Advanced Drainage (WMS) Earnings Call Transcript

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DATE

Feb. 5, 2026 at 10 a.m. ET

CALL PARTICIPANTS

• President and Chief Executive Officer — Scott Barbour
• Chief Financial Officer — Scott Cottrill
• Executive Vice President, Sales — Michael Higgins
• President, Infiltrator Water Technologies — Craig Taylor

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TAKEAWAYS

• Adjusted EBITDA Margin -- 30.2%, with a 250 basis point increase driven by business mix, cost initiatives, and product strategy.
• Adjusted EBITDA -- Up 9% amid essentially flat revenue, as profitability improved across all segments.
• Year-to-Date Operating Cash Flow -- $779 million, representing over 100% conversion of adjusted EBITDA to cash, an increase of $239 million or 44% from last year due to working capital management, stronger profits, and lower cash taxes.
• Ending Cash -- Exceeded $1 billion at quarter end, supporting both operations and capital deployment flexibility.
• Leverage -- Ended the period at approximately 1.5 times net leverage following the NDS acquisition, inside the long-term target range of 1-2 times.
• Revenue Guidance (Fiscal 2026) -- Raised midpoint to $3.015 billion, reflecting current performance and forecast factors.
• Adjusted EBITDA Guidance (Fiscal 2026) -- Updated midpoint set at $945 million, supported by expected margin between 31.1%-31.6% (up 50-100 basis points over the prior year).
• NDS Acquisition -- Closed Monday and will contribute approximately $40 million revenue at a 20% EBITDA margin for the balance of the fiscal year.
• Stock Repurchase Authorization -- Announced new $1 billion program, bringing the total to $1.148 billion, enhancing capital allocation flexibility.
• Allied Product Sales -- Increased 8%, with StormTech storage chambers, Nyloplast capture structures, and water quality products cited as key drivers connected to new product launches.
• Infiltrator Revenue -- Rose 2%, with Southeast and South highlighted as growth regions, and tanks supported by product expansion and distribution.
• Pipe Revenue -- Decreased slightly, as HP pipe growth was offset by weakness in residential and infrastructure channel sales.
• Nonresidential Sales -- Increased 5%, particularly in the Southeast, Midwest, and Atlantic Coast into the Northeast.
• Residential Market -- Sales declined slightly, but Infiltrator outperformed the broader market driven by new products and expanded distribution.
• Nonresidential Demand Forecast -- End market outlook revised to down low to mid-single digits, versus previous expectation of flat to down low single digits.
• CapEx Outlook -- Increased by $40 million at midpoint, attributed to project timing rather than to specific sites such as Lake Wales.
• NDS Integration Plan -- $25 million in annual cost synergies targeted within three years, with ramp up weighted toward years two and three.
• Self-Help Programs -- Management cited that operational efficiency improvements contributed further margin expansion across categories.
• Capital Markets Activity -- Company expects to access debt markets to address near-term maturities, not to increase overall leverage.

SUMMARY

Advanced Drainage Systems (NYSE:WMS) delivered one of its most profitable third quarters, advancing adjusted EBITDA margin despite mixed volume trends and sector variability. Management emphasized that a balanced approach to capital allocation, with 70% of deployed capital since fiscal 2020 directed toward growth—including strategic acquisitions—has increased revenue from $1 billion in fiscal 2019 to approximately $3 billion today, and raised adjusted EBITDA margin from the mid-teens to north of 31%. The NDS acquisition, completed this week, adds immediate scale and margin accretion, with integration synergies and operating leverage positioned as key priorities for the next three years. New product initiatives in Allied and Infiltrator, supported by R&D and engineering investments, contributed tens of millions of dollars in incremental revenue within the past two quarters. Executives stated that disciplined working capital management and self-help initiatives in manufacturing and logistics enabled free cash flow growth and created room for a $1 billion stock buyback program.

• Integration of Orenco is exceeding expectations, with both margin synergies and an 80% reduction in recordable incident rates since acquisition.
• Management confirmed NDS will be reported in the Allied and Other segment and provided transparency on revenue and margin contribution in guidance ranges.
• The company maintained that approximately 50% or more of the business is targeted to come from higher-margin Allied and Infiltrator segments, a structural mix shift central to profit resilience.
• Infrastructure pipeline visibility is improving but remains uneven due to geographic variability and sectors like roads and highways trailing other verticals such as airports and rail.
• Residential declines were concentrated in the DIY channel, while multifamily and Infiltrator products gained share; management projects benefit from recovery in housing construction and infrastructure spend in coming periods.

INDUSTRY GLOSSARY

• TRIR: Total Recordable Incident Rate; a safety metric measuring OSHA-recordable workplace injuries per 200,000 hours worked.
• HP Pipe: High-Performance polypropylene pipe product family targeting infrastructure and commercial drainage replacement markets.
• Allied Products: Complementary water management solutions (e.g., StormTech, Nyloplast, water quality products) outside core pipe offerings, typically with higher margins and growth rates.
• Infiltrator: Segment focused on onsite septic wastewater and stormwater management systems and accessories.
• OPBBA: Operating tax benefit applied to the business; mentioned as a driver for lower cash taxes, but not further defined in the transcript.
• SNOP: Sales and Operations Planning; an integrated business management process aligning demand and supply.

Full Conference Call Transcript

Scott Barbour: Thank you, Michael, 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% 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 Orenco 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. Lead field sales remained resilient despite the market sluggishness, and advanced treatment systems continued 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're 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 our 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 Orenco, the resiliency of our profitability, payoff 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 stormwater 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. 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's 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 will 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.

Scott Cottrill: Thanks, Scott. Today, my comments will focus on cash flow, capital allocation, and our updated guidance. Jumping to Slide seven. 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 OPBBA. We ended the year with over $1 billion in cash and a half turn of net leverage. Turning to Slide eight. 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 1.5 times, and is well within our guardrails of one to two times. 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 nine, 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 2026 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 31.1-31.6%, up 50 to 100 bps versus the prior year.

This guidance includes approximately $40 million of revenue from the NDS acquisition at 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 US has experienced over the past two 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: We will now begin the question and answer session. Please limit yourself to one question and one follow-up. To withdraw your question, press 1 again. Please pick up your handset when asking a question. And if muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. Our first question comes from the line of Matthew Bouley with Barclays. Your line is open. Please go ahead.

Matthew Bouley: Good morning, everyone. Thanks for taking the questions. So just one on here on the nonresidential side because noticed you lowered your end market guide there. Correct me if I'm wrong, it looks like you increased your overall revenue guidance by seemingly more than just what NDS may be contributing. So, question is, if that's kinda more of a mark to market on what's already happened in the first nine months of the year in nonresidential or are you seeing something in your orders and backlog? And, you just mentioned the storms regarding the fourth quarter. That perhaps may be a little bit more choppy and nonresidential than what you previously thought. Thank you.

Scott Barbour: Alright. So Matt, Scott Barbour, nice to hear you. Thank you for the question. A little bit to unpack in there. I think the know, the beat, the raise, we kinda gave you the beat, raised a little bit. Then gave you the NDS. I think the raised a little bit is reflective of good performance, particularly of our allied products in the HP pipe in the nonresidential segment. As you know, we're really scaled in that with in our in a lot of our product lines and our go-to-market is tuned for that nonresidential market.

So we think we're gaining, you know, winning more than our more than our fair share of the projects that are out there with good products, good pursuit. The storm that you mentioned, yeah, pretty darn disruptive as you can imagine for us. So as a result of that, we took some of that to 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. Make no mistake. That storm is gonna 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.

With these kind of temperatures, kinda in the Midwest and the North.

Matthew Bouley: Okay. That's perfect. Yeah. Great color. So then you know, I guess second one, I mean, stepping back a little bit as you alluded to, taking shares, a lot of new products in Allied, I mean, sounds like it's contributing everywhere across Allied. Same thing in Infiltrator and, you know, expanding product lines. So my question is, you know, now that you're kinda, I guess, I don't know, seasoning this new engineering center and you know, clearly, a lot of these projects, products are getting to market quicker. What is the kind of future pipeline look like? So any sort of color on you know, what that incremental contribution may be today from these new products?

And then what are you kinda looking at around, you know, the next twelve, twenty four months around kind of additional products coming to market? Thank you.

Scott Barbour: Well, we're not gonna pre give you all the great stuff we're gonna talk about in June today. But I would tell you that you know, the I think what you the words you used are good. You know, we're seasoning and getting better in our pace of innovation, both infiltrator Craig's here with us today and at ADS. And know, I would say right now, you know, when we look at just kinda results over the last quarter or six 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 years are contributing, which moves that needle. You know, 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 then 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, you know, get better. At our pace of commercialization. Of the of those new products.

Matthew Bouley: Excellent. Well, perfect. Well, we'll certainly look forward to June. I'll I'll I'll see you guys there. Thank you, Scott, and good luck, guys.

Scott Barbour: Thanks.

Operator: Our next question comes from John Lovallo with UBS. Line is open. Please go ahead.

John Lovallo: Good morning, Thanks for taking my questions as well. 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?

Scott Cottrill: Hey, John. Scott Cottrill here. So it'll be part of the Allied and 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 three, Year one will be more of kind of the investments and the beginning of the integration activity, and then you'll see it kinda ramp between year and year two and year three.

John Lovallo: K.

Scott Cottrill: We'll talk about that in June. We'll talk about that.

John Lovallo: Okay. Yeah. Okay. No. Understood. And then it looks like you guys raised the CapEx outlook by about $40 million at the midpoint. Is this Lake Wales related or is, you know, something else driving this?

Scott Cottrill: No. Not like whales at all. We're 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. Yeah. I would say timing in our in our and this is Scott B, John. Just our when we can pull those things in and get the impact sooner, you know, we're gonna do it. The bonus depreciation really helps with those requirements as So We were we had our eye on that as well.

John Lovallo: Understood. Thank you, guys.

Scott Cottrill: Yep.

Operator: Our next question comes from Bryan Blair with Oppenheimer. Your line is open. Please go ahead.

Bryan Blair: Thank you. Good morning, everyone. Solid quarter. Good morning. I owned morning. Having owned Durango for a bit over a year now, maybe offer a little more color on integration phasing and progression above the deal model, where margins are now, if there's been any change to the 1,000 basis point expansion target that your team have laid out, I'm sure we'll get more detail on this in June, but highlights would be would be great.

Craig Taylor: Good morning, Bryan. This is Craig. The acquisition of Orenco is going well. 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 the wrinkle product are being offered up. And that's helping towards the growth of the business. As we move forward. From a margin standpoint, 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.

Head of plan. Ahead of the plan right now. And working on that margin improvement that you had mentioned a thousand basis points. So acquisition's 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. Yeah. An 80% reduction in our TRIR, which is our recordable incident rates, since we've acquired the company. Which is outstanding before this is Scott. Scott Barbour, the outstanding safety performance, which was a very early focus of Craig and his team out there. And we were very excited that it's ahead of plan. On the surgery plan and the profitability piece.

But, boy, the team there at Norinco 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, Orenco, as we move into this phase with NDS. And I'll be out there next week. Looking forward to being out there.

Bryan Blair: Okay. That's all great to hear. And then curious if you could speak to infrastructure project visibility. You know, the your team has faced you know, pretty difficult comps at least on, you know, trailing basis and they're some administrative uncertainties that impacted project flow, specifically IJA funded projects there. Seems like within the transportation verticals where you have meaningful exposure, the pipeline is resetting or there's more optimism looking through calendar '26 even into '27. Wondering if that's showing up and what your team tracks on a pipeline basis.

Scott Barbour: 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, you know, 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. Some things that have kinda moved through from you know, 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 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, you know, we're we're we have visibility. We're in their pitching. And the actually, our order orders are slightly better right now in that category than they were. So we're we will remain pretty focused on gaining share there.

Bryan Blair: Okay. Understood. Thank you again.

Scott Barbour: If you know, you now I forgot. You know, you kinda you I think you maybe alluded to it in the question was that government shutdown probably didn't help. You know, through those thirty eight or forty days of the government shutdown, we did see some friction created particularly in that kind of work and some other type of work through where there was just no one there to release an order or take a take a delivery, to tell you the truth.

Bryan Blair: Understood. Nice, guys.

Operator: Our next question comes from Garik Shmois of Loop Capital Markets. Your line is open. Please go ahead.

Garik Shmois: 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 you're seeing specific to any regions or any categories that is leading to the move to down low to mid single digit declines.

Michael Higgins: Hey, Garik. Michael 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. You know, that's just more of an update. You know, hey. We're through nine months of the year. We have a pretty good idea of what it's going to look like. And so, you know, kind of on the lower end, maybe a little it'd be end market activity's been a little weaker than we thought. Looking forward, I would not take that move as a signal that we think the end market deteriorating or getting any worse.

You know, it just kinda 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, you know, non residential is a very broad segment. When you get in there, there are certain project types data centers always, come up that are continued to be strong. We've seen improvement in warehouse activity. Our sales are now up for the fiscal year. You know, which is good. That had been, you know, a decliner over the past couple years. And, you know, depending on the geography, we are seeing fairly solid activity in 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.

Garik Shmois: Yep. Okay. No. Thanks for the detail there. I wanted to ask on NDS now that it's closed. Wanted to be clear on how much you're incorporating in the four q guide with respect to sales And if there's any EBITDA contribution And then also, if you can speak to you know, what we should be thinking about for calendar '26. You know, you know, we're not, you know, in the fiscal twenty seven guidance range just yet, but any additional you know, handholding on the expected contribution from the recently closed acquisition?

Scott Cottrill: Yeah. Like we said on the call, the, NDS and the current guide is about $40 million of revenue at a 20% EBITDA margin. So that's how we incorporated it for the last two months of our fiscal year. Ending here at March 31. As to next year, again, we'll get into a lot more detail of that at the Investor Day. But I would encourage you to go back and look at the 8-Ks that we filed a couple months ago. And in there, we gave a little bit of detail on kinda what their performance looks like. So I think it'll give you kinda the guardrails to start thinking about it. And how to model it.

Garik Shmois: Okay. Thanks for that. I'll pass it on.

Operator: Our next question comes from Trey Grooms with Stephens. Your line is open. Please go ahead.

Trey Grooms: Hey, good morning, everyone. Thanks for taking my question. So with the with the $1 billion, you know, 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 buyback you know, buying back stock versus future M&A. Know, and now with the integration, NDS integration, you know, probably going into full swing, I would think, here in short order. You know, if maybe you could talk about your appetite for deals here, kind of you know, in the in the more medium term.

Scott Cottrill: Yeah. Right now, Trey, the folks is gonna be organic. It's it's getting, NDS integrated. I'd say it's also the reason we're hosting it, the engineering and technology centers 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. Only one and a half times levered right now.

Our guardrails are one to two times. And you know what? We're gonna generate a bunch of cash over the six, nine, twelve months and year couple years like we've been doing. So we're gonna, you know, we're gonna toggle lower to one and a half times 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'll be tuck ins and bolt ons. Those are things we do really, really well. And those are things that might have an EV purchase price at $1.50 to $2.50 to maybe up to $300 million. And that's really kinda 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 we're always looking in for the right opportunity. We've got the capacity to pull the trigger, so that's always something we'll be looking for.

Scott Barbour: If I could add one thing to that is, you know, much like we saw with Infiltrator, where, you know, some capital infusion could 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 capital has been invested over the last ten years. By the previous owner. They have some great ideas around automation, around some new products, around some other, you know, kind of high value moves. We're anxious to get in there into look at those in more detail with them. So re and I'm only saying this, Trey, to kinda reinforce what Scott says. About the organic opportunities we have.

So know, I think we're gonna stay kind of in that range we're in today of capital spending. Where we're spending some of that is likely to shift a bit. We got a big project going on at 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.

Trey Grooms: Yep. That's all super helpful. Thank you for all that. 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 you know, incremental leverage there? Or is this really just purely just taking care of the maturities?

Scott Cottrill: Yeah. Right now, the primary focus is on the, the maturities. Right? So I like a weighted average maturity that's, you know, the extended. It gives us a lot of flexibility. And that's the primary focus right now.

Trey Grooms: Yep. Makes sense. Okay. Thanks a lot. I really appreciate it.

Scott Cottrill: You're welcome.

Operator: Our next question comes from Jeffrey Reive with RBC Capital Markets. Your line is open. Please go ahead.

Jeffrey Reive: Thanks. Good morning. And I appreciate all the details thus far. Really nice free cash flow generation this quarter. But 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?

Scott Cottrill: 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 SNOP processes continue to get better. We've talked about the you know, the investments we made in our customer service side of the house as well.

So all of those things kinda lean into, kinda 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 resin environment. It's also, again, that effective management of the pounds that are on the ground that we have. So, again, really good kudos to the team.

Operator: Our next question comes from Collin Verron with Deutsche Bank.

Collin Verron: Good morning. Thank you for taking my questions. I just to start on the mix. I was hoping you can dive a little bit further into that. Help us to 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 port sales of pipe toward Allied and Infiltrator versus maybe a mix shift within each of the categories? And then just how are you 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?

Scott Barbour: Good question. And this is Scott Barbour. I'll take that. So for many years, you know, 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 the water solution set. So we've been doing this quite a quite a long time. In addition, as we've added know, kinda infiltrator in, you know, we want to give better resiliency to our profitability. So we would get a lot of questions around, wow. You know, you've run the profitability up. It gonna come back down?

Are you just gonna ride up and down with your materials pricing environment? And we don't wanna do that. We'd 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. You we're doing that with acquisitions. In the case of Orenco and NDS, it's not to say that we don't like the pipe business. We do. You know? But we also realized that investors wanted a more resilient profit profile. So that's what we work on. It's not a one time thing.

Will it move around a bit as a percentage? Absolutely, it will. But I think we kinda like this 50% you know, or better. In Allied and Infiltrator. We think the natural tendencies of the growth of these businesses will continue to take us in this direction. But if the pipe market takes off somewhere, you know, that could bounce around a bit, and that's not gonna scare us. That's not gonna frighten us. I think we know how to 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 is we move forward. Over these years.

Collin Verron: Great. That's really helpful color. And then I guess just want 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 and calendar year '26 just based on what you're seeing today?

Scott Cottrill: I'll let Scott Cottrill handle this question. Yeah, so again, price cost, you see it in our EBITDA waterfall and 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 caught our LE, our latest estimate. So it's constantly something that we look at. But to Scott's point, it's 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 with within manufacturing, transportation, and then obviously within SG and A. So specifically to your question, I'm not gonna get into sequentially, kinda where we are, but I would just tell you through the waterfalls, it's it's it's been a nice you know, driver. Of profitability this year.

Then we always look at that in our forecast as well as all the other movers when setting our guide. And our targets.

Collin Verron: Understood. Thank you.

Operator: Our next question comes from David Tarantino with KeyBanc Capital Markets. Your line is open. Please go ahead.

David Tarantino: Good morning, everyone.

Scott Barbour: Morning. Good morning.

David Tarantino: 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 given the confidence here? And how you think about expanding margins moving forward as NDS contributes more meaningfully?

Scott Cottrill: Starts with that mix. Right? We talked about the Infiltrator and the Allied Products segment being 50% adjusted gross margin or greater businesses. So it starts with that mix. It also, you know, about 65, 70% of our cost of sales you know, sits on our balance sheet. So we know how that's gonna roll out here over the next two to three months. Obviously, the mix of the products that we sell and the segments that drive that are important to try to get right and kinda 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, you know, what's gonna be rolling off.

That's not just the resin cost. That's our manufacturing conversion cost. 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 two x the pipe business, that really mixes us up. So those all go into it and are the drivers for that margin expansion story.

Scott Barbour: I would add one other thing to that, Scott, is, you know, we sixteen, eighteen months ago, know, we started a lot of self help programs. Across the company, and it and it was in materials, conversion, logistics, recycling, the infiltrator, you know, work at a Renco, in particular. I mean, all that stuff you know, gained momentum as we've gone through these core these three quarters. Yeah. And we've seen that contribute, and I think that gave us some confidence to increase that part 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 tend to we wanna be, you know, 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 gonna work. And it and it was across lots of different categories. Of stuff. Even at even some categories we didn't expect that were contributing nicely. And, you know, this kinda I think it I quarter like we just had, isn't just the result of one you know, kind of one set of activities it's it builds up. And that's why I kinda bring that up.

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

Scott Barbour: Yeah. I would say that for this is Scott Barbour again. You know, our polypropylene pipe we call our HP pipe, selling quite well. Selling quite well. And, you know, 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 growing nicely. Our black dual wall in 12 pipe is kinda riding along at the market, maybe a little bit better than the market. The downdraft that we're we're experiencing in pipe in particular are the agriculture segments which although had a good year over year quarter, has been has been tough.

You know, 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, three years in a row. So our downdraft, I'd say we're market neutral with the black dual walled in 12. We're gaining share with the HP product. Couldn't be happier with that one. With the single wall, some is market headwinds.

Some are some are, you know, things that we need to go do better. But that's the one 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 kinda look at that. We'll talk a lot about that in June when we're together, but there it frustrates Scott You know, there are elements of that pipe segment that are super, super healthy. And then these others that have some challenges that we gotta get on top of.

David Tarantino: Okay. Great. Thanks for the color, guys.

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

Scott Barbour: 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. You know, I kinda said there a lot a lot of what we have seen this year, particularly in these last two quarters, are is really good performance. We think significantly outpacing our and competitors and all that stuff. It's a result of work we've been doing over the last year and a half. Or two 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. There's some things underneath that you guys would never see that are growing very nicely for us. It's the HP pipe. It's Brett's reconfiguration of some of our sales activities. So there's a lot of work going on. We're really proud of the how it's it's it's coming to fruition in our results here. And we're super excited about the NDS acquisition. 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 gonna be out there with that team next week.

And I and I know it's gonna be a an equally successful kinda journey with them as some of these other things that we've done. We appreciate your attention, and we look forward to talking to you later or seeing you around soon. Bye.

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

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