Q1 2022 Core & Main Inc Earnings Call
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Hello, everyone and a warm welcome at G D Cool and main Q1 2022 earnings call. My name is Melissa and I'll be your operator.
If you would like to ask a question. Following today's presentation. You can press star followed by one on your telephone keypad I now have the pleasure of handing over to your house will been bought breach begin well been a V E.
Thank you good morning, and welcome to the core named fiscal 2022 first quarter earnings call. This is Robin Bradbury, Vice President of Investor Relations and F P&A for Gordon.
I'm joined today by Steve Leclair, our Chief Executive Officer, and Mark Wikowsky, Our Chief Financial Officer.
Steve will lead today's call with a brief business update followed by a review of our growth strategy and an example of how we are targeting growth in underpenetrated product categories.
Mark will then discuss our first quarter financial results and our full year outlook, followed by a Q&A session.
We will conclude the call with Steve's closing remarks.
We issued our fiscal 2022 first quarter earnings release, this morning, and posted a presentation to the Investor Relations section of our website.
As a reminder, our earnings press release presentation and the statements made during this call include forward looking statements. These statements are subject to risks and uncertainties and actual results may differ materially from those expectations and projections.
Such risks and uncertainties include the factors set forth in the earnings press release and in our filings with the Securities and Exchange Commission.
Additionally, we will discuss certain non-GAAP financial measures during today's call, which we believe are useful to assess the operating results and efficiency of our business.
A reconciliation of these measures can be found in our earnings press release and in the appendix of our fiscal 2022 first quarter earnings presentation.
Thank you for your interest in corn main I will now turn the call over to Chief Executive Officer, Steven Leclair.
Thanks, Rob and good morning, everyone. Thank you for joining us today and welcome to our fiscal 2022 first quarter earnings call starting on page five I'll begin with a brief business update.
We delivered an extraordinary start to fiscal 2022, as we achieved strong growth in both net sales and adjusted EBITDA.
This marks our 25th consecutive quarter of average daily sales growth.
Both in the quarter was driven by strong demand across each of our end markets.
Higher average selling prices as we passed along rising material cost execution across our sales initiatives to drive market share gains and acquisitions.
Inflation remained elevated and supply chain challenges persisted through the first quarter, but our resilience and execution delivered remarkable results.
We achieved another quarter of solid gross margin rate expansion relative to the prior year.
When combined with our 52% net sales growth and cost leverage we delivered over 101% adjusted EBITDA growth for the quarter.
Market demand continues to be strong and broad based across the country. We are encouraged by the strength in residential land and lot development, Despite rising interest rates and inflationary pressures across the residential building sector.
We saw a nonresidential construction activity accelerate through the first quarter municipal repair and replacement activity remained very strong.
Bidding activity backlog and pace of orders all trended favorably through the first quarter, giving us confidence in demand through the end of the fiscal year.
Product shortages persisted through the first quarter, we continued to impact lead times of material costs, we continue to benefit from our size and scale by maintaining industry, leading product availability, a testament to our value proposition.
We are focused on maintaining the right inventory to stay efficient while also ensuring we have access to products that support our customers and their installation schedules.
We have been increasing our inventory to maintain fulfillment levels, but we are closely monitoring bidding and project activity to be prepared for any changes in the market.
Most of the inventory we have on hand is either reserve for a job or is a commonly used product that can be moved quickly our investments in inventory and supply chain strategies are generating significant returns for the business.
We remained active in M&A during and subsequent to the quarter, highlighting our commitment to drive sustainable growth through acquisitions.
We closed on the Dodson engineered products and lock city supply acquisitions and signed a definitive agreement to acquire Earth savers erosion control.
Dodson engineered products as a single branch full service distributor water wastewater storm drainage agricultural irrigation products based in Western Colorado.
Locke City as a single branch full service distributor water and wastewater products based in New York with almost 50 years of industry experience lock city supply has proven itself to be a distributor of choice in its local market.
<unk> erosion control operates three branches in California.
And as a full service distributor Geo synthetics and erosion control materials, including straw waddles erosion control blankets and a broad array of geotextile products for over a decade <unk> has been a leading and preferred resource in California, Nevada, and Arizona markets and surrounding areas. We look forward to combined.
Forces and expanding our expertise to further serve our customer base in the western region.
Each of these businesses are great. Examples of what we look for in acquisitions offering and expansion into new geographies access to new product lines and the addition of key talent.
The integrations are progressing according to plan and employee engagement is positive and feedback from customers and suppliers has been great.
Our acquisitions are performing considerably well and we're working to optimize the synergy potential from each business, we maintain a large and highly diverse acquisition pipeline, which you will continue to pursue to position ourselves for sustainable growth.
In addition to our focus on M&A. We also remain focused on attracting developing and retaining top talent in the tight labor market.
Our associates are our most valuable asset and are essential to our success.
We offer a pay for performance culture to attract and retain high performing teams. This is especially.
Actually important for our customer facing and support roles within our branches we.
We believe that our people first culture consistent investment in the health well being and the development of our people and competitive compensation programs result, lower turnover rates among our associates.
Sales associates in branch management have the opportunity to earn competitive pay through our performance based compensation structure.
Our local business nationwide philosophy incentivize as both our sales force and our operations team to be entrepreneurial, making decisions grounded and customer centric approach.
We have a resilient business model and our leadership team with a history of navigating through various economic cycles.
The diversified nature of our end markets customer base product offerings and geographic footprint provides better stability for our business relative to other distributors operating on a smaller scale.
The municipal residential and nonresidential construction markets have historically operated on different cycles.
And benefit from very demand drivers. Additionally.
Additionally, roughly 40% of our business consists of non discretionary municipal repair and replacement activity, which has proven resilient during the previous economic downturns.
We have a long and established track record of strong cash flow generation, our working capital optimization provides both counter seasonal and counter cyclical stability, allowing us to invest and build working capital during periods of growth yet remain agile in the event of an economic decline.
Our variable compensation structure also allows us to quickly take cost out of the business in times of economic declines.
We are sharing these characteristics because certain market uncertainty is common discussion topic right in the market right now.
However, as mentioned earlier, we are very confident in the current demand environment, the resilience of our business and in the end markets in which we operate.
While our current expectation is that we may not see incremental volume from the infrastructure Bill until 2023 or beyond.
Due to constrained supply chains and labor shortages, we believe those funds could be access sooner in the event of an economic downturn.
Materials and labor utilized on private construction projects today could likely be redeployed and accelerate projects in the municipal water sector.
On page six we outlined the levers that enable us to drive sustainable growth over the last several years, we've invested in people and capabilities to strengthen our ability to drive growth as we look ahead, we see multiple avenues to continue to continue pursuing.
We have demonstrated that we can grow faster than our underlying markets and believe that our competitive advantages allow us to continue gaining share at the local level.
We continue to drive organic expansion in underpenetrated geographies through new Greenfield locations.
We have meaningful runway to increase our share through strategic accounts, which include large private water companies and national contractors.
Our size and scale position us to continue accelerating the adoption of products and technology in our industry, such as Geo synthetics and erosion control solutions smart meters Fusible <unk> technology in a number of other developing product categories.
As I mentioned earlier acquisitions are a key component of our growth strategy and we have a long runway to consolidate our fragmented industry.
Finally, we have opportunities to continue enhancing gross margins, including private label through global sourcing and pricing and procurement initiatives.
We have an opportunity to transition ancillary spend to internally source products.
We have a team of pricing analysts, who have been able to enhance product margins using data to drive pricing decisions and by proactively updating price changes to increase visibility to our branch network. Additionally.
Additionally, our category management team as the opportunities continue shifting spend to suppliers with the best pricing and payment programs to optimize gross margins.
We are in the early innings of executing on many of these initiatives and see a long path of growth ahead.
On page seven we highlight an example of how we are constantly evaluate opportunities to expand our addressable market and drive sustainable growth.
We have recently increased our presence in the Geo synthetics and erosion control market, which is large highly fragmented and estimated to be roughly $5 billion of our 32 billion dollar addressable market.
Oh, synthetics and erosion control products are used prevent soil erosion and storm water run off.
Geotextile Geo grids erosion control blankets and other related products coming both earth friendly and biodegradable options.
They are primarily used to reduce environmental disruption during construction.
Land development tends to increase soil erosion risk with Geo synthetics and erosion control products reduced the likelihood that soil erosion will cause pollution and displace native wildlife.
We estimate that our current share in this market is only 1%, but we have a long runway of organic and inorganic growth opportunities ahead, we.
We developed a platform for growth in this market after our successful acquisition and integration of erosion resources supply in 2019, and <unk> bag and supply last fall.
Our recent agreement to acquire <unk> erosion control illustrates our ability to consolidate this large and fragmented market we.
We maintain a large pipeline of high priority Geo synthetics targets.
And we see meaningful bolt on opportunities ahead.
In addition to growth through M&A, we have multiple avenues of organic growth pursuing geo synthetics and erosion control as we pull these products through our national branch network and into the hands of our existing customers.
We have the ability to increase our private label offerings from the fabrication capabilities brought to us and our recent acquisition of Ellen M VAG and supply.
Environmentally conscious regulations for storm water runoff prevention are becoming more prevalent and we are aligning our sales efforts nationwide to capitalize on that locally regulated driven demand.
Our sales associates taken consultative approach using their knowledge of the local regulatory requirements and specifications provide customer specific product and service solutions.
We are deeply involved in our customers' planning process and our ability to support our customers by enabling them to comply with local regulations provides us with a significant competitive advantage.
We are utilizing our acquired talent and expertise trainings and incentives to drive cross selling with our existing customer base.
Lastly, we are benefiting from our sourcing consolidated buying capabilities to enhance the margin profile of certain geo synthetics and erosion control product categories.
A roll up strategy is underway, we have a highly experienced team working to expand our product portfolio and service capabilities nationwide.
To wrap up my remarks, I continue to be impressed with how our team has come together to deliver these great results earlier. This year, we talked about our focus areas for fiscal 2022 executing on our key growth strategies deepening our competitive advantage and building on our foundation of long term profitable growth we've made great.
Progress in each of these areas and continue to position the company for success, we acknowledge the amount of uncertainty associated with inflation rising interest rates and the war in Ukraine, but we have not yet seen this translate into lower demand.
Furthermore, we expect to continue gaining market share as we deliver high value to our customers and execute on our product customer and geographic expansion initiatives.
We remain focused on our operating priorities and delivering a best in class customer experience.
I'll now turn the call over to our Chief Financial Officer, Mark with Koski to discuss our first quarter financial results and full year outlook go ahead Mark.
Thank you Steve Good morning, everyone turning to page nine I'll begin by covering our first quarter operating results.
Net sales in the first quarter were nearly $1 6 billion, an increase of approximately 52% over the prior year.
The increase was driven by higher average selling prices as we passed along rising material costs strong volume growth and acquisitions.
Our sales benefited from volume growth across each of our end markets.
We've continued to see strength in residential land and lot development.
Nonresidential construction activity continues to accelerate and municipal repair and replacement activity has remained strong.
Net sales for pipe valves fittings, and storm drainage products benefited from strong end market growth acquisitions, and higher average selling prices across most product lines.
Our fire protection products benefited from a strong commercial construction markets and higher average selling prices.
Our meter products grew at a slower pace, primarily due to shortage of semiconductor chips, which are components of certain smart meter products.
We've seen sequential improvement in meter volume since last quarter and expect that trend to continue for the remainder of the year.
We outperformed our end markets and drove above market growth in the first quarter due to our industry, leading product availability and the execution of our product customer and geographic expansion initiatives.
Roughly three fourths of our net sales was due to higher average selling prices driven by our team's ability to pass along rising material costs.
We continue to experience inflationary costs from our suppliers and the conflict in Ukraine is further challenged our supply chain in recent months near.
Nearly two thirds of the pig iron imported by the U S last year came from Russia, and Ukraine, but the conflict is reduced shipments and created a global shortage of steel and iron.
When coupled with rising fuel prices, we have recently experienced immediate surcharges imposed on certain product categories.
Despite these challenges our teams are navigating the inflationary environment exceptionally well working with our customers to give advance notice of market price increases and added surcharges.
Acquisitions contributed approximately five points of sales growth in the first quarter.
Gross profit in the first quarter increased 64% to $421 million.
Gross profit as a percentage of net sales was 26, 3% compared with 24, 3% in the prior year, an improvement of approximately 200 basis points.
Similar to recent quarters, our gross profit margin was positively impacted by inventory investments ahead of supplier cost increases and gross margin enhancement initiatives.
We're operating in a less sensitive price environment due to industry wide product shortages, which we benefited from due to our supportive inventory levels.
We continue to make great strides across our margin initiatives delivering sustainable gross margin rate expansion relative to the prior year.
We also achieved accretive.
Accretive synergies from recent acquisitions, which we expect to continue benefiting from moving forward.
Selling general administrative expenses for the first quarter increased 34% to $206 million <unk>.
SG&A as a percentage of net sales was 12, 9% compared with 14, 6% in the prior year period, an improvement of approximately 170 basis points.
The decrease in SG&A as a percentage of net sales was due to our ability to leverage our fixed costs.
Interest expense for the first quarter was $13 million compared with $36 million in the prior year. The decrease was primarily attributable to the redemption of the 2024 and 2025 senior notes.
Income tax expense for the first quarter was $30 million, reflecting the effective tax rate of 18% compared with $6 million in the prior year at an effective rate of 18, 2%.
The effective rate for each period reflects only the portion of net income that is attributable to taxable entities.
Adjusted net income increased to $127 million from $27 million in the prior year the.
The increase was primarily attributable to higher operating income and lower interest expense, partially offset by an increase in income taxes.
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 101% to $219 million, improving adjusted EBITDA margin by approximately 340 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 on the sales and gross margin growth.
On page 10, I will now cover our cash flow and balance sheet highlights for the quarter.
We had an operating cash outflow of $37 million. This quarter, we generally anticipate an operating cash outflow in the first quarter and this year was no exception as we continue to build inventory to support demand and to ensure we have products available for our customers, while navigating long lead times.
The operating cash outflow for the quarter was a result of higher profitability and lower cash interest expense that was more than offset by higher operating capital to support our growth both year over year and sequentially.
And higher cash taxes.
We have historically generated the majority of our cash in the second half of the year and we expect the same trend this year, particularly as we work to optimize our inventory levels.
Our net debt at the end of the quarter was $1 $545 million, bringing our net debt leverage down to two two times and improvement of <unk> three times since last quarter.
The improvement was attributable to an increase in adjusted EBITDA, partially offset by $57 million of borrowings under our senior ABL credit facility to fund operations meet our working capital needs and execute M&A.
Our term loan carries interest at LIBOR, plus 250 basis points on the unhedged portion of the facility we entered into a five year fixed interest rate hedge with a notional value of $1 billion to lock in the LIBOR rate at 74 basis points.
The current cash value of that hedge stands at $76 million.
At the end of the first quarter, we had $785 million in total liquidity, excluding the cash value of the hedge.
We expect that our current liquidity combined with our anticipated operating cash flow will be sufficient in the near term to fund operations and continue pursuing our growth strategies.
I'll now wrap up on page 11, with a discussion of our outlook for fiscal 2022.
Despite the current macroeconomic backdrop, we have great momentum heading into the summer selling season.
We expect end market demand remained strong and the pricing environment to remain stable for the remainder of fiscal 2022.
<unk> activity is robust and we have not observed a slowdown in bidding activity or a rise in project cancellations.
Material costs continue to decline through the first quarter due to sustained demand and little to no improvement in supply chain capacity.
As a result, we now expect pricing to be higher in the second half of the year than originally anticipated.
We expect residential and nonresidential demand to be positive for the full year, though we expect pressure in the second half as we anniversary strong volumes in the prior year.
We expect to continue benefiting from stable municipal repair and replacement activity through the remainder of the year.
Overall end market sentiment is positive and we entered the summer construction season with a strong backlog.
Taken altogether, we now expect high teens net sales growth for fiscal 2022, consisting of stronger growth in the first half of the year moderating in the second half as we annualize more difficult comparisons from both volume and pricing.
Given the sustained price realization benefit from the rising material costs. We now expect gross margin rate to be roughly flat with the prior year.
At the midpoint of our range, we expect to achieve SG&A leverage and we anticipate our full year adjusted EBITDA margin will be slightly slightly above fiscal 2021.
With these factors in mind, we are raising our expectation for fiscal 2022, adjusted EBITDA to be in the range of $710 million to $750 million representing year over year growth of 18% to 24%.
We expect to convert roughly 65% to 80% of our adjusted EBITDA into operating cash flow in fiscal 2022, as we work to optimize our inventory balances in the second half of the year.
We typically convert 60% to 70% of our adjusted EBITDA into operating cash flow with fiscal 2021 being an exception as we invested heavily in working capital to support growth and to ensure product availability for our customers.
Our expectation for operating cash conversion is less than originally anticipated due to sustained price supply chain challenges and our decision to continue investing in inventory ahead of supplier cost increases.
To close out our prepared remarks, we are thrilled with our first quarter results, we have a resilient business model and our leadership team capable of adjusting quickly to changes in the market we remain.
<unk> focus on delivering sustainable market share gains improving profitability and generating strong operating cash flow.
That concludes our prepared remarks at this time I would like to turn the call over to the operator for questions.
Thank T. If you would like to ask a question. We invite you to press star followed by one telephone keypad. If you change your mind or if you feel that your question has already been answered you compress thoughtfully by Chi to withdraw your question.
Rafi, please ensure that weren't going to ask your question you ensure that you are on mute you lately.
Our first question today comes from Matthew Bouley of Barclays Matthew AVG.
Hi, This is Elizabeth Lane on for Matt today, Erik Congratulations on the results.
I was wondering if you could touch him.
Could you give us an idea of where you are seeing notable strength in your respective end market.
It's kind of driving those expectations higher.
And if you have seen a change.
Have any of those markets given the uncertainty in the macro.
Elizabeth Steve So thanks for your question.
What we've seen through first quarter has really been robust demand across all of these end markets municipal has continued to be very strong you know I think we look at the demand in that area. It has continued to build for the last several quarters and it's continuing to build the bid activity looks very strong as well too and municipal.
Nonresidential has been strong continues to really drive a lot of our fire protection sales and then residential we've been watching it closely obviously, we're concerned about what happens with interest rates and all of the other dynamics that seem to be impacting <unk>.
Residential but land development continues to be really really strong through the quarter and continues to be as we as we look forward. So yes, I would say that we just saw all three end markets really performing extremely well as we got through first quarter and continue to see a lot of bid activity.
Ross all of them at this point.
Thank you that's very helpful.
I was also hoping you could touch on how youre thinking about.
You're maintaining your market share gains that are being driven by your access to products and do you expect those will be sticky or do you think that youll see some reversion.
Hi team.
Yes, what we're seeing right now is supply changes continues to be tight tighter than we anticipated.
The capacity for a lot of our manufacturers they've.
<unk> been challenged to try and increase that.
And any type of short or medium term.
Timeframe so.
No.
That continues to be tight we continue to get preferred access to product that many of our smaller competitors aren't able to get we continue to serve them at a high level and I think thats been the important part as long as we can continue to get that opportunity to serve some of these newer customers that we've gained by getting access to product will continue.
To support them when supply chain E. So we're hopeful that we'll be able to continue that momentum even after the supply chain starts to ease at some point in the future.
Okay does that answer your.
Question.
Yes. Thank you.
Thanks Elizabeth Thank you.
Our next question today comes from Nigel Coe of Wolfe Research.
That night U S T a.
Good morning, everyone. This is will branco in for Nigel.
I'm wondering well first wondering if you could good morning.
I was wondering if you could talk about the price cost contribution of the quarter and how you see it rolling through the rest of the year.
Yes. Thanks will thanks for the question as you saw gross margins for the quarter were strong up about 200 basis points.
You know really benefiting mostly from from price cost.
Spread.
I'd say, that's about call it 170, or so basis points of that with another 30 basis points being contributed.
From accretive acquisitions and synergies there so.
We continue to benefit both.
With this favorable pricing environment buying ahead of inventory and then the gross margin initiatives that we've had in place.
Continue to see good results there.
Got it.
And I was also wondering if you could provide any color on how you're thinking about the seasonality of earnings this year and maybe any color on the second quarter setup.
Yes, well typically you know what we'd see going into the second quarter would be a be a nice ramp up sequentially.
Due to volume.
We're also continuing to see pricing accelerate so would expect.
Sequential growth at the top line in Q2.
Typically we would see that kind of level off in Q3, and then Q4 typically sequentially would be down from those Q2 and Q3 levels.
Primarily due to the colder regions that we have slowing down their construction season, so to expect I'd say, a return to kind of normal seasonality levels here through the remainder of 2022.
Got it that's very helpful. Thank you.
Yep.
Thank you. Our next question today comes from Joe Ritchie of Goldman Sachs J S. T a.
Alright, Thanks, good morning, everybody and congrats and I start to the year.
Thanks, I appreciate that Jack.
Yes.
First question is just around.
I don't think I heard you guys say, it but the pricing commentary.
What are you guys expecting for pricing as part of your growth equation for the year and then and then my follow on to that is how should we be thinking about pricing in the second half of the year, because obviously the comps get a lot tougher.
Yeah, Thanks, Joe Yeah.
The pricing.
I would say within our guide we were anticipating in our in our previous <unk>.
Range that we gave pricing and kind of the mid single digit range. We've increased that now to I'd say mid mid teens for the for the full year, which you know as you look at the back half assumes I'd say kind of low low to mid single digit pricing in the back half. So we've got it I'd say starting to stabilize.
<unk> and then potentially some of the commodities coming back later in the year and just trying to reflect some of the uncertainty on the commodity side potentially later this year.
Got it and then Mark I guess, what is that kind of mean for the gross margin equation, because obviously you know you.
You guys are forecasting.
Getting in the guide flat gross margins, but obviously, a great start to the first quarter.
Is there does that necessarily mean compression at the gross margins naturally from from those dynamics.
Yes, Joe you know as we've talked about we do expect that we're benefiting from about 50 to 100 basis points of some.
Some temporary margin benefit just given the environment we're in.
Nothing really changing there in terms of our expectation.
Now I would say several quarters in Canada.
26, north of 26% margin. So I think that 50 to 100 kind of coming off. This run rate is is how we're thinking about it so that if those prices potentially stabilize.
The remainder of the year I would expect that temporary benefit to subside and then.
You're not really seeing that.
Kind of back into that.
Level that we're at in the prior year as we as we finish off 2000.
Got it okay, and if I can sneak one more in here Steve for you just the.
You mentioned that the info bill.
You're not expecting to see much of a benefit from that until 2023 some of it being supply chain oriented. This can can you just maybe provide a little bit more color.
What's what's maybe holding up some of the spending and then also.
Is there a risk at all with that.
Because it gets factored into this is really truly just deferral into 2023.
Joe It's really looking right now that some of these projects are being tabled that would utilize.
These funds just simply because of the time constraints and the limited availability of products, So and the municipal world some of the larger diameter projects that are out there.
Lead time for some of these pipe the pipe products and things like that can go out in some cases almost 52 weeks. So we believe until that capacity starts freeing up a little bit that we're just not going to see a whole lot of these funds being applied now if things do change you know if we start seeing maybe some residential start to soften in.
The back half of the year.
Think that may be able to pull in some of this municipal demand and offset some of that that's kind of how we're looking at it right now.
But we're just seeing very robust pipelines today, four four our backlog and everything and municipal that these funds are just not needed at this point to continue the momentum that we that we've been seeing for the last several quarters.
Sure.
Okay, that's great to hear thank you both.
Thanks, Joe.
Thank you Jay will now move on to our next question, which comes from the line of Jamie Cook from Credit Suisse, Jamie AVG.
Hey, good morning nice quarter.
I guess a couple of questions. One just the operating cash flow you lowered your conversion rate of 65 to 85, sorry, 265% to 80% of adjusted EBITDA versus I think last quarter, you were talking about 85% to 100%. So if you could give some color there or is it just you know inventory and then my second question back to <unk>.
Again can you just talk to what you expect or what you're seeing on pricing on PVC or other commodities and whether these moderate in the back half of the year and just pricing on non commodities as well. Thanks.
Thanks, Jamie on operating cash flow, it's really more of a factor on our growth that we expect now for the full year, we were expecting.
Growth in the higher single digit rephrase that now for the full year up into the into the high teens. So.
To support the kind of growth rate and we think the working capital need is higher so that's what we've reduced R. R.
Our guide for on the operating cash flow I'd say our investments in inventory.
We expect.
Maybe hold on to those a little bit longer but more of it's really related to the to the growth that we anticipate.
On the on the pricing side.
Really we've continued to see accelerating pricing across the commodities through the first quarter.
Non commodities as well we've seen price increases there.
And our guide, we're assuming those prices kind of hold for.
For the non commodities.
Commodities, we do have those coming back a little bit as we get through the through the end of the year and again, that's primarily reflecting some of the uncertainty in the macroeconomic backdrop, if we do see some demand slowdown, which we haven't seen but if we do see that we've got that kind of reflected in pricing.
Pricing.
Please.
Through the remainder of the year.
Thank you.
Alright, thank you.
Thank you Jamie we'll take our next question today from Mike Dahl of RBC capital market.
T.
Good morning, Thanks for taking our questions.
Just a.
A couple on the M&A side Eastern block M&A is contributing 5% sales for the first quarter.
Give us a thought on.
Just given what you've already closed.
And year to date.
What's embedded in the <unk>.
Full year contribution for that.
Yeah.
Yeah, Hey, Mike.
About 5% for the quarter, probably similar in the second quarter, we will start to anniversary some of our larger acquisitions that we did last year, primarily the Pacific pipe and Ellen M bag in supply.
So with the with the new ones that we've that we've closed we've got I'd say in the low to mid single digit range in the back half of the year.
And that doesn't include our savers that that has not closed at this point.
And just quickly on that is any parameters you can give us to think about I know you said three branches in full service, but relative sizing of receivers.
Yes, I'd say, we've provided in the past the average sized branch Ken in the $8 million to $10 million range.
So with three branches, you're probably looking somewhere in that that area.
Okay. That's helpful and my follow up question sticking on M&A.
Obviously theres been a lot of the capital markets disruption in the public markets Youre seeing rising funding cost and things like that.
But just wondering what youre seeing in.
In terms of M&A, whether it's some of this.
Disruption has either shaken loose some assets is it affecting competition for assets.
How are you seeing.
Incremental changes in your M&A pipeline today.
Yes, Mike what I would share with you is that our pipeline has been pretty robust certainly going into the first part of this year and continues to be so.
When we've seen this.
Gnomic disruption in some of the uncertainty that's happened in the past that really lends itself very well to the type of acquisition targets.
That.
We would typically be targeting in this and bring some of them to the table. So we look at it as almost a favorable situation in our industry that when you start getting a lot of uncertainty along those lines.
It does really help aid. The addition into the pipeline of some different assets.
Area, but if you look at where we are.
The acquisitions that we've done they've been just really good bolt on acquisitions, whether they've been our waterworks branch in New York or in.
In Colorado, you couple that with.
The consolidation.
We have underway and erosion control and Geo synthetics, just a very robust pipeline right now of opportunities out there for us to continue to consolidate and we think any type of economic disruption probably helps us in some regard along those lines.
Okay. That's helpful. Thanks, Steve Thanks, Michael.
Thank you.
Okay.
Thank you Mike. Our next question today comes from Patrick Bowman of J P. Morgan.
Patrick Please go ahead.
Hi, good morning.
Can you give a little more granularity.
The type of pricing you expect for commodity pipe this year.
Within that mid teens.
Do you expect for the total company.
And then along those lines.
In the first quarter versus the fourth quarter what.
Stepped up incrementally.
And price is.
The price.
Contribution.
It seems like improved a bit sequentially. Just curious is that the commodity pipe or is that the.
Other products that you sell them.
Other than the commodity pipe any color on that would be helpful.
Yes, Patrick first I guess on the Q4 to Q1, we did see an acceleration of of pricing sequentially I'd say.
<unk> was a factor there I wouldn't say, it's the it's rising as.
As fast as some of the other.
Product lines that we've had PVC has had a good run.
So I wouldn't say that was the necessarily the largest contributor in terms of the.
The level of the increase that.
We have seen it really across.
A lot of the other non commodities, which have taken maybe a little bit longer to get price.
Then the commodities. So we have started to see a benefit.
Coming out of there in terms of the guide going forward on commodity versus non commodity I'd say, we haven't really broken it out that way but.
Embedded in our in our guide for the kind of full year mid teens pricing does assume some of those commodities come back down I think the non commodities, we really view as much much stickier for the long term and continue to believe there's probably even some more opportunity there with some of those products.
Suppliers look to try to recoup some of their costs that they've they've incurred so.
That's right the best way to think about that right now.
Okay, and then on the comments.
Comments you made around.
No benefits from infrastructure yet.
Demand that youre seeing.
And then subsequent comments that if.
There was moderation in project activity in your other markets non res or is he.
You could maybe see a step up in <unk>.
The ability to serve that I'm, just curious has there been.
Demand youre seeing from a muni perspective, so far that you haven't been able to serve because like you just too busy with.
Private.
The resi and the demand stuff is.
Is that where you're making that comment I'm. Just curious if you can give more color around that comment.
Yes, more and more of the comment is really geared towards municipal.
Projects that are out there were a lot of the municipalities are just holding off at this point from further.
Rehabilitation of their lines, just given the challenges associated with getting access to product.
Pipes not pipe so theres a lot of different diameters of pipe that have different characteristics that some may be more available than others and for some of these projects, particularly projects with larger diameter pipe. The lead times right now are prohibited from a lot of these municipalities from.
Really aggressively pursuing some of these projects at this point. So we are seeing some of that happen.
But for the most part it's not a trade off of which end market are we serving in this more so than.
Are we seeing some delay in some of these projects pending better availability of product and shorter lead times. So they can execute them in a more consistent predictable manner with more predictable pricing.
Understood. Okay. Thank you.
Thank you Patrick will now move onto a question from Keith Hughes of tourist Keith's associates.
Thank you most of my questions are answered, but I guess, you've talked about product availability issues. Continuing can you list off the top couple of problem child in terms of getting supply for your customers.
Well there is.
I wouldn't want to give strong.
Specific product detailer supplier details, but I think when youre looking at some of the demand that's out there, particularly for some of the basics like pipe to lead times have extended out fittings have extended out.
Those are obviously critical to being able to complete a lot of these projects.
Get into some smaller components that may be out there in terms of restraints and gaskets and things like that that can sometimes.
Slow a project down those are those are primarily what we're seeing and we're trying to balance a lot of that across all the country right now to fulfill.
Projects, along those lines meters have been a big one as well too. So we're still continuing to be challenged with getting access to all of the meters that we need for a lot of the.
Smart meter installations that we have.
Where they are still struggling to get the proper chips and everything they need to produce at the quantity that we need. So those are those are a couple of the areas Keith that we're seeing some of those constraints still.
So it's not just commodity areas youre, saying that some of the more engineered bar like yours problems are resolved, but yes, correct yes.
Yes, correct.
Absolutely. Thank you.
Yes.
Thank you.
Next question comes from David Manthey of bet David M T.
Thank you good morning, Steve You mentioned land development trends what are the other.
Key datasets that are on your dashboard today.
We're watching that closely we're obviously watching our bid activity and a lot of these areas David So.
We're looking at whether it's a municipal bid or.
Our residential land development, we watch and you know the pace at which these are happening we're watching the execution of these projects obviously.
Time to execute a lot of these projects has been prolonged in some cases, given labor shortages and supply constraints. So we watch a lot of those aspects to make sure that projects are moving along we seen our backlog age a little bit as we try and fulfill.
And execute the fulfillment through these so those are a couple of key things that are on <unk>.
Hi.
My Daily and weekly looked at how I assess what's what's happening out there.
As we've gone through that we've been able to re look at how we're looking at the rest of the year, how we're looking at pricing and I think you've seen that reflected in the guidance that we've provided and the confidence that we have and what we're seeing in our end markets at this point.
Okay.
<unk>.
Im not a big fan of comparing every cycle to the GSE, but.
HTS waterworks was down <unk>, 7% or eight nine more than 50% peak to trough and that may have been tax rolls and unstable muni market and things like that but.
Can you discuss the mix of the business and the overall economic environment today versus the predecessor company in that.
<unk>, which is clearly an unusual.
Yes, certainly if we go back to the great recession, and what happened back in that timeframe. Our business was nearly 50% residential at that time, we focused a lot of our effort and resources on that.
Since that timeframe one of the things that we were challenged with its about the time when Mark and I came on board to really try and reposition the business for long term sustainable growth and we built out a number of new opportunities within municipal we started aggressively going after smart meters going after other products to better serve that.
<unk>.
Our sector.
And now Youre seeing a much different shift with the way our business is positioned on how residential plays into it so and.
In addition, what I would say is back then as well too we were also going through an integration of <unk>.
Two different sizeable.
<unk>.
Two players national Waterworks and huge supply waterworks. So there was a lot there was some internal consolidation that was happening as well, which just lends itself to some of the challenges that we face now what we have seen is we've really positioned ourselves in so many different ways from a product standpoint from a market standpoint from a sales standpoint.
To better drive a lot of the adoption of that of those and to continue that sustainable growth secondly, as even during that downturn, we generated an immense amount of cash that we were able to use to reinvest back in the business and that's been one of the cornerstones of how we've.
Really endured through a lot of these different economic size cycles is between our.
Our ability to.
Adjust our SG&A and adjust our investments and how cash spins off a week.
I look at it some type of downturn.
Does that help at all David.
It does yeah, that's very good thanks, a lot Steve.
Thank you.
Thank you David we'll take our next question from Anthony Pettinari Citigroup Anthony. Please go ahead.
Hi, This is asher founded on for Anthony.
I think you pointed to strong demand in residential and but I think on your last call you talked about expecting demand from residential end markets to sort of decelerate from low double digit growth to sort of mid single digit high single digit growth in 2022.
Is that still the case.
Okay.
Yes.
The way to think about it is we had really strong demand.
Last year, so, especially as we got later into the Q3 and Q4, so going up against those comps I would say, we expected a lower growth rate in terms of <unk>.
Residential demand, but we're still seeing the strength there.
Lot development, just not at the rate coming off of kind of double digit increases.
Increases that we saw sort of last year.
Great. Thanks, and then just as a quick follow up.
On your comments around product availability.
Some of these projects these municipal projects on hold as product availability remains tight as they are with that sort of II JA funds don't even flow through meaningfully in 2023.
Product availability challenges persist throughout the year.
There is there is a chance I guess that could happen, but I would say given the demand that we've seen and the desire to be able to do a lot of these projects.
I think youre going to see those funds start flowing through in 'twenty three I think it will replace a lot of the self funding that's happened with a lot of the municipals a lot of the bond markets and the bond funding that has happened with some of the existing projects. So we anticipate it'll be utilizing that demand momentum will continue into 'twenty three.
Great that's very helpful I'll turn it over.
Thank you.
Thank you Ashley and we'll take our next question today from Kathryn Thompson of Thompson Research group.
Great.
<unk>.
Hi, Thank you for taking my questions today, focusing on inflation outlook on inventory.
How much of the raised outlook is driven by volumes versus pricing and putting some year over year perspective.
Patrick.
And then the second on really more on the inventory side given the shift from just in time, which I think Keith.
Strategy.
In a post Covid world.
How are you managing inventories going forward.
All are on fill rates today.
First of all if you ever get periods would be helpful.
I bring this up is simply because even though inventories carry a greater value overall in a post COVID-19 world. We're starting to see some companies that are getting a little lift in your skis in terms of inventory.
Any color in terms of how you plan on managing inventories effectively. So you also don't get over your skis. Thank you.
Alright, Thanks, Catharine, it's Mark I'll take the inflation question.
<unk>.
Yes in terms of the raise on the guidance I would tell you most of that is pricing.
We said, we saw a lot of that accelerate and continue to accelerate through Q1.
So that top line raise I'd say is primarily pricing.
And in terms of.
The full year.
On that I'd say, it's in kind of the mid teens that we expect.
And that's.
At a lower rate than what we had in the first quarter, obviously as we continue to anniversary some of those inflationary.
Metrics that we had in 2021, so we expect that that rate of acceleration with.
Slow down throughout 2022.
Steve do you want to take the inventory Jerry So Catherine you talked a little bit about just in time and just in case inventory one of the things I would share with you that we watch closely is so much of our business is project based and so when we're looking at bringing in inventory the.
The majority of that inventory is essentially allocated to a specific project for the most part.
We do do some speculative buying some items that you know obviously would be stocked for ready to serve type inventory.
Those tend to be very transferable across our network and different branches. So now it is something obviously, we watch and watch closely to make sure that our inventory doesn't get out of balance with what we're seeing both with our backlog and our bidding activity. So we're very conscientious of that we as you saw.
And the last several quarters, we've been able to invest in inventory and show a real strong return and we predicate a lot of that based on being able to understand what's coming at us in terms of these projects that were yet to fulfill that are in our backlog and with the bidding activity looks like in these end markets. So we do watch it closely obviously.
Very aware of some of the challenges that particularly some of the retailers have gone through with writing.
Write down inventory et cetera, but all of our inventory is either.
Allocated or.
Fungible to other.
Other projects across our network to be able to be utilized along those lines.
Okay, Great that's helpful and then.
In terms of.
What visibility you have for volumes, which is really more.
Okay backlogs, but the projects that are upcoming what type of what types of changes are you seeing in terms of the type of projects how has that changed today versus a year ago and even conference. This year. Thank you.
You know.
From a year ago, I think probably the one area. We're seeing some continued growth and it is certainly in nonresidential construction and commercial construction.
So we're seeing our fire protection product pull through being a lot stronger as we started this year.
Was an area that was recovering after COVID-19 and we're starting to see some strength in that area, which has been encouraging.
Residential and municipal have just been pretty steady and stable for the most part at least.
From what we've seen compared to last year.
Okay, great. Thank you very much.
Thank you Catherine.
Thank you Catherine we have our last question today from Andrew <unk>.
America Andrew Please go ahead.
Thank you.
I think.
This is David Ridley Lane on for Andrew <unk>.
Mark I just wanted to clarify something you said earlier, so last year, you got a 50 to 100 basis points gross margin benefit from.
Sell through of lower cost inventory.
Is your expectation that that is.
Flat for this full fiscal year.
Yes, so the way I would think about that is that 50% to 100 basis points would be off of what our margin rate has been over the last I'd say three quarters, which has been in the kind of low 26% range.
And when you apply that for the remainder of the year you end up with gross margin rates that are about flat with 2021.
Okay.
Got it and then the other question have you seen.
Absolutely hear you on the pipeline and so forth have you seen any indicator we seem like maybe the time from from bidding projects start or.
Anything happening.
Thank you.
Yeah.
Yes. Thanks for the question really we have not seen any indicators at this point that there is any any softness.
We continue to talk to our suppliers our customers look at all of our internal data.
We've seen one and really nothing at this point that points to any kind of a slowdown in those those times.
Thank you very much.
Thanks.
Thank you Andrew that was our final question today, so I'd like to hand back to Steve for any closing remarks.
Sure.
Thank you all again for joining us today, it's a pleasure to have you on and we hope you are doing well we're extremely pleased with our first quarter performance continued to focus on the controllable areas of our business. While there are many external factors that continue to impact the global economic backdrop, we remain confident in our ability to deliver strong results to our stakeholders in 2012.
Two and beyond we.
We are committed to providing our customers with local knowledge local experience and local service nationwide.
Thank you for your interest in core and main operator that concludes our call.
Yeah.
Thank you Steve. This concludes the crude today. Thank you all for joining you may now disconnect.
Yeah.
Yeah.
Okay.
Okay.
Okay.