Earnings Call Transcript - WMS Q1 2024

Operator, Operator

Thank you, and good morning. With me today, I have Scott Barbour, our President and CEO; and Scott Cottrill, our CFO. I would also like to remind you that we will discuss forward-looking statements. Actual results may differ materially from those forward-looking statements because of various factors, including those discussed in our press release and the risk factors identified in our Form 10-K filed with the SEC. While we may update forward-looking statements in the future, we disclaim any obligation to do so. You should not place undue reliance on these forward-looking statements, all of which speak only as of today. Lastly, the press release we issued earlier this morning is posted on the Investor Relations section of our 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. With that said, I'll turn the call over to Scott Barbour.

Scott Barbour, CEO

Thank you, Mike. Good morning. Thank you all for joining us on today's call. We appreciate your time. The first quarter was a solid start to the year and highlighted the resiliency of the ADS model even in the face of lower market demand. The net sales and adjusted EBITDA results exceeded expectations, primarily driven by better-than-expected performance from the Infiltrator business and the Allied Products portfolio. Importantly, the positive mix effect from these two segments, as well as strong execution on pricing, good control over material and operational costs, and the benefit from actions we took during the second half of last year to reduce manufacturing and transportation costs in the lower demand environment led to a record 36.2% adjusted EBITDA margin. This is the highest quarterly margin in the Company's history and 350 basis points higher than the same quarter last year. This record profitability was achieved despite a 15% demand-driven sales decline in the quarter. I'd like to highlight growth in three highly strategic areas of the business today that are in part representative of the large opportunity in front of the business. Sales of Infiltrators active treatment products and ADS' HP Pipe and Water Quality products all increased this quarter due to the successful execution of the market share model. In particular, sales of the active treatment and water quality products are dependent upon the intensely local knowledge of our sales force, as product requirements and standards vary significantly depending on local regulations. Our business model incorporates a high-touch sales team combined with a national distribution footprint and engineering services support. The growth of these products in the quarter demonstrates the resilience of that business model even in unfavorable demand conditions. As communities and developers deal with the increasing effects of heavy rainfall and water scarcity, ADS is a trusted resource in the development of standards and practices around the management of water, the world's most precious resource, helping to safeguard our environment and communities. Developers, contractors, and distributors recognize our expertise and value proposition as they continue to choose ADS and Infiltrator as the premier partner for water management solutions. Water management remains a critical aspect of proper infrastructure development and stormwater management, highlighting the ADS brand promise; our reason is water, whether it be flood mitigation, nitrogen removal, water quality improvement, or water conservation. We remain focused on staying true to our foundational mission to provide clean water management solutions to communities and deliver unparalleled service to our customers. Now let me provide an update on what we are seeing in the end markets. From a residential perspective, the overall shortage of available housing and the lack of existing homes for sale in the United States continues to give us confidence in the long-term market growth potential and opportunity for further market penetration. The outlook for single-family housing starts has improved since the beginning of the year, which in turn benefited sales of infiltrators, leach field chambers, and septic tanks. Though demand was down overall, sales picked up sequentially through the quarter alongside the improvement in single-family housing starts. This improvement in outlook has not yet resulted in increased residential land development activity where ADS products are sold early in the development cycle. However, as single-family housing starts improve, the available inventory of land will decrease, driving the land acquisition and development activity to follow. In the nonresidential market, we primarily participate in horizontal low-rise construction projects. Financing in the nonresidential market can be impacted by credit availability from small and regional banks, including tightening credit standards and higher loan-to-value requirements. We are seeing this impact the demand for speculative development projects, while projects such as the ADS engineering and technology center we are building and many large-scale development projects continue to move forward. There continues to be uncertainty as to how the back half of this year will play out and whether the government stimulus programs like the IIJA, IRA, and CHIPS Acts will be able to offset the impact of lower demand in other segments of the residential market. We are closely tracking projects related to these government stimulus programs, including semiconductor, automotive, battery, and EV projects among others. We quote on these projects utilizing our business development team to pursue relationships with contractors, distributors, and engineers that are working on these projects. This is the same strategy we previously used to successfully build relationships with related parties in warehouse and data center development, as well as the large national and regional homebuilders. Within the infrastructure market, which increased 1% this quarter for us, the IIJA activities are starting to pick up. As we have talked about before, the initial funding has primarily been allocated to repair work, and the real capacity expansion projects are still to come. We continue to see good quoting activity for airport projects where the transportation benefits of ADS products are very attractive to contractors. In the agriculture market, our outlook remains favorable as farm economics continue to do well. The contractor installation window in the upper Midwest was compressed in the spring due to weather, but we expect to see that business pick up in the fall. In areas less impacted by late-breaking winter or heavy precipitation, the spring season was basically on plan. Moving to profitability. Our adjusted EBITDA decreased 6% this quarter on a dollar basis due to the lower demand environment. The adjusted EBITDA margin increased 350 basis points to 36.2%. The short-term weakness in demand we began to see in the second half of the calendar year resulted in lower fixed cost absorption in the period. However, the actions and initiatives we've taken to align our cost with this lower demand environment allowed us to mitigate some of the headwinds we faced, and our first-quarter results are the product of the ADS resilient business model and the successful execution of operational strategies at both ADS and Infiltrator. I want to highlight the progress on our world-class engineering and technology center. As we talked to you last, we directed steel beams for the structure, which is on track to open in 2024. I'm very excited that this facility will bring product design, material science, and manufacturing technology under one roof to increase our pace of innovation and incorporate more recycled content into our products. In summary, we're off to a very good start to the year in the lower demand environment. ADS' value proposition, solutions package, conversion strategy, and unique sustainability position in water and recycling remain highly relevant, and we are committed to being the leader in sustainable water management solutions. We will continue to manage cost and production to meet our commitments in this lower demand environment that's in front of us. But importantly, we are managing the business for the upturn in the residential and nonresidential markets. We will continue investing in capacity in underpenetrated geographies, new products, automation, safety, and maintenance to ensure that when the market ramps up, we have good service and the right capacity to be the partner of choice for contractors and engineers. With that, I'll turn the call over to Scott Cottrill to further discuss our financial results.

Scott Cottrill, CFO

Thanks, Scott. As Scott has largely covered revenue and profitability results for the quarter, I will move straight to Slide 7, where we present our free cash flow. We generated $202 million of free cash flow year-to-date compared to $214 million in the prior year. Our year-to-date capital spending increased 17% year-over-year to $42 million as we continue to make investments to grow our manufacturing and recycling capacity, make productivity improvements, as well as build out our new world-class Engineering and Technology Center here in Columbus, Ohio. Our capital allocation strategy and priorities remain unchanged: first, investing in the business organically through capital investments in growth, productivity, recycling, and innovation. For the full year, we expect to spend between $200 million and $225 million on capital expenditures. Second, we'll continue to focus on acquisitions that are close to our core while being open to close adjacencies that will provide future platforms for growth and expansion of our current addressable market. Third, we will continue to buy back shares under our current share repurchase program. In the first quarter, we repurchased 500,000 shares for a total of $48 million, leaving $377 million under our current existing authorization. Finally, we are committed to the quarterly dividend paid to shareholders. This year, we are returning $0.14 per share quarterly, an increase of 17% from the $0.12 per quarter we paid in the prior year. We also will continue to return excess cash to shareholders through our share repurchase program and recurring dividend as we move through the year. Moving on to Slide 8. We show our fiscal 2024 guidance ranges, which are unchanged with revenue at $2.6 billion to $2.8 billion and adjusted EBITDA expected to be between $725 million to $825 million. We are encouraged by our results in the first quarter. The demand environment in July continued to perform in line with the trends we saw in the first quarter. We are also keeping a close eye on order rates and backlog so we can respond quickly to changes in the demand environment when needed. Given today's results, it is fair to say we are trending to the upper end of our adjusted EBITDA guidance range, though there still remains uncertainty in the nonresidential market as to the impact of credit tightening on developmental projects. We will revisit our guidance at midyear and update you as appropriate on our next quarterly earnings call. We remain focused on executing the plan and investing in the business for the long term, for long-term growth, margin expansion, and free cash flow generation. With that, I'll open the call for questions. Operator, please open the line.

Matthew Bouley, Analyst

Congrats on the results. I guess I'll start with a question on price. You guys spoke to pricing discipline holding. So I'm just curious kind of what you're seeing from a competitive perspective in light of this kind of volume softness in the market. What are you seeing and hearing on the pricing side and sort of how do you expect price to trend this year?

Scott Barbour, CEO

So this is Scott Barbour. I would say there's always regional flare-ups of price activity by competitors. It might be a little more than, let's say, a year ago, but I wouldn't say it's a raging fire if that's kind of how we think about it. Honestly, where we see things that we got to do to remain the market leader or competitive, we'll go do that. But obviously, it's not been a situation beyond anywhere near what we expected or beyond what we feel like we can adequately control.

Scott Cottrill, CFO

Yes, Matt, as we continue to say, we expect to hold on to the majority of the pricing, right? We've gotten over the last two years, and that's consistent with what we saw in the first quarter and what we see going forward. And again, our brand recognition, the brand of ADS, it's more than just a price competition that's out there. So the solutions package, all the other things that you know about us. So we're able to deal with those pockets of competition pretty effectively.

Scott Barbour, CEO

And we haven't seen that move a whole lot here in the last 30 days from...

Matthew Bouley, Analyst

Got it. Great color. And then second one, kind of zooming into the near term, given where you started the year from a margin perspective, I know you just mentioned there at the end, Scott, say that you're tracking towards the high end of the guide for the full year. But given the 36% margin in the first quarter, it looks like transportation is starting to go in your favor. You mentioned material costs kind of stable sequentially. How do we think about kind of the cadence of margins, these next couple of quarters and sort of where you think sort of EBITDA margins can go, especially into the second quarter given your starting point here?

Scott Cottrill, CFO

Yes. I think, Matt, we'll keep to the 28% to 29% we've been talking about. The midpoint of the guidance range is 28.7%. Obviously, very encouraged by the first quarter results. We'll have to see where the trends are. We purposely have been conservative in how we're talking to guidance and waiting until after midyear after our second quarter. That commercial real estate, that credit tightening, that impact on developers and that non-res, that's something we really need to keep our eye on. So there's a lot of reasons why we're being encouraged by the first quarter yet being very prudent in how we think about giving that guide. So that applies to the margins as well. The EBITDA bridge that we put in here, you can see that margin expansion, where we like to see it, was from gross margin expansion year-to-date. So really good performance in every line item there, but we're not going to get over our skis and we'll still talk to the kind of that end goal of 28% to 29% margins by the end of '25, although we are very much aware of the strong start out of the gate. So we'll see how it progresses.

Michael Halloran, Analyst

So just clarifying that last point then. So if I think about the cadence through the year that's assumed in guidance, if 2Q is probably at the upper end of the full year range, maybe a little better than that. And then back half, we're probably tracking to the low end or below the range relatively typical seasonality. Is that the thought process as far as the margin cadence that's assumed in guidance as of today?

Scott Cottrill, CFO

Yes, absolutely, Michael, you're spot on. That's exactly the way to think about it.

Michael Halloran, Analyst

Okay. And also just back to the first question here. When you think about the price cost commentary and the price cost curve on a forward basis, recognizing that there are some dynamic things going on market to market. It doesn't feel like you feel all that differently about your ability to maintain a pretty healthy price cost spread as we look forward from here, correct?

Scott Cottrill, CFO

Correct. Yes. I'd say sequentially that just be aware on the year-over-year comps that's going to get more difficult as we get to the back half. But sequentially, is the right way to think about that comment that you just made, Michael.

Michael Halloran, Analyst

Any way to help on how much mix was the benefit in the quarter on that margin line?

Scott Cottrill, CFO

It was a benefit, although not significant. We certainly keep it in mind and monitor it. Scott mentioned that the ag season has been somewhat compressed in the spring. However, we still have a positive outlook for the entire year. We'll see how this plays out. If the favorable conditions in Q1 materialize as we anticipate in the fall, we may experience a slight negative impact from mix down the line, and that's how we are approaching it.

Scott Barbour, CEO

Better volume behavior with a slight negative mix and absorption. However, if I focus on the $50 million figure, it's largely due to minimal mix doing well, strong pricing, and being primarily driven by materials. We've observed that while the overall figure remains positive, the factors contributing to it have shifted from pricing towards materials, with a bit of mix included, as we previously discussed.

Michael Halloran, Analyst

Yes, that makes sense. Regarding the non-rise side of things, I understand that you’re in the early stages and aware of the concerns about credit tightening. How would you describe the availability of projects in the marketplace? I’m not necessarily asking about those that are ready to start immediately, but rather from a backlog or pipeline perspective. If people felt more confident about the situation, do you think they could begin projects quickly? I'd appreciate any thoughts you have on this.

Scott Barbour, CEO

There are several important points to discuss. First, our quoting activity continues to show positive growth year-over-year in terms of dollar volume. However, the types of projects we are seeing have changed somewhat, with a noticeable increase in larger projects as we focus on onshoring initiatives and electric vehicle and battery projects. Overall, quoting remains strong. That said, there seem to be fewer projects available, especially those that might have been seen as speculative. We've been researching this situation and often hear from clients that while they completed four projects last year, they can only manage two this year due to changes in their credit situations and the need to secure more equity for their projects. Despite this, larger onshoring projects and other initiatives are helping to fill the gaps in quoting activity. Additionally, we're benefiting from our increased investment in what we refer to as high-priority states. Consequently, we feel somewhat more optimistic about our business activity today than we did about three months ago, including with Infiltrator.

Michael Halloran, Analyst

Last one from my perspective. The residential side, one side, you'll see a little better starts, a little more optimism on starts, hasn't hit the property development side yet. If you look back in history, what kind of lag is there normally between when those start improving a little bit versus when that starts hitting the next wave of property development?

Operator, Operator

Yes, Mike, it's Mike Higgins. I believe that a timeframe of over eight months is likely. This time may be different depending on the homebuilders and their current land holdings, as well as their need to acquire more land to develop and install the necessary underground infrastructure before commencing home construction. While we have seen stabilization in starts with indications of potential improvement, we are not yet observing a comparable level of activity in land development. If the current trends continue, we anticipate experiencing some benefits in our next fiscal year, which begins around April 2024.

Garik Shmois, Analyst

I wanted to follow up on the residential piece as it relates to Infiltrator, given that these projects tend to go in after houses are completed, but we're seeing starts and completions narrow fairly significantly. Just wondering what the outlook for Infiltrator growth is over the next several quarters? You've seen some declines or the kind of the improvement in the rate of declines of late, but should we continue to expect that path? Or could you see a bit of an air pocket here?

Scott Cottrill, CFO

Yes. Garik, yes, I'm very encouraged by Infiltrator results. We had talked about the first half of the year for the entire company being down 15% to 20%. But when you look at those housing starts and the impact on Infiltrator, we thought their impact was going to be much greater than that average for the Company, and it didn't come to fruition that way. So I'd say that right now, our line of sight would expect that favorability from what we thought looking at how dire those housing starts were six months ago, nine months ago to continue, but it's definitely something that we're watching right now.

Operator, Operator

We made the comments in the call, Garik, that the two things that are also helping Infiltrator there are these septic tanks have a large conversion opportunity and we've made some investments over the past couple of years at Infiltrator to give them the capacity to sell these and kind of take the handcuffs off the sales guys and have them go out and chase and sign up more distribution, sign up more contractors. So that's helping even though the gap is narrowing that kind of conversion story in the tanks and then the active septic are helping kind of offset some of the weakness that you're seeing in their traditional leach field chamber business.

Garik Shmois, Analyst

Understood. A follow-up question is on SG&A. In light of the headcount reductions you recently announced, the SG&A cost savings fully baked in at this point? Or should we expect continued improvement on the SG&A volume moving forward?

Scott Cottrill, CFO

Yes. I think right now, we're happy and in line with our expectations. We've managed those costs so that we're still investing in certain areas. You think about the engineering technology center, engineering and in those kind of areas. So you think about our service capability and other things that we're investing in so right now on a dollar basis, we're pretty much flat first quarter to first quarter, but a little bit of an impact from a margin perspective. So that 350 bps year-over-year very much gross margin, offset by a little bit of degradation on the SG&A side. I would expect that largely to continue. Again, actions around T&E and a lot of other things that we put into place, advertising and other things, we'll continue as we go through the year and monitor such. But I would say, generally, those programs are in-flight in having the desired impact.

John Lovallo, Analyst

Could you provide some insight on SG&A? It remained flat year-over-year despite a 15% decline in revenue. What factors are contributing to the consistency in SG&A, and how should we anticipate it will trend for the rest of the year?

Scott Cottrill, CFO

Yes. I think in there, there's really nothing in there other than the fact that you've got favorability from how we're looking at T&E, advertising spend, all the other cost reductions that we took on our spend, but we're still making investments in areas that are going to be for our long-term growth and profitability, areas around engineering and technology, IT. We're not going to cut those programs that support the service and logistics and other things that are going to differentiate or continue to differentiate ADS and make us more competitive. So we're ramping up those investments and those are offsetting the cost-cutting actions that we've taken to get to a flat dollar basis, and that's exactly what we intended to do coming into the year. So it's not a surprise to us. It's exactly where we wanted it, and that will continue as we march through the year. We'll see gross margin favorability offset by a little bit of margin degradation because of SG&A because of the lower demand environment but we're not going to cut these programs short based on a lower demand environment this year.

John Lovallo, Analyst

Okay. Understood. And then given some of the improved manufacturing strategies and efficiencies and the lower transportation costs. How should we think about incremental margins in a scenario where volume comes back maybe sooner than expected?

Scott Cottrill, CFO

Yes. I mean you've seen our results and what we can do in those areas. I think the exciting piece about it is, obviously, you got to look at that price cost bar and what do you think is going to happen to resin materials in a higher demand world using those tend to go up, but our ability to price and recover that goes up as well. But that fixed cost leverage that we get when you start seeing that leverage come to bear, especially given the investments we've made around productivity, automation, and growth in capacity in certain geographies of the country, those are really going to kick in. And we're already getting the productivity savings out of those new machines and new investments we've made. But we start getting the volume when we do see that turn the corner and those green shoots arrive, we're going to get really good fixed cost leverage, and that's something that led to really good expectations around incremental margins. I'm not going to give you a range or a percent, although the fact that it should be very leveraging.

Joe Ahlersmeyer, Analyst

Nice job on the quarter. I just wanted to go back to the Infiltrator results in the quarter and thinking about also the comment around the sales improving sort of in line with the improvement in starts in the quarter? And maybe if you could talk about the relationship with completions, if you think maybe since completions in the second quarter on single-family were roughly flat, slightly down, if that had anything to do with the sort of maybe the lag in strength that you may not have expected if you were just looking at starts. And then on that improvement alongside starts, does that have anything to do with the destocking that you saw in the fiscal second quarter of last year? Maybe inventories were too low and so now starts are improving. You're seeing ordering and inventories coming back up, just a theory, but would be curious to your thoughts.

Scott Barbour, CEO

This is Scott Barbour, Joe. I would say yes, definitely. I think the distribution may have overcorrected a bit. As housing starts improved, the demand for septic distribution increased, leading them to bring in inventory at a faster pace than we expected, which is how we surpassed our expectations. The gap between starts and completions has returned to more traditional time frames, benefiting Infiltrator. Additionally, the areas where they operate in ex-urban, suburban, or rural markets seem to show more consistency compared to the fluctuations in volume homes that have experienced significant swings in starts. There's a lot to unpack here. The third point is more based on our belief but we are confident that the distribution has indeed corrected itself. Demand has improved, and distribution has resumed at normal rates, which we've seen in our analyses. Current channel checks and reorder patterns, particularly for late July and August, appear to be quite normal. Overall, I feel confident about Infiltrator’s trajectory. We’ve faced some questions regarding how to leverage gross margins, and Infiltrator's sequential and year-over-year gross profit performance serves as a strong example of efficient operations. Last fall, we implemented several measures including reducing our material inventory, adjusting headcount, and shutting down some machinery, which did result in some underabsorption for a couple of months. However, as we rebounded, we capitalized on favorable material purchases due to low inventory levels, which allowed us to effectively manage our costs. The team did an exceptional job responding to these challenges, all while transitioning management with Roy's retirement and Craig's ascension. There has been great continuity during this period, and despite past concerns regarding Roy's retirement and the strength of our management team at Infiltrator, this situation highlights their ability to remain focused and navigate through changes. We are incredibly pleased and proud of their current operations.

Joe Ahlersmeyer, Analyst

I appreciate all the details provided. Should I interpret that in comparison to last year's destock, you believe sales for Infiltrator are up year-over-year in fiscal 2Q? And then...

Scott Barbour, CEO

I don't think we believe that. No, we don't believe that. It's still kind of down, but it's just better than we expected. Scott mentioned it; we thought it would decline by 25% to 30%, and it's actually down 15%. Given that kind of mix effect and profitability due to the actions taken, I think it's well earned by our team. However, let's not misinterpret this as a sign that demand is going to skyrocket in the next 90 or 30 days.

Scott Cottrill, CFO

It's just not as bad as we thought it was going to be.

Scott Barbour, CEO

This is not the best. We've been trying to describe the situation. The pipe business really performed, with a slightly different mix, but the demand at the end of the day was about the volume we anticipated going into the quarter. We've done a solid job of executing against that. Infiltrator performed better than expected from both a demand and execution standpoint. Allied Products, which is a strong product line for us, also exceeded our expectations in terms of volume and pricing execution. The breadth of our product line really worked to our advantage over the past quarter, and I think we can expect it to continue in the next quarter, but...

Scott Cottrill, CFO

We communicated a lot through those comments, but overall, we are satisfied with the quarter as it met our expectations. Infiltrator performed better than anticipated. However, after four months into the year, we are not ready to declare victory. There are still many uncertainties in the market, and we will continue to execute our plan.

Josh Pokrzywinski, Analyst

So Scott, and I'll let you guys figure out which Scott I mean. Can we talk a little bit about calorie count between some of these mega projects, stimulus near-shoring, some of the bigger stuff versus your more run rate business. The only reason I ask is that I'm thinking kind of two dimensionally low rise along the ground, is a big chip plant in Texas or Ohio sort of comparable to half a dozen Walmarts in Florida because obviously, your guys' content doesn't necessarily shift around as much as some other folks out there. Any way to sort of dimensionalize relative importance or how much of your business you think some of the bigger projects could be once we're a little further along here?

Operator, Operator

Yes, Josh, it's Mike Higgins. I would say your analogy is quite accurate. When discussing chip development and semiconductor plants, the value of the product we handle is about $1 million to $1.5 million, which represents a significant order for us. We're not downplaying that. If you consider six or seven typical Walmart developments, the content is going to be fairly similar. As we've mentioned before and as Scott noted, we are very focused on manufacturing and industrial construction projects that are expanding. We are actively pursuing these opportunities and have good visibility on them. We are currently tracking, quoting, and shipping some of these projects. This will help counterbalance the challenges we face in the low-rise market, which is where we see the majority of our activity.

Scott Barbour, CEO

The preponderance of our business is in that Walmart.

Operator, Operator

Yes. That horizontal low rise...

Scott Barbour, CEO

That horizontal low rise construction. I think we've effectively utilized our business development resources, a team we started building before the pandemic, by redirecting them about 18 months ago to focus on the engineering firms and general contractors that handle significant onshoring projects. The collaboration between those central teams and our local teams, who ultimately execute the projects, has created a strong combination that has enabled us to remain very agile in this area.

Josh Pokrzywinski, Analyst

Got it. That's helpful. Maybe taking a step back, trying to piece together some of the comments you guys have made thus far. I mean, seems like the current quarter is off to the start you expected. It sounds like as much as maybe there are some reasons to be cautious on the non-res side. There are also reasons to be optimistic. Scott, I guess what would sort of inform being just call it at the high end of your range or maybe even closer to the midpoint because I would have guessed before the call started, it's the more traditional non-res stuff maybe rolling over, but it doesn't really sound like that's what you're seeing in the business. Just wondering where you see kind of the real sensitivity there outside of the fact that, hey, it's just early in the year, and we want to wait and see some more.

Scott Barbour, CEO

Well, part of it is that it’s early in the year. We should not underestimate the learning experience we have compared to last year. Your question is very relevant because I believe this is primarily about demand. We are confident in our materials, pricing, and our ability to execute in the factories. What concerns us, and what will guide us as we look 90 days ahead, is the demand picture. In 90 days, it will depend on how the fall agricultural season plays out, how the Sun Belt continues to develop, and whether we are successful in large projects and onshoring where we expect to be. It will definitely be demand-driven, and we appreciate that because we know demand will eventually return. Scott mentioned this in relation to some of the SG&A questions. We are structuring our costs to accommodate that uptick and to execute effectively, not just in manufacturing but also in our engineering efforts, including investments to staff our Engineering and Technology Center and to enhance the use of recycled materials, product improvements, and innovation. We believe this strategy will pay off, and we want to be prepared for it.

Bryan Blair, Analyst

You noted the dollar level of quoting activity is higher year-on-year with a pretty notable shift in mix or composition that should ultimately be favorable for your team. I'm wondering if you could drill down a bit more on regional quoting activity and if there's any notable sequential change to call out there?

Scott Barbour, CEO

I wouldn't say there's much change in that. This is Scott Barbour, by the way. Good question. What we can share is that the strong areas in the geographies remain strong. We have observed that the Northeast and Northwest, particularly California, have started to recover. So that's a sequential change since they had been rather down for almost 9 to 12 months, which is encouraging news. We believe that this will stabilize as we move forward. Florida remains strong, and it's good to see California and New England bouncing back. The Midwest is also performing well with some of these very large projects. Overall, I wouldn't describe a significant change other than what's happening in California and the Northeast.

Bryan Blair, Analyst

Okay. Understood. That's helpful information. How about Texas? The approval is still in the early stages, but you did mention last quarter that activity had begun. Is there anything to add on that?

Scott Barbour, CEO

I believe we are progressing well with designs and plans. We are seeing positive recognition of our products within the Texas DOT engineering community, and they are gaining approval. Once we secure that approval, it's important to communicate the benefits to others. We are still in the process of winning bids, so shipments haven't started yet. However, the development is occurring at a faster pace than we had anticipated in terms of bidding and winning. As these projects evolve, significant spending will occur in Texas over the next five years. We remain optimistic about this situation. Additionally, we are seeing strong demand for our HP Pipe, and the growth we are experiencing in this product line has been positively influenced by activities in Texas, particularly with our high-performing polypropylene product.

Operator, Operator

Yes. I mean I would just add, like our order book that we've seen kind of in infrastructure where with this kind of Texas DOT approval would play is at good levels versus maybe the same time last year? So we're seeing some things. It's just as we've told you guys, the stuff ramps over time. And we'll look back a year from now, it'll be much better three years to five years is where you'll really see kind of the impact of this approval and our ability to get that implemented and execute against it in the market.

Bryan Blair, Analyst

Understood. That's good to hear. One more quick one, if I may. Any comments you can offer on the deal environment. I know that you're spending a lot of capital organically, it's high return. The outlook is great on that front. Just curious what you're seeing in terms of seller expectations, the availability of the assets, whether we may see a strategic deal come through in your fiscal '24.

Scott Barbour, CEO

I know that you'll see a huge strategic deal in '24. There are other things we're working on that are smaller. I mean, they're all kind of strategic to us but I know what you're talking about. Availability it's not a huge space. So availability can be an issue. We have several ones where we are talking to and talking about and engaging, but it's tough to get them in the boat. I would say seller expectations are still pretty high to tell you the truth.

Jeff Hammond, Analyst

Just a couple of follow-ups. So on these mega projects, can you just talk about price competition and mix and what your experience has been early on?

Scott Barbour, CEO

Well, we compete against reinforced concrete pipe there pretty much all the time. Every now and then we will run into one of our plastic pipe competitors. But I'd say on the big onshoring industrial ones, it's concrete that we're competing against. And what wins is our value proposition of fewer trucks to the site to make the deliveries, fewer joints, safety, less labor-intensive, less heavy equipment needed to kind of install versus those. It's really those pieces of our value proposition that win the day because on those projects, unlike some other projects, time is really important to get those factories built and get that work starting to move from a supply chain perspective or a localization perspective for these companies. And I think we've said this before, that part of our value proposition really rings when people are concerned about kind of number of trucks to the site, how much labor do I need to install this stuff, what's my time to get this stuff up and going. I mean that was a big part of our success in the warehouses is they like to get that stuff up and going because they have a time, a very definitive in those models, time to revenue. And these big manufacturing projects are the same.

Operator, Operator

Yes. I would say, Jeff also ease of installation, speed of installation and then Scott hit on this too. But that service and delivery capability, right, the national footprint with our manufacturing plants and then our long relationships with all the big waterworks distributors and their ability to kind of fill in and service locally to as well is big, right? These are big projects they need to keep moving. So our ability to get product to a job site on time is really important.

Jeff Hammond, Analyst

Okay, great. Regarding residential, you mentioned that you haven't observed land development yet. Considering previous cycles, what is the typical timeline before we recover from the bottom in terms of starts and begin to see an increase in land development?

Operator, Operator

Yes, we discussed this earlier, and we believe it's around eight months or more. One factor to consider is how much land they have available for development, which could accelerate the process if they're operating with a land-light asset model. They may need to increase land purchases for development since their land bank isn't substantial. In this cycle, it feels similar to the previous one during the financial crisis. Back then, housing starts began to recover around our fiscal years 2010 and 2011, but the significant increase didn't occur until fiscal 2013 and 2014. The difference now is that there isn't much developed land or infrastructure available, as developers had to use up their existing inventory before they could focus on new subdivisions. Currently, there aren't many homes available for sale, so the recovery could be quicker this time. There are no further questions. At this time, I will turn this call back over to Scott Barbour for closing remarks.

Scott Barbour, CEO

Well, thank you very much for the really good questions and discussion. And as usual, you guys have pretty sharp questions and insights into our business, and we appreciate that. To really summarize, we like how the first quarter ended up and exceed our expectations. Like Scott C. said, we're kind of in that ZIP code of the upper range of our guidance. We're off to a decent start this quarter, and we'll continue to execute. That's what we do. And I think it would be an interesting discussion in 90 days, as we get a little bit further down the road in our fiscal year, and we'll see how it develops. So with that, we appreciate your time, and I'm sure we'll be on the phone with many of you later in the day and have a nice weekend. Bye-bye.

Operator, Operator

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