Q4 2025 Advanced Drainage Systems Inc Earnings Call
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[music].
Speaker Change: Good morning, ladies and gentlemen, and welcome to the advantage of drainage Systems' fourth quarter of the fiscal year 2025 results conference call My.
Speaker Change: My name is to make up and I'm. 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.
Speaker Change: I'd like to ask a question during that time press star followed by the number one on your telephone keypad. If you like to withdraw your question Press Star followed by the number one.
Speaker Change: I would now like to trying to presentation over to your host for today's call Michael Higgins, Vice President of Investor Relations and corporate strategy. Please go ahead Sir.
Michael Higgins: Thank you and good morning, everyone I'm here with Scott Barbour, our president and CEO and Scott <unk>, our CFO and Craig Taylor.
Speaker Change: <unk> Vice president of Avs, the precedent of infiltrator.
Speaker Change: 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.
Speaker Change: 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 this morning is posted on the Investor Relations section of our website.
Speaker Change: A copy of the release has also been included in an 8-K submitted to the SEC.
Speaker Change: We will make a replay of this conference call available via webcast on the company website.
Speaker Change: With that I'll now turn the call over to Scott Barbour.
Scott Barbour: Thank you Mike and good morning, everyone. Thank you all for joining us on today's call.
Speaker Change: We concluded fiscal 2025 with net sales of $2 9 billion.
Scott Barbour: An increase of 1% over the prior year.
Scott Barbour: Importantly, domestic construction market sales increased 3% as we continued to drive above market performance through our material conversion strategy and the storm water and onsite wastewater market.
Scott Barbour: We saw strong growth in places like Florida with double digit growth in.
Scott Barbour: Allied products and implemented our products and in Texas with double digit growth in infiltrator products as well as growth in pipe and the nonresidential market.
Scott Barbour: From a product standpoint water quality products increased double digits as did the coltec retention detention chambers that we acquired in 2022.
Scott Barbour: Thanks to an active treatment products and infiltrator each grew double digits also and Craig will talk about those here in a few minutes.
Speaker Change: Moving to profitability. This year is 36% adjusted EBITDA margin.
Speaker Change: March the second most profitable year in our company's history down modestly off peak in a year when we faced headwinds in pricing and material cost. In addition to a challenging economic backdrop that impacted demand.
Speaker Change: The resiliency demonstrated by this year's profitability is partially due to our strategy to grow the more profitable segments infiltrator Allied products being a higher mix of overall sales organic sales in these segments increased 5% and 3% respectively and the on site.
Speaker Change: Wastewater and Allied products now represent a collected 44% of revenue.
Speaker Change: The evolution of ABS as product mix is one of the topics we intended to discuss in our Investor day originally planned for this upcoming June.
Speaker Change: We have a lot of exciting things to highlight about our future.
Speaker Change: But it will trigger and ags around growth innovation and the customer experience. However, right now the industry is highly dynamic and as we wait to see how the construction economy unfolds with the current economic uncertainty.
Speaker Change: While the current dynamics play out I didn't think that the audience is going to be the most receptive to it.
Speaker Change: Make your Investor day talking about how things look over the next three years.
Speaker Change: So I think that there'll be a better opportunity for that type of discussion later in the year. When we have a much better picture of what this three three.
Speaker Change: Three year outlook will look like.
Speaker Change: Therefore, we're going to push the Investor day, and we'll be in touch with the new date it'll be sometime later this year.
Speaker Change: Now I want to turn to slide five which highlights this journey that Acs has been over the past 10 years.
As we move from left to right from FY <unk> FY 'twenty five we have strategically diversified products.
Speaker Change: The geography, and the end market mix to become a higher margin more profitable business.
Speaker Change: We focused on driving growth in our higher margin Allied products, which grew at a 10% CAGR over this time period outpacing the core type business.
Speaker Change: We deepened and broadened our exposure to the residential market.
Speaker Change: Both our pipe business and infiltrator products.
Speaker Change: Our exposure to the residential land development is growing at an 18% CAGR over this time period, driven by a focus on building relationships with large national homebuilders.
Speaker Change: Assuming approvals and engineering to acceptance and some of the fastest growing residential areas primarily in the southeast.
Speaker Change: If deployed incremental resources around that over this time period, we think that paid off.
Speaker Change: Very well for the company.
Speaker Change: This focus on residential was complemented by the acquisition of Infiltrator, which increased our residential exposure to 30, 36% of the overall company again accelerating our overall growth and enhancing the margin profile of the company.
Speaker Change: This diversification is incredibly important to our go forward strategy and increases the profit resilience of the company.
Speaker Change: Supports ongoing margin expansion and it enables us to pursue projects across nearly all facets of the water management, we participate in.
Speaker Change: We have evolved throat simply a pipe manufacturing company in FY 16.
Speaker Change: Broader water management solutions provider and I think our profitability is reflected is reflected in that and we're really pleased with this diversification growth and the leadership we have in each one of these segments.
Speaker Change: Now, let me move to slide six.
Speaker Change: This diversification has expanded our total market opportunity by about $10 billion over over this timeframe.
Speaker Change: We have a very nice addressable market.
Speaker Change: And then we have a long runway to continue executing the convergent strategy across these markets and all of our product lines.
Speaker Change: And as storm water market.
Speaker Change: Where <unk> is the clear market leader plastic pipe is about 40% of that $5 $5 billion market.
Speaker Change: And the Allied products again, where we have market, leading participant product lines and participation will probably around 10% of that.
Speaker Change: And then the onsite wastewater infiltrate your share is about one third of the market. So when each of those categories. We feel we have a long way to go it will drive that.
Speaker Change: Through our tried and true and getting approvals given good teams in the field and driving this through our distributions.
Speaker Change: There are also some secular tailwind that you are going to drive these markets. We've talked about these in the past it's really the under built U S water infrastructure, this increasing frequency and intensity of large scale storage events and residential under bills.
Speaker Change: As highlighted many times when we talk with you.
Speaker Change: We've mentioned these studies in the past the one we really like as from the American Society of Civil Engineers. They did their 2025 infrastructure report card.
Speaker Change: And water infrastructure.
Speaker Change: <unk> D, which simply says the existing infrastructure is important to fair condition and mostly below current standards.
Speaker Change: This is good this is a good trend for us I mean, this will continue to pace investment into water management infrastructure across a broad array of products and geographies. So over the long term. We will continue to have these secular growth tailwind will drive that growth through it.
Speaker Change: Good current portfolio of offerings.
Speaker Change: Continued new product introductions acquisitions.
Speaker Change: Acquisitions, it will drive that conversion and share of wallet.
Speaker Change: Yes.
Speaker Change: Desire opportunity on these different projects.
Speaker Change: Turning to the next phase and this is how we drive that share of wallet.
Speaker Change: This is really what we think of it as are our value proposition and it starts at the top of this chart with a best in class portfolio of water management products.
Speaker Change: We are the only company that can deliver a complete water management solutions on a national or North American scale.
Speaker Change: That are safer more sustainable more sustainable faster to install and at a lower installation costs. It is a superior line of products. We have at the top of the top of this page.
Speaker Change: And for many years.
Speaker Change: <unk> run this market share model, it's a proven go to market share market strategy of approvals acceptance coverage win rate is supported by these 300 professionals in the field, which are the envy of our industry in terms of field sales capability and technical know how to get the field.
Speaker Change: So we're very proud of that product line and our ability to kind of sell those product lines with our distributors in the field.
Speaker Change: But I think there's more to it than that.
Speaker Change: And it's that bottom tier this chart is that balance sheet.
Speaker Change: We've improved the profitability and cash flow profile of the company we can reinvest.
Speaker Change: And at an appropriate pace.
Speaker Change: With the right returns and new capacity in the critical geographies.
Speaker Change: New products.
Speaker Change: New capabilities for engineering.
Speaker Change: <unk> and increasingly investments around customer service.
Speaker Change: <unk> tools.
Speaker Change: We over these last several years, we have built some industry leading design tools.
Speaker Change: Our customers can design around our products select our products, we make these available to them in many different ways digitally and it is really superior.
Speaker Change: Service or our asset of our company that I think we don't talk about enough.
Speaker Change: In addition.
Speaker Change: Leading service, we've always had is our fleet.
Speaker Change: We delivered over 70% of the products, we sell on the ABS side.
Speaker Change: <unk> that fleet and modernize that didn't have really a great set of assets out there working for our customers.
Speaker Change: I've mentioned this modernizing our customer experience we've invested in that heavily over the last year, we needed to do that our July performance is now over 90% and these tools, we're rolling out and giving you a differentiated.
Speaker Change: Market, leading information and availability information for our customers.
Speaker Change: Thank you all know we opened our engineering and Technology Center about nine months ago. It is by far the most advanced storm water facility in the world, which enabled us to develop and launch new products faster.
Speaker Change: While also working on our manufacturing processes and safety and efficiency, we really have everything we need to do around that storm water business contained in this facility from an engineering and product management standpoint.
Speaker Change: And we are already in the first nine months as some great examples of accelerated in the market products and materials that we've benefited from that from that from this new investment would move that we had.
Speaker Change: So when you stack all three elements of this chart together.
Speaker Change: The scale.
Speaker Change: The best in class products that go to market strategy, our ability to reinvest.
Speaker Change: I think it's really clear to me, what Andrew would rather play it as that company that we have now and move into FY 'twenty six versus the company that we had in FY 16, and I would argue versus any company that we're competing against other daily on a daily basis.
Speaker Change: So I'm very proud of the team for the performance delivered in a really challenging year.
Speaker Change: We got a lot of things done.
Speaker Change: In spite of a very difficult demand environment and a difficult pricing.
Speaker Change: Zero state materials market, we continued to make progress in safety because we pass the milestone this year in safety performance. There were very products. So lots of good things to talk about.
Speaker Change: And we all kind of gather those along with our three year plan to show at the Investor Day that we'll do a little bit later this year.
Dr. Charles: Dr. Charles is going to give you an outlook on FY 16 in a minute.
Speaker Change: Feel confident in our ability to achieve above market growth in our core domestic construction markets and maintain attractive profitability. Even if it is still a bit of a challenging demand environment.
Speaker Change: First I'm going to turn this over to Craig Taylor, the president of our Infiltrator business to review their fiscal 'twenty 2025 performance and talk a little bit about the breakthrough they have there.
Craig Taylor: Thanks, Scott and good morning, I'm happy to be here today.
Craig Taylor: Fiscal 2005 with another strong year added material.
Craig Taylor: <unk> $516 billion in sales, an increase of 15% over prior year, including $46 million in our regular sales.
Craig Taylor: On organic basis sales increased 5% driven by double digit growth in both septic tanks and advanced treatment products.
Craig Taylor: <unk> sales increased 12% driven by material conversion and new product introductions.
Speaker Change: Just like Aes's material conversion strategy.
Craig Taylor: Trader for plastic tanks are driving market conversion from the traditional concrete Inc.
Craig Taylor: Fiscal year 2025, we launched two new products to address market needs and to provide contractors with additional installation flexibility.
Craig Taylor: Organic advanced treatment sales increased 33% compared to prior year, primarily driven by market growth as well as the introduction of the eco pod and apps.
Craig Taylor: This product is the next generation of advanced.
Craig Taylor: Wastewater treatment technology designed to meet new regulations.
Craig Taylor: Required higher levels of nitrogen reduction to protect watersheds and the environment.
Craig Taylor: Adjusted gross margins increased 60 basis points.
Craig Taylor: To 53, 6%. This includes the impact of the <unk> acquisition.
Craig Taylor: Organically, we expanded adjusted gross margin by 250 basis points, primarily driven by favorable pricing manufacturing efficiencies and material cost.
Infiltrated profitability today demonstrates the benefit from capital investments made in machinery and equipment over the last six years most significantly.
Craig Taylor: Highly automated GMP manufacturing facility opened in 2020.
Craig Taylor: Since opening infiltrators profitability has improved by 1100 basis points.
Craig Taylor: When the market slowed two years ago, we were able to utilize that facility. While we took all their equipment offline for refurbishment.
Craig Taylor: As we ramped back up we achieved a 15% improvement in productivity and efficiency.
Craig Taylor: In addition, our business continues to be very innovative.
Craig Taylor: New products, we've introduced in the past three years accounts for over 20% of our revenue.
Craig Taylor: As we look at a ratio, we see an opportunity to grow revenue and improve the processes and efficiency in our manufacturing.
Craig Taylor: We are targeting margin improvement of about 10 basis points over the next three to five years.
Craig Taylor: We are excited about the additional breadth this acquisition brings to our product line.
Craig Taylor: The acquisition also gives us access to new application.
Craig Taylor: For example, the Prevost product is just homeowners converting to centralized wastewater systems <unk>.
Craig Taylor: By making the process more costs and less disruptive.
Craig Taylor: In addition, a rank of advanced treatment products increases our exposure to the commercial systems.
Craig Taylor: Where the infiltrator products have a strong foothold in residential systems.
Craig Taylor: All in we are very proud of this year of accomplishments and excited about the future growth F. Infiltrator as we continue to drive material conversion and cash.
Craig Taylor: Growth in advanced treatment market.
Dr. Charles: Now I will turn the call over to Dr. Charles.
Dr. Charles: Thanks, Greg.
Greg: Fourth quarter net sales decreased 6% overall as demand was impacted by higher interest rates economic uncertainty and unfavorable weather conditions recall last year, we experienced favorable weather conditions that allowed for an early start to the spring selling season in both construction and agriculture from a timing.
Greg: Perspective, construction activity and agriculture accelerated by about six weeks this year compared to last year importantly price costs remain in line with expectations and manufacturing and transportation costs were both favorable in the period.
Greg: On slide 10, we present, our free cash flow and liquidity as most of you know one of the strategic advantages of the business is the consistency and quality of our cash flow generation, even in a choppy and uncertain macro environment, we generated $581 million of cash from operations during fiscal $2000.
Greg: 25, the <unk>.
Greg: Strong cash generation of the business gives us the flexibility to invest in production capacity and innovation to grow our position in the highly attractive storm water and onsite wastewater markets.
Greg: Thats, an envious position to be in and one we intend to optimize to continue driving long term shareholder value.
Greg: Capital spending increased 15% to $212 million in fiscal 2025, as we continue to invest in improving customer service through investments in technology and better order management processes accelerating.
Greg: Accelerating innovation in new products, and new technologies that add to our storm water and wastewater solutions packages.
Greg: Increasing our production capacity in certain regions and certain products.
Greg: That has superior demand profitability and growth characteristics.
Greg: Debottlenecking and expanding our recycling operations, such as our recycling facility in Cordele, Georgia, as well as our material science and blending capabilities.
Greg: And finally, increasing the safety productivity and efficiency of our manufacturing network.
Greg: In addition, we upgraded our transportation assets, including refreshing the fleet and implementing the latest telematics and safety technology to improve superior delivery and customer service.
Greg: Turning to capital allocation, our priorities remain unchanged and rooted in our commitment to drive growth and create long term shareholder value first and foremost we will continue to invest strategically in the core business for all of the reasons I just mentioned.
Greg: A close second the pursuit of acquisitions to grow our product offering and leadership in the storm water and onsite wastewater markets.
Greg: That said, we recently announced the acquisition of River Valley pipe a manufacturer of corrugated plastic pipe products, serving the agricultural market in the Midwest, We will continue to focus on opportunities to expand our product offering and capacity.
Greg: But our balance sheet and free cash flow profile gives us the ability to move decisively when the right opportunities emerge without needing to dilute shareholders or take on excessive leverage.
Greg: We remain opportunistic in evaluating M&A that enhances our portfolio and aligns with our long term strategies.
Greg: We've also maintained a balance sheet the capital deployment or I'm, sorry, a balanced approach to capital deployment retarding of $121 million in fiscal 2025 to shareholders through dividends and share repurchases.
Greg: We have deliberately built and maintained a fortress balance sheet that provides us with the flexibility to navigate cycles as well as probably act on opportunities. We closed the year with $1 $1 billion of liquidity and a net leverage of one one times.
Greg: In addition, today, we announced a 13% increase in our annual dividend to <unk> 72 per share.
Greg: Moving on to slide 11, we present, our fiscal 2026 guidance ranges.
Greg: Based on our order book backlog and market trends, we expect revenue to be in the range of $2 billion $825 million and $2 billion at $975 million and adjusted EBITDA to be in the range of $850 million to $910 million. These.
Greg: These ranges result in an adjusted EBITDA margin of 31% to 36% down 50 basis points to flat compared to this year's 36% margin.
Greg: It is important to note that we do not expect a material impact from tariffs.
Greg: Today's guidance reflects the end market outlook on slide 12.
Greg: We do not expect the nonresidential or reserve residential end markets to accelerate as both are under pressure from higher interest rates and economic uncertainty.
Greg: We expect the nonresidential end market to be flat to down low single digits and the residential market to be downloaded to mid single digits.
Greg: The infrastructure market continues to benefit from JA funds, and we expect that market to grow low single digits next year.
Greg: Finally, both the agriculture and international end markets are expected to be down double digits in the year.
Greg: Finally, the fiscal 2026 guidance at the midpoint includes the following key assumptions for revenue volume up low single digits and pricing down low single digits.
Greg: For profitability price cost should be neutral for the year as we expect lower material costs year over year to offset the impact of pricing I just noted.
Greg: Manufacturing costs will be unfavorable due to fixed cost absorption primarily in the first quarter. The higher costs are due to the lower production volume over the winter months due to the slower demand experienced in Q4 as well as expected in fiscal 2026.
Greg: <unk> costs are expected to be favorable year over year due to improved efficiency and route planning and SG&A costs are expected to be 14% of revenue for the year.
Greg: We will remain focused on executing our long term strategy to drive consistent long term growth margin expansion and free cash flow generation, and a large and attractive storm water and onsite wastewater markets the significant conversion opportunity.
Greg: With that I will open the line for questions.
Greg: At this time, if you would like to ask a question press star followed by the number one on your telephone keypad.
Greg: Your question has been answered and you would like to remove yourself from the queue Press star followed by the number one.
Speaker Change: Your first question is from the line of Mike Halloran with Baird.
Speaker Change: First Scott I'd like to clarify that.
Speaker Change: You just made there on the price cost side of things and pricing side of things.
Speaker Change: Is pricing how has pricing tracking sequentially have you seen any incremental pressure embedded in that pricing comment are there any mix components to what that pricing looks like.
Speaker Change: Certainly heard that you expect to be price cost neutral as we work through the year because of those dynamics just want to understand what's happening on the pricing side of things.
Speaker Change: Yes, Michael so largely basically sequentially level as we've talked about since Q2 of this past year. So most of what you see in the comment related to price being down low single digits as relative to it doesn't lap the pricing impact until Q2 of this fiscal year. So most.
Speaker Change: That relates to just the comment that we will see continued on favorability, especially in Q1 as we work through the year, but then sequentially throughout the year relatively flat on.
Speaker Change: On price Okay.
Speaker Change: Okay that makes sense, so you're basically saying first quarters, where the pressure point is and then.
Speaker Change: Static year over year once you lap that comp okay that helps.
Speaker Change: And then the demand side of the equation modestly positive volumes.
Speaker Change: Seems like you're embedding some sort of share gain potential within the context of that based on the end market commentary that you have on slide 12.
Speaker Change: Maybe just talk about where you are expecting the share gains to come in.
Speaker Change: And what are the catalysts for that on an insular level by products and markets. However, you want to go after that.
Scott Barbour: So Mike this is Scott how are you doing.
Michael Higgins: Yes, there are.
Scott Barbour: Share gains through conversion.
Michael Higgins: From traditional materials to plastic pipe.
Michael Higgins: As there usually are in our guidance there those are primarily the HP or polypropylene products.
Michael Higgins: And products, primarily in the kind of what I would call the larger diameter.
Michael Higgins: We've been gaining share there in the comment in that.
Michael Higgins: This discussion we mentioned the residential segment.
Michael Higgins: <unk>.
Michael Higgins: We are clearly gained share and continued to gain share there to our sales efforts the superiority of our value proposition for those.
Michael Higgins: Those that type of development or that type of projects and that early land development.
Michael Higgins: And yes, we see that market can have different levels of growth and uncertainty, but we have been growing pretty steadily.
Michael Higgins: Through that and started from a low point.
Matthew Bouley: Your next question is from the line of Matthew Bouley with Barclays.
Matthew Bouley: Good morning, everyone. Thank you for taking the questions.
Matthew Bouley: I wanted to ask first about the cadence for the year thinking about the top line. So a lot of great color there around some of the margin impacts in Q1, but just thinking about revenue, yes, I guess, if I look at the fourth quarter organic growth was maybe down 3% or so.
Matthew Bouley: Is Q1 shaping up similar to Q4, plus or minus and kind of what I'm getting at is what's the implication to year over year growth as you think about the second half of the year within your guidance. Thank you.
Speaker Change: We can't really get too much Matt into the quarters, but I will highlight we do talk about 100% to image and typically the business, we'll see $55, 60% of the revenue in the first half of the year at 40% to 45% obviously in the second half.
Speaker Change: We expect to see that same dynamic this year I think in the first quarter on a year over year basis. Obviously, there is a little bit of upside opportunity given that some of that pull ahead that we saw last year that we mentioned so our year over year comp.
Speaker Change: That's a little bit easier in the first quarter, but expect 55% to 6% of the revenue in the first half consistent with what we normally do.
Speaker Change: Normally generate in drive <unk> got the retro impact.
Speaker Change: Great.
Speaker Change: Okay got it great Thats helpful.
Speaker Change: Thanks for that Scott and then.
Speaker Change: I wanted to maybe just step back.
Speaker Change: The Investor Day, I, just wanted to ask a little bit more about the I guess the postponement there.
Speaker Change: I certainly hear you around the uncertain cycle.
Speaker Change: But obviously you have a lot of great sort of non cycle topics. The point too as you went through in your prepared remarks.
Speaker Change: And you obviously just guided to 2026, so presumably you have you have a starting point.
Speaker Change: Think about a three year guide so I guess, what I'm asking is are you just seeing the end market volatility to such a degree that year, you sort of lost the comfort I guess around putting out a longer term out outlook or.
Speaker Change: Yes, I'm just trying to understand how these current market conditions are giving you that sort of pause there. Thank you.
Scott Barbour: Scott stop Harvard Good good question.
Speaker Change: And I think it comes down to kind of two things Matt one was.
Scott Barbour: Well, just getting FY 'twenty, six kind of nailed down yet.
Scott Barbour: There was a lot going on over the last three months.
Scott Barbour: Tried to deal about that and then every time, we got into what kind of assumptions to make on market growth and these other things to really nail down a three year plan.
Scott Barbour: We could we just didn't feel comfortable nailing down a three year plan underneath those kind of conditions.
Scott Barbour: You all will hold me it highly accountable to that plan and I didn't want to have that you need such a big range that makes sense.
Scott Barbour: So that's why that's why we postponed it youre right, we have a lot of great things to talk about.
Scott Barbour: But I felt like without a really solid economic three year plan in front of you. We wouldn't accomplished what we wanted to accomplish with you and I didn't want to waste your time on that so I'd, rather give you a really solid plan taken up in.
Scott Barbour: An extra couple of months to get it done and.
Scott Barbour: Now with my logic on that.
Bryan Blair: Your next question is from Bryan Blair with Oppenheimer.
Bryan Blair: Thanks, Good morning, guys.
Speaker Change: I wanted to good morning.
Bryan Blair: Put a circle back to.
Bryan Blair: Order rates.
Bryan Blair: I understand the the framework for for the full year Guide and then I appreciate all the moving parts there.
Bryan Blair: How youre contemplating and market dynamics, just curious what youre seeing on a run rate basis, you mentioned that the orders are positive year to date just curious.
Bryan Blair: The end markets are trending relative to the guidance framework that you have and maybe speak to potential catalyst for first risks as we think about the full year progression.
Bryan Blair: Okay.
Scott Barbour: Okay. This is Scott.
Scott Barbour: Order rates are trending positive and definitely support.
Scott Barbour: The guidance that we gave in the first half second half.
Scott Barbour: As Scott mentioned a bit earlier I think what we are really very focused on right now as we've mentioned there was there's there was because of seasonality and a favorable weather last year unfavorable weather. This year. There was clearly a shift from our fourth to first.
Scott Barbour: It's going on right now and we think even if you strip that out to the market is growing but we would just like to get through that.
Scott Barbour: And in April May June.
Scott Barbour: Really understand that impact and as you can appreciate particularly on the infiltrator side.
Season starts.
Scott Barbour: There is an ordering and how those reorder patterns occur really to gain in the first of June I know Craig has got its eye on that.
Scott Barbour: Very very very much, particularly on those core leach fueled products that.
Scott Barbour: That we have where we have really great visibility into the market.
Scott Barbour: We need to get to that point.
Scott Barbour: Brian.
Scott Barbour: Reorder points to make sure this kind of shifting of seasonality is in head facing us.
Scott Barbour: I think we really want to.
Scott Barbour: No.
Scott Barbour: Comment deeply about the strength of the market.
Scott Barbour: Okay understood I appreciate that detail.
Alright.
Scott Barbour: Perhaps a.
Scott Barbour: A little more of.
Scott Barbour: An update on <unk> integration.
Scott Barbour: Confirm.
Speaker Change: Did I hear that the target is a 1000 basis points.
Scott Barbour: Margin expansion and.
Scott Barbour: And then perhaps touch on.
Scott Barbour: Strategic fit and expected financial contribution of River Valley. Please thank you.
Speaker Change: So Craig let you talk about a rig as it did in fact see that big of a number yes.
Speaker Change: Margin expansion is really the growth that I've talked about growing the topline merging the commercial business together with our business and then using our distribution channels and growing the GOP, which is our turnaround type product. So really focused on the growth opportunity there, bringing tomorrow progress of our manufacturing system.
Speaker Change: Efficiencies into our operations there can help that margin expansion.
Speaker Change: Next couple of years, so that's a three to five year outlook for that extension.
Speaker Change: I think the infiltrator guys are really talented.
Speaker Change: Engineering and manufacturing people and I think they're.
Speaker Change: Out there on a rotating basis in Oregon, working through a very good plan.
Speaker Change: And as Craig said, they've done a lot of I would say commercial integration have already opened up some new distribution.
Speaker Change: <unk> already kind of starting to see some benefits from from those things.
Speaker Change: And it is an aggressive plan and you did hear it right.
Speaker Change: So we're really encouraged by this first seven months.
Speaker Change: The ownership with the team out there in Oregon bankruptcy, and then River Valley. So River Valley, we always wanted to be bigger and.
Speaker Change: And more competitive in Illinois in Illinois.
Iowa River Valley has a couple facilities one in each of those states. So this was a chance to gain market share and give us future optionality on our footprints.
Speaker Change: And honestly.
Speaker Change: We wanted to.
Speaker Change: With assets like this come up we want to own them and not have other zones.
Speaker Change: So I think for those three regions River Valley makes a lot of sense for us.
Speaker Change: And.
Speaker Change: Acquired a nice customer list in addition to a.
Speaker Change: A nice product line that will be.
Speaker Change: Right alongside <unk> in those two geographies, where we think we definitely over many years Aes has wanted to be stronger in.
Speaker Change: In those two states and this opportunity came up and I wasn't going to work.
John Lovallo: Your next question is from the line of John Lovallo with UBS.
John Lovallo: Good morning, guys. Thanks for taking my questions I wanted to go back to just kind of market growth and your forecast for.
Speaker Change: Internal growth it seems like on a blended basis, you're expecting year end markets to be down kind of low single digits.
Speaker Change: And you are guiding to roughly flat sales, if we back out <unk> and River Valley I mean, how much of this is organic sales.
Speaker Change: <unk> versus kind of the.
Speaker Change: <unk> portion.
Speaker Change: The point is it seems like the expectation is for only sort of modest outperformance versus the end markets. This year.
Scott Barbour: Yes, John it's Scott here.
Scott Barbour: And when you look at the end markets. You've got also wait to the end markets based on about 45% of our business is non res 35 is red.
Scott Barbour: When you look at what we think that market is going to be down low to mid single digits.
Scott Barbour: Roughly our guide would say organically at the midpoint, we're going to be flat on.
Scott Barbour: On the volume side of the house.
Scott Barbour: So again, we think that it's still.
Scott Barbour: Really great example of.
Scott Barbour: Conversion and continuing that trend.
So thats the way we looked at it and the way we think it's going to play out based on what we know right now.
Speaker Change: Okay got you and then for the 2026 EBITDA margin of 33, I mean, it's down roughly 30 basis points year over year on sort of flattish sales I guess, a similar question I mean, how much of this decline is organic versus inorganic and on the organic piece is that predominantly.
Speaker Change: Focused on the first quarter, where that price cost is going to be unfavorable.
Speaker Change: Yes, I would say right now you've got to remember the absorption impact we talked about that's coming in in the first quarter.
Speaker Change: So roughly when you look at kind of what we think are renco.
Speaker Change: It is going to be about 50 bps dilutive to what we're going to do organically.
Versus about 30 bps.
Speaker Change: Was in the first 25 so.
Joe: Thank you Joe.
Speaker Change: Relatively flat.
Speaker Change: Year over year organically is the way I think about it with a little bit more dilution from aramco, having them for the full year at the lower margin profile.
Speaker Change: Your next question is from Garik <unk> with loop capital partners.
Garik: Hi, Thanks, just wanted to follow up on the year.
Speaker Change: Pricing piece, recognizing it's been stable for for.
Speaker Change: Several quarters, but just with the market expected to again be down.
Speaker Change: Any additional.
Speaker Change: Maybe handholding as to your level of confidence that pricing will remain stable from this point forward in a softer market.
Yes.
Speaker Change: I think that.
Speaker Change: We the way we manage this.
Very daily basis.
Speaker Change: And looking at.
Speaker Change: Participation competitor.
Speaker Change: Sure the job the nature of the customer stuff, we've been doing that.
Speaker Change: The last four quarters and a lot of detail.
Speaker Change: And then.
Speaker Change: Trying to find opportunities for pricing advancement.
Speaker Change: We liked that process, we feel that that gives us good visibility it's really.
Speaker Change: On the pipe piece of the business.
Speaker Change: So it's contained in certain geographies.
Speaker Change: So I think we feel pretty confident.
Speaker Change: This process, we have the managers, we have looking at that the data we can look at it as is.
Speaker Change: Is going to continue to be a good tool for us to manage that price and participation.
Speaker Change: And we feel good about both right now we've always had competitors, we're always going to have competitors.
Speaker Change: And.
Speaker Change: This is just the daily fact of life.
Speaker Change: Nearly all of that.
Speaker Change: Add to that is there are examples where we do have pricing that will be increasing whether it's in certain regions.
Speaker Change: <unk> or end markets. So it's always a mix and it's a balance there so.
Speaker Change: When we got the lapping.
Speaker Change: I already talked about as well.
Speaker Change: That will impact year over year. So we blend all that together to come out with that kind of vision as to what we think it will be on a relatively flat basis, but you've got to factor all of those pieces in there when you look at it.
Speaker Change: Okay.
Speaker Change: That's helpful.
Speaker Change: And then just follow up is just on capital allocation.
Speaker Change: Youre sitting at a pretty comfortable.
Speaker Change: <unk> ratio.
Speaker Change: Slide in the deck it does talk to.
Speaker Change: Your.
Speaker Change: Capabilities and your balance sheet.
Speaker Change: Is quite attractive to accelerate your investment so is there a scenario here.
Speaker Change: We've made two acquisitions over the last several quarters, but is there an opportunity for you to.
Speaker Change: Ramp up even further or go larger.
Speaker Change: The opportunity presents itself.
Speaker Change: Yes.
Speaker Change: Our growth algorithm is very compelling at growing above our end markets via the conversion story, the innovation of new products, and then putting the balance sheet to work through acquisitions to get incremental growth on top of that we like what we've been able to do over the last 12 to 18 months going all the way back to fiscal 'twenty for the Infiltrator acquisition Thats been a grand Slam item at all Brian.
Speaker Change: We look at that being at one one times Levered, we have a lot of opportunity to put this balance sheet to work and we're actively actively looking at all options, including the engineering and Technology Center in innovation and what we can do there with new products.
Speaker Change: So again very excited about that long term shareholder value creation.
Speaker Change: And acquisitions will definitely be part of that.
Speaker Change: Your next question is from the line of Jeff Hammond with Keybanc capital markets.
Jeff Hammond: Hey, good morning, guys.
Speaker Change: Hey, Jeff Good morning.
Jeff Hammond: Just.
Speaker Change: It sounds like the near term orders are good but I'm just wondering if you look a little further out in the pipeline. One what are you seeing on residential land development trends into any real time signs of delays deferrals on construction projects just given the tariff noise.
Jeff Hammond: Uncertainty and higher costs et cetera.
Scott Barbour: So Scott Barbara here Jeff.
Jeff Hammond: So were not really impacted by tariffs.
Scott Barbour: Very minimal impact for us as a company.
Scott Barbour: We do worry about demand being impacted and construction projects being pushed.
Scott Barbour: It pushes and pulls.
Scott Barbour: We haven't seen a meaningful over the last 60 days.
Scott Barbour: We didn't see a meaningful.
Scott Barbour: Bunch of projects coming off the board.
Scott Barbour: Since last week.
Scott Barbour: Whenever you want to call the the agreement to delay.
Scott Barbour: These actions with China by 90 days, we haven't seen a bunch come back on I think people are.
Scott Barbour: A little.
Scott Barbour: Their heads heads a little bit sore from Switzerland, and be jerked around some months. So we see what we do see.
Speaker Change: Is it fairly consistent.
Speaker Change: The pace of orders pace of quotes.
Speaker Change: That is.
Speaker Change: Improved over last year.
Speaker Change: It's not radically high.
Speaker Change: But it's not going down either I mean, it's at a very modest space.
Speaker Change: And we anticipate that will continue here.
Speaker Change: For the rest of the quarter.
Speaker Change: But I really don't know whats going to happen in the second half of the year I mean, it's pretty hard to gauge.
Speaker Change: What weather is 90 days these things get resolved and everything goes back to normal or what's going to happen with interest rates I mean, it's pretty pretty uncertain out there. So we're going to be very conservative.
Speaker Change: Our response to that we're forecasting in our guidance.
Speaker Change: I haven't seen anything radical.
Speaker Change: In terms of change in what happens to us over these last days with these different announced.
Speaker Change: Yes, I think if we can just slow.
Speaker Change: Yes.
Rich: Rich go back to February right. When we released our earnings and everybody thought the world was going to add because of all of these tariffs. It was great uncertainty and there's been a lot of moves since then so move as Scott referenced a week or so 10 days ago with relation to China.
Rich: Good about themselves, but again that can change and another 60 90 120 days opened their first for strength for that yes.
Speaker Change: Actually we haven't.
Speaker Change: Good plan its in a very balanced strategy in a good position in the market to execute that.
Speaker Change: And.
Speaker Change: We can't control the end market is what we can control how well we execute on our strategy of outperformance growing alloy products trade or faster than the pipe business.
Speaker Change: The price cost discipline.
Speaker Change: Okay, Great and then just a second.
Speaker Change: The capital allocation question so.
Speaker Change: To ask it a different way maybe.
Speaker Change: One a lot of my companies are saying, hey, it's tougher to get deals done in this environment just given all the uncertainty I'm wondering if you're seeing any of that and then I think your answer to the prior question was a lot more towards growth and external growth.
Speaker Change: How are you thinking about buybacks.
Speaker Change: You highlighted.
Speaker Change: Get things about the business.
Speaker Change: The market doesn't seem to be appreciating it and just wanted to.
Speaker Change: To see when when and if you want to lean in on buybacks.
Speaker Change: So again I think like we talked.
Speaker Change: <unk> remains the same it's reinvesting in the business you saw we're getting increased Capex, we did about $212 million in fiscal 'twenty five we're now projecting $275 million in fiscal 2006, So innovation through the engineering Technology Center, new products, New technologies, new things, we intend to accelerate through that process.
Speaker Change: What a really core good opportunities to invest internally acquisitions, absolutely. There's things that are always in the funnel of things that we're looking at.
Speaker Change: And then returning excess cash to our shareholders and that balanced capital allocation approach is absolutely core for US we did $120 million of that this past year through dividends and buybacks is continually something that we look at.
Speaker Change: And we will do that we always look at that based on the outlook for the company, whereas our working capital our cash flow and opportunities and the macro economic backdrop, that's coming at us in the next 612 18 months. So it's balanced it's a good really good approach I.
Speaker Change: I would say the share buybacks are always something that we think about and look at as we look at the first couple of buckets that I already mentioned, so we'll continue to do that.
Speaker Change: And again if opportunities if we generate the cash that we think and other opportunities avail themselves as we think they might then yes you could.
Speaker Change: This to be back in the market.
Speaker Change: I would add one thing that which is.
Speaker Change: We are still in a period of relative uncertainty.
Speaker Change: And we want to have.
Speaker Change: A very strong balance sheet.
Speaker Change: Wherever moving into those kind of times, but I think Scott's right I mean, its excess cash beyond what we see for our needs and so we obviously see some needs out there with an appropriate level of conservatism.
Speaker Change: Your next question is from the line of Trey Grooms with Stephens.
Trey Grooms: Hey, good morning, Thanks for taking my question.
Trey Grooms: So you guys did a great job in the quarter managing SG&A.
Trey Grooms: How should we be thinking about the SG&A expense in 'twenty six.
Trey Grooms: Maybe if you could talk about some of the levers you're pulling ore cost out she can tap if end markets.
Trey Grooms: Remained subdued or maybe even.
Trey Grooms: Decreased more than expected from here just kind of given the current level of uncertainty.
Trey Grooms: Sure. So obviously, you've got the impact of Aramco coming in there.
Trey Grooms: That's part one.
Trey Grooms: Craig did a good job highlighting the synergy program and some of the things that we're looking out there on.
Trey Grooms: On the internal basis, absolutely things that we're going to continue to invest in as we look to the long term growth of the company obviously when the top line is not growing in it.
Trey Grooms: And at the midpoint is flat year over year.
Trey Grooms: That's tough right because there are certain things you need to invest in.
Trey Grooms: And so forth. So right now we've got a bunch of initiatives in place a lot of things that we're looking at related to outside spend.
Trey Grooms: And things that we can do there through our procurement team as well as our team here.
Trey Grooms: And manage with our partners.
Trey Grooms: So a lot of actions in flight that we're looking at to keep that.
Trey Grooms: Manageable if you will.
Trey Grooms: So that's what I would I would tell you right now that 14%.
Trey Grooms: Revenue is where it rolls up but a lot of things in flight to.
Trey Grooms: To mitigate such as we move through the year.
Trey Grooms: Okay great.
Trey Grooms: Helpful.
Trey Grooms: And then you mentioned.
Speaker Change: Just kind of geographically, if we could touch on that strength in Florida.
Speaker Change: Traders' strong in Texas.
Speaker Change: Any other geographic puts and takes you could talk about as we look at your footprint.
Speaker Change: So I think.
Speaker Change: Greg you were pretty strong in the last year across all geographies.
Speaker Change: Both companies.
Speaker Change: <unk> remained very focused with capacity and head count all those kinds of things on the southeast and the Atlantic Coast.
Speaker Change: And yes.
Speaker Change: We haven't seen that slow down trading I mean, it does continue to be.
Speaker Change: Very very good for us.
Speaker Change: Texas.
Speaker Change: I had a very good year with ample trailer. These new tanks I think have done quite well there.
Speaker Change: And we strengthened our distribution there.
Speaker Change: And we continue to believe Texas for the ABS side.
Speaker Change: Both pipe and allied products to be a good opportunity for us.
Speaker Change: <unk>, our market share and grow it's not an easy market, it's competitive but I think continues to be a good one Mike can you think of any other geographies in particular, I mean that was a core geographies have been going along at kind of a I would say Trey Scot.
Speaker Change: Scott mentioned, a handful of states, Florida, Texas.
Speaker Change: Carolinas et cetera.
Speaker Change: We talked a lot about these priority space and this was the year again, where we saw it as a group of 15 16 states, primarily kind of concentrated in the lower half of the U S. Again, you saw those states grow faster.
Speaker Change: The company average.
Speaker Change: Again as we've told you guys. Many times those states, we all know them they are growing faster than the rest of the country. Our market shares are lower in those states southern provide really good runway for growth.
Speaker Change: This helped offset some of the softness that we've seen some of our some of our other geographies that tends to be more mature Electra northeast, Ohio. Some other places in the Midwest, etc.
Speaker Change: It's that focus on geographic focus on where those opportunities are where we're really seeing.
Speaker Change: <unk> consistent strength despite.
Speaker Change: And markets that were quite a bit softer this past year.
Speaker Change: Your next question is from Kurt.
Kurt Marino: Marino with Deutsche Bank.
Kurt Marino: Good morning, guys. Thanks for taking my question I, just wanted to dive a little bit more into the manufacturing transportation side. They were quite favorable in the first quarter and the fourth quarter here.
Speaker Change: Noted manufacturing flipped to a headwind in the first quarter, but transportation. It sounds like it's going to continue to be favorable to fiscal year 'twenty six so any additional color on how we should think about sort of the manufacturing and transportation.
Speaker Change: Yes, good morning, Scott.
Scott Barbour: Yes, Collyn sure. This is Scott Barbour and sand logistics.
Speaker Change: Yes, there are several things we're doing.
Speaker Change: Primarily on the ABS side.
Speaker Change: That are decreasing our mileage.
Speaker Change: Paul this through.
Speaker Change: Some planning techniques some different strategies, we're taking around service to the market.
Speaker Change: Without any degradation of delivery performance and some things that patent the lists are doing.
Speaker Change: On.
Speaker Change: Got it.
Speaker Change: No.
Speaker Change: Making sure we use the right mix of assets in the right place internal versus external.
Speaker Change: Lots of different programs going on in logistics, we have also refreshed our fleet and brought down the average age of our fleet pretty significantly over the last 18 months.
Speaker Change: So that's going to decrease our repair and maintenance cost and increase our miles per gallon.
Speaker Change: Lee this is being more efficient.
Speaker Change: So I think that will continue to be a good story through the year and again all things that we have invested in them differently intentionally intentionally strat Dev strategy is about on our manufacturing costs.
Speaker Change: In the fourth quarter, we benefited not only from better.
Speaker Change: Efficiency, but also we had favorable absorption.
Speaker Change: Earlier in the calendar year.
Speaker Change: You might recall that.
Speaker Change: That either favorable or unfavorable absorption of manufacturing goes on our balance sheet.
Speaker Change: Leases to the P&L about three months later.
Speaker Change: So as we had to take volume down really beginning December December January February March because we were in good shape on our inventories and our delivery performance.
Speaker Change: Had some under absorption and Thats whats, primarily going to come through and hit us.
Speaker Change: June April May June.
Speaker Change: And so now we're working very hard to offset that.
Speaker Change: Your absorption, but kind of that's the favorable.
Speaker Change: Favorable and before turning to unfavorable as the timing of that under absorption off the balance sheet that said the infiltrator guys operating at very very.
Speaker Change: Good manufacturing cost.
Speaker Change: Today as we operate in the pipe plants very very good manufacturing costs.
Speaker Change: Benefits of the investments we've made the organizations we built.
Speaker Change: And some of the actions we took.
Speaker Change: Back in starting November December January February we will see those coming through later in this year.
Speaker Change: <unk> costs are going onto our balance sheet now and we'll release later so.
Speaker Change: I really think we're on the right track.
Speaker Change: With respect to both the logistics and the manufacturing cost.
Speaker Change: Great that's really encouraging commentary and I guess just on the Capex really quickly you called out the step up.
Speaker Change: The step up how are you guys thinking about free cash flow generation. This year and then how are you thinking about capex sort of in the medium term as we move beyond fiscal year 2006.
Speaker Change: Yes, so yes, we will always look at cash flow from us we target and then greater than 65% is always kind of the target that we look at obviously working cap as a percent of sales.
Speaker Change: Yes, we're a build to stock type of operation. So we target, 20% working cap percentage of sales. So those are some of the key metrics, we keep in front of us.
Speaker Change: Manage the business. So right now again that the free cash flow level, 40% plus conversion of EBITDA is what we look at and target. Obviously, we're going to we're going to invest in the business and we see that as the best use and highest return use of our capital, but we keep all of those kind of key.
Speaker Change: Key kpis and guardrails and benchmarks in front of us to make sure that we're managing it correctly. So again free cash flow targeting a great greater than 40% of EBITDA cash flow from operations targeting greater than 65%.
Speaker Change: Keep it in those guardrails and then we'll spend the capital will be probably in this range.
Speaker Change: Yes, we have some things coming up this is a big year with a couple of big investments and facilities on the ABS side there'll be some investments and ample traders coming up.
And we'll balance those as we go through the year, we push and take but if I was looking at three or four years as well, yes, I think the other thing I would highlight there is the fact that Scott's point.
Speaker Change: A big part of that $2 75.
Speaker Change: Is that will trail.
Speaker Change: So again, when you look at the margins and profitability of that business.
Speaker Change: Where else would you rather have put habits put those funds to work.
Speaker Change: What's really important when you think of.
Speaker Change: Innovation, and engineering and Technology Center, and those products, particularly in the Allied area that we see some of the early wins there as well.
Speaker Change: Again, there is some really exciting things to go in areas that are very profitable for the business and that's how we're prioritizing.
Speaker Change: So is that $275 million of Capex is going to take five years for returns at a low.
Speaker Change: Margin, it's basically the other way of rabbits, it spending and in areas that are high profitability and are going to add really greatly to that shareholder value over time.
Speaker Change: Alright, Thanks Scott.
Speaker Change: We.
Speaker Change: We're maybe of all the questions.
Speaker Change: So we appreciate.
Speaker Change: Everyone being on the call today, and the questions and the engagement.
Speaker Change: And.
Speaker Change: We will be unfold many of you later today.
Speaker Change: This year with a lot of accomplishments that we just closed.
Speaker Change: I mentioned several of them a year with some frustration and disappointment.
Speaker Change: Disappointments on a couple of things we finished pretty strong.
Speaker Change: As we ended the team never gave up as we as we closed the year.
Speaker Change: And as we mentioned.
Speaker Change: In line with this guidance in April and May so far so will we.
Speaker Change: We'll continue.
Speaker Change: To push forward and we look forward to seeing talking to you all were seeing you all in the near future. Thank you.
Speaker Change: This concludes today's call. Thank you for joining you may now disconnect your lines.
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