Advanced Drainage Systems Inc (WMS) Q3 2021 Earnings Call Transcript

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Advanced Drainage Systems Inc (WMS 0.03%)
Q3 2021 Earnings Call
Feb 4, 2021, 10:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning, ladies and gentlemen, and welcome to Advanced Drainage Systems Third Quarter Fiscal 2021 Results Conference Call. My name is Tammy and I am the operator for today's call.

[Operator Instructions]

I would now like to turn the presentation over to your host for today's call, Mr. Mike Higgins, Vice President of Corporate Strategy and Investor Relations. Sir, you may begin.

Mike Higgins -- Vice President-Corporate Strategy & Investor Relations

Thank you, and good morning. Thanks to everyone for joining us today. With me, I have Scott Barbour, our President and CEO, and Scott Cottrill, our CFO. I would also like to remind you that we will discuss forward-looking statements. Actual results may differ materially from those forward-looking statements because of various factors, including those discussed in our press release and the risk factors identified in our Form 10-K filed with the SEC. While we may update forward-looking statements in the future, we disclaim any obligation to do so. You should not place undue reliance on these forward-looking statements, all of which speak only as of today. Lastly, the press release we issued earlier this morning is posted on the Investor Relations section of our website. A copy of the release has also been included in the 8-K submitted to the SEC. We will make a replay of this conference call available via webcast on the company website.

With that, I'll turn the call over to Scott Barbour.

D. Scott Barbour -- President and Chief Executive Officer

Thanks, Mike, and good morning, everyone. Thank you for joining us on today's call. We delivered another quarter of record financial performance in the third quarter of fiscal 2021. Sales grew 24% year-over-year, driven by 17% non-residential sales growth and 36% residential sales growth, as we continue to execute at both ADS and Infiltrator in a favorable demand environment. In fact, sales across each of our end markets increased double digits in the quarter. It was very encouraging to see the demand in our non-residential end market increase 17% this quarter. We continue to benefit from growth in horizontal construction, such as warehouses, distribution centers, data centers and developments that follow the residential build-out.

There was continued strength in the regions we have experienced growth this year, such as the Atlantic Coast and Southeast, and we experienced a rebound in regions that have been softer this year like the Northeast and Western United States. In addition, allied product sales in the non-residential market increased 23%, giving us confidence in the underlying market strength. We also continue to experience strength in our residential market with 36% growth in the quarter, driven by favorable dynamics in new home construction, repair/remodel and on-site septic, accelerated by the material conversion strategies at both businesses. Our indicators are showing that homebuilders continue to acquire land for future development and that there's an overall shortage in available homes, which bodes well for both the front end, new community development stake with ADS and at the home completion stage with on-site septic at Infiltrator. The retail market, which is roughly 25% of our residential sales, continues to experience strong growth as well with the continued strength in remodeling and home improvement.

Sales in the agriculture market increased 33% this quarter, driven by the programs we put in place around organizational changes, new product introductions, and improving execution as well as favorable weather and market dynamics. These dynamics are being driven by favorable indicators such as higher farm income and strong crop pricing, which is leading to farmers to invest in land productivity through better field drainage. Improving field drainage is a low-risk, proven method of increasing per acre yield for farmers.

International sales also increased 18%, primarily driven by double-digit growth in our Canadian business, which represents about 70% of the international revenue. Canada is doing well across both the construction and agriculture end markets with similar market trends to the United States. Additionally, this quarter, we were able to leverage our pipe manufacturing facilities in Mexico to help service the strong demand we experienced in the United States. We expect a slower recovery from the COVID-19 pandemic in our Mexico and our export businesses, but these markets will recover and return to growth.

Finally, Infiltrator continues to exceed expectations with 37% sales growth in the third quarter. Infiltrator continues to see double-digit growth in tanks and leach field products with strong growth in Georgia, North Carolina, Florida and Tennessee among other states. This was led by their material conversion strategy of displacing concrete septic tanks with plastic tanks and the economic advantages of septic chambers in leach field systems.

Moving to our profitability results. We achieved another quarter of record adjusted EBITDA during the period. Adjusted EBITDA margin increased 540 basis points overall in our first full quarter of comparable results from the Infiltrator acquisition. The increase in profitability in both businesses was driven by leverage from the strong sales growth, favorable pricing and material costs as well as contributions from our operational productivity initiatives.

In January, we hosted a well-attended ADS Distributor Conference to touch base with our partners and outline how we are thinking about the business moving forward. We have many new faces and roles among our senior leadership team and with that comes new focused programs to build on the ADS value proposition, including the service component of our business. The ADS value proposition includes not only the products we design and manufacture, it includes the delivery and design services led by the logistics and transportation we provide to our distribution partners and customers. This speaks to ADS' unique model, is not just a pipe manufacturer, but also a large specialized logistics and transportation company.

We are committed to investing in the people, processes, technology and fixed capital to deliver on customer expectations and increased capacity to meet our customers' needs. We also talked to our customers about the new ADS brand and our digital marketing initiatives. You may have noticed we updated the ADS logo, and are in the process of rolling out our refreshed brand to encompass the progress we've made over the last several years. Our new brand identity not only visually updates the look of ADS to reflect who we are as a company today, it reflects where we are going. Our products and services platform, sustainability initiatives and community involvement all drove the new brand look and tag line, Our Region is Water, setting the tone for our updated mission and values, which will be rolled out over the next several months.

Looking forward, we believe the demand environment in calendar 2021 will look similar to what we experienced overall this past year. We are certainly fortunate that as part of the construction industry supply chain, we could manufacture and ship our products over the last 12 months without significant interruption. My observation is that the construction industry, including the manufacturing, distribution and contractors weathered the pandemic and related economic disruptions better than many parts of the economy. We will continue executing on our material conversion and water management solution strategies in what I expect to be a favorable demand environment, benefiting from our national presence as well as our favorable geographic focus in end market exposure.

Our confidence in these favorable trends is supported by the strength of our order book, our project tracking, the book-to-bill ratio in the backlog. While we have some cost headwinds coming at us in the fourth quarter, including inflationary costs, such as materials and transportation, we are confident we will be able to offset them through favorable pricing, level loading at our facilities, operational productivity initiatives, our recycling programs and the capital deployment initiatives.

In summary, we did a great job executing this quarter, and we'll look to build on our strong market position, execution and new levels of profitability going forward. I want to thank our employees, without whom our success would not be possible. We will stay focused on employee health and safety and delivering on the needs of our customers. As we look ahead, we are well-positioned to capitalize on residential development and horizontal construction, while continuing to generate above-market growth due to execution of our material conversion and water management solution strategies. We will remain focused on disciplined execution as we look to close out on a very strong 2021.

With that, I will turn it over to Scott Cottrill to further discuss our financial results.

Scott Cottrill -- Executive Vice President, Chief Financial Officer and Secretary

Thanks, Scott. On Slide 6, we present our third quarter fiscal 2021 financial performance. I'll be brief on this slide, as Scott has already covered a lot of the details here, but I want to reiterate a few key points. The very strong 24% revenue growth we reported this quarter was driven by both volume and pricing as well as strong growth across both our ADS legacy and Infiltrator businesses as well as in each of our end markets and product applications.

The demand environment for our products remain strong, and we expect this strength to continue as we move forward into calendar 2021. The 52% growth in consolidated adjusted EBITDA was driven not only by this strong topline growth, but by favorable material costs, operational efficiency initiatives as well as our synergy programs. Finally, we continue to monitor our costs and are committed to offsetting increases that materialize through a combination of pricing as well as operational and productivity initiatives and continue to look to expanding margins year-over-year as we move forward. Overall, we are very well-positioned to leverage the favorable demand environment anticipated due to our market-leading position, national relationships, breadth of products and services, as well as our geographic and end market diversity.

Moving to Slide 7. Our year-to-date free cash flow increased by $141 million to $391 million as compared to $250 million in the prior year. These impressive free cash flow results were driven by our strong year-to-date sales growth and profitability as well as execution on our working capital initiatives. Our working capital decreased to 16% of sales, down from 19% of sales last year. In addition, we ended the quarter in a very favorable liquidity position, with $224 million of cash and $339 million available under our revolving credit facility, bringing our total liquidity to $563 million. It is also worth noting that our trailing 12-month leverage ratio is now 1.1 times. Given our strong balance sheet position, capital deployment remains one of our top strategic initiatives. Our first priority continues to be investing organically in the ADS and Infiltrator businesses to support growth, innovation, productivity, safety and new product development. M&A is our next priority. We remain very focused on following our disciplined acquisition process as we move forward into calendar 2021.

Finally, on Slide 8, we increased our revenue and adjusted EBITDA guidance ranges for fiscal 2021. Based on our performance to date, order activity, backlog and current market trends, we currently expect net sales to be in the range of $1.915 billion to $1.950 billion, representing growth of 14% to 17% over last year. Adjusted EBITDA to be in the range of $550 million to $565 million, representing growth of 52% to 56% over last year. And we expect to convert our adjusted EBITDA to free cash flow at a rate of greater than 60% for the full year.

With that, I'll open the call for questions. Operator, please open the line.

Questions and Answers:

Operator

[Operator Instructions]

Your first question comes from the line of Michael Halloran with Baird.

Michael Halloran -- Baird -- Analyst

Hey good morning everyone. So good stuff, really impressive quarter there. So at the risk of trying to front run your fiscal '22 guidance, not what I'm trying to do here, but you want to parse out a couple of things that you said there. In the slide deck, you said demand was pretty similar to last year, but it certainly sounds like you're saying demand is growing, and the expectation is for demand growth in this calendar year. Maybe just kind of sync those two before I go into a few more relevant questions.

D. Scott Barbour -- President and Chief Executive Officer

So, good morning Mike, and what I mean kind of by that is when -- as I look at fiscal 2021 in aggregate, it's going to be kind of first half, regionally very different. I think it's going to be second half, more regions, let's say, more kind of consistent or equalized, if you will. And I think if you kind of add those two together, I think, 2022 fiscal year would be more like that aggregate of the two altogether, right? I think all in all, if you kind of survive and did well, and we think we did pretty well over the last nine or 10 months through the pandemic and I look at what's going forward, I think you're going to even like that more. It will be more consistent and less nuanced by region.

Michael Halloran -- Baird -- Analyst

So in other words, the expectation is for growth, but it's going to have some variability as you look through it. So a couple of things there. One, the pricing side, obviously, that's going to be probably pretty robust here based on what we're -- at least we're hearing. Maybe some thoughts on the willingness of the market to take price, what that kind of looks like, any pushback in any of your regions? I know Infiltrator tends to be a little different. So maybe some thoughts on that as well?

D. Scott Barbour -- President and Chief Executive Officer

Yes, I think the pricing environment across all construction type of materials is going to be robust for lots of different reasons, good demand and rising material -- input materials. Both companies have been out with pricing, and it is sticking and in progress. You probably recall that at ADS, we did some back in September kind of time frame and that was resulted positively. Infiltrator has gone out since that time frame with some pricing. We are doing some more pricing in our quotation activities in selected geographies or segments. So I would describe Cottrill as being pretty active with our sales teams on that and has good line of sight what we need to accomplish our objectives. And to kind of pick up on your point, we've seen it sticking, there's always a little leakage in a couple of places, but it's nothing extraordinary or that we haven't dealt with in the past.

Scott Cottrill -- Executive Vice President, Chief Financial Officer and Secretary

I'd say, Michael, the only thing I'd add, a couple of years ago, especially Scott changed the paradigm around pricing here. It's input costs and resin first, absolutely. But then we also look at what's going on with diesel, common carrier, transportation, logistics, labor. So it's a holistic look at that cost scenarios and making sure that we stay in front of it. So that's embedded in the pricing dynamic or paradigm that we now have.

Michael Halloran -- Baird -- Analyst

Absolutely. Two more here. One, the commercial side, plus 17% in the non-res side, pretty amazing continuity environment. Maybe just talk about puts and takes by region, kind of verticals you serve and then how you feel about the sustainability.

D. Scott Barbour -- President and Chief Executive Officer

I think the very positive thing about that number in the non-residential, which had a lot of questions and clouds around it were two things. The return of the Northeast to good demand levels and the Western US, particularly California, where we certainly picked up sales in the quarter and some of these target segments we were talking about, distribution, data centers, residential build-outs and land development, all those things we've been working on kind of popped, particularly in the Western US Last point, allied products, highly vectored to non-residential. And it had been through the first half of the year, what was it, plus 4% or...

Scott Cottrill -- Executive Vice President, Chief Financial Officer and Secretary

Low single-digits.

D. Scott Barbour -- President and Chief Executive Officer

Yes, low single-digit, which was uncharacteristic for us. However, it rebounded nicely. The order book is good. So that gives us a lot of confidence and work to do on the non-residential -- on that side and making sure the supply chains and all that stuff are up and rolling.

Mike Higgins -- Vice President-Corporate Strategy & Investor Relations

Hey Mike, this is Mike Higgins. So one point I would add to that comment about non-residential that Scott made is -- he talked about that rebound in demand in the Northeast and the West, but the areas that had been strong, the South and the Southeast, those continue to be strong, if not accelerate.

D. Scott Barbour -- President and Chief Executive Officer

That's a good point. It's a good point.

Michael Halloran -- Baird -- Analyst

Yes. Great. And then last one, high-quality problem here. It's kind of amazing how quickly your leverage got down toward 1. What's the plan on the free cash from here? Obviously, internal investments, but how does the M&A side look? And how are you thinking about usage of that cash?

D. Scott Barbour -- President and Chief Executive Officer

So two comments, I'm sure Cottrill will jump in too, but we stepped up our capital spending. And you've noticed that. And that's both Infiltrator, which is a big nut, and it's ADS too. So, we're stepping up that, and we had a Board meeting yesterday, where we talked about this a lot. And they're encouraging us to go faster on the organic side, certainly. We've been working our process. There's a couple of things that we're working on there. They're not like an Infiltrator type of thing, but we are making some progress through that, but nothing I would say highly imminent or actionable.

Scott Cottrill -- Executive Vice President, Chief Financial Officer and Secretary

The only thing I'd add to that is that we're going to make some additional investments on our side on the capabilities side to help accelerate and move that, but it's going to be a disciplined process. So it's been very active, but it's got to be the right thing, close to our core. We've talked about bolt-ons. It's got to be at the right multiple. It's got to hit the strategic lens. So all of those things. We're not going to let kind of this leverage kind of burn hole in our pocket, if you will. We're going to make sure we do the right thing and do the right acquisitions as we move forward. So very active is the way I would characterize it. We know we've got a great opportunity in front of us. And we're going to make some investments on that side to help accelerate that moving forward.

Michael Halloran -- Baird -- Analyst

Great. Appreciate it. [Indecipherable]

D. Scott Barbour -- President and Chief Executive Officer

Thanks, Michael.

Operator

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

Matthew Bouley -- Barclays -- Analyst

Good morning, everyone. Thanks for taking the questions. Congrats on the results.

D. Scott Barbour -- President and Chief Executive Officer

Hi, Matt.

Matthew Bouley -- Barclays -- Analyst

I guess I'll start out with a question on Infiltrator. 37% growth, kind of similar as the non-res question you just had. But we know resi is in a strong place right now in general, but I'm curious if you have any sense of how that Infiltrator growth may have compared versus sort of the underlying market opportunity, if it's just higher penetration. I don't know if you rolled out some of that portfolio to new products or just customer wins. Just kind of bridge us from the market, so that's 37% growth there.

D. Scott Barbour -- President and Chief Executive Officer

Yeah. That's a good question. And I would say, certainly -- and Number one, Matthew, we're thrilled with the performance of Infiltrator in all respects. Roy and his team continue to do a great job, and we're continuing to invest in them in lots of ways. But I would say I don't know exactly how to break it down, but certainly better than the market, probably twice as good as the market, certainly benefits from secular trends in the Southeast and the mid-South and higher penetration of on-site septic in those areas.

And I think Roy would tell you, and we were talking about this last night. When people are trying to rapidly develop land, it sometimes is hard to get the municipal sewer systems out there soon enough or to those areas soon enough. So that often makes people go to on-site septic because they could -- they can stand up and sell that home faster, if you will. So, there has been some incremental use of on-site septics in the category over the last couple of years. And he believes that, that has accelerated some, given what we've all seen in kind of the -- what I would call -- I call the secular migration to the suburban or light suburban or rural areas. So, there's definitely some market pickup in there.

And then the other piece of that is they have great distribution. I mean very national distribution of those products. So, they're well connected. Wherever the growth might be for that kind of stuff, they're there. And on -- in their primary product, the chamber, has all these advantages of faster installation, smaller footprint, high familiarity with the contractors. So those guys are labor constrained and trying to go fast, I think that just gets it.

And this is something that we saw with that team early on is they've got a flywheel there. And they certainly know how to work that and to gain share. So that's what I would kind of add around the Infiltrator. And we're thrilled on the residential piece of ADS, too. I mean, the programs we've been working. Our high-touch sales model there has been working pretty good for us.

Matthew Bouley -- Barclays -- Analyst

Great. Well, that's helpful. And yes, that business just continues to surprise to the upside. Second one on the margin, since it sounds like you're willing to at least give a little bit of flavor around how you're thinking about calendar '21. So you're guiding to 29%, almost the midpoint for fiscal '21. So as we think about the next leg, are there areas where you can still take cost out of the system? You had a lot of targets you outlined way back at the Investor Day there. Presumably, mix can still be a driver as Infiltrator is strong here, but just -- what are the puts and takes as we think about margins beyond this 29% here?

Scott Cottrill -- Executive Vice President, Chief Financial Officer and Secretary

Let me answer.

D. Scott Barbour -- President and Chief Executive Officer

Cottrill is going to jump in here because he is dying to. But if you go back to that Investor Day and you look at the programs we were talking about in four-wall manufacturing and logistics and transportation. I would say those are on or maybe slightly ahead. And it gained momentum, particularly in the four-wall manufacturing over the last time. And I say that, to your point of -- what you got left to go do? And I think on that day, we said we're going to get into this. We think there's a lot of opportunity that is proven to be true and probably feel more confident today about that than otherwise. And it comes in a lot of different forms. Non-resi procurement work that is going well, productivity, fixed capital investment, some automation things that we've done. And we continue to believe we're in the early, early innings of that game to be played, and so...

Scott Cottrill -- Executive Vice President, Chief Financial Officer and Secretary

The only thing I'd add to that is kind of let's start with that pricing, right? Paradigm we talked about a little bit ago. So, we're going to keep that pricing in front of us, be aggressive on that front, stay in front of any kind of material cost inflation environment we see, not only on input cost, but on transportation, logistics, across the board.

Scott hit it on ops excellence. I think the key takeaway here is we're in the early innings in almost every one of those categories. And we're seeing really nice traction, and we're backing it up with our balance sheet and deploying capital to do that. I'd say the growth -- you can't go without saying that the growth, especially in Infiltrator with their gross margins and EBITDA margins as well as our allied products, that mix of growth really bodes well as we start thinking about margins as we move forward.

On the SG&A side of the house, sure, we've had some temporary savings this year, but that's all factored into how we think about pricing and operational excellence and so forth. So, we don't see that as a big headwind at all as we turn the corner into next year. So bullish on that margin, sustainability and expansion.

Matthew Bouley -- Barclays -- Analyst

Great. Well, thank you both for the comprehensive answers and best of luck.

D. Scott Barbour -- President and Chief Executive Officer

Thank you.

Scott Cottrill -- Executive Vice President, Chief Financial Officer and Secretary

Thanks, Matt.

Operator

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

John Lovallo -- Bank of America -- Analyst

Hi, guys. Thank you for taking my questions as well. Maybe dovetailing off of, Scott, one of your answers to Matt's question. Are you seeing any project delays from builders on the single-family construction side as builders are kind of scrambling to get land and get labor as activity has been so hot?

D. Scott Barbour -- President and Chief Executive Officer

We are certainly out there looking for that. The answer to your question is no. But we also see, as you do, that the land inventory is getting low. And they're running -- they're going to be running into constraints around that. And we've kind of followed the comments this quarter and all those things you guys publish around that. And I wouldn't say we've been slowed down by that, John. I would suspect that where we might run into that, if we do, it will be on the ADS side, and it would be later in the year.

That said, we have incremental gains and relationships to go forward with the national homebuilders. And we have made our guys sensitive to, particularly the more regional guys that it -- you got to be not looking only at the big people that are developing 250 lot land -- new communities, but the guy doing 50 homes or 40 homes and stuff. So that could hit us, hadn't hit us yet, but that's a good point, it could. But I think the incremental, perhaps, we have a chance to offset it because we're not up and planning with every homebuilder in the planet or in the United States.

John Lovallo -- Bank of America -- Analyst

That makes sense. Okay. And then you called out international business, I think, being up 18%, and you mentioned that Canada was up double digits. How did Mexico perform in the quarter?

D. Scott Barbour -- President and Chief Executive Officer

Mexico was up. And we did export some pipe from Mexico into the Southern United States to alleviate -- just help us get some more inventory. I think without that, they were up 1% or 2% or something like that. I kind of think we bottomed there. And our new leadership has got programs very focused around distribution relationships, segment targeting, a lot of our familiar playbook. So, we're -- it's a work in progress. They've done a nice job in Mexico, making that product and giving it to the United States where we could use it. We'll probably do a bit more of that, as we move through the winter months here. And it's going to be -- Tom Waun and I are working it hard, believe me.

John Lovallo -- Bank of America -- Analyst

Okay. And then...

D. Scott Barbour -- President and Chief Executive Officer

But we're really thrilled with Canada. We're really thrilled with Canada. So that's -- have to put in that plug for our Canadian team that has done a really nice job this year.

John Lovallo -- Bank of America -- Analyst

Got you. Okay. And then finally, with more and more chatter around potential infrastructure build at some point. Any updates on your lobbying efforts in Texas and the ability to penetrate that 30- to 60-inch diameter market?

D. Scott Barbour -- President and Chief Executive Officer

So I'll be down there next week to kind of meet with our advocate and some people. And we're progressing according to the timetable that the Texas DOT has given us and the installations that they've given us. We like it to go a little faster, but we are doing what we said we were going to go do in terms of getting those installations done. The nice thing right now is we've seen other pickups in Texas, not necessarily related to the Texas DOT, but I think we've sharpened our game some there over the last couple of years, and we're seeing good growth there right now. It is -- had some tough markets like Houston, but Houston recovered. And so, we're -- I'm anxious to get down there next week and see how things are going.

John Lovallo -- Bank of America -- Analyst

Thanks a lot.

Scott Cottrill -- Executive Vice President, Chief Financial Officer and Secretary

In Texas, a couple of things. We've seen good growth in the residential market. And then while we're working very hard on this Texas DOT initiative, we have made progress in some, call it, more metro area, metro suburban approvals for public infrastructure, and we're starting to see some of those things pay off as well.

John Lovallo -- Bank of America -- Analyst

Perfect. Thanks a lot guys.

D. Scott Barbour -- President and Chief Executive Officer

Thank you.

Operator

Your next question comes from the line of Garik Shmois with Loop.

Garik Shmois -- Loop -- Analyst

Thank you. Congratulations on the great quarter. Just the first question is just curious how sales progressed during the quarter. I don't know if you could give it by month or just more broadly, just given consensus is looking for mid-single-digit growth, and you are so far ahead. And just wondering if the strength was evident right off the bat, or did it build and accelerate as the quarter progressed?

D. Scott Barbour -- President and Chief Executive Officer

So it's a good question. And I would say September, October and until Thanksgiving, we were going pretty darn hard, mainly driven by, yes, the recoveries in the West and the East, but we were going real hard in the agriculture business. I mean, things were flying out of here in the October and November. December seasonally came down as it normally does, but year-over-year was still a good December. So we like the pace throughout the quarter to tell you the truth, particularly with a nice December. December and January, in our business, historically can be pretty tough months. It is for everyone. But we did a nice job in December, and January is good, too.

Garik Shmois -- Loop -- Analyst

Great. Second question is just around the fourth quarter. Are you expecting any abnormal pull forward of sales? I think a year ago, you did have some pull forward of sales. It's more due to COVID and people trying to buy ahead of the uncertainty, but I was just wondering if you're anticipating anything abnormal this summer interval?

D. Scott Barbour -- President and Chief Executive Officer

Yeah, you're right. I think we had 20 -- we said there were $20 million in the fourth quarter that we felt like $10 million was a pull ahead for COVID uncertainty and $10 million was really good weather patterns that benefited the agriculture business. I guess the way it looks right now, I don't think that's going to be that big of a headwind for us. I mean, we could have some really crappy weather like you had in the Northeast and our shipments went down for two days. They bounced back yesterday. We watched that pretty darn closely. So, I don't anticipate a headwind from that, but I could be surprised by really crappy weather or something. The other way I would answer that question is that our implied Q4 guidance that's in our guidance range does not assume any kind of pull aheads into this. As you know, we end here at the end of March. So we're really trying hard not to slow anything here.

Garik Shmois -- Loop -- Analyst

Great. Thanks for that. And just a last question, just a follow-up just around the discussion on organic growth. How that's a main priority of the free cash flow? How should we think about the balance between new investments around new products versus just the need potentially to build out incremental capacity, just given the surge in demand both on the residential and non-residential side? And how should we think about labor inflation in that context moving forward?

D. Scott Barbour -- President and Chief Executive Officer

So, I think there's probably, let's call it, less than 25% [Phonetic] of that $100 million is probably just pure new product type stuff. And probably most of it is incremental capacity, safety, productivity type investments. So, there's the IT things in there and stuff like that. But there are new products we launched that we got to go tool at both Infiltrator and ADS, but it's not the preponderance of our capital spending right now.

Now that said, when we invest, let's say, in a set of tooling, like pipe tooling, we often look at the design, the profiles, the way -- all these kinds of things and try to make incremental improvements in that product as we invest in a new tool, but I wouldn't call that a new product, I would call that an incremental thing. But something that we really work hard on is when we make a tooling or a machine investment, we expect better performance out of that piece of equipment or that investment versus the prior design or the prior iteration of the design or the prior iteration of that machine.

Garik Shmois -- Loop -- Analyst

Great. Thanks, again. Best of luck.

D. Scott Barbour -- President and Chief Executive Officer

All right. Thank you.

Scott Cottrill -- Executive Vice President, Chief Financial Officer and Secretary

Thank you.

Operator

[Operator Instructions] And there are no audio questions. I will now turn the call back to Scott Barbour for closing remarks.

D. Scott Barbour -- President and Chief Executive Officer

Okay. Got it. Thank you, Tammy. And thank you again all for joining. Thank you for the questions today. We always enjoy getting those questions and a chance to elaborate on what's going on. And we're -- like I said, we're really pleased with the quarter and what I would say the momentum we have going forward. We'll continue to focus on health and safety. It's really important right now as well as providing the essential storm water management and on-site septic solutions to our customers and the communities they serve. As the sales ramp-up in this year, we're going to use level loading, building inventory to get ready for the seasonal demands, productivity, new fixed capital. All those things are going to be important for us to execute our strategy as we move into our FY 2022.

Lots of discussion today on mitigating inflation. Scott said it very well several times. We want to be paid fairly for the services we provide. And that's the products and that's the transportation, logistics we do. And I think our team is doing a nice job on that, and we'll continue to be a big focus for all of us there.

I want to lastly just thank our employees. They've really done a fantastic job under a unique set of circumstances. You see it with them when you're out there and you're with them every day and a lot of pride in what they're doing. And so, I certainly appreciate that and the support they're giving us and our customers.

So with that, it's a wrap. We appreciate it, and we will talk to you soon.

Operator

[Operator Closing Remarks]

Duration: 40 minutes

Call participants:

Mike Higgins -- Vice President-Corporate Strategy & Investor Relations

D. Scott Barbour -- President and Chief Executive Officer

Scott Cottrill -- Executive Vice President, Chief Financial Officer and Secretary

Michael Halloran -- Baird -- Analyst

Matthew Bouley -- Barclays -- Analyst

John Lovallo -- Bank of America -- Analyst

Garik Shmois -- Loop -- Analyst

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