Good morning, everyone, and welcome to the Advanced Drainage Systems conference call for the second quarter of fiscal year 2025 results. My name is Regina, and I will be your operator for today's call. Currently, all participants are in listen-only mode. We will have a question-and-answer session later. Now, I would like to hand over the presentation to your host for today's call, Michael Higgins, Vice President of Investor Relations and Corporate Strategy. Please go ahead, Michael.

Good morning, everyone. I'm here with Scott Barbour, our President and Chief Executive Officer; and Scott Cottrill, our Chief Financial Officer. I would also like to remind you that we will discuss forward-looking statements. Actual results may differ materially from those forward-looking statements because of various factors, including those discussed in our press release and the risk factors identified in our Form 10-K filed with the SEC. While we may update forward-looking statements in the future, we disclaim any obligation to do so. You should not place undue reliance on these forward-looking statements, all of which speak only as of today. Lastly, the press release we issued earlier this morning is posted on the Investor Relations section of our website. A copy of that release has also been included in an 8-K submitted to the SEC. We will make a replay of the conference call available via webcast on the company website. With that, I'll turn the call over to Scott Barbour.

Thank you, Mike, and good morning, everyone. Thank you all for joining us on today's call. One of our Board members summarized the second quarter environment very well. In a demand environment challenged by economic and political conditions plus severe weather events, some friction has developed versus our expectations. ADS is addressing the current environment by making high-quality decisions day by day with an eye on the long-term objectives of the company and what is needed from an investment and resource perspective to achieve those objectives. We are doing this while also enhancing safety, improving delivery and operational execution and wisely investing capital. Additionally, we continue to return capital to our shareholders and have maintained an adjusted EBITDA margin of over 30%. So I think about the current environment in terms of what's good and what's not so good. Let's start with the good. ADS's residential and infrastructure end markets continue to grow. Sales in the residential end market increased 6%, driven by the Infiltrator growth of 11% as well as 8% growth in the legacy ADS sales that go in at the land development stage of the residential cycle. Residential market sales are benefiting from previous investments in programs to help strengthen our partnerships with large national and regional homebuilders, solid market penetration and favorable supply-demand dynamics due to the long-term undersupply of housing. Infiltrator continues to perform well as revenue growth was driven by 14% growth in tanks and 40% growth in advanced treatment products, as well as additional distribution, a strong residential demand backdrop. We remain excited about this offering and with the addition of Orenco Systems, we will continue to grow our portfolio in wastewater and advanced treatments. The infrastructure market sales increased 7% in the quarter due to continued strength in roadway and airport projects aided by funds allocated under the IIJA and other publicly funded projects. This is a segment where ADS historically under-participated, but we are now positioned well following the investments in go-to-market resources and capacity in key geographies. Our outlook remains favorable for this market. Profitability remains strong, demonstrating the resiliency of the ADS business model, and we are consistently posting adjusted EBITDA margins around or above 30%. Capital spending, deployment, and the return on previous investments remains favorable. We have steadily increased capital expenditures over the last several years and we are seeing those investments pay off. Infiltrator is an excellent example. Adjusted gross profit increased 17% over the prior year, and they are performing well across the platform. These results are fueled by the capital, new products, and resource investments made since we acquired them in 2019. At ADS, the capital investments in the pipe network are improving downtime, efficiency, safety, and scrap performance. All of these measures improved in the second quarter. In addition, delivery performance also continues to improve, driven by the higher inventory levels as well as new distribution and automation investments being made to further improve the customer experience. From a capital allocation perspective, in the first half of this year, CapEx increased 36%, the dividend is up 17%, and we dialed back our share repurchase program to allocate capital to the Orenco acquisition, which closed October 1. Between those four priorities, we have doubled the amount of capital we either reinvested in the business or returned to shareholders thus far in this fiscal year. Now moving to what's not so good, demand. Demand in ADS's largest market, non-residential construction, which is about 45% of sales, this demand was choppy by segment and geography. The impact manifests itself in two ways for ADS. Non-residential construction is our single largest market for pipe products and two-thirds of our Allied product sales. We adjusted expectations for the non-residential market from low single-digit growth to flat for fiscal '25, reducing our revenue outlook by approximately $40 million for the year. Second, weather played a factor in both our second quarter and the start of the third quarter in key geographies. I don't like to talk about weather on these calls, but due to the severity and intensity of various well-documented storms, it would be imprudent not to mention their impact on ADS results. Accordingly, we reduced revenue outlook due to weather by an additional $40 million. The ADS and Infiltrator employees in the Southeast are accounted for and safe after the hurricanes in September and October. We had a few employees with property damage and most had disruption to their lives, and we've provided support to those that needed assistance. Our five facilities in the Southeast were up and running again shortly after the hurricanes and suffered no damage. The ADS Foundation also contributed to Florida and North Carolina organizations assisting those most affected in the region by these hurricanes. These weather events are typically disruptive in the short term yet favorable over the medium to longer term. In the short term, shipments slowed down significantly as products are not able to be brought onto job sites. Then in the recovery phase, it is excavation contractors that clean up the sites, which further delays installations. We do a lot to make emergency shipments with our fleet in these situations, but this does not overcome the slowdown in overall installation activity. Over the medium term, we typically see a favorable impact from the catch-up in repair. And over the longer term, new projects and regulations are designed and constructed to handle increased volumes of stormwater. So these events cause short-term pain but create medium and long-term tailwinds to the ADS demand profile. Lastly, you can see in the EBITDA bridge that price, material cost, and mix remain a challenge as we knew it would. We've been able to offset the negative impact with volume growth and improved execution in manufacturing and transportation. However, material costs are moving more unfavorably than we expected, which is also reflected in today's updated guidance. As I think about this bridge and how we manage the company, it is about the day-to-day decisions on profitability and market participation in the context of the ADS value proposition at a very local level, balanced with the overall objectives of the company. As you know, ADS has a great value proposition for our customers in the regulatory work we do to gain approval for the use of our products, the breadth of our pipe product lines, the full package we provide with the Allied products and solutions we offer to the engineering, distribution and contractor communities. We stack on top of this the breadth of our network, the inventory we hold locally for superior delivery and the specialized trucking fleet we operate to deliver to the job site. We remain one of a kind in our industry and will continue to invest in the ADS value proposition to further serve our customers. The hurricanes in the second and third quarter affected several important states in the Southern Crescent, such as Florida, North Carolina, South Carolina, and Texas. These events often encourage municipalities and other regulators to re-evaluate their water infrastructure needs, which presents a long-term opportunity for ADS to provide communities with more resilient water management solutions. In April, the EPA delivered the 2022 Clean Watershed Need Survey results to Congress. This report assesses the capital investments needed to meet the water quality goals of the Clean Water Act over the next 20 years. The Clean Water Act is designed to prevent, reduce, and eliminate pollution and the nation's water sources to restore and maintain its chemical, physical, and biological integrity. The EPA estimates that $630 billion of investments will be needed over the next 20 years, citing aging infrastructure and climate change as an ongoing challenge to clean water infrastructure nationwide. The Stormwater management category was estimated to need $115 billion in funding, an increase of $91 million or 385% since the previous survey in 2012. The increase is due to a variety of factors, including changing regulatory requirements, the increase in frequency and intensity of heavy precipitation events, and an increase in impervious surfaces. In addition, decentralized wastewater treatment systems where Infiltrator participates need an estimated $75 billion to rehabilitate, replace, or install new systems, an increase of $47 billion or 172% since 2012. To that end, this quarter, we announced the acquisition of Orenco Systems, a leader in advanced treatment for onsite septic wastewater management. Orenco is a great strategic fit for Infiltrator, and we are busy integrating the two businesses. We first started talking publicly about the need for advanced treatment solutions in 2022 at our Investor Day and market demand has continued to grow since then. Infiltrator's organic advanced treatment products are already growing double-digits consistently, and this acquisition accelerates the company's growth in a highly fragmented and fast-growing segment of wastewater. The enhanced portfolio of complementary solutions combined with a broader sales force, geographic reach, and distribution footprint will drive further penetration in this attractive segment. Craig Taylor and the team at Infiltrator are already working with the Orenco team to continue building on both companies' strengths to deliver exceptional products and services to customers. In October, we hosted the grand opening of ADS's Engineering and Technology Center, the world's largest and most advanced stormwater research and engineering center. This facility brings the talent and tools in one purpose-built facility that allows the ADS teams to collaborate on material science, product design, tooling design, and manufacturing process engineering. This facility will help to bring new products to market faster, drive the industry forward with new innovation, and solidify our leadership position and scale in Stormwater Management with highly-engineered innovative solutions. Just to give you a few examples of what we will be working on, this facility is equipped to open new streams of recycled plastic material and enhance the resins that will divert more plastic waste from landfills and improve the performance of the Stormwater products. We will also be utilizing over 90,000 gallons of recycled water in a closed-loop system to test stormwater products under precisely controlled real-world conditions. We couldn't be more excited about the new opportunities and solutions ADS will create in this center. This type of investment is one example of what sets ADS apart from competitors. We have the ability and capital to invest in advancing products, manufacturing processes, and material science that are unmatched in this industry. In summary, the second quarter results reflect strong demand at Infiltrator as well as the ADS residential and infrastructure end markets, which drove the fourth consecutive quarter of construction market volume growth. In spite of continued choppiness in the non-residential end market, coupled with the short-term disruption of significant storm events, we achieved an adjusted EBITDA margin of 31.4%, underscoring the resiliency of the ADS business model. Demand for localized water management solutions remained strong, driven by aging water infrastructure and changing weather patterns, highlighting the continued opportunity for ADS and Infiltrator to support the development of more resilient water infrastructure. Overall, we are well positioned in attractive end markets with secular tailwinds from the increasing needs to manage and protect water, the world's most precious resource, safeguarding our environment and communities. With that, I will turn the call over to Scott Cottrill to further discuss our financial results.

Thanks, Scott. On Slide 7, we present our second quarter fiscal 2025 financial performance. From a top-line perspective, sales in the ADS legacy pipe business decreased 3%, primarily driven by unfavorable price mix in the period that offset an increase in volume. Allied product sales increased 3%, driven by sales of water quality and capture products, and Infiltrator sales increased 11% with active treatment sales up 40% and above-market growth in tank sales as those products continue to take share from traditional materials. From a profitability perspective, we are pleased with the 31.4% adjusted EBITDA margin in the second quarter. The profitability benefited from volume growth in the quarter as well as the mix benefit from Infiltrator growing faster than the pipe business. Manufacturing costs were favorable in the period due to fixed-cost absorption, improved operational efficiency, as well as the benefit of prior investments we've made in the business. We continue to invest in logistics and transportation assets as well to ensure we have good product placement and best-in-class customer service. Importantly, we were able to offset unfavorable price/cost through volume growth, product mix, and favorable manufacturing costs. On Slide 8, we present free cash flow. We generated $238 million of free cash flow year-to-date compared to $376 million in the prior year, primarily due to an increase in inventory levels as well as material costs. Our year-to-date capital spending increased 36% year-over-year to $112 million, and we now expect to spend approximately $250 million in capital for the full year. These investments are focused on productivity and automation, debottlenecking our recycling operations, the completion of our world-class engineering and technology center, and execution on growth we continue to see in certain geographies. At the end of the first quarter, our net debt-to-adjusted EBITDA leverage was 0.8 times with $613 million of cash on hand and $590 million of availability under our revolving credit facility. With ample liquidity and low leverage, we are in a great position to execute on our capital deployment priorities. On Slide 9, we highlight our disciplined approach to capital allocation. As you all know, our first priority is to grow the business organically through capital investments, closely followed by strategic M&A to enhance our market position and scale. The capital investments we have made in the last several years are clearly paying off and one of the reasons for our strong profitability profile. We are excited about the Orenco acquisition, which closed in the fiscal third quarter. The Orenco business will report through the Infiltrator segment and is included in today's updated guidance. This was a strategic acquisition in the attractive and growing advanced treatment market. For the balance of fiscal 2025, we expect Orenco to contribute $40 million to $50 million in revenue with profitability initially in the mid-teens. It is worth noting that we see this margin expanding significantly over the next several years through our aggressive synergy program. Notably, while we have been able to reinvest $362 million back into the business in the first half of the year, we have also returned $95 million to shareholders through dividends and share repurchases, staying true to our disciplined and balanced approach to capital allocation. Finally, on Slide 10, based on our performance to date, current visibility, backlog of existing orders, and trends, we updated our fiscal 2025 guidance ranges today. We now expect revenue to be in the range of $2.900 billion and $2.975 billion, and adjusted EBITDA to be in the range of $880 million to $920 million. These ranges result in an adjusted EBITDA margin of 30.3% to 30.9%, down 120 to 180 bps from last year's record margin of 32.1%. Today's fiscal 2025 guidance accounts for the results through the first half of the year, the impact from significant weather events to date, continued choppiness in the non-residential end market, the acquisition of Orenco, as well as incremental pressure on material costs and product mix. Pricing is expected to stay at the current levels through the remainder of this fiscal year. We remain focused on executing on our long-term strategic plan to drive consistent long-term growth, margin expansion, and free cash flow generation. With that, I'll turn the call back over to Scott.

So thanks, Scott. In closing, though we expect some continued choppiness in the non-residential market for the second half of the year, we will be focused on doubling down on our strengths, including continuing to invest in the end markets where we benefit from attractive tailwinds, specifically the growth in residential and infrastructure across Infiltrator and ADS, and getting Orenco onboarded and integration ramped up so we can capitalize on growth in advanced on-site treatment and executing on the improvement investments we have made and the cost reduction programs in flight at ADS. The non-residential market will continue to be choppy, and we will manage through this in the second half of the year. Operator, you may now open the line for questions.

Our first question will come from Mike Halloran with Baird. Please go ahead.

Hey, good morning, everyone.

Good morning.

So, Scott, at the end there, I think you provided some useful insights into the ups and downs. Can you clarify what's happening with pricing compared to material costs? It seems like pricing is generally meeting your expectations, remaining stable sequentially, while material costs are increasing, and you might not be able to adjust prices accordingly. Could you explain the situation regarding pricing and the pressures from rising material costs? When do you anticipate the price-cost dynamics will level off, becoming neutral or positive?

So, Mike, it's Scott Barbour. The non-residential market, which is our largest market, has performed below our initial expectations for the year. We had anticipated low to mid-single digit growth, but it's been more flat. This adjustment to our outlook has impacted demand in what we typically consider our strongest market. Simultaneously, in this weak market, we are experiencing some material inflation, making it harder to recover costs in the short term. We still have a strong value proposition and are converting projects from competitive materials regularly. This remains strong. However, the slowdown in demand for Allied products, which has historically grown at a high single-digit to low double-digit rate, has been significant, as two-thirds of those sales are tied to the non-residential market. This weakness has affected the overall performance of the company. We are trying to accelerate growth for Infiltrator and Allied products, and while Infiltrator is performing well, the slowdown in Allied is impacting us. We are actively managing material costs and continually working on pricing strategies for projects. We believe we are in a stable position. Cottrill, do you want to add anything?

No, I agree with everything Scott said. I think the material cost side of the house, we saw some of that in the first half, but we're going to see more of that in the second half as we go through the year as we look at it. That price cost dynamic is very much a factor of the demand world that we're in right now, as we've talked about. To your point about when do we see that kind of bottoming out and inverting kind of into a favorable perspective, that depends on our view on the end markets...

You mean for next year...

For next year, yeah...

It doesn't seem like there is additional price pressure. That's the stable aspect. The challenge lies in the current demand environment, making it harder to catch up. Additionally, we are experiencing some inflation pressures that are higher than anticipated, along with some mix pressures if I simplify the message. Is that accurate?

Yes. That's a good summary.

And then the second one would be just on the underlying demand. You touched on the pressures on the commercial side. When you think about the project activity, what your customers are saying, anything on that front log and or funnel side of things, has that changed at all? And maybe talk about the decision-making process that your clients and customers are facing, what gets them to maybe turn that spigot on, and how are you thinking about that recovery curve from here?

What prompts them to proceed? That's a great question. Regarding the funnel, our quoting activity reflects our demand, which has been inconsistent. We see fluctuations between good and bad regions, leading to a sideways trend in non-residential areas. However, residential and infrastructure sectors remain consistently positive. In non-residential, it remains choppy, while Craig's business and Infiltrator show steady order input, similar to previous market trends. When we engage with our customers about their decision-making, many indicate they’re awaiting this week’s outcomes. They want to see the election results and interest rates changes, despite the Fed's recent accommodating stance. We haven’t observed significant project work movement recently due to these factors, which warrants attention. Our distributors echo this sentiment, noting that things are still somewhat stalled, especially in certain areas.

Thank you. Really appreciate it.

All right.

Our next question comes from the line of Matthew Bouley with Barclays. Please go ahead.

Good morning, everyone. Thank you for your questions. I wanted to revisit the price-cost aspect. It's clear that prices are stable, and the main adjustment to the forecast relates to material cost inflation. First, could you explain how you typically manage price increases in the context of this level of inflation? Additionally, are you waiting for an improved demand environment to raise prices, and are you beginning to indicate to your distributors that price hikes could be expected soon? Any details on your plans to address this would be appreciated. Thank you.

Good morning, Matt. It's Scott Barbour. When we discuss pricing, it's essential to consider our value proposition. I covered several aspects of this in today's script and highlighted our goals for local projects, focusing on potential opportunities, project significance, size, competitors, and the shift from traditional materials. All of these factors influence our daily decision-making. Lately, we've seen material costs gradually rising, which poses challenges in a low-demand environment where it's tough to adjust prices accordingly. We're continuously assessing these daily decisions and actively working on the material side through procurement, recycling, and blending to alleviate as much of the impact as possible. Our factories have performed well, and transportation efficiency has helped mitigate some challenges. However, recovering from these rising material costs proves more challenging in a weak demand environment compared to periods of high demand. In such conditions, maintaining pricing power becomes more difficult.

Okay, so you're suggesting that if costs were to rise more rapidly, it would be easier for you to raise prices rather than experiencing a gradual increase, if I understand you correctly.

That is very true. That is very true. Yeah. Very true. I mean repeated many times in the history of the company, as you guys saw in previous high material inflation environments.

Yeah, got it. Okay. Thank you for that, Scott. And then secondly, on the manufacturing and transportation line, as you were just alluding to, I think I heard you say at the top, but I mean, part of the improvement in that line was driven by your prior investments. And obviously, you guys are still in the middle of this big capital investment cycle. So I'm just curious if you could kind of draw a line between some of the investments you have been making in your manufacturing facilities and in transportation and just sort of what the implications should be to that kind of manufacturing and transportation line going forward? Thank you.

Thank you for the question. First, I'd like to highlight the performance of the Infiltrator business. Following the acquisition, we made significant capital investments, and those have yielded impressive results. We’ve experienced better efficiency and throughput, along with new products that offer improved shot sizes and reduced material content. These changes are evident in the profitability numbers. Secondly, within the ADS pipe network, we've seen lower scrap rates, improved equipment uptime, enhanced throughput, and better safety performance. Our initial focus on certain plants within the ADS network has led to these positive developments, thanks to the engineering team's efforts. Looking ahead, I believe Craig and his team at Infiltrator will maintain high profit levels and continue to achieve improvements. We have additional investments in the pipeline that we’re already considering. As we further implement our investments across the pipe network, we expect to see consistent improvements there as well. The capital has been directed towards machine rebuilds, new tooling, and automated equipment. Additionally, over half of our trucking fleet has been updated, resulting in excellent safety performance and significant efficiency gains in terms of loads and miles per gallon. While these improvements may not match the financial impact of those in Infiltrator or the pipe network, they are still significant. We will continue to progress in this area, and although it has been a long journey, it will ultimately benefit the company.

Excellent. Well, thanks, Scott. Good luck, guys.

All right. Thanks. See you later, Matt.

Our next question comes from the line of Garik Shmois with Loop Capital. Please go ahead.

Hi, thanks. Could you provide more details about what you're experiencing this quarter, especially concerning the non-residential side? We understand the market has been unstable for a while, but were there any specific factors, aside from the storms, indicating that conditions were deteriorating as the quarter went on, or is it more generally the case? I'd appreciate any additional insight on how non-residential has evolved over the past few months.

The first thing that comes to mind regarding the non-residential sector is our Allied products, which primarily serve that market. We have experienced consistent growth in our Allied products, especially in the Stormtype storage product line. Recently, however, growth has plateaued. It’s not that we are losing jobs or that something is wrong there; it's just that deliveries have been delayed. We might quote, design, and receive orders, but we consistently see schedules pushed back. This indicates many projects have been completed, yet there is a reluctance to move forward. This uncertainty could potentially change now that the election is over, but our quote and design activity do not suggest anything significant is amiss. It simply shows that jobs are stalled and not progressing, with no issues related to our product line, our competitors, or pricing. The jobs simply aren't being released for shipment.

Okay. That makes sense. On the transportation cost piece, specifically, I think last quarter, you were repositioning product kind of across the country, and that was a bit of a headwind. It looks like that reversed nicely here. Just wanted to confirm that you're effectively through that process. And then just on inventories just broadly, how should we think about that? You mentioned they ticked up a little bit year-on-year here. Is there any concern for potential destocking in some of the channels you service?

On your question about destocking, there is no concern there. As for the transportation costs, we are preparing for this year. We discussed that in the fourth quarter of our fiscal year 2024 and how it has been affecting the first quarter. These costs are included in our inventory and appear on our balance sheet, impacting us in about three months. In the second quarter, we still faced some of these costs as a challenge in manufacturing and transportation, but they were offset by the strong performance of the manufacturing group during that quarter. Regarding when we expect to see a year-over-year improvement, we anticipate that in the second half of the year. We expect transportation to be positive compared to last year in this period. However, we predict that our manufacturing costs, particularly in terms of absorption, may be affected. Given the demand environment and our current inventory levels, we will adjust production slightly, which will have an absorption impact. Therefore, we expect manufacturing to be a bit unfavorable in the second half, and that is reflected in our guidance.

Okay. That all makes sense. Thanks, and best of luck.

Our next question comes from the line of Bryan Blair with Oppenheimer. Please go ahead.

Thank you. Good morning, everyone.

Hey, Bryan.

Good morning.

Scott, you just touched on information related to one of my questions. What type of decremental should we expect for the second half? We've been discussing the different components of the revised full-year bridge. Given the sudden storm impact and the associated adjustments, I would think that with the slower non-residential market and the $40 million storm impact, we may see significant decrementals. Additionally, with changes in production levels based on your inventory, I'm trying to understand that component and the revised bridge.

I would answer that by looking at it in two ways. From a phasing perspective, we typically see about 55% of our revenue in the first half and 45% in the second half. This is reflected in our guidance. Regarding decremental margins, when comparing the second half to the first half, we usually anticipate it to be about 300 to 400 basis points weaker in the second half due to seasonality, lower demand, and decreased revenue. Currently, I would suggest thinking of it as approximately 400 to 450 basis points for the decremental margin performance in the second half compared to the first half.

Okay. That's very helpful. Thank you. And then you mentioned, I think $40 million to $50 million in Orenco revenue for the remainder of fiscal '25. What should we think about in terms of normalized growth rates there given the combination of the assets and commercial synergies that you can bring to the deal? And then mid-teens margin, where should we expect that to go over time? Is there a concrete kind of synergy level that we can assume for years one, two, or any way to help us think about the path forward?

Yeah, I think right now, Bryan, we're not going to get into a lot of detail on that. I think what I would highlight for you though is we are so excited about this acquisition. And you know the Infiltrator for financial performance, leadership team, what they've been able to do. This is a strategic acquisition, and I couldn't emphasize how excited we are and what this team is going to be able to do. Is a mid-teens margin kind of where we want it to be? No. And you know when you look at our segment disclosure, Infiltrator's in the mid to high 50s from an adjusted gross margin perspective. So are we going to be able to get this business to there? No, unlikely based on where we are today. Are we going to be able to expand that margin significantly over the next two, three, four, five years? Yes, we will. So more to come on that as we think about next year's guide and so forth. But just suffice it to say, $40 million to $50 million of revenue is in our guide and mid-teens margin. So we thought that was a really appropriate level of disclosure to give you all, so that you could make sure you understood kind of how that was factored into our guide.

Okay. Understood. Thanks, again.

Yeah. The one thing I would add, I think we'll probably talk a lot about the Infiltrator's advanced treatment segment and what we're doing in that both organically and with acquisition at our Investor Day.

Our next question will come from the line of Trey Grooms with Stephens. Please go ahead.

Hi, everyone. This is Ethan Roberts on for Trey Grooms. Thanks for taking my question. First, I just wanted to ask, what are the implications of lower than expected commercial demand and continued difficulties in agriculture on price mix, especially since you guys called out last quarter that this quarter would have a higher percentage of agriculture sales?

The biggest impact on our non-residential segment is related to our Allied product, which is crucial for us. Its growth has stabilized, affecting our company's gross margin mix. Additionally, the non-residential market is significant for our pipe products, and we consistently pursue various projects there. We will begin to feel optimistic about the non-residential market once we see the architectural billing index rise above 50 and a recovery in non-residential starts. We also experienced a negative mix due to agriculture, which has performed better in the second half of the year compared to the first half, the latter being heavily affected by wet weather, especially in the upper Midwest. Our agricultural business had a solid fall season, but as that segment grows, it comprises a larger share of our business in September, October, and November, presenting challenges from a mix perspective. We managed to mitigate some negative mix impacts in July and August, but overall, it's not currently advantageous for us and is acting more as a headwind.

Yeah. But I would say...

We're managing pretty well through that.

I think so. And we just talked about elevated volumes in Q2, Q2, and we did see that, right? The volumes that we sold in Q2 were really on our expectations, which was a step-up, which is...

We're currently in the process of recovery. We have a new General Manager for our Ag business who is making great strides, and there is significant enthusiasm about the contributions he will make to our company.

Okay. Thank you. That's super helpful. And then just shifting gears real quick on Orenco. I know you said you'd give more detail in an upcoming Investor Day, but just high level, how are you thinking about the cross-sell opportunities? And it's a highly fragmented market as you pointed out, so any thoughts on additional bolt-on opportunities there?

After the acquisition, we spoke to many people, and the immediate cross-sell opportunity is to integrate Infiltrator septic tanks into Orenco systems, which was not possible before since the companies were competitors. Additionally, Orenco has a controls business, and many septic systems offer remote monitoring. Their control package enhances the Infiltrator product lineup, presenting opportunities there. Furthermore, one of Orenco's fastest-growing products is the Prelos liquid-only sewer system, which facilitates the implementation of centralized sewer systems in small rural areas. This system includes tanks and piping that pump wastewater to central treatment facilities, creating good prospects for us to introduce this product to the Infiltrator sales team and broaden its distribution.

Perfect. Thanks so much. I'll pass it on.

Our next question comes from the line of John Lovallo with UBS. Please go ahead.

Good morning, guys. Thanks for taking my questions. The first one is the moving pieces on the revenue side, you've talked about quite a bit here, but can you just help us maybe put a finer point on the walk from the prior implied second half EBITDA margin of around 31.5% to kind of the implied revised margin of closer to 28.5%. I mean, it seems like there's 30 to 40 bps from Orenco. It sounds like there's a little bit of headwind on the manufacturing side, some unfavorability there. But what are some of the other moving pieces if you could help just kind of bucket those?

Hey, John, it's Scott here. You mentioned two key drivers, but I believe the third one is related to material costs. We are experiencing manufacturing challenges and some issues with the mix in Allied products linked to non-residential weakness. Material costs have been steadily increasing on a year-over-year and sequential basis each month. We expect to see more of this cost reflected in the second half compared to the first half. When you consider this, it significantly affects our margin performance. Typically, the second half sees margins that are 300 to 400 basis points lower than the first half due to seasonality, and this time, it will likely be around 400 to 500 basis points lower due to these factors.

Okay. Understood. And then I know you generally want to give kind of full-year guidance as opposed to quarterly, but there are so many moving pieces here. Is there any way you could kind of help us frame maybe the cadence of revenue and margin in Q3 and Q4?

I think the only way, John, I could do that is just to just go back to bubble it up a little bit and just indicate that the way we see our revenue phased out typically is in that kind of 55%, 45% 1H, 2H as to how our revenue falls. And we see that falling about the same way. As to Q3 versus Q4, I really don't want to get into that just because of the impact of seasonality on those two quarters. So I think using that as what we're projecting and predicting for the second half as well as what we indicated we think is kind of that end market weakness and the weather impact that we expect, I think that's the way I would guide you to try to put that in there and model it out.

Okay. Thank you, Scott.

Our next question comes from the line of Ryan Connors with Northcoast Research Partners. Please go ahead. Ryan, you might be on mute.

Good morning.

Good morning.

I would like to discuss the competitive environment, as Mike has mentioned that pricing has generally remained strong through various economic cycles. Is there anything that has changed competitively that poses more challenges? Additionally, are there certain markets experiencing better pricing compared to others across the country? Any insights on competitive and geographic pricing would be appreciated.

Yeah, Ryan, I would say the competitive environment, Scott made some comments about the kind of demand in the non-residential being a little bit weaker and the difficulty to pass the price through as much as we would like to. I would say strategically, we're out there making those decisions day to day in certain geographies to pass the price, where you think you're able to get it. As far as the competitive environment, typically our more competitive geographic places tend to be the Northeast parts of the Midwest, Texas, and parts of the West. And I would say that is holding true today. So I wouldn't say there's some kind of big change or big sweep in how we look at that.

Okay. Regarding the substitution, one thing that hasn't been highlighted much today is conversion. This has usually been a significant aspect of our narrative. Has the pricing we've implemented over the past few years reduced the gap with some substitutes, thereby affecting the conversion story and subsequently influencing pricing? Can you provide an update on the conversion aspect?

The conversion story continues to progress as it always has. It's very methodical. We still feel we are gaining 100 to 200 basis points of market share, largely driven by the HP product, which is polypropylene. We do not believe the pricing environment or the price increases we've experienced over the past three years have significantly negatively impacted our conversion story. We feel we have still been able to take share. The concrete pipe industry has faced similar inflationary pressures, such as increased input costs, labor costs, and transportation expenses, which have forced them to raise prices as well. Therefore, we believe the conversion story remains intact, and we do not feel it has hurt us in the long term over the past four to five years.

I would add that the residential and infrastructure growth is largely a conversion story. And those markets have been growing pretty well for us. Those are sales and go-to-market resources we started investing in four years ago, and they've really paid off for us.

Got it. Thanks for your time.

Thanks. Thank you.

Our next question comes from the line of David Tarantino with KeyBanc Capital Markets. Please go ahead.

Hey, good morning, everyone.

Good morning.

Just to follow-up on some of the longer-term margin commentary, a lot of good color on the near term, but we're still ahead of historical levels. So maybe could you touch on the sustainability of these higher margins longer-term, particularly relative to kind of all the price cost commentary and what offsets from investments you still have?

This is Scott Barbour. We are currently exceeding our long-term targets. We will present new financials at our Investor Day next calendar year. Progress does not follow a linear path; it tends to have its ups and downs, which we are experiencing now due to varying demand conditions and some short-term issues in the materials market. We are making significant investments in our engineering center, material science, and various recycling initiatives that we believe will have a long-term positive impact. If your question is whether we will revert to the previous guidance from our 2022 Investor Day, I don't believe that's the case. We will outline a plan that continues to advance the company positively in the long term.

Okay, great. That's helpful. And then just a quick one on the CapEx outlook. It looks like we're still running at a higher level, but could you give us some color around the change here? Is it just timing of projects? And then maybe on capital allocation following Orenco, should we expect you to return to share buyback levels you were previously running at?

So, CapEx is a timing thing on a couple of bigger projects. And we will remain at elevated CapEx versus historical there. Probably this $250 million is not a bad number. We might go above and below that a bit, but we're going to invest in good projects in the company. And then share buyback, we're always looking at cash on hand and what's going on in the market and what our particular thing looks like, how we return that, what our needs are and opportunities internally. So it's certainly in the mix for us is more share buyback. But that's all I'd like to say right now.

Great. Thanks for the time.

Thank you.

That concludes our question-and-answer session. And I will now turn the call back over to Scott Barbour for closing remarks.

Thank you for your questions and for the discussion today. We will continue to focus on what we do well by driving our Infiltrator and ADS businesses. We plan to engage deeply in the growing residential and infrastructure markets. We will maintain our efforts regarding our value proposition and the projects currently underway, especially in localized markets. Although the non-residential market may remain inconsistent, we believe it will stabilize over time. We are also working on the integration of Orenco, as these product lines, along with our sales teams and distribution, are significant in the advanced treatment sector, which we find promising and is performing well for us. We will push forward in the second half of the year. There are many cost reduction initiatives underway at ADS, but they will not deter us from achieving our long-term goals. Thank you very much, and I hope everyone has a good weekend.

That will conclude today's call. Thank you all for joining. You may now disconnect.