Advanced Drainage Systems (NYSE:WMS) lowered its fiscal 2027 revenue outlook after reporting a 5% increase in second-quarter sales, saying raw material inflation was lower than it had anticipated while residential demand continued to weaken.
The drainage and water management products company reported quarterly revenue of $889 million and adjusted EBITDA of $287 million, for an adjusted EBITDA margin of 32.2%. Management said the quarter was affected by customers moving purchases into the first quarter ahead of price increases.
Chief Financial Officer Scott Cottrill said the company now estimates that $40 million to $50 million in revenue shifted from the second quarter into the first. He said second-quarter margin compression primarily reflected that shift, peak material inflation and higher diesel and third-party logistics costs.
For the first half of the fiscal year, revenue rose 13%, including 2% organic growth. President and CEO Scott Barbour said the six-month period provided a better picture of underlying performance because of the timing of customer purchases. The company posted a first-half adjusted EBITDA margin of 34.1%, which Barbour described as the highest in its history.
Lower Revenue Outlook, With Pricing Expected to Cover Costs
Advanced Drainage Systems lowered the midpoint of its fiscal 2027 revenue guidance by 3% to $3.35 billion. It also reduced the midpoint of its adjusted EBITDA guidance by 1% to $1.015 billion, implying a 30.3% margin. The outlook excludes the pending StormTrap acquisition.
Cottrill said the revenue adjustment primarily reflects lower-than-expected inflation in resin costs and, consequently, less pricing needed to recover those costs. Transportation costs, by contrast, have remained higher than the company anticipated in May.
At the midpoint of guidance, the company expects low-single-digit organic growth in the second half and pricing that offsets year-over-year increases in material and transportation costs. Cottrill said the benefit from pricing relative to those costs would be less pronounced than in the first half, when price increases took effect ahead of some cost increases.
Barbour said the company was not actively giving back pricing already implemented. Rather, it did not need to raise prices as much as initially anticipated. Cottrill said the second quarter was expected to be the high point for resin costs on a cost-of-goods-sold basis, though costs would remain elevated in the second half. Transportation cost pressures were still accelerating, he said.
Residential Weakness and Nonresidential Growth
First-half residential sales rose 21%, reflecting the acquisition of NDS, but declined 4% organically. Barbour attributed the organic decline to weak residential land development, partly offset by growth at the Infiltrator business.
Barbour said the company’s principal change in demand expectations was in residential construction. Higher interest rates had removed what little momentum existed in residential land development, he said.
Nonresidential revenue increased 10% in the first half, including 8% organic growth. Barbour cited double-digit growth in large projects such as data centers and warehouses, as well as general commercial construction. Mike Higgins, vice president of corporate strategy and investor relations, said activity varies by geography and that speculative nonresidential construction remains challenging, while large projects financed from companies’ own balance sheets continue to move forward.
First-half organic revenue grew 6% in Allied Products and 3% at Infiltrator. Higgins said demand for polypropylene pipe continues to support conversion from concrete pipe, while new products and efforts to sell more of the company’s portfolio on individual projects have contributed to Allied Products growth.
StormTrap Deal and NDS Integration
The company expects its proposed acquisition of StormTrap, a provider of engineered stormwater storage solutions, to close in the fourth quarter of calendar 2026. Cottrill put the purchase price at approximately $530 million, or about $450 million after adjusting for the net present value of expected tax benefits.
Higgins said StormTrap’s vault products would complement the company’s existing pipe and chamber offerings on projects where space is constrained or deeper storage is needed. Barbour said StormTrap had been growing somewhat faster than Advanced Drainage Systems in the retention and detention market, without providing a specific growth rate.
NDS contributed $172 million in first-half revenue, Barbour said. Cross-selling began in the second fiscal quarter, but Higgins said it had not yet produced a material amount of orders. He expects a larger impact next fiscal year. Higgins also said NDS integration synergies were tracking ahead of the first-year plan and that the company had identified opportunities beyond its $25 million target.
Advanced Drainage Systems generated $359 million in free cash flow in the first half and ended the quarter with leverage of 1.6 times. Cottrill said the company expects net leverage of approximately 2.0 times after the StormTrap acquisition, within its preferred range of 1.5 to 2 times.
About Advanced Drainage Systems (NYSE:WMS)
Advanced Drainage Systems, Inc (NYSE: WMS) manufactures water-management products for infrastructure, construction, agriculture and residential markets. Its offerings include thermoplastic corrugated pipe and related products used to manage stormwater, drainage and wastewater.
The company also provides stormwater storage, treatment and infiltration systems, as well as products for onsite wastewater and septic systems through its Infiltrator Water Technologies business. Its portfolio includes solutions for projects ranging from roadways and commercial developments to residential wastewater applications.
Founded in 1966 and headquartered in Hilliard, Ohio, Advanced Drainage Systems serves customers across North America and in international markets.
