Advanced Drainage Systems, Inc.

Good morning, ladies and gentlemen, and welcome to Advanced Drainage Systems' Second Quarter of Fiscal Year 2025 Results Conference Call. My name is Regina, and I am your operator for today's call. At this time, all participants are in listen-only mode. Later, we will conduct a -and-answer session. If you'd like to ask a question at that time, simply press star followed by the number one on your telephone keypad. To withdraw your question, press star one again. We do ask that you please admit yourself to one question and one follow-up. Thank you. I would now like to turn the presentation over to your host for today's call, Michael Higgins, Vice President of Investor Relations and Corporate Strategy. Sir, you may begin.

Good morning, everyone. I'm here with Scott Barber, our President and Chief Executive Officer, and Scott Cottrell, our Chief Financial Officer. 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 that release has also been included in an AK submitted to the SEC. We will make a replay of the conference call available via webcast on the company website. With that, I'll turn the call over to Scott Barber.

Thank you, Mike, and good morning, everyone. Thank you all for joining us on today's call. One of our board members summarized the second quarter environment very well. In a demand environment challenged by economic and political conditions plus severe weather events, some friction has developed versus our expectations. ADS is addressing the current environment by making high-quality decisions day by day with an eye on the long-term objectives of the company and what is needed from an investment and resource perspective to achieve those objectives. We are doing this while also enhancing safety, improving delivery and operational execution, and wisely investing capital. Additionally, we continue to return capital to our shareholders and have maintained an adjusted EBITDA margin of over 30%. So I think about the current environment in terms of what's good and what's not so good. Let's start with the good. ADS's residential and infrastructure end markets continue to grow. Sales in the residential end market increased 6%, driven by the infiltrator growth of 11%, as well as 8% growth in the legacy ADS sales that go in at the land development stage of the residential cycle. Residential market sales are benefiting from previous investments and programs to help our partnerships with large national and regional home builders, solid market penetration, and favorable supply-demand dynamics due to the long-term undersupply of housing. Infiltrator continues to perform well as revenue growth was driven by 14% growth in tanks and 40% growth in advanced treatment products, as well as additional distribution and a strong residential demand backdrop. We remain excited about this offering, and with the addition of Orenco systems, we will continue to grow our portfolio in wastewater and advanced treatment. The infrastructure market sales increased 7% in the quarter due to continued strength in roadway and airport projects aided by funds allocated under the IIJA and other publicly funded projects. This is a segment where ADS historically under-participated, but we are now positioned well following the investments in -to-market resources and capacity in key geographies. Our outlook remains favorable for this market. Profitability remains strong, demonstrating the resiliency of the ADS business model, and we are consistently posting adjusted EBITDA margins around or above 30%. Capital spending, deployment, and the return on previous investments remains favorable. We have steadily increased capital expenditures over the last several years, and we are seeing those investments pay off. Infiltrator is an excellent example. Adjusted gross profit increased 17% over the prior year, and they are performing well across the platform. These results are fueled by the capital, new products, and resource investments made since we acquired them in 2019. At ADS, the capital investments in the Pipe Network are improving downtime, efficiency, safety, and scrap performance. All of these measures improved in the second quarter. In addition, delivery performance also continues to improve, driven by the higher inventory levels as well as new distribution and automation investments being made to further improve the customer experience. From a capital allocation perspective, in the first half of this year, CapEx increased 36%, the dividend is up 17%, and we dialed back our share repurchase program to allocate capital to the Orenco acquisition, which closed October 1st. Between those four priorities, we have doubled the amount of capital we either reinvested in the business or returned to shareholders thus far in this fiscal year. Now, moving to what's not so good. Demand. Demand at ADS's largest market, non-residential construction, which is about 45% of the sales, this demand was choppy by segment and geography. The impact manifests itself in two ways for ADS. Non-residential construction is our single largest market for pipe products and two-thirds of our allied product sales. We adjusted expectations for the non-residential market from low single-digit growth to flat for fiscal 25, reducing our revenue outlook by approximately $40 million for the year. Second, weather played a factor in both our second quarter and the start of the third quarter in key geographies. I don't like to talk about weather on these calls, but due to the severity and intensity of various well-documented storms, it would be imprudent not to mention their impact on ADS results. Accordingly, we reduced revenue outlook due to weather by an additional $40 million. The ADS and infiltrator employees in the Southeast are accounted for and safe after the hurricanes in September and October. We had a few property, a few with property damage, and most had disruption to their lives, and we've provided support to those that needed assistance. Our five facilities in the Southeast were up and running again shortly after the hurricanes and suffered no damage. The ADS Foundation also contributed to Florida and North Carolina organizations assisting those most affected in the region by these hurricanes. These weather events are typically disruptive in the short term, yet favorable over the medium to longer term. In the short term, shipments slow down significantly as products are not able to be brought on to job sites. Then in the recovery phase, it is excavation contractors that clean up the sites, which further delays installations. We do a lot to make emergency shipments with our fleet in these situations, but this does not overcome the slowdown in overall installation activity. Over the medium term, we typically see a favorable impact from the catch up and repair, and over the longer term, new projects and regulations are designed and constructed to handle increased volumes of storm water. So these events cause short term pain, but create medium and long term tailwinds to the ADS demand profile. Lastly, you can see in the Ibidai Bridge that price, material cost, and mix remain a challenge as we knew it would. We've been able to offset the negative impact with volume growth and improved execution in manufacturing and transportation. However, material costs are moving more unfavorably than we expected, which is also reflected in today's updated guidance. As I think about this bridge and how we manage the company, it is about the day to day decisions on profitability and market participation in the context of the ADS value proposition at a very local level, balanced with the overall objectives of the company. As you know, ADS is a great value proposition for our customers in the regulatory work we do to gain approval for the use of our products, the breadth of our pipe product lines, the full package we provide with the allied products and solutions we offer to the engineering, distribution, and contractor communities. We stack on top of this the breadth of our network, the inventory we hold locally for superior delivery, and the specialized trucking fleet we operate to deliver to the job site. We remain one of a kind in our industry and will continue to invest in the ADS value proposition to further serve our customers. The hurricanes in the second and third quarter affected several important states in the southern Crescent such as Florida, North Carolina, South Carolina, and Texas. These events often encourage municipalities and other regulators to reevaluate their water infrastructure needs, which presents a long-term opportunity for ADS to provide communities with more resilient water management solutions. In April, the EPA delivered the 2022 Clean Watershed Needs Survey results to Congress. This report assesses the capital investments needed to meet the water quality goals of the Clean Water Act over the next 20 years. The Clean Water Act is designed to prevent, reduce, and eliminate pollution in the nation's water sources to restore and maintain its chemical, physical, and biological integrity. The EPA estimates $630 billion of investments will be needed over the next 20 years, citing an aging infrastructure and climate change is an ongoing challenge to clean water infrastructure nationwide. The stormwater management category was estimated to need $115 billion in funding, an increase of $91 million, or 385 percent, since the previous survey in 2012. The increase is due to a variety of factors, including changing regulatory requirements, the increase in frequency and intensity of heavy precipitation events, and an increase in impervious surfaces. In addition, decentralized wastewater treatment systems where infiltrator participates need an estimated $75 billion to rehabilitate, replace, or install new systems, an increase of $47 billion, or 172 percent since 2012. To that end, this quarter we announced the acquisition of Orenco Systems, a leader in advanced treatment for onsite septic wastewater management. Orenco is a great strategic fit for Infiltrator, and we are busy integrating the two businesses. We first started talking publicly about the need for advanced treatment solutions in 2022 at our investor day, and market demand has continued to grow since then. Infiltrator's organic advanced treatment products are already growing double digits consistently, and this acquisition accelerates the company's growth in a highly fragmented and fast-growing segment of wastewater. The enhanced portfolio of complementary solutions combined with a broader sales force, geographic reach, and distribution footprint will drive further penetration in this attractive segment. Craig Taylor and the team at Infiltrator are already working with the Orenco team to continue building on both companies' strengths to deliver exceptional products and services to customers. In October, we hosted the grand opening of ADS's Engineering and Technology Center, the world's largest and most advanced stormwater research and engineering center. This facility brings the talent and tools in one purpose-built facility that allows the ADS teams to collaborate on material science, product design, tooling design, and manufacturing process engineering. This facility will help to bring new products to market faster, drive the industry forward with new innovation, and solidify our leadership position and scale in stormwater management with highly engineered, innovative solutions. Just to give you a few examples of what we will be working on, this facility is equipped to open new streams of recycled plastic material and enhance the resins that will divert more plastic waste from landfills and improve the performance of the stormwater products. We will also be utilizing over 90,000 gallons of recycled water in a closed-loop system to test stormwater products under precisely controlled, real-world conditions. We couldn't be more excited about the new opportunities and solutions ADS will create in this center. This type of investment is one example of what sets ADS apart from competitors. We have the ability and capital to invest in advancing products, manufacturing processes, and material science that are unmatched in this industry. In summary, the second quarter results reflect strong-demanded infiltrator as well as the ADS residential and infrastructure end markets, which drove the fourth consecutive quarter of construction market volume growth. In spite of continued choppiness in the Ron residential end market, coupled with the short-term disruption of significant storm events, we achieved an adjusted EBITDA margin of 31.4%, underscoring the resiliency of the ADS business model. Demand for localized water management solutions remains strong, driven by aging water infrastructure and changing weather patterns, highlighting the continued opportunity for ADS and infiltrator to support the development of more resilient water infrastructure. Overall, we are well positioned and attractive in markets with secular tailwinds from the increasing needs to manage and protect water, the world's most precious resource, safeguarding our environment and communities. With that, I will turn the call over to Scott Cottrell to further discuss our financial results.

Thanks, Scott. On slide seven, we present our second quarter fiscal 2025 financial performance. From a top-line perspective, sales in the ADS legacy pipe business decreased 3%, primarily driven by unfavorable price mix in the period that offset an increase in volume. Allied product sales increased 3%, driven by sales of water quality and capture products, and infiltrator sales increased 11%, with active treatment sales up 40% and above-market growth in tank sales as those products continue to take share from traditional materials. From a profitability perspective, we are pleased with the .4% adjusted EBITDA margin in the second quarter. Profitability benefited from volume growth in the quarter, as well as the mixed benefit from infiltrator growing faster than the pipe business. Manufacturing costs were favorable in the period due to fixed cost absorption, improved operational efficiency, as well as the benefit of prior investments we've made in the business. We continue to invest in logistics and transportation assets as well to ensure we have good product placement and -in-class customer service. Importantly, we were able to offset unfavorable price costs through volume growth, product mix and favorable manufacturing costs. On slide 8, we present free cash flow. We generated $238 million of free cash flow -to-date compared to $376 million in the prior year, primarily due to an increase in inventory levels as well as material costs. Our -to-date capital spending increased 36% -over-year to $112 million, and we now expect to spend approximately $250 million in capital for the full year. These investments are focused on productivity and automation, de-bottlenecking our recycling operations, the completion of our world-class engineering and technology center, and execution on growth we continue to see in certain geographies. At the end of the first quarter, our net debt to adjust the EBITDA leverage was 0.8 times, with $613 million of cash on hand and $590 million of availability under our revolving credit facility. With ample liquidity and low leverage, we are in a great position to execute on our capital deployment priorities. On slide 9, we highlight our disciplined approach to capital allocation. As you all know, our first priority is to grow the business organically through capital investments, closely followed by strategic M&A to enhance our market position and scale. The capital investments we have made in the last several years are clearly paying off and one of the reasons for our strong profitability profile. We are excited about the Orenco acquisition, which closed in the fiscal third quarter. The Orenco business will report through the infiltrator segment and is included in today's updated guidance. This was a strategic acquisition in the attractive and growing advanced treatment market. For the balance of fiscal 2025, we expect Orenco to contribute $40-50 million in revenue, with profitability initially in the mid-teens. It is worth noting that we see this margin expanding significantly over the next several years through our Aggressive Synergy program. Notably, while we have been able to reinvest $362 million back into the business in the first half of the year, we have also returned $95 million to shareholders through dividends and share repurchases, staying true to our disciplined and balanced approach to capital allocation. Finally on slide 10, based on our performance to date, current visibility, backlog of existing orders and trends, we updated our fiscal 2025 guidance ranges today. We now expect revenue to be in the range of $2.9 billion and ,000,000, and adjusted EBITDA to be in the range of $880 million to $920 million. These ranges result in an adjusted EBITDA margin of .3% to 30.9%, down 120 to 180 BIPs from last year's record margin of 32.1%. Today's fiscal 2025 guidance accounts for the results through the first half of the year, the impact from significant weather events to date, continued choppiness in the non-residential end market, the acquisition of Orenco, as well as incremental pressure on material costs and product mix. Pricing is expected to stay at the current levels through the remainder of this fiscal year. We remain focused on executing on our long-term strategic plan to drive consistent long-term growth, margin expansion, and free cash flow generation. With that, I'll turn the call back over to

Scott. So thanks, Scott. In closing, though we expect some continued choppiness in the non-residential market, for the second half of the year, we will be focused on doubling down on our strengths, including continuing to invest in the end markets where we benefit from attractive tailwinds, specifically the growth in residential and infrastructure across Infiltrator and ADS, and getting Orenco onboarded and integration ramped up so we can capitalize on growth and advanced on-site treatment, and then executing on the improvement investments we have made and the cost reduction programs in flight at ADS. The non-residential market will continue to be choppy, and we will manage through this in the second half of the year. Operator, you may now open the line for questions.

At this time, I'd like to remind everyone in order to ask a question, press star followed by the number one on your telephone keypad, and we do ask that you please admit yourself to one question and one follow-up. Our first question will come from the line of Mike Halloran with Baird. Please go ahead.

Hey, good

morning, everyone. Good morning. So, Scott, at the end there, I think you're pretty helpful in kind of the put-takes, but just can you help understand what's going on on the pricing side versus what's happening on the materials side? Sounds like the pricing side, generally in line with your expectations, relatively stable, all sequentially, but the material costs are inflating and you're just not in a position maybe move on the price. So could you talk about what's happening on the pricing side then and then what those material cost inflation pressures look like and how you think that, when you think that price-cost timing starts flattening out and becoming neutral or positive?

So, Mike, Scott Barber, you know, this is really our largest market, which is the non-residential market, being less than what we anticipated at the beginning of the year. You know, we thought it would be low to mid-single digits, low single digits, and it's more flattish. We've changed our outlook for that market. That's hurt the demand and probably our strongest position market. At the same time, in a weak market, you know, you have some of these material inflations and it's a little more difficult to recover that in the short term in a weakening market. We have a great value proposition. We're converting, you know, projects every day from our competitive materials. All that stuff remains very much intact. I would also say that this impact on allied products, you know, we drive those allied products at a, you know, high single digit, low double digit growth rate consistently over the years, but two-thirds of those sales go into the non-residential market and that's caught up with us with that weakness there and that's slowed down, kind of hurting that overall, what I would call, you know, overall mix of the company. You know, we try to grow infiltrator and allied faster. The infiltrator guy is doing a great job of growing. You know, that and allied slowing down has certainly had an impact on us. You know, we're managing through this, you know, from a material cost side, you know, working on a lot of programs. We're working on this every day and how we price projects. But we think we're kind of in a steady state. Cottrell, you want to add to that?

No, I agree with everything Scott said. I think the material cost side of the house, we saw some of that in the first half, but we're going to see more of that in the second half as we go through the year, as we look at it. That price cost dynamic, very much a factor of the demand world that we're in right now, as we've talked about. To your point about when do we see that kind of bottoming out and, you know, inverting kind of into a favorable perspective, that depends on our view on the end markets. Soon for next year. And for next year. Yeah, that'd be next year.

So it doesn't sound like there's incremental price pressure. That's the stable part. It's just more in a demand environment. You're sitting in, you can't catch, it's tougher to catch up. And then you're just seeing some more inflation pressures relative to the thought and a little mixed pressure if I just simplify the message. Is that fair?

Yes. That's a good summary.

And then the second one would be just on the underlying demand. You touched on the pressures on the commercial side. When you think about the project activity, what your customers are saying, anything on that front log or funnel side of things, has that changed at all? And maybe talk about the decision-making process that your clients and customers are facing. What gets them to maybe turn that spigot on? And how are you thinking about that recovery curve from here?

What gets them to move forward? That's a good question. So let's, you asked a bit about the funnel. And I would say our quoting activity is reflective of our demand activity, choppy. We'll have a good region and then a bad region. It's just not very consistent. It's kind of sideways, if you will. And I'm really talking about the non-residential. I think in residential and in the infrastructure, it's pretty consistently positive right now. But in that non-res, very choppy. In Craig's business, an infiltrator, pretty steady from an order input. Not a lot different than what we've been seeing for these good markets. Remaining choppiness there. And when we talk to our customers about what makes them move forward, I will tell you, a lot of them are waiting for this week to get over. We hear that a lot about, I'd like to see what happens with the election. I'd like to see what's going on with interest rates. We'd like to see interest rates move, even though the Fed has been accommodating here over the last two meetings. I don't think we're seeing that much movement of project work with that. I don't think we got a big tailwind from that in September or here recently. So I think that bears watching. But when we talk to our distributors, I'm kind of repeating to you what they're saying to us, is that things are still kind of bottled up a bit, particularly in some areas. Thank you. Really appreciate it. All right.

Our next question comes from the line of Matthew Lee with Barclays. Please go ahead.

Morning, everyone. Thank you for taking the questions. I wanted to – I got to go back to the price cost side. I think that was super clear what you just said, that really price is stable here. And what appears to be the biggest change to the guide is on material cost inflation. And so I guess, number one, it would be helpful if you could maybe educate us a little on historically what happens in terms of your ability to take price when you do have this level of inflation. And also, in this case, what you're really waiting for is just kind of a better demand environment in order to be able to push price. Are you starting to signal to the trade that price could be something on the horizon? Just any kind of details there on how you would plan to offset it. Thank you.

Matt, Scott Barber here. Good morning. Whenever we talk about price, it's always about our value proposition. And all the things we do – I reiterated them in today's script – all the things we do around that. And then what are we trying to achieve in that local environment? So very local business. And what are we trying to achieve in that local project? It's just people that we think we have opportunities with, what's the importance of the project, the size of the project, the competitors on the project, the conversion from traditional materials and whatnot. That kind of all goes into that -to-day decision-making. And as we've seen, we've kind of been like in the boiling pot here on material cost. They've just been kind of eking up a little bit, a little bit, a little bit. That's more difficult environment. In a weak demand environment, it's more difficult to recapture those kinds of price movements. So that – and again, like I said, it's -to-day how we're making those decisions. And we would – believe me, we're battling on the material side too on our – in our procurement, in our recycling, in our blending activities to try to mitigate as much of that as we can. Good performance from the factories and in transportation has helped overcome some of that. But getting that in a weak demand environment, that slow boil of materials has been more difficult to recover than maybe in really peak high-demand environments. That kind of makes sense. You know, with demands weak, pricing power is more difficult.

Okay, right. And you're saying that – it sounds like you're also saying that if costs were to be inflating more quickly, you might have an easier time to push price rather than the kind of slow bleed upwards. So I'm hearing you correctly.

That is very true. That is very true. Yeah. Very true. Okay. Been repeated many times in the history of the company as you guys saw in previous high material inflation environments.

Yep. Got it. Okay. Thank you for that, Scott. Secondly, on the manufacturing and transportation line, as you were just alluding to, I think I heard you say at the top that I mean part of the improvement in that line was driven by your prior investments. Obviously, you guys are still in the middle of this big capital investment cycle. So I'm just curious if you could kind of draw a line between some of the investments you have been making in your manufacturing facilities and in transportation and just sort of what the implications should be to that kind of manufacturing and transportation line going forward. Thank you.

Yes. So, all right. Thanks. Appreciate the question. And kind of number one on that list is the performance at the infiltrator business. As you know, just after the acquisition there, we made pretty significant capital investments. And those investments have paid off very nicely. The results of those investments have been better efficiency, throughput, the new products that have better shot sizes, reduced material content, all that stuff. And you guys can see the numbers, what's happened in terms of their profitability. Number two, in the ADS Pipe Network, we can see lower scrap rates, better uptime of equipment, better throughput and rate, better safety performance. Now, we got a lot of plants in that ADS network. Those that we concentrated on first, we have seen those improvements. And the plans, the engineering team that has been working on that equipment, I think have done a pretty nice job. And that's what's turning the tide there is that kind of stuff. So going forward, which is your real question, I think Craig and his team at Infiltrator will continue to perform at very high profit levels. Pretty good profitability, but I think they'll continue to make improvements. There are additional investments we'll make there that we've already started working on and contemplating. And then I think as our investments across the Pipe Network spread, we ought to see more consistency there also. And this is that capital has been machine rebuilds, new tooling, automated equipment. We've got more than half of our trucking fleet is now refreshed, truck and trailer fleet, fantastic safety performance in our trucking fleet now, and very nice efficiency gains with loads and miles per gallon. So not quite the same magnitude of dollars as at Infiltrator or in the Pipe Network, but still meaningful improvements. So we're going to continue to work on that. And it's been a long road and it will continue to be a good thing for the company.

Excellent. Well, thanks, Scott. Good luck, guys. All right. Thanks. See you later, Matt.

Our next question comes from the line of Garik Shmoy with Loop Capital. Please go ahead.

Oh, hi. Thanks. Somebody could just go through what you were seeing in the quarter in a little bit more detail, particularly on the non-res side. We know that the market has been choppy for a while now, but is there anything maybe outside of the storms

that

informed you that things were getting worse as the quarter progressed or is it really just kind of broad-based? So just a little bit more color on just how non-res had moved over the last several months.

Well, you know, the first thing that comes to my mind when I think about the non-residential and is in our in our allied products, you know, those products, the majority of them go into that segment. And, you know, we've had very nice, consistent growth in our allied products, and particularly in the StormTech, which is the storage product line. And it just flattened out. It's not like we were losing jobs or there's something going on in there. It's just stuff, you know, continually pushes to the right for delivery. You know, we might quote, design, get the order, and then consistently things have been pushing out on us there. And to me, that tells you that there's just a lot of the projects got completed. There's this hesitation to move forward. This is some of that uncertainty I was talking about. Maybe the election being done will break loose some of that. But there's nothing underneath that in terms of quote and design activity that tells us something is really wrong. It just tells us that things are bottled up and not moving forward. And when I say wrong, I mean, with our product line or our offering or a competitor or pricing or something like that, it's just these darn jobs aren't releasing for shipment.

Okay, that makes sense. On the transportation cost piece, specifically, I think last quarter, you were repositioning product, you know, kind of across the country, and that was a bit of a headwind. It looks like that reversed nicely here. Just wanted to confirm that you're effectively through that process. And then just on inventories just broadly, how should we think about

that?

You mentioned they picked up a little bit year on year here. Is there any concern for potential de-stocking in some of the channels you service? So you want to go,

Katron? Yeah, I can do it. Garik, on your question, first on de-stocking, there's no risk there. So we'll put that one off to the side. On the what we call capitalizer or interplant freight item, you know, absolutely getting ready for this year. We talked about that in Q4 of our fiscal 24 and how we did that running through a little bit of our first quarter. Those costs go into our inventoryable costs. They go on our balance sheet and come through in three months. So in the second quarter, we did actually still have some of those costs as a headwind in that manufacturing and transportation bar. They were just offset by the strength of the manufacturing group's performance during the quarter. To your point as to when do we expect to see that kind of ease on a -over-year basis and actually flip to a benefit, that's in our 2-H guide. We actually expect transportation to be favorable -over-year in 2-H. The issue you have, and it kind of goes to the inventory, we expect our manufacturing costs, however, on that absorption side of the house. As we look to that demand environment, as we look to our current inventory levels, these are our inventory levels that we have and get to the right DSI, we'll take production down a little bit and have an absorption impact. So again, you'll see manufacturing being a little unfavorable in the second half, and that's embedded in our guide.

Okay, that all makes sense. Thanks and best of luck.

Our next question comes from the line of Brian Blair with Oppenheimer. Please go ahead.

Thank you. Good morning, Brian. Good

morning. Scott, you actually just mentioned info related to one of my questions. What kind of decrementals should we assume for the back-ends? We've been kind of walking through the different bars of the revised full year bridge. I would think with there being the relative suddenness of storm impact and related adjustments that if we look at the slower non-res, chowpier non-res environment, 40 million, the 40 million in storm impact, that there may be pretty elevated decrementals on that. Also with adjusting production levels based on your own inventory, just trying to get my head around that bar in the revised bridge.

Yeah, the way I would answer that is I'd look at it two ways. First of all, on a phasing perspective, we typically see about 55% of our revenue in the first half, 45% in the back half. So I would say that that is reflected in this guide as well. When we talk about decremental margins as we look at it, usually it's, we look at 2H versus 1H, it's usually about 300 to 400 basis points weaker in the second half of the year based on seasonality, lower demand, lower revenue, and so forth. Right now, I would tell you it's going to be a little bit like the 4 to 450 is the way to think about that from a decremental or 2H margin performance off of our 1H performance is the way I would model that out or think about it.

Okay, that's very helpful. Thank you. And then you mentioned, I think 40 to 50 million in Orenco revenue for for the remainder of fiscal 25. What should we think about in terms of normalized growth rates there, given the combination of assets and commercial synergies that you can bring bring to the deal? And then mid-teens margin, where should we expect that to go over time? Is there a concrete kind of synergy level that we can assume for years one, two, or any way to tell us think about the past forward?

Yeah, I think right now, Brian, we're not going to get into a lot of detail on that. I think what I would highlight for you, though, is we are so you know, excited about this acquisition. And you know, the infiltrator for financial performance, leadership team, what they've been able to do. This is a strategic acquisition. And I couldn't emphasize how excited we are and what this team is going to be able to do. Is a mid-teens margin kind of where we want it to be? No. And you know, when you look at our segment disclosure infiltrators in the mid to high 50s from an adjusted gross margin perspective. So are we going to be able to get this business to there? No, unlikely based on where we are today. Are we going to be able to expand that margin significantly over the next two, three, four, five years? Yes, we will. So more to come on that as we think about next year's guide and so forth. But just suffice it to say, you know, 40 to 50 of revenue is in our guide and mid-teens margin. So we thought that was, you know, a really appropriate level of disclosure to give you all so that you could make sure you understood kind of how that was factored into our guide.

Okay, understood. Thanks again.

Yeah, the one thing I would add, I think we'll probably talk a lot about the infiltrators advanced treatment segment and what we're doing in that both organically and with acquisition at our investor day. And

yeah. Our next question will come from the line of Trey Grooms with Stevens. Please go ahead.

Hi, everyone. This is Ethan Roberts on for Trey Grooms. Thanks for taking my question. First, I just wanted to ask, what are the implications of lower than expected commercial demand and continued difficulties in agriculture on price mix, especially since you guys called out last quarter that this quarter would have a higher percentage of agriculture sales?

Okay. So I think the biggest impact on this non-res thing is really this allied product where it's such an important product force and it's the growth of that is leveled out. And that affects the gross margin mix of the company. So that's one. Two, in that non-res market, it's a big market for our pipe products. We pursue a lot of projects there all the time, you know, every day. And when we start to see that architectural billing index move to above 50, when we start to see non-residential starts recover, that'll be when we begin to believe that the choppiness in that non-residential market is gone. And then we did have some negative mix. You know, agriculture is bigger. You know, it's had a better second half than first half. First half very impacted by the weather, the very wet weather, particularly in the upper Midwest. We have had a pretty good fall season in our ag business. The mix of that as it grows is a higher percentage of our business, really beginning in kind of September, October, November, does hurt us from a mix perspective. We think we overcame it a little bit in July and August, that negative mix of September. But your point is, you know, it is not a tailwind for us right now. It's more of a headwind. Yeah. But I would say we're managing pretty well through that time. I think

so. And we talked about elevated volumes in Q2 and we did see that, right? The volumes that sold in Q2 were really on our expectations, which was a step up,

which is the next big

mix Scott was talking about.

We're kind of recovering in that right now. And we have a new general manager of our ag business who's hit the ground running, and lots of excitement about what he's going to bring to our business.

Okay. Thank you. That's super helpful. And then just shifting gears real quick onto Renco. I know you said you'd give more detail in an upcoming investor day, but just high level, how are you thinking about the cross-sell opportunities? And it's a highly fragmented market, as you pointed out. So any thoughts on additional bolt-on opportunities there?

Yeah. So Ethan, I think after the acquisition, we talked to a lot of people. And the immediate cross-sell opportunity is the ability to sell the infiltrator septic tanks into the Renco systems. That wasn't happening before the acquisition because the companies were competitors. So that's number one. Number two, Renco has a controls business. A lot of the septic systems have remote monitoring. So their controls package strengthens the infiltrator offering. So there's opportunity there. And then one of the faster growing or the fastest growing product line at Renco was this, what this brand name is this Prellos liquid only sewer, which is the ability to take effectively put in a centralized sewer system in small rural areas. So there's tank and piping that goes with that. And then they're able to kind of under pressure, pump the wastewater to kind of like a centralized treatment facility. And so there's good opportunity there with that where we can get that product in the hands of the Renco sales, I'm sorry, the infiltrator salespeople in the infiltrator distribution and kind of broaden the reach and expansion of that product line.

Perfect. Thanks so much. I'll pass it on.

Our next question comes from the line of John Mavallo with UBS. Please go ahead.

Good morning, guys. Thanks for taking my questions. The first one is the moving pieces on the revenue side. You've talked about quite a big year, but can you just help us maybe put a finer point on the walk from the prior implied second half EBITDA margin of around 31 and a half to kind of the implied revised margin of closer to 28.5. I mean, it seems like there's, I don't know, 30 to 40 bits from a Renco. It sounds like there's a little bit of headwind on the manufacturing side, some unfavorability there, but what are some of the other moving pieces if you could help just kind of bucket those?

Hey, John Scott here. I think you hit on two of the key drivers. I think the third that you didn't mention was related to material cost. So again, you got the manufacturing headwind, you got a little bit of that mix in allied products on that non-res weakness, but that material cost, that's really one of those items, as we talked about on the call, that really we've seen kind of an incremental increase as we've gone through almost every month on a -over-year basis and sequential basis. And it's one of those items that we'll see more of that cost coming through in two H than we did in one H. So when you throw that in there, that really impacts your margin performance. And again, like we've talked about, two H to one H is usually 300 to 400 bits weaker, just based on seasonality, and this will be somewhere around 400 to 500 based on those factors.

Okay, understood. And then, you know, I know you generally want to give kind of full year guidance as opposed to quarterly, but there are so many moving pieces here. Is there any way you can help us frame maybe the cadence of revenue and margin in three Q and four Q?

I think the only way, John, I could do that is just to go back to bubble it up a little bit and just indicate that the way we see our revenue phased out typically is in that kind of, you know, 55 to 45 percent, one H, two H as to how our revenue falls. And we see that falling about same way as to Q3 versus Q4. I really don't want to get into that just because of the impact of seasonality on those two quarters. So I think using that is what we're projecting and predicting for the second half, as well as what we indicated we think is kind of that end market weakness and the weather impact that we expect. I think that's the way I would guide you to try to put that in there and model it out.

Okay. Thank you, Scott. Yep.

Our next question comes from the line of Ryan Connors with North Coast Research Partners. Please go ahead. Ryan, you might be on mute.

Good morning. Good morning. I wanted to talk a little bit about maybe the competitive environment because, you know, obviously, you know, Mike, you've talked a lot about how price has always been generally positive through all sorts of different cycles historically. And I mean, is there anything that's shifted competitively that's a little more challenging and related to that? Is there any geographic nuance to, you know, are certain markets seeing more better pricing than others around the country? Any kind of color there about kind of competitive and geographic pricing?

Yeah, Ryan, I would say, you know, the competitive environment, you know, Scott made some comments about the kind of demand and the non-residential being, you know, a little bit weaker and, you know, the difficulty to pass the price through as much as we would like to. You know, I would say, you know, strategically, we're out there, you know, making those decisions day to day in certain geographies to pass the price, you know, where you think you're able to get it. As far as the competitive environment, you know, typically our, you know, more competitive plastic geographies, you know, tend to be the northeast, parts of the Midwest, Texas, and parts of the West. And I would say, you know, that is holding true today. So I wouldn't say there's some kind of change or big sweep in how we look at that.

Okay. And then related to that, you know, the substitution. So one thing you haven't mentioned much today that I've heard is conversion. And normally that's been a big part of the story, but is there anything where the price you've taken the last few years has kind of narrowed the gap versus some of the substitutes and the conversion? And has that impacted the conversion story and had a knock on effect on price at all? Any update on kind of the conversion side?

So I would say, you know, the conversion story continues to progress as it always has. It's very methodical. You know, we still feel, you know, we're gaining, you know, 100 to a couple hundred basis points of share gain. You know, a lot of that is driven by the HP product, which is polypropylene. You know, I don't think the pricing environment or, you know, how much price we've had to pass over the past three years has had a significant impact, negative impact on our conversion story. You know, we feel we've still been able to take share. You know, the concrete pipe industry has faced very similar inflationary pressures that we've had, whether that be input costs going into their product, whether that be labor costs to make it or transportation costs to deliver it. You know, so they've had to continue to raise price as well. So, you know, I think it's still intact and we don't feel like that has hurt us over the long term here over the past four or five years.

I would add that the residential and infrastructure growth is largely a conversion story. And those markets have been growing pretty well for us. Those are sales and -to-market resources we started investing in four years ago and it really paid off for us.

Got it. Thanks for your time. Thanks.

Thank you. Our next question will come from the line of David Tarantino with KeyBank Capital Markets. Please go ahead.

Good morning, everyone. Good morning. A follow-up on some of the longer-term margin commentary. A lot of good color on the near term, but we're still ahead of historical levels. So maybe could you touch on the sustainability of these higher margins longer term, particularly relative to kind of all the price cost commentary and what offsets from investments you still have?

Yeah, this is Scott Barber, David. Yeah, we're above our long-term targets. We'll look at new financials in our investor day that will be next year, next calendar year. We think that we still, you know, things kind of, they don't go in a straight line. They kind of ebb and flow a bit and I think we're seeing some of that right now due to some demand conditions and some short-term things in our materials market. We're making big investments in our engineering center, in material science, in all the different recycling activities that will, I think, impact that over the longer term. So if your question is, are we going back to our prior, our investor day guide of 2022? No, I don't think we're going back to that. You know, we'll have a plan that continues to march the company up and to the right as we look at the long-term.

Okay, great. That's helpful. And then just a quick one on the CapEx outlook. It looks like we're still running at a higher level, but could you give us some color on the change here? Is it just timing of projects and then maybe on capital allocation following or ENCO? Should we expect you to return to share buyback levels you were previously running at?

So CapEx is the timing thing on a couple of bigger projects. And we will remain at elevated CapEx versus historical there. Probably this 250 is not a bad number. We might go above and below that a bit, but we're going to invest in good projects in the company. And then share buyback, you know, we're always looking at, you know, cash on hand, you know, what's going on in the market and what does our particular thing look like, how we return that, what our needs are and opportunities internally. So it's certainly in the mix for us is more share buyback, but that's all I'd like to say right

now. Thank you. Great. Thanks for the time. Thank you.

That concludes our question and answer session and I will now turn the call back over to Scott Barber for closing remarks.

All right. Thank you very much for those questions and we appreciate the discussion that we had today. You know, we're going to continue to do what we do well. You know, we're going to drive our businesses, the infiltrator and the ADS businesses, we're going to lean into these markets that are growing in residential and infrastructure in particular. We're going to continue to, you know, work hard when we're, you know, in the context of our value proposition, the projects on the street and what we want to do in these localized markets from a participation standpoint in the non-res market is going to continue to be a little choppy, but that'll develop, that'll work itself out. We're going to work on the ARINCO integration where these are great product lines and expansion of our sales teams and our distribution and our product lines in this advanced treatment segment, which we really like and has been growing organically, very strong for that, for us. And we'll push on hard over this second half. We have lots of cost reductions and some things in flight here at ADS side, but that's not going to keep us from getting to our long-term objectives. That's it. Thank you very much, everyone. Have a good weekend.

That will conclude today's call. Thank you all for joining. You may now...