Advanced Drainage Systems Inc (WMS) 2017 Q2 法說會逐字稿

Good morning, and welcome to the Advanced Drainage Systems' second-quarter FY17 conference call.

(Operator Instructions)

Please note this event is being recorded for webcast.

I would now like to turn the conference over to Mike Higgins, Director, Investor Relations and Business Strategy. Please go ahead.

Thank you. Good morning. With me today is Joe Chlapaty, our Chairman and CEO; Scott Cottrill, our CFO; and Ron Vitarelli, our co-COO. On today's call Joe will summarize our results for the second fiscal quarter, Scott with then provide more detail on the financial results for the quarter as well as our guidance for FY17, before we open the call up to your questions.

I would also like to remind you that we will discuss forward-looking statements, as defined under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those forward-looking statements as a result 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 is also been included in an 8-K we submitted to the SEC.

We will make a replay of this conference call available via webcast on the Company website. With that, I'll turn the call over to Joe Chlapaty.

Thank you, Mike, and good morning everyone. Welcome to ADS's second-quarter FY17 earnings conference call. We would like to thank all of you for joining us today.

We appreciate your patience and support through the most recent restatement process, which we finalized January 10, and as we continue to work diligently to become current with all of our SEC filings. Scott will cover more details related to the restatement in just a minute, so let me now turn to highlights for the second fiscal quarter.

As we indicated on our last call, market conditions during the second quarter were softer than initially expected, but I am pleased with our overall performance during the quarter, as we continue to outpace the overall construction market, while generating strong profits and cash flow. On a year-to-date basis, we have generated solid growth of 6% in our non-residential end-market. We continue to see double-digit growth of our HP pipe, and growth in our Allied Products, led by Nyloplast, StormTech and our BaySaver water quality units.

Our second quarter sales results declined primarily due to continued softness in ag and Mexico, lower sales in Canada, and a lack of growth in our domestic construction markets, which resulted in a consolidated net sales decline of 6%. We generated $66 million of adjusted EBITDA this quarter, about 3% higher compared to the prior year. Our price management and material cost advantage continued to enable us to generate good, healthy profits.

On a year-to-date basis, adjusted EBITDA has increased an impressive 18% to $137 million, even though net sales have decreased 2% over the same time period. Although we are facing greater-than-expected headwinds to our top-line revenue, which Scott will cover in more detail, we feel good about our ability to continue driving above-market growth and healthy profitability for FY17 and beyond.

Importantly, we also expect to continue generating favorable cash flow, which will create additional avenues for shareholder value creation, including organic investments in our business, acquisitions, cash returns to shareholders, and maintaining a healthy balance sheet. Let me spend just a few minutes on some of these investments.

Our new manufacturing facility we are building in Harrisonville, Missouri remains on schedule and on budget. Once complete, this facility would help free up production capacity in the Midwest, allow us to meet the growing demand for our products in the region, and help reduce the time and cost of delivery to our customers. As a reminder, this facility is expected to open in the first half of calendar 2017.

We are also committed to investing in product innovation, that helps to extend our leadership position and competitive differentiation. We have some exciting news on this front, and we will have more information to share regarding a new pipe product very soon. We believe this new product offering will help further our market share gains in the infrastructure end-market, particularly for large diameter storm sewer applications, building upon the success we have seen with our HP product line.

We're also reviewing our manufacturing footprint to identify investments and other actions we can take to improve our efficiency, and lower our fixed costs, without sacrificing our service levels to customers. We are early in that process, and will have more to share in the coming quarters. In addition to organic investments, we also expect to build on our track record of making strategic acquisitions to complement our product mix and geographic footprint.

Lastly, we are committed to returning a portion of our excess cash to shareholders through our dividend program, and will consider opportunistic share repurchases in the future. Now, I will turn the call over to Scott Cottrill to discuss the highlights from Q2 2017, as well as our FY17 guidance. Scott?

Thanks, Joe. On slide 5, we have outlined the impact of our recently-completed financial restatement, which impacted the annual periods ending March 31, 2012 through 2016. To summarize, during our interim review of share-based awards and related administrative procedures, we identified accounting issues with the treatment of our stock-based compensation.

Specifically, we gave participants in the plan the ability to net shares upon exercise for tax withholding requirements, at an amount greater than the statutory minimum. We also at times repurchased shares from employees within six months of issuance. Both of these items resulted in our conclusion that we should change the way we account for our share-based awards from the equity method to the liability method.

As part of our review, we also determined that additional adjustments were required for historic compensation expense associated with certain executive employment agreements, as well as for certain stock repurchase agreements, in place with members of the Senior Management Team.

Importantly, as we outline on slide 5, the adjustments were all 100% non-cash, and did not impact net sales or adjusted EBITDA for any of the impacted periods. For further details on the restatement, please refer to our amended financial statements for the above referenced periods filed with the SEC earlier this week.

With this restatement now behind us, we continue to expect that we will become a timely filer, when we file our Q3 report. For more specifics, please refer to the updated timeline on slide 6.

Let me now shift to our financial results for the second fiscal quarter, a summary of which is provided on slide 7. During the quarter we generated net sales of $361 million, down 5.9% from $383 million in the prior year. As mentioned on our last earnings call, domestic construction markets in the second quarter were slower than we initially anticipated.

Additionally, ag and Mexico continue to be significant headwinds. With regards to Mexico, we believe the market has bottomed, and are cautiously optimistic about our future performance there.

Let me now highlight a few year-over-year improvements during the quarter. Despite lower sales, our gross margin and adjusted EBITDA margin improved versus the second quarter of FY16. Our gross margin improved 250 basis points to 25.1%, and our adjusted EBITDA margin improved 160 basis points to 18.2%.

The key drivers to the margin expansion were effective price management, lower resin costs, and favorable transportation and operation costs. These improvements were partially offset by higher SG&A.

Turning to slide 8, domestic net sales decreased 4.7% on a year-over-year basis to $312 million. This decline was primarily attributable to the ongoing weakness in our ag end-market, and a soft domestic construction market. That said, we feel our performance in the non-residential end-market held up better than the broader market, growing approximately 1% during the second quarter year over year, and up approximately 6% year to date.

Despite the decline in sales, we continue to show improvement in our adjusted EBITDA, on both a dollar and margin basis. Our domestic adjusted EBITDA increased 3% year over year to $57 million, and our adjusted EBITDA margin improved 140 basis points to 18.3%, driven again by effective price and cost management.

On slide 9, I would like to provide a little bit more detail on what is driving our domestic performance by end-market. Our non-residential end market sales continued to perform well in a difficult market environment, with results up slightly year over year.

A slight decline in pipe sales was offset by an 8% increase in sales of our Allied Products. The strength of our Allied Products sales, particularly the performance of our Nyloplast and StormTech product lines, reflects market adoption for our complete product package for stormwater management solutions. As mentioned previously, on a fiscal year-to-date basis, our non-residential end-market sales were up approximately 6%, as compared to last year.

Our residential end-market was slightly lower than expected, decreasing 2%. Similar to the first quarter, a 2% increase in new residential construction sales was offset by a 5% decline in our retail channel, primarily due to the warm weather we experienced last winter, and inventory management and destocking practices many of our retailers have implemented this year.

In our infrastructure end-market, our sales declined 5% in the quarter, driven by weaker project activity in markets where we have strong approvals. Again, we believe the decrease in year-over-year sales is due to the timing of projects, and weaker activity, and do not believe we have lost any market share. Longer term, we still feel good about our position in this market, and look forward to continued success of our HP product line, as well as the roll-out of the new product that Joe mentioned earlier.

Lastly, sales in our ag market were down 27% on a year-over-year basis, primarily as a result of an earlier start to the planting season, as well as weaker underlying economic conditions in the agricultural economy. Given the persistent challenges in the overall ag market, we're in the process of evaluating our facilities and production capacity, in locations that primarily serve this market.

To date, we have shuttered one facility in the upper Midwest, and have taken out or moved approximate 7% of our production lines to other facilities with less capacity and/or exposure to the ag end-market. We will continue to evaluate our options to optimize our manufacturing footprint moving forward, given the weakness in the ag markets we serve, as well as to ensure we have the right product, at the right plant, at the right time.

Turning to slide 10, on a year-to-date basis, free cash flow improved to $22 million, an increase of $27 million when compared to a use of $5 million last year. This improvement was due primarily to higher EBITDA and lower working capital requirements, partially offset by the timing of cash payments related to the financial restatement. As Joe mentioned, strong cash flow generation affords us the opportunity to invest in profitable growth, whether that be organically, or by making strategic bolt-on acquisitions, as well as the ability to return excess cash to our shareholders.

Lastly, we repaid $77 million in debt since September 30 of last year, and ended the quarter with net debt of $420 million. CapEx for the first half of FY17 was $24 million, an increase from $22 million during the same period last year. We're on track to hit the low end of our expected range of between $50 million and $55 million for the full year.

Slide 11 highlights our disciplined capital deployment strategy. Our highest priority use of cash continues to be investing in our business, as well as making strategic bolt-on acquisitions to complement our product offerings and our geographic footprint. We remain committed to returning a portion of our excess cash to shareholders through our dividend program, and will consider opportunistic share repurchases in the future.

Based on our performance year to date, backlog of existing orders and trends, we are updating our net sales and adjusted EBITDA guidance for FY17, which is noted on slide 12. Our current expectations are for net sales to be in the range of $1.225 billion to $1.250 billion, and adjusted EBITDA to be between $190 million and $210 million for FY17. Our expectations reflect primarily net sales performance for the fiscal third quarter, as well as a more conservative view on the fiscal fourth quarter.

On a consolidated basis, we anticipate net sales for the fiscal third quarter will be approximately 6% lower than the previous year. We anticipate sales in our domestic construction market will improve low single digits year over year, driven by non-residential sales, which will be up mid single digits.

With respect to our other domestic and international end-markets, we expect similar performance to what we saw in Q2. For the fiscal fourth quarter, we have assumed net sales will be approximate 7% lower than Q4 of last year. That being said, as we all know, weather can be very unpredictable, particularly in the winter, which makes it difficult to provide accurate estimates for the fourth quarter.

Lastly, it is worth noting that we are up against relatively strong comps in the fourth quarter, due to favorable weather last year. In fact, last year's winter was one of the mildest in recent memory.

In terms of adjusted EBITDA, our updated range is primarily due to our lower forecasted sales, and lower pricing. Our pricing in the first half of FY17 was better than we initially anticipated, and our revised guidance on October 7 assumed that benefit would continue. Our updated range incorporates current pricing levels, which are in line with what we had assumed at the beginning of the fiscal year, of about 1% to 2% lower year over year.

On slide 13, we have provided our outlook on the end-market dynamics driving our full-year expectations. In our core construction markets, we have narrowed the expected range from market growth to between 0% and 2%. Comparatively, our performance in the construction market this year, including our preliminary view on the fiscal third quarter, will be in the low single digits, with non-residential sales up by mid single digits, partially offset by lower retail and infrastructure sales.

Our revised net sales guidance assumes that the low single digit growth in our domestic construction markets will be offset by continued softness in ag, which we expect to decline by 20% to 25% for the full year. We also expect weakness in our international markets to persist throughout the remainder of the year, driven by continued softness in Mexico, and second-half weakness in the ag market in Canada.

Again, with regards to Mexico, we believe the market has bottomed, and are cautiously optimistic that our performance in the region should begin to stabilize, if not improve moving forward.

Now, we will be happy to take your questions. Operator, please open the line.

(Operator Instructions)

Rob Hansen, Deutsche Bank.

So your top line came in largely as expected. You gave this updated guidance, and we really appreciate that. What has really changed between last time when you gave guidance and this time, right? And why did you reduce guidance?

I'm thinking, is it something that you are seeing in January here that wasn't good? What are your thoughts on that? And are there specific verticals within non-res that came in weaker than expected? And by verticals, I mean office or retail or something like that.

Hey, Rob. Scott here. I think year to date, through Q2, we had seen our non-resi up mid-single digits, and so when we had done the prior forecast, we were using that as the trajectory as we've moved forward. We did not think, and originally in the guidance we put out, we thought Q3 was going to be up year over year a little bit. And obviously in Q3, what we saw again, what we pointed to was continued weakness in our construction end markets, or at least weaker than what we anticipated being down.

Especially that was in the infrastructure and retail end markets, as well as the fact that pricing, we had assumed in the October forecast when it came out, we were seeing very favorable pricing versus what we had expected at the beginning of the year. We played that forward, assuming that it would gradually go down, but that we would largely leave it intact.

What we saw through Q3 ended up becoming more in line with what we thought at the beginning of the year, which is, when you are in the second full year of a lower resin cost environment, you can end up giving some of that back. Now again, ag and retail, you would expect to give that back. That is our price-sensitive markets.

And again on the non-resi and construction markets, they are very savvy customers as well, and it's something to be expected. So those would be the biggest changes that we saw, just the weaker demand dynamic, as well as pricing.

Got it. And the pricing, it seems like in the second half of the year, it is a swing factor. It looks like it might be anywhere from flat to down 200 basis points or so, or something like that. Is that what's embedded in the guidance?

It is, Rob. Yes.

Got it. And then just on the -- from an input cost perspective, what is that looking like? What are input costs up or down year over year? And how aggressive have suppliers been? And then just lastly, if you could just give us the gross margin for domestic versus international, that would be helpful.

Rob, this is Joe Chlapaty. Let me give you the 10,000-foot review of raw material, and then Scott can give you the specifics. We have maintained a favorable outlook and attitude towards material costs, and that really hasn't changed. And we see meaningful capacity coming on stream this year, augmenting what came on last year.

So going forward, we remain -- I don't want to use the word optimistic, but we haven't changed our outlook on downward pressure on material costs. That looks like it is going to take place, and is taking place, so we feel good about it. Scott can give you some of the specifics on the margins themselves.

Again on the resin side, during the first half of the year we were down about 14% year over year, so again, great trajectory. The comps get more difficult in the second half, so that still would be a benefit, but not as much as what we saw in the first half of the year.

I'll talk to the EBITDA margin side, Rob. On the EBITDA margin, domestically we were at about 19.5% year to date, and about 17% international. And that blends us to about the 19% for the year-to-date period, consolidated.

Okay. And then just last one, what's going on in Mexico, and why do you believe that the market there has bottomed?

We are actually experiencing recovery in Mexico, and it really started in December. I think the outlook down there is for improved activity, again in, I would say, the construction markets, mainly as it relates to residential. And we have implemented some programs to recapture market share that we believe escaped from us over the past couple of years.

So we have a new team in place down there. They're doing a good job. And as we speak, over the last, say, 60 days, Mexico has turned into an upward trajectory. We're not looking for huge growth there, but we're looking for improvement over the -- than it was, let's say, over the past 1.5 years.

All right, thank you.

Bob Wetenhall, RBC Capital Markets.

This is actually Marshall Mentz on for Bob. Couple questions for you, looking into actually your FY18. Would you talk about the Missouri facility, with respect to financial impact, and how that could potentially flow through in 2018 and beyond?

Well, we have a facility in Missouri being completed from a couple of different standpoints. We believe there is a growing market opportunity in Missouri, and in that region out there. And we have received some meaningful approvals, improvements in our approvals out there, which give us a lot of confidence.

And quite honestly, equally important was the ability to dramatically reduce our freight shipping costs to that area, where we had kind of a hole, and we were incurring a lot of freight expense delivering product to that market. So as the sales trend is up, we need the capacity out there, and the ability to save freight cost dollars becomes more meaningful.

And then shifting gears a little bit, but still talking about next fiscal year, the agricultural end market, and given your commentary about the negative impact to the planting season the last year, how does that play out in the future, and do you anticipate any pent-up demand? I think you had some commentary, maybe about backing away from the business a bit, just given conditions. But is there potential for some sort of recovery, given what has happened?

I'll have Ron Vitarelli comment on that in a broader perspective, but we certainly are not giving up on that market. We just think that with a company our size, with soon-to-be 49 domestic plants, we need to deploy your operating lines in those geographies where there is strong business volume. So if we have lines in those situations that are -- have been, say, idled, we're going to move those to areas where we need that capacity.

Ag is a very variable market, and every time you think you have analyzed where it is going to go, it changes direction. And I would say that, and I will let Ron address this, but it is hard to ignore the weather impact that we've had over the past 1.5 years, but we don't want to just use that as some type of an excuse. The market is softer, but the year-to-year weather impact has been significant.

Yes, and just to echo, this is Ron Vitarelli, just to echo that comment a little bit, obviously the weather has a certain impact on the agricultural market for us. And although we don't see a very significant demand push forward, or from this year to last year, from an ADS perspective, we've been in this market for a very long time. Our market share is very stable and our customer base is very stable, which bodes well for just continued market performance in the ag business. Our expectations are, I think, realistic in the ag market, but we're not expecting to see a very drastic increase, based on pent-up demand.

Marshall, it's fair to say that when we do our Q3 earnings release coming up in early February, we'll be giving directional -- additional directional look into what we think the end-market performance will be.

Great. Thank you.

Mike Halloran, Robert W. Baird.

So, first, let's start on the non-res side, and I'm thinking back to the last update call. There was an expectation that things would get a little better in the fiscal third quarter, beyond, obviously today you talked about how you're taking those expectations down. But maybe you could talk a little bit about how the performance has been sequentially, relative to what you normally see from a sequential perspective? Was it a little bit closer to normal sequential pattern, a little worse? How would you characterize that?

I'll take a first stab, and then let these guys add some context to it. I think the first quarter was very strong. We were up 11% in non-resi in the first quarter, and that was the mild winter, the spring. It was -- people were outside. People were working; people were getting a jump on things much earlier than what you normally see.

A little bit of that was timing then, and again it has mostly impacted ag and retail and some of those other construction markets. But you also saw a little bit of that weaker activity in Q2, that I think was a little bit of that timing and phasing, to be honest with you. I look at the first half being up 5.6% in the non-resi side as more of a normalcy, if you will, for how we did in those six months. And to me, that is kind of a normal trajectory with what we thought.

I think really on the pricing side, that is where we saw a little bit of the weaker activity. All of that started coming in Q3, and again that was -- I don't want to get into the months, but again, as we saw in November and December, we were picking back up, and then you had winter, and weather started impacting us in mid-December again.

So I would say the sequentials, I would just talk to it the way I just did, as to the first half was in line with what we expected, when you looked at it over the entire six-month period. And in Q3, I think a little bit of weaker activity. A little bit of what we assumed at the beginning of the year on the pricing side came to fruition. And then again, we've got tough comps in Q4, but we still expect it to be up mid-single digits in Q4 year over year, despite those comps, in the non-resi side of the house.

It sounds like you're saying basically that the sequential trends, a little bit of weather headwinds, comps certainly a problem, but the sequential trend probably as you work through the year and try to normalize everything out, not that different from what you'd see in a normal year. Is that fair?

That's correct. This is Ron Vitarelli again. We've talked with the greater group in detail in the past. We track the conceptual side of that business and the design side of that business very closely. And all the indications that we are witnessing would support the positions that we have taken, that it is a timing issue.

Certainly cold weather on a company like us impacts construction, because we are 100% outside of a building. But what we are seeing certainly supports our outlook, as stated.

Makes sense. And maybe a similar discussion on the resi side of things. Obviously, different distribution channel, a little harder distribution channel. But weather benefits I'm assuming there as well, from part of the year, comps harder here as well. How would you characterize the core market there, and your performance relative to the core market, and what you have seen sequentially?

Again, I think as we have talked to the market, we have not lost any customers or market share -- I think we, to be honest, I think we underestimated the impact of the Q4 winter, and the pull forward a little bit. We just did. We said 10% to 15%; it was probably closer to 20%, 25% impact there.

On the pricing side again, our price-sensitive markets are ag and retail. And not that you don't have that pressure again on the construction markets, but primarily it's in those two markets first, and they are very savvy customers on the retail side of the house. So I think that's what you saw.

You've got different weathering events at different geographies throughout the US that didn't help us. Whether that be a drought in the West or heavy rains in Texas, I mean none of that ended up boding well for us as we went throughout the year.

And then you also have, we mentioned the inventory management practices that our large retail customers put into place, not that they don't always have that in place, but we saw it more so this year when it came to destocking and really having just-in-time inventories, if you will, and keeping inventories at a relatively low level. So I think those are the key drivers we have seen in the retail side of the house.

That makes a lot of sense.

This is Mike Higgins. One other thing to add on the residential piece is there's the retail component of the Business, and then there's the new residential construction, which would be related to new subdivision development, new multi-family development. That business has performed in line -- you said mid-single-digit growth over the first half of the year, so that is really where, again, that's where the conversion story is in play for us. That is the focus. That's where we are competing against traditional materials.

As Scott mentioned, the retail, we have the share there. We're really focused on, and pleased, is that growth we're seeing in the residential construction because that means our strategy of conversion is at play, and we're being successful.

Great, and the last one for me, just maybe an update on the impact that you are anticipating on the hedging side this year?

Yes, we've had actually favorable movements on the monomer, the propylene monomer year to date, so that's primarily the financial hedge side, other than diesel. The best way to look at that is about a $3 million favorability on both the GAAP earnings and EBITDA perspective, than what we had assumed at the beginning of the year.

Good. Thanks. Appreciate the time.

Ryan Connors, Boenning & Scattergood.

I wanted to, actually I had a question, a bit of a bigger-picture angle on the pricing situation from a structural standpoint, talking about the construction market. And obviously, your markets are really regional, so even though you are talking about pricing in the national context, my understanding of the Business is it really is these regional markets, where the supply-and-demand situation would really be what dictates price.

So can you talk about your pricing situation on a regional basis? With construction growth so low, I imagine there are markets where the growth is negative, and that's pressuring that supply-and-demand dynamic. And also as it relates to the re-tasking of agriculture assets by yourselves and others, whether that is creating some regional issues in terms of pricing from a supply standpoint?

Certainly, and I will handle, this is Ron Vitarelli, I'll handle that and we will start with ag. And very simply, in a declining ag market, it becomes a competitive environment, with more people competing for a smaller piece of the pie. And I think that's something that we have been exposed to and working on for the last 50 years.

As it relates to the commercial construction, and I will call the heavy construction market overall, we are booking it regionally by local polyethylene players, and then concrete players more on a national level. So we price ourselves accordingly. We understand that the concrete input pricing has moved upwards, and we're trying to be conscious of that in the market, where we are directly converting against the reinforced concrete pipe producers.

And in marketplaces where our primary competitors are the polyethylene pipe producers, we have to take a little different view on things, to make sure that we don't lose market share. And one of the things that I think we should certainly highlight again this year is that we have -- we feel very strongly that we have not lost any market share to any of our traditional competitors, both on the concrete side of the Business and the polyethylene side of the Business. So hopefully, I hope that answers your question as to our regional looking at those things.

Okay, but if I can -- go ahead.

I just want to add one flavor, one context to this, right, is the fact that for the year, we expect resin costs to be, on average down 10% year over year. And on the pricing side again, it's blended average of ag and retail and all of our markets, but we expect pricing to be down 1% to 2%. I just want to put that in context, that the majority of what we're seeing on that resin side, we are able to keep, and we pride ourselves on being able to do that. And the sales guys do a really effective job of managing that, both up and down.

Okay. So if I can just paraphrase that then, you don't believe, even though the market growth has been a little bit below your expectations, in some of the markets, you don't believe that there is any lingering oversupply issue of too many production lines out there, from an industry standpoint?

In the construction markets, no, where you would have that overcapacity would be in the ag markets.

Got it. Okay. And that's a good segue, because my other question had to do with ag. It does seem that a couple, a few years into this down cycle, and it does seem like the negative momentum that you are forecasting here, down 20% plus, is certainly a little bit more pronounced than in some of the other ag-related markets, think of irrigation for example, where things are kind of stabilized.

My question is, what do you think is driving that? And is there some change, some shift? I know that a lot of your product is used in tiling applications. Is there some shift taking place in the way the product is used, or is not used, in these applications that is either exacerbating the cyclical impact in some way?

I think what's been difficult -- this is Joe Chlapaty -- to try to separate the actual market expectations from weather has been very challenging. Because, as Scott had mentioned earlier, the ag season never really stopped last year much in winter. We had a fourth quarter in ag last year that was probably close to a record for us. So, when you factor that into this year, again, you don't know how much pullback you have had.

I'll say this: Agricultural field drainage is a proven technique to improve crop yield by 20%. And most lending institutions, if you want to borrow money to buy farmland, oftentimes they will require that the land be drained. We're going through a situation here, a transition where commodity prices are certainly down from where they have been, but where is the bottom? I would like to think we're there. It's where does it go next year, it's just a hard one to predict.

We could, and I'm not suggesting this, but you could see a rebound in our Business earlier this year. Again, if weather turned warm in March, you would see a rebound in that business. We had a much earlier start to winter in the upper Midwest in December, which we just didn't experience last year.

I don't know where you are calling from, but if you were in the upper Midwest in the second, third week of December, it was bitterly cold. And once installers put their equipment away, they tend not to pull it back out until spring. Maybe that's kind of a lot of words that didn't address your question, but I hope it was helpful.

No, it absolutely is, and thanks for your time this morning.

(Operator Instructions)

This concludes our question-and-answer session. I would like to turn the conference back over to Joe Chlapaty, Chairman and CEO, for any closing remarks.

Thank you. In summary, we are happy to have the restatement behind us, and are pleased with our performance so far for the first half of the year, particularly given the more difficult-than-expected end-market environment. Our performance in the construction market this year, including strong results in non-residential and residential construction end markets, continues to outpace the market. We're also pleased to see double-digit growth in our HP pipe, as well as solid growth in our Allied Products.

Our gross margin and adjusted EBITDA margin improved compared to the prior year by 250 basis points and 160 basis points, respectively. And we are generating healthy profits and free cash flow, which will create additional avenues for shareholder value creation, including organic investments in our Business, acquisitions, excess cash returns to shareholders, and maintaining a healthy balance sheet. We also remain confident in our strategy to outperform the overall market by driving conversion opportunities from traditional materials, as well as generating significant operating leverage over time.

Thank you all again for joining us today, and we look forward to speaking with many of you very soon. Operator, that concludes the call.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.