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Advanced Drainage Systems Inc (WMS) Q4 2020 Earnings Call Transcript

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Advanced Drainage Systems Inc (NYSE:WMS)
Q4 2020 Earnings Call
May 21, 2020, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by and welcome to ADS’s Fourth Quarter Fiscal Year 2020 Financial Results Conference Call. [Operator Instructions]

I would now like to turn the conference over to your first speaker today, Michael Higgins, Vice President of Corporate Strategy and Investor Relations. Thank you. Please go ahead, sir.

Michael HigginsVice President of Corporate Strategy and Investor Relations

Thank you and good morning. With me today, I have Scott Barbour, our President and CEO; and Scott Cottrill, our CFO. I would also like to remind you that we will discuss forward-looking statements. Actual results may differ materially from those forward-looking statements because of various factors, including those discussed in our press release and the risk factors identified in our Form 10-K filed with the SEC. While we may update forward-looking statements in the future, we disclaim any obligation to do so. You should not place undue reliance on these forward-looking statements, all of which speak only as of today.

Lastly, the press release we issued earlier this morning is posted on the Investor Relations section of our website, a copy of the release has also been included in the 8-K submitted to the SEC. We will make a replay of this conference call available via webcast on the Company website.

With that, I’ll turn the call over to Scott Barbour.

D. Scott BarbourPresident and Chief Executive Officer

Thanks, Mike, and good morning everyone. Thank you for joining us on today’s call. I hope you and your families are healthy and safe during these difficult circumstances. Both ADS and Infiltrator are essential businesses as part of the construction supply chain. So in that sense, we are very fortunate to have demand for our products and services. To be able to deliver to our customers, we must be able to provide a healthy and safe environment that our employees are able to work and want to come to work in.

The people in our factories and distribution points, the drivers and loading personnel and the transportation and logistics network, our customer service, financial and engineering personnel all have done an extraordinary job in adapting to the new health and safety protocols and changes in the location and processes they use to execute their responsibilities each day. So I connect the dots with our organization all the time in this way.

We’re fortunate to have a stable demand environment right now. We are providing a safe and healthy work environment for our employees to execute their jobs. We must deliver products to our customer sites in a healthy, safe and on-time manner. And by doing these things well, we are navigating our way through this very unusual set of circumstances.

As Scott C and I will discuss in more detail, we’ve been able to execute pretty well and deliver good performance in a very strong fourth quarter in fiscal 2020. Despite the regional differences in state or provincial directives and pace, demand for our products has been relatively stable through April and May, allowing us to continue executing on our long-term strategic initiatives to drive sales, margin expansion and cash flow generation. While various markets may weaken in the future, we feel we have the right programs in place that will make the necessary adjustments to adapt as market conditions on the ground change.

When we execute well on our priorities underneath these strategic initiatives, we drive profitability and cash flow improvements, which in turn allows us to protect our balance sheet through these uncertain times. Because ADS and Infiltrator are categorized as a central businesses, we remained up and running through the last few months, the states issued varying degrees of shutdown orders.

From a health and safety standpoint, we are taking all the necessary standardization and social distancing protocols at our facilities. Where possible we transitioned employees to working from home to limit physical interaction. We are also using a thorough case management process to work through any potential cases, which is further limited exposure within our employee base. I’m very proud of our team’s response to support our businesses, our customers and the communities they serve.

From a market perspective, we are closely watching quoting activity, order pace and shipments. Demand has remained fairly stable overall into the first quarter and April net sales increased mid-single digits in both the US and international. Underneath that, the agriculture and residential construction market sales showed strength. The non-residential construction market differs by state, and we are seeing weakness in the states were shut down orders were more restrictive like, Washington, Michigan, Pennsylvania and California. However, construction activity was strong in such states as Florida, parts of the Southeast and the Carolinas.

Similarly in May, we are seeing solid sales activity with good demand in the same areas. We are encouraged to see states that were weaker in April starting to come back as restrictions loosen. Today, May construction sales are improving both year-over-year and sequentially and agriculture continues to be robust. So that business will seasonally slow down as we get into June.

Demand environment may weaken and we are prepared in the event market conditions become less favorable in the second half of the year. Accordingly, we have implemented a prudent cost reduction and mitigation program to protect our profitability with an initial $10 million of savings implemented. Out of an abundance of caution, we also drew down $100 million from our revolving credit facility in March.

Right now we are very focused on the first half of the year and running our sales and operations planning process twice monthly so that we are able to execute effectively in this stable demand environment, which does have some variability by region and segment. This planning takes us out into the September time frame. I want to go through a couple of cycles of the monthly economic forecast on non-residential construction and housing starts before we spend a lot of time developing a point of view on the second-half demand and firming up our production planning schedules and material.

However, we are not waiting to take mitigation actions and are taking the prudent steps shareholders expect of us to ensure we are prepared for what May lie ahead. And we feel confident we will emerge from this period a stronger business in terms of our focus and execution capabilities.

Moving to the fourth quarter results. We had a very strong quarter at both ADS and Infiltrator Water Technologies. ADS organic sales of 15% was driven by our key sales programs including material conversion, water management solutions in key states. Favorable weather conditions in the fourth quarter contributed approximately $10 million to the top line sales growth. Additionally, we believe there was about $10 million of pre-buying in March, attributable to the COVID-19 from contractors getting jobsite materials delivered ahead of any potential closing or destructions. So net-net, there is about $20 million of fourth quarter sales due to pull ahead and weather. Absent this, sales growth would have been 8% in the quarter, which is still on pace with what we were experiencing before COVID-19.

Infiltrator sales were up 4% year-over-year, performing ahead of our expectations with strong growth in tanks and chambers due to execution on their material conversion strategy in the residential onsite septic market. We achieved our fiscal 2020 synergy targets and are on track to achieve our synergy targets in year two and three. Our fiscal 2021 projects related to materials, recycling, procurement, transportation and logistics are all under way. Over 40% of the synergies today are from material-based projects and we think that will grow as those programs gain traction and contribute on a full year basis.

The fourth quarter adjusted EBITDA was also strong with margin expansion of 590 basis points overall and a 160 basis points organically. The strong fourth quarter results and execution in fiscal 2020 has put us in a favorable position coming into the current environment. Over the last eight weeks, we have learned a lot about the way we can do business. A large portion of our employees and customers can effectively work from home, a testament in part to the technology investments we made over the last several years. We also stood up new processes in our plants, not only around health and safety, but also in customer interactions as well as in production and inventory planning, which are making our operations more efficient.

Like many of you, we spent time thinking and analyzing how the non-residential construction markets will change post-COVID-19. Non-residential construction is 52% of our domestic sales. So we are highly sensitive to how and when these changes occur. Some segments like warehouses and data centers, two good markets for ADS, will continue to have strong demand. Other segments like hospitality and restaurants, we expect to be weaker. I believe we are well positioned to leverage our high coverage, high-touch national, sales and distribution model to pursue and close on the most promising segments and geographies.

Our HP products, which are good products for growing geographies like Florida are doing very well. This is the tip of the spear for us to further penetrate large diameter stormwater applications. Additionally, partnered with Infiltrator increased our exposure to the residential end market, which we think will recover more quickly than non-residential due to both the shortage of housing and the post-COVID-19 preference for single-family housing.

Finally, in our operations, we view this as an opportunity to drive our continuous improvement programs, working capital initiatives and programs related to transportation and logistics. We’re using this opportunity to improve inventory planning and management, which will position us well when construction activity strengthens. As we continue to adjust to the circumstances in front of us, our priority remains a healthy and safe place for our employees to work.

Our key strategies are still very relevant including delivering on operational improvements, executing our material conversion and water management solution strategies and expanding in key states where construction growth remains active. Though we are facing new challenges, our long-term objectives remain the same. Sales growth, margin expansion and cash flow generation, all which drive a healthy balance sheet.

Furthermore, we are working to strategically position the business to respond to changes and demand, as well as ensuring we remain on offense with our strategic programs that focus on high priority states, allied product growth and new products, particularly at Infiltrator.

With that, I will turn the call over to Scott Cottrill to further discuss our financial results.

Scott CottrillExecutive Vice President, Chief Financial Officer and Secretary

Thanks, Scott. On Slide 6, you will find a summary of our results for the year as compared to our most recent guidance ranges. Net sales, adjusted EBITDA and adjusted EBITDA margins for the year, all exceeded the high end of our guidance range. Our outstanding financial results for the past year allowed us to hit our long-term adjusted EBITDA and cash conversion targets one year ahead of plan, while also keeping us on track to achieve our long-term revenue growth targets.

On Slide 7, we break down our sales growth by end market. As shown on this slide, our sales grew substantially above our domestic end markets. This above market growth was driven by continued execution on our conversion strategy and our focus on growth in key states. We also saw sales in our domestic agriculture market increase by 35% as we capitalize on favorable industry dynamics by successfully implementing organizational changes, introducing new products and better execution.

Sales in our residential construction end market increased 76%, which includes the results from Infiltrator, as well as 16% growth in our legacy ADS business. Though we expect housing starts to decline in calendar 2020, due to the impact from the COVID-19 pandemic, we believe the residential end market could recover more quickly than our non-residential end market and is well positioned.

Moving to Slide 8. As Scott has already discussed the revenue performance, I will go right to the drivers of our year-over-year profitability. Our organic adjusted EBITDA increased $11 million from the prior year quarter, resulting in a 160 basis points of margin expansion. The improvement was driven by sales growth in both our pipe and allied products, favorable material cost and disciplined pricing. This favorability was partially offset by an increase in manufacturing overhead costs related to building out our operational excellence programs and an increase in selling, general and administrative costs due to investments in our strategic growth initiatives, as well as higher incentive compensation expense due to our outperformance this year.

During the quarter, Infiltrator Water Technologies contributed an additional $25 million to adjusted EBITDA, resulting in 440 basis points of improvement in the consolidated adjusted EBITDA margin. On a stand-alone basis, the adjusted EBITDA margin of the Infiltrator Water Technologies business was 33.5%. As a result of the strong ADS legacy and Infiltrator results, our consolidated adjusted EBITDA increased 95% to $72 million from the prior year, and our consolidated adjusted EBITDA margin increased 590 basis points to 19.4%.

Our excellent fourth quarter results contributed to a record year for the Company as shown on Slide 9. Organic net sales increased $122 million or 9% from the prior year with an increase in all of our domestic end markets, including 7% growth in non-residential, 16% growth in residential, 6% growth in infrastructure and 35% growth in agriculture. We are very proud of our sales and operations teams who made this happen. Infiltrator contributed $211 million to our net sales during the eight months since the acquisition, bringing consolidated net sales to $1.7 billion, an increase of 21% over the prior year.

Organic adjusted EBITDA increased $56 million, increasing our margin 230 basis points to 19.1% for the full year, well ahead of the 16.8% margin last year and a full year ahead of the 18% target we communicated in November 2018 at our Investor Day. The margin improvement was driven by sales growth in both our pipe and allied products, favorable material cost, as well as disciplined pricing. This favorability was partially offset by an increase in manufacturing costs. Although we expect this trend to reverse and turn positive on a year-over-year basis in fiscal 2021, as we realize the benefit from our continuous improvement initiatives.

Selling, general and administrative expenses increased primarily due to the factors I already mentioned, including investments in our sales team and higher incentive compensation expense due to our performance this year. Infiltrator Water Technologies contributed $76 million to adjusted EBITDA for the eight months since the acquisition, increasing our consolidated adjusted EBITDA margin by an additional 250 basis points. On a stand-alone basis, the adjusted EBITDA margin of the Infiltrator Water Technologies business was 36.2%. Including the results from Infiltrator, our full year consolidated adjusted EBITDA increased 56% to $362 million, resulting in 480 basis points of margin improvement.

Moving to Slide 10. We highlight our very strong free cash flow performance during fiscal 2020. The business generated $239 million of free cash flow this year, an increase of $131 million over the prior year. This increase was driven primarily by higher profitability as well as a significant improvement in working capital. The improvement in working capital was driven by improved receivables performance year-over-year, as well as lower inventory driven by greater inventory turns, a reduction in slow-moving inventory, as well as lower resin cost. And finally, we’ve been able to extend payables through negotiations with our vendors. While we have made great progress on our working capital initiatives in fiscal 2020, there is still significant opportunity for further improvement in front of us.

Moving on to Slide 11. We highlight our pro forma trailing 12-month leverage ratio of 2.5 times. We are extremely focused on preserving our liquidity and driving free cash flow. We have previously communicated our guardrails of two times to three times levered, and still is even more important than ever that we take proactive and prudent steps and actions to protect our balance sheet and liquidity. We ended the year in a very favorable liquidity position, with $174 million in cash at March 31, 2020 and $239 million available under our revolving credit facility, bringing our total liquidity to $413 million. Actions we took this past year to make favorable changes to our capital structure has also resulted in no significant debt maturities until 2026.

Finally, due to the uncertain economic environment, we currently find ourselves in, we will not be providing guidance for fiscal 2021 at this time. That being said, here are a couple of data points to consider as we enter into fiscal 2021. The favorable resin cost trends we’ve experienced in fiscal year ’20 have continued into fiscal 2021. Like the rest of the economy however, there are a lot of unknowns and hence why we are not providing any guidance around resin cost at this time. Lastly, in fiscal 2021, we will continue investing in safety, quality, productivity as well as innovation. As a result, we expect capex spending to be between $60 million and $65 million.

With that, I’ll open the call for questions. Operator, please open the line.

Questions and Answers:

Operator

Thank you. [Operator Instructions] Your first question comes from Mike Halloran from Baird. Your line is open.

Mike HalloranBaird — Analyst

Hey, good morning, everyone. Hope everyone’s doing well. So, let’s start with some of the commentary around April and some of the forward commentary, just so I can understand the perspective you guys have here. So, seeing pretty stable trends in April and May here, the commentary in the prepared remarks, press release, talked about more concerned a couple of quarters out. I just want to try to understand what the genesis of that? Is that just chalking this up to COVID-19 and just the broader market uncertainty, or is that customer commentary, customer thought process and maybe a typical cycle dynamic as you work through things? Just a little bit more color on what that — what the implication there is from your perspective.

D. Scott BarbourPresident and Chief Executive Officer

Good morning, Michael. This is Scott — Scott Barbour. I would say that colored more about that more on the economic uncertainty and how I think things will change as we roll the non-residential and housing start forecast over the next couple of months and versus customer commentary or anything specific, like project cancellations or anything like that.

Essentially, right now, I think what we’re experienced is two things. Some states very much pre-COVID-19 behavior, and a pretty good backlog ahead of those states. Other states, the ones that went down hard, Washington, Pennsylvania, Texas, the Northeast, that pent-up demand is now coming back at some kind of pace, right now. So, we’re executing on that. And there’s probably a backlog behind that too, once you get through some of that pent-up demand. And it’s just not clear to me when we get through all that.

And then once you chew through that, how long that might take, then you begin to experience whatever the ramifications are from projects that are pushed out or canceled. And that visibility has not developed yet. So, we — so, just kind of summarize, we focus a lot on forecasting — like I said, we’re doing our S&OP twice a month, now to really make sure we have complete fidelity between now and September. And then once we go through a couple of spins on the economic forecast, I think we’ll be able to get a better look at what might be developing in terms of projects that go forward, projects that might be downsized, projects that might not go right now, but go in a couple of months because of one reason or another or things that are just canceled. That’s not clear at all right now.

Mike HalloranBaird — Analyst

Perfect. That was the color I was looking for. So, you also talked about mitigation measures to address the environment, maybe some context on what those might be, how much is structural in nature versus more traditional, temporary? And thinking more broadly, what do you think you would need to see to really go after some of the broader structural changes, whether it’s footprint or some other things on a forward basis?

D. Scott BarbourPresident and Chief Executive Officer

So, the $10 million today is what you would call temporary, delaying hiring, no merits, all that kind of stuff. Probably there — yes, there is probably very little of any structural in there. So what Scott and I are working on with our team now is what would be those structural things you would launch in the second half, if you saw — say deteriorate really, really bad. And so, we got that playbook. We know what we’re going to go to on that. Frankly, right now, I need all the capacity I can get to kind of service [Technical Issues]. So, we’re running pretty hard to tell you the truth. So, I would have to take any structural work into that second half when the demand really fell off and allow me to go do that.

If I could just add one thing to that, which I think, you’ll appreciate. We’ve really taken this as an opportunity to execute more sharply on a lot of things in the four walls of manufacturing, and in that transportation, logistics. And while those things are process related and day-to-day management related, I would put those as permanent types of capabilities that are gong in place, which we will continue to see benefits from. Now that’s not in those mitigation actions, but I think they’re ringing the register right now, along with the synergy programs that we’re working on and are going pretty well with IWT — with Infiltrator, excuse me.

Mike HalloranBaird — Analyst

And last one for me. When you think about the Infiltrator piece, maybe just some commentary around, similar to the first answer where maybe just talk about how that cycle plays out, because it’s probably going to be a little more quick turns, less projects that are forward facing or out facing. So, maybe just thoughts on how that cadence would look both today and in some variability as you look forward?

D. Scott BarbourPresident and Chief Executive Officer

Yes. It’s definitely a shorter cycle business that, that Roy and the Infiltrator guys operate than the more project based business of ADS. So, we kind of think of it as more of a V or maybe a little bit of a U and in accordingly void pulled back pretty quick and he’s beginning to see some things better than he anticipated. I wouldn’t call it the V yet, but that’s why we want to get through a couple of cycles of that housing. And probably the way I kind of talk about it, Mike, is if residential might be more of a V, I think non-resi might be more of a smoosh, because of just all the different segments that ABS projects activate in. some will be good, some won’t be so good. And that will make that more of a smoosh versus a V, as we go forward.

Mike HalloranBaird — Analyst

Thanks for the context. Appreciate it.

D. Scott BarbourPresident and Chief Executive Officer

All right.

Scott CottrillExecutive Vice President, Chief Financial Officer and Secretary

Thanks, Michael.

D. Scott BarbourPresident and Chief Executive Officer

Thank you.

Operator

Your next question comes from Matthew Bouley from Barclays. Your line is open.

Matthew BouleyBarclays — Analyst

Hey, good morning, everyone. Thanks for taking the questions. Hope you guys are all well. The comments you made, Scott B about the kind of longer term disruptions in non-resi and some of those verticals better off than others. I guess, number one, could you remind us how much of your non-resi exposure is specifically new non-resi versus R&R? And number two, I guess, is there any kind of difference in product mix or product intensity, I guess, for some of those stronger verticals that you mentioned relative to the weaker ones? Thank you.

D. Scott BarbourPresident and Chief Executive Officer

Okay. So, good morning. Good to — thank you for participating today. And we all — we are all well here. We all got masked and things like that, but we’re doing pretty well. So, I think on the ones — you take the first one Mike Higgins on the non-residential.

Michael HigginsVice President of Corporate Strategy and Investor Relations

Yes, Matt, non-residential construction, we pretty much view everything as new. And so, it’s going to be heavily weighted to that new construction, whether that’s breaking new ground or taking any existing site redeveloping it.

D. Scott BarbourPresident and Chief Executive Officer

Yes. It all looks new. And then on the intensity, I think, the way I would answer that is, our non-residential has a very high allied product intensity. Most of our allied products are sold into the non-residential commercial construction segments, various degrees around that. But that is something that we are looking at is how that intensity could affect us in those different segments as they go through this smoosh pattern that we think is going to develop over the next months or year, a couple years. The pipe is very heavy and the infrastructure, very few allied products in that, obviously the agriculture very heavy, pretty much pipe on like. So, that is something that we continue to analyze and peel back.

Matthew BouleyBarclays — Analyst

Okay. Got it. That’s helpful. Thank you for that. And then secondly, I guess, asking about detrimental margins is a little premature if you’re still running positive revenue growth quarter-to-date, but I guess just wondering if you could provide any additional framework on that, just given you are providing some cautious commentary around second half of fiscal 2021, just how we should think about perhaps detrimental margins in an environment where revenues potentially turn negative? Thank you.

Scott CottrillExecutive Vice President, Chief Financial Officer and Secretary

Yes, Matt, Scott C here. It’s a little bit dangerous to do that absent resin and mitigation actions. But generally, probably something in the 45% to 50% range is probably the right way to look at that from a detrimental margin perspective. Again, though, that would be pre-mitigation and/or any benefit we’d get from lower diesel, lower resin or other of those costs pressures we normally see when things are going the other way. We likely see those — we get some relief from those as it goes back the other way, but that’s the way I think about it. Absent, whatever assumptions you’d put into your model for those items becoming favorable.

D. Scott BarbourPresident and Chief Executive Officer

I would just add on that, that the way we’ve been doing this, it’s painful and it hurts. So, we bring it down to 50% and we started working like, heck to patch back to that 40% to 35% to 30%, depending on how many things we can go and grab quickly, which is part of the reason we did this $10 million mitigation actions early, even while business is good, so that we’re able to put a little bit a way when the detriment comes, we’re already on a head-start with that along with the things we’re putting in our playbook that I answered on the previous question.

Matthew BouleyBarclays — Analyst

Got it. Thanks so much and stay well, everyone.

D. Scott BarbourPresident and Chief Executive Officer

Thanks, Matt.

Operator

[Operator Instructions] Your next question comes from John Lovallo from Bank of America. Your line is open.

John LovalloBank of America — Analyst

Hey guys, thank you for taking my questions as well. First question is, appreciating that you’re not giving official guidance here, but typically we would see your business accelerate sequentially fourth quarter to first quarter. As we stand today, is there any reason other than the $20 million of pull forward sales that this shouldn’t continue this year for both the legacy business and Infiltrator? And along those lines, what segments did the pull forward sales impact?

D. Scott BarbourPresident and Chief Executive Officer

So, this is Scott B. So, the pull forward was $10 million of agriculture that was weather related and then $10 million basically non-residential construction business, because guys wanted to get material on jobsites before all hell broke loose. So, it kind of came in those segments, John. And I would tell you right now, given what we’ve seen in April and May, our normal sequential seasonal top line is behaving as you would expect.

John LovalloBank of America — Analyst

Okay. Great. That’s helpful. And then, on Slide 7, you guys calculate 2% year-over-year market growth through residential construction. Just curious how you’re coming up with that number. It seems like starts may have been a little bit higher than that by our calculations. And maybe more importantly, how were you able to so handily beat the market in that segment.

Scott CottrillExecutive Vice President, Chief Financial Officer and Secretary

You are talking about resi — sorry, residential, right John?

John LovalloBank of America — Analyst

Correct. Yes, correct.

Scott CottrillExecutive Vice President, Chief Financial Officer and Secretary

Yes. So, a couple of different factors there. We really kind of look at total housing starts, which were kind of relatively flat year-over-year, but there’s a bit — there’s a lag there too. So, a lot of the activity we’re seeing is kind of pre that house going up on lot. Or you said before they do a new subdivision or a new community, they need to come in and put in kind of the roads and streets, so they’re able to access that. And then on the Infiltrator side, they’re really on a kind of a six-month lag, right. The housing start happens and then kind of roughly six months later is kind of when an onsite septic system would get installed.

John LovalloBank of America — Analyst

Got it. Okay. That’s helpful. And then finally, I think there were $5 million of COVID related expenses in the quarter. Is that a reasonable run rate over the next couple of quarters? And just where in the P&L did those hit?

Scott CottrillExecutive Vice President, Chief Financial Officer and Secretary

Hey, John, this is Scott Cottrill here. Mostly in COGS, and related to a program we put in place with our hourly workers that allowed them up to two weeks pay for any kind of leave for child care or illness or any reason to be honest with you. And we accrued for those that entire program here in the fourth quarter, but most of that was in cost of sales.

John LovalloBank of America — Analyst

Great. Thanks a lot, guys.

Operator

Your final question comes from Josh Pokrzywinski from Morgan Stanley. Your line is open.

Josh PokrzywinskiMorgan Stanley — Analyst

Hi, good morning all. Hope, you’re all well. Just wanted to start off, I guess, first on you kind of the nature of the business on the non-resi side, I would imagine that you guys participate more and I guess for lack of a better term horizontal construction. So, kind of bigger plots of land, the 50-story building doesn’t matter so much as — maybe the horizontal square footage. Does that tell us anything about kind of the verticals that would be most prominent in the portfolio? I guess, I think of like big box retail and warehouse as being bigger drivers there, but anything that you guys can point to that that may be some helpful parameters around some of the verticals within non-resi.

D. Scott BarbourPresident and Chief Executive Officer

Yes. So, I think, your assumption there about where non-resi is better for us when it’s horizontal versus vertical, that is accurate. In terms of the various project types, we — in a normal situation, we would do very well with all of those — going back to the comments we said earlier, I think where we’ve seen strength has been in kind of warehouses, distribution data centers. Those have been strong in the past couple of years. Those are expected to stay relatively strong kind of through this pandemic. Where we would probably see more weakness and they would probably be smaller type developments or smaller type structures would be around kind of restaurants, kind of small retail centers, maybe hotels, obviously, are going to take a hit, and that’s going to take some time for them to come back. But also too, we do very well in institutional project. So, think about education and other types of business, healthcare, community centers, nursing homes, things of that nature.

So, I think it’s a balance. I’d probably say kind of on the kind of trade commercial side, which would be restaurants and retail and hotels. Those are going to have some struggles as we move forward. On the flip side, the things around distribution, data centers, education, healthcare, those should remain strong. So, our sales team and engineering team will work hard to identify those projects in their individual geographies. And they’re going to work like heck to get our product specified quoted and sold.

Josh PokrzywinskiMorgan Stanley — Analyst

Got it. That’s helpful. And then, just following up on the comment made earlier about some of this kind of backlog of activity of things that need jobsites, pre-open states, pre-open. How large do you think that is? And what — when does that kind of get work through the system? Is it a month or two or perhaps something longer?

D. Scott BarbourPresident and Chief Executive Officer

I thought — this is Scott B. I thought about it this way. So, you have many states that didn’t work or work at greatly reduced pace for 30 to 60 days, but that that work has to get completed. And then the market was running pretty well before all of this, call it, up until the middle of March, and our customers were telling us they had 30 or 60 days of backlog of work out ahead of them. So, it’s not going to be perfect, but I kind of do all that math and I see it and I see things kind of running, muscling through it like we are right now to an extent. And I’d say that because of not, we muscling through it from execution, but just how the demand is highly variable across the states that we look at every day.

And I think that kind of takes us maybe through the summer. And that’s why we have such intense focus on that twice a month sales and operations planning cycle. So, we’re just kind of keeping on top of that right now, because I know we got to execute and make our money right now. Because that I really don’t know what’s going to happen in that second half. So, that’s what it kind of looks like to me right now in terms of that kind of, call it, level of activity for awhile. And we spent a lot of time and resources and analysis time looking at it, but I I’d be less than really frank if I didn’t tell you, it could be cloudy some days to try to figure out what’s going on. But all that said, I think we’re operating pretty well right now.

Your question around horizontal construction and the segments that are moving, I mean, we’re talking with our sales team every day about pursuing the right jobs. Spend our time pursuing the right jobs, all segments aren’t created equal right now. I think this is where our high touch national footprint really helps us a lot as a company, because we’re really spread out nicely geographically. I don’t think that’s always the case with our competitors, in stormwater management, whether they be plastic or alternative materials. So, we have some nice, I think, cards to play here and that’s what we — that’s where we’re going to continue to work on, given some of this uncertainty.

Josh PokrzywinskiMorgan Stanley — Analyst

Got it. That’s helpful. And if I can just sneak one more in on some of the market outgrowth. The 600 basis points this quarter, obviously pretty impressive and higher than I guess what you would normally do. How should we think about that as being something that you has to do is kind of structural and repeatable versus maybe something that would be — perhaps more of a one off or a big project, something like that, that maybe we go back to the normal rate.

D. Scott BarbourPresident and Chief Executive Officer

Yes. Our normal rate is to gain one or two points of market share. I think this year was kind of extraordinary. Don’t sign me up for another 600 basis point gain in market share. But we will continue to kind of pursue that 100 to 200 basis points a year. I think that’s the right way for us to think. When we go through this, there wasn’t one big job that drove it. There wasn’t just one state that drove it. I really think it’s this focus on priority states that drive most of the construction work in the country. You’ve heard me talk about the crescent, is that focused on allied product attach rate, where we want to sell more dollars of allied products on every job.

We could fill holding up assigned to me saying, don’t forget our HP product line, which is the polypropylene product line focused on the large diameter, which has been a strategic focus for us for the last two and a half years. And we had really nice gains in that in many geographies. So, I kind of think it’s that program of just — some years is going to go better than others, but consistently it’s going to grind out 100 to 200 basis points.

Josh PokrzywinskiMorgan Stanley — Analyst

Got it. That’s helpful. Appreciate it. Best of luck to you guys.

D. Scott BarbourPresident and Chief Executive Officer

All right.

Operator

We have no further questions. I would like to turn the call over to Scott Barbour for closing remarks.

D. Scott BarbourPresident and Chief Executive Officer

All right. Thank you. Thank you all for those questions and very helpful for us to be able to provide some color, because I know it’s not easy out there right now. And we appreciate you taking the time. And as I said and believe we talk about this every day. We will continue to focus on the health and safety of our employees, because if they’re healthy and safe, they feel good about coming to work, we have demand, we can service that. Essential stormwater management and onsite septic wastewater solutions for our customers and our communities, that they serve, I mean, that’s what we do. We’ll continue to protect our profitability, the balance sheet and the cash flow, even through this economic uncertainty from COVID-19, and we feel confident we will come through this as stronger company. I think the initiatives that we’re working on right now, some of them, as I mentioned, are structural and we’ll carry that forward.

So, I want to thank our employees again for all their hard work and dedication. They’ve done a great job over these last eight weeks in a very difficult environment. And we appreciate all of your participation today. Operator, that concludes our call.

Operator

[Operator Closing Remarks]

Duration: 44 minutes

Call participants:

Michael HigginsVice President of Corporate Strategy and Investor Relations

D. Scott BarbourPresident and Chief Executive Officer

Scott CottrillExecutive Vice President, Chief Financial Officer and Secretary

Mike HalloranBaird — Analyst

Matthew BouleyBarclays — Analyst

John LovalloBank of America — Analyst

Josh PokrzywinskiMorgan Stanley — Analyst

More WMS analysis

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