Advanced Drainage Systems, Inc. (WMS) Q2 2027 Earnings Call Transcript

Good morning, ladies and gentlemen, and welcome to the Advanced Drainage Systems second quarter of fiscal 2027 results conference call. My name is Matthew, and I am your operator for today's call. At this time, all participants are in listen-only mode. After today's prepared remarks, we will host a question and answer session. If you would like to ask a question, please 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.

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

Okay, thank you, Mike, and good morning, everyone. I'd like to start today's discussion with a look at the results for the first half of the year, which provides a better picture of our underlying performance, given the revenue pull forward from the second quarter into the first quarter. Year-to-date, revenue was up 13%. Driven by our differentiated growth strategy focused on new product introductions, material conversion, strategic partnerships, distributor programs, and disciplined acquisitions. Organically consolidated revenue is up 2% on a year-to-date basis in a very challenging demand environment, including 6% organic growth in allied products and 3% growth in the infiltrator business. In the non-residential in-market, revenue is up 10% year-to-date, or 8% on an organic basis. We generated double-digit growth on large projects, like data centers and warehouses, as well as general commercial construction. Residential sales increased 21% year-to-date, reflecting the strategic acquisition of NDS. Importantly, we began cross-selling in the second fiscal quarter, and we are pleased with the progress to date. While still early, we're encouraged by customer response and see meaningful opportunities to expand participation across irrigation, retail, and broader water management applications. On an organic basis, residential sales were down 4%. Reflecting 5% growth in infiltrator, offset by weak residential land development activities. Importantly, we delivered a 34.1% adjusted EBITDA margin for the first half of the year, the highest in the company's history, reflecting the resilience of our business. The pricing actions we took successfully outpaced the inflationary pressure on both material and transportation costs in the first half. We continue to invest in growing our portfolio of products while building upon the ADS platform, which expands our addressable market and growth opportunity. During the quarter, we announced our agreement to acquire Stormtrap, an industry leader in large volume, space-constrained, and highly engineered stormwater solutions. Stormtrap is an excellent fit for our specification-driven commercial model And it's an attractive asset-life operating model with a national precast partner network. By combining those capabilities with ADS's national scale, customer relationships, and go-to-market platform, we see attractive opportunities to expand StormTrap's reach while creating immediate cross-selling opportunities across both non-residential and infrastructure applications. The transaction is expected to close in the fourth quarter of calendar 2026. Stormtrap is another example of our disciplined approach to capital allocation. We have built a strong balance sheet specifically so that we have the flexibility to act when we identify opportunities that enhance or expand our adjustable market, complement our portfolio, and strengthen the long-term growth profile of the company. The current demand environment reinforces the importance of the actions we have taken over the past several years to focus on driving growth through the factors within our control. Innovation and new products contributed over $260 million to the top line in the first half of this year. Product partnerships, such as the Aquabox plastic crate line for retention and detention systems, continue to drive growth as well. Aquabox revenue was four times higher year-to-date than in the prior year period. And finally, NDS has contributed $172 million to revenue year-to-date. We will continue to focus on these initiatives to diversify our portfolio, expand our product offering, and diversify in-market exposure. As we go into the second half of the year, our priorities remain clear. Focus on selling the package. Bringing new products to market, advancing our material conversion strategy, and outperforming the underlying markets. We will continue to effectively manage price costs, execute our productivity initiatives, and deploy capital in a disciplined manner to the highest risk-adjusted return opportunities. As Scott will discuss, today we are adjusting our expectations for the year to reflect lower inflation on raw materials than we initially expected. We remain confident in the long-term fundamentals of the business. I believe the investments we are making today will strengthen the business and position us well as our in-markets recover. With that, I'll turn it over to Scott Cottrell.

Thanks, Scott. Looking more specifically at the second quarter, revenue increased approximately 5% to $889 million. And we generated $287 million of adjusted EBITDA, resulting in an adjusted EBITDA margin of 32.2%. You may recall from our first quarter call, we estimated approximately $30 to $40 million that was pulled, $25 to $30 million, that was pulled into the first quarter from the second quarter due to the timing of price increases. We now estimate that is closer to $40 to $50 million, given how revenue and order patterns played out in the second quarter. Importantly, the pricing actions we took in the first quarter have been fully realized, and we continue to see year-over-year favorable pricing in the market. The second quarter margin compression is primarily due to the volume pulled into the first quarter, peak inflationary pressure on materials, and significant inflation in both diesel and third-party logistics costs. That being said, it is important to point out that pricing actions are more than offsetting the inflationary pressures we've experienced on both materials and transportation costs to date. Moving to cash flow, year-to-date, we have generated $359 million in free cash flow. Cash generation is a core strength of the ADS business model and provides the financial capacity and flexibility to invest organically. Pursue strategic acquisitions, and return excess capital to shareholders. We ended the quarter with leverage of 1.6 times. Following the acquisition of Stormtrap, we expect net leverage to be approximately 2.0 times, which remains within our preferred leverage range of 1.5 to 2 times. The purchase price for the proposed acquisition of Stormtrap is approximately $530 million, or approximately $450 million, when adjusted for the net present value of expected tax benefits. The transaction represents a multiple of approximately 10 times adjusted EBITDA for the trailing 12 months ended July 2026. Inclusive of expected run rate, cost energies, and is expected to be accretive to adjusted earnings per share in the first quarter. Moving to slide seven, I want to highlight that our ability to deploy capital toward a highly strategic acquisition of this size While also continuing to invest organically in the business and return capital to shareholders, demonstrates the strength of our balance sheet, our strong cash flow generation, as well as the financial flexibility we have built over time. Our capital allocation priorities remain unchanged. First, investing organically in growth, including innovation, new products, material science and blending capabilities, automation and productivity. Next, pursuing strategic acquisitions that strengthen our competitive position and expand our addressable markets. And finally, returning excess capital to shareholders through our quarterly dividend and opportunistic share repurchases. If you look at slide eight, following the proposed acquisition of Stormtrap, we will have deployed over $1 billion of capital this year, inclusive of $406 million of capital returned to shareholders. Due to the strong cash generation profile of the business, we remain very well-positioned to continue executing against our capital allocation priorities. Moving to guidance, we are updating our fiscal year 2027 outlook to reflect our updated inflation expectations for the year. We have adjusted our revenue guidance by 3% at the midpoint to $3.35 billion. Primarily driven by lower inflationary cost pressure on raw materials than we anticipated back in May. In addition, we updated our adjusted EBITDA guidance by 1% at the midpoint to $1.015 billion, resulting in a margin of 30.3%. At the midpoint, our full-year guidance implies the second half of the year grows low single digits organically. And stable pricing that will offset the year-over-year inflation on material and transportation costs in the second half of the year. Our updated guidance is non-inclusive of Stormtrap, as the acquisition has not yet closed. While end market demand remains challenged, our performance this year continues to demonstrate the strength and differentiation of the ADS growth strategy. We continue to expand our portfolio, execute on price costs, and invest in the future through acquisitions like NDS and Stormtrap. Combined with our strong cash generation and disciplined capital allocation process, we believe ADS is well-positioned to continue outperforming our markets and create long-term value for shareholders. With that, operator, please open the line for questions.

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, please press star 1 to raise your hand. If you would like 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 while we compile the Q&A roster. Your first question comes from the line of Mike Halloran with Baird. Your line is now open. Please go ahead.

Thank you. Good morning, everyone. Hey, Mike. Good morning. Hey, could you help me bridge the guidance previous versus current? Scott B., Scott Barber, in the early prepared remarks, said something about lower inflation pressures as part of the reason why the sales came down. But I look at some of the end market thought processes, and those came down as well. But margins, obviously, really good. So maybe just help understand the puts and takes between previous guidance and current guidance.

Hey, Mike. Scott Cottrell here. You nailed it. At the midpoint, as you look at it, it's really that inflationary cost pressure side of the house, and primarily on resin material costs. Transportation costs continue to be higher than what we had thought or anticipated back in May. But when you look at the resin and how we now project that, A, what we saw during the first six months, and then what we expect to see over the next six months, it's not going to be as high as what we had thought going into the year. Back in May, when we gave our guidance, we thought it was higher for longer. It obviously was higher, but it wasn't the longer piece of that. So, when you look then at the revenue picture and the recovery therein that needs to be done on our side to offset that, obviously, that's the sole reason why that has come down. And when you think about that, our EBITDA guide is not changing significantly. And that's because price costs, not only material costs, but transportation costs, we still will offset. So, revenue is coming down because of the lower inflationary cost pressures. Even though it's largely unchanged, there will be a little bit on the upper end of that that needs to come down. But that results now in a projected EBITDA margin of 30.3% versus where the midpoint was in our original guide.

So the thought process is maybe just a touch less price cost favorability, even though still price cost favorable?

No, it'll be price cost favorable. If you look at the one half, a lot of timing, we've got pricing in the market ahead of the cost, and we're really good at that. We've done that historically. So you see really nice spread in that price, material cost and transportation costs in the first half. We're still going to get that favorability and be on top of it, but it's not going to have that spread, if you will, or favorability that we saw in the first half. More of a dollar for dollar offset, which is kind of how we talked about at the beginning of the year.

Okay, so we're saying the same thing. That makes sense. And then the second question is just maybe talk through the end market assumptions as you work from here in terms of the residential and non-residential pieces. Are you seeing any deterioration with boots on the ground, or is it relatively stable at lower levels, all as equal, versus how you were thinking about it before?

Hey, Mike, it's Mike Higgins. Yeah, I would say, you know, clearly the residential market remains challenged and has obviously weakened as the year has gone on. You know, with the non-residential end market, yeah, I would say it's the same as what we've been saying really for the past two years. You know, it's highly variable by geography. You see some segments of non-res, which is, you know, very, very broad for us, that remain Good activity, right? The data centers, warehouses, and distribution centers. And then again, depending on the geography, there's some pretty solid performance and just kind of general purpose. Uh, commercial construction, but, you know, with interest rates remaining higher, you know, that's still making, you know, speculative non residential construction, uh, you know, very, very choppy and very challenging while things that, you know, people are financing off their own balance sheet, large capital projects. Those those continue to to move forward.

Okay, thanks everyone. Appreciate it. Bye.

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

Good morning, everyone. Thank you for taking the questions. Another one on the volume and demand side. I mean, and correct me if I'm wrong, it seems like in the revenue guidance change, you know, there is a little bit of a reduced end market demand outlook, at least looking at the slide. So my question is, you know, understanding the pre-buy dynamic, you know, how much of that kind of underestimation of the pre-buy, if, you know, perhaps caused you to overestimate the end demand for the year? And sort of what I'm getting at is how much of the volume outlook change. Could be due to that, if there was any overestimation versus how much is due to, you know, sort of an actual change on, on, on demand on the ground. Thank you.

Matt, Matt, this is Scott Barber. Um, I, I don't think our overall, um, estimation of the, of the demand was, um, much affected by the pre-buy. It just says we kind of got into the second quarter, it was clear more had been pulled into the first. And I think we went from like 20 to 30 to 40 to 50, and we saw that in our order and our behavioral patterns. Our overall demand change, kind of this prior guidance versus today's guide, has really only been affected in the residential market, where two things I think are really important. One, you know, our original estimations were interest rates were at six and a half and maybe headed lower. Post-conflict, starting in February, and just seeing what's been happening, now they're at seven and a half. And that's really taking whatever, you know, small momentum was in the residential piece, particularly of the land development piece off the board. So our only real change and reflection on our demand. Is in that area. The non-residential, why we adjusted our outlet for the market a little bit, you know, our forecast is kind of hanging in there, driven by the allied products, driven by our penetration with particularly the polypropylene pipe, just our scale to be able to address any market in the country. That piece we still feel pretty good about. But that, I think that's kind of how I, the only change I saw, Matt.

Got it. Okay, no, that's perfect. Yeah, that's a great color. Thank you for that. Secondly, NDS, I heard you mention you're sort of getting the ball rolling on cross-selling synergies. I know the revenue synergies would have not been part of the initial guidance there. So maybe on both revenue synergies, kind of update us on or any more color on how that is advancing there. And then, you know, where are you on the cost synergies as well since that deal closure? Thank you.

All right, this is Scott B. again. NDS is performing quite well. I think they've had their most successful six months from kind of an economic standpoint in their history of their company, you know, since being with us. And I can tell you that the work we're doing with Mike's team is really quite good, and both organizations leaning in well. So while we've seen a lot of quoting and some product movement on the cross-selling, really it's just them performing well against everything we've asked them to do and taking advantage of some things in the market for them. So they had a good revenue year over year in the first six months, and they had good profitability year over year in the first six months. And we see other good things coming along. Uh, from a, from a cash flow and cost performance perspective there. Uh, you know, as you probably know, that cross selling takes a while to get things going, but we're, we're, we're, I think that the gears are really, uh, meshing and starting to move there. Do you add anything, Mike, on, on NDS?

I mean, uh, you asked about the synergies. I would say we're tracking ahead of our year one plan and synergies. Um, that's gone very well. We're starting to see the benefits of that. I would say we've, as we've kind of owned the business now for several months, we've covered other opportunities. We think that will be additive to that $25 million target we had. But just re-emphasize, like what Scott said, the cross-selling just kicked off. You know, very encouraged about what we're seeing early. Hasn't turned into, you know, a material amount of orders yet. But, you know, the momentum for that will build through the year. And, you know, I would expect that the bigger impact from that will come next fiscal year versus, you know, in the remaining months that we have this fiscal year.

Excellent. Well, thanks, guys.

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

Hey, good morning, guys. You've Matt Johnson on for John. Appreciate the time. I guess my first question is just on the resin costs have clearly been volatile. I think last quarter you guys had said the expectation was for peak resin cost inflation to hit in the second quarter, although I know you mentioned that the pressure has been a bit less than expected. So I guess, has that expectation changed for 2Q to be, you know, peak resident inflation? And have we felt the impact of peak transportation cost inflation yet?

So, on the latter part of that, no, on transportation costs, still something that we're managing through. But again, we've talked about that. Something that continues to accelerate on us as we look, particularly, you know, sequentially in year over year. So, on the resident cost side of the house, timing in the first half, but second quarter, we still project will be the high end of that on a college basis. We obviously look at what we procure, how it sits on the balance sheet, then when it comes through to the income statement. So, again, Q2 is going to be the high watermark, but that being said, when you look at 2H, That's going to be at a relatively higher, steady level. And in the first half of the year, we had not as much in Q1, but more in Q2. And that gets to the pricing getting in front of that, as we saw in Q1. So again. Q2 is the high watermark, but we're still going to see elevated res as we go into 2H, but it's not going to be as high as what we saw in Q2. Still elevated, though. Yeah, it's not going back down.

That's for sure. Still elevated.

Appreciate that color. And then I guess if I can just take a stab at the EBITDA bridge, I think in the back half, the outlook implies that your total EBITDA is down, I think, about $27 million year-over-year at the midpoint. I mean, should we think of, based on what you guys are saying, that the price mix materials? Bucket plus the manufacturing and transportation buckets will combined remain positive year over year, which will be offset by pressure on the others. I know you guys had mentioned that organic volume should be up. So just trying to get some help on how we should think about that.

Yeah, organic volume should be up below single digit, but absolutely, you said it well. When we look at price material costs, that bar will continue to be favorable. When you look at transportation headwinds that we have, again, that pricing will offset that as well. So we expect that plus the volume all in to be net-net green as we look at that 2-H.

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

Thank you. Good morning, guys. We can obviously back into fiscal 2H expectations given the reset guide, and you've given some good color on the bridge 2H versus 1H. Anything else you can offer on revenue and edict, cadence, Q3, Q4, given current visibility?

No, I think we're trying to stay away from giving quarterly guidance, Brian. I think the most important takeaways are, first, low single-digit organic growth in 2H. Again, we saw that in 1H. Again, we're going to grow organically, even in these down-end markets. That's key takeaway number one. Key takeaway number two, pricing is covering not only material costs, but the transportation cost headwinds that we have, net-net, and that is going to continue. You saw the bridge we put out there for the first half of the year, year-to-date September, and again, we'll see the same in 2-H. It won't be that robust of a spread, if you will, but it's still going to cover it more on a dollar-for-dollar basis as we go through 2-H. But that's a key takeaway. Price cost, favorable. Organic, low single-digit growth. So those would be two of the key takeaways I would make sure that you have.

Okay, understood completely. And then hopefully we could focus a bit more on storm traps. Why was that, or why is that the right asset for you to expand in the large-volume space-constrained vertical? And we know snapshot TNL metrics, but how fast has storm traps been growing? Over recent years and recent past, and how significant could or should cross-selling opportunities be going forward? Any related color would be great. Thank you.

Yeah, hey, Brian, it's Mike Higgins. So, you know, why that's the right product for us in these large volume, kind of space-constrained, deep applications. You know, clearly, you know, StormTech is a market leader in those applications. But, you know, the chambers, you know, are best suited when, you know, you have space, you know, you're not footprint constrained, and you don't have to go too deep to get the storage you require. When you get into a situation where you're footprint constrained, you need larger volumes of storage, you need to go deeper, and the vault provides, you know, the best solution or the best application for it in those type of projects or in those type of applications. And as we, you know, continue to look at the segments, you know, we sell into those four parts of the life cycle of a raindrop, you know, we want to have a full set of solutions for people across, you know, specifically storage in the treatment, treatment segments and capture. So, you know, if you look at what we have today, you know, we have. Pipe can be used in that application. We have chamber, plastic chambers with StormTech and Coltech, and now with StormTrap, you know, we have these vault products to kind of cover the spectrum of applications and solutions you would need, and that makes, we think, makes us more valuable, you know, to our engineering customers and contractors. The second part of your question about the cross-selling. You know, we think that's going to be, you know, pretty strong going forward. You know, obviously they have the same type of go to market strategy, so it fits very well with us. It's very engineering centric, spec driven. And, you know, today, you know, we're, you know, they have basically a vault product and kind of a smaller water quality product line. And so we can open access to their salespeople, to all of our products. And then this just also, we can open up further engineering customers and engineering contacts to their salespeople. So this really enhances our scale through that specification community.

Makes a lot of sense. Thanks again.

Your next question comes from the line of Garrick Schmoise with D.A. Davidson. Your line is now open. Please go ahead. Oh, hi.

Thanks. I'm just hoping you can speak to the competitive landscape. It's encouraging you're still seeing strong improvement in price costs and expected to offset transportation costs as well. But is there any change? In the landscape, just given the softer resi backdrop, and, you know, how should we think about that just more broadly in this slower demand environment?

So, I'll take this one. This is Scott Barber. I would not say there's any major change. You know, I think there, in fact, there might have been some retreat in some areas because of this inflationary pressure, particularly rapid rises in materials and the transportation, making it a little harder for smaller guys to compete against us. Many, many times they don't have the balance sheet we have. They don't have a fleet. Uh, like we do, where they can control the cost a bit more of the transportation of the product. Um, so I wouldn't say it's gotten any more competitive. Uh, and I would also say, perhaps in some areas, it's, it seems that people take a step back. Um, that said, you know, we, we, we, we have to remain, uh, sharp with, uh, the service and economics we provide in the market, so. You know, we continue to focus on that every day with our work in the various regions.

Okay, that's helpful. I want to ask just on a couple of the smaller end markets, infrastructure and agriculture, just given the outside sales declines in the second quarter, anything to call out there?

Yeah, so on agriculture, Allison is giving me some kind of signal here. I don't know what it is. But on agriculture, big pull ahead in the first quarter. I think it was up 16%, 17%. That certainly got reflected in poorer sales in the second quarter. Year-to-date in agriculture through that first part, we were down a million dollars for agriculture. Big impact of that. Probably the question around more pull ahead than anticipated, probably that happened in the agriculture piece. The end markets remain, you know, weak in agriculture. That's no surprise. But we're coming into the cyclical seasonal part of that, which is looking better, better right now than than. Then we anticipated slightly. On the infrastructure, you know, it's kind of weird, same story, where we are strong versus where we are weak in terms of our approvals and participation and penetration of those markets. But certainly those markets are a little more sensitive right now, the infrastructure markets on kind of big projects because of the inflationary pressures there. Our sense is they're doing a lot of smaller stuff. There's not as many tenders, big tenders going out right now.

Garrett, this is Mike Higgins. The other thing I would add on the infrastructure, you know, we're seeing, you know, specifically you asked about the quarter, it was just the different segments we play there was mixed. You know, when you look at the things that we sell to state DOTs, that was up high single digit. We're still lapping a pretty difficult comp on the airport activity, you know, that we talked about last year where a lot of that early construction on some of these airport projects where our products go in was happening, you know, that now that spend of construction has moved to things going above the ground where obviously we don't participate. And then in the quarter we have seen. It's kind of a slowdown in kind of local infrastructure spending. So it's a little bit of a mixed bag there in the segments, too, along with what Scott said about, you know, just being highly variable by geography.

That's helpful. Thank you very much. Your next question comes from the line of Jeff Reeve with RBC Capital Markets. Your line is now open. Please go ahead.

Thank you. Good morning, everyone. I want to go back to the material inflation running below your original assumptions. Are you actively giving back any of the pricing you put in earlier this year, or is it simply that you just don't need to implement additional increases that were planned previously?

So this is Scott Barber. The answer to your question is no. The material inflation was not as much as we anticipated. So therefore, we did not have to price as we anticipated at that time. However, if you look at the bridge, for like the fourth or fifth time in the nine years I've been here, we've successfully covered our inflation with pricing. And we are successfully holding on to that pricing in a reasonable way after, you know, it kind of goes up. And I think we've done this several times. We know how to go do it. The competitive competitors have to do the same thing because they're subject to even more egregious material pricing than we get. Added to that is this transportation that has been highly inflationary. And we've been able to, you know, cover that. By the way, we've also been able to mitigate the cost side a lot because we own our own fleet. You know, it's a real advantage for us in these kind of conditions when we own our own fleet on that. So we're even more competitive in the market for that reason right now. So we're, I think we're in good shape on this. And, you know, the material is elevated. They've kind of stayed at that elevated rate, which is above year over year. We raised pricing to capture that, and we will continue to hold that pricing to cover those increased costs. They're not as much as we thought, but they're still bad, and we've, I think, successfully done what we told you we would do.

And Jeff, the one thing I'd add to what Scott said there, when you look at the EBITDA guidance, it's largely unchanged. And that's a great testament to what Scott just said there, right? If we didn't have confidence in that pricing, being able to cover those costs, it would be a much different picture, and you would have seen more of a change there.

Got it. Okay, I appreciate that. And maybe just one, on the pre-buyer, you revised the estimate a little bit higher, but I mean, what gives you confidence that the incremental, that 10 to 20 million is really just, you know, timing and not the end market deterioration?

Well, we look at, you know, kind of order patterns, and by, with some detail, you know, by geography, by segment, by distributor, and we know what kind of programs we drove with them, or they drove, you know, we discussed as they did those pre-buys, and then we look in the second quarter, you know, where those kind of adjusted out to, and We know that the first and the second quarters are usually, you know, kind of the same in terms of volume. And we look at that, and if you kind of make that $50 million adjustment, the quarters are pretty much flat. So we have two or three different points of view on that to triangulate it.

The one thing I'll add as well to Scott's earlier point to one of the other questions, we've done pricing in this kind of environment before, so we generally have a really good handle on kind of the activity, if you will, or behavior of our customers as they try to get in front of this, of a pricing that's coming their way. So we know kind of the duration that we need to watch to kind of get a sense for kind of what did that look like from that pull-the-hip perspective, and then when does it normalize? So, again, we feel very confident that by the end of the second quarter that it all normalized out, and as Scott said in the prepared remarks, 1H is really the performance you need to look at that shows you or demonstrates how the company really did perform during the first half of the year.

Great. I appreciate that. Thank you.

Your next question comes from the line of David Tarantino with KeyBank Capital Markets Incorporated. Your line is now open. Please go ahead.

Hey, morning, everyone. Maybe just to put a finer point on maybe in this deceleration of pipe, I assume this is more due to the pull forward. So maybe how would you describe underlying demand here and maybe give us an update on how material conversion is playing out, particularly as your competitors are also dealing with these same inflationary pressures? And maybe conversely, just talk about the outgrowth and allied products and where you're seeing the most growth there.

Yes, I had a hard time. This is my kick. I had a hard time understanding the first part of your questions. You're asking about the conversion story. Did I hear that right?

Yeah, just how you're seeing material conversion play out. I assume kind of most of your plastic and concrete competitors are having to raise prices maybe more so than you are given you own your transportation fleet, etc. So just give us an update there.

Yeah, again, I... The conversion story is intact. You know, it's very kind of consistent, methodical year after year. A lot of that conversion is being driven by the polypropylene pipe, the HT product. So we continue to see, you know, good uptake of that in the marketplace, good continued new acceptance of that in the marketplace. So no concerns with our conversion story and taking market share from concrete pipe. The allied products, you know, outgrowth is really the things that we've talked about, you know, really over the past year or so. You know, it's, you know, we have a very acute focus with our sales team and our engineering team about selling the package, selling the full solution. So making sure, you know, we're getting more products specified on projects, giving us more opportunities to sell. Obviously, there's a conversion element with some of those products as well. And then, you know, I believe Scott had some comments in the opening remarks that he had about, you know, the new products that we have been bringing to the marketplace. You know, there's been new chamber sizes that we've introduced. There's been new products in our capture product line. You know, we've introduced new water quality products. I think we're on a just released our third new one over the past call it 24 to 30 months. You know, and the same thing holds true with Infiltrator as well. You know, their growth coming from the continued conversion to the plastic septic tanks, those continue to grow, and then the advanced treatment products as well, which, you know, they continue to introduce new products in advanced treatment and the septic tanks, and, you know, this regulatory environment continues to evolve and become more stringent for these advanced treatment products. So they're capturing on that or a great position, market position.

Does that answer your question? Okay. Yeah, yeah, that answers my question. And maybe just a similar line of thought on Resi seems to be holding up maybe a little bit better than the broader end market. So can you talk about the outgrowth there and how sustainable is this, particularly kind of going into the second half where it appears that headwinds in that end market continue to grow?

Yeah, I think when you look at the stormwater business, you know, that outperformance is going to be driven by us taking market share from concrete pipe, right? You know, whether it be with HP or with the N12, that's allowing us to outgrow the market there. And then, you know, I would say the same thing with the infiltrator business. Like I just talked about, it's advanced treatment for residential. You know, even though they have good share with the leach field, the septic chambers, and their other products, there's still share to go after there, and they're executing. And then, again, as I mentioned before, the septic tanks, right? New products in the septic tanks, adding more points of distribution, converting to the infiltrator tanks from precast concrete, all of those things together, you know, help us Let's outgrow a very challenging residential end market, as everybody knows. Great. Thanks, guys.

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

Hey, guys. Thanks for taking my question. Sorry I fell off there for a minute, so I hope I didn't miss this. But one is on operating leverage, SG&A, you guys performed pretty well there despite that incremental pull forward. Maybe that was a little stronger than you thought into the prior quarter. Anything to note there? And again, sorry if I missed it, but NDS, synergies, how they're trending versus plan?

So, this trade is Scott Barber. NDS performing above plan from both slightly on the revenue, but quite nicely and more significantly on the profitability. And they've leaned in hard with us on all the different programs. I'd say we're ahead of plan on the kind of operational cost. Side of it. The cross-selling, we're really just now beginning, but we're encouraged by the quotation and activity that we see there. That's a little longer to implement, but I think we're on our way there. And then our SG&A, really all the incremental SG&As is the NDS ad. I think we're watching SG&A pretty closely at Infiltrator and at Legacy ADS. The NDS guys do a nice job managing their SG&A as well. We'll continue to work that. You know, we want to make sure we control that well because we don't want to get on a bad, you know, cost curve there as we move into next year, particularly.

Okay, and one last one for me, and this is just for some clarity on, I guess, on my part, and I've gotten the question a couple times, but just on the transportation and the fuel. And understanding you guys own your own fleet, but just so that we can understand the mechanics here on the fuel side and, you know, transportation side, is that usually passed through, you know, as fuel surcharges that can, you know, fluctuate back and forth with freight and fuel costs? Or is that, you know, embedded in the overall pricing that you guys put out there in the market?

On the fleet we run, it is embedded. So that fleet delivers primarily pipe products to job sites and distributors. And it is an embedded price. And we look at the DOT fuel table every week and adjust the elements of price that is embedded in our pricing. Does that make sense? You know, Trey. So, to answer your question, we look at it. I look at it. Catrell looks at it. I mean, we're pretty active managing that.

Yep. Got it. Okay. Well, thanks for the clarity there. Best of luck. Thank you.

Thank you. Thank you, Trey.

This marks the end of the question and answer session. I will now turn the call back to Mr. Scott Barber for closing remarks.

All right, thank you for those questions, and we appreciate the opportunity to provide clarity, and what we understand is a lot of movement. In that first quarter, in that first half, and in the year here. You guys know us well. I mean, we're pretty focused on executing against our plan and sharing with y'all how we're going about doing that. We have confidence where we're going. We had really good board meeting and committee meetings this week. You know, I think we're well aligned. We're anxious to close the storm trap. The acquisition here this quarter. We're really looking forward to getting in and closely working with that team, Nate and his team, on the growth opportunities there. The question was asked about, you know, how we build this portfolio. And if you guys recall what we talked about on the capture, where we had a very nice bespoke product line with Nyloplast. We added in a market-leading standard product with the NDS. I think if you look at our storage, this retention-detention market, it's kind of built around StormTech. We added in the Coltec product line. We added in the Aquabox crate product. Think of this Stormtrap as just adding to what I call our stack of solutions for a very attractive, nicely growing market in that retention and detention. And Stormtrap has been growing a little faster than we have in that market, and we were growing pretty well in that for ourselves. So we'll continue to look at how we added that package over time, and I think we feel good about where we're set up right now. So thanks, and we look forward to being on the call with a group of you here afterwards.

This concludes today's call. Thank you for attending.