Advanced Drainage Systems, Inc. Q2 FY2026 Earnings Call

Good morning, ladies and gentlemen, and welcome to Advanced Drainage Systems Second Quarter of Fiscal Year 2026 Results Conference Call. My name is Kayla, and I will be your operator for today's call. I would now like to turn the presentation over to your host for today's call, Mr. Mike Higgins, Vice President of Corporate Strategy and Investor Relations. Sir, you may begin.

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

Thank you, Mike, and good morning, everyone. Thank you all for joining us on today's call. ADS executed well this quarter in spite of a challenging market environment, driving growth at strong margins. In the second quarter, we delivered 9% revenue growth and 17% growth in adjusted EBITDA. This performance reflects ADS' strategy to prioritize higher growth, higher-margin products, execute the material conversion strategy, and implement self-help initiatives to improve safety and productivity, all of which we executed exceptionally well this quarter. As we continue to deliver above-market growth and industry-leading margins, we remain committed to investing in both organic and inorganic growth to further strengthen our position as a leader in water management. Let me touch on a few highlights from this quarter. Allied Product sales increased 13% with double-digit growth in several key products, including the StormTech retention detention chambers, the Nyloplast catch basins, and the water quality products, all of which benefited from new products introduced over the last year. Infiltrator revenue increased 25%, including Orenco or 7% on an organic basis, driven by double-digit growth in both tanks and advanced treatment products launched in the last several years. Pipe revenue increased 1% with double-digit growth in the HP pipe products and construction applications being offset by weakness in the agriculture market. Importantly, pricing remains stable. From an end market perspective, 15% nonresidential sales growth was broad-based geographically across the U.S. Organic growth of 12% was driven by double-digit growth of Allied Products as well as the strong growth in HP pipe products. Inorganic results contributed 3% to the growth in the nonresidential market. The residential end market was more mixed as interest rates continue to weigh on single-family housing starts, existing home sales, and land development activity. For the second quarter in a row, we experienced strong Allied Product growth in the multifamily development activity. From a geographic lens, land development activity was better in the Atlantic Coast and South Central U.S., but the DIY channel we service through big box retailers remains challenged. Infiltrator's core residential business significantly outperformed the market and the continued outperformance by both companies gives us confidence that we have the right strategies, product portfolio, and go-to-market model to increase participation in the residential segment. Overall, we executed well in a challenging market environment and remain focused on driving profitable growth by executing these strategies, introducing new products and customer programs, pursuing acquisitions and investing capital for long-term growth. We continue to build on the strong foundation of the ADS story. We operate in highly attractive water segments supported by secular tailwinds from changing climate patterns as well as the increasing awareness of the societal value of proper storm water and on-site wastewater management, ultimately driving long-term demand for the company's products. ADS is the only company with solutions that extend throughout the entire storm water or on-site wastewater system on a national scale. Through our best-in-class portfolio of water management products, we deliver solutions that are safer, faster to install and lower cost through savings on labor and equipment. We were excited to announce an agreement to acquire NDS in September, a U.S. supplier of residential storm water and irrigation products that complement the existing ADS product portfolio. This acquisition presents another opportunity for us to grow our Allied Product portfolio with NDS' differentiated offerings alongside our core pipe products, ultimately providing a broader solution set to capture, convey, store, and treat storm water. We will continue to execute ADS' strategy to diversify and increase the mix of profitable Allied and Infiltrator products that enhance resiliency, support profitable growth, and enable ADS to pursue additional opportunities in water management products across a broader set of applications. The regulatory process remains ongoing, and we look forward to providing an update once available. The market outlook presented at the bottom left of Chart 4 remains unchanged. Overall, the residential and nonresidential end markets remain choppy. The recent outperformance is driven by strong execution by our employees, and I'm very proud of the team for their performance delivered in the challenging quarter. Their disciplined execution and commitment to continuous improvement resulted in our safest first half of the year on record, achieving a total recordable incident rate half of the industry average. This performance reflects our ongoing focus on safety and operational excellence, which are foundational elements of our sustainable growth strategy. When you stack our strengths, the scale, product portfolio, go-to-market strategy, and the ability to invest in our business, people, and industry growth, you see ADS as a powerful value proposition. In summary, we continue to execute effectively in a challenging environment. Our self-help operational initiatives continue to bear fruit as demonstrated by the 33.8% adjusted EBITDA margin reported today. We will continue to increase the capacity of existing production facilities and add new capacity in strategic areas to meet customer demand. We are also highly focused on service and delivery experience for our customers, leveraging the new digital tools across the platform. While we navigate the near-term environment, we do so with an eye towards the future. We remain firmly committed to our long-term vision, and we'll continue investing in the capabilities that will position us for future success. Overall, the long-term outlook for our business remains strong, supported by compelling secular tailwinds driving demand for water management solutions across North America.

Thanks, Scott. On Slide 5, we present our second quarter fiscal 2026 financial performance. Revenue increased 9% to $850 million, primarily due to the factors Scott mentioned. Importantly, we believe our results outpaced the end markets overall, demonstrating the resilience of the ADS business model. From a profitability perspective, we were very pleased with the 17% increase in adjusted EBITDA year-over-year and the resulting 33.8% adjusted EBITDA margin. A couple of things I feel are worth reiterating related to our strong performance during the quarter. First, we experienced strong growth in both our nonresidential and residential end markets. It is worth noting that the nonresidential end market also accounts for two-thirds of our Allied Product sales. In addition, we continued to see favorable price/cost performance in the quarter. Regarding manufacturing and transportation costs, we incurred incremental transportation costs related to the strong demand during the quarter as well as to reposition products around the network as a result of previously announced realignment actions. Regarding SG&A costs, the year-over-year increase was primarily driven by the acquisition of Orenco as well as higher sales-related costs. Again, it is important to highlight the company's performance and the resulting 33.8% margin in the quarter, demonstrating the resilience of the ADS business model. On Slide 6, we present our free cash flow. We generated $399 million of free cash flow year-to-date compared to $238 million in the prior year, primarily driven by increased profitability as well as better working capital performance and lower cash taxes. Of note, we expect the OBBBA to result in an incremental $30 million to $40 million of free cash flow this fiscal year than we had originally anticipated. Thoughtful capital allocation continues to be a key focus for the management team and our Board, given the strong cash generation of the company. We expect to spend approximately $200 million to $225 million for the full year. These investments will focus on innovation and new product development at our world-class engineering and technology center, increasing our recycling capacity, particularly in the Southeast, continued investments in customer service, productivity, and automation, as well as executing growth initiatives in certain key geographies. We ended the quarter with less than one turn of net leverage, or 0.7 turns to be exact, and over $1.4 billion in available liquidity, including $813 million of cash on hand. Our target leverage looking forward is approximately 2 turns. We plan to use a significant portion of the cash on hand for the proposed acquisition of NDS. As a reminder, ADS signed an agreement to purchase NDS in an all-cash transaction valued at $1 billion or $875 million net of tax benefits. This represents a valuation multiple of 10x NDS' adjusted EBITDA for the trailing 12 months ended June 30, 2025, inclusive of expected run rate cost synergies. This is a compelling acquisition given the highly complementary strategic fit, alignment with the ADS water management strategy, growth profile and additional exposure to the residential segment and resilient applications such as residential repair, remodel and the landscape irrigation markets. The company expects the acquisition to be accretive to adjusted earnings per share in the first year. And given ADS' proven integration capabilities, we expect to generate $25 million in expected annual cost synergies by year three. We expect to achieve additional upside from revenue synergies through cross-selling products and expanding market opportunities in new segments and applications. We look forward to identifying areas where we can enhance our collective capabilities and create new opportunities for customers. Moving on to Slide 7, we present our updated guidance ranges for fiscal 2026. Based on our performance in the first half of the year as well as current trends and backlog, we increased the revenue guidance by 2% at the midpoint to $2.945 billion. In addition, we increased the adjusted EBITDA guidance by 5% at the midpoint to $920 million. The updated guidance derives an adjusted EBITDA margin of approximately 31.2% or 60 basis points higher than fiscal 2025. Despite our second quarter performance, we see demand and market strength to be the largest risk in the second half of the year, especially given the impact of seasonality. We remain cautious about market demand in the current environment and have reflected such in our guidance. We remain focused on executing our long-term strategic plan to drive consistent long-term growth, margin expansion, and free cash flow generation. With that, I will open the call for questions. Operator, please open the line.

Our first question comes from Mike Halloran with Baird.

A couple of questions here. First question, maybe just how you see the end markets playing out in the back half of the year and what's embedded in your guidance. I certainly understand the unchanged end markets on a holistic basis. Does that assume normal sequentials from here? I know the original guidance assumes some deterioration in dynamics. Is that still part of the story? And then maybe just a comment on what inventory looks like in the channel.

Yes. So at the midpoint, Mike, when we look at 2H, we've basically implied a little bit of degradation on a year-over-year basis. Again, when you look at our first half performance organically, it was good, up low single digits. And again, really good conversion from the company on all levels, new products, as Scott mentioned, as well as geographies. So again, as I ended my comments in the prepared script, it's demand that we see as kind of the riskiest part of the rest of the fiscal year, and we've reflected such in our guide. So a little conservative on that end based on where Q2 was. But again, we feel that that's prudent right now.

The inventory piece?

This is Scott Barbour, Mike. I don't think we see anything unusual from an inventory standpoint, either in our customers' inventory or in our inventory. It's sized correctly for what we describe as tepid and uncertain demand. There’s some friction out there; this government shutdown isn’t helping. I think it creates a bit of uncertainty and friction. People are still waiting to see what ultimately happens with interest rates. However, I believe we are competing well and capturing more than our fair share in this market. This is due to our go-to-market model, our scale, our national footprint, and our broad portfolio of products at Infiltrator, which is positioned in the right geographies with the right product lines alongside the ADS side. We are being cautious and conservative regarding the demand side, knowing that the second half of the year presents the most uncertain demand environment due to weather and the focus on northern climates.

The other thing I'd highlight, Mike, is we've also highlighted our realignment activities as we look at the network and we optimize such. So again, really robust S&OP process, realignment activities to make sure that we're focusing on the right growth areas. So I would say the management team is focused in the right areas.

No, that makes sense. And you can certainly see the strong outperformance in the numbers. Maybe a similar question on the margin line. Just help me with the puts and takes in the back half of the year. I'm assuming there's an element of conservatism in how the margins move to the back half. But maybe walk through mix, how you're thinking about price/cost and just bridge a little bit to the back half of the year from the front half.

Yes. I would say price/cost, we'll start with that. That seems to be the topic everybody is the most interested in. But again, no degradation assumed in price/cost. So I think it's important to get that out of the way. The way we've kind of set our 2H guide or implied guide is very much driven by demand and the top line. And then we've kind of used our 30% to 40% incremental decremental margin approach, if you will, to look at what that might mean from an EBITDA perspective. Again, volume generated as we look through price cost, manufacturing, transportation, SG&A, nothing unusual in there or something unexpected that we need to highlight or should highlight, just demand driven.

And your next question comes from the line of Matthew Bouley with Barclays.

Really a similar line of question here around that second half guide to start off. Just to maybe clarify one piece of it. Basically, are you actually seeing any signs of slowing as we kind of move into, let's say, October, November? Or is this really just taking that kind of conservative outlook and uncertainty, government shutdown, et cetera, and so forth, like you said, and building that into guide. Just curious if you've actually seen anything that would suggest that kind of bigger slowdown in that second half.

This is Scott B, Matt. I want to say that we're taking a more cautious approach as we move into the second half. I believe we did very well in the second quarter. If there's an opportunity, we'll seize it. However, we are concerned about what I refer to as friction in the market. It's not overwhelmingly apparent everywhere, but we can detect a slowdown, especially regarding infrastructure. The government shutdown is not resulting in fewer quotes or orders, but it is creating some delays in shipments. While this isn't the largest part of our business, we are monitoring it closely. The government has been shut down for over 40 days, and they do have an impact on the economy. Therefore, we're a bit wary about demand. Additionally, regarding our costs and our spending choices or initiatives, we are confident that we have that well managed. We will put in the effort in the second half to continue this. Our main concern is that demand may be weak and inconsistent. This period from November to March tends to be our most volatile in terms of demand.

Okay. Perfect. That's perfect, and I appreciate the thoughts there. So then secondly, on residential, so the 9% growth, I guess, presumably, that's mostly organic, but curious if that's true. So I guess across ADS and Infiltrator. You touched on at the top that multifamily was up in Allied and lot development is kind of choppy around the country. I'm really just looking if you can expand a bit. I mean, it stands out in a tough residential backdrop to have that type of growth. So maybe you can kind of go through the individual pieces of your residential business and expand a little bit on kind of what's driving that growth.

Yes. So I'm going to add something then Mike can add something. So Craig Taylor from Infiltrator is here with us today, our Infiltrator President. But new products, the tank products that we tooled and launched in the last two, two and a half years, Craig, the advanced treatment products, the work that he and his team are doing with Orenco on profitability, all that stuff kind of read through nicely. The multifamily, where we have very good participation and particularly our Allied Products has done well. Mike, did you want to add something on residential?

Yes, I was going to mention that there was some contribution from Orenco in the quarter. However, if we exclude that, we observed positive organic growth at ADS and Infiltrator in the residential market. This is due to the new products and the programs we are developing with builders to enhance land development for single-family subdivisions. Additionally, as we noted in the first quarter, we've seen an uptick in multifamily activity across various regions, which is reflected in the sales of Allied Products that cater to the residential sector.

And your next question comes from the line of Jeff Hammond with KeyBanc Capital Markets.

So just to stay on the outgrowth because I think you're worried about demand, but your outgrowth has been quite exceptional. Just kind of the sustainability of the outgrowth into the second half? And then my other second half question is just how we should think about first half, second half margin step down on the seasonality factor, given that it seems like price/cost is moving much better in the right direction versus a year ago.

Jeff, Scott C here. So again, as we said before, I'll just reiterate it, it's very much a demand-driven outlook. Based on the choppiness, again, very encouraged by what we saw in Q2. If you look at the first half, however, that 5% of growth, 2% organic, 3% from Orenco. We're not seeing green shoots yet. So there's a lot of reason to be cautious and build such into our outlook. So it's demand-driven. When you look at the margin expectation off of that, as I said previously, it's more just looking at our 30% to 40% decremental margin historical kind of performance and putting it there. Price/cost stable, as I mentioned earlier, there's nothing falling off a cliff there for folks to be worried about. And if I look at manufacturing transportation, SG&A, is there any kind of large onetime thing in there or some trend that we need to be concerned about? No. So that's the way I would present it, demand-driven with a 30% to 40% decremental margin approach.

And your next question comes from the line of Matthew Bouley with Barclays.

Yes. Just to follow up with a question on the residential side. You mentioned some new products driving growth. Can you drill down a bit on how impactful those new products have been in your residential business?

Yes. The new products have been very impactful, particularly in Infiltrator, where we've seen strong demand with our new tanks and advanced treatment solutions. Additionally, our Allied Products have seen significant uptake, especially in the multifamily projects, which are gaining traction in various markets. The combination of innovative offerings and targeted marketing efforts has contributed to this growth. The execution of our conversion strategies with builders is also yielding positive results. Overall, these factors have not only driven revenue but have also positively influenced our market position.

And your next question comes from the line of John Lovallo with UBS.

The first one, maybe just following up on Matt's question on the residential side. I mean, builders have clearly pulled back on starts to rightsize inventory in certain markets, but community count continues to grow pretty nicely. And personally, we're fairly optimistic heading into next year. But the question is, how are you thinking about the residential builder business heading into the spring? And what are you hearing from the folks on the ground?

I don't think we're hearing much different from what you described, a bit of caution with a preference for price over speed. However, there’s still a significant opportunity for us to gain market share in those areas since our market share is much smaller compared to nonresidential sectors. This year, our builder programs promoting our conversion strategy and the ADS value proposition have shown promise. Geographically, regions like Texas and North Carolina are experiencing strong growth, while Florida was soft in the first quarter but saw flat sales in the second quarter, which is encouraging. Our aim is to always outperform the market, and we believe there are plenty of opportunities with the conversion strategy and Allied Products. Additionally, we see potential in the Infiltrator and Orenco opportunities we are promoting in that segment. We feel equipped to counter any underperformance in the market.

And your next question comes from the line of Garik Shmois with Loop Capital.

I wanted to ask on price cost in the back half. So I was wondering if you could speak to what you're seeing on the material cost side of the ledger. And then just on pricing, it's been stable sequentially for a number of quarters here. But just given maybe the more conservative demand outlook, should we expect any change to pricing?

Yes, Garik, this is Scott C. As I mentioned earlier, the outlook for the second half is driven by demand considerations. Price and cost remain largely stable, both in terms of materials and pricing. So I recommend incorporating that into your second-half expectations. Additionally, when I analyze the various components of gross profit and consider the factors that could impact margins, I don’t see any significant issues in SG&A that would raise concerns or indicate a negative trend.

Okay. And then just on the SG&A piece, it picked up a little bit in the second quarter. It sounds like that level of inflation shouldn't continue or just any way to contextualize SG&A in the second half?

Regarding SG&A, we noticed an increase due to the acquisition of Orenco, which is a higher SG&A company than our baseline. We incurred various costs associated with the transaction, as it requires investment to manage significant announcements like NDS. There are some accruals included in that area. We believe we have a strong handle on our SG&A spending, price costs, conversion, and transportation and logistics. We are confident in our current position and the progress we’ve made heading into the latter half of the year. I constantly remind the team that many of the improvements you observe stem from initiatives we began last year, focusing on our network, cost efficiency, and new product development. Although last year wasn't ideal, we kept investing in these areas, and our efforts have shown positive results. That’s the essence of effective management—investing for long-term success, and I believe we are executing that well at this time.

And your next question comes from the line of Collin Verron with DB.

I just wanted to follow up on price cost. I think last quarter, you indicated that price cost is expected to be neutral for the year. Can you just talk about what's coming in better than expected in the second quarter that got you that $30 million EBITDA tailwind?

Yes. Again, you're referring to the waterfall, the EBITDA bridge on a year-over-year basis. So again, pricing stable. We've been talking about sequentially as well as year-over-year. Resin cost, for sure, this year has been one of those items that's been good and something that we see sequentially flattening out on a procured basis. Again, we have really good line of sight to what's on our balance sheet and what's going to be coming off over the next two to three months. So something that we constantly put in front of us. But price cost is, again, one of those items that favorable to expectations coming into the year. And I'd say the team is managing it really well on both sides.

As well as mix. I think the things that have exceeded expectations are around the material cost, our ability to convert the product across the board, not just pipe, but in Infiltrator and our Allied Products, and then the things that we targeted for transportation and logistics, all that have exceeded our expectations as well as the mix and the organic growth of Infiltrator and the Allied Products over the last four or five months. And again, things we started a year ago kind of bearing down hard on.

That's really helpful color. And I guess you mentioned on the transportation cost side of things that there were some of this inventory shift due to the realignment. I guess, is this expected to be ongoing? It sounds like it is just because your second half guide is mostly volume-driven, but I just wanted to confirm that.

Let me take this one. So as demand might get stronger in one geography versus another or we announced the closure of a plant in the Northwest earlier in the calendar year, we had to move inventory to service our customers around that network. And we're going to do what it takes to do that. And our logistics people are executing extremely well. We have a lot of great programs around safety and the new equipment we've added in there that we have done, and we will continue to do that. And that's really what's strong there. I'm smiling at Cottrill because he's always busting on us on that. But that's what we're going to do. And I would add, because of our scale in these logistics capabilities, we can do that. We can move this stuff around because of the size, scale, and management of that fleet. So that's what you saw through there is just kind of peak a little bit. But fundamentally, the cost per unit are performing as we want. We just had to move some stuff around a little bit more than we anticipated.

And your next question comes from the line of Jeff Reive with RBC Capital Markets.

Appreciate all the color thus far. At WesTech this year, you had an impressive presence showcasing both Infiltrator and Orenco. It's pretty clear how complementary those businesses are. Now that you've owned it for about a year, could you talk about how the integration is progressing, synergy capture and where you see opportunities to drive growth or efficiencies?

I'm going to let Craig Taylor take that.

Yes. So the acquisition is going extremely well right now. We're starting to bring the products together that you saw at WesTech and expanding that to the Orenco dealers, too. They've seen more of our Infiltrator product, and it's helped them understand what we can contribute to the market for them. And on the synergies, it's on track. It's exceeding our expectations, too, on what we've been doing. The commercial portion takes a little bit longer as that's winding up right now on the synergies, but it's hitting on all other elements that we put together in the Board model and our expectations going forward.

Yes, it's gone very well.

Yes, I would add that what we've seen so far is earnings growing faster than sales, which is good, and the margins have improved as well. So I think we're tracking very well, like Craig said, on the operating efficiencies and the synergies and improving the margin performance of that business. Customers are really happy.

A lot of activity around that. That's a good question. We appreciate it. I also mentioned the safety performance has been very good out there in Oregon, and we've leaned in very hard and the team there has grabbed it. And that's been super good that we're glad to see. We reviewed a lot of this with our Board yesterday, the synergy plan, which is really doing nicely in that safety performance. So we're really happy. One year in, we couldn't be more pleased about where Craig and the team are with that acquisition.

That's really helpful. And just a follow-up on pricing. I believe your prior guide called for price down low single digits, volumes up low single digits. So just kind of given the up guidance range, have your assumptions for the remainder of the year shifted at all, either price or volume?

Not on pipe. No, that's what you're referring to. Honestly, the pipe is exactly what we expected. It fluctuates slightly by product line. We're very pleased with the strong growth of the HP product line. Overall, in terms of volume, pricing, mix, and costs, the material costs are somewhat better than we anticipated, as are the conversion costs. Demand and pricing in the market are almost precisely in line with our plans. Our team in the field is performing very well with those product lines and is effectively capturing opportunities in the Allied Products segment. Craig's team is excelling in the field. We are clearly focused on the right geographies, distribution, and product lines. Over the years, we've made strategic investments in certain geographies, including increasing our capacity and trucking capabilities, as well as introducing new advanced treatment products that Craig has developed, which are doing well. Both Infiltrator and ADS are thriving right now. We will continue to execute our plans and invest in the necessary personnel, processes, systems, and equipment to succeed.

And your next question comes from the line of Trey Grooms with Stephens.

Can you share more detail about the potential revenue synergies related to NDS? In your earlier conference call, you mentioned possible upsides from cross-selling and other opportunities. How do you view these potential synergies contributing to enhanced top line growth?

All right, Trey, I'll try to tackle this without stepping over any lines. This is Scott Barbour. Highly, highly complementary product line to our very bespoke catch basins that we call Nyloplast. NDS has, by far, the market-leading standard products, smaller in diameter than we do. And when we get plans that show kind of the whole waterworks installation on a nonresidential site, for instance, we see a lot of those products on there. And we think we will be able to package very effectively those kind of products. We run across a lot of opportunities for channel drains that they have a great product line in channel drains that we don't have today. And we think both our sales force will be able to kind of sell those products. We think in certain parts of the distribution, they're going to be able to sell more of our products, the pipe products. We think that their focus, particularly in turf and irrigation, which is kind of world-class, is going to be a strengthening of what we do, complementing and strengthening what we do at ADS. And on the waterworks side, we think we will complement and strengthen NDS. So those are the kinds of things that we're very excited about. And these products really exist in an installation side by side. So we're just going to get increased visibility on projects and jobs and opportunities that are going on in the market between our two sales groups and our relationships just deepen with the addition of NDS. We're super excited about working with that team out there. And that's probably about all I can say.

Okay. Well, that's pretty exciting. And I guess just another kind of higher level, thinking a little longer term. You guys are putting up some really nice margins. The price/cost equation has kind of been beating to death here, but you're executing well. You've made some headway organically, clearly. And notwithstanding or just kind of setting the NDS equation or acquisition aside here, is there any way or maybe any update on how we could be thinking about longer-term margin profile of the business given kind of some of these improvements you've made here even organically?

Go ahead, Scott C. This is a Scott C question.

I'll give you a couple of different ways to think about it. A, we love the DNA of the company, right? The Allied and Infiltrator parts of the business grow at a much faster clip than the pipe side of the business, and they have much larger adjusted gross margins. So we really like that. So we kind of margin and accrete up as we go over time. I would say as well, the new product introduction, the engineering technology center, the way that we deploy capital and capital allocation, really powerful. And you look over the last five to six years and kind of what we've done there and how that's led to where we are. I think those are all kind of key avenues there. I think you'll see more of our capital deployed in that innovation as well as a bigger mix of what we spend on the CapEx side in the Allied and the Infiltrator side of the house now that we've kind of caught up a little bit on the pipe side. Still some automation, productivity, and other investments we need to do there, but a lot of margin accretion opportunity, both on the productivity automation side of the house, new product introduction side of the house, the growth algorithm, if you will, as well as putting this balance sheet to work through accretive acquisitions as we move forward. I see all of those as kind of a trifecta, if you will, of how we not only grow the company but as well as accelerate that margin expansion as we go. So do we think that this ADS is a 20% to 25% EBITDA margin business? We don't. We see a lot of different reasons why we can continue to accrete that as we move forward.

And there are no further questions at this time. Scott Barbour, I turn the call back over to you.

Okay. Thank you very much, and we appreciate everyone being on the call today and the quality of the questions. We kind of anticipated a lot of questions around the second half like that. I'm sure we'll get more of them as we go forward. But a good quarter. Like I said earlier, this is a quarter that we really started on a year ago with all the things that we began to work on, understanding that the demand environment was going to be a little tepid. Those things we can control, we feel good about. We'll continue to work hard on those. And I think as the demand develops, we'll capture our fair share more, but we'll just have to see how it develops over time. So thank you very much, and you all have a good day.

This concludes today's conference call. You may now disconnect.