Advanced Drainage Systems, Inc. Stock

Good morning, ladies and gentlemen, and welcome to Advanced Drainage Systems First Quarter of Fiscal Year 2027 Results Conference Call. My name is Caleb, and I'm your operator for today's call. [Operator Instructions] I would now like to turn the presentation over to your host for today's call, Mr. Mike Higgins, Vice President of Corporate Strategy and Investor Relations. Sir, you may begin.

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

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

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

Thank you, Mike, and good morning, everyone. Before I begin, I want to thank everyone who made the trip to Ohio for our Investor Day in June. It was a great opportunity to showcase our Engineering and Technology Center and highlight what makes ADS a unique and compelling investment opportunity.

At Investor Day, we focused on 4 key themes that continue to guide our strategy. First, ADS is a pure-play water company, serving attractive end markets supported by powerful secular tailwinds, including aging and underbuilt infrastructure, more frequent and intense storm events and the growing need to protect and manage water, the world's most precious resource. Second, we highlighted our differentiated growth strategy. Material conversion remains an important driver and key component of our growth, and we continue to focus on innovation, new product introductions, strategic partnerships, distributor programs and disciplined acquisitions to further differentiate the company.

Third, we built a resilient platform that delivers industry-leading profitability and strong cash generation across a variety of market conditions. And finally, we remain committed to disciplined capital allocation, reinvest in opportunities that strengthen our competitive advantages and create long-term shareholder value. Simply put, if we continue to grow faster than our markets, generate strong profitability and cash flow and reinvest that capital wisely, we believe that's a winning formula for ADS and our shareholders.

Now shifting to the quarter. The first quarter results reflect strong performance as the team continued to execute well despite the tepid demand environment. For the first time ever, we recorded over $1 billion in revenue this quarter, an increase of 21% versus the prior year. Organic revenue increased 9%, driven by growth across both the Stormwater and Wastewater segments. Adjusted EBITDA increased 29% to $358 million, resulting in an adjusted EBITDA margin of 35.8%, which is among the most profitable quarters in our history. The impressive results reflect our diversified portfolio, disciplined management of price/cost, material conversion initiatives and operational execution that once again enabled us to deliver strong financial performance.

The quarter developed largely as we anticipated when we entered the fiscal year, and the first half of the year is developing as expected. We estimate there was approximately $25 million to $30 million of revenue pulled into the first quarter from the second as customers try to get ahead of price increases. Ultimately, we expect the first half of the year to have normal seasonality, representing 55% to 60% of revenue. However, the normal first and second quarter revenue patterns will be affected by this pull-ahead. So if you take the $95 million of revenue from NDS and assume approximately $25 million to $30 million was pulled forward, we still reported strong mid-single-digit organic growth.

Sales in the nonresidential market were strong, increasing 14% on an organic basis. Activity in commercial construction and large projects, including data centers and warehouses, remains resilient. Residential market sales increased 29%, primarily driven by NDS. Organic results in the residential market were flat overall. Infiltrator residential revenue increased double digits, driven by tanks and residential advanced treatment systems. On the Stormwater side, we saw weakness in both retail and residential land development. The challenges in residential construction are well documented as affordability pressures and elevated interest rates continue to weigh on homebuyers.

Importantly, our diversified portfolio is working exactly as intended. While portions of the residential market remain under pressure, our geographic and end market diversification, new product introductions, distributor programs and product partnerships continue to provide additional growth opportunities to help offset this market weakness. I'd like to highlight the Stormwater storage category within our Allied Products, which grew 18% in the quarter and is an excellent example of when we do our strategies well.

We continue to introduce new products in our core StormTech chambers product line, acquired CULTEC, a complementary chamber line, and we established a partnership to bring Aquabox plastic crates to market in the U.S. for applications with a tighter footprint. And we wrap that with industry-leading digital design tools that easily enable engineers to design and specify these storage products. Another great example of this is the Wastewater segment, where revenue increased 8%, significantly outperforming the underlying residential market. Growth was driven by new tank products and expanded distribution as well as growth in our market-leading advanced treatment products.

We're very pleased with the performance of NDS. Their performance and the integration activities continue to progress well. We are increasingly excited about the long-term opportunities to cross-sell products, broaden customer relationships and expand participation in both irrigation and retail channels. NDS delivered another strong quarter and continues to validate the strategic rationale behind the acquisition.

We continue to operate under the strategy of recovering inflationary costs on a dollar-for-dollar basis. Transportation costs remain significantly elevated driven by higher diesel and common carrier costs. The cost of materials procured in the quarter was significantly higher on a year-over-year basis, though the first quarter profitability reflects material procured in the prior year at a favorable cost. Another lever we use to offset higher material costs is increasing the use of recycled materials, a strategy we accelerated in late February as raw material costs began to rise and the spread between recycled and virgin material widened.

Of note, the expansion of our Cordele, Georgia, recycling facility is nearing completion. This expansion significantly enhances both processing capacity and operational capability in a high-growth region, transforming the facility into a fully integrated recycling plant capable of producing finished materials. The design of this facility reduces material movement, streamlines production flow and enhances process control throughout the manufacturing cycle. Upon full ramp-up, we expect Cordele to be the benchmark for recycling performance within the ADS network. The facility will deliver industry-leading cost efficiency, improved quality and consistency and superior operational performance, strengthening our recycled material supply chain, supporting our long-term growth and margin improvement.

Our operational initiatives continue to produce tangible results. Over the last several years, we have invested heavily in production efficiency, automation, logistics capabilities and service levels at both ADS and Infiltrator. Those investments continue to improve productivity, support customer service and strengthen our competitive position. The benefits of those actions remained evident in our profitability, cash generation and ability to serve customers across a broad range of end markets. Overall, we are pleased with the start to the fiscal year and believe our results reinforce the strength of the ADS business model.

The long-term fundamentals supporting our business are stronger than ever. As we discussed at Investor Day, we are a pure-play water company operating in attractive markets, supported by powerful secular tailwinds and the growing need for advanced water management solutions. These trends continue to play directly to the strengths of our portfolio and position us for the long-term growth. Our differentiated growth strategy continues to set ADS apart. While material conversion is a core business driver, we are increasingly creating growth through innovation, new product introductions, strategic partnerships, expanded distribution programs and acquisitions.

As we look ahead, our priorities are clear: execute against the initiatives within our control, advance the integration of NDS and continue to leverage our resilient platform to generate strong profitability and cash flow across a range of market conditions. We remain committed to disciplined capital allocation, reinvesting in opportunities that strengthen our competitive advantages, strategic acquisitions and return capital to shareholders through dividends and opportunistic share repurchases. While we expect the demand environment to remain tepid, the inflationary cost pressure is dynamic. We are confident in our team's strategy and ability to continue delivering profitable growth and sustained value for our shareholders.

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

Thanks, Scott. Turning to the first quarter financial performance. Net sales increased 21% to $1 billion. Excluding the impact of NDS, organic sales increased 9%, and adjusting for the pull-ahead, revenue grew mid-single digits. That mix of growth is the ADS model at work. First, we grow faster than our end markets organically. And second, we leverage strategic acquisitions such as NDS to compound such growth.

Stormwater revenue increased 24% to $809 million as compared to $652 million in the prior year. On an organic basis, Stormwater sales increased 10%, driven by growth in both pipe and Allied Products. Wastewater revenue increased 8%, driven by double-digit growth in both tanks and residential advanced treatment. Importantly, we continue to outperform our underlying end markets during the quarter, reflecting the benefits of our diversified product portfolio and our material conversion strategy.

Adjusted EBITDA increased to $358 million, resulting in an adjusted EBITDA margin of 35.8% as compared to 33.5% in the prior year, an increase of 230 basis points and the second highest in the company's history. Several factors helped drive the strong performance during the quarter: strong organic volume growth, especially relative to our underlying markets; the contribution from the NDS business, which also grew year-over-year in a challenging market; the $25 million to $30 million pull-ahead from customers trying to buy ahead of price increases as well as good execution on our commercial strategies, including the timing benefit realized from implementing pricing actions ahead of higher material costs.

Moving to cash flow. Free cash flow for the quarter totaled $203 million. Cash generation remains a core strength of the business and reflects both earnings performance and disciplined working capital management. We ended the quarter with net leverage of approximately 1.5x, below our target of 2x and had available liquidity of approximately $901 million. We expect to spend approximately $200 million in capital expenditures this fiscal year as we close out the Cordele expansion and invest in automation and additional capacity at our Infiltrator business.

Our capital allocation priorities remain unchanged: invest organically in areas such as growth and new products, material science and blending capabilities as well as automation and productivity; pursue strategic acquisitions; and finally, returning excess capital to shareholders through our quarterly dividend and share repurchase authorization. We remain extremely well positioned financially and continue to maintain significant flexibility.

Moving to guidance. We continue to expect net sales of $3.350 billion to $3.550 billion and adjusted EBITDA of $1 billion to $1.05 billion. While our first quarter performance was strong, we continue to operate in a challenging environment characterized by inflationary cost pressures and fluctuating raw material costs. From a market demand perspective, the nonresidential market is performing modestly better than we had anticipated, while our residential end market demand is performing modestly worse.

As we look to the remainder of the year, we still expect normal first half to second half revenue patterns with 55% to 60% of revenue in the first half of the fiscal year. In addition, while material costs were a benefit in Q1, they will be a significant year-over-year headwind for the remainder of the year. We also expect the higher transportation costs we experienced in Q1 to remain significantly elevated throughout the remainder of the year. And finally, we continue to expect our pricing initiatives to offset inflationary cost pressure on a dollar-for-dollar basis for the full fiscal year.

In summary, we delivered a strong start to fiscal 2027 through disciplined execution and effective price/cost management. We remain confident in our strategy, focusing on the 4 core themes that Scott initiated - or mentioned a minute ago. Our unique position as a pure-play water company serving markets supported by long-term secular demand drivers. Our differentiated growth strategy, where we continue to outperform our end markets through material conversion, innovation, strategic partnerships, expanded distribution and disciplined acquisitions.

Our resilient platform, which enables us to deliver industry-leading profitability and strong cash generation across a variety of market conditions, as evidenced by our 35.8% EBITDA margin and $203 million of free cash flow we delivered this quarter. And finally, our disciplined approach to capital allocation, as we invest in the highest risk-adjusted return opportunities available to us while maintaining a strong balance sheet and creating long-term value for our shareholders. Taken together, these 4 pillars give us confidence in our ability to continue delivering profitable growth, strong cash flow generation and compelling shareholder returns over the long term.

With that, operator, please open the line for questions.

[Operator Instructions] Your first question comes from the line of Matt Bouley with Barclays.

I'll start off with a question on the guide, picking off there where Scott C. finished. So you mentioned the cadence of revenues. My question is on the cadence of EBITDA. I think I heard you say that raws were a tailwind and they're going to become a headwind moving forward. So could price/cost actually become sort of temporarily negative as a result and kind of thinking about how that occurs and the timing of when price and cost would match? And so is there any kind of resulting cadence to the EBITDA -- EBITDA margin specifically that you can speak to?

Matt, it's Scott C. Yes, absolutely, you should think about it that way. So normally, based on seasonality, product mix, our Q2 is normally 300 basis points, EBITDA margin-wise, below Q1 on a sequential basis. I would expect this year to be worse than that. So that is exactly the right way to think about it. If you look at the EBITDA bridge that we had in the first quarter on a year-over-year basis, again, as we mentioned, you had favorability in that price/cost bar from both pricing and that FIFO roll of our inventory costs. So we still had favorable resin costs that we experienced on a year-over-year basis in the first quarter. That will flip on us as we go into Q2.

We're still getting the pricing, and we'll still see that sequential. It's just going to be the cost side of the house. And as, like we said, that's the resin coming at us in Q2 that we didn't have in Q1, but we also have those transportation costs that were very much a headwind for us here in the first quarter, and they will remain that way as we go through the rest of the year.

Okay. Perfect. No, that color is exactly what I was looking for. And then secondly, NDS, you said $95 million of sales. I think I heard you say that maybe organically, they were up year-over-year. Question is, I mean, what does June quarter seasonality typically look like for them? Because $95 million would seem like it annualizes to a large number, but maybe this is typical of them. And obviously, what I'm getting at is you mentioned the organic growth. Are you seeing kind of early wins on cross-selling or revenue synergies? And just more broadly, how is that initial integration going?

So Matt, this is Scott B. Their highest quarter is the quarter we just completed. And we are still learning their seasonality, but we're obviously working with that team to kind of see what the patterns are. So you can't just annualize that quarter, although it was a good quarter for them. Their performance has been quite good. We are seeing some, I'd say, a lot of opportunities that we're working on the cross-selling. I don't think we're kind of generating tremendous amounts of revenue day in and day out on that, but we've definitely got them in sight and have people on the ground working those.

And we have also had very good work with them on cost, cash flow, just kind of all the different things that you know well about our team here that we're working and they're right in there with us. And a very solid 2 days -- they were here over the Board meeting in the last couple of days, very solid 2 days with them on all these topics. So I would say, not yet, but their performance has given us every indication that those future activities like cross-selling are going to be winners for us.

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

Why don't we start off where you left off there on the NDS piece? Maybe just kind of cadence, how you're thinking about what the steps look like in the short term on the any kind of facility work or restructuring work or internal improvement work that you're doing, both kind of this year and then into next year? And how those are going to start cadencing out for you?

So this is Scott B. Mike, there are, I would say, a couple of small facility types of things that are pretty much complete that are certainly additive to our synergy and integration activities right now. And some of that will be showing up in their profit statement going forward. The bigger one doesn't occur. It's more of a next year program that we will see the effects of that. That's a much bigger one that we're working on.

And then I think right behind that, from a facilities kind of CapEx spending, we kind of get facility type stuff out of the way between now and the end of this calendar year. Once we get those behind us, we start to work on some automation things, which would be kind of conversion costs related. And then we have a very good program defined with them on working capital and cash. I mean those are really some big priorities with us right now, Mike, as well as setting up the cross-selling. I mean, to get that cross-selling going, you got to establish some back-office practices, you got to get people trained up, you got to get in front of customers. And that has all kind of occurred, and now we're doing some trial geographies at the beginning of this month.

So I'd say our first 6 months with them starting in February been pretty busy. And it's good to, like I told them, I mean, you're off to a great start, and let's keep going.

Yes, Mike, I think they benefited from kind of coming under the ADS umbrella and having more resources and some expertise at their disposal. So we've been able to maybe help them operate the business more effectively and efficiently than maybe it was in the past.

We clearly look at things differently than the prior.

Yes. No, that makes sense. And then second question, I think, Scott C., you referenced nonres maybe tracking a little better than you thought. Maybe just talk about some of the reasons what you're seeing that support that regional subcategory, anything that you would highlight?

I would start with the Allied Products. Our Allied products, the storage products, which I kind of went a lot into there and the range of solutions that we have in our storage products today are really kind of just market-leading by far. And I think we're winning new business in that category. Our capture products, still, again, that Nyloplast product line, that Duraslot product line, sell well. We haven't even gotten to the really good cross-selling yet with the NDS products there. Our fittings had a good month -- I mean, a good quarter. That was pulled along with some of the buy-ahead and the pipe strength. Our water quality products, we continue to get new approvals in new jurisdictions.

So I think we've said many times in the past that the Allied Products is very vectored to the nonres segment, and the strength of our portfolio there, the programs that we're running in that, I think, are just really winning. Data centers, warehouses, institution work, that all continues to go kind of well. It is not broad-based geographically. It is certain geographies that are doing well. And our quoting activity is good in this area, the nonresidential area. And so I think it's -- Mike, you add any color to that.

No, I think you hit it. I mean I think when you look, when we look through kind of the subprojects under nonresidential, we saw pretty steady growth across just general purpose commercial. Warehouses have continued to kind of improve on a year-over-year basis, the data centers, institutional construction is usually pretty steady, and that's been good. And again, the programs, we have a very high focus with our sales force of selling the package and increasing what we call Allied Products attachment. I think we're seeing better performance there.

And like Scott said, geographically, it's little kind of all over the place, but there's, when you think about kind of the West has some strength in certain states, Texas was good this quarter. The Northeast was pretty solid in some states. The Midwest had some positive ones. It's just a couple of places like California, Florida have been a little soft, right, on a year-over-year basis. But I think we definitely think we're outperforming the markets and doing well, and that's probably goal number one.

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

I think in the past, you've talked about having 30 days of raw mats inventory, about 60 days of finished goods. With that in mind, I mean, resin costs certainly spiked earlier in the year, but they have come back in quite a bit over the past few months. And I think you've talked about input costs remaining elevated through the remainder of the year. But I guess I'm curious as to when you think the lower or the reduced input costs will start flowing through? I mean, is that more of a next year phenomenon? Or could that hit later in this fiscal year?

Yes. John, it's Scott C. here. You're correct. I think the peak on the resin side is definitely going to be Q2, Q3 based on what we know today and the procured and what we see on the balance sheet. So really good visibility there. It's still going to be elevated in Q4, but not at the level that we expect in Q2 and Q3. So that's number one. Transportation will be the next part of that conversation. But again, those rates and everything else we're seeing are going to be there. Now our internal fleet helps us hedge that, and 70%, 75% plus is done internally on our fleet, which is a great mitigation factor against that external CC and what we see going on there. But that's still going to remain elevated. It was elevated in the first quarter. As you can see in our EBITDA bridge, it's going to be that way through the rest of the year.

I want to add, this is Scott Barbour, John, one thing to that is, and you're correct, it spiked high, kind of came off a bit, but it is still significantly over where it was a year ago from -- to procure that material. So I just don't want to lose sight of that, that it's been very dynamic, but it's still above the prior year materials cost. It's still above the prior year on the transportation cost.

Got you. Okay. And then in terms of the $25 million to $30 million of sales that were pulled forward from the second quarter into the first quarter, how should we sort of think about the split between Stormwater and Wastewater? And then were there any end markets in particular where this is most pronounced?

I would say primarily Stormwater. Absolutely, there was a little bit in Wastewater as well. But I mean we saw it across the board. I mean the price increases, there were multiple in certain cases. We took it across the board, every business unit, both segments. So again, you'd see a little bit of that in each one of those. But on a dollar basis, primarily, you'd see the largest piece of that being in Stormwater.

I mean it's proportional.

And from an end market, it's probably more nonresidential driven than residential or infrastructure.

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

We know that your team has had to be pretty aggressive with price actions. I think you framed last quarter that most of it would hit in Q2. To level set, I was wondering if you'd be willing to disclose Q1 price and what you're contemplating for Q2 and back half price realization.

So it's kind of the sequential pattern of pricing.

Yes. So what I'd say is absolutely, we got the pricing into the market fast. We always talk about getting that into the market 30 to 45 days before the resin hits us. So success there. As we look at Q2 and we progress through the year, obviously, we're going to match those inflationary cost pressures on a dollar-for-dollar basis. So what you'll see in Q2 is largely kind of that pricing kind of remain at that level. And then as we go through the second half of the year, then we'll adjust accordingly based on what the inflationary cost pressures we have forecasted and what we're seeing. So again, Q2, we'll see the pricing that we got into the market in the first quarter continuing.

Okay. Understood. I believe you mentioned that advanced treatment continued to grow double digits in the quarter. One, am I correct? Did I hear that correctly? And what kind of growth does your team anticipate from advanced treatment going forward? Obviously, you have pretty healthy comps that you face there. And I suppose the same question on engineered systems. That's smaller now, but it seems like a pretty compelling opportunity for your team, at least through more of like a medium-term lens. Just curious how impactful that may be to fiscal '27.

Bryan, this is Craig. Yes, advanced treatment continues to be strong on the residential side for us. With the synergies between Orenco and Infiltrator, that's been an opportunity for us on the advanced treatment side. And then when it comes to Infiltrator, we launched a new product, which was our Edge product in the residential market, which was very healthy throughout the first quarter with that launch. So that continues to be strong for us in addressing the needs out in the market. And as we look forward, the engineered systems is an opportunity for us. As we look at that and serving the market as it moves forward, especially under the Orenco business, we combine that with the Infiltrator business to grow that segment. It's a small segment, but a segment that we're looking to grow as we move forward.

And investing in from both an organization and capacity, both Louisiana and in Oregon. So we like that market. You're right, Bryan. We like that market a lot.

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

Just on the price, I think you said price is going to be similar 2Q versus 1Q. So I'm just trying to understand better why you had to pull-ahead if pricing was kind of already in because I was under the impression price would step up, but maybe just clarify.

Jeff, why don't you ask it again? What's the question?

Well, you're saying the pricing isn't going to step up in 2Q. So I'm just wondering why the early buy or prebuy...

It's because we had good visibility to what's coming at us. Again, we see the resin on our balance sheet. We also know what we're procuring at in April, May and June. So we had, in some cases, multiple price increases that went out. And again, we try to get in front of it. And again, we succeeded and got that in front of us. So we've got the pricing in place in anticipating of the costs that are coming at us. Those costs, again, based on our FIFO roll and how they come out of the balance sheet, are going to hit us. It's going to be Q2, Q3 as well as Q4, but the peak of it, like we just talked about, will be Q2 and Q3. And again, the pricing is in place. And so we've got it in place in advance. Are we going to go out with new price increases? No. But in certain geographies, products, if we need to, absolutely, we will. And we're also managing the transportation costs.

So the takeaway is we got in front of it, right? And that's what we try to do. And then basically, now we're going to continue it as we go through the first half of the year. But in Q2, what's going to be different is we've got a lot more resin cost coming at us than we did in the first quarter. And that's, hence, the margin conversation, right? We typically have, based on product mix and seasonality, kind of a 300 kind of basis point degradation in sequential margins between Q1 and Q2. It will be a little bit worse than that this year based on the magnitude of those resin costs coming at us. And again, transportation costs will stay elevated at the rate they are.

But again, we have a good forecasting S&OP process. We've got the pricing in place to offset those costs on a dollar-for-dollar basis. We just happen to get them into the market and start getting them earlier than the cost hit us.

Okay. That's helpful. Just, I'm trying to better understand maybe the outgrowth. You gave the growth rates like non-res, res, infrastructure, ag. I think that includes NDS and includes the pull forward. Is there a way to think about how those markets grew for you ex maybe the pull forward and ex NDS?

I think that's the...

Yes. So what we talked about, Jeff, was 21% at the total consolidated level, revenue up year-over-year. We talked about organically, excluding NDS, being up 9%. And then we talked about if you take the $25 million to $30 million of pull-ahead out, that 9% organic would have been more like mid-single digits, up. Now to give it to you by end market, I think Scott and Mike answered the question earlier, where a lot of that pull-ahead we saw was in the non-res side of the house. So that's the way I would look at it.

And I think it's proportional.

With a little bit in the resi side.

The Wastewater, I think it's proportionate.

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

Kind of just as a follow-on to the last one there as you guys were commenting the kind of the outperformance -- or market outperformance. It sounds like it's a lot of that's kind of non-res related. As we look in the back half and you kind of look at kind of the, I don't know if you want to call it, backlog of activity out there on nonres, is it still your thought that you should kind of continue to outpace at a similar kind of rate as what we saw in the first quarter or anything to call out there?

Yes, Trey, Mike here. I think we'll still continue to outperform the market, but to say that we're going to continue to be kind of up 18%, 19% is a little bit of a stretch. But I think we'll continue to see growth. Maybe it's kind of closer to like kind of what we said, like kind of mid-single digit.

More like last year.

Yes, more like last year. That's kind of what we expect for the year to unfold. But yes, we don't really see any kind of significant weakening in demand from where we are today. There's a little bit of benefit of the pull-ahead. You got some pricing that's come through there. So that's goosed that number a little bit. But we did see kind of mid-single-digit volume growth in the nonresidential end market. So we would expect that to kind of hold in there, right?

Yes. That was the number I was referring to is the mid-single digit kind of stripping out all the other. That makes sense. And then, so understanding we're in an inflationary environment, but free cash flow should still be good this year. CapEx still looks like it's going to be down year-over-year despite some of these internal kind of growth projects that you have. You've got NDS integration underway. You bought back a pretty good slug of stock in the quarter. So how are you balancing buyback with any potential M&A in this environment? And as you're integrating the large NDS acquisition that we keep that in mind. Just curious update on your appetite for M&A versus buyback here given the cash flow backdrop.

It was a big slug of stock we bought back. And -- but there was severe dislocation during the quarter and volatility during the quarter. So as you guys all know, we buy against the grid. We will continue to work that same strategy. We continue to look at opportunities. We're 1.5x levered. Even though we bought back all that stock, we spent a fair amount of capital. I think it was $57 million worth of capital. We'll spend all that capital this year on Craig's business, completing the Building 7 expansion, doing a couple of NDS things. We've got Cordele complete -- which is largely complete. But we feel like we have the capacity to continue to look at things, and we'll do that. So I wouldn't say we're standing on the sidelines, Trey. How is that?

Yes. I mean what I'd add to Scott's point, like we talked about at Investor Day, highest risk-adjusted return opportunities. So again, we continue to look organically to all the items that Scott mentioned as kind of our highest return, lowest risk use of capital. Acquisitions followed close therein. It's great. We've got a very robust process and always looking at the funnel. It also comes down to some actionability as well within there. But we'll always look at strategic first, and then financial has to obviously be there for us to move forward.

But we're 1.5x levered. Our target is 2x leverage, right? So we've got plenty of firepower, capability, capacity and flexibility. And again, when it makes sense and we have dislocation and we're sub-2x levered, that excess cash. If there's nothing actionable within the strategic acquisition funnel, then absolutely, we'll buy back shares like we did in the first quarter.

I mean, it's a big number, almost $250 million, including the dividend return to shareholders in the first quarter.

Yes, 1.5 million shares.

Were repurchased.

Your next question comes from the line of Jeffrey Reive, RBC Capital Markets.

Just with the $25 million to $30 million prebuy headwind baked into the second quarter and peak material inflation in the quarter 2, is there a scenario where the second quarter margins compressed below 30%? Or do you think you have enough offsets in place to hold that line?

Yes. Like we said earlier, definitely, the way I like talking about it is our sequential margin performance, again, based on product mix, seasonality, typically, we see around a 300 bps degradation in our margins between Q2 and Q1 sequentially. Based on the resin that we expect to come at us, it will be more exasperated or a greater spread sequentially than 300 bps. So that is the way to look at it.

Okay. Got it. And then now that your new recycling facility in Georgia is operational, can you give us a sense of maybe throughput, how it's tracking relative to capacity, how quickly it's contributing to your recycled resin mix? And is the facility ramping fast enough to provide that meaningful offset to inflation next quarter? Or is that more of a second half story?

The answer to your last kind of question is yes. It is contributing to mitigation of material costs already. It is ramping up now. So we're not at full production. That will take several months to do. I was down there a couple of weeks ago. We have nice supply coming in there. All the equipment is up and running. The blending is up and running. We're filling silos. We're waiting for our railcar spur to be approved and activated. It's all kind of installed. Team is fired up, as always, down there.

But the bottom line is it meaningfully will contribute to our material cost mitigation strategies this year. It will not be at full capacity yet this fiscal year, but we'll reach full capacity next year. But I can tell you, no one is going to work harder to get there faster than Bobby and his team down there. We're really proud of what they're doing.

[Operator Instructions] Your next question comes from the line of Collin Verron with Deutsche Bank.

I just want to follow up on the recycling. I know you called out that you were already increasing your recycled content in February. I guess, can you get back to sort of 50% recycled content in fiscal year '27? I know it was pretty low last year. Or are there any limitations within the year that might keep you below that? And then longer term, I guess, is there upside to sort of the 50% recycled content range?

So Scott Barbour here. Yes, on high-density polyethylene, we are pivoting to get to 50% recycled again or as kind of as fast as we can go. There's an upper limit on what we can do because some of our products require virgin, particularly for public jobs. So yes, we pivoted fast. That team has done a great job of procuring material, putting it through our other 2, Clarion and Pandora, facilities that were up and running. Our production was up in that in the quarter. Our usage was up in the quarter. Cordele contributed a little bit. It will continue to contribute more and more.

What is the top of that number? I really don't want to kind of go down that path. But there are some limitations on -- by regulatory limitations for certain markets and applications in some states, not all states. But we continue to work that. And that is driven by your ability to come up with the right blends from an engineering standpoint. We showed you the capabilities we have to do that on Investor Day through our Engineering and Technology Center, really those first 2 labs that you toured, the analytics lab and then the blending lab there. And it is how much source of supply can you find on that. And we actually have capabilities and nicely demonstrated in both of those.

And then how can you ramp those facilities like a Cordele? Cordele will have a lot more capacity than Pandora and Clarion. And then how does that kind of roll out the demonstrated technologies and capabilities we see at Cordele, how do you back flush that into these other facilities? That's kind of the long-range thing, but material science and finding sources of supply and having the right capacity, that's the formula.

Yes, Collin, Mike Higgins. I mean, just for context on timing, right? It took us 10 years to get to 50%, right? So again, we've talked about this a lot. When you incorporate recycled materials, you need to maintain the same quality and performance you get with virgin materials. These are in critical applications. They're going under pavement. They need to perform. And maybe to add to what Scott is saying is we'll work things on the high-density polyethylene side, but also, too, our 2 fastest-growing products are the HP Pipe and StormTech chambers, which are virgin polypropylene. So very hard at work at finding ways to incorporate recycled materials or other type of additives to reduce that virgin content there. But again, first and foremost, maintaining the same quality and performance.

That's really helpful color. And I guess just on the transportation inflation, any color as to like how much of the inflation you're expecting is from diesel prices versus inflation and maybe third-party freight rates? And can you benefit from like a pivot back towards WMS-owned freight? And any sense of how much of a help that could be would be helpful.

Sure. I think on the logistics side of the house, again, we have an economic radius that it makes total economic sense to use our fleet. Anything that's going out past that economic radius, common carrier can be more efficient and effective to use. Diesel absolutely is part of our cost that we need to manage. But the internal fleet cost is well below what we see on the common carrier side, especially when we're dealing within that economic radius, which is the predominant percentage of what we do.

So again, we manage the diesel. We do have a diesel hedging program. So we do hedge our diesel exposure. We also hedge it via using our internal fleet because of the lower cost structure that we have there versus the CC side of the house. And like I said, we try to target something greater than 70%, 75% of our shipments going out on the internal fleet. So those are all kind of the mitigations that we'll continue to do. And that route planning and the technology that the guys have there and how we're getting better at how we do our route planning, how we do our loading as well, a lot of investment we've had in there to improve our customer service, but as well as to lower our cost to serve in those markets when it deals, again, with loads and route planning. A lot of opportunity there, and they're already starting to get it.

The inflationary effects that we've had this year are kind of masking a lot of really good work we've done there to become more efficient in both our fleet and kind of our mode selections.

Your next question comes from the line of James Ko with Jefferies.

I wanted to touch on the price/cost dynamic here a little bit again. What specific resin price assumption are you kind of using in your full year guidance? And has that assumptions like changed like relative to what you kind of embedded when you initially set the like 2027 guidance back in May? And what could kind of present upside versus downside here?

Yes. We're constantly monitoring that. And there's other mitigation as well as to the procured cost of it. Scott hit on it earlier, it's using recycled and everything else that we're doing there. So yes, I mean, what we're seeing coming at us is kind of what we thought was going to be the higher for longer for the entire year on a procured basis. Pretty much what was -- what we've talked to is the fact that, yes, we're going to have the peak of that resin that we procured pretty much in April, May and June coming through at us here in the next couple of quarters. And then again, we expected that higher rate that we are procuring at to stay there through the remainder of the year, but it has come off.

So again, that is reflected in how we look at our guidance, the performance in the first quarter and also how we look at our pricing and our return model. So again, very dynamic, very fluid, but we have a very robust and mature model that we use to project that and stay in front of it.

Got it. And I guess touching on the pricing here a little bit. How much of your current pricing is locked in like through like formal contracts or purchase orders versus like negotiated kind of on spot? I'm just trying to understand the risk of like price give back if costs normalize. Yes, any color here would be helpful.

Our pricing is largely project-based pricing. So you could have between quote to order something like 60 to 90 days kind of lead time, and our quotes are good for 30 days. So that's the way I would think about it. But it's project-based pricing. So we have a lot of flexibility, a lot of ability to adjust or toggle through.

Go ahead, Craig.

And for -- this is Craig. And for our business, I mean, that's something that's locked in. It's what we sell to our distributors, and that pricing holds on that...

Through list price.

That is list price.

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

All right. Thank you very much, everyone. Lots of good questions today. We anticipated a lot of price/cost questions today. So thanks for those. I'm pleased with the quarter. It's going to be dynamic as we kind of go through this first half and then the second half. And I think you guys hit on all of the different moving pieces that we're working on, between the resins and the cost mitigations, to recycle, the transportation costs, which are a significant rise, how we're reacting to that across the board with all of our product lines in the market. But like I said at the beginning, I mean, the fundamentals are strong. We like where we're at so far in the year, and we'll continue to kind of work towards that guidance. Thank you.

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

Good morning, ladies and gentlemen, and welcome to Advanced Drainage Systems Fourth Quarter and Fiscal Year 2026 Results Conference Call. My name is Tracy, and I'm your operator for today's call. [Operator Instructions]

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

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

I would also like to remind you that we will discuss forward-looking statements. Actual results may differ materially from those forward-looking statements because of various factors, including those discussed in our press release and the risk factors identified in our Form 10-K filed with the SEC. While we may update forward-looking statements in the future, we disclaim any obligation to do so. You should not place undue reliance on these forward-looking statements, all of which speak only as of today.

Lastly, the press release we issued earlier this morning is posted on the Investor Relations section of our website. A copy of the release has also been included in an 8-K submitted to the SEC. We will make a replay of this conference call available via webcast on the company website.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Operator, please open the line.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

It would be more manageable.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Good morning, ladies and gentlemen, and welcome to Advanced Drainage Systems Third Quarter of Fiscal Year 2026 Results Conference Call. My name is Ellen, and I am your operator for today's call. [Operator Instructions]

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

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

I would also like to remind you that we will discuss forward-looking statements. Actual results may differ materially from those forward-looking statements because of various factors, including those discussed in our press release and the risk factors identified in our Form 10-K filed with the SEC. While we may update forward-looking statements in the future, we disclaim any obligation to do so. You should not place undue reliance on these forward-looking statements, all of which speak only as of today.

Lastly, the press release we issued earlier this morning is posted on the Investor Relations section of our website. A copy of the release has also been included in an 8-K submitted to the SEC. We will make a replay of this conference call available via webcast on the company website.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Our next question comes from John Lovallo with UBS.

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

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

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

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

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

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

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

We had our eye on that as well.

Our next question comes from Bryan Blair with Oppenheimer.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Our next question comes from Trey Grooms with Stephens.

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

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

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

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

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

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

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

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

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

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

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

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

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

Our next question comes from Collin Verron with Deutsche Bank.

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

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

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

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

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

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

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

I'll let Scott Cottrill handle this question.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Good morning, ladies and gentlemen, and welcome to Advantage Drainage Systems Second Quarter of Fiscal Year 2026 Results Conference Call. My name is Kayla, and I will be your operator for today's call. [Operator Instructions]

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

Good morning, everyone. Thanks for joining us today. Here with me, I have Scott Barbour, our President and CEO; and Scott Cottrill, our CFO. I would also like to remind you that we will discuss forward-looking statements. Actual results may differ materially from those forward-looking statements because of various factors, including those discussed in our press release and the risk factors identified in our Form 10-K filed with the SEC. While we may update forward-looking statements in the future, we disclaim any obligation to do so. .

You should not place undue reliance on these forward-looking statements, all of which speak only as of today. Lastly, the press release we issued earlier this morning is posted on the Investor Relations section of our website. A copy of the release has also been included in an 8-K submitted to the SEC. We will make a replay of this conference call available via webcast on the company website. I'll now turn the call over to Scott Barbour.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

[Operator Instructions]

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

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

Go ahead.

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

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

The inventory piece?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Go ahead, Scott.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Yes, it's gone very well. .

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

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

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

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

Yes.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Good morning, ladies and gentlemen, and welcome to the Advanced Drainage Systems Conference Call. My name is JL, and I am your operator for today's call. [Operator Instructions] I would now like to turn the presentation over to your host for today's call, Mr. Mike Higgins, Vice President of Corporate Strategy and Investor Relations.

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

Before we begin, I would like to remind you that we may discuss forward-looking statements. Actual results may differ materially from those forward-looking statements because of various factors, including those discussed in our press release and the risk factors identified in our Form 10-K filed with the SEC. While we may update forward-looking statements in the future, we disclaim any obligation to do so.

You should not place undue reliance on these forward-looking statements, all of which speak only as of today. Lastly, the press release we issued earlier this morning is posted on the Investor Relations section of our website. A copy of the release has also been included in an 8-K submitted to the SEC. We will make a replay of this conference call available via webcast on the company website.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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