Q2 2024 Advanced Drainage Systems Inc Earnings Call
Good morning, ladies and gentlemen, and welcome to advanced drainage Systems' second quarter fiscal year 2024 results Conference call. My name is Christina and I'll be your operator for today's call. At this time all participants are in a listen only mode. Later, we will conduct a question and answer session.
If you would like to ask a question. During this time simply press star followed by the number one on your telephone keypad. If you would like to Italia question again Press Star one.
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.
Good morning, everyone. Thanks for joining us here today, I have Scott Barbour, our president and CEO and Scott to trial our CFO.
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.
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 will 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.
As a pure play water company focused on storm water in the legacy <unk> business and onsite septic wastewater infiltrator, we play a crucial role in developing sustainable water management solutions to protect and manage water the world's most precious resource.
Safe guarding our environment eight communities over the last several years, we have been experiencing a secular trend whereby large scale water related climbing that fence are increasing in frequency.
Asian and intensity.
Was once a 100 year storm event is now happening far more often in the second quarter alone, we saw severe storms and flooding impact the eastern half of the United States as well as a hurricane in the southeast. These severe water events caused billions of dollars in physical damage and asset destruction.
I'll also displacing people and disruptive businesses degrading quality of life and communities.
Storm water infrastructure in the United States is often inadequate to accommodate such large quantities of water and very short time periods, which poses a critical challenge as the event as these events become more common at.
At Ats, we engineered solutions to mitigate the impact of these water related to climate events for the millions of peoples of people affected building resilient communities in the face of changing weather patterns.
Whether it be flood mitigation nitrogen removal water quality improvement or water conservation. We remained focus on the a D. S brand promise a reason is water.
By providing clean management water management solutions to communities and delivering unparalleled service to customers.
The secular trend of larger and more frequent water events combined with the success of our conversion strategy gives us confidence in the future of ABS and the adverse investments, we're making in the business to drive growth and profitability over the long term.
This morning, we announced the construction of a new manufacturing facility in Lake Wales, Florida, which will break ground in 2024.
Third is the second largest state for overall construction spending it remains a priority state for the company.
Built on a 100 acre plot of land this new state of the art facility. It is designed for the future workforce promoting safety.
Efficient flow of materials and traffic and incorporating the most advanced automation technology for manufacturing corrugated thermal plastic pipe.
This facility will complement the two existing manufacturing facilities, we have located in winter garden in Sebring, helping the company to meet current and future customer demand and giving us the flexibility to expand as we continue to penetrate this market through our conversion strategy and superior go to.
<unk> execution.
Since the Florida D O T approved the use of corrugated thermal plastic pipe for storm water in 2014, we have executed well on conversion and growth.
Increasing the a D S pipe sales in the state by over six times.
The Lake Wales will investment will help us further penetrate the attractive Florida market as well as open capacity in the south Eastern United States.
Where there are large and attractive markets like Georgia, the Carolinas and Virginia.
This Florida Playbook is also the foundation for our conversion strategy in Texas, where we intend to capitalize on the November 2022, Texas D. O T approval of corrugated thermoplastic pipes for use of infrastructure projects.
Accelerating the growth in this important market.
Similar to Florida, the political approval in Texas comes on the back of an already strong business Foundation and we expect this to serve as a force multiplier for conversion and growth over time.
We are also investing in engineering, and Technology Center, and Hilliard, Ohio, which will be the world's most advanced storm water Engineering research and development facility construction is well underway and remains on track for completion in 2020 for this facility will bring product design and material science.
And manufacturing technology under one roof, which will increase our pace of innovation and importantly help us to incorporate more recycled material into our products.
This facility plays a key role in enabling <unk> to meet our goal to consume 1 billion pounds of recycled material annually by physical 2032.
In September we issued the physical 2023 sustainability report.
Courage you to go to our website to read it Theres a lot of important information in this report on the progress we have made on the sustainability front. This report also aligns to the United Nations Sustainable development goals as a D. S became a signatory to the UN global compact in August.
Now moving to the second quarter results, we saw better than expected performance in the infiltrator business and Allied products portfolio continue in the second quarter, despite domestic demand headwinds from higher interest rates credit tightening and economic uncertainty.
Demand and pricing for the a D. S pipe portfolio continued to perform in line with expectations.
While nonresidential and residential Martinus weakness continued in the second quarter infrastructure activity remained consistent overall and we're starting to see pickup on locally funded projects.
As those at the municipal and county level as well in airport activity.
From a margin perspective, we once again demonstrated the resilience of the business model through the 180 basis point expansion in adjusted EBITDA margin to 31, 6%, despite a lower demand environment.
This marks the seventh quarter in a row of year over year margin expansion.
The margin performance this quarter reflected that we benefited.
From sales mix and previous investments in the business, including automation more efficient production lines and tooling effective management of price cost and continuous improvement within the operations transportation costs are trending favorably, but the slow demand environment is resulting in higher manufacturing costs.
Driven by under absorption of fixed costs as well as well as an increase in manufacturing engineering personnel that execute the capital investments.
This morning, we updated our guidance to reflect the better than expected demand and margin performance in the infiltrator business.
And allied products portfolio in the first half of the year.
Demand and price for the pipe business remained unchanged from previous guidance and we expect demand in the second half of the year to remain consistent with the plan we laid out in may.
We will continue to pursue growth opportunities through new products attractive markets and partnerships building out our portfolio and executing well. So we can service customers needs and enable communities to solve their storm water and onsite septic wastewater issues. One thing is certain the demand for storm.
Water and onsite septic wastewater products will persist and the secular tailwind for water management will only increase.
In summary, we had a solid first half of fiscal 2024, we feel confident in our ability to deliver on our commitments this year expanding margins despite the slow demand environment.
<unk> value proposition solutions package conversion strategy and unique sustainability position in water and recycling remain highly relevant and we are committed to being a leader in sustainable water management solutions.
We will continue to manage cost and production, but importantly, we are managing this business for the eventual recovery in the residential and nonresidential end markets. When we look to continue to gain share due to superior products.
Capabilities and commitment to service it both a D S and infiltrator.
With that I will turn the call over to Scott Cottrell to further discuss our financial results. Thank.
Thank you Scott in the second quarter, we reported revenue of 700.
Excuse me $780 million, a decrease of 12% primarily due to lower volume adjusted EBITDA was $246 million a decrease of 6% we were able to partially offset the decrease in sales volume with favorable price cost management. The team has done an excellent job managing pricing on a local basis.
The result in the second quarter were in line with expectations material costs were favorable year over year in this in the quarter that we expect price cost favorability to flatten out in the second half of the year.
In addition, this quarter, we continued to see higher manufacturing costs year over year, primarily due to lower absorption of fixed costs as well as the increased investments we have made in engineering quality and safety.
On slide eight we present <unk> free cash flow.
We generated $376 million of free cash flow in the first half of fiscal 2024 compared to 361 million in the prior year, an increase of 4%.
Year to date working capital management has resulted in better conversion adjusted of adjusted EBITDA to cash flow from operations.
Capital spending increased 9% to $83 million in the first half of fiscal 'twenty 'twenty four as we continue to make investments to increase automation grow manufacturing and recycling capacity and increase productivity as well as build our new World Class Engineering and Technology Center here and Hilliard, Ohio.
Our first priority for capital deployment remains investing organically in the business, which we view as the lowest risk highest return use of capital. We continue to expect to spend between 200 and $225 million on capital expenditures. This year inclusive of this year's initial spending for the new manufacturing facility in Florida.
<unk> announced earlier today.
Our second priority is acquisitions.
That are close to the core while being open to Adjacencies that would provide for future platforms for consistent growth as well as expansion of our addressable markets.
Third we will continue to buy back shares under the current share repurchase program in the first half of the year, we repurchased 1 million shares for approximately $102 million, leaving $316 million remaining under the existing authorization at the end of the second quarter year to date adjusted earnings per diluted.
<unk> share decreased 6% to $3 78 sets importantly, the share buyback program has resulted in 7% fewer shares outstanding compared to last year, partially offsetting the impact of lower net income on earnings per share.
And lastly, we remain committed to the quarterly dividend paid to shareholders of 14 cents per quarter, a 17% increase versus last year.
Moving on to slide nine we present, our updated fiscal 'twenty 'twenty four guidance ranges, we raised the bottom of the revenue guidance, which is now expected to be between $2 $7 billion to $8 billion. We also increase the adjusted EBITDA guidance, which is now expected to be in the range of $801 million to eight.
Hundred and $50 million.
Today's updated guidance is driven by the better than expected demand and margin performance in the first half of the year or.
Our second half sales expectations remain unchanged and we continue to expect revenue to be roughly flat to down 10% on a year over year basis, we expect normal seasonal patterns with 55% to 60% of revenue coming in the first half of this year and 40% to 45% coming in the second half.
We believe the implied second half margins in our revised guidance are prudent given the challenging end market demand that we have been discussing throughout the year due to the higher interest rate environment as well as tighter lending standards. The revised guidance also includes the impact of accelerating certain customer service and order management initiatives.
Into the second half of this year, given our better than expected results year to date further strengthening our position as a supplier of choice, both now and into the future.
We remain focused on executing on our plan and investing in the business for long term growth margin expansion and free cash flow generation.
With that I will open the call for questions. Operator, Please open the line.
Yeah.
Thank you at this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad and we'll pause for a moment to compile the Q&A roster.
Your first question comes from the line of Michael Halloran with Baird. Your line is open.
Hey, good morning, everybody, you've got pads on for Mike.
A quick one for you if we take a look at your residential performance can we may be parse out what you're seeing across the legacy pipe and infiltrator I know that you said infiltrator is performing a little bit ahead of expectations, but can you maybe parse out what you're seeing from a fundamental demand perspective, given that they set a little bit different places in the build cycle.
Okay.
Yeah. This is Scott Barbour. So we would tell you that infiltrator is is stronger.
Dan.
In that latter half of the the build cycle.
And I think theyre benefiting from kind of completions of homes catching up with starts here over the last six.
Six months, let's say because they've had a very strong first half relative to expectations and I think we've probably got the right mix geographically and end home type there.
On the front end that land acquisition piece that where the pipe business plays in.
Is weaker for sure and we really haven't seen it pick up.
In addition in that residential I think Mike Higgins is buried the multifamily which has not been has not been very very good either.
So we're really pleased with how the infiltrator business has unfolded this year.
And they've done a great job of managing.
There are costs being ready for this better than expected demand they are still down year over year, but it's a lot better than we thought it was going to be.
And I was there we were there two weeks ago.
And many of you went to the building seven.
There, we have the new equipment and automation and it was just awesome how that that that facility is performing.
Yes. Thank you that's super helpful color, maybe maybe digging a little bit deeper on the automation investments can you maybe remind us on the <unk>.
<unk> degrees of automation across the different facilities, how much room. There is to go and maybe kind of remind us on some of the level of sophistication. Just so we can tie in and Theres a lot of maybe the opportunity set.
Yeah, Theres, a long way to go and if you think about just simple trader I mean that are most building seven what do we have three or four buildings than they're doing production a couple of buildings doing material handling and warehousing, but kind of really.
No.
Two of the two of those facilities are really automated the building seven did you all saw highly highly automated not quite as much in the other building.
And then the initial building that we have down there not not very automated at all and it through our pipe factories Big Big network.
We have.
Some good automation projects really in flight well in flight and in operating I would call it three facilities.
You know with the court with the Maxi color and then the other two with the end of line automation. So theres a long way to go there.
We announced today the Lake Wales.
We will use our our best ideas the way, we're thinking about things for the future in that facility from.
From an automation standpoint.
Because we believe that that's this manufacturer.
Manufacturing workforce of the future and we will.
And this will dictate really how much you can make.
The pounds that you can produce in those kind of facilities will be your level of automation, because youre not to be able to get.
The labor that you once were able to get in many of these communities.
This is Mike Higgins I think another way to think about it is is it still pretty immature side.
Side, Okay. So lots of opportunity to go there much broader network and then on the Infiltrator campus.
Where maybe the cut of heavy lift initial kind of automation is in place and a lot of spots and their focus has moved to okay. How can we automate further the downstream activities to mitigate those challenges around hiring and then also to eliminate tasks that might provide a safe.
The risk and make those roles in those jobs a lot safer.
I don't think we're there.
With these in place.
Yeah I'll.
Ill leave it there and pass it on.
Alright.
And your next question comes from the line of Matthew Bouley with Barclays. Your line is open hey, good.
Morning, everyone. Thank you for taking the questions.
So maybe picking up on where Scott left off at the end of the prepared remarks around the margins in the second half I think youre guiding to something like 25%.
EBITDA margin in the second half after you did 34% in the first half. So obviously, that's a bit of a larger first half the second half margin decline than is normal for us. So.
I think you mentioned there might be some accelerating investments that you're looking at perhaps building in some conservatism.
Maybe just kind of touch on the bridge, there and sort of what would lead to that larger than normal decline into the second half. Thank you.
Yeah, Matt Scott here.
You nailed two of the biggest ones right, it's being prudent with our end market guidance given kind of the what we see out there.
I think on the gross margin side of the house Youll kind of see relatively flat performance as you look at the guide to what we're used to seeing in that one H two H degradation.
The SG&A piece of this that talks to the investments, we're making in engineering customer service.
Order execution, we are taking advantage of a better than expected year to pull some of those investments forward. So those will come through SG&A. So you will see some of that headwind on our margin deterioration you are absolutely correct that one H two H degradation is greater than what we normally historically experience and those will those are the three key <unk>.
Drivers.
All of that.
Got it okay. That's perfect. Thank you for that.
And secondly price cost obviously was positive again in the quarter.
I wanted to pick up on some of your comments that you said a few times that price is performing in line with expectations. So just just kind of wanted to unpack a little.
Is that a little bit what were those expectations, how is price performing within that price cost bucket.
And are you are you finding opportunities to perhaps utilize price adjustments in any regions, perhaps when conversion to your products. Thank you.
Yeah, I mean, it is a local game as we keep talking Matt and as you know so the team's done a great job, we talked about holding onto the majority vast majority of the pricing that we've gotten into the market over the last couple of years a lot of drivers for why a D. S is able to do that but what we're seeing is absolutely a realization of what we do.
Talked about.
We never talked about holding onto all of it obviously.
We need to be aware of competitive environments geographical issues.
All of those items come into play, but we talked about holding onto the vast majority we are holding onto the vast majority that will continue and obviously, we've got the the nice resin being lower on a year over year basis, which is as you saw in our EBITDA bridge that we provide it gives us a nice little.
Acceleration of our performance both on the margin as well as the EBITDA growth.
Great Alright, guys. Good luck.
Thanks, Matt.
And your next question comes from the line of <unk> with loop capital. Your line is open.
Oh, hi, Thanks for taking my question.
Well, we'll just wondering on the non res side.
Now how bidding on projects and how your backlog was tracking over the course of the quarter.
Okay.
Yes so.
But a little bit of a hard time hearing you there Derek but I think you've talked about kind of backlog and project activity in the nonresidential end markets.
I would say.
Steady right it's.
It's a challenging nonresidential end market.
Theres pockets of different types of projects, but we've seen pretty good activity on.
But I would say kind of the backlog is steady order activity through the quarter was was good we didn't see it deteriorates further.
But with that said, we still have another six months of the year, that's left and I think everybody is well aware of the challenges that exist.
Around nonresidential with <unk>.
Higher interest rates tightening credit standards.
And just general concern about kind of strength of the economy moving forward, but I think we feel good with with where we are in that space.
Obviously, it's done very local and very geographic so you see kind of pockets of strength and pockets of resilience and done you see pockets that might be a little weaker but it is encouraging that some of the geographies we saw weaker in the first quarter.
Specifically some of the states out west.
<unk> seen improved performance as we moved through Q2.
Great. Thanks for that just wanted to follow up on.
<unk> plans to add capacity in Florida, just wondering if you could provide a little bit more detail around how much incremental capacity does that represent is it going to be displacing any overcapacity or is this all purely incremental and then just maybe just the timing around a project just given some of the macro headwinds.
Recognizing it's going to take some time for.
For the facility to come online, but just curious as to why now.
Okay.
So this is.
Scott Barbour.
Couple of things one it will not displace existing facilities, we have two really high performing facilities and winter Garden, Florida in Sebring, Florida.
That are doing a super job servicing that market, which is still a very very strong market for us across all of our segments.
So it is truly incremental capacity for us.
In that state, particularly around the work that is growing really fast and in the D. O T work in the residential work and <unk>.
Our polypropylene pipe.
Which is our highest performing tip of the spear pipe.
We're not going to disclose kind of number of lines or how many pounds were going to make or anything like that at this point, we're going to break ground.
Early next year, we are closing on the property now.
We've been working on this for some time.
And.
To move through the different stages of kind of getting prepared to announce it.
We're very excited about this we needed in this region.
It's a very strong region for us as we've been talking about for I've been here six years now and I think.
We've been talking about this since the very beginning of how important the crescent is or that southeast United States and these priority states and we've done a great job of growing there were six times larger in Florida than we were 10 years ago. When we got the massive approval for.
Our our pipe products to be installed and public works down there.
And so we've done a good job in our existing facilities meeting that demand, but we know that's going to get better because we still understand we have room to grow in terms of penetration.
And I would expect this capacity to start to come online in 2025 calendar 2025.
Understood. Thanks for all that and I'll pass it on.
Sometimes you have to win.
No go ahead go ahead Sir.
So sometimes you have to invest.
Now in periods like this which we are doing to be ready for when these markets recover as the market recovers its too late.
And I just.
We were talking about the infiltrator.
Little earlier right. After we bought infiltrator in 2019, we approved within weeks.
I think it was 40 or $60 million of capital a lot of capital, which was which was all incremental people were worried about the residential market and all that kind of stuff and we needed that capacity.
Over the last two or three years and now that capacity is going full bore at great cost and that's the performance you see there. So I just bring that up because yeah times are a little uncertain. There is no doubt about it but we have the capacity to continue to invest this capital to be ready for that upturn.
And I think that's what one of the nice characteristics about the company as we've been able to develop this really good cash flow and can go deploy that capital. So as we think about this Florida investment.
You know this infiltrator investment we made right. After the acquisition is kind of how we're thinking about it.
Be ready for the upturn to be ready for these next legs of <unk>.
Penetration gain to be ready for these next legs of market upturn.
Go ahead with your question please.
And your next question comes from the line of Joe <unk> from Deutsche Bank. Your line is open.
Hey, everybody. Thanks for taking the question.
I'd like to talk about long term profitability in the context of the EBITDA bridge that we're seeing today.
Hearing you talk about sort of net neutral price cost in the back half it seems to me like probably the positives and negatives have reduced and magnitude, meaning you're likely getting less deflation as we move through here, but there's also not.
<unk> give back on price and so moving into next year, we shouldnt really assume that that changes much necessarily and then on the investment side.
Manufacturing under absorption there.
That seems to me like something that part part of that is temporary as part of this investment.
But also if the end markets are improving you would get a better incrementals on volume through that manufacturing line. So I'm just trying to model, how you would get back down to 28% to 29% long term EBITDA margins when in a year like this you're guiding to nearly 30% at.
At the high end.
Hey, Jeff It's Scott here.
So we're not going to get into talking in fiscal 'twenty five.
Or longer.
I will tell you though.
The performance that we've had in the year to date through the first six months, absolutely exceeding our expectations as Scott talked about during the prepared remarks.
EBITDA bridge as presented and shown for a reason right. It shows you all the key drivers that we have and as you look at that Youre right in looking at.
Euro assumption managements got our own view of it and we'll share that when the time is right, but what is that volume picture look like as we turned the corner in the next year price cost. This company does.
Don't know if anybody does a better job at managing price cost and what <unk> does.
So we'll continue to look at that and anything that you assume on the volume side that comes back whenever you assume at in the cycle or year. Then you get some really nice fixed cost absorption that comes through that manufacturing line.
We will always manage our SG&A cost to make sure that we're being competitive to Scott's point, it's getting the capacity where it needs to be during kind of a downturn. It's also getting more efficient more competitive when we come out of it as well, which is what you heard us talk about related to customer service order execution and so forth. So again.
Not going to get get into 'twenty five we did at the Investor day give 28% to 29% margins.
There's kind of a three year look as to where at the end of fiscal 'twenty five we expect to get well, obviously update that guide as we come out with guide related to next year in the May timeframe like we always do.
But again.
It doesn't stop us from executing and delivering as much as we can based on the environment. That's in front of us so.
Yes, I agree with you on the price cost I think the numbers don't lie there maybe then back to fiscal 'twenty for what maybe is included at the high end of the sales range for residential we've heard the builders talking about development spend just wondering what your assumptions are within your guide there for <unk>.
When you might see that if it's not in fiscal 'twenty. Four is at the early part of 'twenty five because it seems like all signs point to increase land development spend into next year.
Yeah, Hey, Joe might taken it's I think with regards to the residential this kind of move or the positive optimism that the builders have been talking about further development, that's probably in FY 'twenty five impact for us.
That's not going to happen.
FY 'twenty four.
As they kind of ramp and start to develop more land for more communities more subdivisions, we would expect to see that sometime in the next fiscal year, but.
Not really counting on any of that for FY 'twenty four.
Yeah, I think that goes back to Scott's comment, but what we're seeing in infiltrate on the completion side a lot of focus right now and getting caught up for some of the backlog from the starts over the last couple of years and focusing on completions right. Now is what we're saying versus land acquisition land development and starts.
All very encouraging thanks, everyone.
Your next question comes from the line of John Lovallo with UBS. Your line is open.
Morning, guys. Thank you for taking my questions first one on free cash flow conversion from EBITDA, it's running at around 70%, 71% I think year to date, which is solid I mean, how are you thinking about cash flow conversion in the second half of the year and then as we move out into next year, how should we be thinking about sort of the incremental capex from <unk>.
Some of these initiatives that you guys announced today.
Yes free.
Cash flow from operations is absolutely, where we start when we look at it.
It starts with EBITDA, but working capital management is the big driver there John and so I would say right now as we look at it we target a 20% working cap as part of sales as a percent of sales will continue to look at that right now we're sub 18% year.
Year to date so.
Again, we will look at that and see where we need to be we like where we're at inventory wise given this lower demand environment, we've done a great job looking at our variable costs getting our.
Our labor, where it needs to be getting our inventories where it needs to be so I think we've done a really good job of getting ourselves, where we needed to be and you see that coming through the working capital right the receivables come off the inventory.
Is a great driver a big driver of that working capital improvement and cash year over year over year. So those are the key drivers in that.
I would say right now we focus more on the free cash flow to EBITDA.
From a conversion perspective, and cut and we always kind of target of 50% or greater is the way we look at it that ties to your next part of your question on the Capex side 200 to 225. This year does include the Engineering Technology Center. It does include some initial spending on the Lake Wales, Florida manufacturer.
<unk> facility, you'll see more of the Lake Wales facility, obviously coming in fiscal 'twenty five.
But we've consistently been talking about the fact that this heightened level of Capex versus what we've previously spent is going to be around for at least the next couple of years as we use the balance sheet as we use our leverage.
And liquidity to focus on what we believe is the lowest risk highest return use of that capital. It's on our footprint. It's on productivity. It's also an innovation and that's an engineering technology center. So again, you'll see elevated capex spend it will kind of toggle a little bit toward the Lake Wales facility.
From a magnitude mix perspective, but you'll see a lot still in that productivity engineering and innovation side of the house as well.
That's good color I appreciate it and then I guess, maybe zoning and not here on the on the non <unk> business curious, what you're seeing in sort of that core low rise horizontal type projects are those still pretty soft and then I guess confers like Conversely on the institutional business or the non spec side of the non resin side is that still.
Pretty.
Pretty solid.
Yeah, Hey, John Mike Higgins.
You said.
Is true so things that are kind of as we said kind of more speculative in nature I think.
Remain challenged.
You see things getting pushed to the right.
Institutional, which we would consider the schools and other educational facilities and hospitals and things of that nature I would say that's been pretty resilient and that's because a lot of that funding that typically goes to build those projects is more stable rate its tax base Thats bond based so I think we've seen that become very.
Resilient and then again things that are we described is built for purpose, our engineering and technology Center things that are financed off people's balance sheets.
We're not going to the market for financing those.
<unk> continued to move forward, but again the bulk of what we sell into is in that kind of commercial general purpose commercial property. So yes.
As we've said before around some of these mega projects, we do see.
<unk>.
Bidding, we're identifying projects chasing specifications.
Shipping product on several of the business right now right now yeah.
But also.
Good news, obviously out there that some of these announced projects or investments are being paused and getting pushed to the right. So.
I still like we say it's.
We are battling through the non res market right, we're doing what we need to do and Thats kind of be present in market have good project knowledge gift.
Gift products specified.
And take market share from traditional materials. So we still feel we're kind of performing better than market. When you look at our results.
Got.
It remains a battle out there day to day on the nonresidential side I would say, particularly in the Allied products, Yes, we are.
Which which John have a very good Scott Barbour have a very high focus on the nonresidential.
Job pursuit in market for us.
And we know how much the market's down and where.
Having really great performance, both sales profitability order rate in our allied products. So I think that's kind of the power of the go to market that we have is really manifesting itself there.
Got it. Thank you guys appreciate the color.
And once again, if you would like to ask a question. Please press Star then the number one on your telephone keypad.
And your next question comes from the line of Jeff Hammond with Keybanc capital markets. Your.
Your line is open.
Hey, Good morning, guys. This is David Tarantino on for Jeff.
Maybe to be clear on some of the pricing commentary it seems like it's coming in in line can we dig into the gross margins in pipe little bit. It seems like it took a little bit more of a step back.
Relative to the balance of the businesses is there anything to call out in the quarter and maybe moving forward.
No not not really.
Pipe was very much in line with what we thought coming into it.
Price cost dynamic is laid out.
Yeah, we talked about the first quarter coming at a little bit better than what we'd expected Q2 largely in line.
So really nothing unusual a little bit of timing of some of the costs.
And phasing, but theres nothing nothing in there at all related to any kind of trends or anything there that we're concerned about at all.
Great and then maybe switching gears on just on infrastructure, obviously smaller part of the business today, but it appears you guys have somewhat of a renewed focus here.
Could you maybe give us an update on what youre seeing flow from the recent stimulus packages I mean, it seems like.
Much of this has yet to show through yet.
Yeah, Hey, David Mike Higgins I feel like we said in the prepared comments I think we're starting to see some activity around that I think what we're saying is more kind of.
At the local level, so think about counties or cities.
We've seen good activity around airport projects as well.
These things take time right to get to you know the government has to get the infrastructure in place to kind.
Handle requests disburse money that money then has to get to these local agencies. They have to then prioritize projects. They want to do get those projects to market to bid get awarded for construction to start. So I think this I think we've said this many times this infrastructure builds a long term thing and you're not necessarily for us.
So we believe youre not going to see.
One year or a specific year see this huge boom or huge impact, but when you look back on it after five 710 years cumulatively it will add up to something significant.
Great. Thank you.
And your next question comes from Trey Grooms with Stephens, Inc. Your line is open.
Hey, good morning. This is actually in the home or Cosco on for Trey and thanks for taking my questions.
So first.
I wanted to good morning, I wanted to follow up on a question that was asked earlier on.
Thinking about.
Sort of leverage on volume growth.
How should we be thinking about incremental margins in a scenario, where you do have volume growth and maybe price cost is neutral.
Yeah, the best way to start or think about that as we talked about incremental margins from volume alone being in that 30% to 40% range.
That's still kind of a good rule of thumb for right now.
Obviously, you know as as a starting point like anything else. You. Then you have to take a step back and what's your assumption around pricing resident in some of the cost drivers.
But again, 30% to 40% is what I would tell you to start with.
Got it that's in again.
The other thing I'll lay on top of that is again, it's a rule of thumb and it's a starting point, but you got to be really careful when you look at kind of the the segments the timing, especially when youre looking at volume coming on our volume coming off because that can sway that one way or the other as well so again, sorry, we're 30% to four.
80% and then toggle with as you go.
Understand.
And then for my follow up you know as we look at the sort of end markets in the back half of the year. This year, you've had both non res and res down but residential has been less severe.
And the comps get easier in the back half. So would you expect that dynamic to reverse where maybe non res outperforms, whereas even though there are probably or possibly both down.
Well I think what you see with the rest kind of performance is the strength of that infiltrator business in the first half of the year.
I think yes, you're right the comps.
Should be easier in the back half of the year.
I think.
You know I don't want to speculate by the end market, but I think what you've seen kind of Q1, and then look at Q2.
There might be some compression there, but I don't think its going to be I don't think its going to be significant.
Yeah, the other color or context, I would give you is our guide assumes flat to down 10.
And so I think.
That would be the takeaway after being down 13% in the first half so that that assumes that the comps get a little bit easier as we go and again res and non res are 85% of the business. So.
Those would be the key drivers.
Alright that all makes sense. Thanks for taking my questions and good luck with the rest of the year.
Thanks.
Okay.
And there are no further questions at this time I would like to turn the call back over to Scott Barbour.
Okay. Thank you very much and we appreciate the questions.
And I look forward to the follow ups today.
We feel very good about the quarter feel good about raising our guidance I think we're being prudent in how we're looking at the rest of the year, we announced the big investment today I think we've been kind of foreshadowing this in.
And the capital spending we've been talking about in this level for the next couple of years. We're very excited about that very excited about what's going on for us in the southeast.
And in Florida in particular in Texas.
And we continue to look for the long term and when these markets recover and be ready for that.
So with that we'll sign off we appreciate it you all have a great day bye bye.
And this concludes today's conference call you may now disconnect.
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