WMS - NYSE

Good morning, ladies and gentlemen, and welcome to Advanced Drainage Systems Second Quarter of Fiscal Year 2025 Results Conference Call. My name is Regina, and I am your operator for today's call. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] I would now like to turn the presentation over to your host for today's call, Michael Higgins, Vice President of Investor Relations and Corporate Strategy. Sir, you may begin.

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

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

Thanks, Scott. On Slide 7, we present our second quarter fiscal 2025 financial performance. From a top line perspective, sales in the ADS legacy pipe business decreased 3%, primarily driven by unfavorable price mix in the period that offset an increase in volume. Allied product sales increased 3%, driven by sales of water quality and capture products and Infiltrator sales increased 11% with active treatment sales up 40% and above-market growth in tank sales as those products continue to take share from traditional materials. From a profitability perspective, we are pleased with the 31.4% adjusted EBITDA margin in the second quarter. The profitability benefited from volume growth in the quarter as well as the mix benefit from Infiltrator growing faster than the pipe business. Manufacturing costs were favorable in the period due to fixed-cost absorption, improved operational efficiency, as well as the benefit of prior investments we've made in the business. We continue to invest in logistics and transportation assets as well to ensure we have good product placement and best-in-class customer service. Importantly, we were able to offset unfavorable price/cost through volume growth, product mix and favorable manufacturing costs. On Slide 8, we present free cash flow. We generated $238 million of free cash flow year-to-date compared to $376 million in the prior year, primarily due to an increase in inventory levels as well as material costs. Our year-to-date capital spending increased 36% year-over-year to $112 million, and we now expect to spend approximately $250 million in capital for the full year. These investments are focused on productivity and automation, debottlenecking our recycling operations, the completion of our world class engineering and technology center and execution on growth we continue to see in certain geographies. At the end of the first quarter, our net debt-to-adjusted EBITDA leverage was 0.8 times with $613 million of cash on hand and $590 million of availability under our revolving credit facility. With ample liquidity and low leverage, we are in a great position to execute on our capital deployment priorities. On Slide 9, we highlight our disciplined approach to capital allocation. As you all know, our first priority is to grow the business organically through capital investments, closely followed by strategic M&A to enhance our market position and scale. The capital investments we have made in the last several years are clearly paying off and one of the reasons for our strong profitability profile. We are excited about the Orenco acquisition, which closed in the fiscal third quarter. The Orenco business will report through the Infiltrator segment and is included in today's updated guidance. This was a strategic acquisition in the attractive and growing advanced treatment market. For the balance of fiscal 2025, we expect Orenco to contribute $40 million to $50 million in revenue with profitability initially in the mid-teens. It is worth noting that we see this margin expanding significantly over the next several years through our aggressive synergy program. Notably, while we have been able to reinvest $362 million back into the business in the first half of the year, we have also returned $95 million to shareholders through dividends and share repurchases, staying true to our disciplined and balanced approach to capital allocation. Finally, on Slide 10, based on our performance to-date, current visibility, backlog of existing orders and trends, we updated our fiscal 2025 guidance ranges today. We now expect revenue to be in the range of $2.900 billion and $2.975 billion, and adjusted EBITDA to be in the range of $880 million to $920 million. These ranges result in an adjusted EBITDA margin of 30.3% to 30.9%, down 120 to 180 bps from last year's record margin of 32.1%. Today's fiscal 2025 guidance accounts for the results through the first half of the year, the impact from significant weather events to-date, continued choppiness in the non-residential end market, the acquisition of Orenco, as well as incremental pressure on material costs and product mix. Pricing is expected to stay at the current levels through the remainder of this fiscal year. We remain focused on executing on our long term strategic plan to drive consistent long term growth, margin expansion and free cash flow generation. With that, I'll turn the call back over to Scott.

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

[Operator Instructions] Our first question will come from the line of Mike Halloran with Baird. Please go ahead.

Hey, good morning, everyone.

Good morning.

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

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

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

You mean for next year...

For next year, yeah...

That would be next year.

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

Yes. That's a good summary.

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

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

Thank you. Really appreciate it.

All right.

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

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

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

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

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

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

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

Excellent. Well, thanks, Scott. Good luck, guys.

All right. Thanks. See you later, Matt.

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

Hi, thanks. I was hoping if you could just go through what you're seeing in the quarter in a little bit more detail, particularly on the non-res side. Just -- we know that the market has been choppy for a while now, but was there anything maybe outside of the storms that informed you that things were getting worse as the quarter progressed or is it really just kind of broad-based? Just a little bit more color on just how non-res had moved over the last several months?

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

Okay. That makes sense. On the transportation cost piece, specifically, I think last quarter, you were repositioning product kind of across the country and that was a bit of a headwind. It looks like that reversed nicely here. Just wanted to confirm that you're effectively through that process. And then just on inventories just broadly, how should we think about that? You mentioned they ticked up a little bit year-on-year here. Is there any concern for potential destocking in some of the channels you service?

So, you want to go, Cottrill?

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

Okay. That all makes sense. Thanks and best of luck.

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

Thank you. Good morning, everyone.

Hey, Bryan.

Good morning.

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

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

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

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

Okay. Understood. Thanks, again.

Yeah. The one thing I would add, I think we'll probably talk a lot about the Infiltrator's advanced treatment segment and what we're doing in that both organically and with acquisition at our Investor Day. And -- yeah.

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

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

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

Yeah. But I would say...

We're managing pretty well through that.

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

We're kind of...

Scott was talking about, yeah.

We're kind of recovering in that right now. So -- and we have new General Manager of our Ag business who's hit the ground running and lots of excitement about what he's going to bring to our business.

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

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

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

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

Good morning, guys. Thanks for taking my questions. The first one is the moving pieces on the revenue side, you've talked about quite a bit here, but can you just help us maybe put a finer point on the walk from the prior implied second half EBITDA margin of around 31.5% to kind of the implied revised margin of closer to 28.5%. I mean, it seems like there's 30 to 40 bps from Orenco. It sounds like there's a little bit of headwind on the manufacturing side, some unfavorability there. But what are some of the other moving pieces if you could help just kind of bucket those?

Hey, John, it's Scott here. I think you hit on two of the key drivers. I think the third that you didn't mention was related to material cost. So again, you got the manufacturing headwind, you got a little bit of that mix in Allied products on that non-res weakness. But that material costs are -- that's really one of those items as we talked about on the call that really we've seen kind of an incremental increase as we've gone through almost every month on a year-over-year basis and sequential basis. And this is one of those items that we'll see more of that cost coming through in 2H than we did in 1H. So when you throw that in there, that really impacts your margin performance. And again, like we've talked about, 2H to 1H is usually 340 -- 300 to 400 bps weaker just based on seasonality and this will be somewhere around 400 to 500 based on those factors.

Okay. Understood. And then I know you generally want to give kind of full-year guidance as opposed to quarterly, but there are so many moving pieces here. Is there any way you could kind of help us frame maybe the cadence of revenue and margin in 3Q and 4Q?

I think the only way, John, I could do that is just to just go back to bubble it up a little bit and just indicate that the way we see our revenue phased out typically is in that kind of 55%, 45% 1H, 2H as to how our revenue falls. And we see that falling about the same way. As to Q3 versus Q4, I really don't want to get into that just because of the impact of seasonality on those two quarters. So I think using that as what we're projecting and predicting for the second half as well as what we indicated we think is kind of that end market weakness and the weather impact that we expect, I think that's the way I would guide you to try to put that in there and model it out.

Okay. Thank you, Scott.

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

Good morning.

Good morning.

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

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

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

So I would say the conversion story continues to progress as it always has. It's very methodical. We still feel we're gaining 100 to 200 basis points of share gain. A lot of that is driven by the HP product, which is polypropylene. I don't think the pricing environment or how much price we've had in the past over the past three years has had a significant impact -- negative impact on our conversion story. We feel we've still been able to take share. The concrete pipe industry has faced very similar inflationary pressures that we've had, whether that be input costs going into the product, whether that be labor costs to make it or transportation cost to deliver it, so they've had to continue to raise price as well. So I think it's still intact and we don't feel like that has hurt us over the long-term here over the past four or five years.

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

Got it. Thanks for your time.

Thanks. Thank you.

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

Hey, good morning, everyone.

Good morning.

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

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

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

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

Great. Thanks for the time.

Thank you.

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

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