Advanced Drainage Systems, Inc. Q4 FY2026 Earnings Call

Good morning, ladies and gentlemen, and welcome to Advanced Drainage Systems' fourth quarter and fiscal year 2026 results conference call. My name is Tracy, and I am 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. If you would like to ask a question, press star 1 to raise your hand. To withdraw your question, press star 1 again. 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. With me today, I have Scott Barber, our President and CEO, Scott Cottrell, our Chief Financial Officer, and Craig Taylor, President of our Infiltrator Business. 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. 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. Lastly, the press release we issued earlier this morning is posted on the investment available via webcast.

Thank you, Mike, and good morning, everyone. Thank you all for joining us on today's call. We are pleased to close out fiscal year 2026 with strong results, and we have a lot to cover today, including our fourth quarter performance, full year results, an update on the NDS integration, and a preview of what lies ahead as we prepare for our upcoming investor day. A lot happened in the fourth quarter. Despite the quarter being our most weather-dependent a seasonally variable period, we executed well and delivered results that reflect the strength and breadth of our portfolio. The diversification across our allied products, infiltrator business, and the HP pipe products, combined with the continued execution of our market share model, allowed us to navigate a challenging demand environment and close the fiscal year on a strong nose. Let me touch on a few highlights. As you saw in the press release, following the acquisition of NDS, we updated our reporting segments to stormwater and wastewater as reflected in the results today. The stormwater segment contains the legacy ADS business, pipe and ally products, as well as acquisitions we have made in the space, NDS, Coltac, and River Valley pipe. The wastewater segment contains the legacy infiltrator business, as well as the acquisition of a rent code. Stormwater revenue increased 12%, driven by a 43% increase in allied product sales, including the $49 million contribution from the NDS acquisition that closed February 2nd. On an organic basis, stormwater sales increased 2% overall, with a 12% growth in allied products. Once again, revenue in several highly profitable products grew double digits, including the StormTech retention and detention chambers, the NIDL-class capture structures, and our water quality product line. These product lines continue to benefit from new product introductions and ongoing customer programs. Pipe revenue decreased 2%, reflecting softness in the residential and infrastructure markets. Agriculture sales increased 30% in the quarter as customers fought ahead of price increase. Pricing remained stable throughout the quarter, and material costs were favorable relative to the prior year. Waste water revenue increased 4% with strong activity in the southeast and south. Tech products increased double digits, driven by material conversion, product line expansion, and additional distribution. Leachfield sales remain resilient, and our advanced treatment systems, including Orenco, continue to gain share in both residential and commercial applications. From an in-market perspective, sales in our core non-residential market increased 6%, with strength in the West and Midwest. Sales of allied products experienced broad-based growth across the U.S. as we continue to focus on selling the complete package. Sales in the residential end market increased 18%, including the impact from NDS. Excluding NDS, residential sales decreased 1%. Segal family housing continues to face headwinds from affordability and interest rate dynamics, in addition to geopolitical uncertainty. Importantly, we continue to see improving trends in the multifamily development. The infiltrated corn residential business continues to significantly outperform the market, driven by new products and new distribution partners. We remain confident we have the right strategies and portfolio to increase our participation in the residential market as conditions inevitably improve. Moving to profitability, adjusted EBITDA increased 6% in the quarter, resulting in an adjusted EBITDA margin of 27.8%. This quarter's resilient margin is a reflection of the favorable growth, product mix, and price costs, as well as operational self-help initiatives and the capital invested over the last several years. Turning to the NDS integration, we are pleased with the progress made since closing the acquisition in February. The NDS team is a strong cultural fit, and we are on track to achieve our integration milestones. We continue to expect $25 million in annual cost synergies by year three, and we are increasingly excited about the revenue synergy opportunities as we expand the collective product portfolio video across our distribution and retail channels. We look forward to talking about NDS at Investor Day. Regarding the upcoming Investor Day, which will take place on June 18th at our Engineering and Technology Center in Hilliard, Ohio, we are looking forward to sharing updates on our differentiated growth strategy and our resilient profit platform, as well as our medium-term financial targets, and the payoff from the significant capital we have deployed over the last several years. We hope to see you all there. Please reach out to the investor relations team with any questions about the event. Fiscal year 2026 was a milestone year for ADS, and I'm very proud of the entire organization for how we executed. We closed the highly strategic acquisition of NDS almost entirely with cash on hand, delivered one of our most profitable years in our history. generated significant free cash flow, returned $155 million to shareholders, and continued to invest in the capabilities that will define our next phase of growth. We significantly outperformed our two largest markets, non-residential and residential, increasing 8% and 7% respectively. These two markets represent over 80% of our revenues. The self-help operational initiatives we launched over a year ago are clearly bearing fruit and our teams executed at a high level despite a challenging demand environment, resulting in the second highest adjusted EBITDA margin in the company's history of 31.6%. As we look into fiscal 2027, overall demand at this point looks similar to fiscal 2026 with a slightly more negative outlook on agriculture and single-family housing. Demand is very choppy, with order patterns shifting as customers try to get orders in ahead of price increases. This could result in an air pocket this summer, though we expect this to normalize overall within the first half of the year. The non-residential market is modestly more resilient, expected to be flat to up low single digital digits, activity in this market is driven by strength in large projects like data centers. We are well positioned to win these jobs due to the solutions package, installation benefits, last mile delivery, and the national network that we have, all of which position us to capture larger portions of the stormwater system.

The residential market remains under pressure with interest rates as well as economic and geopolitical and certainly impacting construction activity.

We expect to outperform the market, driven by our sales efforts to work with large national and regional home builders, focus on the cross-selling opportunities, and capitalize on the growing portions of the market, such as advanced treatment and the multifamily development. When you stack up our strengths to scale product portfolio, go-to-market strategy, installation benefits logistics capabilities and our ability to invest in the business people and industry growth you see the ads value proposition remains both relevant and powerful overall the long-term outlook for our business remains strong and supported by compelling secular tailwinds driving demand for water management solutions across north america now i'll turn the call Thanks, Scott.

Before I get into the details, I want to step back and highlight a few key takeaways from the quarter. We delivered excellent financial performance, exceeding the top end of both our revenue and adjusted EBITDA guidance ranges. We also closed the NDS acquisition in early February, representing a $1 billion investment that strengthens our portfolio and positions us well for long-term growth. As you saw in our press release, we announced a new segment and reporting structure to better align with how we think about and manage the business. And finally, we fortified the balance sheet through a series of capital structure actions that extended our weighted average maturity to more than six years while lowering our weighted average cost of debt by 30 basis points. These actions combined with our strong cash generation resulted in year-end leverage of only 1.6 times, inclusive of the $1 billion NDS acquisition, and most importantly, provide the flexibility and optionality to support in fiscal 2027. For the fourth quarter, revenue increased 10% to $677 million, including the impact from NDS. On an organic basis, revenue from allied products, tanks, and residential advanced treatment all increased by double digits, as Scott mentioned. Importantly, we believe our results outpace the underlying end markets, demonstrating the differentiated growth strategy and resiliency of the ADS business model. From a profitability perspective, we are very pleased with the 27.8% adjusted EBITDA margin for the fourth quarter. A couple of things I feel worth noting regarding the quarterly results. First, the fourth quarter is the fourth consecutive quarter of volume growth and payable price cost. Regarding manufacturing and transportation costs, we are seeing significant inflation on diesel and common carrier rates, and we experience incremental transportation costs related to the strong demand during the quarter, particularly in the West, coupled with increased oil prices and greater macroeconomic uncertainty. Importantly, we continue to benefit from the capital invested over the last several years in new production lines and automation improvements. Regarding SG&A, the year-over-year increase was driven primarily by the acquisition of NDS as well as incremental compensation expense related to the strong four-year results. On slide 8, we present our free cash flow. For the full fiscal year, we generated $569 million in free cash flow compared to $369 million in the prior year, primarily driven by increased profitability and effective working Capital Management. The OBBBA contributed an incremental $35 million of free cash flow benefit in fiscal 2026. Cash flow operations for the full year totaled $819 million, representing an 85% conversion of our adjusted EBITDA. In February, we refinanced near-term maturities of our 2027 senior notes and our term loan B, as well as increased our revolving credit facility to $750 million. Our weighted average cost of debt is now 5.65%, which we view as highly favorable in the current environment, and our weighted average maturities are now over six years, as compared to two years prior to these transactions. transactions. We ended the fiscal year with leverage of approximately 1.6 times as I mentioned previously. In addition, in the fourth quarter, we repurchased 720,000 shares of common stock under existing repurchase authorization. Moving to slide nine, thoughtful capital deployment continues to be a key focus for the management team and the board, given the strong cash generation of the business in fiscal 2026 we deployed 1.4 billion dollars of capital with 1.2 billion invested in growth we spent 250 million dollars of that on capital expenditures with investments focused on executing growth initiatives in key geographies customer service productivity and automation automation initiatives expanding our production capacity and infiltrator as as well as increasing our recycling capacity in the southeast we also returned 155 million dollars to shareholders through dividends and repurchases an increase of 29 over the prior year today in a separate press release we announced an 11 increase in our dividend demonstrating our ongoing commitment to returning capital to shareholders while also continuing to invest in the growth of the business moving on to slide 10 we are introducing our fiscal year 2027 guidance today based on current visibility backlog of existing orders are in market outlook and the trends we see entering the fiscal year including the continued integration of nds we are establishing the follow following guidance ranges for fiscal year 2027 we expect revenue to be in the range of $3.35 billion to $3.55 billion, and adjusted EBITDA to be in the range of $1 billion to $1,050,000. For guidance purposes, we are assuming significant year-over-year inflationary cost pressure on input material costs as well as transportation costs. We've taken pricing actions to offset these inflationary pressures on a dollar-for-dollar basis. We expect normal revenue seasonality with approximately 55% of revenue in the first half of the year. Quarterly revenue patterns in the first half of the year may be affected by customers trying to buy ahead of anticipated price increases. This guidance also includes approximately $300 million of revenue from NDS for the full fiscal year. 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.

We will now begin the question and answer session. Please limit yourself to one question and one follow-up. If you would like to ask a question, press star and the number 1 to raise your hand. To withdraw your question, press star 1 again. We ask that you pick up your handset when asking a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device. Please stand by now while we compile the Q&A roster. Your first question comes from the line of Mike Halloran with Baird. Your line is open. Please go ahead.

Let's start on the guidance and how you guys are thinking about the composition from here. Obviously, Scott, you talked to a bunch of moving pieces as we sit here. Maybe two things, I guess. One, how are you thinking about the sequential revenue dynamics versus normal? I know you just mentioned some pre-buy activity. How does that functionally play out? That will be the first question.

Yeah, so this is Scott Barber, Mike, and the question is around how is the first half going to perform kind of sequentially month by month or quarter to quarter?

All right, so as we said, Mike, that first half, second half, and then you got, you know, that 40% to 45% in the second half. We see it lining up largely the same. The only thing that Scott mentioned, and I did as well in our remarks, you know, we've had a couple price increases already announced into the market. We see some pre-buying going on here in the first fiscal quarter of our year. Our guide, by the end of one cube, it flattens out.

Okay, then the follow-up is maybe the similar dynamic on the margin side. Given the timing on the pricing and inflation to pull forward, does that mean that the fiscal first may be a little compressed on the margin line relative to how that would normally play out, and then 2Qs start getting more bounced out on a margin dollar basis before being more normal from there, sequential in the back half of the year? Is that the thought process on the margin line within the guidance?

I think that's a fair way to look at it, Mike. I think you've got a little bit more of the volume kicking in in that first quarter based on the pull ahead with the pricing actions we've taken mostly starting to hit in the fiscal second quarter. And again, we've assumed right now that's a dollar-for-dollar basis. So as we move through the year, that's going to be diluted to margins. I mean, again, it's focusing on the dollars right now and that uncertainty that we're managing.

So, but that's fair to look at it that way as we progress through the year. Can I add one thing to that, Mike? This is Scott B. You know, matching those up is really tough as materials and transportation costs. You know, we run a big fleet, uses a lot of diesel every freaking month. So, those are tough to match up. And we, you know, this is based on these things kind of normalizing. But it's going to be a little choppy. I just want to kind of get that out there. We're on top of it, but it's hard to perfectly time these things on a month or a quarter basis.

That makes sense. And you're saying basically on the dollar side of things, you're covered in relatively neutral. Yeah, but it's just the math behind the margins that becomes an optical head, right?

I think we talked about this with the board yesterday and clearly we think the right thing to do is get it dollar for dollar, but don't try to press for the margin on these kind of, what we would view as extraordinary escalations driven by these events in some of our really important input markets. and that's our strategy. That's what we're going to do and we feel good about that and we're willing to kind of work our way through that margin compression optics and when we've done this before, over the long term, we kind of come out favorable on the long end of that and very similar to how we've done this in the past with, I think, even better tools and positioning than we had before.

Yeah, I mean, it's Scott's point. We talk a lot about pricing and dollar for dollar, but it's not lost on us that we also have that recycling lever that we can pull on the residence side of the house. We also have the internal fleet versus the external common carrier fleet. So there's a bunch of dynamics and other items that we're obviously levering behind the scenes to work on all of that as well.

Thanks, guys. Appreciate it.

Your next question comes from the line of Matthew Booley with Barclays. Your line is open. Please go ahead.

Morning, everyone. Thanks for taking the question. So apologies that I'm going to keep beating that horse on price cost for a second here. Big topic today. So my question is on your kind of competitive positioning and demand, et cetera. So maybe focusing on the competitive side first, you know, versus your plastic competitors. You just mentioned your vertical integration and recycling capabilities, but then also versus concrete pipe, et cetera, and kind of considering the cost of transportation here. What are you seeing out there from the competitive perspective, and how do you think that ultimately plays through with your ability to actually get the price you need in the market, given, you know, this fairly unprecedented level of cost inflation. Thank you.

All right. Okay, Matt, we'll keep going on price costs. So, number one is we're out in the market. You know, we are trying to get ahead of this. These inflation of this magnitude and breadth and speed, If you don't get ahead of it, you're really in bad shape. So, we went to get ahead of that, probably ahead of our competitors in many places. But we're holding in the line, and our orders and rate are holding up nicely. We would say in the – so, that's in general. And as you know, this thing is kind of regional, and it's better behaved in some areas versus others. But I'd say right now versus our competitors, you know, they are experiencing similar inflationary pressures that we are. And I'm thinking about the plastic pipe guys. As you said, obviously, we use all of our scale of buying in the virgin market and pivoting to the recycled material quite quickly over the last 60 days. honestly, faster than I thought we could, and our team is doing a really nice job both getting, procuring the right material and converting the right material, and we have that new asset in Cordial, Georgia ramping up next month, so our timing couldn't be better on this recycling activity, which again, we believe makes us extremely competitive against against any regional competitor on the plastic pipe. On the concrete side, they're not facing the same escalations we are. So our, you know, value prop is probably compressed a little bit, particularly in certain regions. But we don't think that's a permanent thing. We believe that, you know, that's some of the normal dynamics. But I would recognize that in certain places, that has become much more competitive, our value prop versus the concrete guys. But we'll work our way through that. And we're thinking about other things and products and techniques to get even more competitive against those guys than we have been.

Okay. That's perfect. I really appreciate all that color, exactly what I was looking for. So I'll move to another topic. I'm sure there will be more asks on that. But the non-resi end market, so you're guiding that to be, you know, modestly positive or flat to up low single digits, excuse me, in the next fiscal year. Sounded like large projects are what's carrying that, but I'm curious if you can kind of just, I guess, unpack that a little bit, you know, regionally, by vertical, you know, where are you seeing more of that strength? You highlighted data center a couple times, you know, how much of that is kind of carrying the load here versus, you know, other areas that might still be more choppy on the non-res-y side. Thank you.

So I'm going to say a few words, Matt, and then I'm going to hand it over to Mike Higgins. But in general, you know, our biggest focus and strength is on that non-res market from the ADS legacy business. You know, in those allied products, our coverage, the HP products in there, our N12, I mean, we just have a great product line for a wide, wide breadth of non-residential. And I think that's what we've been seeing over the last year or so, is that we are consistently outperforming in that market. So, you know, and it's across lots of kind of jobs. I'll turn it over to Mike. He has a lot of insights around that kind of by segmented geography.

Yeah, I mean, Matt, you hit on the data centers. That's obviously, you know, a lot of activity there. Again, kind of a small part of what we do. But, you know, what we've seen all year from answering the project type, and we've just seen pretty solid growth in activity and just kind of general purpose commercial construction, institution pretty solid. You know, when you look at geographically for the year, you know, we had probably 35-plus in the Midwest that were really good. You know, we see good Don Residential. A lot of focus on Florida, Virginia. And, you know, Scott touched on this a little bit.

Thank you. Good luck, and I'll see you all next month. Look forward to it.

Your next question comes from the line of Brian Blair with Oppenheimer. Your line is open. Please go ahead.

Thank you. So level set, a little bit on the top line outlook, I think you've mentioned $300 million in NDS contribution. With regard to the recast of the sessions, how should we think of organic stormwater and wastewater growth for fiscal 27?

Yeah, the way I would talk to it or at the midpoint of our guide is roughly a flat end market, you know, based on the end market dynamic and what we're seeing out there, They're basically flat on the volume side of the house. Price costs, we've talked about kind of having the pricing in the market to offset the cost inflation and cost pressures we're seeing. Then you got the $300 million of costs for the full year for NDS. So that's the way to kind of get to that $3,450,000,000 at the midpoint of our revenue gap.

Okay, I understand. It sounds like NDS integration is tracking well a reiterated confidence in $25 million in cost energies by year three. what should we assume for fiscal 27 synergies? And then, perhaps more importantly, maybe you can speak to some of the cross-selling opportunities that are starting to be realized.

I'm going to let Catrell answer the question of the plan. I'm not allowed to answer those, Brian. But the cross-selling, we are going to talk a lot about that at the investor day. We think that's a great topic to talk about in the investor day for the longer-term plan. What I would just kind of parenthetically add to that is we get more excited about the cross-selling as we go forward in time over these last couple of months. They're not all easy to get to quickly, but they're there. And it's channel, it's product line, it's sales force, it's a lot of good things. It's just not one-dimensional. But then I'll hand it over to the other one to Scott.

I'll say right now, we're really excited, like Scott said on the call, about the opportunities in front of the acquisition model and where we saw the phasing over those three years. Again, cross-selling is becoming one of those things that's really, as Scott just mentioned, I'm not going to give you a dollar amount. All I'll tell you is that in the first year of that three-year plan, it was basically a back-end year two, year three kind of ramp, if you will, to get to that run rate synergy by year three. So we didn't assume a lot here in the first full year, but I'll tell you that we're well ahead of it.

Appreciate the color.

Your next question comes from the line of Jeff Hammond with KeyBank Capital Markets. Your line is open. Please go ahead.

Yeah, hi. Good morning, everyone. Just on – I think you said wastewater and stormwater, you think flat volumes, and I guess wastewater being heavily res in a down to mid to high single market, you know, pretty impressive. Can you just talk about, you know, again, what's driving the outgrowth there? And then I think you mentioned in the prepared remarks about an air pocket potentially in that res-e-end market. Maybe just expand on that.

So let me take the air pocket first, and I'm going to hand it over to Craig Taylor, who runs the infiltrator business in that wastewater segment, for us to answer kind of what that outgrowth is. But the air pocket is just simply people buying ahead of these pricing, announced price increases. You know, we're limiting that. We're managing that. That's not an open-ended thing. But it's not unfamiliar behavior of our in inflationary times or ahead of price increases. We really, what we expect is Q1 to be a little heavy and bountiful from a volume standpoint, but we expect that to correct itself in the second quarter. And this guidance, this plan, our discussion really says that it's all normalized within the first half of the year versus the second half of the year, which is usually how we guide is first half, second half revenue. But I'm just trying to get the marker out there with you guys that if the volume and the sales are big or above expectations in Q1, there's an air pocket out there for sure. And I just don't want to get, I've been telling the board in preparing for today, I made it pretty clear, I wanted to get this out there with you all so you're not surprised. So that's really the wrap on that part of the remarks, Jeff. Now Craig can tell you how we're outperforming the market and the residential really driven by his business.

Morning, Jeff. Yeah, the wastewater business is going to be challenged on the residential side, but we've had a really good run here with our new products that we've introduced into the market, specifically around our tanks business, and then also around our advanced treatment systems, too. The tanks, we've expanded the product category. We've been able to take market share there. And then on the advanced treatment systems, again, with the Eranco acquisition and the infiltrator, we've put that together. We're attacking the advanced treatment markets and picking up some pretty good share there. Also, we've been able to get more distribution points for our tanks out in the market, and this has really helped offset that slowdown in the residential market for our business right now, but we see that the new products continue to provide some growth.

If I were to just add one thing, you know, a couple of things to that, that, you know, very good, they had, Infiltrator had very great spread or distribution points in leach field products, the traditional, and as they've introduced the tanks and expanded the number of displacements or skews in that offering, it's really been able to get into the additional distribution points. So think about wherever we sell a leach field, we want to be selling a tank, and we're still relatively underpenetrated on that. So that, along with these advanced treatment products and an intense focus on getting the regulatory side of that lined up, which they do very, very well, I think that's why you're seeing the beat versus the market there. I mean, you know, it's the scale, it's their obvious, you know, technology prowess, and those new products kind of just driving through that market left and right.

Okay, great. And then, you know, the balance sheet's in pretty good shape despite the acquisition. I know you were kind of protecting the balance sheet ahead of that NDS deal. But, you know, stocks really taking a hit around, you know, this inflation concern. Just how are you thinking about, you know, kind of the lean on buybacks versus, you know, maybe what the pipeline looks like here.

I'll say a few words. I think Catrell will want to chime in on this as well, Jeff. But, so, you were right. We conserved cash ahead of that deal, practically paid all cash for it. I knew that would give high level of certainty to get the deal done. We got a buyback authorized with the board shortly after that. We weren't immediately exercising on that, but in February, When this conflict began and our stock went down with the board, we went and authorized that, and we exhausted that $200 million, you know, here recently. We'll go back in and try to use our balance sheet to do that prudently while maintaining, you know, the right level of liquidity to run our business. You know, we're going to consume some working capital this year as our receivables go up, as our inventory costs go up. We know that. We don't let that alarm anyone. So we're kind of planning and budgeting for that. And even with that, you know, some repurchase and doing that, we really got room to go do something if we really wanted, if the right one came up. You add to that, Scott?

I think you did a great job summarizing that. The only thing I'd say is right now we've got to digest NDS, which we're focused on. But to Scott's point, if one of those strategic assets becomes available, we've got the financial flexibility to do more than consider that.

It would be more management benefits.

That would be what we'd have to work on. But we've got the balance sheet, to your point, where it needs to be. Working cap of the percent of sales came in slightly below the 20% target that we have. At the end of 26, we've got that going up to about 21% at the end of fiscal 27, just based on the inflationary cost pressures. Again, we know how to manage the balance sheet. We have a great S&OP process. NDS has a very active working capital management program underway right now, a significant opportunity to bring that down as part of our synergy program. Our synergy programs for NDS aren't all on the revenue and EBITDA side. Perfect, thanks.

Your next question comes from the line of John Lovallo with UBS. Your line is open. Please go ahead.

Hey, good morning, guys. You've Matt Johnson here. I'm for John. Appreciate the time. Could you guys just talk a little bit about your ability to flex up recycled resin right now? I guess kind of where does your recycled usage sit today? How quickly can you ramp that up? And then also just any color you guys can give on what the cost spread between virgin and recycled looks like today.

So I'm going to let Scott Control answer the virgin versus what he's got in there. Like I said, I'm not allowed to answer those questions anymore.

So what you saw in 26 is, you know, we love our recycling program. We see a lot of advantages. It's usually that 15% to 20% benefit. But that can invert at times. And what we saw in 26 is it was a much more friendly virgin resin market for us. So you saw us toggle a little bit more towards the virgin than the recycled side of the house. What you see us now doing is toggling back to the recycled resin. The other thing I would say is we're also putting the cash flow and the balance sheet to work. We have a significant expansion of recycling capacity and capability going on in the southeast U.S. right now, putting that closer to our facilities in that region, which makes a lot of sense on the transportation side and conversion side of the house, so in agility to toggle back the recycling.

Yeah, so we won't we won't disclose, you know, kind of the, you know, the percentage recycled that we're going much lower than normal because of the pricing dynamics in the market at the time. That said, you know, this recycling activity for us is a long-term operational component of the company. It really bears a lot of fruit in these inflationary times like this, and it mitigates a lot of costs, and so we're flexing that pretty hard. In fact, as I said earlier, we're flexing it hard. The team's going faster than I thought we would be able to do. We're also able to get the material into our recycling facilities. In other words, there's enough material out there to get. That's always – you've got to work that in very, very hard. So I think it's a unique competitive advantage of the company that we're going to press the floor on right now.

I guess just kind of bigger picture here. I know you guys have, I would say, a pretty long history of navigating through different inflationary environments. I think the way you guys typically talk about it is you put through price and then you hold on to the majority of that, even as costs kind of normalize. But I guess, do you guys see that playing out any differently this time around? Or I guess, ask differently, does the, you know, the softer demand environment right now make that more challenging to do?

And certainly that is a factor. I think the way you overcome some of that softer demand is selling the package of products that we have, making sure we're using the scale of the distribution that we have across both the wastewater and the stormwater distances. Will the dynamics on the other end, as you suggest, play out perhaps a little differently than the past because of competitive intensity? Maybe, maybe not. It'll be really regional and local. If it does, it won't be a nationwide outbreak type thing. But I feel pretty good about our tools to go and work that on the other side. I feel pretty confident about the value proposition we have versus our competitors on the other side of this. So we'll see how it plays out. I appreciate the question. I understand where you're going, but, you know, it's not just enough to say we've done this before, we know how to do it. I think it is more we've done it before, we have a playbook, we have tools, we have experience. We acknowledge that it could be a little different on the other side, but I would never bet against us to be able to understand and adjust to that accordingly in a very profitable manner.

Thanks, guys. Appreciate it.

Your next question comes from the line of Colin Barron with Deutsche Bank. Your line is open. Please go ahead.

Thanks for taking my questions. I guess I just wanted to start. One of the other levers that you talked about other than recycling was on the transportation side. You made a comment about internal fleet versus common carrier exposure. Can you just sort of help us understand sort of your ability to flex that and kind of what the benefit of that could be from a dollar standpoint?

So, again, Scott Barber, a good question on our logistics. You know, we are an ultimate last-mile carrier, you know, with our fleet to our trade deliveries. And anything within, you know, a certain mileage of our factories and distribution centers, you know, we deliver on that fleet. It's roughly 70% of our revenue for the legacy business, the ADS business. And here's what I think, and why this is the right long-term investment. In high inflationary transportation times, where both diesel and the rate, in other words, there's two components on common carriers. It's the rate they charge you to carry, and that's a supply and demand, and then it's the cost of diesel to operate that. It also can be their wages and drivers, but it's mainly the diesel. Right now, both rate and diesel are accelerating quickly. On my private fleet, I really only have diesel accelerating. So I've become much more competitive versus common carriers in my fleet. Now, what does that mean? That means I can probably expand my radius of delivery from my points to make myself more competitive against competitors that are largely on common carrier, not last mile delivery like we have. This, again, part of our scale, our balance sheet, all those things we've done over a long period of time to create that kind of thing. So, this is the time when these kinds of – in these inflationary times, on the logistics, it's our fleet inflates at a lower rate, basically just on the diesel, and on the recycling, where we have an additional tool versus the virgin material buy to mitigate costs. These kinds of times really show the benefit of the long-term investments the company has made and how it positions us in these more difficult periods. That's why I'm so confident we went on the other side based on that other question. I mean, because we have these tools and insights that I think are really unique in this industry.

That's a really helpful caller. And I guess after the NDS acquisition and sort of your portfolio with Infiltrator, is there any way to think about sort of how you guys look at the end markets and your ability to outperform? Is there a category or end market that you guys expect to see the biggest share gains? I'm looking at that residential assumption being down the most here, but like given your portfolio or your expanded portfolio, is the opportunity for share gains really in that resi market? Is it really across the board? I'd just be curious as to how you guys think about the puts and takes on the outperformance within the different end markets.

I think we probably have more opportunity in residential because that's really where NDS is stronger. You know, we have our strength in infiltrator in residential kind of participation and their growth. You can see where they're growing in residential. The natures of the two are a little different. Infiltrator is more new construction, a third R&R. NDS kind of flips that. But there's no doubt we've gotten bigger in residential. Our legacy business relatively underpenetrated in residential. We think this might give us a few more insights there. That cross-selling comes in play more on the residential. However, on the non-residential side, there are some great products NDS has that we do not have for our package, solutions package, that we sell basically to these projects. These channel drains in particular, those will be a very nice addition to our product lines. So I think to answer your question, maybe more on the residential than the non-residential, we both have runway. way.

Great. I appreciate all the commentary and good luck.

Your next question comes from the line of Trey Grooms with Stevens. Your line is open. Please go ahead.

Yeah. Hey, good morning, guys. This is Ethan. I'm for Trey. Thanks for taking the question. You briefly touched on the prepared remarks on maybe leveraging SG&A a little bit to mitigate some of that COGS inflation. Any more color on the initiatives here? I know you've previously guided to SG&A as a percent of sales in the past, so if you can provide it any color on what guide assumes from an SG&A standpoint, it would be great. Thanks.

Yeah, I mean, again, the SG&A for this past year has a lot of moving pieces to it, but as you think through next year, I would guide you to use kind of a 14% SG&A as percent of revenue kind of a number. We're getting back to kind of a normalized number for us. Again, you've got NDS coming in on a full year, so obviously that's incremental increase that you've got going on there. But then you've got the initiatives that we all have here that we have every year on managing our costs all the way from T&E and everything else that we put into place. We do a really good job, I think, of putting a shine of light on it in the different cost centers and managing that cost bucket really well. But we also know that we have to invest for the future. So we do that to make sure that we're supporting the long-term growth and strategic initiatives of the company. So there's always going to be some dollar increases.

And maybe switching gears to, you know, just making sure we understand the assumptions around the volume guide. The guide assumes volume flat. Obviously, your performance has been trending above this rate, and you still expect to outperform the market. But there's a lot of moving pieces, right, because of the customer buying ahead of the price increases. And, you know, you also made comments around some potential regional compression of your value prop relative to concrete pipes. So, I guess my question is, is this implied deceleration in volume more a reflection of what you're seeing on the ground in terms of underlying demand, perhaps in response to these price increases, or just some understandable conservatism on the volume outlook?

I think, this is Scott Barber, I think our conservatism on the volume is really related to the market and the end market and demand, and if you recall, I said non-res, and we think it will be more of the same. Agriculture will be a little compressed year over year, and the residential, particularly on the pipe side will be compressed year over year because land development projects are slowing down. There's no volume compression due to competitive activity. You're correct. We do think these dynamics will happen in the market, and we will meet what we've got to go do to get the business that we want on a local basis. So it's more the end market behavior.

Got it. That's all very clear. And, yeah, your ability to outperform the market in this environment is definitely encouraging. So, yeah, thanks for taking the questions. You're welcome.

Thank you.

So there are no further questions at this time. I will turn the call back to Scott Barber for closing remarks.

Thanks. I appreciate it. And I appreciate the questions and the quality of the questions. We probably went a little deeper than we normally do on some of those. But, you know, as many of you said, there are a lot of moving pieces right now. And I just don't want to have any surprises as we go through the year as different things are kind of emerging. And so that's kind of why we went a little deeper than we normally would. Allison prepared us with like three pages of Q&A for this. But, you know, we're just trying to let you know what's going on. We feel good about this plan. We feel good about the year we close. We feel good about this plan. We know it's not going to be easy. But like I said earlier, the tools that we have, the experience, the footing of the company in the broadest possible way are, I think, a lot better today than they were when we encountered other environments like this. and and we're very confident of that so we appreciate you all coming in today into the call look forward to some discussions later on and let's have a nice memorial today we are a safe and enjoyable Memorial Day weekend thanks this concludes today's call thank you for attending you may not disconnect