. But again, the long-term trajectory and value proposition and model that Scott talked about earlier, no change. So over the long term, absolutely, that growth trajectory, that material conversion story, all that holds true. So that—the ADS model, the Infiltrator model, that conversion story is intact.

Mike Higgins, Vice President of Corporate Strategy and Investor Relations

Yes. I think the way we talk about it, Josh, is, yes, clearly, there's something going on in the market. It's an inflection point; there's uncertainty, but our business model is not broken, right? The conversion story, the value proposition that we bring, we're still executing on that every day, and we'll be very resilient, and we can pivot based on kind of where opportunities are presented in the end markets.

Scott Barbour, President and CEO

And if you're thinking—Josh, this is Scott Barbour. No, I was going to say this is Scott B. I think this is really—we're in that period of inflection, and you don't really know where it's going to end up. I mean we know there's something common; the depth or length of it, we don't know. We can read the signals and watch the Fed and all that other kind of stuff. But we just don't know yet. So we're not going to change our long-term growth plans around any of this until we get a better handle on what the depth and length of what we're entering is there. I mean I think as I tried to describe, I mean, we were saying along in July and August; September was a lot different than July and August. October has kind of been the same. We're trying to figure out exactly these different impacts of destocking, slowdown in core demand in the end market, all these things. And we'll sort it out, and we won't know until we're past it, but we're going to stay on top of it every day. And this is not unlike when the pandemic began. When we—there was a couple of months of sorting things out, making sure we were lined up right, then you go, and that's where we are.

Scott Cottrill, CFO

Hey, Josh, the only thing I'd add to that, you heard Scott and myself mention it multiple times, but we're continuing to invest heavily in the business. Obviously, certain regions still need to be invested for growth, but a lot of automation and efficiency type of spend that's coming that way. And again, as we talk to it, our game plan here is to continue investing in these areas so that we're even more competitive when we come out of this downturn. And again, we've got the balance sheet to do that, and we see that as a great way to not only invest organically in the business but again, we can be positioned for any kind of M&A opportunities that might come our way down the road as well.

Operator, Operator

Our next question comes from Garik Shmois with Loop Capital. Your line is now open.

Garik Shmois, Analyst

Hi, thanks for taking my question. You kind of alluded to this a little bit on the pricing questions. But just curious if the pace of the competitive behavior has accelerated at all over the course of the last couple of months? Or is it more of a normal pricing environment when you start to see resin costs start to come down?

Scott Barbour, President and CEO

Good question, Garik, this is Scott Barbour. So it differs by market. And I would say to you that in the regions of tight RCP, reinforced concrete pipe supply, high demand for that stuff, maybe a lot little like capacity in those products, pricing is very steady and maybe with some opportunities. In our more competitive markets like agriculture, some days, there's a daily fight. Other days, it's pretty steady. It's not anything that we don't experience in the normal course. And like Scott said, we're going to protect our market share, but it's not at any elevated level over normal. And I think that's what you're kind of asking, is there any unusual activity because of the decrease in material prices. And it's—every now and then, you see one, you see a hot one, but it hasn't been above what I would call normal type of activity.

Garik Shmois, Analyst

Got it. That's helpful. Follow-up question is just on material conversion, just the pace of how that could look over the next several quarters? And just I don't know if you can wind back maybe in other periods of an economic slowdown, you've been able to maybe accelerate the pace of material conversion and maybe speak to the spread now between HDPE pipe pricing versus maybe some of the other competitive materials that are seeing some more inflationary pressures moving forward?

Mike Higgins, Vice President of Corporate Strategy and Investor Relations

Yes, Garik, Mike Higgins. So to the first part, other periods where we've seen economic slowdown, I would say it's more geography-based where you're able to kind of accelerate that share gain, right? So clearly, things become more competitive; guys are looking to protect margins on a slowdown. So if you have a contractor who maybe you have on the edge of kind of converting to your product, you're able to kind of push him a little further because of that competitive need in an economic slowdown. So I would say the pace accelerates in certain geographies, maybe more than others. But I think we're running at a pretty good clip right now at conversion, specifically in the residential end markets. And I'm sorry; I forgot what the back half of your question was?

Garik Shmois, Analyst

The installed cost?

Mike Higgins, Vice President of Corporate Strategy and Investor Relations

Yes, I think where we've seen over this year, the kind of the spread, the total installed cost advantage of our products versus the traditional materials has come into that more normalized level kind of 15%, 20%, 25% versus concrete pipe, as they've had to kind of take prices up around inflationary pressures and demand constraint—supply constraints related to the demand. I think we've seen those geographies where there were some parity maybe evolving that advantage has come back in line with what we typically see.

Operator, Operator

Our next question comes from John Lovallo with UBS. Your line is now open.

Spencer Kaufman, Analyst

Hey, guys. Good morning. This is actually Spencer Kaufman on for John. Thanks for fitting me in here. Maybe just the first one, given Amazon announcements on pausing warehouse distribution CapEx as a refer to the industry. How are you thinking about the sustainability of warehouse and distribution end markets? And sort of along the same lines, just given all the economic uncertainty out there, you mentioned that we're sort of in this inflection point right now. What type of visibility do you have into the entire business right now?

Scott Barbour, President and CEO

Why don't you take that one?

Mike Higgins, Vice President of Corporate Strategy and Investor Relations

Yes, Spencer, Mike Higgins again. On the warehouse distribution center part of that question, I'd say broadly, overall, the activity level remains strong. Specifically on the coasts, there's a real kind of acute shortage of warehouse space there. So we still see pretty strong demand up the East Coast, up and down the West Coast. As far as the Amazon piece, I know that gets a lot of headlines, but they're roughly 15% of the market. So there's still a lot of other development, a lot of other activities that go out there. So the market is not solely reliant kind of on Amazon. And kind of—one of the kind of viewpoints that we have been here is Amazon typically overinvests early into things, and this might be one of those things that a pull back, right? So they overinvested in this type of space. They're kind of pulling back on that a little bit. And then the other thing we hear from other kind of real estate professionals or the real estate industry is when you pull a couple of those layers back, Amazon kind of subleasing some of the space out is older stock. So they’re older buildings that they've been in. They're trying to consolidate operations into these newer facilities that they've built which are much larger, heavily automated to deal with the labor challenges. And there's takers for that old stock that old warehouse space. So we feel pretty confident in that type of activity through the end of the fiscal year.

Spencer Kaufman, Analyst

Okay. Thanks, Mike. I appreciate the color there. And my follow-up question, just on the raw material costs that are improving down both quarter-over-quarter and year-over-year, but still elevated how you guys are describing it. I mean, when you couple that with just some of the demand weakness you're seeing? And how are you thinking about the price moving forward? I mean would it be unreasonable to see potentially some giveback here?

Scott Barbour, President and CEO

It's—I think the giveback is just so localized that it's difficult for—I think you guys do it. I mean, it's pretty minimal within the context of how much price we've gotten over the past year. When we give—when we have to give back price, it tends to be on one project and one very regional type of thing. It doesn't tend to be across one whole class of distribution or customers. And it tends—it's very rifle shot. And the experience of the company is those rifle shots don't kind of pile up into some kind of tsunami. We're pretty good at keeping them extremely localized. And we offset that with—when we compete against reinforced concrete with our polypropylene or HDPE products that are a bit tighter in supply, higher demand environment that we're competing against those guys. And we also have the pricing that we do on our Allied Products, which tend to be highly, highly differentiated and highly, highly specified. You kind of roll all that together, Spencer, and we feel like it's a very manageable, very manageable variable for us.

Scott Cottrill, CFO

And when you look at some of the other inflationary cost pressures, you look at—it's not just all about resin, but when you look at labor, you look at transportation; those are all costs that are still with us at elevated levels. So—so again, I understand the question, but again, not a big item as we look at it.

Operator, Operator

There are no further questions. I'll pass the call back over to Scott Barbour for closing remarks.

Scott Barbour, President and CEO

I really appreciate everyone's participation and the good questions today. We anticipated a lot of these lines of questions; we look forward to kind of the follow-ups. And I just conclude, our team continues to work extremely hard on execution. You guys know me, I mean; execution is the first thing we think about in our business all the time. That's going to be really important. It's always important. It's really important in times of inflection. We remain very focused on kind of our end markets and customers and those programs that we can drive growth. We'll manage through it. It's an inflection point in the market. There are a few things that we've got to continue to figure out; we feel good about kind of holding the EBITDA guidance and are well-positioned on that and the cash flow generation of the business that I think gives us a lot of options on things that we can do in the future. So I appreciate it. I look forward to talking to you all soon or seeing you all. Thanks.

Operator, Operator

That concludes the conference call. Thank you for your participation. You may now disconnect your lines.