Advanced Drainage Systems - Q3 2026

Transcript

Operator (participant)

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. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. To withdraw your question, press star one again. 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.

Mike Higgins (VP of Corporate Strategy and Investor Relations)

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.

Scott Barbour (President and CEO)

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's strategy to prioritize higher growth, higher margin Allied and Infiltrator products that strengthen the resiliency and 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 Products sales increased 8% with growth in several key products, including the StormTech storage chambers, the Nyloplast capture structures, and the water quality products, all of which benefited from new products introduced over the last year. Infiltrator revenue increased 2% with good activity in the Southeast and the South. The Orenco acquisition is now fully lapped, and its impact is embedded in our reported growth. Growth in tanks continues to be driven by conversion, product line expansion, and additional distribution. Leachfield sales remain 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 in-market perspective, sales in our core non-residential 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 in-market demand forecast for the non-residential 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's 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 in-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 Products 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 in-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 points 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 in-market environment to achieve favorable price costs in this period. We are excited to have closed the NDS acquisition on Monday of this week. NDS's products are highly complementary to ADS's 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 in-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. On that note, I'm pleased to share the date for ADS's Third Investor Day: June 18th, 2026. Management will host a presentation at ADS's Engineering and Technology Center in Columbus, Ohio, followed by a tour for in-person guests. Invitations will go out in the coming months, but at this event, you can expect us to cover growth priorities and updates to our key sales strategies, a deeper look at acquisitions, particularly of NDS and Orenco, the resiliency of our profitability, payoff from the capital deployed over the last several years, as well as the next capital programs we will invest in going forward, and of course, new medium-term financial targets.

We look forward to providing the business updates and showing off the Engineering and Technology Center, the largest stormwater research facility in the world, which will drive innovation for many years to come. If you have questions about the event, please reach out to our Investor Relations team. To summarize, we continue to execute effectively in a challenging environment. Our self-help operational initiatives continue to bear fruit, as demonstrated by the profitability reported today. The outperformance 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's value proposition remains both relevant and powerful.

While we navigate this near-term environment, we will do so with an eye toward the future. We remain firmly committed to our long-term vision, and 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.

Scott Cottrill (CFO)

Thanks, Scott. Today, my comments will focus on cash flow, capital allocation, and our updated guidance. Jumping to slide seven, I'd like to start by highlighting the fact that year-to-date, we generated $779 million in cash from operations, converting more than 100% of our Adjusted EBITDA into cash. Year-over-year, cash flow from operations increased $239 million, or 44%, driven by effective working capital management, increased profitability, and lower cash taxes, primarily due to the benefits of bonus depreciation. We ended the year with over $1 billion in cash and a half-turn of net leverage. Turning to slide eight. We highlight our disciplined approach to capital allocation over the last several years. Approximately 70% of total capital deployed from fiscal 2020-2026 was dedicated to growing the business through capital expenditures and strategic acquisitions.

This reflects our conviction in the long-term demand outlook across our in-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 is well within our guardrails of 1x-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 nine, based on our performance to date, current visibility, backlog of existing orders and trends, we updated our fiscal 2026 guidance ranges today. We increased our fiscal year 2026 revenue guidance to a midpoint of $3.015 billion and Adjusted EBITDA to a midpoint of $945 million.

The Adjusted EBITDA margin is expected to be between 31.1% and 31.6%, up 50-100 basis points 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 two weeks is a great example of this. We have included the anticipated impact of these storms in the updated guidance ranges we announced today. We remain focused on executing our long-term strategic plan to drive consistent long-term growth, margin expansion, and free cash flow generation. With that, I'll open the call for questions. Operator, please open the line.

Operator (participant)

We will now begin the question-and-answer session. Please limit yourself to one question and one follow-up. If you would like to ask a question, please press star one on your telephone keypad. To withdraw your question, press star one again. Please pick up your handset when asking a question, and if muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. Our first question comes from the line of Matthew Bouley with Barclays. Your line is open. Please go ahead.

Matthew Bouley (Senior Equity Research Analyst)

Morning, everyone. Thanks for taking the questions. So just one here on the non-residential side because 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 nine months of the year in non-residential, or are you seeing something in your orders and backlog? And obviously, you just mentioned the storms regarding the fourth quarter that perhaps may be a little bit more choppy in non-residential than what you previously thought. Thank you.

Scott Barbour (President and CEO)

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 the 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 non-residential segment. As you know, we're really scaled in that, and a lot of our product lines and our go-to-market is tuned for that non-residential market. So we think we're winning more than our fair share of the projects that are out there with good products, good pursuit. The storm that you mentioned, yeah, pretty darn disruptive, as you can imagine, for us.

So as a result of that, we took some of that 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 with these kind of temperatures kind of in the Midwest and the North.

Matthew Bouley (Senior Equity Research Analyst)

Okay. That's perfect. Yeah. Great, great color. So then I guess second one, I mean, stepping back a little bit, as you alluded to, taking shares, a lot of new products in Allied. I mean, 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 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? Thank you.

Scott Barbour (President and CEO)

Well, we're not going to pre-give you all the great stuff we're going to talk about in June today, but I would tell you that I think the words you used are good. We're seasoning and getting better in our pace of innovation, both Infiltrator, Craig's here 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 six months, I mean, it's tens and tens of millions of dollars of revenue that these projects that we've just engineered in the last couple of years are contributing, which moves that needle to growth for these very challenging markets.

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

Matthew Bouley (Senior Equity Research Analyst)

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

Scott Barbour (President and CEO)

Thanks.

Operator (participant)

Our next question comes from John Lovallo with UBS. Your line is open. Please go ahead.

John Lovallo (Managing Director and Senior Equity Analyst)

Good morning, guys. Thanks for taking my questions as well. The first one is, will NDS be broken out as a separate segment, or will it flow through the current segments? And what is the cadence of that $25 million of annual cost synergies that we should expect?

Scott Cottrill (CFO)

Hey, John. Scott Cottrill here. So it'll be part of the Allied and Other segments. So that's where we'll have it right now, and that's where we'll put it. The $25 million of cost run rate synergies by year three. Year one will be more of kind of the investment and beginning of the integration activity, and then you'll see it kind of ramp between year two and year three.

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

John Lovallo (Managing Director and Senior Equity Analyst)

Okay.

Scott Cottrill (CFO)

Otherwise.

John Lovallo (Managing Director and Senior Equity Analyst)

Okay. Understood. Then it looks like you guys raised the CapEx outlook by about $40 million at the midpoint. Is this Lake Wales-related, or is something else driving this?

Scott Cottrill (CFO)

No, not Lake Wales 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.

Scott Barbour (President and CEO)

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

Scott Cottrill (CFO)

Yeah. The bonus depreciation really helps with those returns as well, so.

Scott Barbour (President and CEO)

Yeah. We had our eye on that as well.

John Lovallo (Managing Director and Senior Equity Analyst)

Understood. Thank you, guys.

Scott Cottrill (CFO)

Yep.

Operator (participant)

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

Bryan Blair (Managing Director)

Thank you. Morning, everyone. Solid quarter.

Scott Cottrill (CFO)

Good morning.

Bryan Blair (Managing Director)

Good morning. Having owned Orenco 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.

Craig Taylor (President of Infiltrator)

Good morning, Brian. This is Craig. The acquisition of Orenco 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 the Orenco 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, actually exceeding a little bit of our expectations.

Bryan Blair (Managing Director)

Ahead of plan?

Craig Taylor (President of Infiltrator)

Ahead of the plan right now and working on that margin improvement that you had mentioned, the 1,000 basis points. So acquisition's going well, the integration of the team members, the growth expectations, and the synergies.

Scott Barbour (President and CEO)

I would add the safety performance has been really good.

Craig Taylor (President of Infiltrator)

Yeah. An 80% reduction in our TRIR, which is our recordable incident rates, since we've acquired the company.

Scott Barbour (President and CEO)

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

Bryan Blair (Managing Director)

Okay. That's all great to hear. And then curious if you could speak to infrastructure project visibility. Your team has faced pretty difficult comps, at least on a trailing basis, and there are some administrative uncertainties that impacted project flow, specifically IIJA-funded projects there. Seems like within the transportation verticals, where you have meaningful exposure, the pipeline is resetting. There's more optimism looking through calendar 2026, even into 2027. Wondering if that's showing up in what your team tracks on a pipeline basis.

Scott Barbour (President and CEO)

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. Frankly, it's competitive. Some 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 have visibility.

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

Bryan Blair (Managing Director)

Okay. Understood. Thank you again.

Scott Barbour (President and CEO)

And yet now 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.

Bryan Blair (Managing Director)

Understood. Next guest.

Operator (participant)

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

Garik Shmois (Managing Director)

Well, hi. Thanks. Good morning. Just on non-residential, just wondering if you can go into a little bit more detail on what led to the reduction in the market guidance. Is there anything that you're seeing specific to any regions or any categories that is leading to the move to downgrade mid-single-digit declines?

Mike Higgins (VP of Corporate Strategy and Investor Relations)

Hey, Garik. Mike Higgins. I think Matt made the comment in his question about that, a kind of mark-to-market. And I would kind of agree with that. That's just more of an update. Hey, we're through nine months of the year. We have a pretty good idea of what it's going to look like. And so 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 Non-residential, it's a very broad segment.

When you get in there, there's certain project types; data centers always come up that 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. Depending on the geography, we are seeing fairly solid activity in just kind of your general purpose, kind of commercial-type construction. Think of the things we always talk about. Horizontal, low-rise-type construction is where we do best in that Non-residential segment.

Garik Shmois (Managing Director)

Yep. Okay. No, thanks for the detail there. I wanted to ask on NDS, now that it's closed, wanted to be clear on how much you're incorporating in the 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 2026. We're not in the fiscal 2027 guidance range just yet, but any additional handholding on the expected contribution from the recently closed acquisition?

Mike Higgins (VP of Corporate Strategy and Investor Relations)

Yeah. 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 two months of our fiscal year, ending here at March 31st. As to next year, again, we'll get into a lot more detail of that at the Investor Day, but I would encourage you to go back and look at the 8-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'll give you kind of the guardrails to start thinking about it and how to model it.

Garik Shmois (Managing Director)

Okay. Thanks for that. I'll pass it on.

Operator (participant)

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

Trey Grooms (Equity Research Analyst)

Hey. Good morning, everyone. Thanks for taking my question. 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 buyback stock versus future M&A? And now with the integration, NDS integration probably going into full swing, I would think here in short order, if maybe you could talk about your appetite for deals here kind of in the more medium term.

Scott Cottrill (CFO)

Yeah. 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 it, the engineering and technology centers, on purpose. Innovation, new product introduction, really important as we go. So again, we look at the opportunities we have organically. And again, especially within not only the Pipe business but Allied and Infiltrator, highest return, lowest risk use of our capital and how we deploy it. So that by far will be number one. Again, pro forma debt with NDS, again, we paid for almost the entire deal out of cash on hand. We're only 1.5x levered right now. Our guardrails are 1x-2x. And you know what? We're going to generate a bunch of cash over the next six, nine, 12 months and a 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'll be tuck-ins and bolt-ons. Those are things we do really, really well, and those are things that might have an EV purchase price at $150 million-$250 million, 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 in for the right opportunity.

We've got the capacity to pull the trigger, so that's always something we'll be looking for.

Craig Taylor (President of Infiltrator)

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. And I'm only saying this, Trey, 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 at Infiltrator right now. We've done a lot of great work in the pipe network that's really paying off for us. This NDS is the next big opportunity, I believe.

Trey Grooms (Equity Research Analyst)

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

Scott Cottrill (CFO)

Yeah. Right now, the primary focus is on the maturities, 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.

Trey Grooms (Equity Research Analyst)

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

Operator (participant)

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

Jeff Reive (Research Associate)

Thanks. Good morning. I appreciate all the details thus far. Really nice free cash flow generation this quarter, but working capital was a meaningful lift. Can you walk us through what drove that and maybe how we should be thinking about free cash flow for next quarter?

Scott Cottrill (CFO)

Yeah. 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 S&OP processes continue to get better. We've talked about 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 in day-by-day and little things that add up to that kind of performance. So really good.

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

Operator (participant)

Our next question comes from Collin Verron with Deutsche Bank.

Collin Verron (Director)

Good morning. Thank you for taking my questions. 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 mixed shift within each of the categories? And then just how are you thinking about this? Is this a structural improvement, or could some of this roll off as we see some of the end markets pick up, like residential in particular?

Scott Barbour (President and CEO)

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? Are you just going to ride up and down with your materials pricing environment?" And we don't want to do that. We'd be more consistent than that. We want to be more consistent.

I think we've proven that by continuing to move our mix to these Allied Products and the Infiltrator products. You do that with sales efforts. You do that with new products and programs. We do that with acquisitions. In the case of Orenco and NDS, it's not to say that we don't like the Pipe business. We do. But we also realized that investors wanted a more resilient profit profile. So that's what we work on. So it's not a one-time 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 in 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. 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.

Collin Verron (Director)

Great. That's really helpful color. I guess 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. 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 2026 just based on what you're seeing today.

Scott Barbour (President and CEO)

I'll let Scott Cottrill handle this question.

Scott Cottrill (CFO)

Yeah. So again, price cost, you see it in our EBITDA waterfall and our bridges for the quarter and year-to-date period. It's obviously something that we always look at and try to gauge. I mean, we have a pretty good forecasting process. We 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 ADS 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.

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

Collin Verron (Director)

Understood. Thank you.

Operator (participant)

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

David Tarantino (Assistant VP)

Hey. Good morning, everyone.

Scott Barbour (President and CEO)

Good morning.

David Tarantino (Assistant VP)

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

Scott Cottrill (CFO)

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. 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 two to three months. Obviously, the mix of the products that we sell and the segments that drive that are important to try to get right and 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 costs. 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 mixes us up. So those all go into it and are the drivers for that margin expansion story.

Scott Barbour (President and CEO)

I would add one other thing to that, Scott, is 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 Orenco in particular. I mean, all that stuff gained momentum as we've gone through these three 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 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.

It was across lots of different categories of stuff, even some categories we didn't expect that were contributing nicely. This kind of, I think, a quarter like we just had isn't just the result of kind of one set of activities. It builds up, and that's why I kind of bring that up.

David Tarantino (Assistant VP)

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

Scott Barbour (President and CEO)

Yeah. I would say that. This is Scott Barbour again. Our polypropylene pipe, what we call our HP Pipe, is 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 N-12 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, 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 three years in a row. So our downdraft, I'd say we're market neutral with the black Dual Wall N-12. We're gaining share with the HP product. Couldn't be happier with that one. With the single wall, some is market headwinds. Some are things that we need to go do better, but that's the one that's the downdraft. And we have programs that we've been talking about through our strategic planning process this fall that we're activating in that, very high on our priority list, some of those things that we need to do in that segment for the pipe. So that's how we kind of look at that. We'll talk a lot about that in June when we're together. But 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.

David Tarantino (Assistant VP)

Okay. Great. Thanks for the color, guys.

Operator (participant)

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

Scott Barbour (President and CEO)

All right. Thank you very much. Lots of great questions. We appreciate the chance to give some color on the business and what's going on. I kind of said it there. A lot of what we have seen this year, particularly in these last two 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 year and a half or two years, whether they be acquisitions or new products like the tank and the active treatment that Craig has been working on for a long time. In the ADS side, it's the new StormTech products. It's the new Nyloplast products. 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 Brett's reconfiguration of some of our sales activities.

There's a lot of work going on. We're really proud of how it's coming to fruition in our results here. 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. Monday was quite a nice day to finally get that closed. We're going to be out there with that team next week. 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. We appreciate your attention, and we look forward to talking to you later or seeing you around soon. Bye-bye.

Operator (participant)

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