Q4 2021 Core & Main Inc Earnings Call
Hello, and welcome to the call and maybe Q4 2021 earnings call. My name is Alex that'll be close rates in our call today, if you'd like to ask a question at the end of the presentation that you can press star one on your telephone keypad, if you'd like to control. Your question you May Press Star two.
I'll hand over to your host open Bradbury with call. It nine to begin to you Robin.
Thank you good morning, and welcome to the Korn main fiscal 2021 fourth quarter and full year earnings call. This is Robin Bradbury, Vice President of Investor Relations and SG&A per Courtney. Thank you for joining us. This morning, we're excited to share our results with you.
Steve <unk>, our Chief Executive Officer will lead today's call with our fourth quarter and full year execution highlights followed by a discussion on recent topics of interest.
Mark <unk>, our Chief Financial Officer will then discuss our financial results and fiscal 2022 outlook followed by a Q&A session. We will conclude the call with these closing remarks for <unk>.
Q&A. Please limit to one question and one follow up if you have additional questions. You may return to queue. Thank you for your cooperation.
Some of the information you will hear today may include forward looking statements forward looking statements include all matters that are not historical facts.
I am pleased statements regarding our intentions beliefs assumptions, our current expectations concerning our financial position results of operations cash flows our growth strategies.
Forward looking statements are subject to known and unknown risks and uncertainties many of which may be outside of our control. We caution you that forward looking statements are not guarantees of future performance or outcomes and they may differ materially from those made in or suggested by the forward looking statements contained on this call.
These forward looking statements are made only as of the date of this call. We do not undertake any obligation to update or revise any forward looking or cautionary statements to reflect changes in assumptions the occurrence of events or changes in future operating results.
In addition to providing results that are determined in accordance with U S. GAAP, we present certain non-GAAP financial measures.
The operating results and our effectiveness and efficiency of our business.
We present these measures because we believe investors consider them to be important supplemental measures of performance.
For a reconciliation of the non-GAAP measure to the nearest GAAP measure please refer to the slides in the appendix of the fiscal 2021 fourth quarter Investor presentation, which can be found on the Investor Relations section.
Of our web site.
Thank you for joining us this morning and for your interest in Foreign Man I will now turn the call over to Chief Executive Officer, Steve Leclair. Thanks.
Thanks, Rob and good morning, everyone. Thank you for joining us today and welcome to our fiscal 2021 fourth quarter and full year earnings call.
Fiscal 2021 was a remarkable year for coordinated we delivered record financial performance, while delivering on our pledge of dependable service to our customers and suppliers and challenging market conditions, the strength flexibility and resilience of our business model was exemplified as we fulfill unprecedented levels of demand.
Yes.
We continue to execute on our strategies to grow the business and strengthen our operational capabilities, while delivering value to our customers supporting our associates and achieving strong financial performance.
We navigated through supply chain challenges, while continuing to deliver extraordinary service to our customers.
Infrastructure solutions are localized and must meet product specifications and engineering standards that vary from one municipality to another.
Our customers count on us to provide the right solutions to meet these local requirements.
Really important access to specialty products is critical to our customer success and a testament to our value proposition.
Our customers choose us for the breadth of our products extensive industry knowledge familiarity with local specifications convenient for customers and develop relationships.
Just with many new customers across the country.
Our success.
Any obstacle to achieve our goals.
When confronted with a difficult operating environment our associates adapted.
And continue delivering on our promise of providing local knowledge local experience and local service nationwide.
Like to express my Sincerest gratitude to all of corn means 4100 associates for their unwavering dedication determination and region.
Hires communities.
To each other.
In fiscal 2021, we delivered just over $5 billion of net.
Sales up 37% over fiscal 2020.
$604 million of adjusted EBITDA of 77% over prior year.
Our sales growth was driven by strong demand across each of our end markets higher average selling prices as we passed along rising material costs.
Solid performance across our sales initiatives to deliver market share gains and acquisitions.
We also achieved share gains from having preferred access to products during a period of material shortages.
Our teams leveraged our strong sales growth through the expansion of our margin in fiscal 2021.
Our focus on pricing analytics and operational execution at both the corporate and local levels pretty solid.
M&A standpoint, adding five.
Extraordinary businesses to our team in fiscal 2021 and of course firing Dodson engineered products.
Each of the acquisitions fits well within our M&A strategy.
Morning expansion to new geographies.
Access to new products.
Positions and the addition of key talent.
Engineered products as a single branch.
Full service distributor water wastewater.
Agricultural and irrigation products based in Western Colorado.
Founded in 1970 Datsun it.
Long history, as a trusted and reliable partner to its customers suppliers and associates the.
The opportunity to bring a company such as this and the core main family provide strategic value.
While the initiatives to deliver above market growth.
Patients throughout fiscal 2021.
These new locations will allow us to expand into new geographies and expand.
And underpenetrated product lines.
Despite our vast geographic footprint, there was significant remaining white space across the country and our team uses a data driven strategy to identify and evaluate.
These markets we.
We have a pipeline of priority markets that we're targeting for greenfield expansion, some of which could convert in the coming quarters as we align sales talent and operating facilities.
Turning to page six I'd like to highlight an example of how we deliver significant value to our customers and their projects.
In February <unk> and across the yards of Veterinary Heights, New Jersey residents due to a major pipeline leak.
After inspecting the job.
Today's standards.
Daniel.
The repair solution.
Our customer engineered drawings and a quote.
Particularly what was needed to repair the rupture in the line.
We produced and delivered accustom retrofit.
That solution with specialty fabricated fabricated fusible HDTV pipe and fittings.
With our <unk>.
<unk> fusion equipment and technician on the job the solution. We provided was a success.
Our local new Jersey team embraced their responsibility.
Some resources, we do work like this every day, our associates live and work in their local communities and partner with them to ensure the best solutions for any water and wastewater infrastructure needs.
On page seven.
Ill finish with a few topics of interest product availability through the fourth quarter and continue today, but given our long standing relationships with our suppliers and leadership position in our in our industry.
We have been able to gain.
Continued serving our customers.
Continue to impact lead times and project.
Half of fiscal 2022.
Our overall sentiment remains positive and our strong backlog is indicative of future demand.
The supply chain normalize we expect to release products reserve for jobs held in backlog.
Our inventories in backlog have grown as a result of us holding inventory for customers until we can secure all the necessary parts.
The components to ship, the complete solutions and support our customers' installation schedules.
Yes.
Cereal cost inflation.
All product lines in the fourth quarter.
Trade manufacturing capacity shipping container shortages important suppliers.
Our teams.
We continue to navigate the inflationary environment.
During with our customers to give them timely mill.
And locating the products they need so they can complete their projects as scheduled prices have inflated more than any of us.
Of our other product lines and have remained at an all time high.
While it's possible PVC pipe prices.
There are a number of factors that are keeping pace.
Prices high and the near term like strong demand continued supply constraints.
Due to raw material shortages and tight manufacturing capacity.
And note that every piece of pressurized PVC water pipe has to undergo pressure testing to past American water works associated general purpose resin used for other apps.
Applications.
Additionally, we continue to experience.
Price increases across many other products.
Product lines that could offset any potential future deflationary pressure from our commodity based products like PVC pipe.
During the fourth quarter, we continued purchasing inventory ahead of supplier cost increases, resulting in gross margin rate expansion.
Procurement costs stabilize in fiscal 2022 or we don't.
We would expect to continue passing.
Although gross margin rates may contract.
Inventory.
Through the first.
We have seen prices remain high and even increase across most product categories.
Decline.
We have a strong.
And track record of acquiring and integrating businesses and we continue to cultivate a solid pipeline of targets for the short and long term.
We have closed 17 acquisitions since becoming an independent company in 2017, adding more than $650 million in annualized net sales practice bolt on opportunities and we are well positioned to source acquire and integrate new businesses.
We believe we are widely viewed as the acquirer of choice due to our long standing relationships and entrepreneurial culture.
Fragmented our pipeline continues to be robust and as we look ahead, we see a long runway.
For growth through M&A.
Capital allocation priorities.
We have significantly improved our financial flexibility as a result of debt repayment from the proceeds of our initial public offering we have a stronger balance sheet lower cash interest payments.
At the end of the fiscal year.
Prices with greater Optionality to invest in.
And value creating growth opportunities moving forward.
Our current capital allocation priority is to continue investing in organic.
Anakin inorganic growth opportunities.
So we will evaluate other capital allocation options as we generate strong cash flow over the next year and beyond.
Over the course of the last few years, we've been able to using our cash flow we.
We are comfortable operating in.
While making investments to grow the business.
Yes.
Infrastructure Bill.
We are optimistic about the opportunities provided by the infrastructure investment and jobs Act a once in a generation bill that makes transformational investment in our nation's infrastructure.
An infusion of funds of this magnitude has immense implications to accelerate the repair and replacement of aging water infrastructure and it will lead to a more sustainable future for our communities provide multiyear tailwind for the municipal water sector. We also Blake.
Maybe it will take time before we see those funds flow through to our business as a result of constrained supply chain.
Gains in industry wide labor shortages.
It's likely that we may not see incremental volume from the bill until 2023 or beyond however, we are well positioned to capitalize on the favorable tailwind due to our market leadership position and competitiveness.
Advantages.
Current market events. There are a few recent themes in the global macroeconomic backdrop I'd like to address.
Versus the conflict in Ukraine.
Core net or the Ukraine, but it is still difficult to determine what supply chain or demand impacts could arise from the ongoing conflict.
Given the recent ban on Russian imports, we could see further impacts to our supply chain and we will.
Most likely be impacted by inflationary pressure on fuel costs.
We may also see inflationary pressure in certain product categories linked to supply chain shortages.
We're confident that we remain well positioned to navigate any <unk> products.
We have not seen a slowdown in demand related to economic inflation of rising interest rates demand has continued to be strong.
As inflation, our interest rate increases can put impact demand, we're not seeing anything like this currently but if we do.
We believe we are well positioned given our mix of repair and replacement projects and the municipal end market.
As I look ahead to fiscal 2022, I am confident that corn, Maine is investing in the right areas.
And at the right time, we are deepening our competitive advantage and building on our foundation of long term profitable growth, we have multiple levers where organic growth continually cultivating ways to grow faster are poised to benefit from favorable industry trends, we have an attractive and resilient financial.
Profile with strong returns.
And to deliver strong performance this year and many years to come.
I will now turn the call over to our Chief Financial Officer, Mark Makowsky to discuss our fiscal 2021 fourth quarter and full year financial results.
Followed by our fiscal 2022 outlook go ahead Mark.
Thank you Steve Good morning, everyone turning to page nine I'll begin by covering our fourth quarter operating results.
Net sales in the fourth quarter were $1 2 billion, an increase of approximately 50% over the prior year period. The increase was driven by higher average selling prices strong volume growth and acquisitions.
Sales benefit.
In addition to more moderate weather this year than last year.
The municipal market continued to experience strong demand due to growth in water and wastewater infrastructure spending.
Residential land and lot development continued to be robust in the quarter.
We've also started to see growth accelerate across the nonresidential market as demand continues to.
We experienced strong.
Product lines in the fourth quarter, except for our meter products due to shortages of semiconductor chips.
Products.
Our sales initiatives and our industry, leading product availability allowed us to outperform our end markets and deliver above market growth during the quarter.
Roughly two thirds of our net sales increase in the fourth quarter was due to higher average selling prices, which was much more than expected and driven by our team's ability to pass along rapidly rising material costs.
We continue to experience rising.
Fire capacity.
These challenges our teams navigated the inflationary environment, well working closely with our suppliers to secure products and giving advancements.
Notice of price increases to our customers.
Acquisitions contributed approximately five points fourth quarter increased 60% to $327 million.
Gross profit as a percentage of net sales was 26, 2% compared with 24, 5% in the prior year period, an improvement of approximately 170 basis points.
The increase was primarily attributable to strategic inventory investments ahead of announced price increases.
Execution of our gross margin initiatives, such as expanding private label achievement of growth based supplier incentives and accretive acquisitions.
Some of them.
Similar to the third quarter, our gross profit was positively impacted by our inventory purchases ahead of supplier cost increases which results in a lagging weighted average cost of goods sold relative to current market prices.
We're also operating in a significantly less sensitive pricing environment due to industry wide product shortages, which we benefited from due to our investments in inventory.
We continue to make great strides across our pricing and private label initiatives delivering sustainable gross margin rate expansion relative to the prior year.
We also achieved gross margin synergies from our recent acquisitions, which we expect to benefit from on a go forward basis.
Selling general and administrative expenses for the fourth quarter increased 33% to $183 million.
SG&A as a percentage of net sales was 14, 7% compared with 16, 6% from the prior year period, an improvement of approximately 190 basis points.
The decrease in SG&A as a percentage of net sales was due to our ability to leverage our fixed costs, partially offset by higher variable compensation costs higher costs from acquisitions and increases in other variable costs due to volume inflation.
Adjusted net income increased 72 million to $73 million in the fourth quarter.
The increase was due to strong sales growth gross margin rate expansion in SG&A cost leverage.
And preparing adjusted net income we exclude the effects of noncontrolling interests, as we evaluate and manage the business as a whole.
Adjusted EBITDA grew 113% to $151 million.
<unk> adjusted EBITDA margin by approximately 360 basis points.
The increase in adjusted EBITDA margin was due to strong net sales growth gross margin rate expansion and leveraging our fixed cost structure in the sales and gross margin growth.
Turning to page nine I'll now cover our fiscal 2021 full year results.
Net sales for fiscal 2021 were just over $5 billion, an increase of nearly 37% over fiscal <unk>.
2022 2020.
The increase was driven by higher average selling prices due to rising material costs, which contributed approximately half of our net sales increased strong volume growth and acquisitions.
Our sales benefited from volume growth across each of our end markets throughout the year.
We estimate that the residential end market experienced low double digit volume growth due to robust land and land development activity to support housing demand.
We've recently seen an acceleration of volume growth across the nonresidential construction market is local economies continue to recover and as demand returns to pre pandemic levels.
We estimate that our nonresidential end market grew at a low single digit rate this year.
Municipal repair and replacement volume grew at a low to mid single digit rate due to healthy municipal budgets and better access to low cost capital.
Overall, we believe our end markets delivered mid single digit volume growth in fiscal 2021.
We achieved considerable share gains due to our sales initiatives and also from having preferred access to products during a period of material shortages, which allowed us to acquire.
Many new customers.
Our product customer and geographic expansion initiatives delivered solid performance throughout the year with.
We've continued to accelerate the adoption of new products in our industry, such as feasible HDD solutions to our waterworks customers like the projects, Steve discussed earlier fabrication and kitting assemblies for fire protection and contractors and new water retention and erosion control systems.
We've also increased our share with strategic accounts typically pursuit complex projects that require greater technical expertise and specialized procurement needs. The.
The combination of our growth initiatives and winning new customers allowed us to achieve above market growth well in excess of our historical average annual share gains.
Acquisitions contributed approximately three points of sales growth in fiscal 2021.
Gross profit for fiscal 2021 increased 46% to approximately $1 3 billion.
Gross profit as a percentage of net sales was 25, 6% compared with 24, 1% in fiscal 2020, an improvement of approximately 150 basis points.
The increase was primarily attributable to strategic inventory investments ahead of announced price increases a favorable pricing environment. The execution of our gross margin initiatives achievement of growth based supplier incentives and accretive acquisitions.
We estimate that roughly 50 to 100 basis points of our fiscal 2021 gross margins may be temporary in nature as a result of our inventory investments the favorable pricing environment and resetting of certain group based supplier incentives.
However, we have multiple margin initiatives in place to help offset the impact of temporary gross margin rate benefits.
Selling general and administrative expenses for fiscal 2021 increased 29% to $717 million.
While SG&A as a percentage of net sales improved approximately 100 basis points to 14, 3%.
SG&A as a percent of net sales declined due to strong cost leverage partially offset by higher variable compensation costs $21 million related to higher equity based compensation expense due to accounting for equity awards and $5 million due to costs in connection with the IPO and secondary offering.
Interest expense for fiscal 2021 was $98 million compared with $139 million in fiscal 2020.
The decrease was attributed attributable to the redemption of the 2024 senior notes the redemption of the 2025 senior notes and lower interest rates on our senior term loan due to refinancing transactions completed in July .
Income tax expense for fiscal 2021 was $51 million compared with $9 million in the prior year, reflecting effective tax rates of 18, 5% at 19, 6% respectively.
The effective tax rate declined in the current year due to certain fixed tax expenses of permanent differences decreasing as a percentage of pretax income.
During the fourth quarter, a secondary public offering of 20 million shares of class a common stock was completed by certain of our shareholders. We did not receive any of the proceeds from the offering.
In connection with the offering approximately $7 5 million partnership interests were exchanged for shares of class a common stock together with the retirement of a corresponding number of shares of class B common stock.
As a result of these exchanges, we acquired certain tax attributes held by <unk> and its affiliates.
We expect that these tax attributes will reduce our future tax cash tax payments to taxing authorities.
Under our tax receivable agreements, we've recorded a payable that represents 85% of these anticipated tax savings, while we retain the remaining 15% is cash tax savings.
A summary of each area is located in the appendix of the presentation.
Because we only make TRA payments, if we achieved the benefit of a cash tax savings, we do not consider TRA liabilities current for future to be debt like items.
Following the offering <unk> and its affiliates ownership decreased to roughly 70%.
Adjusted net income increased $223 million to 266 million for fiscal 2021 <unk>.
The increase was due to strong sales growth gross margin rate expansion in SG&A cost leverage.
Adjusted EBITDA grew 77% to $604 million.
Proofing adjusted EBITDA margin to 12, 1% from nine 4% for fiscal 2020 and growing nearly two times the rate of our sales growth.
The increase in adjusted EBITDA margin was due to strong net sales growth gross margin rate expansion and leveraging our fixed cost structure on the sales and gross margin growth.
On page 11, I'll now cover our cash flow and balance sheet highlights for the year.
We had an operating cash outflow of $31 billion in fiscal 2021 with the increase in profitability more than offset by investments in operating capital required for strong sales growth and to ensure product availability for our customers.
We made additional investments in inventory that we believe were prudent and necessary to ensure our customers to complete their projects on time.
Additionally, our operating cash taxes were roughly $47 million higher than the prior year period due to higher pretax book income.
While we've made substantial investments in operating capital this year, our after tax operating profit, excluding intangible amortization relative to our year end balances of accounts receivable inventory and accounts payable was just over 40% for fiscal 2021.
Our net debt at the end of the quarter was $1 $492 million, bringing our net debt leverage down to two five times the reduction in net debt leverage compared with the end of fiscal 2020 was attributable to debt repayment from the proceeds of our IPO. In addition to an increase in adjusted EBITDA.
We expect to improve our maintain our net debt leverage in the near term, despite making strategic investments to grow the business.
At the end of the fourth quarter, we had $842 million in total liquidity.
Please that our liquidity and our cash generation from operations will be sufficient in the near term to fund operations anticipated capital expenditures scheduled principal and interest payments on our.
On our term loan and continue to pursue our growth strategies.
I'll wrap up our prepared remarks on page 12, with a discussion on our outlook for fiscal 2022.
Fiscal 2021 was a transformative and record year, and we entered fiscal 'twenty, two with strong backlogs and great optimism.
The underlying pace of demand appears favorable across each of our end markets. We expect residential housing tailwind to continue given the under supply of new homes and population shifts despite homebuilders, having to navigate ongoing labor and material shortages.
The macro environment for non residential construction continues to be well supported.
An increase in nonresidential construction in the second half of fiscal 2021, and we expect those trends to continue into 2022 as demand returns to pre pandemic levels and as commercial construction activity expands to support growth in housing development.
We expect municipal repair and replacement activity to remain strong and we see favorable tailwind leading into 2022.
Municipal budgets are healthy municipal policies have access to low cost capital and the need to repair aging infrastructure is growing in importance and significance.
Municipalities have increased water and wastewater utility rates each of the year over the last decade highlighting.
Their ability to effectively increase revenue to improve their AGM.
<unk> infrastructure systems.
While we are excited about the long term positive impact infrastructure investment and jobs that could have on our water infrastructure. We have not included any incremental benefits associated with the bill and our assumptions for 2022 guidance.
We saw some project scheduled for delivery in fiscal 2021 get delayed and pushed into fiscal 'twenty, two due to supply chain constraints, which could provide a tailwind in the first half of the year.
Yes.
We continue to execute on our growth strategies and focus on the controllable areas of our business, including ensuring product availability for our customers remaining ahead of inflationary or deflationary pressures and driving productivity gains and effective cost management.
We expect favorable impacts from higher average selling prices to continue through at least the first half of the year potentially moderating in the second half as we approach more difficult comparisons.
Even with the potential for price deflation of supply chain to normalize or if demand softens, we expect to generate a favorable net sales benefit in fiscal 2022 due to the timing and magnitude of price increases in the prior year.
In terms of acquisitions, we currently have a strong pipeline of high quality targets and we look forward to adding more of these companies to our team throughout the year.
Our recent acquisitions are performing well and we expect them to contribute 2% to four percentage points of top line growth this year.
Based on these factors, we expect fiscal 2022 net sales to grow in high single to low double digit range with strong growth in the first half of the year, but moderating in the second half with more difficult comparisons.
Regarding our gross margins, we do not expect to repeat the significant price related realizations benefits. We achieved in 2021 during the rapid rise of inflation.
You mentioned earlier that we believe our fiscal 2021 gross margins included roughly 50 to 100 basis points of potential temporary one time benefits. However, we have margin initiatives in place to help offset some of the potential pressure related to these one time benefits.
We expect first quarter margin gross margins to be weaker sequentially in our fiscal 2021 fourth quarter due to the resetting of group based supplier incentives and inventory cost catch up with market prices.
While we expect to achieve SG&A leverage for the full year, we anticipate our adjusted EBITDA margin may decline modestly in 2022.
With all of these factors in mind, we anticipate our fiscal 2022, adjusted EBITDA to be in the range of $595 million to $635 million.
This includes only the contributions from acquisitions that have already closed.
At the midpoint of our range, we expect 12 month adjusted EBITDA to be above our $604 million of fiscal 2021, adjusted EBITDA each quarter throughout the year.
We expect that our fiscal 2022 results could be front end loaded with stronger performance in the first half slightly subsiding in the second half its supply chain has normalized and commodity prices decline.
Additionally, we will be challenged with tough year over year comparisons throughout the second half of the year.
We expect interest expense to be in the range of $58 million to $60 million for the year.
Term loan carries interest at LIBOR, plus a margin of 250 basis points on the <unk> portion of the facility.
In July of 2021, we entered into a five year fixed interest rate hedge with a notional value of $1 billion to lock in LIBOR rate at <unk> 70 at 74 basis points.
We anticipate an effective tax rate of approximately 20% in fiscal 2022.
This is slightly higher than our 2021 effective rate due to more class a shares which results in more taxable income to corn maintenance.
Regarding our cash flow, we typically conferred roughly 60% to 70% of our adjusted EBITDA into operating cash flow with.
With fiscal 2021 being exception as we invested heavily in working capital to support growth and ensure product availability for our customers.
We expect to convert roughly 85% to 100% of our adjusted EBITDA into operating cash flow in fiscal 2022, as we optimize our inventory balances in the second half of the year.
We have historically generated the majority of our cash in the back half of the year and as we unwind working capital and we expect the same trend in fiscal 2022.
To close out our prepared remarks, we are very proud of our record fiscal 2024th quarter and full year financial results.
The challenges we faced this year our teams continued to execute flawlessly we continue.
To focus our efforts on delivering sustainable market share gains improving profitability and generating strong operating cash flow.
That concludes our prepared remarks at this time I'd like to turn the call over to the operator for questions.
Thank you if you'd like to ask a question a compression style one on Nintendo <unk> pads.
Lots of Petroleum question, you May press Star, let's say.
Please ensure your unmated lately when asking your question.
First question for today comes from Matthew Bouley of thought.
Please Matthew your line is now open.
Hey, good morning, everyone. Congrats on the results. Thank you for taking the questions. This morning.
So first one I guess on the gross margin outlook.
I think Mark you said Q1 commentary is around sort of the continuation of tight supply chain and inflation continuing to rise.
Obviously supported the gross margin over the past year.
So kind of how are you balancing that.
What's it going to take to really see gross margins to normalize.
Assuming these positive drivers seem to continue to be in place. Thank you.
Yes, Thanks, Matthew for the question as you look at the first decline there just sequentially due to resetting some of the growth based supplier incentives and then you're spot on I mean, it's really going to take some freeing up of the supply chain.
Given kind of what we're seeing so I would split certainly as we get potentially into Q2 Q3 timeframe.
See some of those prices start to stabilize that's maybe when we should start.
<unk>.
Supply chain.
This type of levels.
I'm normally high gross margin.
Yes, certainly.
Certainly that could persist Matthew I think.
One thing that we're keeping an eye on is our ability.
This advance notice we're starting to see some of these price increases come even faster.
At this stage.
So that'll be a potential headwind that we face if we are unable to continue.
To procure these types of products with that advance notice like we've been able to in fiscal 'twenty.
We do expect to continue to.
<unk>.
Get those pass along as timely as we can.
Okay.
Certainly.
We did see some very strong.
Margin expansion in 2021, and just don't expect that kind of at those levels.
Okay, That's fair and then.
You can to some normalization.
Price.
<unk> and <unk>.
Second half so the sort of helpful to understand what you're really assuming on the pricing side as we kind of model the cadence through the year. Thank you.
Yes sure <unk>.
As you look at volume in the 2022 outlook, we've got a kind of low to mid single digit with.
With market and are above market.
Okay growth initiatives that we've got pricing in kind of the mid mid single digit and then acquisitions contributing about two points on top of that.
Perfect well, thanks, everyone and good luck.
Alright, thank you.
Thank you.
Question comes from Jamie Cook of Credit Suisse. Jamie Your line is now open.
Hi, good morning, and nice quarter I guess.
Two questions one I think you talked about.
Some projects that were delayed that could potentially be challenging through the first half of the year I'm. Just wondering if that's embedded in your guidance. If you could sort of size that and then understanding some of the near term issues that are sort of pressuring that.
That could potentially pressure margins in 2020, Q can you talk about sort of the.
Some of the structural initiatives you guys have put in place to improve margins and what's embedded in the forecast for that for 2022.
Jamie I'll start with some of the projects that we're seeing for the most part.
All of our projects are continuing bidding activity continue to remain incredibly strong.
Through the fiscal year end.
A couple of areas, where we're seeing real product shortages and exceptionally long lead times in the six to eight months.
Range get to be large diameter.
Projects that require PVC pipe or large diameter, ductile iron where those lead times can stretch out to four to six months. So those are some of the ones, they're kind of I don't want call anomalous, but.
There are projects that.
Are starting to see a push that we're going to continue to see a push on those as we go forward. They continue to be on the table. They continue to be in the backlog, but due to the timing constraints in being able to get some of that specialty type large diameter.
Product and it's been very difficult Mark do you want to talk a little bit about the margins.
Yes, Jamie in terms of the gross margin initiatives that we've got that we believe are going to offset some of that temporary pressure certainly our private label initiative continues to expand.
We continue to add more capabilities and products there to rollout through our branch network.
Our acquisition of Ellen M supply really expanded our abilities and the erosion control products, which is.
Our higher margin product for us and we believe we can continue to expand that through our branch network cost. So that is an area that we will see a pretty good expansion in 2022.
We continue to work on our pricing initiatives not only to get the pricing into the market and make sure that we're current with that but also looking at ways to optimize price, especially on some of our non did in ancillary type products.
Locally.
Given some of the pricing data that we see across the country, we've been able to optimize that and really get get those products priced.
Accurately and at the right levels.
So between those three we typically expect.
Say 20 to 30 basis points of gross margin expansion in any given year and we think that helps offset some of the.
Benefits that we've achieved in 2021 that we said could be temporary.
Okay. Thank you.
Okay.
Thank you next.
Our next question comes from David Manthey of Bad David Your line is now open.
Thank you and good morning, everyone.
If you could break down by segment.
Ray.
August the luxe.
With rates in fiscal 'twenty two.
Relative impact on price in those assumptions.
Yes, Dave Thanks for the question in terms of.
Breaking out the end markets I would tell you that we feel really really strong on the residential end market kind of in that mid mid single digit and that's coming off of a low double digit growth in 2021. So we still see a lot of a lot of demand there with lot development as I mentioned non <unk>.
<unk> sorry.
Starting to follow and then it kind of returned to those pre pandemic levels, I'd say slightly slightly lower than the resi growth that kind of right in that mid single digit range and then the.
The Muni segment still kind of strong and steady that kind of low low single digit range and again, that's coming off of a really strong.
Growth rate in 2021.
In terms of price no major differences across the end markets as it relates to price.
Think about like we said mid single digit range in terms of the price benefit with more of that kind of front loaded and then coming up against more difficult comps given.
Given the pricing levels as we got towards the end of the year.
Okay. Thanks, and then just a follow up on that.
Maybe I misheard that but did you imply that.
Second half.
Pricing could actually be negative for being more positive in the first half and that nets out to mid single digit did I hear that correctly.
Yeah, Dave that's how we're looking at it right now and again that assumes the supply chain does free up at some point kind of middle of the year.
The impact of that is some declining commodity prices havent necessarily seen that yet, but thats kind of how we're looking at just given some of the uncertainty in the back half.
Okay.
And just to level synthetic who will talk about guidance you've given previously you've kind of done the same thing right you sort of assume that commodity prices come down whether they do or not.
Thank you David.
Yes, I'd say its fairly consistent with how we've looked at it in the past days.
We've got pretty good visibility as we get three to six months out in terms of the backlog and in the supply chain.
And just given that uncertainty with that kind of making those assumptions in the back half of it at some point that's going to come down.
Good morning.
Okay.
Alright, thanks very much.
Alright, thank you.
Thank you. Our next question comes from Nigel Coe of Wolfe Research Nigel Your line is now open.
Thanks, Good morning, everyone last quarter.
So just on the outlook I think you will.
EBITDA margin as if it will just taken I think of about 100 basis points.
Lower year over year at the midpoint again, if I'm if I'm mistaken that please correct me, but I was wondering if you could maybe bridge that.
And then within that I think you've talked about the price cost favorability, representing about a 40 basis points.
In that range.
Wins into 2022, I'm, just wondering how that looks right now based on what you see.
Yes, Thanks, Nigel I think as you look at the guide for 2022, we've got EBITDA margins coming back and that kind of 80 to 90 basis point range with most of that coming from the gross margin line, we do expect to see.
A little bit of SG&A cost leverage coming into 2022, as we anniversary some of the IPO related one time costs in there.
So that's kind of that's kind of a range I think it is coming down a full 100 basis points, but I would say a majority of it obviously coming from the gross margin rate line.
And then could you asked that second question again Nigel.
Okay.
Yes, sorry, the price cost impact, obviously, you've got some favorability coming through.
This year, how does that shake out into 'twenty two.
Yes, I think as we as we think about the price cost benefit certainly in the first half we expect if prices continue to stay high and accelerate.
We see a similar opportunity there with some potential headwinds just given the timing of when we get those.
Price increases.
But I think as we as.
As we get into Q2, Q3, certainly Q4, and we start running up against much more difficult comps and you will see that that's really where I see the gross margin benefits starting to get we start seeing some pressure there year over year.
Yeah.
Okay. Okay and then my follow on is with all these price increases and I understand that PVC piping is not.
A huge proportion of that project project values, but.
Do you have a sense on how the overall kind of projects inflation is looking for for the for the end customers and.
Any concerns on some demand destruction.
Given the inflation wave on products and labor labor availability and I'm, just wondering on top of that.
The stimulus funding coming through in 'twenty, three if that's causing maybe some of the starts to make a push to the right.
Yes, Nigel this is Dave.
Sure there right now we haven't seen any demand deterioration whatsoever in regards to pricing or inflationary activities the projects.
All of them seem to be absorbing this at this point and one of the key aspects of the.
The value of these projects in the materials themselves in that.
Whats on our mind and most of these contractors and municipalities is the completion of these projects and keeping their crews active.
The material costs aren't as significant as being able to complete the projects and being able to keep their labor fully active in this and I think that's that's the primary concern right now.
Bidding activity and everything else continues to remain very very strong.
When I look at the funding characteristics. We haven't just we just have not seen much of the funding get through to the state revolving funds at this point or cause any type of delay along those lines.
I think thats still a work in progress, but everything is still working through the backlog right now of all the existing projects that are out there looking at the new bidding activity.
So I can tell you as we stand here right now there really has hasnt, we havent seen any impact whatsoever of a delay awaiting state revolving funds in the infrastructure package, making its way through.
Great. Thank you very much.
Thank you.
Thank you. Our next question comes from Patrick Baumann of Jpmorgan.
Your line is now open.
Thank you hi, good morning, guys.
Hey, good morning, Pat.
On the.
The acquisition environment, I think you said, 2%.
It is embedded in the outlook for sales growth can you talk about.
The pipeline and weather.
<unk>, we've seen in the market year to date is delayed any deals from happening.
And then you also mentioned something about evaluating additional capital allocation opportunities, maybe you could kind of talk a little bit more about what you meant by that.
Sure ill talk a little bit about the M&A outlook and I'll, let mark talk about capital allocation, we just see a very strong robust pipeline fill in M&A activity and if you look at what a lot of these business owners have gone through between Covid supply chain challenges.
And all of that environment, it's been very difficult for them and it's really created a good opportunity for us.
From the standpoint of being able to look at a lot of the different areas, where we drive value from M&A, where we look at either consolidating in certain markets or we look at expansion opportunities.
And even look at product opportunities looking at everything from erosion control products and being able to expand in that area. There is just a robust pipeline out there and we continue to work through a pretty strong pipeline out there and are encouraged by what we're seeing as we go into 2020 to Mark do you want to talk a little bit about capital allocation, yes, Pat.
Nothing really there to read into we'll continue to look at where we were reallocate capital, but more of it's just timing and opportunities on the M&A side, we're going to continue to focus on on our growth strategy. There. So nothing really additional to add there.
Okay and then.
<unk> is on a commodity type product that how big is that as a percentage of sales now given the strong environment you saw for price there.
2021.
And then on the non commodity type product, but what kind of product cost inflation did you see there last year and what are you seeing so far this year.
Yes, thanks, Pat on the commodity side now with PVC ductile steel pipe some of those categories represents about 32% of our overall net sales.
And what I would tell you on the non commodity side as we've continued to see.
Very strong pricing on that side as well.
Slightly under our under the average with the commodities being slightly above the average.
Okay and for that piece of the business I mean are you.
Are you seeing that less tied to kind of like.
The volatility in steel PVC et cetera, So you should see price from that part of the business continue.
This year or is that still going to be.
Moving up and down with with those commodities.
Like the commodity.
We'll say, it's pretty typical around this time of year to get price increases coming in and a lot of the non pipe related products and.
So we'll see if that there continues to be more price increases and what that frequency is right. Now if you look at the demand profiles that are out there in the supply constraints.
Favorable for a pricing environment out there, but it's too early to tell yet whether we will see that through continue on all the way through first quarter and second quarter for the non commodity products.
Understood. Okay. Thanks, Thanks for the time appreciate it.
Thank you.
Next question comes from Kathryn Thompson of Thompson Research group.
Your line is now open.
Alright, Thank you for taking my questions today.
Now there's been a lot of focus on pricing today.
Little bit more of a conceptual question as we head into 'twenty two.
Strategic buys were an important part.
In addition to a favorable price environment.
Okay to driving top line.
Two thirds of the top line gain.
Last two quarters.
But as we head into 'twenty two.
Are you doing the same type of strategic buys in does that strategy work.
This market.
How do you think about the strategic buys.
Favorable wind it hasn't really stuck in each region.
Yes, Catherine we have a couple of different ways. When we look at this we look certainly at our backlog of existing projects that we've closed that are due to shifts due to shift at some point over the next next several months. We also factor in what we're seeing in bidding activity and the price sensitivity.
Associated with the bidding activity.
So we look at this thing very closely about whether to take longer positions in certain product categories and what the capacity constraints are and if you do look at.
I understand that many of our suppliers are really dedicated to this sector and the sector alone we have pretty good feel for what the capacity constraints may be that allows us to take a position.
Depending on what we're seeing on those internal metrics that we're looking at for backlog and for bidding activity. So right now we see.
Very favorable demand environment, we see tight supply constraints that look similar to where we ended fourth quarter for sure. So I think we're encouraged by that and will continue to take positions, where we think we can.
Continue to find that that margin enhancement opportunity and get access to product and be able to pass that price growth.
And as we.
It's really critical that a world.
And then could grow.
Sure.
The feedback that we're getting consistently.
Wide variety of industry contacts along the industrial volume.
And construction value chain.
A different approach carried inventory.
And with all the supply chain shortfalls.
I think really the globalization trend patients.
Patients to grant a propensity key.
Are you wanting to play more simple and integrated.
This is Pete.
And that inherently carrying inventory what is your position and spot.
On that on that concept.
Versus how you've operated.
Pre COVID-19 .
How you intend to operate going forward.
Catherine wanting things that we saw really coming out of COVID-19 as well going into Covid, we really sell the demand was really starting to increase while supply was still wide open I think you saw some suppliers that took some capacity out during COVID-19 .
Given some of the uncertainty.
Yes.
Always seen and feel like we have a really good outlook at what the demand profile is going to be and also what the bidding activity means and the closeness that we have with our customers to understand.
What the appetite is and when we're going to start seeing demand either slip or capacity in our in our area falls or increase as well too. So I don't know if we necessarily changed our approach in how we operate we certainly see the value of inventory in it.
And it has been able to capitalize on that we continue to see as today and just given our size and scale in this area it's really.
A benefit of ours to be able to do that to support our customers on where we can allocate into the inventory get access to our final alternative materials for our customers.
Okay.
Helpful and then just looking forward.
Hi.
When you look at your four major operating segments and you look at.
In the pipeline with tenant tenant.
In terms of jobs in the future.
Alright.
Patterns are you seeing today that may be different.
A year ago.
I think we continue to see really strong municipal demand a lot of repair replace work in that area that aging infrastructure and the ability to fund it for these municipalities.
To be very strong and robust residential and land and lot development continues to be really strong.
I think the nonresidential construction and particularly for commercial construction for our fire protection products.
As we saw really good signs of life last year, we're encouraged by what we're seeing in that sector. And then you look at what's happening with <unk> with the infrastructure Bill we support that with storm drain in generation control products and I think that's an area that we're excited about as we get into.
The 2022 as well.
Great. Thank you very much.
Thanks Catherine.
Thank you.
That concludes the Q&A today.
I will hand back to Steve <unk> for any closing remarks.
Thank you all again for joining us today to participate in our fourth quarter earnings call fiscal 2021 was record setting year for corn main we are thrilled with the resilience of our business and our teams since becoming an independent company in 2017, we've unlocked our ability to grow well in excess of our end markets.
Acquire and integrate businesses and enhance our margin profile.
We are entering fiscal 2022 with a strong team positive market tailwind and extraordinary momentum we remain confident in our ability to deliver strong results to our stakeholders in 2022 and beyond and are committed to providing our customers with local knowledge.
<unk> experience in local service nationwide.
Thank you for your interest in corn main operator that concludes our call.
Yes.
Thank you for joining today's call you may now disconnect.
Okay.
Sure.
Okay.