ADS Outperforms Market Despite Weak Nonresidential Forecast

Date of Call: Feb 5, 2026

Financials Results

• Revenue: $3.015B midpoint for fiscal 2026, increased from prior guidance; Q3 revenue flat year-over-year
• Operating Margin: Adjusted EBITDA margin 30.2% in Q3, up 250 bps year-over-year

Guidance:

• Fiscal 2026 revenue guidance midpoint raised to $3.015 billion.
• Fiscal 2026 adjusted EBITDA guidance midpoint raised to $945 million.
• Fiscal 2026 adjusted EBITDA margin expected between 31.1% and 31.6%, up 50 to 100 bps versus prior year.
• Includes ~$40 million revenue from NDS acquisition at ~20% EBITDA margin.
• Nonresidential end-market demand forecast updated to down low to mid-single digits.

Business Commentary:

Strong Third Quarter Performance and Profitability:

• Advanced Drainage Systems reported one of its most profitable third quarters with an adjusted EBITDA margin of 30.2%, reflecting a 250 basis point increase from the previous year.
• The growth was driven by the outperformance of the Infiltrator business, Allied Products portfolio, and HP Pipe sales, despite a challenging market environment.

Nonresidential Market and Demand Forecast:

• The company's core nonresidential market sales increased 5%, with growth in the Southeast, Midwest, and along the Atlantic Coast.
• The updated forecast for the nonresidential market was adjusted to down low to mid-single digits, influenced by current market indicators and geographic variability.

Residential Market Challenges and Strategies:

• Sales in the residential end market were down slightly, pressured by a high single-digit decline in the overall market.
• Despite this, the Infiltrator core residential business significantly outperformed the market due to new products and distribution strategies, with a focus on recovery as market conditions improve.

NDS Acquisition and Strategic Integration:

• The acquisition of NDS was closed, contributing approximately $40 million in revenue with an expected 20% EBITDA margin.
• This acquisition enhances ADS' stormwater capture portfolio and aligns with the strategic goal of offering a broad range of products across distribution and retail channels.

Cash Flow and Capital Allocation:

• Year-to-date cash flow from operations increased by 44%, reaching $779 million, driven by effective working capital management, increased profitability, and lower cash taxes.
• The company maintained a leverage ratio of 1.5x post-acquisition and plans to access capital markets for near-term maturities, emphasizing disciplined capital allocation.

Sentiment Analysis:

Overall Tone: Positive

• CEO stated: 'We outperformed the market again this quarter... resulting in one of the most profitable third quarters in our history.' CFO highlighted: 'year-to-date, we generated $779 million in cash from operations, converting more than 100% of our adjusted EBITDA into cash.' Management expressed confidence in strategies and long-term outlook, citing strong execution and profitability growth.

Q&A:

• Question from Matthew Bouley (Barclays Bank PLC): Concerns about the nonresidential end-market guidance lowering but overall revenue guidance increasing more than NDS contribution; asks if it's a mark-to-market or reflects new orders/backlog and impact of recent storms.
  Response: The revenue raise reflects good performance in Allied Products and HP Pipe, gaining share. The widened range accounts for disruptive weather (Winter Storm Fern), making Q4 more variable and choppy.

• Question from Matthew Bouley (Barclays Bank PLC): Asks about the future pipeline and incremental contribution from new products, and outlook for next 12-24 months.
  Response: New products launched in recent years are contributing 'tens and tens of millions of dollars' in revenue across Allied and Infiltrator, with acceleration expected as commercialization pace improves.

• Question from John Lovallo (UBS Investment Bank): Asks if NDS will be a separate segment and cadence of $25M annual cost synergies.
  Response: NDS will be part of the Allied & Other segment. Synergies will ramp between year 2 and 3, reaching $25M run rate by year 3.

• Question from John Lovallo (UBS Investment Bank): Asks about the $40M midpoint raise in CapEx outlook and if it's related to Lake Wales.
  Response: The CapEx increase is due to timing of asset puts-in-service and bonus depreciation benefits, not Lake Wales.

• Question from Bryan Blair (Oppenheimer & Co. Inc.): Asks for color on Orenco integration phasing, margins, and synergy target.
  Response: Orenco integration is going well, synergies are ahead of plan, and margin improvement is on track for the 1,000 bps target. Safety performance has improved significantly.

• Question from Bryan Blair (Oppenheimer & Co. Inc.): Asks about infrastructure project visibility and impact of IIJA and government shutdown.
  Response: Infrastructure quoting activity is better, but win rate needs improvement due to competition. Government shutdown caused some friction in order releases and deliveries.

• Question from Garik Shmois (Loop Capital Markets LLC): Asks for details on the nonresidential end-market guidance reduction and specific regional/category trends.
  Response: The guidance update is a mark-to-market reflection of weaker-than-expected activity through the first 9 months, not a deterioration. Nonresidential remains variable by geography, with strength in data centers and warehouses.

• Question from Garik Shmois (Loop Capital Markets LLC): Asks about NDS contribution in Q4 guidance and expectations for calendar '26.
  Response: NDS contributes ~$40M revenue at ~20% EBITDA margin in Q4. Details for calendar '26 will be provided at Investor Day; refer to the 8-K for performance guardrails.

• Question from Trey Grooms (Stephens Inc.): Asks about balancing stock repurchases and M&A appetite post-NDS integration.
  Response: Priority is organic investment and integration; M&A will be tuck-ins/bolt-ons (EV $150-300M) within guardrails. Strong cash generation supports flexibility.

• Question from Trey Grooms (Stephens Inc.): Asks about accessing capital markets for near-term maturities and potential leverage increase.
  Response: Primary focus is on refinancing maturities with extended maturities; no plans for incremental leverage beyond that.

• Question from Jeffrey Reive (RBC Capital Markets): Asks about drivers of strong free cash flow and working capital performance, and outlook for next quarter.
  Response: Working capital improvement was broad-based (receivables, inventory, payables), driven by demand planning, customer service investments, and inventory management. No specific outlook given for next quarter's free cash flow.

• Question from Collin Verron (Deutsche Bank AG): Asks about mix benefits driving top line and margins, and if it's structural.
  Response: Mix shift to higher-margin Allied and Infiltrator products is structural, driven by strategy to enhance profit resiliency. Pipe percentage may fluctuate but overall mix trend is sustainable.

• Question from Collin Verron (Deutsche Bank AG): Asks about raw material cost tracking and outlook for calendar '26.
  Response: Price-cost has been favorable, contributing to profitability. Forecast considers resin costs, but volume, demand, and mix are also key drivers. No specific sequential outlook provided.

• Question from David Tarantino (KeyBanc Capital Markets Inc.): Asks about margin confidence and expansion outlook given NDS's lower margin profile.
  Response: Margin expansion driven by high-margin Allied/Infiltrator mix and cost improvements (self-help programs). NDS's lower margin is offset by these factors.

• Question from David Tarantino (KeyBanc Capital Markets Inc.): Asks for demand trends within Pipe, given stable pricing but sales declines.
  Response: HP Pipe gaining share; black Dual Wall N-12 performing at/market; downdraft from single-wall product in DIY channel (market weakness) and agriculture. Programs are being activated to address challenges.

Contradiction Point 1

Demand Outlook and Market Conditions

Contradiction on the state of demand signals and market "choppiness."

What's the visibility into infrastructure pipeline trends, especially transportation, amid recent optimism? - Bryan Blair (Oppenheimer & Co. Inc.)

2026Q3: Activity is better from a quoting perspective, but visibility is choppy. - D. Barbour(CEO)

Is the conservative second-half guidance due to actual slowdowns in October/November or uncertainties like the government shutdown? - Matthew Bouley (Barclays)

20251106-2026 Q2: The biggest concern is winter weather... creating uncertainty... The primary concern is that demand remains tepid and choppy... - Scott Barbour(CEO)

Contradiction Point 2

Margin Outlook and Drivers

Contradiction on whether margin expectations are modeled conservatively or are demand-driven.

Is the reduced nonresidential forecast and increased revenue guidance based on past nine months' events or new orders/backlog developments? - Matthew Bouley (Barclays Bank PLC)

2026Q3: The raised guidance... reflects good performance in Allied Products and HP Pipe, gaining share in projects. - D. Barbour(CEO)

What factors will impact margins in the second half of the year, and is the outlook conservative? - Michael Halloran (Baird)

20251106-2026 Q2: The second-half margin outlook is demand-driven. The team uses a historical 30% to 40% incremental/decremental margin approach... - Scott Cottrill(CFO)

Contradiction Point 3

Demand Environment and Market Outlook

Contradiction on the current and near-term demand environment for non-residential projects.

What caused the reduction in nonresidential end-market guidance, and is it specific to certain regions or categories? - Garik Shmois (Loop Capital Markets LLC)

2026Q3: The update is more of a mark-to-market based on performance through 9 months, not a signal of deterioration. Demand remains variable by geography. Strengths include continued strong data center and warehouse activity... - Michael Higgins(CSO)

Can you provide details on the non-residential pipeline, project identification, and conversion trends in the current tepid environment? - David Tarantino (Keybanc Capital Markets)

2026Q1: Forward-looking indicators... align with a tepid demand environment. - Michael Higgins(CSO)

Contradiction Point 4

Capital Expenditure (CapEx) Outlook and Strategy

Contradiction on the driver and strategic implication of a change in the CapEx forecast.

What is driving the raised CapEx outlook, and is it related to the Lake Wales project? - John Lovallo (UBS Investment Bank)

2026Q3: The increase is due to timing of when capital expenditures are put into service, not Lake Wales. The company aims to pull projects in sooner to realize benefits earlier... - Scott Cottrill(CFO) & D. Barbour(CEO)

Has the reduction in CapEx guidance from $275M to $200–225M reflect changes in capital projects or increased dry powder for M&A/share repurchases? - Matthew Bouley (Barclays Bank PLC)

2026Q1: The reduction is due to timing shifts of larger projects to the right, not a change in strategy. It does not impact the ability to meet anticipated demand... - Scott Cottrill(CFO)

Contradiction Point 5

Orenco (Renco) Acquisition Margin Expansion Target

Contradiction on the timeline for achieving the 1,000 bps margin expansion target.

Could you share details on the Orenco acquisition integration timeline, margin improvements, and any updates to the 1,000 basis point expansion target? - Bryan Blair (Oppenheimer & Co. Inc.)

2026Q3: The 1,000 bps margin expansion target remains. - Craig Taylor(President Infiltrator & EVP of ADS) & D. Barbour(CEO)

Update on Renco integration and margin expansion goals, and discuss the strategic fit and financial impact of the River Valley Pipe acquisition? - Bryan Blair (Oppenheimer)

2025Q4: The Renco (Orenco) acquisition is a 3-5 year margin expansion opportunity, targeting 1,000 basis points. - Unknown Executive (likely Scott Cottrill)(CFO)