Printing Money With Plastic Pipes

Today, I'm looking at Advanced Drainage Systems (WMS). They are no stranger to the many farmers on this email list.

Quick context before we dive in:

• Manufactures those green-striped plastic pipes you see at every construction site along with a lot of drain tile used in agriculture

• Processes 540 million pounds of recycled plastic annually

• Generates 32% EBITDA margins in what would appear to be a commodity product

• Stock up 15x since 2014 IPO (vs 3x for S&P 500)

Why this matters for entrepreneurs

While AI has everyone captivated, ADS quietly built an empire through two decidedly old school advantages: scale and distribution.

Here's what's fascinating:

• Scale still wins: Operating 60+ manufacturing plants gives them 1-2% cost advantage competitors can't match

• Distribution dominates: 35 distribution centers create customer reach that no startup can replicate overnight

• Infrastructure is surprisingly recurring: Every building, road, and parking lot needs their products

The uncomfortable truth for tech founders (myself included)

We live in a world obsessed with network effects, viral loops, and AI automation. But ADS proves that old-school competitive advantages still drive profitability:

• Their "moat" isn't an algorithm - it's literally concrete plants you can't move

• Customer acquisition often happens through relationships built over decades, not growth hacking

• Switching costs can come from engineering specs just as easily as app stickiness

• Being the largest player in their industry unlocks hard-to-replicate purchasing power

I was unable to pull what percentage of their revenue comes from agriculture but here's a fun tailwind for them: Most farmers in corn and soybean growing areas will tell you that drain tile is their highest ROI investment. I'm guessing that fact plays a contributing factor to their surprisingly high profit margins. And that's a lesson in itself!

With that, I'll see you tomorrow.

Nick

TL;DR

• Advanced Drainage Systems (WMS) is America's largest plastic drainage pipe manufacturer, processing 540M pounds of recycled plastic annually

• Revenue declined from $3.1B peak (2023) to $2.9B (2024) but maintained fortress-level 32% EBITDA margins

• Dominates a $15B+ market through scale economies and distribution advantages across 64 plants and 35 distribution centers

• Stock trades at $10.4B market cap despite recent earnings misses

• Key takeaway: Scale and distribution are still powerful profit drivers even if the world his head-over-heels with tech and AI

The 30,000-Foot View

ADS manufactures the ubiquitous green-striped plastic pipes seen at construction sites nationwide. Their business model centers on four revenue streams: Pipe products (54%), Allied Products like fittings (23%), Infiltrator septic systems (16%), and International operations (7%).

Key stats:

• $11.4B market cap

• $2.9B trailing revenue

• 35%+ gross margins

• $510M net income (FY2024)

• 5,000+ employees.

They're classified as construction materials but operate in water management.

Company History

• 1966: Engineers Ron Martin and Marty Sixt start making plastic pipes in Ohio

• 2004: Joe Chlapaty becomes CEO, begins national expansion strategy

• July 2014: IPO on NYSE at $16/share, raising $232M for growth capital

• 2017: Scott Barbour takes CEO role, maintains expansion trajectory

• July 2019: $1.08B Infiltrator Water Technologies acquisition adds septic systems

• 2024: Opens $65M Engineering Center, announces Orenco Systems acquisition

Show Me the Money

Stand-out financial features:

• Gross margins expanded 500 basis points from 2022 to 2024 through pricing power

• Generated $534M free cash flow in FY2024 despite heavy capex

• 32.1% EBITDA margins (FY2024), industry-leading profitability

• Conservative 1.0x debt leverage provides acquisition firepower

• 9 consecutive years of record profitability through FY2024

Financial Data

The N.O.O.B. Nine — Competitive Powers

The Nerd Out on Business Nine is made up of Hamliton Helmer's famous "7 Powers" of competitive advantage (Scale Economies, Network Economies, Counter-Positioning, Switching Costs, Branding, Cornered Resource, and Process Power) combined with two of my own (Data Flywheel and Distribution Advantage).

Average Score: 3.6/5 - ADS dominates through old-school competitive advantages (scale and distribution) rather than sexy tech moats

Memorable Marketing

ADS markets through data-driven infrastructure fear, positioning themselves as the solution. Key campaigns include:

Harris Poll Water Surveys (2023-2024): Commissioned national polls showing 60% of Americans worry about stormwater infrastructure. Strategy created third-party validation for infrastructure investment needs, generating significant media coverage positioning ADS as thought leader.

Columbus Blue Jackets Partnership (2024-2027): NHL sustainability partnership reinforces environmental credentials while building local brand awareness in headquarters market.

Engineering Center Launch (2024): $65M facility opening as marketing event provided tangible proof of innovation investment, creating premium positioning through "innovation theater."

Tactical takeaways:

• Commission third-party research to validate market problems you solve

• B2B companies need community presence for talent and credibility

• Physical investments can serve as powerful marketing assets

AI Uses & Opportunities

Current AI adoption remains limited despite $10B scale. Manufacturing automation exists through FANUC robotics for safety and efficiency, but major AI initiatives are nascent.

Future opportunities:

• Predictive maintenance across 60+ plants could save millions annually

• Computer vision quality control to catch defects before shipping

• IoT-enabled pipes creating recurring monitoring revenue streams

• AI-optimized recycling to hit 1 billion pound target by 2032

• Smart routing algorithms for distribution network optimization

• Predictive infrastructure failure models for municipal sales

The company that develops "smart pipes" first captures the next decade of growth.

Bumps in the Road

Current challenges:

• Overtime lawsuit alleging systematic wage violations through meal break interruptions

• Q4 2025 earnings miss ($1.03 vs $1.08 expected EPS) triggered 6.35% stock drop

• Revenue declined 6.4% in FY2024 as construction markets cooled

• Raw material price volatility creates margin pressure

Industry risks:

• Polybutylene pipe disasters of 1980s-90s haunt plastic pipe reputation

• Climate change drives demand but extreme weather disrupts operations

• International competition intensifying from Chinese manufacturers

• Sustainability paradox of making plastic products, even recycled ones

Your Swipe File

Five lessons for entrepreneurs:

• Turn costs into moats: ADS became North America's largest plastic recycler not for environmental kudos but because controlling recycled material supply creates 1-2% margin advantage. Vertically integrate where competitors can't or won't match.

• Boring markets hide great businesses: Nobody dreams of making drainage pipes, which explains 32% EBITDA margins. Unsexy industries have less MBA competition and more pricing power from customer indifference.

• Acquire capabilities, not just revenue: The $1.08B Infiltrator acquisition brought septic expertise generating 44% of revenue with less cyclicality. Buy businesses that strengthen your core offering.

• Distribution beats disruption: In physical products, controlling the last mile matters more than revolutionary technology. ADS's 35 distribution centers create a nearly uncrossable moat regardless of pipe innovation.

• Labor compliance isn't optional: ADS's overtime lawsuit shows operational excellence can't come at worker expense. One class-action suit erases years of efficiency gains and destroys cultural credibility.