Q4 2021 Lawson Products Inc Earnings Call
Good morning, ladies and gentlemen, and welcome to the Lawson Products' fourth quarter 2021 earnings call.
This call will be hosted by Michael Takeda Lawson Products', President and Chief Executive Officer, and Ron can Knutson Lawson products Chief Financial Officer.
During this call there will be providing an update on the business as well as covering relevant financial and operational information.
They will there'll be time for question and answers.
Please note that statements on this call and in the press release contain forward looking statements concerning goals beliefs expectations strategies plans.
<unk> operating results and underlying assumptions that are subject to risks and uncertainties that could cause actual results to differ materially from those described.
In addition statements made during this call are based on the company's views as of today. The company anticipates that future developments may cause those views to change. Please consider the information presented in that life. The company may at some point elect to update the forward looking statements made today, but specifically disclaims any obligation to do.
So.
This call is being audio simulcast on the Internet via the Lawson products Investor Relations page on the Companys website Lawson products' Dot com.
A replay of the webcast will also be available on the website through March 31st 2022.
I will now turn the call over to Lawson Products' CEO , Mike Decatur.
Good morning, and thank you for joining the call. This morning, I'll comment on the fourth quarter and the full year I will also share some thoughts on the state of the business and our expectations for 2022.
Ron <unk>, our CFO , who will provide a more detailed review of our financial results followed by your questions.
Before I discuss the quarter at December 29, we announced that Lawson entered into two merger agreements in which for US and agreed to combine with two of Luther King capital management portfolio companies test equity injects Pro services in all stock Trans.
Actions.
I will not be commenting on these merger agreements further on this call except to say that the proxy has been mailed to all shareholders of record <unk>.
And at the shareholder meeting is scheduled for March 15th.
We also reported solid fourth quarter performance growing our average daily sales by five 7% as compared to the fourth quarter of 2020, and 19, 7% for the full year of 2021 over 2020.
Adjusted EBITDA margin for the quarter was eight 3% and eight 6% for the year.
Both sales and earnings impacted by a myriad of factors related to the lingering effects of the pandemic and global supply chain disruption inflation product availability transportation disruptions.
And labor cost increases.
Throughout most of 2021, we've seen good organic growth on a sequential month to month basis.
This growth is encouraging as we believe the shortages and customer labor and our operational excellence are beginning to favorably impact our organic growth.
On previous calls Ive commented on many of our organic growth initiatives, including investments in people and process associated with state local and educational we call it sled markets.
Developing new channels to market and the rollout of our parked washing system.
The fourth quarter included some initial investments into these initiatives I am pleased to report that we are beginning to see encouraging signs that these initiatives will contribute to growth in 2022 and beyond.
Ron will comment more on our overall gross margin for 2021 and the fourth quarter.
But let me say that throughout 2021, we pushed through several price increases associated with input cost increases to protect our margins. We anticipate that this activity will have to continue in 2022.
While supply chain disruptions have continued to impact most companies.
We've made good progress in reducing our customer back orders and managing through warmer than normal lead times from suppliers are.
Our sales and pricing teams have done a great job in managing our cost increases and realizing price increases across our end customer segments custom.
Customers continue to recognize that Lawson products is the lowest cost option for managing their consumable MRO supplies.
This combined with acute labor shortages is resulting in more new prospects turning to loss of products for our service intensive vendor managed inventory offering.
During the quarter revenue retention with nearly 91% the postmaster operational integration is now fully complete sales reps products distribution centers and financial reporting have been fully integrated into wassa.
Overall parks master performed well throughout the year, however, a slowdown in military procurement in the second half of 2021 impacted the overall business.
Military activity appears to be rebounding early in 2022.
We are pleased that our two largest acquisitions <unk> master and the bolt supply house, if performed very well.
As we've discussed bolt supply has operated as a standalone business, whereas parks master is fully integrated into losses.
That both businesses have performed well gives us additional confidence in our future acquisition strategy.
This quarter.
Bolt supply achieved nearly 19% sales increase capped by an all time record sales month in November 2021.
Now turning to sales.
Strategic accounts growth was down sequentially, two 4% for the fourth quarter as compared to the third quarter.
<unk> up nine 7% from the fourth quarter 2020.
However.
On an average daily sales basis, excluding oil and gas segment.
Strategic accounts were up two 4%.
Non oil and gas customers represent 93% of our total strategic account customer base.
Several strategic account segments are growing faster than others.
Industrial customers through our integrated supply partnerships have grown over the past several years and growth is accelerating.
Of the 17 integrated supply partnerships 13 are growing nicely.
Another growth segment within strategic accounts is the construction equipment rental market looking forward. This is a significant growth opportunity for us.
Additionally, Kent automotive.
<unk> accounts achieved 16% growth sequentially versus the third quarter and 38% compared to the fourth quarter of 2020 as you may recall.
Our Kent business was more significantly impacted at the outset of the pandemic, but recovered faster than other businesses.
We added 236, new strategic account locations under Washington side of the business and 331, new kept locations during the fourth quarter of 2021.
We also added several large strategic account customers, including two construction equipment rental companies and integrated supply company and a seven location manufacturing customer. While these new relationships are early in their development. We expect these kinds of new relationships to help us achieve our 2020.
<unk> growth plans.
Sales in our government civilian segment were down as compared to the fourth quarter of 2020.
Like the third quarter. This is attributed to lower PPE sales as compared to 2020, However, our omnia contract continues to add growth.
We were recently awarded a contract in the automotive category through Omnia.
And we are beginning to do business under the recently awarded state of Iowa contract.
Optimistic about our government growth trajectory in 2022.
All three of our previously mentioned growth initiatives sled development of new channels to market and the toric parked Flushing system are still in the early investment stage.
However, these initiatives will start to drive sales in 'twenty two as well.
What other sales related topic sales rep productivity increased by eight 6% as compared to the fourth quarter of 2020 and up five 1% sequentially as compared to the third quarter.
Looking forward.
2022 has gotten off to a solid start.
While supply chain challenges and inflation continue we have learned to manage in this new environment. The initiatives that we've discussed previously are poised to contribute growth in several important segments and this momentum builds it is likely to be sustained for a long period.
Beyond the growth initiatives that I just mentioned our core market is expanding customers across all segments are struggling to find people to run and maintain their equipment more businesses are turning to outsourcing as a solution to this problem.
And we are seeing the benefits of investments that <unk> made over the past years and operational excellence and lean six Sigma which are differentiating us in the market.
This year, Washington celebrates its 70 <unk> anniversary and next year bolt supply will celebrate their 75th anniversary.
Over those years.
We've been refining our value proposition and employing state of the art processes.
We've kept the best of our culture, while remaining resilient and embracing change.
Now I'd like to turn it over to Ron for more information on our financial performance.
Thank you, Mike and good morning, everyone I will start with some key takeaways for the quarter and then we'll get into some of the details.
I'll also share some highlights for the full year of 2021.
First a few highlights for the quarter.
Consolidated sales improved by $4 million to $102 1 million on one less selling day this year.
Average daily sales were up five 7% versus a year ago quarter MRO.
MRO sales rep productivity during the quarter improved by eight 6% versus a year ago.
Second our consolidated gross margin percentage was 52, 9% versus 53, 1% a year ago quarter and 53, 1% in the third quarter.
We proactively manage margins this quarter, despite the global supply chain issues in the marketplace and inflationary pressures.
Third inclusive of $6 9 million of nonoperating iron items, our reported operating loss was 825000 for the quarter compared to a loss of 658, a year ago quarter.
Our adjusted diluted earnings per share was <unk> 52 for the quarter.
And fourth our adjusted EBITDA was $8 4 million or eight 3% of sales.
As we reflect on the fourth quarter in the full year 2021, we've continued to drive our business forward sales.
Sales continue to sequentially improve in the Lawson and bolt business as does our sales rep productivity.
Most product categories realized sequential daily sales increases over Q3.
We continue to make great progress in this environment and continue our focus on driving sales protecting our margins cost controls and cash flows.
We remained focus on supporting our customers and generating revenue in this environment, while continuing to ensure the safety of our teammates.
As Mike mentioned, we're excited to celebrate that this year 2022 is our 70 <unk> anniversary as an organization.
We've built this company through strong customer relationships that rely upon us for our services products and expertise.
In light of the current and anticipated future labor shortages, we have become more critical than ever to our customers' operations.
Partnering with loss and will ensure that they continue to operate in the most efficient manner and reduce their downtime.
During the fourth quarter average daily sales were 1.6 hundred $76 million in October 173, 3 million in November and one $695 million in December .
It's not unusual to see December sales trend down sequentially, given the seasonal aspect of our business and the reduced number of selling days.
Additionally November sales included an all time record sales month for bolt supply as they continue their customer outreach programs and improve their branch operations congratulations to the entire bolt team for this major accomplishment.
For the quarter historical loss in MRO business.
Average daily sales increased nine 6% over Q4 of 2020.
While bolt supply increased nearly 27%.
These increases were offset by lower parts Master sales, primarily within the military segment of this business as the federal government pulled back on some of their spend.
Consolidated gross margins for the quarter came in at 52, 9% compared to 53, 1% a year ago and in the third quarter of 2021.
On a standalone basis before the classification of certain service related costs into gross margin.
Lawson MRO margin was 59, 2% in Q4 compared to 58, 7% in Q3.
57, 2% in Q2.
This sequential improvement in the loss in MRO business is a direct result of actions taken as 2021 progressed to offset increasing vendor transportation and labor costs.
While the fourth quarter consolidated gross margin percentage fell slightly versus a year ago, we generated $1 9 million of additional gross margin dollars as compared to a year ago quarter on one less selling day.
In this challenging supply chain environment, we remain focused on growing our gross margin dollars in managing through the related inflationary impacts specific actions taken throughout 2021 include <unk>.
Putting price increases in place as appropriate identifying secondary sources of supply, including national branded products reallocating, our labor resources to focus on fast moving products to ensure we fill our customers' needs and working closely with our suppliers to gain insight on delivery times.
And cross docking from our Mccook facility to our forward Dcs when possible.
While we're pleased with our overall margin percentages for the fourth quarter of 2021, our ability to access products has negatively impacted our sales our customer back orders and service level metrics have improved sequentially from Q3 to Q4, however are not yet back to our normalized.
We're adjusting our actions to manage through this unusual period and expect that we'll have to continue with these types of activities throughout most of 2022.
For the quarter operating expenses were $54 8 million compared to $52 7 million a year ago, and $51 4 million in the third quarter.
The fourth quarter of 2021 includes approximately $7 3 million of non operating costs related to mark to market accounting for stock based compensation.
Severance and costs related to the negotiation review and execution of their merger agreements related to Lawson's proposed business combination with test equity and <unk> services.
The fourth quarter of 2020 also included nonrecurring expenses of $7 6 million for stock based compensation acquisition costs severance and a goodwill impairment excluding.
Excluding nonrecurring items adjusted operating expenses were up $2 4 million or five 3% compared to the year ago quarter, primarily driven to support higher sales the return of more customer facing selling activities.
And planned upfront investments to grow sales by expanding our channels to market.
Our reported operating loss was 825000 for the fourth quarter on an adjusted basis, including the non operating items non-GAAP operating income was $6 1 million for the quarter compared to $6 9 million in Q4 of 2020.
That EBITDA as a percent of sales was eight 3% for the fourth quarter compared to nine 1% in Q4 2020 with 2021, having one less selling day.
On an adjusted basis, excluding stock based compensation and other non operating items diluted earnings per share was <unk> 52 cents.
For the quarter versus <unk> 60 in the year ago quarter.
Capital expenditures for the quarter were approximately $2 5 million, including work being performed to expand our suwanee distribution capabilities and the purchase of Torrance parts washing machines.
Total 2021, Capex was $8 2 million, including the planned upgrades to our suwannee infrastructure to allow for increased volume in the future to build out of our new Dallas facility and the purchase of our parts washing machines that we lease to customers in <unk>.
2022, we will be relocating.
Relocating our Calgary distribution center to a new location with expanded square footage to better service, our bolt in western Canadian MRO customers.
We expect our capex to be in the range of $10 million to $12 million in 2022.
As an organization, we continue to make investments in the business in particular areas that have a direct impact on sales.
While the ongoing uncertainties in unevenness from the pandemic recovery and the related supply chain challenges continued.
We were still able to generate improvements in the business, while balancing our cost structure against our sales trends.
We ended the quarter in a net borrowing position of seven 5 million inclusive of making the final $33 million payment for the parts Master acquisition in the second quarter and increasing our working capital on higher sales.
During 2021, we increased our working capital in particular inventory, reflecting the vendor cost increases carrying a PPE items and investments in certain inventory categories to support upcoming planned marketing programs.
We ended the quarter with $91 3 million of liquidity, consisting of $4 2 million of cash and cash equivalents and $87 1 million of availability under our $100 million credit facility.
This places us in a great position to invest in the business and support future acquisitions.
As 2021 progressed, we managed our way through a slowly recovering environment over 2020, but not without a few twists and turns related to the pandemic as well as various supply chain disruptions, including accessing product rising vendor costs and labor shortages.
<unk>.
Consolidated sales for the full year 2021 were $417 7 million. This.
This represents an 18, 8% increase over 2020 levels driven by parks Master being included for all of 2021 as compared to only the four month post acquisition period in 2020 and organic sales growth of nine 4%.
Over 2020 levels.
This increase was driven by a nine 1% increase in Lawson organic MRO average daily sales and nearly a 19% increase at bolt supply.
For the most part putting aside some one off items sales grew sequentially as 2021 progressed in nearly every category and all segments.
For the full year adjusted EBITDA finished at $35 8 million or eight 6% of sales.
This represents an improvement of $1 7 million over 2020 levels.
Also exceeded our 2019 levels by $1 3 million.
Keep in mind that during 2020 significant temporary cost reductions were put in place to protect our margins and cash flows in a very uncertain pandemic environment.
For which many have now been put back in place.
We're very pleased with our overall performance as 2021 progressed, we were able to manage through the continued effects of the pandemic, including the global supply chain disruptions that started in early 2021 as well as the resulting inflation.
As Mike and I have both previously stated we are managing through this challenging time with the expectation that we will come out of this environment in a stronger position than how we entered it.
The integration of parts Master into the organization was completed in 2021, and we are now one organization.
As with many other companies, we have experienced inflationary costs due to the global supply chain disruptions, we are proactively monitoring and managing through this situation and have taken the necessary actions, including price increases to protect our margins.
Before I turn it over to the operator, let me thank the entire team.
We have had significant activities taking place on many fronts that Tim mentioned managing through the effects of the pandemic.
And more extensive inflation and supply chain challenges than most of us have ever seen.
The team continues to work through this unusual period to make us stronger for our customers our employees and our shareholders.
Thank you for all of your commitment to the company.
I will now turn it over to the operator for questions.
We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.
If you are using a speakerphone please pick up your handset before pressing the keys.
To withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
And the first question coming in is from Kevin Spanky from Barrington Research Associates, Kevin Your line is live.
Good morning, Mike and Ron.
Kevin Good morning, Kevin.
Okay.
I was just wanted to ask about Mike you mentioned in your.
Upfront comments, there that you think.
Labor shortage or labor shortages are starting to help your organic growth and obviously, that's a theme you've been talking about for a while.
Shortages maintain maintenance mechanics et cetera, but.
Is there anything youre seeing in the field are hearing from the customers now any anecdotes that are kind of really.
Pointing to that.
The situation in the labor market really starting to help drive growth even more for you.
Thank you Kevin Yes, we are beginning to see that.
In new new customers coming to us people, who were not customers prospects, who are reaching out and engaging us.
I'd say its still a little anecdotal what I'm really looking forward to is reporting statistically significant.
Customer counts that's.
That's when it moves from a lot of good encouraging anecdotal examples to statistically valid examples and Thats really what were excited about so as soon as we can communicate not anecdotes in which there are a lot of them in many many of us have.
Personally seen that in sales calls that we've made in speaking with sales reps. So there's a lot of good anecdotal evidence it will really show up in customer accounts.
And it will really show up and it continued.
Increase, albeit it will be slow increase in revenue and retention.
I think the last time, we talked our revenue retention was a hair over 90% and now were just a hair under 91%. So we're feeling very good about that that gets very very hard. The more you go from 91 to two to three to four.
There are companies that go out of business and that counts against us.
But.
The combination of customer account.
And revenue retention are two key metrics that are statistically valid and were able to report them.
Alright, thats helpful. It'll be it'll be interesting to be able to track those metrics over time.
You mentioned.
Investments in the three growth initiatives.
<unk> been talking about during the fourth quarter.
Any way to size those investments and then following up on that.
You mentioned.
Youre seeing some early very early signs that it will start to capture growth in 2022, So maybe what youre what youre seeing.
From those.
Yes, absolutely so maybe I'll start rodkin punctuated with little bit of data.
So in the sled area.
A lot of activity there.
And the investment of talking about and that is the addition of a number of field based.
Government strategic account managers and there are more to come yet this quarter.
Quarter in this first half year.
As well. The addition of a number of backroom.
Office folks to help us win more bids and quotes and also make the field both the field strategic account government strategic account managers more productive and the general population of sales reps in the general population of sales reps do the bulk of the selling even the government the government strategic account managers with <unk>.
Larger contracts Theyre generally populated and large counties large cities and where we have real density of government.
Near large educational opportunities, that's where we're placing those folks moving onto the second initiative being channels to market.
They are again thats the combination of proactive outbound marketing.
It's <unk>.
Tiring inside sales reps and retention sales reps retention sales reps, helping with the revenue retention.
Holes that we have.
And also we've engaged an external firm for more customer outreach. The combination of that is the addition of outside resources inside resources and sort of building that channel to market lastly, as the tourist part Flushing system, Ron alluded to that Amanda.
A minute ago with our some of our Capex.
But there again a unique system.
It's more about training existing sales reps and opening them into a new set of products for us ones that we had not previously.
Carried now the parks Master sales reps were intimately familiar with.
With the parts washing system.
We just have to have all the rest of the legacy <unk> sales reps focused on it as well so.
Investments in the early stage of investments in the early stage of return on those investments at this moment, but really optimistic that they will have a real impact on accelerating growth.
Yes, Kevin this is Rob so.
From the from the fourth quarter perspective, as Mike mentioned.
Some pretty pretty significant investments in primarily in people to drive sales and I had mentioned previously that we are continuing to invest in areas specifically to drive our top line sales I know we've talked about the operating leverage that we can create as an organization being between 25 and 30%.
In terms of dollars that hit the fourth quarter related to these investments.
It's about $3 to $400000 for the quarter, So if you're thinking about kind of the.
So the comparison either versus Q4 or even Q3.
I'd use the number of about $400000 of of some of these upfront investments and as Mike said I mean, we're we're early in the fourth quarter in particular.
Early in this process so.
We're confident about the return on those investments as we move throughout 2022.
Alright, Thats helpful should we expect.
Similar size of investment.
For the next couple of quarters here does that begin to taper off or even accelerate just how should we think about kind of that.
400, <unk> as kind of being a baseline or yes, I think it's I think it's a pretty good baseline. However, I will say that in particular in attracting new customers in the market segment segmentation area.
And some of those.
Other channels to market.
We'll probably make more investments here.
In.
In the early part of 2022 to really get that kicked off Mike had mentioned.
Kind of outsourcing some of the some of the custom.
Customer.
Customer acquisition.
So that may that may come up a little that may go up a little bit but at the same time.
We should be generating starting to generate those revenue dollars as well where that that wasn't necessarily so much. The case in the fourth quarter, just because it was a pretty early start on it.
And within that Middle segment, the channels to market segment.
There are four initial market segments or sub segments that we have identified.
Very rich opportunity for us, where we have good track record, but they are very large and fragmented customer opportunities that.
We're very optimistic that we want far greater share in those areas, where we already have tremendous credibility and marquee accounts. So part of that is directed at marketing programs marketing communication subject matter experts.
But boy, it's a really rich opportunity.
Alright, great.
Mike you called out construction equipment rental is.
Significant.
Potential growth area for your strategic account initiatives.
And I know a construction equipment rental as always.
<unk> been kind of a.
Source of strength for you anyway, but you've mentioned, adding two more strategic accounts. There. So is there something changing or even picking up a little bit more in that market that gives you optimism there.
I think there are two things, but the most important thing is that as we have continued to work on that industry, our sales reps and our market segment leaders strategic account teammates.
Developed a real in depth understanding of the customer's needs.
The American rental Association.
Most of the rental companies belong to <unk> would say that that is about a 66 zero billion dollar and I'm talking about rental revenue not our opportunity.
Rental revenue was $60 billion highly fragmented industry.
And.
Again, it's extremely fragmented most rental shops are one or two branches. Unlike the largest players in the space, which may have 1000 branches, but the fact that we're doing business with the largest earns us sub marquee credibility more importantly, it earns us tremendous knowledge of what the customer needs. So we can.
For real value.
Two customers in that space and little by little our reputation is getting out with a very high quality work, we do and the service intensity of service intensive vendor managed inventory, which helps them keep their equipment rental again, if you're an asset manager specifically in the regulated industry there.
Really two variables you look at rental rate and time utilization those are the two that's the law.
Life blood of a rental company time utilization in rental rate, we help you with time utilization.
So we are uniquely positioned are way more than 1000 sales reps are positioned to.
So really make a difference for that marketplace and by the way are there. Other similar marketplaces, you asked about that one but there are other markets that have those same characteristics.
Alright, great just wanted to ask a couple more here it sounds like you are.
Waning for supply chain disruptions to continue for much of 2022.
And you've done a good job of managing through that.
I believe you mentioned improved back orders we've seen.
That come down in any meaningful fashion I don't know if you could put numbers around it or not but.
At least qualitatively how that's trending.
Yes, we have seen we have seen improvement in back orders.
That is in large part to the outstanding work of our supply chain team.
Purchasing team.
We have seen improvement during the fourth quarter and continuing.
We're almost transitioning you mentioned the word supply chain disruption and yes, thats true as compared to 19, but we're getting confident really used to managing in this new environment I don't think it will be further disrupted then it's already disrupted.
And we are working very well to manage in this new environment, we're doing quarterly business reviews with suppliers against far more frequently they ever did.
Working hard to develop cross docking with suppliers, which take cycle time out of the our order through to us to the customer delivery time. So there are a number of actions that we've taken to to manage in the new environment.
He is well would certainly anticipate that inflation is not yet fully run its course.
And we have pushed through several price increases last year with very high price realization and again, even one this year with very high price realization. So a lot is changing but our team has been incredibly nimble our access to rich data lean six Sigma.
People do better and more thorough analysis talked about them in the company. So more people are coming to better answers and more quickly on all these topics than ever before Brian I'm sure you want to jump in with some data yes, Kevin.
I would just add to mikes mikes comments about this.
On the supply chain side, and the margin management side clearly has been a real focus for us as 2021 developed and as you go back and you look at.
Our product margins and I'm going to talk here about kind of our historical loss in margins before some of the service cost Reclassifications and so forth and when you look at that what we did experience and I think a lot of companies saw this was a dip in those margins in the second quarter. However, we've improved our gross.
<unk> percentage.
Really going from Q2 to Q3 to Q4, and I would say as Mike mentioned, even even we've taken actions in the first quarter of 2022.
To work on trying.
Trying to expand that and.
And I would also say that that's up against some headwind.
Relative to our sales mix from our customers and the fact that as Mike mentioned, our strategic customers.
Continue to see some really nice growth in particular, our Kent automotive strategic customers. So we.
We understand what those levers are that we need to pull in order to to protect our margins.
And I think in.
I know in 2021, we were.
Very active in making those necessary moves in order to do that and to the extent that some of those same pressures continue into 2022, even though we have seen as Mike mentioned, we've seen.
A a reduction on our customer back orders.
<unk> is where we ended at the end of Q3.
Probably about a 20% reduction in our customer back orders and our so our line service levels have improved accordingly, as well sequentially from Q3 to Q4 so.
Something that we're clearly monitoring and managing and taking.
The appropriate actions.
And last thing Kevin on this.
This question.
Important to put it in context, we now ship about 35 or process about 35000 lines a day back to where we were in 19.
And we're shipping 97% of them out.
Appropriate same day.
That's not exactly where we want to be we want to be north of 97%, but.
It has to be put into a little bit of context.
It's.
We're doing a very good job as it relates to this challenging situation.
And more improvement of course to come.
Okay. That's helpful.
Lastly.
You mentioned in the press release, obviously, the sequential daily game sales gains.
Over the third quarter.
Yes.
Are pointing to evidence of strong customer demand and that has continued into early 2022.
So maybe.
What kind of color.
Numbers can you give us around what you're seeing thus far in the first quarter here, maybe from an average daily sales basis.
Yes, Kevin let me I'll take that.
So we have seen.
A nice start to 2022 and both I would say sequentially going from Q4 into January in January into February and then also versus January a year ago.
And so versus versus January I'm, sorry versus January combined January and February a year ago. If you combine let's let's call. It the first.
Seven weeks.
We are in.
I would say mid to high single digits.
An increase versus a year ago, so and we experienced that in both January and February so.
I think to Mike's points earlier about some of the increases that we're seeing from just an overall customer demand standpoint and also.
Some of the some of the additional points that Mike pointed out relative to strategic account growth. So although we've seen.
Really even as you go back into it.
2021 for the most part our growth was across all product categories and for the most part across most customer segments and we're really kind of seeing the same thing here early in 2022.
Alright, great just one last numbers question here do you have the selling days for 2022.
The total and then by quarter.
Yes.
In 2022 Q.
Q1 has 64 days Q2, 64 days Q3 dollars 64, and then Q4 is 60 so.
So we have 252 total days in 2022, there were 251 selling days in.
2021, and we pick up that extra day here in the first quarter.
Alright, great. Thanks for taking all the questions.
Thanks, Kevin Thanks, Kevin.
Thank you and once again, ladies and gentlemen, you can enter the queue to ask a question by pressing star one on your Touchtone phone Thats star one to enter the queue to ask a question.
And the next question is coming from Ken Newman from Keybanc capital markets.
Your line is live.
Hey, good morning, guys.
Ken.
Yes.
Good morning.
I appreciate that you don't want to talk about the merger.
That makes sense, but I do think you published some longer term forecast for the Standalone business in the proxy earlier this month.
That highlighted seven 5% growth in it.
Adjusted EBITDA margin at around nine 5% for 2022.
I just wanted to clarify if that outlook is still kind of in the ballpark of how you're thinking about the standalone business for the year and if not what changed.
Yes, Thank you, Ken and Youre right, we are not going to comment on the merger.
That document stands.
And so I think we'll just let the documents.
Proxy stand as it is.
And leave it at that.
Understood I think the question is more so on the forecast that you had for just the standalone loss in business rather than the other two mergers and so again just going back to the forecast for just standalone loss and is that still kind of in line with your expectations with the outlet that you provided today, yes I can.
Yes. So this is raj so we.
We don't.
Typically go out and provide any any formal guidance on a routine basis or on an update basis.
What I would.
Really point you back to is what we've seen here so far in the first seven weeks of the year and.
Our comments around really how the first the first.
Call. It almost two months have developed around the top line sales numbers.
And.
You guys know our business pretty well in terms of in terms of the operating leverage that comes through on that incremental growth show.
As we sit here today.
We really can't I can't speak to any formal guidance or any update to that but.
I think our commentary around how the first couple of months are trending.
As positive in terms of how we've gotten the year started so far in 2022.
Yes, that's fair enough.
And then kind of moving over to the cash flow, maybe just talk a little bit about the outlook for inventory build I know you built inventories through 2021.
Maybe any color on how you view your inventories relative to your customer needs and where you expect working capital as a percentage of sales to trend in 2022.
Yes, so you're right Ken.
We have we have built inventories throughout.
2021.
As you know I mean, some of that is just a direct reflection of the cost increase coming through from our from our vendor base.
Where we sit today.
We're pretty comfortable with our with our overall inventory levels.
I think that as we move throughout 2022.
We have invested in some upcoming programs relative to.
Carrying some inventory on programs that we're going to accelerate.
From historical parts master product into our into our loss in sales base.
But the vast majority of those investments have already been made so we think that most of that increase that we saw in 2021 certainly.
That increase won't be there again here in 2022 were pretty comfortable with where we're at.
In 'twenty one we also consolidated in all of the parks Master inventory. So we now have really all of that inventory.
Within the existing distribution network. So we don't feel like there will need to be a necessary build here in 2022.
That so so historically, if you look back as a percent of sales.
You really between AR inventory and AP we've ran.
Kind of Twentyish percent from an overall working capital.
Were sent to sales.
One was higher than that just because of the build in inventory but.
That's a pretty comfortable number for us to still be as weak as we think about going forward.
Still in the.
The low 20% relative to sales.
Ken to that point, we also added about nine more than 9000, Skus when we acquired parks Master and now need to want to make them available. They are available to the total sales population.
So there was a little bit of that it will also be interesting to see this whole economic challenge I'm really talking about for our customers not so much.
As a supply driven so are our customers are challenged with labor availability raw material availability.
There are a number of them that if they could be operating on a second or third shift they would be and yet because of raw material and labor to having a hard time operating on a second or third shifts so as as these forces sort of abate a little bit we would accept expect an acceleration of Mitch.
She machine time utilization and the more year on year machine, where you have to maintain your machine. So.
I think we have tailwind.
For the future because at some point everybody is going to sell and settle into the new reality.
And that will have an impact on inventory turns and inventory in general.
Yes.
As I kind of.
Try to wrap that question.
No you are expecting a decent increase in capex with some of these new investments.
Would you expect.
Free cash flow be positive in 2022, just kind of thinking about the moving pieces in operating cash flow.
And then how do you think about the run rate free cash flow conversion as a percentage of net income throughout the cycle.
Yes, yes, so for definitely for 2022, we'll be throwing off off positive cash and even though our our capex as I mentioned is in that call. It 10 to 12 range. This year and some of that are the investments that.
Mike had talked about relative to two.
The three initiatives, but then also.
Making some investments into Suwanee distribution center will finish off in terms of in terms of those investments to expand throughput. There and then we're also going to be kicking off.
Really kind of a similar process in mccook to expand their third line throughput volume as well are there capabilities. So.
But yes, I mean, it's.
From a from an overall cash flow perspective.
As an organization.
With a 30% drop through on EBITDA.
I would say putting aside some of those incremental investments made in 2021.
We were we were thrown off positive cash flow and we certainly expect that to be the case in 2022 as well.
Understood.
Just a few more here from me.
You had talked a little bit about the strategic account mix and I know, it's a small part.
With the oil and gas customers, but with oil prices kind of where they are do you have any idea or color on what you think about activity for those accounts into 2022.
Yes.
The little.
A little step back in that segment first.
First let me say, we Havent lost customers and in particular, what I was referring to is we have a couple of very large.
Pipeline construction companies gas pipelines.
And.
Very closer relationships very loyal customers and yet this happened sort of periodically where they move from 130 miles spread.
Up the road another 30 miles and they are building 600 mile long.
Pipelines and so this past winter fourth quarter, they slowed a bit because they were finishing one segment moving to other segments.
That's a little bit of what we see was big enough because of this specific individual pipeline I think it is going from Canada through West, Virginia through Ohio, I mean really neat stuff, but.
But in any event the sort of the volatility of that project had a little impact.
I don't think we've seen yet you would think with the oil prices where they are.
Things like.
Exploration fracking things like that May or may not come back those are long cycle projects and exploration companies have to think hard about whether now is the time.
It will the prices be sustainable enough to afford them the opportunity to make their capital investments to restart projects that are dormant and to explore new tracks.
Little hard to predict at this time, but bearing in mind, our cycle and responsiveness, our cycle time and responsiveness can be so fast that if someone calls us on Monday, and we can start having product to them on Tuesday, and quick setup. So the idea of lead time for us.
Is that really a concept we can respond extremely quickly as we see opportunities and again, we have a great reputation with a huge number of these companies.
But what you saw in that number was a couple of specific <unk>.
<unk> related volatility.
Understood.
Last one from me.
I appreciate all the color on gross margins on the on the historical MRO side. It sounds like you guys have been able to.
Execute pretty well in terms of realizing higher prices to offset inflation.
As I think about the the progress or the cadence of gross margins into 'twenty two.
Any color on how you can help us think about the operating leverage and gross margin expansion for 'twenty. Two is the higher sales kind of flow through and just.
I guess, maybe some incremental color on where you see the price cost spread whether that's widening out.
Supply chain, maybe normalizing I think you had mentioned.
Getting used to operating in this type of tight environment, and whether that kind of shows through as a widening out of our price cost spreads here.
Yeah.
I have to think about it but I don't think we'd see it widening out.
It's relatively stable, we will likely see cost increases continue to come through.
We have already put in place a price increase with very high price realization.
I think the market our customers recognize that this is a necessity.
Also recognize though that while our prices are going up we are by far the lowest cost option they have in maintaining their equipment.
Opportunity cost is a very real thing Kevin asked a moment ago about the construction equipment rental market.
A large excavator will rent for three or $4000 a day.
Bearing in mind that our average piece price of 94, <unk> do you want <unk>.
$400000 excavator down for one extra day, when you rented for three or $4000 a day for a 94 part or a $5. Apart of course the answer is no.
So.
The value proposition is rock solid in fact, becoming more valuable to more companies, who are choosing to outsource what they used to manage internally the expansion of the market I referred to.
And we are not trying have been saying this for years, we are not trying to expand our gross profit percent through price increases now we don't wanted to contract because of cost increases, which is where we are in step.
But we feel like we're fairly paid by our customers and we offer a tremendous value to our customers and so we expect neither long term contraction nor long term expansion.
<unk>.
Of those margin percent.
Got it and.
And just since you mentioned the rental companies. This will be my last one here I just wanted to clarify I know youre working to help improve time viewed on the fleets there.
I imagine that time utilization is pretty tight right now for a lot of these rental fleets just because of the availability of the equipment and do know that a lot of the larger suppliers are expecting to open up production in the back half of this year.
Maybe just help us think about how you are.
Planning to strategize around that market as fleet availability opens up a little bit maybe times, you've kind of comes off a pretty pretty high peaks that we saw in 'twenty one.
Yes.
Thats right and we will see how production becomes available.
Yes, the major manufacturers are talking about production expansion.
It's contingent on raw materials and labor at the large equipment manufacturers so I.
I hope theyre right, because the industry could use new and fresh or equipment.
As a.
Life expectancy in an age associated with the equipment ground engaging equipment like backhoes and bulldozers up a much shorter lives and aerial equipment and so there are a lot of this equipment is really getting long in the tooth.
So the larger the fleet becomes and the more we talk about outsourcing of.
Sure.
Consumable MRO for the same kind of trend that's happening in the construction equipment industry, where people used to own their backhaul, where theyre bulldozer and now they're saying let me just ran it for the day is I need. So I think that market is expanding as well and all of that represents opportunity for us. We also have <unk>.
Very close relationships with the largest companies I mean, very close relationships with senior management from the Ceos down to.
The purchasing departments.
And these large companies.
No.
We're in lockstep with them quarterly.
Very helpful color. Thanks for the time guys. Thank you. Thanks Curt.
Thank you. This concludes our question and answer session I would now like to turn the conference back over to Mike <unk> for any closing remarks. Thank you Paul.
Thank you for joining us today, the fourth quarter and full year reflect <unk> ability to be nimble and adapt to the changing environment.
The year also highlighted the critical nature of our service intensive vendor managed inventory value proposition.
More customers and prospects are turning to loss and to enable them to keep their plant and equipment operating in the face of increasingly acute labor maintenance labor shortages.
While supply chain challenges persist our team has done an extraordinary job of managing in the new environment. Thank you for all your hard work and commitment to ensuring our success in 2021 and for years to come.
We're investing in programs to accelerate growth.
2022 has started strong.
Investments that we've made years ago are in Asia.