Advanced Drainage Systems Inc (WMS) 2026 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to Advanced Drainage Systems third-quarter of fiscal year 2026 results conference call. My name is Ellen, and I am your operator for today's call. (Operator Instructions)

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

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

I would also like to remind you that we will discuss forward-looking statements. Actual results may differ materially from those forward-looking statements because of various factors, including those discussed in our press release and the risk factors identified in our Form 10-K filed with the SEC.

While we may update forward-looking statements in the future, we disclaim any obligation to do so. You should not place undue reliance on these forward-looking statements, all of which speak only as of today.

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

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

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

Let me start with the third quarter results. We outperformed the market again this quarter through the Infiltrator business, the Allied Products portfolio, and HP Pipe sales as we continue to drive the market share model, introduce new products, distribution, and customer programs.

These strategic priorities continue to help us achieve growth in the mixed demand environment we see today and reflect ADS' strategy to prioritize higher growth, higher-margin Allied and Infiltrator products that strengthen the resiliency in our profitability. This resulted in one of the most profitable third quarters in our history with a 30.2% adjusted EBITDA margin.

Let me touch on a few highlights. Allied Product sales increased 8% and with growth in several key products, including the StormTech storage chambers, the Nyloplast capture structures, and the water quality products, all of which benefited from new products introduced over the last year. Infiltrator revenue increased 2% with good activity in the Southeast and the South.

The 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. Leach field sales remained resilient despite the market sluggishness and advanced treatment systems continue to gain share in residential due to new product launches and the growth in commercial systems.

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

From an end market perspective, sales in our core nonresidential market increased 5% with growth driven by sales in the Southeast, Midwest, and up the Atlantic Coast into the Northeast. Based on market indicators we follow, we are updating our end-market demand forecast for the nonresidential market to down low to mid-single digits compared to the previous outlook of flat to down low single digits.

In spite of a challenging demand environment, ADS' third-quarter performance highlights the strength and balance of our portfolio and the execution of the sales team on selling the high-growth products we continue to highlight, HP Pipe and the Allied products.

Sales in the residential end market were down slightly as it remains under pressure. However, the Infiltrator core residential business continues to significantly outperform the market due to new products and distribution. In addition, for the third quarter in a row, Allied Product sales increased in the residential market, driven by the multifamily construction activity.

Single-family residential land development activity was better in the Atlantic Coast and Southeast, but the DIY channel continues to experience significant weakness. Based on our performance in the current end market, which was down high single digits, we are confident that we have the right strategies, the right product portfolio, and the go-to-market model to increase participation in the residential market, and we will benefit as that market inevitably recovers.

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

We are excited to have closed the NDS acquisition on Monday of this week. NDS' products are highly complementary to ADS' stormwater capture portfolio and enhance our offering in both the distribution and retail channels. We now operate the three most relevant brands in stormwater and wastewater management, Advanced Drainage Systems, Infiltrator, and NDS.

The portfolio of products available across these brands is the largest and broadest in the industry which gives us unmatched ability to meet customer needs across applications and end markets. We are in the early days of integration, and we look forward to sharing more about the business and our synergy plan at our Investor Day this summer.

And on that note, I'm pleased to share the date for ADS' third Investor Day, June 18, 2026. Management will host a presentation at ADS' Engineering and Technology Center in Columbus, Ohio, followed by a tour for in-person guests. Invitations will go out in the coming months.

But at this event, you can expect us to cover growth priorities and updates to our key sales strategies, a deeper look at acquisitions, particularly of NDS and Orenco, the resiliency of our profitability, pay off from the capital deployed over the last several years, as well as the next capital programs we will invest in going forward, and, of course, new medium-term financial targets.

We look forward to providing the business updates and showing off the Engineering and Technology Center, the largest 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 year-to-date is driven by strong execution, and I'm very proud of the team for doing so in a challenging environment.

When you stack up our strengths, the scale, the product portfolio, our go-to-market strategy and the ability to invest in our business, our people, and the industry's growth, you can see ADS' value proposition remains both relevant and powerful.

While we navigate this near-term environment, we will do so with an eye toward the future. We remain firmly committed to our long-term vision and we'll continue investing in the capabilities that will position us for the future success. Overall, the long-term outlook for our business remains strong, supported by compelling secular tailwinds driving demand for water management solutions across North America.

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

Thanks, Scott. Today, my comments will focus on cash flow, capital allocation, and our updated guidance. Jumping to slide 7. I'd like to start by highlighting the fact that year-to-date, we generated $779 million in cash from operations, converting more than 100% of our adjusted EBITDA into cash.

Year-over-year cash flow from operations increased $239 million or 44%, driven by effective working capital management, increased profitability and lower cash taxes, primarily due to the benefits of the OBBBA. We ended the year with over $1 billion in cash and a 0.5 turn of net leverage.

Turning to slide 8. We highlight our disciplined approach to capital allocation over the last several years. Approximately 70% of total capital deployed from fiscal 2020 to 2026 was dedicated to growing the business through capital expenditures and strategic acquisitions.

This reflects our conviction in the long-term demand outlook across our end markets and our confidence in the returns generated from expanding capacity, innovation, and new product development, as well as continued automation and productivity improvements. The benefit of our balanced approach to capital allocation as well as our strong commercial execution over this period of time is evident in the growth and profitability of the business we experienced.

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

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

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

Finally, on slide 9. Based on our performance to date, current visibility, backlog of existing orders and trends, we updated our fiscal 2026 guidance ranges today. We increased our fiscal year '26 revenue guidance to a midpoint of $3.015 billion and adjusted EBITDA to a midpoint of $945 million.

The adjusted EBITDA margin is expected to be between 31.1% and 31.6%, up 50 to 100 bps versus the prior year. This guidance includes approximately $40 million of revenue from the NDS acquisition and an approximate 20% EBITDA margin.

The fourth quarter is our most variable quarter because of the impact of weather on construction. Winter storm Fern and the adverse weather most of the US 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 Instructions) Matthew Bouley, Barclays.

Good morning. Thanks for taking the question. So just one on -- here on the nonresidential side because I noticed you lowered your end market guide there. Correct me if I'm wrong, but it looks like you increased your overall revenue guidance by seemingly more than just what NDS may be contributing.

So my question is, if that's more of a mark-to-market on what's already happened in the first nine months of the year in nonresidential? Or are you seeing something in your orders in backlog? And obviously, you just mentioned the storms regarding the fourth quarter that perhaps maybe a little bit more choppy in nonresidential than what you previously thought. Thank you.

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 gave you the beat, raised a little bit, then gave you to NDS. And I think the raise a little bit is reflective of good performance, particularly of our Allied Products and the HP Pipe in the nonresidential segment.

As you know, we're really scaled in that with and a lot of our product lines and our go-to-market is tuned for that nonresidential market. So we think we're gaining, winning more than our fair share of the projects that are out there with good products, good pursuit.

The storm that you mentioned, 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 that segment. You don't dig a lot of holes and put pipe in it, which is -- these temperatures in the Midwest and the North.

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 share, a lot of new products in Allied. I mean it sounds like it's contributing everywhere across Allied. Same thing in Infiltrator and expanding product lines.

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

Well, we're not going to give you all the great stuff we're going to talk about in June today. But I would tell you that I think what -- the words you used are good. We're seasoning and getting better in our pace of innovation, both Infiltrator, Craig is with us today and at ADS.

And I would say, right now, when we look at just 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.

And that would be in the active treatment products that Craig has been launching in Infiltrator, the new tank products that he's launched that we've invested capital in to do, some new StormTech products, which are really exceeding expectations and some new Nyloplast products.

And in the water quality products, the new filtration -- I mean, the new separator and the new biofiltration. When you add all that up, Matt, it's literally tens and tens and tens of millions of dollars that are being contributed right now, and we would see that accelerating as we get better at our pace of commercialization of those new products.

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

Thanks.

John Lovallo, UBS.

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?

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

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

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

No, not like 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 the assets are being put in service, so the timing.

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

Yeah. The bonus depreciation really helps with those --

We had our eye on that as well.

Understood. Thank you, guys.

Bryan Blair, Oppenheimer.

Thank you. 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.

Good morning, Bryan. 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 their [wrinkler] product are being offered up, and that's helping towards the growth of the business as we move forward.

From a margin standpoint, it's what we were planning. There's some synergies that we've laid out. We're working towards those synergies. Those synergies are doing well. It's actually exceeding a little bit of our expectations, ahead of the plan right now.

And working on that margin improvement that you had mentioned, 1,000 basis points. So acquisition is going well, the integration of the team members, the growth expectations, and the synergies.

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

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

Which is outstanding. This is Scott -- Scott Barbour, the outstanding safety performance, which was a very early focus of Craig and his team out there, and we're very excited that it's ahead of plan on the synergy plan and the profitability piece.

But boy, the team there in Orenco grabbed our safety program and implemented things quickly with a lot of support from the Infiltrator folks, and Craig has done a great job of cycling his senior managers out there through it. And we will follow very similar playbooks as we have with Infiltrator, Orenco as we move into this space with NDS. And I'll be out there next week and looking forward to being out there.

Okay. That's all great to hear. And then curious if you could speak to infrastructure project visibility. The -- your team has faced pretty difficult comp, so there's some -- on a trailing basis and there are some administrative uncertainties that impacted project flow, specifically IIJA funded projects there.

It seems like within the transportation verticals where you have meaningful exposure, the pipeline is is resetting, there's more optimism looking through calendar '26, even into '27. Wondering if that's showing up in what your team tracks on a pipeline basis.

Scott Barbour, again. I would say the things we track and look at for infrastructure, the activity is better from a quoting perspective. And the visibility continues to get better on that. That said, it's choppy. Our win rate needs to be better in that segment. It's not like we're not finding and seeing and looking for things, we're just -- frankly, it's competitive.

So things that have moved through from that we've already had ordered and sold over the past year that made some of our comps difficult versus prior year were places where we had very high participation, particularly around some of our Allied Products like airports and rail and things like that. But when we get into the road and highway, we're good in some states, we're not good in some states. And that has hurt our participation there.

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

Okay. Understood. Thank you.

I forgot, you -- 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 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.

Understood.

Garik Shmois, Loop Capital Markets.

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

Hey, Garik. Mike Higgins. I think Matt made the comment in his question about that mark-to-market. And that's -- I would 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 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 looks like more of the same as we've been telling you guys all year, highly variable by geography.

And then when you get into -- nonresidential is a very broad segment. When you get in there, there are certain project types, data centers always come up that are -- continue to be strong. We've seen improvement in warehouse activity.

Our sales are now up for the fiscal year, which is good. That had been a decliner over the past couple of years. And depending on the geography, we are seeing fairly solid activity and just your general purpose commercial type construction. Think of the things we always talk about, horizontal, low-rise-type construction is where we do best in that nonresidential segment.

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

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

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 31.

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

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

Trey Grooms, Stephens.

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 buying back stock versus future M&A?

And now with the integration -- NDS integration, probably going into full swing, I would think here in short order, maybe you could talk about your appetite for deals here in the more medium term.

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 at the Engineering and Technology Center is on purpose, innovation, new product introduction, really important as we go.

So again, we look at the opportunities we have organically -- and again, especially within not only the Pipe business, but Allied and Infiltrator, highest return, lowest risk use of our capital and how we deploy it. So that by far will be number one.

Again, pro forma debt with NDS, again, we are -- we paid for almost the entire deal out of cash on hand. We're only 1.5 times levered right now. Our guardrails are 1 to 2 times. And you know what, we're going to generate a bunch of cash over the next 6, 9, 12 months and year -- couple of years like we've been doing. So we're going to toggle lower to 1.5 times pretty quick.

So does that mean that we've got an appetite for M&A? We'll continue to look. We have a funnel, but it will be tuck-ins and bolt-ons. Those are things we do really, really well. And those are things that might have an [EV] purchase price at $150 to $250 million to maybe up to $300 million. And that's really where we do really well, we excel and we leverage.

And again, we have a great balance sheet, extremely fortified and the leverage to go put that to work. So organic, for sure, as well as some productivity and efficiency initiatives that we have and continue to have, but then strategic M&A is definitely something we'll look there.

But right now, the priority is organic. But we're always looking for the right opportunity. We've got the capacity to pull the trigger. So that's always something we'll be looking for.

If I could add one thing to that is much like we saw with Infiltrator, where some capital infusion could get some projects going really quickly and fast and that's paid off wonderfully for us. We see similar things at NDS, where not a lot of capital has been invested over the last 10 years by the previous owner.

They have some great ideas around automation, around some new products, around some other high-value moves. So we're anxious to get in there and look at those in more detail with them.

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

Yeah. That's all super helpful. Thank you for all that. And just 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?

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.

Yeah. Okay. Thanks a lot. I really appreciate it.

Jeff Reive, RBC Capital Markets.

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

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

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

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

Collin Verron, Deutsche Bank.

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

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

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

In addition, as we've added Infiltrator in, we want to give better resiliency to our profitability. We would get a lot of questions around, wow, you've run the profitability up. Is it going to come back down? Or are you just going to ride up and down with your materials pricing environment. And we don't want to do that.

We'll be more consistent than that. We want to be more consistent. I think we've proven that by continuing to move our mix to these Allied products and the Infiltrator products. And you do that with sales efforts, you do that with new products and programs. We do that with acquisitions in the case of 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 onetime thing.

Will it move around a bit as a percentage? Absolutely, it will. But I think we like this 50% or better in Allied and Infiltrator. We think the natural tendencies of the growth of these businesses will continue to take us into this direction. But if the pipe market takes off somewhere, that could bounce around a bit, and that's not going to scare us.

That's not going to frighten us. So I think we know how to handle that. I'm sure we'll talk about this at Investor Day as well, but it's just the changing complexion of the company as we move forward over these years.

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

I'll let Scott Cottrill handle this question.

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

So it's constantly something that we look at. But to Scott's point, it's not just a resin cost environment that drives our pricing and/or profitability model. So that volume side of the house, that demand side of the house, that mix side of the house comes in pretty important when you look at that growth rate of Allied and Infiltrator and how that mixes us up from a margin and profitability perspective, and then all the self-help initiatives that we've got going on within manufacturing, transportation, and then obviously within SG&A.

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

Understood. Thank you.

David Tarantino, KeyBanc Capital Markets.

Hey. Good morning, everyone.

Good morning.

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

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

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

I would add one other thing to that, Scott, is we -- 16, 18 months ago, we started a lot of self-help programs across the company, and it was in materials, conversion, logistics, recycling, the Infiltrator work at 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're always -- we want to be pretty conservative about what we predict or see coming from a profitability standpoint.

But those programs, which a lot of people contributed to, I think, worked better than we thought they were going to work. And it was across lots of different categories of stuff, even some categories we didn't expect that we're contributing nicely. And this -- I think a quarter like we just had isn't just the result of one -- one set of activities, it builds up, and that's why I bring that up.

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

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

Our black dual wall N-12 pipe is 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. I couldn't be happier with that one.

But the single wall, some is market headwinds, some are things that we need to go do better, but that's the 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 look at that. We'll talk a lot about that in in June when we're together. But there -- it frustrates Scott, there are elements of that pipe segment that are super, super healthy. And then these others that have some challenges that we got to get on top of.

Okay. Great. Thanks for the color, guys.

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

All right. Thank you very much. We -- lots of great questions. We appreciate the chance to give some color on the business and what's going on. As I said 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 1.5 years or 2 years, whether they be acquisitions or new products like the tank and the active treatment that Craig has been working on for a long time in the ADS side, it's the new StormTech products, it's the new Nyloplast products, it's some things underneath that, that you guys would never see that are growing very nicely for us, it's the HP Pipe, it's breadth reconfiguration of some of our sales activities.

So there's a lot of work going on. We're really proud of how it's coming to fruition in our results here. And we're super excited about the NDS acquisition. As many of you know, we worked on that for a long time, had our eyes on that for a long time.

So Monday was quite a nice day to finally get that closed, and we're going to be out there with that team next week. And I know it's going to be an equally successful journey with them as some of these other things that we've done.

So we appreciate your attention, and we look forward to talking to you later or seeing you around soon. Bye-bye.

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