Advanced Drainage Systems, Inc. Aktie

Good morning, ladies and gentlemen, and welcome to Advanced Drainage Systems Fourth Quarter and Fiscal Year 2026 Results Conference Call. My name is Tracy, and I'm your 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.

Good morning, everyone. Thanks for joining us today. With me today I have Scott Barbour, our President and CEO; Scott Cottrill, our Chief Financial Officer; and Craig Taylor, President of our Infiltrator business.

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.

I'll now turn the call over to Scott Barbour.

Thank you, Mike, and good morning, everyone. Thank you all for joining us on today's call. We are pleased to close out fiscal year 2026 with strong results, and we have a lot to cover today, including our fourth quarter performance, full year results, an update on the NDS integration and a preview of what lies ahead as we prepare for our upcoming Investor Day. A lot happened in the fourth quarter. Despite the quarter being our most weather-dependent and seasonally variable period, we executed well and delivered results that reflect the strength and breadth of our portfolio.

The diversification across our Allied products, Infiltrator business and the HP pipe products, combined with the continued execution of our market share model allowed us to navigate a challenging demand environment and close the fiscal year on a strong note. Let me touch on a few highlights. As you saw in the press release, following the acquisition of NDS, we updated our reporting segments to Stormwater and wastewater as reflected in the results today. The Stormwater segment contains the legacy ADS business, Pipe and Allied Products as well as acquisitions we have made in the space, NDS, Coltec and Rivervallee Pipe. The wastewater segment contains the legacy Infiltrator business as well as the acquisition of Orenco. Stormwater revenue increased 12%, driven by a 43% increase in Allied Products sales, including the $49 million contribution from the NDS acquisition that closed February 2. On an organic basis, Stormwater sales increased 2% overall with a 12% growth in Allied Products.

Once again, revenue in several highly profitable products grew double digit, including the StormTech retention detention chambers, the NyloPlast capture structures and our water quality product line. These product lines continue to benefit from new product introductions and ongoing customer programs. Pipe revenue decreased 2%, reflecting softness in the residential and infrastructure markets. Agriculture sales increased 30% in the quarter as customers bought ahead of price increases.

Pricing remained stable throughout the quarter and material costs were favorable relative to the prior year. Wastewater revenue increased 4% with strong activity in the Southeast and South. Tank products increased double digits, driven by material conversion, product line expansion and additional distribution. Leach field sales remained resilient and our advanced treatment systems, including Orenco, continued to gain share in both residential and commercial applications. From an end market perspective, sales in our core nonresidential market increased 6% with strength in the West and Midwest.

Sales of Allied Products experienced broad-based growth across the U.S. as we continue to focus on selling the complete package. Sales in the residential end market increased 18%, including the impact from NDS. Excluding NDS, residential sales decreased 1%. Single-family housing continues to face headwinds from affordability and interest rate dynamics in addition to geopolitical uncertainty. Importantly, we continue to see improving trends in the multifamily development.

The Infiltrator core residential business continues to significantly outperform the market, driven by new products and new distribution partners. We remain confident we have the right strategies and portfolio to increase our participation in the residential market as conditions inevitably improve.

Moving to profitability. Adjusted EBITDA increased 6% in the quarter, resulting in an adjusted EBITDA margin of 27.8%. This quarter's resilient margin is a reflection of the favorable growth product mix and price cost as well as operational self-help initiatives and the capital invested over the last several years. Turning to the NDS integration. We are pleased with the progress made since closing the acquisition in February. The NDS team is a strong cultural fit, and we are on track to achieve our integration milestones.

We continue to expect $25 million in annual cost synergies by year 3, and we are increasingly excited about the revenue synergy opportunities as we expand the collective product portfolio across our distribution and retail channels. We look forward to talking about NDS at Investor Day. Regarding the upcoming Investor Day, which will take place on June 18 at our engineering and technology center in Hilliard, Ohio. We are looking forward to sharing updates on our differentiated growth strategy and our resilient profit platform as well as our medium-term financial targets and the payoff from the significant capital we have deployed over the last several years.

We hope to see you all there. Please reach out to the Investor Relations team with any questions about the event. Fiscal year 2026 was a milestone year for ADS, and I'm very proud of the entire organization for how we executed. We closed a highly strategic acquisition of NDS almost entirely with cash on hand, delivered one of our most profitable years in our history, generated significant free cash flow, returned $155 million to shareholders and continue to invest in the capabilities that will define our next phase of growth. We significantly outperformed our 2 largest markets, nonresidential and residential, increasing 8% and 7%, respectively.

These 2 markets represent over 80% of our revenues. The self-help operational initiatives we launched over a year ago are clearly bearing fruit, and our teams executed at a high level despite a challenging demand environment, resulting in the second highest adjusted EBITDA margin in the company's history of 31.6%. As we look into fiscal 2027, overall demand at this point looks similar to fiscal 2026 with a slightly more negative outlook on agriculture and single-family housing.

Demand is very choppy with order patterns shifting as customers try to get orders in ahead of price increases. This could result in an air pocket this summer, though we expect this to normalize overall within the first half of the year. The nonresidential market is modestly more resilient, expected to be flat to up low single digits. Activity in this market is driven by strength in large projects like data centers. We are well positioned to win these jobs due to the solutions package, installation benefits, last mile delivery and the national network that we have, all of which position us to capture a larger portion of the storm water system.

The residential market remains under pressure with interest rates as well as economic and geopolitical uncertainty impacting construction activity. We expect to outperform the market, driven by our sales efforts to work with large national and regional homebuilders, focus on the cross-selling opportunities and capitalize on the growing portions of the market, such as advanced treatment and the multifamily development.

When you stack up our strengths, the scale, product portfolio, go-to-market strategy, installation benefits, logistics capabilities and our ability to invest in the business, people and industry growth, you see the ADS value proposition remains both relevant and powerful. Overall, the long-term outlook for our business remains strong, supported by compelling secular tailwinds driving demand for water management solutions across North America.

Now I'll turn the call over to Scott Cottrill.

Thanks, Scott. Before I get into the details, I want to step back and highlight a few key takeaways from the quarter. We delivered excellent financial performance, exceeding the top end of both our revenue and adjusted EBITDA guidance ranges. We also closed the NDS acquisition in early February, representing a $1 billion investment that strengthens our portfolio and positions us well for long-term growth.

As you saw in our press release, we announced a new segment and reporting structure to better align with how we think about and manage the business. And finally, we fortified the balance sheet through a series of capital structure actions that extended our weighted average maturities to more than 6 years while lowering our weighted average cost of debt by 30 basis points. These actions, combined with our strong cash generation, resulted in year-end leverage of only 1.6x, inclusive of the $1 billion NDS acquisition and most importantly, provides the flexibility and optionality to support our capital allocation priorities in fiscal 2027.

For the fourth quarter, revenue increased 10% to $677 million, including the impact from NDS. On an organic basis, revenue from Allied Products, tanks and residential advanced treatment all increased by double digits, as Scott mentioned. Importantly, we believe our results outpaced the underlying end markets, demonstrating the differentiated growth strategy and resiliency of the NDS business model.

From a profitability perspective, we are very pleased with the 27.8% adjusted EBITDA margin for the fourth quarter. A couple of things I feel worth noting regarding the quarterly results. First, the fourth quarter is the fourth consecutive quarter of volume growth and favorable price cost. Regarding manufacturing and transportation costs, we are seeing significant inflation on diesel and common carrier rates, and we experienced incremental transportation costs related to the strong demand during the quarter, particularly in the West, coupled with increased oil prices and greater macroeconomic uncertainty.

Importantly, we continue to benefit from the capital invested over the last several years in new production lines and automation improvements. Regarding SG&A, the year-over-year increase was driven primarily by the acquisition of NDS as well as incremental compensation expense related to the strong full year results. On Slide 8, we present our free cash flow. For the full fiscal year, we generated $569 million in free cash flow compared to $369 million in the prior year, primarily driven by increased profitability and effective working capital management.

The OBBBA contributed an incremental $35 million of free cash flow benefit in fiscal 2026. Cash from operations for the full year totaled $819 million, representing an 85% conversion of our adjusted EBITDA. In February, we refinanced near-term maturities of our 2027 senior notes and our Term Loan B as well as increased our revolving credit facility to $750 million. Our weighted average cost of debt is now 5.65%, which we view as highly favorable in the current environment, and our weighted average maturities are now over 6 years as compared to 2 years prior to these transactions. We ended the fiscal year with leverage of approximately 1.6x, as I mentioned previously. In addition, in the fourth quarter, we repurchased 720,000 shares of common stock under our existing repurchase authorization.

Moving to Slide 9. Thoughtful capital deployment continues to be a key focus for the management team and the Board, given the strong cash generation of the business. In fiscal 2026, we deployed $1.4 billion of capital with $1.2 billion invested in growth. We spent $250 million of that on capital expenditures with investments focused on executing growth initiatives in key geographies, customer service, productivity and automation initiatives, expanding our production capacity at Infiltrator as well as increasing our recycling capacity in the Southeast.

We also returned $155 million to shareholders through dividends and repurchases, an increase of 29% over the prior year. Today, in a separate press release, we announced an 11% increase in our dividend, demonstrating our ongoing commitment to returning capital to shareholders while also continuing to invest in the growth of the business. Moving on to Slide 10. We are introducing our fiscal year 2027 guidance today. Based on current visibility, backlog of existing orders, our end market outlook and the trends we see entering the fiscal year, including the continued integration of NDS, we are establishing the following guidance ranges for fiscal year 2027.

We expect revenue to be in the range of $3.35 billion to $3.55 billion and adjusted EBITDA to be in the range of $1 billion to $1.50 billion. For guidance purposes, we are assuming significant year-over-year inflationary cost pressure on input material costs as well as transportation costs. We've taken pricing actions to offset these inflationary pressures on a dollar-for-dollar basis. We expect normal revenue seasonality with approximately 55% of revenue in the first half of the year. Quarterly revenue patterns in the first half of the year may be affected by customers trying to buy ahead of anticipated price increases.

This guidance also includes approximately $300 million of revenue from NDS for the full fiscal year. We remain focused on executing our long-term strategic plan to drive consistent long-term growth, margin expansion and free cash flow generation. With that, I will open the call for questions.

Operator, please open the line.

[Operator Instructions] Your first question comes from the line of Mike Halloran with Baird.

So let's start on the guidance and how you guys are thinking about the composition from here. Obviously, Scott, you talked to a bunch of moving pieces as we sit here. Maybe two things, I guess. One, how are you thinking about the sequential revenue dynamics versus normal? I know you just mentioned some prebuy activity. How does that functionally play out? That will be the first question. And then I'll have a follow-up to it.

So was it on the -- Yes. So this is Scott Barbour, Mike. And the question is around how is the first half going to perform kind of sequentially month-by-month or quarter-to-quarter. First half, second half is normally in that 55% to 60% range in the first half, and then you got that 40% to 45% in the second half just based on seasonality.

So we see it lining up largely the same. The only thing as Scott mentioned and I did as well in our remarks, we've had a couple of price increases already announced into the market. We see some prebuying going on here in the first fiscal quarter of our year. So again, do we see that kind of evening out and getting to where we've got our guide for that first half dynamic coming and normalizing is the word I would kind of use by the end of 1H, first half of the year.

Yes, we do. So again, first quarter might be a little bit elevated from what we've seen on a historical basis, but we see that normalizing in Q2 and getting back to that 55% to 60% of the full year in the first half on a revenue performance basis.

No, that makes sense, right? So a little pull forward from 2Q to 1Q, but flattens out. Okay. Then the follow-up is maybe a similar dynamic on the margin side. Given the timing on the pricing and the inflation, the pull forward, does that mean that the fiscal first may be a little compressed on the margin line relative to how that would normally play out and then 2Q, you start getting more balanced out on a margin dollar basis before being more normal from there sequentially in the back half of the year? Is that the thought process on the margin line within the guidance?

I think that's a fair way to look at it, Mike. I think you've got a little bit more of the volume kicking in, in that first quarter based on the pull ahead with the pricing actions we've taken mostly starting to hit in the fiscal second quarter. And again, we've assumed right now that's a dollar-for-dollar basis. So as we move through the year, that's going to be dilutive to margins. I mean, again, it's focusing on the dollars right now and that uncertainty that we're managing. So -- but that's fair to look at it that way as we progress through the year.

Can I add one thing to that, Mike? This is Scott B. Matching those up is really tough as materials and transportation costs, we run a big fleet, uses a lot of diesel every freaking month. So those are tough to match up. And we -- this is based on these things kind of normalizing. But there's -- it's going to be a little choppy. I just want to kind of get that out there. We're on top of it, but it's hard to perfectly time these things on a month or a quarter basis.

That makes sense. But -- and you're saying basically on the dollar side of things, you're covered and relatively neutral. Yes, but it's just the math behind the margins that becomes an optical head, right?

A little bit of SG&A on that fixed cost leverage. But again, that's -- but yes, it's a gross margin dollar for dollar.

I think we talked about this with the Board yesterday. And clearly, we think the right thing to do is get it dollar for dollar, but don't try to pressure the margin on these kind of what we would view as extraordinary escalations driven by these events. in some of our really important input markets. And that's our strategy. That's what we're going to do, and we feel good about that.

And we're willing to kind of work our way through that margin compression optics. And when we've done this before, over the long term, we kind of come out favorable on the long end of that and very similar to how we've done this in the past with, I think, even better tools and positioning than we had before.

Yes. I mean, to Scott's point, we talk a lot about pricing and dollar for dollar, but it's not lost on us that we also have that recycling lever that we can pull on the resin side of the house. We also have the internal fleet versus the external common carrier fleet. So there's a bunch of dynamics and other items that we're obviously levering behind the scenes to work on all of that as well to help mitigate those costs.

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

So apologies, I'm going to keep beating that horse on price cost for a second here. Big topic today. So my question is on your kind of competitive positioning and demand, et cetera. So maybe focusing on the competitive side first. versus your plastic competitors, you just mentioned your vertical integration and recycling capabilities, but then also versus concrete pipe, et cetera, and kind of considering the cost of transportation here.

What are you seeing out there from a competitive perspective? And how do you think that ultimately plays through with your ability to actually get the price you need in the market given this fairly unprecedented level of cost inflation?

All right. Okay, Matt. We'll keep going on price cost. So number one is we're out in the market. We are trying to get ahead of this. The inflation of this magnitude and breadth and speed, if you don't get ahead of it, you're really in bad shape. So we're -- we went to get ahead of that, probably ahead of our competitors in many places.

But we're holding the line and our orders and rate are holding up nicely. We would -- in the -- so that's in general. And as you know, this thing is kind of regional, and it's better behaved in some areas versus others. But I'd say right now versus our competitors, they are experiencing similar inflationary pressures that we are, and I'm thinking about the plastic pipe guys.

As you said, obviously, we use all of our scale of buying in the virgin market and pivoting to the recycled material quite quickly over the last 60 days, honestly, faster than I thought we could. And our team is doing a really nice job, both getting -- procuring the right material and converting the right material. And we have that new asset in Cordell, Georgia ramping up next month. So our timing couldn't be better on this recycling activity, which, again, we believe, makes us extremely competitive against any regional competitor on the plastic pipe.

On the concrete side, they are not facing the same escalations we are. So our value prop has probably compressed a little bit, particularly in certain regions. But we don't think that's a permanent thing. We believe that, that's some of the normal dynamics. But I would recognize that in certain places, that has become much more competitive, our value prop versus the concrete guys. But we'll work our way through that. And we're thinking about other things and products and techniques to get even more competitive against those guys than we have been.

Okay. No, that's perfect. I really appreciate all that color, exactly what I was looking for. So I'll move to another topic. I'm sure there will be more asked on that. But the non-resi end market, so you're guiding that to be modestly positive or flat to up low single digits, excuse me, in the next fiscal year. Sounded like large projects are what's carrying that, but I'm curious if you can kind of just, I guess, unpack that a little bit regionally by vertical, where are you seeing more of that strength?

You highlighted data center a couple of times. How much of that is kind of carrying the load here versus other areas that might still be more choppy on the non-resi side?

So I'm going to say a few words, Matt, and then I'll hand it over to Mike Higgins. But in general, our biggest focus and strength is on that nonres market from the ADS legacy business. In those Allied products, our coverage, the HP products in there, our I12, I mean, we just have a great product line for a wide, wide breadth of nonresidential. And I think that's what we've been seeing over the last year or so is that we are consistently outperforming in that market. So and it's across lots of kind of jobs. I'll turn it over to Mike. He has a lot of insights around that kind of by segment and geography.

Yes. I mean, Matt, you hit on the data centers. That's obviously a lot of activity there. Again, kind of a small part of what we do. But what we've seen all year from answering the project type or project segment thing first is we've just seen pretty solid growth in activity in just kind of general purpose commercial construction, institutional construction has been pretty solid.

When you look at geographically for the year, we had probably 35-plus states that were showing positive growth in nonres. Again, there was parts of the Midwest that were really good. We still continue to see good nonresidential growth in those states that we have a lot of focus on Florida, Virginia, North Carolina, Texas and California were very positive for the year as well. And Scott touched on this a little bit.

That's our best opportunity to sell the complete package, right? 2/3 of our Allied products go into that nonresidential end market. And as the year has evolved, I think our sales team and our product management team has done a really nice job of really just increasing our focus on what we call attachment, managing the project funnel, being upfront, exploiting is a little bit of a strong word, but exploiting our position in the marketplace, our reach in the engineering firms the project resource center that we have that aids these engineers and designs and makes things very simple for them with our tools and our other programs.

So I think it's just a very high level of execution on that. It's not easy. The market is not great. But you know what I mean, but the -- where those opportunities are, our sales force is very nimble and flexible and can go find them and can execute on that. And that's what you saw in those results this year.

Your next question comes from the line of Bryan Blair with Oppenheimer.

So level set a little bit on the top line outlook. I think you had mentioned $300 million in NDS contribution. With regard to the recast segments, how should we think of organic storm water and wastewater growth for fiscal '27?

Yes. The way, Bryan, this is Scott. The way I would talk to it or at the midpoint of our guide is roughly a flat end market based on the end market dynamic and what we're seeing out there, basically flat on the volume side of the house. Price cost, we've talked about kind of having the pricing in the market to offset the cost -- inflationary cost pressures we're seeing. And then you got the $300 million for the full year for NDS. So that's the way to kind of get to that $3.45 billion at the midpoint of our revenue guide.

Okay. Understood. It sounds like NDS integration is tracking well. You reiterated confidence in $25 million in cost synergies by year 3. What should we assume for fiscal '27 synergies? And then perhaps more importantly, maybe you can speak to some of the cross-selling opportunities that are starting to be realized.

Well, I'm going to let Cottrill answer the what in the plan. I'm not allowed to answer those, Bryan.

The cross-selling, we are going to talk a lot about that at the Investor Day. We think that's a great topic to talk about in the Investor Day for the longer-term plan. What I would just kind of parenthetically add to that is we get more excited about the cross-selling as we go forward in time over these last couple of months. They're not all easy to get to quickly, but they're there. And it's channel, it's product line, it's sales force. It's a lot of good things. It's just not one dimensional. But then I'll hand over the other one to Scott.

Yes. I'll say right now, we're, a, really excited, like Scott said on the call about the opportunities in front of us. B, we're ahead of the acquisition model and where we saw the phasing over those 3 years. Again, cross-selling is becoming one of those things that's really, as Scott just mentioned, coming out is an even bigger opportunity than what we had thought going into it. So I'm not going to give you a dollar amount.

All I'll tell you is that in the first year of that 3-year plan, it was basically a back-end year 2, year 3 kind of ramp, if you will, to get to that run rate synergy by year 3. So we didn't assume a lot here in the first full year, but I'll tell you that we're well ahead of that. So that's the way I would respond to that question.

Your next question comes from the line of Jeff Hammond with KeyBanc Capital Markets.

Just on -- I think you said wastewater and Stormwater, you think flat volumes. And I guess wastewater being heavily res and down to mid- to high single market, pretty impressive. Can you just talk about, again, what's driving the outgrowth there? And then I think you mentioned in the prepared remarks about an air pocket potentially in that resi end market. Maybe just expand on that.

So let me take the air pocket first, and I'm going to hand over to Craig Taylor, who runs the Infiltrator business in that wastewater segment for us to answer kind of what that outgrowth is. But the air pocket is, Jeff, just simply people buying ahead of these pricing -- announced price increases. We're limiting that. We're managing that. That's not an open-ended thing, but it's not unfamiliar behavior of our customers in inflationary times or ahead of price increases.

We really -- what we expect is Q1 to be a little heavy and bountiful from a volume standpoint, but we expect that to correct itself in the second quarter. And this guidance, this plan, our discussion really says that it's all normalized within the first half of the year versus the second half of the year, which is usually how we guide is first half, second half revenue.

But I'm just trying to get the marker out there with you guys that if we -- if the volume and the sales are big or above expectations in Q1, there's an air pocket out there for sure. And I just don't want to get -- I've been telling the Board and then preparing for today, I made it pretty clear. I wanted to get this out there with you all, so you're not surprised. So that's really the wrap on that part of the remarks, Jeff. Now Craig can tell you how we're outperforming the market in the residential really driven by his business.

Jeff, yes, the wastewater business is going to be challenged on the residential side, but we've had a really good run here with our new products that we've introduced into the market, specifically around our tanks business and then also around our advanced treatment systems, too. The tanks, we've expanded the product category. We've been able to take market share there.

And then on the advanced treatment systems, again, with the Orenco acquisition and the Infiltrator, we've put that together. We're attacking the advanced treatment markets and picking up some pretty good share there. Also, we've been able to get more distribution points. for our tanks out in the market. And this has really helped offset that slowdown in the residential market for our business right now, but we see the new products continue to provide some growth moving forward.

Bob, we just add one thing, a couple of things to that, that very good -- they had -- Infiltrator had very great spread or distribution points in leach field products, the traditional. And as they've introduced the tanks and expanded the number of displacements or SKUs in that offering, it's really been able to get into the additional distribution points.

So think about wherever we sell the leach field, we want to be selling a tank, and we're still relatively underpenetrated on that. So that, along with these advanced treatment products and an intense focus on getting the regulatory side of that lined up, which they do very, very well. I think that's why you're seeing the beat versus the market there. I mean it's the scale, it's their obvious technology prowess and those new products kind of just driving through that market left and right.

Okay. Great. And then on the balance sheet is in pretty good shape despite the acquisition. I know you were kind of protecting the balance sheet ahead of that NDS deal. But stock really taking a hit around this inflation concern. Just how are you thinking about kind of the lean on buybacks versus maybe what the pipeline looks like here in the near term?

So I'll say a few words. I think Cottrill will want to chime in on this as well, Jeff. But -- so you were right. We conserved cash ahead of that deal, practically paid all cash for it. I knew that would give a high level of certainty to get the deal done. We got a buyback authorized with the Board shortly after that.

We weren't immediately exercising on that. But in February, when this conflict began and our stock went down with the Board, we went and authorized that, and we exhausted that $200 million here recently. We'll go back in and try to use our balance sheet to do that prudently while maintaining the right level of liquidity to run our business. We're going to consume some working capital this year, as our receivables go up, as our inventory costs go up, we know that and let that alarm anyone.

So we're kind of planning and budgeting for that. And even with that, to repurchase and doing that, we really got room to go do something if we really want to -- if the right one came up. You add to that, Scott?

I think you did a great job summarizing it. The only thing I'd say is right now, we got to digest NDS, which we're focused on. But to Scott's point, if one of those strategic assets becomes available, we've got the financial flexibility to do more than consider that.

It would be more manageable.

Yes, that would be what we'd have to work on. But we've got the balance sheet, to your point, where it needs to be. Working capital as a percent of sales came in slightly below the 20% target that we have at the end of '26. We've got that going up to about 21% at the end of fiscal '27 just based on the inflationary cost pressures. Again, we saw the same activity in '21, '22. So we kind of know what happens to the balance sheet.

We know how to manage the balance sheet. We have a great S&OP process. NDS has a very active working capital management program underway right now, significant opportunity to bring that down as part of our synergy program. Our synergy programs were in, yes, are all on the revenue and EBITDA side. Mostly they are, for sure.

But we've got a bunch going on, on the working capital side as well and the cash flow generation. So you'll see us bring that down as well and manage it. So to Scott's point, we target 2x levered in uncertain times and with the macroeconomic uncertainty, the end markets where they are, we'll be prudent. So we'll target staying below the 2 right now. We're at 1.6x, as we mentioned. but we'll manage that actively. And we see it as a really advantage of the company and where we can deploy that capital. So we'll keep managing that as we go forward.

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

You've Matt Johnson here on for John. Appreciate the time. I guess, could you guys just talk a little bit about your ability to flex up recycled resin right now? I guess kind of where does your recycled usage sit today? How quickly can you ramp that up? And then also just any color you guys can give on what the cost spread between virgin and recycled looks like today?

So I'm going to let Scott Cottrill answer the virgin -- when he's got in there, like I said, I'm not allowed to answer this question.

So what you saw in '26 is we love our recycling program. We see a lot of advantages. It's usually that 15% to 20% benefit, but that can invert at times. And what we saw in '26 is it was a much more friendly virgin resin market for us. So you saw us toggle a little bit more towards the virgin and the recycled side of the house. What you see us now doing is toggling back to the recycled resin.

The other thing I'll say is we're also putting the cash flow and the balance sheet to work. We have a significant expansion in our recycling capacity and capability going on in the Southeast U.S. right now, putting that closer to our facilities in that region, which makes a lot of sense on the transportation side and conversion side of the house. So again, we have a lot of capability, capacity and ability and agility to toggle back the recycling pretty quick. And we're already in the middle of doing that right now.

Yes. So we won't disclose kind of the percentage recycled that we're going to. We will acknowledge that the prior year that we just closed was much lower than normal because of the pricing dynamics in the market at the time. That said, this recycling activity for us is a long-term operational component of the company. It really bears a lot of fruit in these inflationary times like this and mitigates a lot of cost. And so we're flexing that pretty hard.

And in fact, as I said earlier, we're flexing it hard. The team is going faster than I thought we would be able to do. We're also able to get the material into our recycling facilities. In other words, there's enough material out there to get. That's always -- you got to work that very, very hard. So I think it's a unique competitive advantage of the company that we're going to press the floor on right now.

Appreciate that, guys. And I guess just kind of bigger picture here. I know you guys have, I would say, a pretty long history of navigating through different inflationary environments. I think the way you guys typically talk about it is you put through price and then you hold on to the majority of that even as costs kind of normalize. But I guess, do you guys see that playing out any differently this time around? Or I guess asked differently, does the softer demand environment right now make that more challenging to do?

That's a good question. And certainly, that is a factor. I think the way you overcome some of that softer demand is selling the package of products that we have, making sure we're using the scale of the distribution that we have across both the wastewater and the storm water businesses. Will the dynamics on the other end, as you suggest, play out perhaps a little differently than the past because of competitive intensity? Maybe, maybe not.

It will be really regional and local if it does. It won't be a nationwide outbreak type thing. But I feel pretty good about our tools to go and work that on the other side. I feel pretty confident about the value proposition we have versus our competitors on the other side of this. So we'll see how it plays out. I appreciate the question.

I understand where you're going. But it's not just enough to say we've done this before, we know how to do it. I think it is more -- we've done it before. We have a playbook. We have tools, we have experience. We acknowledge that it could be a little different on the other side, but I would never bet against us to be able to understand and adjust to that accordingly in a very profitable manner.

Your next question comes from the line of Collin Verron with Deutsche Bank.

I guess I just wanted to start on one of the other levers that you talked about other than recycling was on the transportation side. You made a comment about internal fleet versus common carrier exposure. Can you just sort of help us understand sort of your ability to flex that and kind of what the benefit of that could be from a dollar standpoint?

So again, Scott Barbour, good question on our logistics.

We are an ultimate last mile carrier with our fleet to our trade deliveries. And anything within a certain mileage of our factories and distribution centers, we deliver on that fleet.

It's roughly 70% of our revenue for the legacy business, the ADS business. And what -- here's what I think and that why this is the right long-term investment in inflationary -- high inflationary transportation times where both diesel and the rate, in other words, there's 2 components on common carriers. It's the rate they charge you to carry, and that's a supply and demand and then it's the cost of diesel to operate that.

It also can be their wages of drivers, but it's mainly the diesel. Right now, both rate and diesel are accelerating quickly. On my private fleet, I really only have diesel accelerating. So I've become much more competitive versus common carriers in my fleet.

Now what does that mean? That means I can probably expand my radius of delivery from my points to make myself more competitive against competitors that are largely on common carrier, not last-mile delivery like we have. And again, part of our scale, our balance sheet, all those things we've done over a long period of time to create that kind of thing. So this is the time when these kinds of -- in these inflationary times, on the logistics, it's our fleet inflates at a lower rate, basically just on the diesel.

And on the recycling, where we have an additional tool versus the virgin material buy to mitigate cost. These kinds of times really show the long term -- the benefit of the long-term investments the company has made and how it positions us in these more difficult periods. So that's why I'm so confident we win on the other side based on that other question. I mean, because we have these tools and insights that I think are really unique in this industry.

Great. That's really helpful color. And I guess after the NDS acquisition and sort of your portfolio with Infiltrator, I guess, is there any way to think about sort of how you guys look at the end markets and your ability to outperform? Is there a category or an end market that you guys expect to see the biggest share gains? I'm looking at that residential assumption being down the most here, but like given your portfolio or your expanded portfolio, is the opportunity for share gains really in that resi market? Is it really across the board? I'd just be curious as to how you guys think about the puts and takes on the outperformance within the different end markets.

I think we probably have more opportunity in residential. Because that's really where NDS is stronger. We have our strength in Infiltrator in residential kind of participation and their growth. You kind of see where they're growing in residential. The nature of the 2 are a little different. Infiltrator is more new construction, 1/3 R&R.

NDS kind of flips that. But there's no doubt we've gotten bigger in residential. Our legacy business relatively underpenetrated in residential. We think this might give us a few more insights there that cross-selling comes in play more on the residential. However, on the nonresidential side, there are some great products NDS has that we do not have for our package solutions package that we sell basically into these projects. Think of these channel drains in particular, those will be a very nice addition to our product lines. So I think to answer your question, maybe more on the residential than the nonresidential, both have runway.

Your next question comes from the line of Trey Grooms with Stephens.

This is Ethan on for Trey. You briefly touched in the prepared remarks on maybe leveraging SG&A a little bit to mitigate some of that COGS inflation. Any more color on the initiatives here? I know you've previously guided to SG&A as a percent of sales in the past. So if you can provide any color on what guide assumes from an SG&A standpoint would be great.

Yes. I mean, again, the SG&A for this past year has a lot of moving pieces to it. But as you think through next year, I would guide you to use kind of a 14% SG&A as a percent of revenue kind of a number. We're getting back to kind of a normalized number for us as to where we go. So again, you've got NDS coming in on a full year.

So obviously, that's incremental increase that you've got going on there. But then you've got the initiatives that we all have here that we have every year on managing our costs all the way from T&E and everything else that we put into place. We do a really good job, I think, of putting -- shining a light on it in the different cost centers. in managing that cost bucket really well. But we also know that we have to invest for the future.

So we do that to make sure that we're supporting the long-term growth and strategic initiatives of the company. So there's always going to be some dollar increase there. But in a year like this year coming up and we look at that revenue growth due to this price/cost dynamic that's happening, we should expect to get some real nice leverage on that SG&A fixed cost line. So going down to about 14% from the 15% plus we were this past year is the way I think about it.

Right. Right. Got it. That's all very clear. And maybe switching gears to -- just making sure we understand the assumptions around the volume guide. The guide assumes volume flat. Obviously, your performance has been trending above this rate, and you still expect to outperform the market, but there's a lot of moving pieces, right, because of the customer buying ahead of the price increases.

And you also made comments around some potential regional compression of your value prop relative to concrete pipes. So I guess my question is, is this implied deceleration in volume more a reflection of what you're seeing on the ground in terms of underlying demand, perhaps in response to these price increases or just some understandable conservatism on the volume outlook?

I think -- this is Scott Barbour. I think our conservatism on the volume is really related to the market and the end market and demand. And if you recall, I said nonres, we think it will be more of the same. Agriculture will be a little compressed year-over-year and the residential, particularly on the pipe side, will be compressed year-over-year because land development projects are slowing down. There is no volume compression due to competitive activity. Ethan, you're correct, we do think these dynamics will happen in the market, and we will meet what we got to go do to get the business that we want on a local basis. So it's more the end market behavior.

Got it. That's very clear. And yes, your ability to outperform the market in this environment is definitely encouraging.

There are no further questions at this time. I will turn the call back to Scott Barboyou're for closing remarks.

Thanks. I appreciate it, and I appreciate the questions and the quality of the questions. We probably went a little deeper than we normally do on some of those. But as many of you said, there are a lot of moving pieces right now. And I just don't want to have any surprises as we go through the year as different things are kind of emerging. And so that's kind of why we went a little deeper than we normally would.

Allison prepared us with like 3 pages of Q&A for this. But we're just trying to let you know what's going on. We feel good about this plan. We feel good about the year we closed. We feel good about this plan. We know it's not going to be easy. But like I said earlier, the tools that we have the experience, the footing of the company in the broadest possible way are, I think, a lot better today than they were when we encountered other environments like this, and we're very confident of that. So we appreciate you all coming in today into the call. We look forward to some discussions later on. And let's have a nice memorial today -- a safe and enjoyable Memorial Day weekend. Thanks.

This concludes today's call. Thank you for attending. You may now disconnect.

Good morning, ladies and gentlemen, and welcome to Advanced Drainage Systems Third Quarter of Fiscal Year 2026 Results Conference Call. My name is Ellen, and I am your 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.

Good morning, everybody. Thanks for joining us today. With me today, I have Scott Barbour, our President and CEO; Scott Cottrill, our CFO; and Craig Taylor, President of our Infiltrator business.

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.

I'll now turn the call over to Scott Barbour.

Thank you, Mike, and good morning, everyone. Thank you all for joining us on today's call. We are excited to talk to you today and have a lot to cover, including the strong results we delivered in a challenging market environment, the acquisition of NDS that closed on Monday and other business updates.

Let me start with the third quarter results. We outperformed the market again this quarter through the Infiltrator business, the Allied Products portfolio and HP Pipe sales as we continue to drive the market share model, introduce new products, distribution and customer programs. These strategic priorities continue to help us achieve growth in the mixed demand environment we see today and reflect ADS' strategy to prioritize higher growth, higher-margin Allied and Infiltrator products that strengthen the resiliency in our profitability. This resulted in one of the most profitable third quarters in our history with a 30.2% adjusted EBITDA margin.

Let me touch on a few highlights. Allied Product sales increased 8% and with growth in several key products, including the StormTech storage chambers, the Nyloplast capture structures and the water quality products, all of which benefited from new products introduced over the last year. Infiltrator revenue increased 2% with good activity in the Southeast and the South. The [indiscernible] acquisition is now fully lapped and its impact is embedded in our reported growth. Growth in tanks continues to be driven by conversion, product line expansion and additional distribution. [ Leach ] field sales remained resilient despite the market sluggishness and advanced treatment systems continue to gain share in residential due to new product launches and the growth in commercial systems.

Pipe revenue was down slightly with growth in the HP Pipe products being offset by weaker sales into the residential and infrastructure markets. Importantly, pricing remained stable and materials are favorable compared to the prior year.

From an end market perspective, sales in our core nonresidential market increased 5% with growth driven by sales in the Southeast, Midwest and up the Atlantic Coast into the Northeast. Based on market indicators we follow, we are updating our end-market demand forecast for the nonresidential market to down low to mid-single digits compared to the previous outlook of flat to down low single digits. In spite of a challenging demand environment, ADS' third quarter performance highlights the strength and balance of our portfolio and the execution of the sales team on selling the high-growth products we continue to highlight, HP Pipe and the Allied products.

Sales in the residential end market were down slightly as it remains under pressure. However, the Infiltrator core residential business continues to significantly outperform the market due to new products and distribution. In addition, for the third quarter in a row, Allied Product sales increased in the residential market, driven by the multifamily construction activity. Single-family residential land development activity was better in the Atlantic Coast and Southeast, but the DIY channel continues to experience significant weakness. Based on our performance in the current end market, which was down high single digits, we are confident that we have the right strategies, the right product portfolio and the go-to-market model to increase participation in the residential market, and we will benefit as that market inevitably recovers.

Moving to profitability. Adjusted EBITDA increased 9% despite the flat revenue base resulting in a 250 basis point increase in the adjusted EBITDA margin to 30.2%. Profitability increased across all facets of the business, including Pipe, Allied Products and Infiltrator due in part to the capital invested over the last several years and the cost improvement programs we started over a year ago. The sales team has also done an excellent job strengthening the product mix as well as managing a challenging end market environment to achieve favorable price-cost in this period.

We are excited to have closed the NDS acquisition on Monday of this week. NDS' products are highly complementary to ADS' stormwater capture portfolio and enhance our offering in both the distribution and retail channels. We now operate the three most relevant brands in stormwater and wastewater management, Advanced Drainage Systems, Infiltrator and NDS. The portfolio of products available across these brands is the largest and broadest in the industry which gives us unmatched ability to meet customer needs across applications and end markets. We are in the early days of integration, and we look forward to sharing more about the business and our synergy plan at our Investor Day this summer.

And on that note, I'm pleased to share the date for ADS' third Investor Day, June 18, 2026. Management will host a presentation at ADS' Engineering and Technology Center in Columbus, Ohio, followed by a tour for in-person guests. Invitations will go out in the coming months. But at this event, you can expect us to cover growth priorities and updates to our key sales strategies, a deeper look at acquisitions, particularly of NDS and Onrenco, the resiliency of our profitability, pay off from the capital deployed over the last several years as well as the next capital programs we will invest in going forward and, of course, new medium-term financial targets. We look forward to providing the business updates and showing off the Engineering and Technology Center, the largest storm water research facility in the world, which will drive innovation for many years to come. If you have questions about the event, please reach out to our Investor Relations team.

To summarize, we continue to execute effectively in a challenging environment. Our self-help operational initiatives continue to bear fruit, as demonstrated by the profitability reported today. The outperformance year-to-date is driven by strong execution, and I'm very proud of the team for doing so in a challenging environment.

When you stack up our strengths, the scale, the product portfolio, our go-to-market strategy and the ability to invest in our business, our people and the industry's growth, you can see ADS' value proposition remains both relevant and powerful. While we navigate this near-term environment, we will do so with an eye toward the future. We remain firmly committed to our long-term vision and we'll continue investing in the capabilities that will position us for the future success. Overall, the long-term outlook for our business remains strong, supported by compelling secular tailwinds driving demand for water management solutions across North America.

Now I'll turn the call over to Scott Cottrill.

Thanks, Scott. Today, my comments will focus on cash flow, capital allocation and our updated guidance. Jumping to Slide 7. I'd like to start by highlighting the fact that year-to-date, we generated $779 million in cash from operations, converting more than 100% of our adjusted EBITDA into cash. Year-over-year, cash flow from operations increased $239 million or 44%, driven by effective working capital management, increased profitability and lower cash taxes, primarily due to the benefits of the OBBBA. We ended the year with over $1 billion in cash and a 0.5 turn of net leverage.

Turning to Slide 8. We highlight our disciplined approach to capital allocation over the last several years. Approximately 70% of total capital deployed from fiscal 2020 to 2026 was dedicated to growing the business through capital expenditures and strategic acquisitions. This reflects our conviction in the long-term demand outlook across our end markets and our confidence in the returns generated from expanding capacity, innovation and new product development as well as continued automation and productivity improvements. The benefit of our balanced approach to capital allocation as well as our strong commercial execution over this period of time is evident in the growth and profitability of the business we experienced.

In fiscal 2019, we were a $1 billion revenue company with an adjusted EBITDA margin in the mid-teens. Today, we're generating approximately $3 billion in revenue and operating at an adjusted EBITDA margin north of 31%, which is top quartile in the industry.

In addition, because of the strong cash generation profile of the business, we were able to fund the NDS acquisition this week almost entirely with cash on hand. Post closing, our leverage is now approximately 1.5x and as well within our guardrails of 1 to 2x. It is also worth mentioning, we expect to access the capital markets this year due to some near-term maturities.

In addition, today, we announced a new $1 billion stock repurchase authorization bringing the total authorization to $1.148 billion. This authorization gives us the flexibility to execute the program over time while still prioritizing organic investment opportunities we see as the lowest risk and highest return use of capital as well as strategic M&A.

Finally, on Slide 9. Based on our performance to date, current visibility, backlog of existing orders and trends, we updated our fiscal 2026 guidance ranges today. We increased our fiscal year '26 revenue guidance to a midpoint of $3.015 billion and adjusted EBITDA to a midpoint of $945 million. The adjusted EBITDA margin is expected to be between 31.1% and 31.6%, up 50 to 100 bps versus the prior year. This guidance includes approximately $40 million of revenue from the NDS acquisition and an approximate 20% EBITDA margin.

The fourth quarter is our most variable quarter because of the impact of weather on construction. Winter storm [ Fern ] and the adverse weather most of the U.S. has experienced over the past 2 weeks is a great example of this. We have included the anticipated impact of these storms in the updated guidance ranges we announced today. We remain focused on executing our long-term strategic plan to drive consistent long-term growth, margin expansion and free cash flow generation.

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

[Operator Instructions] Our first question comes from the line of Matthew Bouley with Barclays.

So just one on -- here on the nonresidential side because I noticed you lowered your end market guide there. Correct me if I'm wrong, but it looks like you increased your overall revenue guidance by seemingly more than just what NDS may be contributing. So my question is, if that's kind of more of a mark-to-market on what's already happened in the first 9 months of the year in nonresidential? Or are you seeing something in your orders in backlog? And obviously, you just mentioned the storms regarding the fourth quarter that perhaps maybe a little bit more choppy in nonresidential than what you previously thought.

All right. So Matt, Scott Barbour. Nice to hear you. Thank you for the question. So a little bit to unpack in there. I think the beat, the raise, we kind of gave you the beat, raised a little bit, then gave you to NDS. And I think the raise a little bit is reflective of good performance, particularly of our Allied Products and the HP Pipe in the nonresidential segment. As you know, we're really scaled in that with -- in a lot of our product lines and our go-to-market is tuned for that nonresidential market. So we think we're gaining, winning more than our fair share of the projects that are out there with good products, good pursuit.

The storm that you mentioned, yes, pretty darn disruptive as you can imagine for us. So as a result of that, we took some of that into account by widening our range because this is a highly variable quarter for us. So we wanted to make sure that we gave ourselves enough room in the range. But make no mistake that, that storm is going to make this quarter a bit choppier for everyone in kind of that segment. You don't dig a lot of holes and put pipe in it, which is -- these kind of temperatures kind of in the Midwest and the North.

Okay. That's perfect. Yes. Great. Great color. So then, I guess, second one, I mean, stepping back a little bit, as you alluded to, taking share, a lot of new products in Allied. I mean it sounds like it's contributing everywhere across Allied. Same thing in Infiltrator and expanding product lines.

So my question is, now that you're kind of, I guess, seasoning this new engineering center and clearly, a lot of these projects -- products are getting to market quicker. What does the kind of future pipeline look like? So any sort of color on what that incremental contribution may be today from these new products? And then what are you kind of looking at around the next 12, 24 months around kind of additional products coming to market?

Well, we're not going to give you all the great stuff we're going to talk about in June today. But I would tell you that I think what -- the words you used are good. We're seasoning and getting better in our pace of innovation, both Infiltrator, Craig is with us today and at ADS. And I would say, right now, when we look at just kind of results over the last quarter or 6 months, I mean, it's tens and tens of millions of dollars of revenue that these projects that we've just engineered in the last couple of years are contributing, which moves that needle to growth for these very challenging markets.

And that would be in the active treatment products that Craig has been launching in Infiltrator, the new tank products that he's launched that we've invested capital in to do, some new StormTech products, which are really exceeding expectations and some new Nyloplast products. And in the water quality products, the new filtration -- I mean, the new separator and the new biofiltration. When you add all that up, Matt, it's literally tens and tens and tens of millions of dollars that are being contributed right now, and we would see that accelerating as we get better at our pace of commercialization of those new products.

Our next question comes from John Lovallo with UBS.

The first one is, will NDS be broken out as a separate segment or will it flow through the current segments? And what is the cadence of that $25 million of annual cost synergies that we should expect?

John, it's Scott Cottrill here. So it will be part of the Allied & Other segment. So that's where we'll have it right now, and that's where we'll put it. The $25 million of cost run rate synergies by year 3. Year 1 will be more of kind of the investments and the beginning of the integration activity, and then you'll see it kind of ramp between year 2 and year 3.

And we'll talk about that in June. We'll talk about that.

Okay. Understood. And then it looks like you guys raised the CapEx outlook by about $40 million at the midpoint. Is this [indiscernible] related? Or is something else driving this?

No, not like [indiscernible] at all. We're constantly moving and optimizing things within the network for sure. But this is just the timing of when the CapEx spend and assets are being put in service, so timing.

I would say, timing in our -- this is Scott B, John, just our continued belief when we can pull those things in and get the impact sooner, we're going to do it.

Yes. The bonus depreciation really helps with those...

We had our eye on that as well.

Our next question comes from Bryan Blair with Oppenheimer.

Having [indiscernible] for a bit over a year now, maybe offer a little more color on integration phasing, the progression of the deal model, where margins are now? And if there's been any change to the 1,000 basis point expansion target that your team had laid out, I'm sure we'll get more detail on this in June, but the highlights would be great.

Bryan, this is Craig. The acquisition of [indiscernible] is going well with the integration of the team members into Infiltrator. We've really combined the commercial side of the business right now with the Infiltrator side. And the teams are coming together. There's a lot of projects that are out in the market right now we're quoting on and working towards both the Infiltrator product and [indiscernible] product are being offered up, and that's helping towards the growth of the business as we move forward.

From a margin standpoint, it's what we were planning. There's some synergies that we've laid out. We're working towards those synergies. Those synergies are doing well. It's actually exceeding a little bit of our expectations, ahead of the plan right now. And working on that margin improvement that you had mentioned, 1,000 basis points. So acquisition is going well, the integration of the team members, the growth expectations and the synergies.

And I would add the safety performance has been really good.

Yes. An 80% reduction in our TRIR era, which is our recordable incident rate since we've acquired the company, which is outstanding.

This is Scott -- Scott Barbour, the outstanding safety performance, which was a very early focus of Craig and his team out there, and we're very excited that it's ahead of plan on the synergy plan and the profitability piece. But boy, the team there, [indiscernible] grabbed our safety program and implemented things quickly with a lot of support from the Infiltrator folks, and Craig has done a great job of kind of cycling his senior managers out there through it. And we will follow very similar playbooks as we have with Infiltrator, [indiscernible] as we move into this space with NDS. And I'll be out there next week and looking forward to being out there.

Okay. That's all great to hear. And then curious if you could speak to infrastructure project visibility. The -- your team has faced pretty difficult comp, [indiscernible] on a trailing basis and there are some administrative uncertainties that impacted project flow, specifically IIJA funded projects there. It seems like within the transportation verticals where you have meaningful exposure, the pipeline is is resetting, there's more optimism looking through calendar '26, even into '27. Wondering if that's showing up in what your team tracks on a pipeline basis?

Scott Barbour, again. I would say the things we track and look at for infrastructure, the activity is better from a quoting perspective. And the visibility continues to get better on that.

That said, it's choppy. Our win rate needs to be better in that segment. It's not like we're not finding and seeing and looking for things, we're just -- frankly, it's competitive. So things that have kind of moved through from that we've already kind of had ordered and sold over the past year that made some of our comps difficult versus prior year were places where we had very high participation, particularly around some of our Allied Products like airports and rail and things like that. But when we get into the road and highway, we're good in some states, we're not good in some states. And that has hurt our participation there.

That said, we're we have visibility. We're in there pitching. And the -- actually, our orders are slightly better right now in that category than they were. So we will remain pretty focused on gaining share there.

I forgot, you kind of -- I think you maybe alluded to it in the question was that government shutdown probably didn't help. Through those 38 or 40 days of the government shutdown, we did see some friction created, particularly in that kind of work and some other type of work where there was just no one there to release an order or take a delivery to tell you the truth.

Our next question comes from Garik Shmois of Loop Capital Markets.

Just on nonresidential. Just wondering if you can go into a little bit more detail on what led to the reduction in the end market guidance. Is there anything that you're seeing specific to any regions or any categories that is leading to the move to down low to mid-single digit declines?

Garik, Mike Higgins. I think Matt made the comment in his question about that kind of mark-to-market. And that's -- I would kind of agree with that. That's just more of an update. Hey, we're through 9 months of the year. We have a pretty good idea of what it's going to look like. And so kind of on the lower end, maybe a little -- the end market activity has been a little weaker than we thought.

Looking forward, I would not take that move as a signal that we think the end market is deteriorating or getting any worse. It just kind of looks like more of the same as we've been telling you guys all year, highly variable by geography. And then when you get into -- nonresidential is a very broad segment. When you get in there, there are certain project types, data centers always come up that are -- continue to be strong. We've seen improvement in warehouse activity. Our sales are now up for the fiscal year, which is good. That had been a decliner over the past couple of years. And depending on the geography, we are seeing fairly solid activity and just kind of your general purpose kind of commercial type construction. Think of the things we always talk about, horizontal, low-rise-type construction is where we do best in that nonresidential segment.

Okay. I wanted to ask on NDS now that it's closed. I wanted to be clear on how much you're incorporating in the 4Q guide with respect to sales? And if there's any EBITDA contribution?

And then also if you could speak to what we should be thinking about for calendar '26. We're not in the fiscal '27 guidance range just yet. But any additional handholding on the expected contribution from the recently closed acquisition?

Yes. Like we said on the call, the NDS in the current guide is about $40 million of revenue, had a 20% EBITDA margin. So that's how we've incorporated it for the last 2 months of our fiscal year ending here at March 31.

As to next year, again, we'll get into a lot more detail on that at the Investor Day. But I would encourage you to go back and look at the 8-K that we filed a couple of months ago. And in there, we gave a little bit of detail on kind of what their performance looks like. So I think it will give you kind of the guardrails to start thinking about it and how to model it.

Our next question comes from Trey Grooms with Stephens.

So with the $1 billion stock repurchase authorization, it's good to see that. And now with the completion of or the closing of the deal, the NDS deal, how are you thinking about balancing buying back stock versus future M&A? And now with the integration -- NDS integration, probably going into full swing, I would think here in short order, maybe you could talk about your appetite for deals here kind of in the more medium term.

Yes. Right now, Trey, the focus is going to be organic. It's getting NDS integrated. I'd say it's also the reason we're hosting at the Engineering and Technology Center is on purpose, innovation, new product introduction, really important as we go. So again, we look at the opportunities we have organically -- and again, especially within not only the Pipe business, but Allied and Infiltrator, highest return, lowest risk use of our capital and how we deploy it. So that by far will be number one.

Again, pro forma debt with NDS, again, we are -- we paid for almost the entire deal out of cash on hand. We're only 1.5x levered right now. Our guardrails are 1 to 2x. And you know what, we're going to generate a bunch of cash over the next 6, 9, 12 months and year -- couple of years like we've been doing. So we're going to toggle lower to 1.5x pretty quick. So does that mean that we've got an appetite for M&A? We'll continue to look. We have a funnel, but it will be tuck-ins and bolt-ons. Those are things we do really, really well. And those are things that might have an [indiscernible] purchase price at $150 to $250 million to maybe up to $300 million. And that's really kind of where we do really well, we excel and we leverage.

And again, we have a great balance sheet, extremely fortified and the leverage to go put that to work. So organic, for sure, as well as some productivity and efficiency initiatives that we have and continue to have, but then strategic M&A is definitely something we'll look there. But right now, the priority is organic. But we're always looking for the right opportunity. We've got the capacity to pull the trigger. So that's always something we'll be looking for.

If I could add one thing to that is much like we saw with Infiltrator, where some capital infusion could get some projects going really quickly and fast and that's paid off wonderfully for us. We see similar things at NDS, where not a lot of capital has been invested over the last 10 years by the previous owner. They have some great ideas around automation, around some new products, around some other kind of high-value moves. So we're anxious to get in there and look at those in more detail with them. .

So to -- and I'm only saying this [indiscernible] to kind of reinforce what Scott says about the organic opportunities we have. So I think we're going to stay kind of in that range we're in today of capital spending, but where we're spending some of that is likely to shift a bit. We got a big project going on in Infiltrator right now. We've done a lot of great work in the Pipe network that's really paying off for us. This NDS is the next big opportunity.

Yes. That's all super helpful. And just kind of circling back on the comment earlier on accessing capital markets this year. You do have some near-term maturities. Is it that you're expecting to -- or are you expecting to maybe bring on any incremental leverage there? Or is this really just purely just taking care of the maturities?

Yes. Right now, the primary focus is on the majorities, right? So I like a weighted average maturity that's extended gives us a lot of flexibility, and that's the primary focus right now.

Our next question comes from Jeff Reive with RBC Capital Markets.

Really nice free cash flow generation this quarter. Working capital was a meaningful lift. Can you walk us through what drove that? And maybe how we should be thinking about free cash flow for next quarter?

Yes. Scott Cottrill here. So again, the great thing about our working capital performance, it was all across the board. It was receivables, inventory as well as accounts payable. So really good execution by the team as we look at that. So our cash conversion cycle came down really nicely. So again, we target 20% working capital to sales. We're coming in well south of that, which is what we like.

So again, it's a big focus of the team. Our demand and [indiscernible] processes continue to get better. We've talked about the the investments we made in our customer service side of the house as well. So all of those things kind of lean into kind of better working capital performance. And again, it's a lot of blocking and tackling and day by day and little things. that add up to that kind of performance. So really good.

And obviously, on the inventory side of the house, it's not just the fact that we're dealing with a lower res environment, it's also, again, that effective management of the pounds that are on the ground that we have. So again, really, really good kudos to the team.

Our next question comes from Collin Verron with Deutsche Bank.

I just wanted to start on the mix, I was hoping you can dive a little bit further into that. Help us really understand the top line and margin benefits there that you've seen. And then can you just talk about how much of this is driven by the shift from sales of Pipe toward Allied and Infiltrator versus maybe a mix shift within each of the categories?

And then just how you're thinking about this? Is this a structural improvement? Or could some of this roll off as we see some of the end markets pick up like resi in particular.

Good question. And this is Scott Barbour, I'll take that. So for many years, our growth algorithm has been to sell Allied at a faster pace than Pipe, really driven by more market participation opportunities in the Allied Products because they tended to be less mature markets versus the Pipe piece of the water solution set. So we've been doing this quite a long time.

In addition, as we've added kind of Infiltrator in, we want to give better resiliency to our profitability. We would get a lot of questions around, wow, you've run the profitability up. Is it going to come back down? Or are you just going to ride up and down with your materials pricing environment. And we don't want to do that. We'll be more consistent than that. We want to be more consistent. I think we've proven that by continuing to move our mix to these Allied products and the Infiltrator products. And you do that with sales efforts, you do that with new products and programs. We do that with acquisitions in the case of [indiscernible] and NDS.

It's not to say that we don't like the Pipe business, we do. But we also realized that investors wanted a more resilient profit profile. So that's what we work on. So it's not a onetime thing.

Will it move around a bit as a percentage? Absolutely, it will. But I think we kind of like this 50% or better in Allied and Infiltrator. We think the natural tendencies of the growth of these businesses will continue to take us into this direction. But if the pipe market takes off somewhere, that could bounce around a bit, and that's not going to scare us. That's not going to frighten us. So I think we know how to handle that. I'm sure we'll talk about this at Investor Day as well, but it's just the changing complexion of the company as we move forward over these years.

Great. That's really helpful color. And then I guess I just wanted to touch on the raw material costs. Based on the bridge, and I think your commentary is favorable on a year-over-year basis. But I'm curious how it's tracking sequentially as we head into February here. And just any early thoughts on material costs in calendar year '26 just based on what you're seeing today?

I'll let Scott Cottrill handle this question.

Yes. So again, price-cost, you see it in our EBITDA waterfall, in our bridges for the quarter and year-to-date period. It's obviously something that we always look at and try to gauge. I mean we have a pretty good forecasting process. We call it our LE, our latest estimate. So it's constantly something that we look at. But to Scott's point, it's not just a resin cost environment that drives our pricing and/or profitability model. So that volume side of the house, that demand side of the house, that mix side of the house comes in pretty important when you look at that growth rate of Allied and Infiltrator and how that mixes us up from a margin and profitability perspective, and then all the self-help initiatives that we've got going on within manufacturing, transportation and then obviously within SG&A.

So specifically to your question, I'm not going to get into sequentially kind of where we are, but I would just tell you, through the waterfalls, it's been a nice driver of profitability this year. And then we always look at that in our forecast as well as all the other movers when setting our guide and our targets.

Our next question comes from David Tarantino with KeyBanc Capital Markets.

Just to tie off the discussion on margins. You're still raising the margins despite NDS having a lower margin profile, if I'm not mistaken, it seems like a lot of this is better mix. But could you walk us through on what's giving the confidence here? And how you think about expanding margins moving forward as NDS contributes more meaningfully?

Starts with that mix, right? We talked about the Infiltrator and the Allied Products segments being 50% adjusted gross margin or greater businesses. So it starts with that mix. It also -- about 65%, 70% of our cost of sales sits on our balance sheet. So we know how that's going to roll out here over the next 2 to 3 months. Obviously, the mix of the products that we sell and the segments that drive that are important to try to get right and kind of gauge that in. So that would be the driver of the margin expansion story as we look forward. It's what's on the balance sheet, what's going to be rolling off.

That's not just resin cost. That's our manufacturing conversion costs, all of those items as well that we look at, and then we roll it forward based on that demand forecast. And then again, like I mentioned, that mix of Allied Products and Infiltrator that tend to grow at kind of 2x the Pipe business, that really [ messes ] us up. So those all go into it and are the drivers for that margin expansion story.

I would add one other thing to that, Scott, is we -- 16, 18 months ago, we started a lot of self-help programs across the company, and it was in materials, conversion, logistics, recycling, the Infiltrator work at [indiscernible], in particular, I mean, all that stuff gained momentum as we've gone through these 3 quarters. And we've seen that contribute. And I think that gave us some confidence to increase the margins as we looked at this back half of the year, which is our toughest part of the year.

I mean, the fourth quarter is our toughest quarter. We're always -- we want to be pretty conservative about what we predict or see coming from a profitability standpoint. But those programs, which a lot of people contributed to, I think, worked better than we thought they were going to work. And it was across lots of different categories of stuff, even some categories we didn't expect that we're contributing nicely.

And this kind of -- I think a quarter like we just had isn't just the result of 1 -- kind of 1 set of activities, it builds up, and that's why I kind of bring that up.

Okay. Great. That's helpful. And maybe could you give us a better picture of the demand trends specifically within Pipe. It sounds like pricing is largely stable, but -- could you give some color on the sales declines here versus the more positive trends elsewhere in the business?

Yes. I would say that for -- this is Scott Barbour, again, our polypropylene pipe, what we call our HP pipe selling quite well, selling quite well. And those are share gains, those are conversions from concrete, we have that specified very nicely in the high-growth geographies of the country primarily. So that's growing nicely.

Our black dual-wall [indiscernible] pipe is kind of riding along at the market, maybe a little bit better than the market. The downdraft that we're experiencing in Pipe, in particular, are the agriculture segments, which although had a good year-over-year quarter as -- has been tough year-to-date, and our team there has done exactly what we wanted them to do in terms of discipline in that market and had a good year relative to the prior year in terms of profitability.

We sell a fair amount of that single-wall product through the DIY channel, which are all kinds of different retailers. And that market has been down like 3 years in a row. So our downdraft, I'd say we're market neutral with the black dual wall [indiscernible]. We're gaining share with the HP product. I couldn't be happier with that one. But the single wall, some is market headwinds, some are things that we need to go do better, but that's the 1 that's the downdraft. And we have programs that we've been talking about through our strategic planning process this fall that we're activating in that, very high on our priority list, some of those things that we need to do in that segment for the Pipe.

So that's how we kind of look at that. We'll talk a lot about that in in June when we're together. But there -- it frustrates Scott, there are elements of that pipe segment that are super, super healthy. And then these others that have some challenges that we got to get on top of.

There are no further questions at this time. I will now turn the call back to Scott Barbour for closing remarks.

All right. Thank you very much. We -- lots of great questions. We appreciate the chance to give some color on the business and what's going on. I kind of said there, a lot of what we have seen this year particularly in these last 2 quarters is really good performance. We think significantly outpacing our industry and competitors and all that stuff. But it's a result of work we've been doing over the last 1.5 years or 2 years whether they be acquisitions or new products like the tank and the active treatment that Craig has been working on for a long time in the ADS side, it's the new StormTech products, it's the new Nyloplast products, it's some things underneath that, that you guys would never see that are growing very nicely for us, it's the HP Pipe, it's breadth reconfiguration of some of our sales activities.

So there's a lot of work going on. We're really proud of how it's coming to fruition in our results here. And we're super excited about the NDS acquisition. As many of you know, we worked on that for a long time, had our eyes on that for a long time. So Monday was quite a nice day to finally get that closed, and we're going to be out there with that team next week. And I know it's going to be an equally successful kind of journey with them as some of these other things that we've done. So we appreciate your attention, and we look forward to talking to you later or seeing you around soon. Bye-bye.

This concludes today's call. Thank you for attending. You may now disconnect.

Good morning, ladies and gentlemen, and welcome to Advantage Drainage Systems Second Quarter of Fiscal Year 2026 Results Conference Call. My name is Kayla, and I will be your 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.

Good morning, everyone. Thanks for joining us today. Here 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 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.

Thank you, Mike, and good morning, everyone. Thank you all for joining us on today's call. ADS executed well this quarter in spite of a challenging market environment, driving growth at strong margins. In the second quarter, we delivered 9% revenue growth and 17% growth in adjusted EBITDA. This performance reflects ADS' strategy to prioritize higher growth, higher-margin products, execute the material conversion strategy and implement self-help initiatives to improve safety and productivity, all of which we executed exceptionally well this quarter. .

As we continue to deliver above-market growth and industry-leading margins, we remain committed to investing in both organic and inorganic growth to further strengthen our position as a leader in water management. Let me touch on a few highlights from this quarter. Allied Products sales increased 13% with double-digit growth in several key products, including the StormTech, retention/detention detention chambers, the catch basins and the water quality products, all of which benefited from new products introduced over the last year.

Infiltrator revenue increased 25%, including Orenco or 7% on an organic basis, driven by double-digit growth in both tanks and advanced the products launched in the last several years. Pipe revenue increased 1%, with double-digit growth in the HP Pipe Products and construction applications being offset by weakness in the agriculture market.

Importantly, pricing remains stable. From an end market perspective, 15% nonresidential sales growth was broad-based geographically across the U.S. Organic growth of 12% was driven by double-digit growth of Allied Products as well as the strong growth in HP Pipe products. Inorganic results contributed 3% to the growth in the nonresidential market.

The residential end market was more mixed as interest rates continue to weigh on single-family housing starts, existing home sales and land development activity. For the second quarter in a row, we experienced strong Allied Product growth in the multifamily development activity.

From a geographic lens, land development activity was better in the Atlantic Coast and South Central U.S. but the DIY channel we service through big box retailers remains challenged. Infiltrator's core residential business significantly outperformed the market and the continued outperformance by both companies gives us confidence that we have the right strategies product portfolio and go-to-market model to increase participation in the residential segment.

Overall, we executed well in a challenging market environment and remain focused on driving profitable growth by executing these strategies, introducing new products and customer programs, pursuing acquisitions and investing capital for long-term growth. We continue to build on the strong foundation of the ADS story. We operate in highly attractive water segments supported by secular tailwinds from changing climate patterns, as well as the increasing awareness of the societal value of proper storm water and on-site wastewater management, ultimately driving long-term demand for the company's products.

ADS is the only company with solutions that extend throughout the entire storm water or on-site wastewater system on a national scale. Through our best-in-class portfolio of water management products, we deliver solutions that are safer, faster to install and lower costs through savings on labor and equipment. We were excited to announce an agreement to acquire September, a U.S. supplier of residential storm water and irrigation products that complement the existing ADS product portfolio.

This acquisition presents another opportunity for us to grow our Allied Product portfolio with NDS' differentiated offerings alongside our core products ultimately providing a broader solution set to capture, convey, store and treat storm water. We will continue to execute ADS' strategy to diversify and increase the mix of profitable Allied and Infiltrator products that enhance resiliency, support profitable growth and enable ADS to pursue additional opportunities in water management products across a broader set of applications.

The regulatory process remains ongoing, and we look forward to providing an update once available. The market outlook presented at the bottom left of Chart 4 remains unchanged. Overall, the residential and nonresidential end markets remain choppy. The recent outperformance is driven by strong execution by our employees, and I'm very proud of the team for their performance delivered in the challenging quarter.

Their disciplined execution and commitment to continuous improvement resulted in our safest first half of the year on record, achieving a total recordable incident rate, 1/2 of the industry average. This performance reflects our ongoing focus on safety and operational excellence, which are foundational elements of our sustainable growth strategy. When you stack our strengths, the scale, product portfolio go-to-market strategy and the ability to invest in our business, people and industry growth, you see ADS as a powerful value proposition.

In summary, we continue to execute effectively in a challenging environment. Our self-help operational initiatives continue to bear fruit, as demonstrated by the 33.8% adjusted EBITDA margin reported today. We will continue to increase the capacity of existing production facilities and add new capacity in strategic areas to meet customer demand.

We are also highly focused on service and delivery experience for our customers leveraging the new digital tools across the platform. While we navigate the near-term environment, we do so with an eye towards the future. We remain firmly committed to our long-term vision and we'll continue investing in the capabilities that will position us for future success.

Overall, the long-term outlook for our business remains strong, supported by compelling secular tailwinds driving demand for water management solutions across North America. Now I'll turn the call over to Scott Cottrill.

Thanks, Scott. On Slide 5, we present our second quarter fiscal 2026 financial performance. Revenue increased 9% to $850 million, primarily due to the factors Scott mentioned. Importantly, we believe our results outpaced the end markets overall, demonstrating the resilience of the ADS business model. From a profitability perspective, we were very pleased with the 17% increase in adjusted EBITDA year-over-year and the resulting 33.8% adjusted EBITDA margin.

A couple of things I feel are worth reiterating related to our strong performance during the quarter. First, we experienced strong growth in both our nonres and residential end markets. It is worth noting that the nonresidential end market also accounts for 2/3 of our Allied Product sales.

In addition, we continued to see favorable price cost performance in the quarter. Regarding manufacturing and transportation costs, we incurred incremental transportation costs related to the strong demand during the quarter as well as to reposition product around the network as a result of previously announced realignment actions.

Regarding SG&A costs, the year-over-year increase was primarily driven by the acquisition of Orenco as well as higher sales-related costs. Again, it is important to highlight the company's performance and the resulting 33.8% margin in the quarter, demonstrating the resilience of the ADS business model.

On Slide 6, we present our free cash flow. We generated $399 million of free cash flow year-to-date compared to $238 million in the prior year, primarily driven by increased profitability, as well as better working capital performance and lower cash taxes. Of note, we expect the OBBBA to result in an incremental $30 million to $40 million of free cash flow this fiscal year than we had originally anticipated.

Thoughtful capital allocation continues to be a key focus for the management team and our Board, given the strong cash generation of the company. We expect $111 million to spend $111 million on capital expenditures year-to-date and expect to spend approximately $200 million to $225 million for the full year. These investments will focus on innovation and new product development at our world-class engineering and technology center, increasing our recycling capacity, particularly in the Southeast, continued investments in customer productivity and automation as well as executing growth initiatives in certain key geographies.

We ended the quarter with less than 1 turn of net leverage or 0.7 turns to be exact and over $1.4 billion in available liquidity, including $813 million of cash on hand. Our target leverage looking forward approximately 2 turns. We plan to use a significant portion of the cash on hand for the proposed acquisition of NDS. As a reminder, ADS signed an agreement to purchase NDS in an all-cash transaction valued at $1 billion or $875 million net of tax benefits. This represents a valuation multiple of times NDS' adjusted EBITDA for the trailing 12 months ended June 30, 2025, inclusive of expected run rate cost synergies.

This is a compelling acquisition given the highly complementary strategic fit, alignment with the ADS water management strategy, growth profile and additional exposure to the residential segment and resilient applications such as residential repair remodel and the landscape irrigation markets. The company expects the acquisition to be accretive to adjusted earnings per share in the first year and given ADS' proven integration capabilities, we expect to generate $25 million in expected annual cost synergies by year 3.

We expect to achieve additional upside from revenue synergies through cross-selling products and expanding market opportunities in new segments and applications. We look forward to identifying areas where we can enhance our collective capabilities and create new opportunities for customers.

Moving on to Slide 7. We present our updated guidance ranges for fiscal 2026. Based on our performance in the first half of the year, as well as current trends and backlog, we increased the revenue guidance by 2% at the midpoint to $2.945 billion. In addition, we increased the adjusted EBITDA guidance by 5% at the midpoint to $920 million.

The updated guidance drives an adjusted EBITDA margin of approximately 31.2% or 60 basis points higher than fiscal 2025. Despite our second quarter performance, we see demand and market strength to be the largest risk in the second half of the year, especially given the impact of seasonality. We remain cautious about market demand in the current environment and it reflected such in our guidance.

We remain focused on executing our long-term strategic plan to drive consistent long-term growth margin expansion and free cash flow generation. With that, I will open the call for questions. Operator, please open the line.

[Operator Instructions]

Our first question comes from the line of Mike Halloran with Baird.

A couple of questions here. First question, maybe just how you see the end markets playing out in the back half of the year and what's embedded in your guidance. I certainly understand the unchanged end markets on a holistic basis. Does that assume normal sequentials from here? I know the original guidance assumed some deterioration in dynamics. Is that still part of the story? And then maybe just to comment on what inventory looks like in the channel?

Go ahead.

Yes. So at the midpoint, Mike, when we look at 2H, we basically implied a little bit of degradation on a year-over-year basis. Again, when you look at our first half performance organically, it was good, up low single digits. And again, really good conversion from the company on all levels, new products, as Scott mentioned, as well as geographies.

So again, as we ended my comments in the prepared script, it's demand that we see as kind of the riskiest part of the rest of the fiscal year, and we've reflected such in our guide. So a little conservative on that end based on where Q2 was. But again, we feel that that's prudent right now.

The inventory piece?

Inventory piece. So we don't -- this is Scott Barbour, Mike. And I don't think we see anything unusual from an inventory standpoint, either in our customers' inventory in our inventory. So it's kind of sized correctly for what we call this tepid and uncertain demand picture. There's some friction out there, I call it, but this government shutdown is not helping. I think that creates a little uncertainty and friction out there.

People are still kind of waiting see ultimately what happens with interest rates. But I feel like we're competing pretty well out there and in doing winning more than our fair share in that kind of market. And I think that's due to our go-to-market model, our scale, our national footprint, we can participate everywhere. And this really broad portfolio of products at Infiltrator, who is definitely in the right geographies with the right product lines and the ADS side.

So we're just -- we're trying to be right, as Scott said, a little cautiously conservative around the demand side, which, as you all know, our second half of the year is the most uncertain demand environment we have because of weather and some of the focus on the northern climbs.

The other thing I'd highlight, Mike, is we've also highlighted our realignment activities as we look at the network and we optimize such. So again, really robust S&OP process, realignment activities to make sure that we're focusing on the right growth areas. So I would say the management team is focused in the right areas.

No, that makes sense. And you can certainly see the strong outperformance in the numbers. Maybe a similar question on the margin line. Just help me with the puts and takes in the back half of the year. I'm assuming there's an element of conservatism in how the margins moved to the back half. Maybe walk through mix, how you're thinking about price/cost and just bridge a little bit to the back half of the year from the front half? .

Yes. I would say price/cost, we'll start with that. That seems to be the topic everybody is the most interested in. But again, no degradation assumed in price/cost, so I think it's important to get that out of the way. The way we've kind of set our 2H guide or implied guide is very much driven by demand and the top line. And then we've kind of used our 30% to 40% incremental decremental margin approach, if you will, to look at what that might mean from an EBITDA perspective. Again, volume generated as we look through price/cost manufacturing transportation, SG&A, nothing unusual in there or something unexpected that we need to highlight or should highlight, just demand driven. .

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

Really a similar line of question here around that second half guide to start off. Just maybe clarify one piece of it. Basically, are you actually seeing signs of slowing as we kind of move into, let's say, October, November? Or is this really just taking that kind of conservative outlook and uncertainty, government shutdown, et cetera, and so forth, like you said, and building that into guide. Just curious if you've actually seen anything that would suggest that kind of bigger slowdown in that second half?

So this is Scott B., Matt. And I would say that we are more conservative as we look into the second half, we feel like we performed very well in the second. If it's there, we're going to get it. But we are worried about what I call the friction in the market. We're not -- it's not overwhelming and evident everywhere. But we do kind of sense that the slowdown, particularly around the infrastructure stuff, the government shutdown, particularly around the infrastructure stuff is not leading to less quote or orders, but it is putting some friction into release for shipment, if you will. And now that's not the hugest part of our business, but we're watching that super closely.

And the government has been shut down for, what, 40-plus days or something like that, and they do drive a piece of the economy. So we are a bit cautious around demand. The part I would add also on this is what we can control around our cost and what we choose to go and do around spending or initiatives, we feel very confident that we got this dialed in. And we'll work hard in the second half to do that. Our concern is that demand is going to be tepid and choppy. And again, this is our most volatile demand period is this period really November through March.

Okay. Perfect. That's perfect. And I appreciate the thoughts there. So then secondly, on residential, so the 9% growth, I guess, presumably, that's mostly organic, but curious if that's true. So I guess across ADS and Infiltrator, you touched on at the top that multifamily is up and Allied and lot development is kind of choppy around the country. I'm really just looking if you could expand a bit. I mean, it stands out in a tough residential backdrop to have that type of growth. So maybe you can kind of go through the individual pieces of your residential business and expand a little bit on kind of what's driving that growth.

Yes, so I'm going to add something and Mike can add something. So Craig Taylor from Infiltrator here with us today are Infiltrator President. But new products, the tank products that we tooled and launched in the last 2, 2.5 years, Craig, the advanced treatment products the work that he and his team are doing with Orenco on profitability, all that stuff kind of redo nicely.

The multifamily, where we have very good participation in particularly our Allied Products has done well. Mike, did you want to add something on residential? .

Yes. I was just going to say, Matt, your question around -- there was some contribution from Orenco in the quarter, but also if you take that out, we saw positive growth organically at ADS and Infiltrator in that residential end market. For the reasons Scott just said, right, the new products, the programs that we're working with builders to drive the conversion in the land development for single-family subdivisions. And then we've seen -- we mentioned in the first quarter, we've seen improvement in multifamily activity in a variety of geographies. And that's coming through. We can see that in the Allied Product sales that go into residential.

Your next question comes from the line of Jeff Hammond with KeyBanc Capital Markets.

So just today on the outgrowth because I think you're worried about demand, but your outgrowth has been quite exceptional. Just kind of the sustainability of the outgrowth into the second half? And then my other second half question is just how we should think about first half, second half margin step down on the seasonality factor given that it seems like price/cost is moving much better in the right direction versus a year ago.

Go ahead, Scott.

Jeff, Scott C. here. So again, as we said before, I'll just reiterate it. It's very much a demand-driven outlook based on the choppiness, again, very encouraged by what we saw in Q2. If you look at the first half, however, you had 5% of growth, 2% organic, 3% from Orenco. It's -- we're not seeing green shoots yet. So there's a lot of reason to be cautious and build such into our outlook. So it's demand driven. When you look at the margin expectations of that, as I said previously, it's more just looking at our 30% to 40% decremental margin historical kind of performance and putting it there. Price/cost stable, as I mentioned earlier, there's nothing falling off a cliff there for folks to be worried about. And if I look at manufacturing, transportation, SG&A, is there any kind of large onetime thing in there or some trend that we need to be concerned about? No. So that's the way I would present it demand-driven with a 30% to 40% decremental margin approach. .

Okay. And then into the second half, can you just talk about how, I guess, last year, a pretty active storm dynamic and lack of this year if that -- if there's any good or bad comp dynamics around that?

Yes. I mean I think -- I mean, are you referring to kind of the back half, the last 6 months of the year that we're getting into? Yes. Yes. I mean, obviously, the biggest thing is winter and everybody's asking kind of questions around the guide, right? And so there's -- obviously, we have caution when we get into the back half of the year, we get through October, you get into November, through March, right? 50% of the country has winter and construction activity shuts down.

And last year, you saw it was a very traditional winner in the northern half of the U.S. and that impacted our business. It doesn't necessarily go away, but guys just can't work as long into the season. And I think we're trying to again be appropriately cautious around that dynamic potentially repeating itself. So yes, if the weather is better in the back half and it's warmer in the Northern climates longer. There's a chance construction activity continues and the fourth quarter is maybe a little better than expected. But we're sitting here on November 6, right? And so we're still like, call it, 60 days away from kind of what we'll know going into the fourth quarter.

Yes, I was actually referring to kind of all the hurricane activity that might have been maybe disruptive and then helpful down the road and this year kind of being a later year.

I mean I think when we have our second quarter, again, not having those probably played a little bit of benefit there. But again, it was pretty good weather in the second quarter. So guys could continue to. We benefited from that .

And your next question comes from the line of John Lovallo with UBS.

The first one, maybe just following up on Matt's question on the resi side. I mean, builders have clearly pulled back on starts to rightsize inventory in certain markets. But community count continues to grow pretty nicely. And personally, we're fairly optimistic heading into next year. But the question is, how are you thinking about the resi builder business heading into the spring? And what are you hearing from the folks on the ground?

I mean I don't think we're hearing a whole lot different than kind of what you described, right, a little bit of caution kind of favoring price over pace. But with that said, there's still large opportunity for share gain for us in those markets. We have a much smaller market share there than what we would have in nonresidential, for example. And when you look at the performance this year, again, the programs we have with the builders, promote our conversion strategy and the ADS value proposition. When you look geographically, places like Texas, North Carolina, seeing strong growth. Florida was very soft in the first quarter, but sales were essentially flat in the second quarter. So that's promising there.

In terms of volumes, which the volume that we're selling in there. So I think our goal obviously is outperformed the market. And we feel like we have lots of opportunity there still with the conversion strategy, the Allied Products. And then when you think about the Infiltrator and Orenco opportunities that we're promoting in that segment as well. And we think we have a lot of tools to go and beat back any underperformance or weaker market performance in the macro.

Got it. And then maybe on Texas specifically. I think the state just passed a $20 billion fund, about $1 billion a year. to replace aging pipe, and I think it starts to maybe 2027. I mean I think you guys have historically talked about Texas is like a $390 million, $400 million Pipe market. Just curious how you're thinking about this new bill, how significant of an opportunity could it be for you guys? And could it actually accelerate the adoption of in the state? .

So John, this is Scott Barbour. We supported that bill. We lobbied for that, Bill. We're -- as you know, we're quite active in Texas. We think this is a really strong step for that state to increase their kind of economic footprint and activity. It will bring great benefit to their populating their citizens. And we believe this will be a very good opportunity for us across the board. Whether it's nonresidential, residential, the rainwater harvesting piece, water conservation and rainwater harvesting was a nice kind of piece of that legislation. And we think this just adds -- I don't know how to dimension it right now, but what I do know is that more money will be spent on water infrastructure and water management in Texas with the result of this bill than before it was passed. So that is a good thing for ADS and Infiltrator for sure.

And your next question comes from the line of Garik Shmois with Loop Capital.

I wanted to ask on price/cost in the back half. So I was wondering if you could speak to what you're seeing on the material cost side of the ledger. And then just on pricing, it's been stable sequentially for a number of quarters here, but just given maybe the more conservative demand outlook, should we expect any change to pricing? .

Yes, Garik, Scott C. here. Like I mentioned earlier that when you look at the implied 2H, it's a demand-driven forecast and outlook. So that's what I would say there. As I mentioned before, price/cost again, largely stable again. So -- and that's both on the material side and the pricing side. So I would say to factor such into your 2H as well. And again, manufacturing, transportation. And if I look through the other parts of gross profit, and I look at the other drivers that can move that margin around. There's nothing in there or SG&A that is -- we're highlighting that would be a significant downdraft trend that folks should be concerned about.

Okay. And then just on the SG&A piece, it picked up a little bit in the second quarter, it sounds like that level of inflation shouldn't continue or just any way to contextualize SG&A in the second half?

Well, I think on the SG&A, there was the piece that we picked up from Orenco that is a year-over-year change. It's a bit higher SG&A company than the base company. We also executed a lot of costs around the transaction. They are -- it's not for free to get people in to help you work through a large -- the announcement of a large transaction like NDS. There's some accruals in there on that kind of stuff. So there again, those things we can control around SG&A spending, price/cost, our conversion, our transportation and logistics, I mean, we feel very solid where we are -- what we've done and where we are headed into the back half of this year.

And I say to the team all the time. A lot of these things you see reading through are really things we started a year ago and began working around our network, costs, equipment focused on certain new products and things like that. And I think what you see is even though last year was not a great year. We continue to invest in those things and they've read through in a pretty good fashion. And that's what management is supposed to do is invest and work for the long-term performance of the company, and I feel like that's what we're doing pretty darn well right now.

And your next question comes from the line of Collin Verron with DB.

I just wanted to follow up on price/cost. I think last quarter, you indicated that price cost is expected to be neutral for the year. Can you just talk about what's coming in better than expected in the second quarter that got you that $30 million EBITDA tailwind?

Yes. Again, you're referring to the EBITDA bridge on a year-over-year basis. So again, pricing stable. We've been talking about sequentially as well as year-over-year. Resin cost, for sure, this year has been one of those items that that's been good and something that we see sequentially flattening out on a precured basis. Again, we have really good line of sight to what's on our balance sheet and what's going to be coming off over the next 2 to 3 months. So something that we constantly put in front of us. But price/cost is, again, one of those items that favorable to expectations coming into the year. And I'd say the team is managing it really well on both sides as well as mix. I think the things that have exceeded expectations are around the material costs, our ability to convert the product across the board, not just Pipe, but at Infiltrator and our Allied Products and then the things that we targeted for transportation and logistics, all that have exceeded our expectations as well as the mix and the growth -- organic growth of Infiltrator and the Allied Products over the last 4, 5 months. And again, things we started a year ago kind...

That's really helpful color. And I guess you mentioned on the transportation cost side of things that there were some of this inventory shift due to the realignment. I guess is this expected to be ongoing? It sounds like it is just because your second half guide is must be volume driven, but I just wanted to confirm that.

Let me take this one. Let me take this. So as demand might get stronger in one geography versus another or we announced the closure of a plant -- and we -- in the Northwest earlier in the calendar year, we had to move inventory to service our customers around that network.

And we're going to do what it takes to do that. And I -- our logistics people are executing extremely well. We have a lot of great programs around safety and the new equipment we've added in there that are -- we've done, and we will continue to do that, and that's really what's from that.

I've got smiling because he's always busting on that. But that's what we're going to do. And I would add, because of our scale in these logistics capabilities, we can do that. We can move this stuff around because of the size scale and management of that fleet. So that's what you saw through there is just kind of peak a little bit. Fundamentally, the unit are performing as we want. We just had to move some stuff around a little bit more than we anticipated.

And your next question comes from the line of Jeff Reive with RBC Capital Markets.

Appreciate all the color thus far. At WesTech this year, you had an presence showcasing both Infiltrator and Orenco. It's pretty clear how complementary those businesses are. now that you've owned it for about a year, could you talk about how the integration is progressing, synergy capture and where you see opportunities to get growth or efficiencies?

I'm going to let Craig Taylor to take that.

Yes. So the acquisition is going extremely low right now. We're starting to bring products together that you saw at tech and extending that to the Orenco dealers, too. They see more of our Infiltrator product, and it's that understand what we can contribute to the market for them. And on the synergies, it's on track, exceeding our expectations too of what we've been doing. The commercial portion takes a little bit longer as that's winding up right now on the synergies, but it's hitting on all other elements that we together in the model and our expectations going forward.

Yes, it's gone very well. .

Yes, I would add that what we've seen so far is earnings growing faster than sales, which is good, and the margins have improved also. I think we're tracking very well, like Craig said, on the operating efficiencies and the synergies and improving the margin performance of that business. .

Yes, a lot of activity that's a good question. We appreciate. I also mentioned the safety performance has been very good out there in Oregon, and we lead in very hard and the team there has grabbed it. And that's been super good that we're glad to see. We read a lot of this with our Board yesterday, the synergy plan, which is really doing nicely in that safety performance. So we're really happy. One year in, we couldn't be more pleased about where Craig and the team are with that acquisition.

That's really helpful. And just a follow-up on pricing. I believe you're prior guide call for price down low single digits, volume up low single digits. So just kind of given the upped guidance range, have your assumptions for the remainder of the year shifted at all either price or volume?

No. Not on pipe. No. No. I guess that's what you're referring to the pipe.

Yes.

Kind of, honestly, the pipe is like right on what we thought it was going to be. It kind of moves around a little bit by pipeline. We're really pleased with the superior growth of HP product line. But overall, from a volume, pricing mix, costs, the material costs a bit better than we anticipated as is the conversion loss. But from just a demand and price in the market, it's really almost exactly on the plan that we plan. So I think our team in the field is doing a very nice job. And with those product lines as well as seizing all opportunities on the Allied Products. Craig's team is doing a great job in the field. We're clearly in the right geographies with the right distribution, the right product lines across the board. And again, this is -- we leaned into we leaned in over the years of beefing up in certain geographies. We leaned with capacity, we leaned it with trucking capacity. We leaned them with new products to get these advanced treatment products Craig has that are doing very well. But across both Infiltrator and ADS that's kind of working for us right now. So we'll continue to execute on that and invest in people and the necessary processes, systems and equipment we need to get the job done.

And your next question comes from the line of Trey Grooms with Stephens.

Maybe a little higher level or maybe longer-term focused questions here. Specifically with NDS, we haven't spent a whole lot of time here on that. I know you gave us some color back a few weeks ago with your conference call. And you mentioned the potential for additional upside from cross-sell and maybe some other opportunities. Do you think you could go maybe into a little more detail around where you see potential revenue synergies where they could exist, specifically with the in the U.S.? And any way for us to think about what those potential revenue synergies could mean for enhanced top line growth opportunities?

I'll try to tackle this without stepping over any lines. This is Scott Barbour, highly, highly complementary product line to our very bespoke catch basins that we call Nyloplast. NDS has, by far, the market-leading standard products, smaller diameter than we do. And when we get plans that show kind of the whole water installation on a nonresidential side, for instance. We see a lot of those products on there, and we think we'll be able to package very effectively those kind of products. .

We run across a lot of opportunities for that they have a great product line and channel gains that we have today. And we think our -- both our sales force will be able to kind of sell those products. We think in certain parts of the distribution, they're going to be able to sell more of our products to pipe products.

We think that their focus, particularly in turf and irrigation, which is kind of world-class is going to be a strengthening of what we do, complementing and strengthening what we do ADS. And on the Waterworks side, we think will complement and strengthen NDS. So those are the kinds of things we're very excited about. And these products really exist in an installation side by side. So we're just going to get increased visibility on projects and jobs and opportunities that are going on in the market between our 2 sales groups and our relationships just deepened with the addition of NDS. We're super excited about working with that team out there. And that's probably about all I can say.

Okay. Well, that's pretty exciting. And I guess, just another kind of higher-level thinking a little longer term, you guys are putting up some really nice margins the price/cost equation has kind of been beaten to here, but you're executing well. You've made some headway organically, clearly. And notwithstanding or just kind of setting in the NDS equation or acquisition aside here. Is there any way or maybe any update on how we can be thinking about longer term margin profile of the business, given kind of some of the improvements you've made here even organically?

Go ahead, Scott C. This is a Scott C. question.

Yes. I'll give you a couple of different ways to think about it. A, we love the DNA of the company, right? The Allied and Infiltrator parts of the business grow at a much faster clip than the pipe side of the business, and they have much larger adjusted gross margins. So we really look at that -- so we kind of margin and accrete up as we go over time. I would say as well, the new product introduction, the engineering technology center, the way that we deploy capital, and capital allocation really powerful. And you look over the last 5 to 6 years and kind of what we've done there and how that's led to where we are.

I think those are all kind of key avenues there. I think you'll see more of our capital deployed in that innovation as well as a bigger mix of what we spend on the CapEx side. In the Allied and the Infiltrator side of the house now that we've kind of caught up a little bit on the pipe side. There's some automation, productivity and other investments we need to do there.

But a lot of margin accretion opportunity, both on the productivity, automation side of the house, new product introduction side of the house, the growth algorithm, if you will, as well as putting this balance sheet to work through accretive acquisitions as we move forward. I see all of those as kind of a trifecta, if you will, of how we not only grow the company but as well as accelerate that margin expansion as we go. So do we think that this ADS, a 20% to 25% EBITDA margin business we don't Yes. We see a lot of different reasons while we continue to creep as we move forward.

There are no further questions at this time. Scott Barbour, I turn the call back over to you.

Okay. Thank you very much, and we appreciate everyone being on the call today, and the quality of the questions, we kind of anticipated a lot of questions around the second half like that. I'm sure we'll give more of them as we go forward. But good quarter. .

Like I said earlier, this is a quarter that we really started on a year ago with all the things that we work, understanding that the demand environment was going to be a little tepid those things we can control, we feel good about. We'll continue to work hard on those. And I think as the demand develops, we'll capture our fair share more, but we'll just have to see how it develops over time. So thank you very much, and you all have a good day.

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

Good morning, ladies and gentlemen, and welcome to the Advanced Drainage Systems Conference Call. My name is JL, and I am your 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.

Thank you, and good morning, everyone. We're excited to be here today to discuss our proposed acquisition of National Diversified Sales, or NDS from NORMA Group SE. With me today to discuss the proposed transaction, I have Scott Barbour, our President and CEO; and Scott Cottrill, our Chief Financial Officer.

Before we begin, I would like to remind you that we may 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.

First, I'll start with an overview of the proposed transaction and key terms as well as a brief overview of NDS. Early this morning, ADS signed an agreement to purchase NDS, a leader in residential storm water and irrigation access boxes in an all-cash transaction valued at USD 1 billion. This represents a valuation multiple of approximately 10x NDS adjusted EBITDA from the trailing 12 months ended June 30, 2025, inclusive of expected run rate cost synergies.

This is a compelling acquisition given the highly complementary strategic fit, alignment with the ADS water management strategy, growth profile and additional exposure to the residential segment and resilient applications such as residential repair, remodel and landscape irrigation. The company expects the acquisition to be accretive to adjusted EPS in the first year and ADS' proven integration capabilities will help drive $25 million in expected annual cost synergies by year 3.

For those of you that are not familiar with NDS, I would like to briefly speak about the company, its business model and its proven industry leadership position. NDS is a water management company who specializes in residential storm water, irrigation and flow management and as a subsidiary of NORMA Group, a German diversified industrial company. That being said, nearly 90% of their sales are generated in the U.S. and their operations reside predominantly in North America.

NDS is a leader in residential water management across multiple product categories with expertise in small-scale drain basins, access boxes and irrigation solutions. The NDS product portfolio is well regarded within the retail distributor and contractor community and we're excited to bring together 2 water management solution leaders that operate in distinct but complementary segments.

With that, I'll now hand it off to Scott Barbour, who will speak more about the strategic benefits of this proposed acquisition.

Thank you, Mike, and thank you all for joining us today. Today's announcement marks another important milestone in the company's journey from a pipe manufacturing company to a more diversified water management solutions provider. We have been executing this strategy for some time to increase business resilience, drive profitability and enable ADS to pursue water management projects across a broader set of applications.

For context, in 2016, nearly 3/4 of ADS' revenue came from the pipe segment. Since then, the company has worked to diversify the product portfolio geographic and end market mix to become a higher-margin, more profitable business. The 2019 acquisition of Infiltrator accelerated this transition as does today's announcement.

After acquiring NDS, the total percentage of company revenues coming from the higher growth and more profitable Allied Products and Infiltrator segments will be approximately 50% and double what it was nearly a decade ago.

This growth has been deliberate, and the results have been beneficial for ADS and its stakeholders. ADS has a track record of investing for growth and has been very intentional in positioning the balance sheet for compelling and attractive opportunities that align with the company's strategy. As you can see on Slide 9, over the last decade, ADS has invested over $3 billion in growth, including both acquisitions and strategic capital expenditures.

At the same time, ADS continues to build a fortified balance sheet with low leverage and ample liquidity, providing the company with the financial flexibility to execute on the transactions such as this one. ADS' acquisition track record has been strong, exemplified by the success of the Infiltrator deal. Since acquiring Infiltrator in 2019, we have driven consistent best-in-class results. We invested approximately $230 million into the business, which contributed to approximate doubling annual sales and a 17% sales growth CAGR over that time period.

We also significantly exceeded internal initial synergy targets, capturing $60 million in annual run rate synergies compared to $25 million originally planned.

ADS has demonstrated proven success in integrating assets and will employ a similar playbook with NDS to maximize growth and profitability. Mike mentioned the compelling valuation of this transaction, which is underpinned by a very strong strategic rationale. First, this transaction adds complementary new offerings in the higher-margin Allied Products segment which has grown at a 10% CAGR since 2015, outpacing the core pipe business.

Second, it enhances ADS' go-to-market capabilities in the retail and distributor channels of water works and turf and irrigation. Third, it expands the addressable market opportunity with a highly complementary product portfolio and segments. And lastly, through the ADS integration playbook, this deal offers significant value creation potential driven by over $25 million in expected annual synergies.

Let me touch on each of these aspects in more detail. Combining NDS' complementary product portfolio with ADS creates a more comprehensive set -- solution set for customers, allowing ADS to pursue management projects -- water management projects across a broader set of applications.

In addition to the added diversification of the product portfolio, NDS primarily participates in the residential segment and broadens the company's reach into the landscape irrigation segments. The addition of NDS will also enhance how we support and reach customers.

Building on recent efforts to digitize and strengthen the customer experience, NDS will further enhance ADS' multichannel strategy with their e-commerce and direct-to-consumer sales platforms, shared customers will benefit from the enhanced offering of the combined product portfolio. The companies also have complementary manufacturing and distribution footprints, especially in areas previously identified as high-growth opportunities which will drive improved customer service, delivery and execution.

The diversification journey ADS has been on over the past 10 years has allowed us to gain exposure to faster-growing, more resilient segments and applications. The addition of NDS to the portfolio continues this journey as we have the opportunity to grow via cross-selling opportunities as well as through the previously untapped and fragmented $1.5 billion landscape irrigation market. Looking forward, we will continue to evolve the mix of businesses to improve the business resiliency while driving top line growth and expanding our margins.

With that, let me turn it over to Scott Cottrill to discuss the financial impact in more detail.

Thanks, Scott. As Scott and Mike mentioned, we see significant value creation opportunities with expected annual cost synergies of over $25 million coming by year 3 post close. We expect to achieve these cost synergies through material procurement as well as optimizing logistics, manufacturing and SG&A expenses. Additional upside from revenue synergies exist through cross-selling products and expanded market opportunities in new segments and applications.

We look forward to identifying additional areas where we can enhance our collective capabilities and create new opportunity for our customers. The combined entity will have pro forma revenue of over $3 billion, with an adjusted EBITDA margin of approximately 31%. In terms of end market exposure, the combined entity will have a more balanced mix between residential and nonresidential, of 40% and 41% of net sales, respectively.

From a financial perspective, the acquisition is expected to enhance growth, generate meaningful synergies and be immediately accretive to adjusted earnings per share, supported by ADS' proven integration capabilities, and operational discipline. I'd like to highlight once more that the proposed acquisition is an all-cash transaction, funded through cash on hand as -- at closing as well as our existing revolving credit facility.

Pro forma net debt is expected to be 1.6x at closing, well within our targeted leverage range of between 1 and 2x. In addition, the transaction value of 10x NDS' adjusted EBITDA and is net of an estimated $125 million tax benefit and inclusive of expected run rate synergies. We view this as a very compelling multiple, given the highly complementary strategic fit and alignment with the ADS water management strategy.

We expect the transaction to close in the first calendar quarter of 2026, subject to customary regulatory approvals and other closing conditions. In the meantime, both companies remain separate and will continue to operate independently. In closing, we're very excited about the value we can deliver from this proposed acquisition. It not only expands our addressable market but also enhances ADS' go-to-market capabilities and position in the broader water landscape, allowing us to better serve customers and drive long-term value creation.

The combined talent, capabilities and operational expertise of the 2 companies give us confidence in our ability to effectively integrate and drive growth. Thank you for your attention, and we look forward to updating you on our progress.

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

Good morning, ladies and gentlemen, and welcome to Advantage Drainage Systems First Quarter of Fiscal Year 2026 Results Conference Call. My name is Tamika, and I am your 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.

Good morning, everyone. 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 all that said, I now will turn the call over to Scott Barbour.

Thank you, Mike, and good morning, everyone. Thank you all for joining us on today's call. We generated strong results in the first quarter, delivering a resilient 33.5% adjusted EBITDA margin despite a challenging market environment. The ADS and Infiltrator teams executed well and remain focused on driving profitable growth and operational excellence by executing our market share model, introducing new products, pursuing acquisitions and investing capital for long-term growth.

Revenue increased 2% overall, primarily driven by the Orenco acquisition. Organic sales were down slightly, though our core nonresidential and residential end markets were resilient in the quarter. Importantly, Allied Products and Infiltrator, which are two of our higher-margin categories, increased revenue in the quarter. We continue to build on the strong foundation of the ADS story. We operate in highly attractive water segments supported by secular tailwinds from changing climate patterns as well as the increasing awareness of the societal value of proper stormwater and on-site wastewater management, ultimately driving long-term demand for the company's products.

ADS is the only company with solutions that extend throughout the entire stormwater system on a national scale. Through our best-in-class portfolio of water management products, we deliver solutions that are safer, faster to install and lower costs through savings on labor and equipment.

To meet the needs of our customers and communities, we continue to bring innovative solutions to the market that expand and evolve our product offering. In June, ADS launched the Arcadia hydrodynamic separator, a high-performance water quality separator product designed to remove suspended solids. With industry-leading performance, this product addresses the need to protect water resources from pollution. This product comes on the heels of the new stormwater treatment solution, the EcoStream biofiltration product launched in the latter half of fiscal 2025. Both of these water quality products are designed to remove pollutants such as nitrogen, phosphorus, sediments, metals and hydrocarbons in different applications.

Water quality remains a key growth area for ADS, and this category has grown at high-teens CAGR over the last 3 years as regulations required stormwater treatment continue to evolve. Our new engineering and technology center equipped with a 90,000 gallon closed-loop hydraulics lab allowed us to test and commercialize these products more quickly than was previously possible. For context, that is the amount of water used by the average U.S. household over the course of 2.5 years. This lab has the capacity to move water at 2,300 gallons per minute and compare that to the water pressure in your average kitchen sink of 2 to 3 gallons per minute, and it will give you an idea of the capability of our new engineering and technology center.

Additionally, demand in the advanced treatment market is also a key focus area, and we are pleased with Orenco's strong start to the year with growth in commercial applications as well as controls. Orenco's performance was a significant contributor to driving Infiltrator's 21% growth this quarter, complemented by double-digit organic growth in on-site wastewater tanks where conversion to plastic remains highly relevant.

Domestic Allied Product sales increased 1%, driven by demand in the multifamily residential market, where we experienced double-digit growth of key products like retention/detention chambers, water quality products and our stormwater capture structures. More broadly, residential market demand was highly variable depending on geography and application. While multifamily construction improved, single-family housing continues to be impacted by the interest rate environment and affordability constraints. For geographic lens, we saw better land development activity in the West and Northeast, but the DIY channel we serve to -- service through big box retailers was challenged. Infiltrator core products both leach field chambers and septic tanks significantly outperformed the market. We will continue to drive growth through product introductions and material conversion opportunities while also building on the relationships with the large national and regional homebuilders to drive above-market growth in residential construction.

In the nonresidential market, growth was driven by acquisitions and strong execution from our sales team, particularly in commercial construction activity in the Midwest, Atlantic Coast, South and Southeastern United States. We continue to see good activity in data centers and large projects and believe that underlying demand in key geographies was impacted by heavy rainfall and high temperature, particularly in May and June.

With respect to infrastructure, despite revenue being down this quarter compared to the prior year, it was actually the third highest revenue quarter in the company's history. As a reminder, this segment is more concentrated in geographies where we have stronger approvals and often large projects like airports can make quarterly performance uneven. That said, over the long term, the demand drivers remain strong. Over 50% of the IIJA's Highway and Street funds will be spent over the next 5 years, so we continue to feel good about the overall direction of the infrastructure market.

Moving to profitability. This quarter's 33.5% adjusted EBITDA margin is among the highest in the company's history despite a challenging demand environment. Excluding Orenco, the consolidated margin would have been 34.1%. Importantly, overall pricing remains stable sequentially as expected. Price/cost was favorable in the quarter benefiting from favorable material costs as well as product mix. Manufacturing costs were unfavorable as expected due to the fixed cost absorption on inventory produced over the winter months. We were able to offset a portion of that with favorable transportation costs driven by the better performance of new assets and implementation of new programs. Also of note, we recently began to wind down operations at a distribution yard and a small pipe manufacturing operation. With the capacity investments in the region and the acquisition of River Valley Pipe, we were able to eliminate some inefficient production while also improving our customer service and delivery.

Over the last year, we have taken fixed cost out of the ADS network by closing two pipe production operations, a recycling facility and three distribution yards without compromising any customer service. We can do this because of the investments we have made in new lines, rebuilds and the planning programs implemented over the last several years.

To illustrate this point, on average, ADS production per line increased by over 20% compared to pre-COVID levels, and the strategic capital invested over the last several years has allowed us to remove inefficient equipment from the network. I'm very proud of the team for the performance delivered in a challenging quarter. Their disciplined execution and commitment to continuous improvement resulted in our safest quarter ever, achieving a record low total recordable incident rate below 1.5 compared to an industry average of 3.2. These achievements reflect our ongoing focus on operational excellence and safety which are foundational elements of our sustainable growth strategy.

When you stack up our strengths, the scale, the product portfolio, our go-to-market strategy and the ability to invest in both our businesses our people and industry growth, you can see ADS as a powerful value proposition.

In summary, we continue to execute effectively in a challenging environment preserving strong margins and enhancing our mix towards more profitable products and geographies. Our self-help operational initiatives are now bearing fruit. We've increased the capacity of the existing production lines and added new ones in strategic areas to meet customer demand. We've also upgraded the service and delivery experience for our customers, leveraging new digital tools across our platform.

While we navigate the near-term environment, we do so within the eye towards the future. We remain firmly committed to our long-term vision and we'll continue investing in the capabilities that will position us for future success. Overall, that long-term outlook for our business remains strong, supported by compelling secular tailwinds driving demand for water management solutions across the U.S.

Now I'll turn the call over to Scott Cottrill.

Thanks, Scott. On Slide 5, we present our first quarter fiscal 2026 financial performance. Revenue increased 2% to $830 million despite challenging end market demand. Importantly, we believe our results outpaced our end markets overall, demonstrating the resilience of the ADS business model.

As Scott noted, from a profitability perspective, we are very pleased with the 33.5% adjusted EBITDA margin in the first quarter. A couple of things I feel are worth reiterating. First, pricing remained stable sequentially as we had indicated and expected. Second, price/cost was favorable year-over-year. From a manufacturing perspective, while we did experience unfavorable fixed cost absorption during the quarter, we were able to partially offset such with favorable transportation as well as favorable variable manufacturing cost performance.

Regarding SG&A costs, the year-over-year increase was primarily driven by the acquisition of Orenco as well as continued investments in areas that drive long-term shareholder value, such as resources and talent at our world-class engineering and technology center. We have worked to offset these increases by containing costs in travel, marketing and other discretionary expenses. Again, despite choppy end market demand, it is important to highlight the company's performance and the resulting 33.5% EBITDA margin, one of the highest margins in the company's history despite end market weakness demonstrated the continued resilience of the ADS business model.

On Slide 6, we present our free cash flow for the quarter. We generated $222 million of free cash flow year-to-date compared to $126 million in the prior year, primarily driven by better working capital performance. Of note, we expect the OBBVA to result in an incremental $30 million to $40 million of free cash flow this fiscal year.

Thoughtful capital allocation continues to be a key focus for the management team and our Board, given the strong cash generation of this business. We spent $53 million on capital expenditures in the first quarter and we now expect to spend approximately $200 million to $225 million for the full year, focusing on innovation and product development at the new world-class engineering and technology center as well as increasing our recycling capacity in the Southeast, continued investment in customer service, productivity and automation as well as executing on growth in key geographies.

We ended the quarter with less than 1 turn of net leverage and over $1.2 billion in available liquidity, including $638 million of cash on hand. This level of financial strength gives us exceptional flexibility to invest with conviction and respond quickly to strategic opportunities as they arise.

Our capital allocation priorities remain focused on value creation levers such as capital expenditures, innovation and acquisitions. Moving on to Slide 7. While pleased with our performance in Q1, given the continued uncertain demand environment, our guidance ranges remain unchanged. We remain focused on executing our long-term strategic plan to drive consistent long-term growth, margin expansion and free cash flow generation. With that, I will open the call for questions. Operator, please open the line.

[Operator Instructions] Your first question is from the line of Bryan Blair with Oppenheimer.

A very solid start to the year. I guess, to level set on Q1 outperformance, can you estimate the impact of weather in terms of project delays and remind us of the easy comp dynamics from Q1 '25. In the end, I guess I'm just trying to get to the net impact of Q1 '26 deferrals versus prior year project.

Okay. Ryan, this is Scott The unpacking how things are moving because of weather. I mean that's kind of the how I interpret your question. And I do think that early in the first quarter, April, May, some things were moving around by week, delayed 2, 3, 4 or 5 weeks, so stuff certainly moved around between the fourth quarter of last year and this quarter. Some stuff moved into this quarter. I'm not sure that it was hugely detrimental to us because it's just as a delay. This stuff kind of comes back. And if I recall correctly, last year was there's probably some stuff pulled into the quarter.

Yes. Bryan, I would say last year, we there's probably $15 million to $20 million when you look at the kind of favorable impact that happened in Q4 that was still in from Q1. So that would kind of be there. I would agree with Scott. Things kind of moved around in the quarter, but kind of even that kind of evened out, right? And as we get through July and August, we think it's kind of a normal run rate, assuming no other significant weather events that delay that.

And I guess what I'm trying to really always us out of these situations is, demand overall is just kind of tepid. It's very regional. And as things -- as weather moves them back and forth a little bit, we've got to be careful not to get too excited when stuff kind of moves around by a couple of weeks or from 1 month to the next. Our overall view of the demand is it's rather flattish and tepid. So when we can grow in residential and nonresidential, these very core markets across both the Infiltrator and the ADS platform, we feel like we're doing pretty good and more than holding serve in our key markets and geographies.

I appreciate the color there. price/cost always came focus and turned positive a little earlier than anticipated, guess given price stability, continued sequential stability, anticipated mix current visibility on input cost, what does your team expect for Q2 price/cost? And is there any shift to the neutral full year impact that you've baked into that?

This was the last part of that first. So price cost for the year still expected to be flat. And then, again, a little bit favorable versus our expectation in the first quarter, as you indicated. But again, remember, last year, kind of we didn't have the pricing impact until our fiscal second quarter. So again, a little bit of pricing that we had to deal with on a year-over-year basis in that first quarter. But we lap in the second quarter. So that will be something as you look at that progression from Q1 to Q2 and then through the remainder of the year. But again, sequentially, pricing has remained relatively flat, like we've been talking about. So that's very good.

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

I wanted to start on CapEx. I think the guide was reduced from $275 million to that $200 million to $225 million. So I just wanted to check on if anything has changed around the capital projects you're planning to invest in this year. This is just timing or if we should kind of read any implications to share repurchase or potentially a little bit more dry powder for M&A?

Matt, it's Scott here. It's just timing. Some of the larger projects we had are just moving to the right a little bit. And again, it doesn't impact our ability to meet our anticipated demand, Scott hit on the efficiencies and productivity and some of the other things that we've done strategically to meet the demand in certain regions. So it's timing. .

Okay. Got it. And then secondly, on Infiltrator, that organic growth of nearly 1%. Obviously, the residential end market is fairly choppy here in terms of starts. I think I heard you mention that you saw double-digit organic growth in on-site wastewater. So I guess I was wondering if you could expand on that a little bit and how that plays into your outlook? And could we expect to see that on-site wastewater side of it, perhaps offsetting this residential backdrop here? .

So this is Scott B. And Craig is here with us today, too, from Infiltrator. And it's tanks. It's tanks that are -- that continue to gain share and grow through new distribution points, new models that we introduced over the last 18 months, tooled and introduced over the last 18 months. And in the core leach field, I think that we are in the right spot where our -- the types of plate homes or geographies that are -- that use our products have on-site wastewater treatment are kind of a higher mix towards that versus municipal there. So we continue to do really great work there in new products, running our programs through the distribution. And again, just executing well in Winchester, Kentucky, very nice facility. .

Your next question is from the line of John Lovallo with UBS.

As well. Wanted to ask about last quarter, you talked about the first quarter, perhaps being the softest margin given pricing dynamics and also the worst fixed cost absorption. So curious if that still stands? I mean, it doesn't seem like the outlook imply that. But is there any change in the cadence of how you're looking at the margins through the year?

John, this is Scott B. Scott wants to talk, I can tell also. But we worked our tail off to try to offset what we saw as really poor absorption through the winter months, flushing out in our first fiscal quarter. So we worked very hard in other areas that were period cost, particularly in transportation and logistics to make that a better story than we anticipated. Does it inform the rest of the year, we're not changing our guide. It's just the first quarter. We're honestly more worried about demand than we are our ability to perform on cost or resin and stuff like that. So that's why we're cautious. I mean I use this word tepid around demand. And I really -- we just don't want to get ahead of ourselves. So that's how we're thinking about it. Scott, do you want to add anything to that?

No, you nailed it. Perfect.

Okay. No, that makes a lot of sense. And then it looks like you guys didn't buy back any stock in the quarter. I mean how should we sort of think about repos going forward? You guys are planning of cash, you lowered through CapEx. How are you thinking about being going forward?

Yes. It's something we're looking at, John. We continue to look at it. So we'll look. It's just something we measure based on our capital needs right now and what we're investing in there. And as you heard me say, some of those projects are moving out to the right a little bit. So we've got a little bit of availability, a little bit more cash. The OBBBA Bill is going to give us a little bit more cash flow than what we had thought as well coming into this year from the bonus depreciation and the R&D piece of that. So again, a little bit more cash to deploy than what we thought. So again, I would look to us looking at data here in the next couple of quarters. And again, as we look at that based on our working capital needs, our capital expenditures, our innovation, and other investments that we're making, it becomes a key part of that disciplined and balanced capital allocation approach that we want to use. So right now, we're comfortable where we are, but that doesn't mean that in the next couple of quarters, we take what I'll around "excess cash" and put that to work. So that's how I talk to it.

Your next question is from Trey Grooms with Stevens.

This is Ethan on for Trey. I wanted to hone in on Allied and Infiltrator, and those two segments seeing stronger growth versus Pipe and how you guys are seeing a nice mix benefit there. So any sense on how you guys are expecting that sort of relative performance to trend for the year, maybe any margin mix benefits versus what had been baked in the guidance? And I think I also heard that there was some geographic mix benefits as well. So any more color on that would be great.

So good question. And we will continue to really drive the Allied work on programs to get higher attach rates of Pipe and Allied Products. And what I mean by that, we are working on a lot of programs to sell the full package and to increase our penetration of the Allied Products at a greater rate than we increased our penetration of plastic pipe. That is -- goes on in every geography. Some are ahead of others. And those geographies that are a little behind in that, we're doing some new things to try to stimulate that. Infiltrator is Infiltrator. It's new products. It's the tanks. The -- we continue to invest heavily in that business from a capital and resource perspective and acquisition perspective to drive that at a higher growth rate. As part of our algorithm is to drive Allied and Infiltrator at higher growth rates than the basic pipe business. That said, I think it's kind of built into our guidance, those relative growth rates. And when we can execute on that, sometimes we get a little bump. I think we probably got some right now. The other thing I would add to that is the really nice program that the Infiltrator team is working on the Orenco acquisition. That mixes them down a bit. They kind of take that personally. So there weren't in really some really good programs. And Orenco team is doing a good job executing those programs as a matter of fact. So that's another big work item for us as a company is to continue to improve the profitability of that acquisition. So those are kind of our major levers. I think we've built it into our guide mostly. But to the extent we can exceed our expectations around growth that would help the gross margin mix of the company.

Got it. Got it. That's very helpful. And I appreciate the color there. And quickly shifting to the cost of the price cost equation. Materials seem to be a bit of a good guy there. Any color that you can give on what's driving the outperformance there? And any more color on that would be helpful.

Yes, anytime you talk about price/cost, starting with the price side, obviously, we've got a little bit of that headwind we talked about for the pricing that started coming off a little bit in the second quarter of last year continuing as we move. You obviously got some mix that goes into there that makes it on that side a little bit better than what we had thought. On the resin side of the house, we have really good visibility of that. We know it's on the balance sheet. We know it's going to release over the next couple of months through cost of sales and our gross margins. So again, not a lot of surprise there. But again, to your point, a nice tailwind.

So it's execution. So it's execution. It's good/price cost management through both Pipe, Allied Products and Infiltrator.

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

I wanted to ask just first on the -- this cost absorption that you had previously called out and saw it in the first quarter. I just wanted to be clear that's fully behind you and there's no lingering impact as you move into Q2?

Yes, nothing worth highlighting there. We got most of that behind us like we talked about.

Okay. And then I just wanted to follow up, just in light of the type of backdrop that you're seeing on the demand side. I think I can predict the answer of this question, but are you seeing any change in the competitive landscape? I know you're getting a ton of questions, with respect to new capacity that's come on in certain regions over the last several quarters, any thoughts on the competitive backdrop, given demand in your words, remains pretty tepid.

Yes. Okay. I appreciate that you continue to get those questions. And nothing new there. I mean we continue to execute well. And I think there's a few things to point out here. One is sequentially, our pricing has been very consistent for the last 4 or 5 quarters. And we have managed pricing against whatever competitive thing we face, mainly in Pipe. We've done that and kept our pricing consistent for a year now, and we continue to grow in residential and nonresidential, which are our two biggest segments and is where people try to come after us. We continue to work our costs pretty darn well, and the profitability of that type thing is pretty consistent. We've executed a lot of different materials programs, engineering programs. Our logistics and transportation team has done a great job of working new programs and using our new assets. We've completely refreshed our truck and trailer fleet over the last year, 1.5 years. So we've done all these things to kind of manage price materials, conversion through the CapEx. We offset a lot of that under-absorption. And our margins are pretty good. I mean, the resiliency of the margins in the face of that competition over the last year that you guys have been bringing up. It's not like we never had competition. We've always had some. I think we're proving that we have a resilient model. And I don't believe in a tepid environment of demand like this that radical price actions increase demand. They don't. I mean, there's only so many projects that are going to come to the market, and you got to have price discipline around that. So I feel pretty good where we are. And I sometimes feel like I don't know what more I can do to demonstrate that we know how to manage this environment. But we'll keep trying, keep working our programs, keep nailing down 30% plus margins. I guess, we'll just keep moving on that path. I know that was a long answer, Gary, but I felt I wanted to really try to put that to bed for you.

Your next question is from the line of David Tarantino with Keybanc Capital Markets.

Maybe just on infrastructure. It sounds like the sales drop is more of a function of tough compares. So maybe could you walk us through the underlying demand trends there and how we should expect this to move forward?

Yes, there are some tough comps in infrastructure, really driven by a lot of very nice airport projects that occurred a year ago. We're pretty strong in that, particularly in the retention/detention area. And those -- I mean I don't like hey, non-repeated big projects, but that's kind of what happens in that segment. Mike, on the Pipe side?

Yes, I think on the Pipe side, David, it's been kind of highly variable, and we've talked to you guys previously about this. Scott mentioned it in the prepared comments about how our participation varies by state depending on the strength of kind of our approvals and acceptance. And it's really a case where we kind of have half the states doing pretty well and then half the states being a bit slow. And I would say as we look forward, project identification is flat, but we're not seeing as much at the DOT level, but seeing more at the local public infrastructure level, which those projects tend to be a bit smaller than what you see for the DOT. I think there's some other things you see out there, too, right? I know everybody talks about, hey, only 50% of the infrastructure bill money has been outlaid so there's stuff to come. But when you look at it, I think the contract counts nationwide by the various people you track, they're anywhere down from 3% to 11%, but the value of those contracts is up. So kind of what we're seeing is, a, it's costing more to do these projects, so kind of more money, more cost, but less projects out there. But again, it's a big focus for us. We continue to work kind of our go-to-market strategy, our market share model against executing there, and we'll continue to work that.

Okay. Great. And then maybe following up on non-res. Could you just give us a little bit more color on what you're seeing in terms of the pipeline of projects and orders relative to the tepid environment you guys outlined in the guide? And you frame for us how conversion outgrowth is tracking relative to these trends?

Yes. I would say the kind of the forward-looking indicators around project identification and quoting and the other kind of third-party metrics we look at kind of line up with a tepid environment. We still think -- even though our share might be more mature in nonresidential versus residential or infrastructure in those key states in the South and the Southeast, where we have lots of opportunity for share gain, we're seeing strong sales in the quarter, and we would attribute some of that to a little bit of, hey, those geographies might be a little stronger from an activity standpoint, but also, too, that we're taking share. When you look at the states this quarter, that were strongest from a volume perspective on nonresidential, we like those states that we see, Florida, Texas, Tennessee, California, those are all states that you guys have heard us talk about, they're kind of in that lower half, the smile, the crescent, whatever you want to call it. And we had good volume growth in the quarter there. So that shows us that, hey, the markets aren't like on fire there. There might be a little better than the national average, but we're being successful taking share like Scott was talking about, the markets are tough, so you're trying to get more share of wallet, acquire new customers, do more conversion. HP has been strong growth in those states as well. So I think it's -- we kind of attributed to, hey, we need to control, we can control, and that's the execution of our go-to-market strategy.

Your next question is from the line of Mike Halloran with Baird.

Just a couple of quick guidance questions. Just following up on it. First, on the revenue side, you had that slide last quarter that pretty aggressively or detailed the revenue outlook from an end market perspective moving through the year. Curious if that's changed? If there's been any moving pieces in the thought process to the tepid market sitting here? And whether you just take normal seasonality is what's embedded in the guidance from what first quarter is, some sort of deterioration, any context around that would be great.

No. I think our look to the end markets mirrors what we went out with guidance wise, as adjusted for seasonality, as you mentioned, Michael. So no change to our outlook right now to those end markets, hence why we're leaving our guidance unchanged.

Okay. That's what I figured. And then similarly on the margin line of things, if I hear all of the commentary around the puts and takes with margins, there really wasn't anything unsustainable in the first quarter margin here other than possibly mix. I heard Scott B comments on more concern over what demand looks like back half of the year. That's partially why there's some caution around -- on the margin line. But what I would like to confirm here is a couple of things. One, just that the sequentials as you're thinking about the margins haven't really changed or the thought process around it hasn't really changed. And then secondarily, are there any moving pieces here that we need to think about other than, again, maybe mix normalizing that would lead to more compression than normal versus that first quarter number because essentially, if you look at the next 3 quarters relative to where the first quarter it is, there is an implication of something a little bit worse than normal. It doesn't seem that's what you're saying. So any context there would be helpful.

No, that's exactly what we're not saying. So again, I think when you look at that kind of how those margins will convey through the year, especially Q1 to Q2. Q2 usually looks a lot like Q1. Obviously, there's going to be puts and takes there based on our Q1 performance. But again, it's 1 quarter, choppy, tepid end markets. So again, we're comfortable leaving the guidance ranges where they are right now. .

What I would add is my worry, Mike, is the demand side. And if that demand side is weaker than I anticipated in the plan, is that going to cause me some absorption problems again, I got to go work. So -- but as far as pricing and materials and our ability to convert and our ability to transport, the mix of Infiltrator and Allied versus Pipe and all that, I'd say we're kind of per the norm in terms of the first half, second half and then relative growth rates of the various segments.

Your next question is from the line of Ryan Connors with Northcoast Research.

Northcoast Research. A couple of questions here. Most of might have answered, but a couple of big picture. First of all, I know there's been some drama in the among some of the bigger players and distributions and new players coming in. I'm just curious if there's anything to call out there in terms of any impact on your business from a volume or a margin standpoint? Any -- is there inventory building or drawdown, any discounting? Anything with that volatility in the channel that's -- yes?

Good question in drama and drama is a good word, I'd say. And the answer is that we believe that to be largely in the past for -- relative to us, and there would be nothing from an inventory build or mix or different behavior that we would call out on that. I mean we're always dealing with some level of change and drama relative to distribution and end markets and customers. It would have been heightened there for a while, but I'd say it's calmed down, Ryan. And -- we do, though, always look for opportunities to run programs, to do stuff, but it's not affecting our business in any spectacular way.

Got it. Okay. That's helpful. And then second, just big picture. If my math is correct, Pipe was barely 50% of sales in the quarter, a 50.1% is what I got. So kind of heading towards this milestone where Pipe actually becomes less than half of the company, which is pretty amazing when we remember the days when it was 90-10 Pipe and Allied Products. So what's the long-term vision? Should we expect pipe to just continue to be declining in the mix over 2, 3, 4 years and at some point, it's 1/3 or 1/4 of the company? Or do we kind of stabilize and we should think about that 50-50 kind of being where the company wants to be longer term?

Yes. So again, another good question. I don't see it being 1/4 or 1/3 of the business for sure. I see it kind of bouncing around its 50-50. And I always kind of come back to our long-term strategy is to grow the Infiltrator business and the Allied Products business faster than the Pipe business because we believe we are less penetrated and particularly in the Allied products than the Pipe. So we, therefore, have more kind of open space and growth opportunities. So we will continue to work that. Whether it goes to 40% at some point, I would see that being the kind of the low watermark of it. But we do think it's very important for us as a company to grow our higher-margin product lines faster than the company average to create positive mix for the company. So that's that's kind of core to my strategy for the company.

At this time, there are no further questions. I will now hand the call back over to our presenters for any closing remarks.

We appreciate all the questions today and the participation in the call. We feel good about the quarter. We feel good about how we are executing. I'll just reiterate, we're worried about demand. And I don't think it's things that we might do -- that we're doing, I think it's just the environment that we're in. But we also know we have the right long-term trends and long-term water positioning for our on-site septic business, our wastewater business Infiltrator, our Allied Products and Pipe business through ADS. So we like the hand we're dealt. We see good needs from the and opportunities of the cash. So we'll -- we continue to be very focused on that as a management team and our Board. That said, we appreciate it. Thank you. We look forward to the follow-up calls we're seeing you all around.

This concludes today's call. Thank you for joining. You may now disconnect your lines.