Advanced Drainage Systems [WMS] Conference call transcript for 2023 q3
2023-11-03 22:57:05
Fiscal: 2024 q2
Operator: Good morning, ladies and gentlemen and welcome to Advanced Drainage Systems Second Quarter of Fiscal Year 2024 Results Conference Call. My name is Christina and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] Thank you. 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.
Mike Higgins: Good morning, everyone. Thanks for joining us. Here today, 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, 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.
Scott Barbour: Thank you, Mike and good morning, everyone. Thank you all for joining us on today's call. As a pure-play water company focused on stormwater in the legacy ADS business and on-site septic wastewater, Infiltrator, we play a crucial role in developing sustainable water management solutions to protect and manage water, the world's most precious resource, safeguarding our environment and communities. Over the last several years, we have been experiencing a secular trend whereby large scale, water-related climate events are increasing in frequency, duration and intensity. What was once a 100-year storm event is now happening far more often. In the second quarter alone, we saw severe storms and flooding impact the eastern half of the United States, as well as a hurricane in the Southeast. These severe water events caused billions of dollars in physical damage and asset destruction while also displacing people and disrupting businesses, degrading quality of life in communities. Stormwater infrastructure in the United States is often inadequate to accommodate such large quantities of water in very short time periods, which poses a critical challenge as these events become more common. At ADS, we engineer solutions to mitigate the impact of these water-related climate events for the millions of people affected, building resilient communities in the face of changing weather patterns, whether it be flood mitigation, nitrogen removal, water quality improvement or water conservation, we remain focused on the ADS brand promise. Our region is water, by providing clean management – water management solutions to communities and delivering unparalleled service to customers. The secular trend of larger and more frequent water events, combined with the success of our conversion strategy, gives us confidence in the future of ADS and the investments we are making in the business to drive growth and profitability over the long-term. This morning, we announced the construction of a new manufacturing facility in Lake Wales, Florida, which will break ground in 2024. Florida is the second largest state for overall construction spending and remains a priority state for the company, built on a 100-acre plot of land, this new state-of-the-art facility is designed for the future workforce, promoting safety, efficient flow of materials and traffic and incorporating the most advanced automation technology for manufacturing corrugated thermoplastic pipe. This facility will complement the two existing manufacturing facilities we have located in Winter Garden and Sebring, helping the company to meet current and future customer demand and giving us the flexibility to expand as we continue to penetrate this market through our conversion strategy and superior go-to-market execution. Since the Florida DOT approved the use of corrugated thermoplastic pipe for stormwater in 2014, we have executed well on conversion and growth, increasing the ADS pipe sales in the state by over 6x. The Lake Wales investment will help us further penetrate the attractive Florida market as well as open capacity in the Southeastern United States, where there are large and attractive markets like Georgia, the Carolinas and Virginia. This Florida playbook is also the foundation for our conversion strategy in Texas, where we intend to capitalize on the November 2022 Texas DOT approval of corrugated thermoplastic pipe for use in infrastructure projects, accelerating the growth in this important market. Similar to Florida, the public approval in Texas comes on the back of an already strong business foundation and we expect this to serve as a force multiplier for conversion and growth over time. We are also investing in an engineering and technology center in Hilliard, Ohio, which will be the world's most advanced stormwater engineering, research and development facility. Construction is well underway and remains on track for completion in 2024. This facility will bring product design, material science and manufacturing technology under one roof, which will increase our pace of innovation and importantly, help us incorporate more recycled material into our products. This facility plays a key role in enabling ADS to meet our goal to consume 1 billion pounds of recycled material annually by fiscal 2032. In September, we issued the fiscal 2023 sustainability report and I encourage you to go to our website to read it. There's a lot of important information in this report on the progress we have made on the sustainability front. This report also aligns to the United Nations' Sustainable Development Goals, as ADS became a signatory to the UN Global Compact in August. Now moving to the second quarter results. We saw better-than-expected performance in the Infiltrator business and Allied Products portfolio continue in the second quarter. Despite domestic demand headwinds from higher interest rates, credit tightening and economic uncertainty, demand and pricing for the ADS pipe portfolio continued to perform in line with expectations. While non-residential and residential market weakness continued in the second quarter, infrastructure activity remained consistent overall. And we are starting to see pickup on locally funded projects such as those at the municipal and county level as well in airport activity. From a margin perspective, we once again demonstrated the resilience of the business model through the 180-basis point expansion in adjusted EBITDA margin to 31.6%, despite a lower demand environment. This marks the seventh quarter in a row of year-over-year margin expansion. The margin performance this quarter reflected – benefited from sales mix and previous investments in the business including automation, more efficient production lines and tooling, effective management of price/cost and continuous improvement within the operations. Transportation costs are trending favorably but the slow demand environment is resulting in higher manufacturing cost driven by under absorption of fixed costs as well as an increase in manufacturing engineering personnel that execute the capital investments. This morning, we updated our guidance to reflect the better-than-expected demand in margin performance in the Infiltrator business and Allied Products portfolio in the first half of the year. Demand and price for the pipe business remained unchanged from previous guidance and we expect demand in the second half of the year to remain consistent with the plan we laid out in May. We will continue to pursue growth opportunities through new products, attractive markets and partnerships, building out our portfolio and executing well so we can service customers' needs and enable communities to solve their stormwater and on-site septic wastewater issues. One thing is certain, the demand for stormwater and on-site septic wastewater products will persist and the secular tailwinds for water management will only increase. In summary, we had a solid first half of fiscal 2024. We feel confident in our ability to deliver on our commitments this year, expanding margins despite the slow demand environment. ADS' value proposition, solutions package, conversion strategy and unique sustainability position in water and recycling remain highly relevant and we are committed to being a leader in sustainable water management solutions. We will continue to manage cost and production but importantly, we are managing this business for the eventual recovery in the residential and nonresidential end markets where we look to continue to gain share due to superior products, capabilities and commitment to service at both ADS and Infiltrator. With that, I will turn the call over to Scott Cottrill to further discuss our financial results.
Scott Cottrill: Thank you, Scott. In the second quarter, we reported revenue of $780 million, a decrease of 12%, primarily due to lower volume. Adjusted EBITDA was $246 million, a decrease of 6%. We were able to partially offset the decrease in sales volume with favorable price/cost management. The team has done an excellent job managing pricing on a local basis and results in the second quarter were in line with expectations. Material costs were favorable year-over-year in the quarter, though we expect price/cost favorability to flatten out in the second half of the year. In addition, this quarter, we continued to see higher manufacturing costs year-over-year, primarily due to lower absorption of fixed costs as well as the increased investments we have made in engineering, quality and safety. On Slide 8, we present free cash flow. We generated $376 million of free cash flow in the first half of fiscal 2024 compared to $361 million in the prior year, an increase of 4%. Year-to-date, working capital management has resulted in better conversion adjusted – of adjusted EBITDA to cash flow from operations. Capital spending increased 9% to $83 million in the first half of fiscal 2024, as we continue to make investments to increase automation, grow manufacturing and recycling capacity and increase productivity as well as build our new world-class engineering and technology center, here in Hilliard, Ohio. Our first priority for capital deployment remains investing organically in the business, which we view as the lowest risk, highest return use of capital. We continue to expect to spend between $200 million and $225 million on capital expenditures this year, inclusive of this year's initial spending for the new manufacturing facility in Florida, announced earlier today. Our second priority is acquisitions that are close to the core while being open to adjacencies that will provide for future platforms for consistent growth as well as expansion of our addressable markets. Third, we will continue to buy back shares under the current share repurchase program. In the first half of the year, we repurchased 1 million shares for approximately $102 million, leaving $316 million remaining under the existing authorization at the end of the second quarter. Year-to-date adjusted earnings per diluted share decreased 6% to $3.78. Importantly, the share buyback program has resulted in 7% fewer shares outstanding compared to last year, partially offsetting the impact of lower net income on earnings per share. And lastly, we remain committed to the quarterly dividend paid to shareholders of $0.14 per quarter, a 17% increase versus last year. Moving onto Slide 9, we present our updated fiscal 2024 guidance ranges. We raised the bottom of the revenue guidance, which is now expected to be between $2.7 billion and $2.8 billion. We also increased the adjusted EBITDA guidance, which is now expected to be in the range of $800 million to $850 million. Today's updated guidance is driven by the better-than-expected demand and margin performance in the first half of the year. Our second half sales expectations remain unchanged and we continue to expect revenue to be roughly flat to down 10%, on a year-over-year basis. We expect normal seasonal patterns with 55% to 60% of revenue coming in the first half of this year and 40% to 45% coming in the second half. We believe the implied second half margins and our revised guidance are prudent given the challenging end market demand that we have been discussing throughout the year due to the higher interest rate environment as well as tighter lending standards. The revised guidance also includes the impact of accelerating certain customer service and order management initiatives into the second half of this year, given our better-than-expected results year-to-date, further strengthening our position as a supplier of choice, both now and into the future. We remain focused on executing on our plan and investing in the business for long-term growth, margin expansion and free cash flow generation. With that, I will open the call for questions. Operator, please open the line.
Operator: Thank you. [Operator Instructions] Your first question comes from the line of Michael Halloran with Baird. Your line is open.
Unidentified Analyst: Hey, good morning, everybody. You've got Paz [ph] on for Mike. Quick one for you. If we take a look at your residential performance, can we maybe parse out what you're seeing across legacy pipe and Infiltrator? I know that you said Infiltrator is performing a little bit ahead of expectations but can you maybe parse out what you're seeing from a fundamental demand perspective, given that they sit a little bit different places in the build cycle?
Scott Barbour: Yes. This is Scott Barbour. So we would tell you that Infiltrator is stronger than in that latter half of the build cycle and I think they're benefiting from kind of completions of homes catching up with starts here over the last six months, let's say, because they've had a very strong first half relative to expectations. And I think we've probably got the right mix geographically and home type there. On the front end, that land acquisition piece where the pipe business plays is weaker for sure. And we really haven't seen it pick up. In addition, in that residential, I think Mike Higgins has buried the multifamily, which has not been very, very good either. So we're really pleased with how the Infiltrator business has unfolded this year. And they've done a great job of managing their cost, being ready for this better-than-expected demand. They're still down year-over-year but it's a lot better than we thought it was going to be. And I was there – we were there two weeks ago. And many of you went to the Building 7 where we have the new equipment and automation and it was just awesome, how that facility is performing.
Unidentified Analyst: Yes. Thank you. That's super helpful color. Maybe digging a little bit deeper on the automation investments. Can you maybe remind us the varying degrees of automation across the different facilities, how much room there is to go? And maybe kind of remind us on some of the level of sophistication, just so we can maybe get an idea of maybe the opportunity set?
Scott Barbour: Yes. There is a long way to go. And if you think about just Infiltrator, I mean, our most – Building 7, what do we have three or four buildings down there that are doing production, a couple of buildings doing material handling and warehousing but kind of really – two of those facilities are really automated. The Building 7 that you all saw highly, highly automated, not quite as much in the other building. And then the initial building that we have down there, not very automated at all. And then through our pipe factories, big, big network. We have some good automation projects really in flight, well in flight and operating, I would call it, three facilities with the maxi coiler and then the other two with the end-of-line automation. So there's a long way to go there. We announced today, the Lake Wales, we will use our best ideas, the way we're thinking about things for the future in that facility from an automation standpoint because we believe that, that's the manufacturing workforce of the future and this will dictate really how much you can make or the pounds that you can produce in those kind of facilities will be your level of automation because you're not going to be able to get the labor that you once were able to get in many of these communities.
Mike Higgins: Hi Paz, this is Mike Higgins. I think another way to think about it is, it's still pretty immature on the ADS side. So lots of opportunity to go there, a much broader network. And then on the Infiltrator campus, where maybe the kind of heavy lift initial kind of automation is in place in a lot of spots and their focus is move to, okay, how can we automate further the downstream activities to mitigate those challenges around hiring and then also to eliminate tasks that might provide a safety risk and make those roles and those jobs a lot safer.
Unidentified Analyst: Yes, fair. I’ll leave it there and pass it on.
Scott Barbour: All right.
Operator: And your next question comes from the line of Matthew Bouley with Barclays. Your line is open.
Matthew Bouley: Hey, good morning, everyone. Thank you for taking the questions. So maybe picking up on where Scott C. left off at the end of the prepared remarks around the margins in the second half, I think you're guiding to something like 25% EBITDA margins in the second half after you did 34% in the first half. So obviously, that's a bit of a larger first half to second half margin decline than is normal for ADS. So I think you mentioned there might be some accelerating investments that you're looking at, perhaps building in some conservatism. Maybe you can just kind of touch on the bridge there and sort of what would lead to that larger-than-normal decline into the second half? Thank you.
Scott Cottrill: Yes, Matt, it's Scott here. You nailed two of the biggest ones, right. It's being prudent with our end market guidance, given kind of what we see out there. I think on the gross margin side of the house, you'll kind of see relatively flat performance as you look at the guide, to what we're used to seeing in that 1H, 2H degradation, the SG&A piece of this that talks to the investments we're making in engineering, customer service, order execution, we are taking advantage of a better-than-expected year to pull some of those investments forward. So those will come through SG&A. So you will see some of that headwind on a margin deterioration. You are absolutely correct. That 1H, 2H degradation is greater than what we normally historically experience and those are the three key drivers of that.
Matthew Bouley: Got it. Okay. That's perfect. Thank you for that. And secondly, price/cost, obviously, was positive again in the quarter, wanted to pick up on some of your comments that you said a few times that price is performing in line with expectations. So just kind of wanted to unpack a little – that a little bit. What were those expectations? How is price performing within that price/cost bucket? And are you finding opportunities to perhaps utilize price adjustments in any regions to perhaps win conversion to your products? Thank you.
Scott Cottrill: Yes. I mean, it's a local game, as we keep talking that and as you know. So the team has done a great job. We talked about holding onto the majority, vast majority of the pricing that we've gotten into the market over the last couple of years. Lot of drivers for why ADS is able to do that but what we're seeing is absolutely a realization of what we talked about. We never talked about holding onto all of it, obviously, need to be aware of competitive environments, geographical issues, all of those items come into play. But we talked about holding onto the vast majority. We are holding onto the vast majority. That will continue. And obviously, we've got the nice – resin being lower on a year-over-year basis, which is, as you saw in our EBITDA bridge that we provided, it gives us a nice little acceleration of our performance, both on the margin as well as the EBITDA growth.
Matthew Bouley: Great, all right, guys. Good luck.
Scott Cottrill: Thanks Matt.
Operator: And your next question comes from the line of Garik Shmois with Loop Capital. Your line is open.
Garik Shmois: Hi, thanks for taking our question. Just higher level, just wondering on the non-res side, how bidding on projects and how your backlog was tracking over the course of the quarter.
Mike Higgins: Yes. So I had a little bit of a hard time hearing you there, Garik but I think you talked about kind of backlog and project activity in the nonresidential end markets. I would say, steady, right. It's a challenging non-residential end market. There’s pockets of different types of projects but we’ve seen pretty good activity on but I would say kind of the backlog is steady. Order activity through the quarter was good. We didn’t see it deteriorate further. But with that said, we still have another six months of the year that’s left. And I think everybody is well aware of the challenges that exist around non-residential with higher interest rates, tightening credit standards and dug in, just general concern about kind of strength of the economy moving forward. But I think we feel good with where we are in that space. Obviously, it’s, again, very local and very geographic. So you see kind of pockets of strength and pockets of resilience and then you see pockets that might be a little weaker. But it was encouraging that some of the geographies we saw weaker in the first quarter, specifically some of the states out west have seen improved performance as we moved through Q2.
Garik Shmois: Great. No, thanks for that. Just wanted to follow up on the planned kind of capacity in Florida. I was wondering if you could provide a little bit more detail around how much incremental capacity does that represent? Is it going to be displacing any older capacity or is this all purely incremental? And then just maybe just the timing around the project, just given some of the macro headwinds and recognizing it’s going to take some time for the facility to come online but just curious as to why now.
Scott Barbour: So this is Scott Barbour. Couple of things. One, it will not displace existing facilities. We have two really high-performing facilities in Winter Garden, Florida and Sebring, Florida that are doing a super job servicing that market, which is still a very, very strong market for us across all of our segments. So it is truly incremental capacity for us in that state, particularly around the work that is growing really fast in the DOT work and the residential work and our polypropylene pipe which is our highest performing tip of the spear pipe. We’re not going to disclose kind of number of lines or how many pounds we’re going to make or anything like that. At this point, we’re going to break ground early next year. We’re closing on the property now. We’ve been working on this for some time and we had to move through the different stages of kind of getting prepared to announce it. We’re very excited about this. We need it in this region. It’s a very strong region for us, as we’ve been talking about for – I’ve been here six years now and I think we’ve been talking about this since the very beginning of how important the crescent is or that Southeast United States in these priority states and we’ve done a great job of growing there. We were 6x larger in Florida than we were 10 years ago, when we got the massive approval for our pipe products to be installed in public works down there. And so we’ve done a good job in our existing facilities, meeting that demand but we know that’s going to get better because we still understand we have room to grow in terms of penetration. And I would expect this capacity to start to come online in 2025, calendar 2025.
Garik Shmois: Understood. Thanks for all that. And I’ll pass it on.
Operator: Your next question…
Scott Barbour: So sometimes you have to – no, go ahead.
Operator: Go ahead, sir.
Scott Barbour: So sometimes you have to invest now in periods like this, which we are doing to be ready for when these markets recover. As the market recovers, it’s too late. And I just – we were talking about Infiltrator a little earlier. Right after we bought Infiltrator in 2019, we approved within weeks, I think it was $40 million or $60 million of capital, a lot of capital, which was all incremental, people were worried about the residential market and all that kind of stuff and we needed that capacity over the last two or three years. And now that capacity is going full bore at great cost and that’s the performance you see there. So I just bring that up because, yes, times are a little uncertain. There’s no doubt about it. But we have the capacity to continue to invest this capital to be ready for that upturn. And I think that’s what – one of the nice characteristics about the company, is we’ve been able to develop this really good cash flow and can go deploy that capital. So as we think about this Florida investment, this Infiltrator investment we made right after the acquisition, is kind of how we’re thinking about it. To be ready for the upturn, to be ready for these next legs of penetration gain, to be ready for these next legs of market upturn. So go ahead with the question, please.
Operator: And your next question comes from the line of Joe Ahlersmeyer from Deutsche Bank. Your line is open.
Joe Ahlersmeyer: Hey, everybody. Thanks for taking the question. I’d like to talk about long-term profitability in the context of the EBITDA bridge that we’re seeing today, hearing you talk about sort of net neutral price/cost in the back half, seems to me like probably the positives and negatives have reduced in magnitude, meaning you’re likely getting less deflation as we move through here but there’s also not a major giveback on price. And so moving into next year, we shouldn’t really assume that, that changes much necessarily. And then on the investment side, in manufacturing and the under-absorption there, that seems to me like something that – part of that is temporary as part of this investment but also if the end markets are improving, you would get a better incrementals on volume through that manufacturing line. So I’m just trying to model how you would get back down to 28% to 29% long-term EBITDA margins, when in a year like this, you’re guiding to nearly 30% at the high-end.
Scott Cottrill: Joe, it’s Scott here. So we’re not going to get into talking fiscal 2025 or longer. I will tell you, though, the performance that we’ve had in the year-to-date through the first six months, absolutely exceeding our expectations, as Scott talked about during the prepared remarks. The EBITDA bridge is presented and shown for a reason, right? It shows you all the key drivers that we have. And as you look at that, you’re right in looking at your assumption, management’s got our own view of it and we’ll share that when the time is right. But what does that volume picture look like as we turn the corner into next year. Price/cost, this company does, I don’t know if anybody does a better job at managing price/cost than what ADS does. So we’ll continue to look at that. And anything that you assume on the volume side that comes back whenever you assume it in the cycle or a year, then you get some really nice, fixed cost absorption that comes to that manufacturing line. And we’ll always manage our SG&A cost to make sure that we’re being competitive. To Scott’s point, it’s getting the capacity where it needs to be during kind of a downturn. It’s also getting more efficient, more competitive when we come out of it as well, which is, what you heard us talk about related to customer service, order execution and so forth. So again, not going to get into 2025. We did at the Investor Day, give 28% to 29% margins as kind of a three-year look as to where at the end of fiscal 2025, we expect to get. We’ll obviously update that guide as we come out with guide related to next year in the May time frame, like we always do. But again, it doesn’t stop us from executing and delivering as much as we can based on the environment that’s in front of us.
Joe Ahlersmeyer: Yes. I agree with you on the price/cost. I think the numbers don’t lie there. Maybe then back to fiscal 2024, what maybe is included at the high-end of the sales range for residential. We’ve heard the builders talking about development spend. Just wondering what your assumptions are within your guide there for when you might see that, if it’s not in fiscal 2024, is it the early part of 2025, because it seems like all signs point to increased land development spend into next year?
Mike Higgins: Yes. Joe, Mike Higgins. I think with regards to the residential, this kind of move or the positive optimism that the builders have been talking about further development, that’s probably an FY2025 impact for us. That’s not going to happen in FY2024. As they kind of ramp and start to develop more land for more communities, more subdivisions, we would expect to see that sometime in the next fiscal year but not really counting on any of that for FY2024.
Scott Cottrill: Yes, I think that goes back to Scott’s comment on what we’re seeing in Infiltrator on the completion side. A lot of focus right now on getting caught up for some of the backlog from the starts over the last couple of years and focusing on completions right now is what we’re seeing versus land acquisition, land development and starts.
Joe Ahlersmeyer: All very encouraging. Thanks everyone.
Operator: Your next question comes from the line of John Lovallo with UBS. Your line is open.
John Lovallo: Good morning, guys. Thank you for taking my questions. First one on free cash flow conversion. I mean from EBITDA, it’s running at around 70%, 71%, I think, year-to-date, which is solid. I mean how are you thinking about cash flow conversion in the second half of the year. And then as we move out into next year, how should we be thinking about sort of the incremental CapEx from some of these initiatives that you guys announced today.
Scott Cottrill: Yes. Well, cash flow from operations is absolutely where we start, when we look at it. Obviously, it starts with EBITDA but working capital management is the big driver there, John. And so I would say right now, as we look at it, we target a 20% working cap as part of sales, as a percent of sales. We’ll continue to look at that. Right now, we’re sub 18% year-to-date. So again, we’ll look at that and see where we need to be. We like where we’re at inventory-wise, given this lower demand environment. We’ve done a great job looking at our variable costs, getting our labor where it needs to be, getting our inventories where it needs to be. So I think we’ve done a really good job of getting ourselves where we needed to be. And you see that coming through the working capital, right? The receivables come off, the inventory is a great driver, a big driver of that working capital improvement and cash year-over-year. So those are the key drivers in that. I would say, right now, we focus more on the free cash flow to EBITDA from a conversion perspective and we always kind of target a 50% or greater, is the way we look at it. That ties to your next part of your question on the CapEx side, $200 million to $225 million this year, does include the engineering technology center. It does include some initial spending on the Lake Wales, Florida manufacturing facility. You’ll see more of the Lake Wales facility, obviously coming in fiscal 2025. But we’ve consistently been talking about the fact that this heightened level of CapEx versus what we previously spent is going to be around for at least the next couple of years, as we use the balance sheet, as we use our leverage and liquidity to focus on what we believe is the lowest risk, highest return use of that capital. It’s on our footprint. It’s on productivity. It’s also on innovation and that’s on engineering technology center. So again, you’ll see elevated CapEx spend. It will kind of toggle a little bit toward the Lake Wales facility from a magnitude mix perspective. But you’ll see a lot still on that productivity, engineering and innovation side of the house as well.
John Lovallo: That’s good color. I appreciate it. And then I guess maybe zoning here on the non-resi business. Curious what you’re seeing in sort of that core low-rise horizontal type projects? Are those still pretty soft? And then I guess, conversely, on the institutional business or the non-spec side of the non-resi side, is that still pretty solid?
Mike Higgins: Yes. John, Mike Higgins. What you said is true. So things that are kind of, as we said, kind of more speculative in nature, I think remain challenged and you see things getting pushed to the right. Institutional, which we would consider schools and other educational facilities and hospitals and things of that nature, I would say that’s been pretty resilient and that’s because a lot of that funding that typically goes to build those projects is more stable, right? It’s tax based, it’s bond based. So I think we’ve seen that become very resilient. And then, again, things that are – we described as built-for-purpose, our engineering and technology center, things that are financed off people’s balance sheets and they’re not going to the market for financing. Those continue to move forward. But again, the bulk of what we sell into is in that kind of general-purpose commercial properties. So as we’ve said before and around some of these mega projects we do see activity. We’re bidding. We’re identifying projects, chasing specifications, shipping product on several of those right now.
Scott Barbour: Yes, right now.
Mike Higgins: Yes. But also there’s been news obviously out there that some of these announced projects or investments are being paused and getting pushed to the right. So I still – like we say, it’s there. We’re battling through the non-res market, right? We’re doing what we need to do and that’s kind of be present in market, have good project knowledge, get product specified and take market share from traditional materials. So we still feel we’re kind of performing better than market when you look at our results but it remains a battle out there day-to-day on the non-residential side.
Scott Barbour: I would say, particularly in the Allied Products, where – which, John, have a very – this is Scott Barbour, have a very high focus on the non-residential job pursuit and market for us. And we know how much the market is down and we’re having really great performance, both sales, profitability, order rate in our Allied Products. So I think that’s kind of the power of the go-to-market that we have. It’s really manifesting itself there.
John Lovallo: Got it. Thank you guys. Appreciate the color.
Operator: [Operator Instructions] And your next question comes from the line of Jeff Hammond with KeyBanc Capital Markets Inc. Your line is open.
David Tarantino: Good morning, guys. This is David Tarantino on for Jeff. Maybe to be clear on some of the pricing commentary, it seems like it’s coming in, in line. Can we dig into the gross margins in pipe a little bit? It seems like it took a little bit more of a step back relative to the balance of the businesses. Is there anything you can call out in the quarter and maybe moving forward?
Scott Cottrill: No, not really. I mean pipe was very much in line with what we thought coming into it, price/cost dynamic has laid out. We talked about the first quarter coming at a little bit better than what we had expected. Q2, largely in line. So really nothing unusual, a little bit of timing of some of the costs in phasing but there’s nothing in there at all related to any kind of trends or anything there that we’re concerned about at all.
David Tarantino: Great. And then maybe switching gears on – just on infrastructure. Obviously, smaller part of the business today but it appears you guys have somewhat of a renewed focus here. Can you maybe give us an update on what you’re seeing flow from the recent stimulus packages? I mean, it seems like much of this is yet to show through yet.
Mike Higgins: Yes. David, Mike Higgins. Like we said in the prepared comments, I think we’re starting to see some activity around that. I think what we’re seeing is more kind of at the local level, so think about counties or cities. We’ve seen good activity around airport projects as well. These things take time, right, to get the – the government has to get the infrastructure in place to kind of handle requests, disburse money, that money then has to get to these local agencies. They have to then prioritize projects they want to do, get those projects to market, to bid, get awarded and construction to start. So I think this is – I think we’ve said this many times, this infrastructure build is a long-term thing and you’re – not necessarily for us, we believe you’re not going to see one year or a specific year, see this huge boom or huge impact. But when you look back on it after five, seven, 10 years, cumulatively, it will add up to something significant.
David Tarantino: Great. Thank you.
Operator: And your next question comes from Trey Grooms with Stephens Inc. Your line is open.
Noah Merkousko: This is actually Noah Merkousko, on for Trey. Thanks for taking my questions. So first, I wanted to follow up on a question that was asked earlier on, I guess, thinking about sort of leverage on volume growth, how should we be thinking about incremental margins in a scenario where you do have volume growth and maybe price/cost is neutral?
Scott Cottrill: Yes. The best way to start or think about that, as we talk about incremental margins from volume alone being in that 30% to 40% range, I think that’s still kind of a good rule of thumb for right now. Obviously, as a starting point, like anything else, you then have to take a step back and what’s your assumption around pricing resin and some of the cost drivers. But again, 30% to 40% is what I would tell you to start with.
Noah Merkousko: Got it. That’s helpful.
Scott Cottrill: Again, the other I’d lay on top of that is, again, it’s a rule of thumb and it’s a starting point. But you got to be really careful when you look at kind of the segments, the timing, especially when you’re looking at volume coming on or volume coming off because that can sway that one way or the other as well. So again, start with 30% to 40% and then toggle it as you go.
Noah Merkousko: Understand. And then for my follow-up, as we look at the sort of end markets in the back half of the year, this year you’ve had both non-res and res down. But residential has been less severe and the comps get easier in the back half, so would you expect that dynamic to reverse where maybe non-res outperforms res, even though they’re probably or possible both down?
Mike Higgins: Well, I think what you see with the res kind of performance is the strength of that Infiltrator business in the first half of the year. I think, yes, you’re right. The comps should be easier in the back half of the year. I think, I don’t want to speculate by the end market. But I think what you’ve seen kind of Q1 and then look at Q2, there might be some compression there but I don’t think it’s going to be significant.
Scott Cottrill: Yes. The other color or context I would give you is, our guide assumes flat to down 10%. And so I think that would be the takeaway after being down 13% in the first half. So that assumes that the comps get a little bit easier as we go. And again, res and non-res are 85% of the business. So those would be the key drivers.
Noah Merkousko: All right. That all make sense. Thanks for taking my questions and good luck with the rest of the year.
Scott Cottrill: Thanks.
Operator: And there are no further questions at this time. I would like to turn the call back over to Scott Barbour.
Scott Barbour: Okay. Thank you very much and we appreciate the questions. I look forward to the follow-ups today. We feel very good about the quarter, feel good about raising our guidance. I think we’re being prudent in how we’re looking at the rest of the year. We announced a big investment today. I think we’ve been kind of foreshadowing this in the capital spending we’ve been talking about in this level for the next couple of years. We’re very excited about that, very excited about what’s going on for us in the Southeast and in Florida, in particular, in Texas. And we continue to look for the long-term and when these markets recover and be ready for that. So with that, we’ll sign off. We appreciate it. You all have a great day. Bye-bye.
Operator: And this concludes today’s conference call. You may now disconnect.
