Advanced Drainage Systems, Inc. Q2 FY2026 earnings call

• ADS executed well in Q2 with 9% revenue growth and 17% adjusted EBITDA growth despite a challenging market environment. - The company prioritized higher growth, higher-margin products, material conversion strategy, and self-help initiatives for safety and productivity. - Nonresidential sales grew 15% geographically across the U.S. with organic growth of 12% driven by Allied Products and HP pipe. - The residential end market was mixed, but multifamily development activity saw strong Allied Product growth. - ADS acquired NDS in September, a U.S. supplier of residential storm water and irrigation products complementary to its portfolio. - The company had its safest first half of the year on record with a total recordable incident rate 1/2 of the industry average. - ADS plans to invest in organic and inorganic growth, increase production capacity, and focus on service and delivery experience.

In the second quarter, Allied Product sales increased 13% with double-digit growth in key products like StormTech retention detention chambers, Nyloplast catch basins, and water quality products, benefiting from new products launched in the last year. Infiltrator revenue increased 25%, including 7% organic growth driven by double-digit growth in tanks and advanced treatment products launched in the last several years. Pipe revenue increased 1% with double-digit growth in HP pipe products and construction applications offset by weakness in the agriculture market.

• Revenue guidance for fiscal 2026 was increased by 2% at the midpoint to $2.945 billion. - Adjusted EBITDA guidance was increased by 5% at the midpoint to $920 million. - Adjusted EBITDA margin is expected to be approximately 31.2%, 60 basis points higher than fiscal 2025. - Demand and market strength are seen as the largest risk in the second half, especially due to seasonality.

• Uncertainty in market demand, particularly in the second half of the year, impacted by seasonality. - Government shutdown and its potential impact on infrastructure spending and economic uncertainty. - Weather affecting construction activity, especially in northern climates during winter months.

Q: How do you see end markets playing out in the back half of the year and what's embedded in guidance?

A: Guidance reflects caution due to demand uncertainty, with a bit of degradation implied year-over-year.

Q: Thoughts on inventory?

A: Inventory is sized correctly for tepid and uncertain demand, with some friction due to government shutdown.

Q: Margin outlook for back half?

A: Margin guide driven by demand, with price/cost stable, and 30%-40% decremental margin approach based on demand.

Q: Signs of slowing in second half?

A: Cautious due to friction in market, government shutdown impact on infrastructure, and winter weather affecting construction.

Q: Residential growth details?

A: New products, programs with builders, multifamily activity, and Orenco contribution driving residential growth.

Q: Texas infrastructure bill impact?

A: Seen as a significant opportunity for ADS across nonresidential, residential, and rainwater harvesting.

Q: Price cost in back half?

A: Price cost largely stable, demand-driven guide, with material cost and conversion exceeding expectations.

Q: SG&A in second half?

A: SG&A includes Orenco acquisition and transaction costs, but management confident in control.

Q: NDS integration?

A: Integration going well, exceeding synergy expectations, complementary product lines, and revenue synergy opportunities.

Q: Long-term margin profile?

A: Focus on Allied and Infiltrator growth, new product introduction, capital allocation, and accretive acquisitions to drive margin expansion.