Summary of Advanced Drainage Systems Conference Call Company Overview - **Company**: Advanced Drainage Systems (NYSE: WMS) - **Acquisition Target**: National Diversified Sales (NDS), a leader in residential stormwater and irrigation access boxes - **Transaction Value**: $1 billion in an all-cash transaction [3][12] Key Points of the Acquisition - **Strategic Fit**: The acquisition is seen as highly complementary to Advanced Drainage Systems' water management strategy, enhancing exposure to the residential segment and resilient applications such as residential repair and landscape irrigation [4][10] - **Financial Metrics**: The acquisition represents a valuation multiple of approximately 10 times NDS' adjusted EBITDA from the trailing 12 months ended June 30, 2025, inclusive of expected run-rate cost synergies [3][13] - **Expected Synergies**: Advanced Drainage Systems anticipates $25 million in annual cost synergies by year three post-acquisition [4][11] Growth and Diversification Strategy - **Historical Context**: In 2016, nearly 75% of Advanced Drainage Systems' revenue came from the pipe segment. The company has since diversified its product portfolio and geographic mix, aiming for higher-margin, more profitable business segments [6][10] - **Impact of Previous Acquisitions**: The acquisition of Infiltrator in 2019 significantly contributed to this diversification, doubling annual sales with a 17% sales growth CAGR [8] - **Future Projections**: Post-acquisition, approximately 50% of company revenues will come from higher growth and more profitable allied products and Infiltrator segments [6] Market Position and Opportunities - **Market Reach**: NDS generates nearly 90% of its sales in the United States, primarily operating in North America, and is recognized for its expertise in small-scale drain basins and irrigation solutions [5][10] - **Addressable Market**: The acquisition allows Advanced Drainage Systems to tap into the $1.5 billion landscape irrigation market, enhancing cross-selling opportunities and expanding its product offerings [10] Financial Outlook - **Pro Forma Revenue**: The combined entity is expected to have pro forma revenue exceeding $3 billion with an adjusted EBITDA margin of approximately 31% [11] - **Debt Management**: The acquisition will be funded through cash on hand and existing revolving credit facilities, with pro forma net debt expected to be 1.6 times at closing, within the targeted leverage range [12] Conclusion - **Integration Confidence**: Advanced Drainage Systems expresses confidence in its ability to integrate NDS effectively, leveraging proven integration capabilities to drive growth and profitability [14] - **Future Updates**: The transaction is expected to close in the first calendar quarter of 2026, pending regulatory approvals [14]

Financial Data and Key Metrics Changes - Sales for the fourth quarter reached $8.5 billion, a 6.9% increase year-over-year, driven by organic growth of 5.8% and acquisition growth of 1.1% [3][4][15] - Gross margin improved to 31.7%, up 70 basis points from the previous year [4][15] - Operating profit for the quarter was $972 million, reflecting a 13.4% increase year-over-year, with an operating margin of 11.4% [4][16] - Diluted EPS increased by 16.8% to $3.48 [4][16] - Full-year revenue was $30.8 billion, a 3.8% increase from the previous year, with operating profit of $2.84 billion, up 0.6% [8][9] Performance by Business Lines - HVAC revenue decreased slightly due to market conditions, but overall HVAC revenue for the year increased by 8% [10][11] - Waterworks revenue grew by 10% for the fiscal year, driven by diversification efforts [12] - Commercial mechanical revenue increased by 21%, while waterworks revenues rose by 15% [8][12] - Residential trade plumbing revenues decreased by 2% due to headwinds in new construction and ongoing PVC price deflation [7][10] Performance by Markets - In the U.S. market, net sales increased by 7.1%, with non-residential revenue growth of approximately 15% [6][16] - Residential end markets remained subdued, with flat revenue due to weakened new construction starts and soft demand in repair, maintenance, and improvement [6][10] - Canada saw net sales increase by 4.8%, with a 4.9% contribution from acquisitions [16] Company Strategy and Industry Competition - The company is focused on HVAC expansion, waterworks diversification, and large capital projects as key growth areas [11][23] - The merger of residential building and remodel with residential digital commerce into Ferguson Home aims to enhance customer experience and drive growth [8][14] - The company continues to consolidate fragmented markets through acquisitions, completing nine acquisitions in the fiscal year [19][20] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in medium-term market conditions despite current uncertainties, leveraging multi-year tailwinds in both residential and non-residential markets [5][23] - The company anticipates mid-single-digit revenue growth for calendar year 2025, with an operating margin range of 9.2% to 9.6% [22] - Management acknowledged challenges in the residential market, particularly in new construction and repair, maintenance, and improvement [28][81] Other Important Information - The company plans to change its fiscal year-end from July 31 to December 31, allowing for better focus during peak seasons [20][21] - The board declared a quarterly dividend of $0.83 per share, reflecting a 5% increase over the prior year [18] Q&A Session Summary Question: Growth and end market outlook - Analyst inquired about growth assumptions and market trends, particularly regarding residential and non-residential sectors [26] - Management noted that while residential markets are expected to remain weak, non-residential markets are showing resilience, particularly in large capital projects [27][28] Question: Non-residential bidding activity - Analyst asked for details on bidding activity and momentum in non-residential markets [41] - Management confirmed healthy backlogs across various segments, including commercial mechanical and waterworks, with strong bidding activity [42][44] Question: Pricing and margin expectations - Analyst sought clarification on pricing trends and gross margin expectations [45] - Management indicated that while pricing has improved, commodity prices remain volatile, and gross margins are expected to normalize [46][49] Question: Residential remodel demand - Analyst questioned the demand trends in the residential remodel market [71] - Management acknowledged continued pressure in the remodel market but noted positive growth in the higher-end segment [72] Question: New residential construction market - Analyst asked about trends in new residential construction and expectations for the second half of the year [80] - Management anticipated a slight decline in new residential construction activity but did not foresee a dramatic drop [81]

Financial Performance - Net sales increased by 43% to $7621 million in Q3 2025 compared to $7308 million in Q3 2024[16] - Adjusted operating profit rose by 61% to $715 million in Q3 2025 compared to $674 million in Q3 2024[16] - Adjusted diluted EPS increased by 78% to $250 in Q3 2025 compared to $232 in Q3 2024[16] - Adjusted EBITDA increased by 66% to $770 million in Q3 2025 compared to $722 million in Q3 2024[16] Segment Performance - US net sales increased by 45% to $7288 million in Q3 2025 compared to $6974 million in Q3 2024[19] - Canada net sales decreased slightly by 03% to $333 million in Q3 2025 compared to $334 million in Q3 2024[19] US End Markets - Residential net sales in the US increased by 2% in Q3 2025, representing 51% of US net sales[8] - Non-residential net sales in the US increased by 7% in Q3 2025, representing 49% of US net sales[8] Capital Allocation - Approximately $690 million was deployed in capital expenditures, dividends, acquisitions, and share repurchases during the quarter[6] - Share repurchases amounted to $251 million, and dividends totaled $166 million[6]