Q4 2022 Aaon Inc Earnings Call
Good day.
I would now like to turn the call over to your host Joseph Mondello, you may begin.
Thank you operator, and good afternoon, everyone. A press release announcing our fourth quarter financial results was issued after market close today and can be found on our website.
Dot com.
The call today is accompanied with a presentation that you can also find on our website as well as on the listen only webcast.
Please turn to slide two we begin with our customary forward looking statement policy during the call any statements presented dealing with information that is not historical is considered forward looking and made pursuant to the safe Harbor provisions of the Securities Litigation Reform Act of 1995, The Securities Act of 1930.
Three and the Securities and Exchange Act of 1934, each as amended as such it is subject to the occurrence of many events outside of <unk> control that could cause <unk> results to differ materially from those anticipated you're all aware of the inherent difficulties risks and uncertainties in making predictive statements.
Our press release and Form 10-K that we filed this afternoon detail some of the important risk factors that may cause our actual results to differ from those in our predictions. Please note that we do not have the duty to update our forward looking statements.
Joining me on today's call is Rebecca Thompson, CFO , and Treasurer, and Matt to Buskey, President and co founder of basics. Unfortunately, Gary fields, our president and CEO he's under the weather today, which is affecting his vocals of bet.
That's why we have Matt here today, he will be filling in for him. We wish we always scary a speedy recovery.
Matt will provide some opening remarks to start the call. Rebecca will then walk through the financials and then we'll finish with Matt for some commentary on the quarter and outlook for 2023 with that I will turn over the call to come out.
Okay, Thanks, Joe and good afternoon.
Starting on slide number three overall, we are very pleased with our 2020 results and particularly with how we finished the year. We started the year at pace with several challenges, which resulted in a slow start. However, we quickly assessing issues adapted and we're able to overcome those issues by the second half of the year, we reported record results in the third quarter and <unk>.
All of that up with another record in the fourth quarter of 2022, despite the slow start to the year. We finished 2022 with record sales and earnings for the year and the fourth quarter sales were up organically 67, 7% and earnings were up over 500%.
Organic volumes in the quarter were up 41% and a two year stack volumes are up 46%.
We have to our previous record EPS in the third quarter EPS was up 39%.
Gross profit margins were the highest since 2020.
At the same time backlog has increased throughout the year, finishing 2022 at record levels, we've increased capacity and production output throughout the year and yet the orders continue to outpace production now.
Now please turn to slide number four.
This is a very interesting time for and for.
For decades, the company focused on a niche of the commercial HVAC market centered around the design and manufacturing of premium quality high performing high energy efficient equipment.
Historically two factors prevented this niche offerings are becoming mainstream the first factor being price and historically has had equipment. They carried at least a 15% to 20% price premium as compared to market pricing.
Limited the size of our addressable market to specific applications into our customers.
The second factor is value up until recently is vast majority of end users. We're not focused on total cost of ownership and premium quality higher performing equipment.
However over the past few years the market has begun to shift dramatically in <unk> favor with the pandemic, creating more focus on indoor air quality and at the same time markets adopting an increased focus on energy efficiency due to higher energy prices decarbonization electrification and government regulations, the demand for higher performing higher.
Energy efficient equipment has accelerated.
Meanwhile, the price premium in Aon equipment has narrowed significantly as government regulations related to mean minimum energy efficiency standards have forced most of our competition to reengineer their equipment, causing them to use higher quality higher priced components in their designs and full product portfolio has been in line with these new standards for years. This spring.
<unk> did not affect us at all from a pricing perspective.
As a result, the cost of manufacturing across our industry has gone up significantly more compared to our costs. This has resulted in substantially larger price increases of our competition compared to the price increases that we have initiated the end result are higher quality product offering ourselves a much more competitive price, making the value proposition that much more attractive.
On top of all that we continue to maintain the lowest lead times in the industry Whats best on time delivery rates. All in these dynamics that paved the way for ANC transitioning from a niche player to a mainstream player.
I'll now hand, the call over to Rebecca Thompson going to go over the financial results.
Thank you Matt.
I'd like to begin by discussing the comparative results of the three months ended December 31st 2022 versus December 31 2021. Please.
Please turn to slide five.
Net sales were up 86, 8% to $254 6 million from $136 3 million the largest driving factor to the growth with organic volume, which contributed 41%.
The growth reflected the company's strong backlog and a fourth straight quarter of record production.
Improved productivity along with the approximate 36, 2% increase in total head count helped drive the increase production and.
In addition to volume pricing contributed 26, 7% and inorganic growth contributed 19, 1%.
Similar to the legacy business basics performed extremely well in the quarter basics realized record sales and EBITDA of any quarter in its history.
Moving to slide six our gross profit increased 195, 9% to $78 5 million from $26 5 million as a percentage of sales gross profit margin was 38% compared to 19, 5% in 2021.
Gross profit margin benefited significantly from multiple price increases initiated throughout the year reduced impact from supply chain issues and production efficiency improvements across all of our manufacturing locations.
Year over year improvement in gross profit margin was also partially attributed to the abnormally low gross profit margin realized in the year ago quarter.
Result of supply chain issues at the end of 2021, which constrained production and resulted in unabsorbed fixed costs.
Please turn to slide seven.
Selling general and administrative expenses increased 51, 3% to $31 9 million from $21 1 million in 2021.
Adjusted SG&A expenses increased year over year at 85, 9%.
As a percentage of sales adjusted SG&A decreased to 12, 5% of total sales compared to 12, 6% in the same period in 2021 and dollars SG&A increased primarily due to our volume growth that created higher earnings, including higher profit sharing expenses commissions and bonuses.
Please turn to slide eight.
Adjusted income from operations grew 397, 2% to $46 6 million from $9 4 million in the year ago quarter.
As a percent of sales adjusted operating margin expanded to 18, 3% from six 9%.
Adjusted operating margin was the highest of any quarter since 2020.
That said pre pandemic the company had achieved operating margin of over 20%.
We foresee is fully returning to those levels and thus expect further improvement from what we achieved in the fourth quarter.
Moving to slide nine diluted earnings per share increased 545, 5% to 71 cents per share from 11 cents per share in.
In the quarter, we benefited from a lower than normal tax rate due to decreases.
Due to increases in our expected R&D tax credits and 117 90 deduction.
Even without this benefit in the fourth quarter, we still experienced growth when compared to our previous record earnings in the third quarter.
Turning to slide 10, you'll see that our balance sheet remains quite strong.
Cash totaled $5 5 million at December 31, 2022, and that was 71 million within the quarter, we paid down approximately $5 3 million on our line of credit lowering our leverage ratio to four six from <unk> 65 at the end of the third quarter.
Turning now to a similar leverage ratio we were at one year ago.
The increase in debt from a year ago was primarily to finance investments in working capital.
We had a working capital balance of $203 5 million at December 31, 2022 versus $131 3 million at December 31, 2021.
The investment working capital was made to help facilitate the robust volume growth, but also helping mitigate supply chain issues.
Capital expenditures for 2022 were $54 million down two 4% from a year ago.
Capital investments were less than we expected at the beginning of the year, primarily due to a finding ways of increasing capacity with our current manufacturing square footage, allowing us to push out certain projects.
Supply chain issues and other economic factors also delayed projects.
We have not slowed our growth related investments at all and we are still on track with our capacity expansion plans relative to our needs.
We continue to be aggressive with our investment planning to help facilitate the robust organic growth we anticipate over the next several years and.
In 2023, we anticipate capital expenditures to be $135 million.
With that I'll now turn the call back over to Matt.
Thanks Rebecca.
I'll now turn to slide 11.
In my opening remarks, we are very pleased with how we finished the calendar year, our operations continue to perform well in Q4.
They need to command the team for their performance all three of our locations are pushing more volume through their respective plans than we've ever seen before.
Organic volume growth of 41% realized in the fourth quarter is pretty much unheard of in this industry and the comp was not easy.
Volume in the fourth quarter of the year ago period was up 4% from fourth quarter and 2020 on a two year stack volume was up 46%. This performance is a result of several factors first the head count was up 36, 2% from a year ago and up 6% from the third quarter. We continued to do a great job with their onboarding, new employees and efficiently.
Integrating them into our operations.
Productivity continues to improve supply chain issues, while leaning a bit still very much exist throughout the year, we learned to manage through supply chain constraints much better leading to improved productivity.
At the same time, we are ramping up head count at an aggressive rate, which can result of inefficiencies if not handled properly.
Despite the challenges our metrics on productivity tell us that our operations are continuing to become even more efficient. The team is fully adapted to the environment and as mitigated most of the financial impact, particularly when it comes to supply chain issues.
We should see productivity improve even more as supply chain issues abate.
Lastly, in addition to head count and productivity improvements. The volume growth was also a reflection of our premier sales channel and the backlog that rep partners have been able to generate for us.
I'd like to thank all of our channel partners as well as our internal sales support our sales channel has never been as strong as it is right now and we're seeing through the shares.
Share gains that we've been realizing.
Please turn to slide 12.
I want to discuss our pricing and gross margin for.
For a couple of quarters now we've been saying the improving margin profile of the backlog has us on track to drive a recovery in gross profit margins, we realized some progress in the third quarter and as we expected and indicated in our last call. We saw even more progress in the fourth quarter.
38% gross profit margin realized in the fourth quarter was up 380 basis points from third quarter, and 810 basis points from the second quarter on a year over year basis gross profit margin improved 1130 basis points.
In the last five years aside from the first quarter of 2020, when he realized gross profit margin of 31, 2%. It was the strongest gross profit margin of any other quarter in history.
We are certainly happy to see that this improvement is largely related to a realignment of price versus cost.
Improved productivity is also a contributing factor historically, we've always managed our pricing to our cost structure, while targeting a gross profit margin of about 30%. However.
However, as I addressed at the top of the call. Our industry has changed a lot over the last couple of years secular trends related to de carbonization energy efficiency in new government regulations is causing the cost of manufacturing across the industry to increase much more drastically than it is for us, causing market pricing to increase more than our pricing.
At the same time, our product offering is a much higher quality and obviously, a better total value proposition justifying a premium price.
We will continue to monitor our pricing to cost.
And we are also beginning to manage pricing to market in.
In the end, we will be able to continue to improve our gross profit margin, while maintaining a price premium that is smaller than it was a few years ago.
Moving to slide 13 overall demand remained strong total backlog was up 110, 6% from a year ago and up six 5% from the end of third quarter. The fact that backlog continues to include increased sequentially as a sign that demand remains strong, particularly because our production is also increasing.
Organic bookings in the quarter were up year over year, 45% sequentially. They were up 14%, which is mostly driven by volume.
Even if you remove the price increases from orders and sales to look at it on an apples to apples basis or is there still outpacing production.
Demand is also very strong in basics backlog of basics was up 269% since the end of 2021.
Pipeline of projects that are on the data center and semiconductor manufacturing end markets remain extensive and the team there is doing a great job in winning orders likewise the production team of basics is doing an outstanding job in increasing capacity.
Please turn to slide 14.
Demand continues to be a fairly broad based.
So if demand continues to be fairly broad based as far as our end markets lodging and office buildings remains soft but outside of that most sectors in which we participate are still quite strong data centers and semiconductor markets are very strong as I mentioned already K through 12 education vertical is also solid I think that actually strengthens in 2023 with a majority of the state.
With money in the cares act, having still not been spent healthier.
Health care and manufacturing are also still very good we continue to see robust demand and growth facility markets and while new construction of warehouses seems to be slowing the end market remains good for us due to retrofit work overall demand is solid across the board. While we continue to monitor for the slowdown, but everyone is anticipating we still do not see it.
And among our channel partners remains very positive and the macro data we track is still encouraging.
Construction spending is back to pre pandemic levels and construction starts are at the strongest level in years, the Abi and the Dodge momentum index, which tracks the pipeline of nonresidential projects early in the planning stages have recently peak, but it's still imply that pipeline is still at historically high levels.
Turning now to slide 15, our biggest challenge right now continues to be ramping up production fast enough. While we are happy to see backlog growing we'd like to see it start to come down led by improving lead times I think we'll start to see this happen in 2023, but it wont be until the second half of the year.
The team is doing a great job with adding head count while improving productivity.
Our orders continue to outpace production, we want to continue to provide our channel partners and customers with the best lead times in the industry to do this we're going to continue to invest in the business.
Continue to add head count and investment capacity for long term growth our capex in 'twenty two 'twenty three as Rebecca mentioned is estimated to be $135 million, which would be a 150% increase from last year. We.
We feel strongly that we have the best product offerings with the best value, which is allowing us to accommodate the increasing demands caused by secular trends, we enter decarbonization energy efficiency higher energy prices indoor air quality and government regulations, we must continue to.
We continue to deliver at the very competitive lead times with them. So we will continue to invest in capacity.
Moving to slide 16.
I wanted to touch briefly on our parts business at 6% of total sales parts still made up a small percentage in 2022. However.
However, as we've discussed in the past. This is an area of the company that we've been focusing on a lot both internally with our sales channel partners in the fourth quarter parts sales were up 23, 1% and in 2022, they were up 33%.
Compared to 2020 parts sales were up 64, 6% in 2022.
Ballpark became a smaller part of the company last year. It was due to the robust growth of equipment sales as well as the acquisition of basics overall.
Overall, though it was a record year for parts and could not could not have been even better in 2022 that parts business arguably was the most affected part of the company.
Our supply chain initiatives, while parts was not as affected on the profit margin basis. It wasn't any sales volume basis, our parks business Leverages the companies buying power of components and parts that go into the equipment manufacturer.
Fly chain shortages limited this buying power in 2022, which in the end adversely affected part sales the most because deliverability of the equipment takes precedence over part sales.
Despite the success, we had it could have been even better.
Our supply chain normalizes, however, our parks pacings will reaccelerate, we'd expect to see this occur over the course of 2023 longer term with what we're doing to structurally build out this part of the company. The fundamentals are very strong.
Furthermore, the parks business is somewhat like a razor razorblade type of business with all the new equipment entering the field last year and this year parts will start to benefit from maintenance demand and just a couple of years I'll remind you that parts gross profit margin is significantly higher than the company's average gross profit margin. We anticipate this business will become a larger part of the company.
Both on a sales and profitability basis as such we are happy to see where this business is positioned and we expect it will continue to be a big priority within our growth strategy.
Please turn to slide 17.
Before finishing up and handing off the call for Q&A.
To provide some information on our outlook for 2023 based.
Based on the size of our backlog and the margin profile of the backlog, which continues to improve increasing production capacity and productivity and strong order trends, we anticipate another record year of sales and earnings.
For your modeling purposes, here's some additional information that should help.
<unk> will be a low double digit contributor to sales growth.
Gross profit margin, we will build off where we finished in the fourth quarter.
It may not be a straight line, especially given some temporary expenses that we will see in the first quarter. The gross profit margins will continue to improve in 2023.
For SG&A, you should be aware that we're making several investments that will help position the company better for long term growth.
This will limit the operating leverage you will normally see within SG&A, we think SGA as a percent of sales will be slightly higher than we realized in 2022.
Finally, capex will be approximately 135 million.
In closing I want to finish by thanking all of our employees sales channel partners and customers.
Also why we announced that we'll be hosting an investor day on may 17th and 18th at our headquarters in Tulsa, Oklahoma you can find more details on this event on our website. We will also be a Denny Sidoti <unk> company in small cap conference on March 20 <unk>.
And Wells Fargo Industrial conference on June 13th.
I hope to see some of you at these events and thank you and I'll now open the call for Q&A.
Thank you if you would like to ask a question. Please press star one on your telephone keypad now you'll be placed into the queue in the order received.
Please be prepared to ask your question when prompted.
Once again, if you have a question. Please press star one on your phone now.
Our first question today will come from Julio Romero with Sidoti <unk> company.
Thanks, Hey, good afternoon, Matt Rebecca Joe.
Good afternoon good afternoon.
Maybe to start on the quarter. If you could just talk about what product lines drove the 41% volume growth through realized in fourth quarter.
Yeah. The overall growth in the fourth quarter was across the board. It was not isolated to one specific product or product line.
We've seen consistent growth throughout all of our production facilities and across all of our production lines.
Okay got it and.
Thinking about price.
And I love, the slide deck and loved the guide.
Does the pricing guide of low double digits for 2023.
Assume the.
The monthly 1% price increase kind of continues through the entire year all the way through December of 'twenty three.
Yeah.
Well I knew someone was going to ask that question Julio.
So right now.
Well so.
We have been continuing to 1% of months' price increases we have not determined yet if we're going to stop those price increases. This is something that we've been looking at.
On a continuous basis.
As Matt spoke to in his presentation, a lot has changed in the industry to cause us to begin managing our pricing to market.
So we do still have the 1% a month in place.
And right now we've made no decisions to stop those increases all that being said, we do expect to see improvement in 2023.
And our gross margin, although it may not necessarily be linear.
As we previously mentioned in our prior calls.
We're using some of this pricing to benefit our employees. So some of these benefits are expected to have a one one time impact on our first quarter.
Expect to see a stronger half of the year when it comes to the gross margin.
And.
You know we're just constant.
Constantly reevaluating of rather than managing to our traditional guardrails of 28% to 32% of looking more at managing to the market and how do you evaluate our gross margin so.
At this time.
<unk>.
But that's that's where I'll leave you.
Yeah.
No I appreciate the color and that does make sense.
I guess.
Maybe just on the expected gross margin I think Matt you might have mentioned.
In the first quarter U you expect some temporary expenses that might affect the first quarter's margin I don't know if you can elaborate on that at all.
There's just a variety of one time expenses as we.
Put in place and some new employee programs and better position the company to provide the employee experience that we expect there are some one time costs and adjustments that we've made in the first quarter.
Kind of driving some of that as a constraint on the overall margin in that quarter.
Okay really helpful. All I'll hop back into queue for now thanks, so much.
Of course.
And our next question will come from Brent Thielman with D D. A davidson.
Hello. This is Jeremy is for Brent how are you.
But.
For my first question regarding supply chain constraints could you talk about the state of sourcing parts and materials and how aon, it's positioning itself to fulfill about backlog orders.
Yes.
Certainly.
Okay.
Go ahead Rebecca.
So I don't know if you've noticed we have increased our inventory quite a bit.
We said a few quarters ago that we've been trying to maintain that inventory level level of about 20% of our sales.
So outside of that we also will take advantage of them.
Opportunistic buys when we're able to.
Yes.
So.
If we get a good.
When we see a chance to buy you know certain.
Okay.
Quantities of steel or metals are component parts at a good price, we'll lock those in and purchase that was maintained.
A higher level than inventories than maybe we normally would just to benefit.
Benefit from that price reduction, we also but keeping that larger quantity on hand that helps them make sure production can continue seamlessly without interruption, but.
I would say supply chain and part shortages as still a daily challenge for the team they're constantly having to find new vendors find alternative parts alternative sourcing redesigned products.
It's just a part of our everyday lives now and how we operate the business.
And just adding a little more context as well the.
From a from a parts perspective, as Rebecca mentioned Theres, continuing maintenance that goes on from a product engineering and manufacturing perspective, as we kind of see these constraints coming ahead of US. The team is extremely nimble and continues to be extremely nimble in assessing the impacts of potential.
<unk>.
And proactively basically looking at the equipment design and configuration and alternate sourcing options and isn't a continuous mode of basically redesign and modification.
Essentially address some of the supply chain constraints that we're experiencing.
We also are very positively impacted by the fact that we are as an organization.
Heavily integrated from a vertical perspective, and so items such as the <unk>.
Manufacturing of coil is a big example, but extending that further the.
Production of fans and ethane assemblies as a huge differentiator for us in the marketplace.
And so as we look at.
Motor or motor constraints motor technology constraints electronic component constraints that are impacting a.
A lot of our other competition our team has been very good at assessing alternative technologies or basically looking at alternate vendors coupled with the fact that we are manufacturing fans as an example.
Really mitigate the overall impact and our deliverability and costing.
Thank you.
And just Oh.
Sure.
Regarding your 2023 model assumptions so.
<unk> profit margin.
Perhaps like <unk>.
Talk about what leads us to our improvement from Q4 of 'twenty two.
And circling back to <unk>.
Can you sustain this 28% to 32% and gross margins through 2023. Thank.
Thank you.
Well, yes.
[laughter].
Go ahead, Matt.
Yes, I'm going to say so are we.
We finished off.
Q4, just.
The 30% range.
But as we look at the backlog and the strength of the backlog from a gross profit margin perspective.
We have an understanding of kind of the improving gross profit profile that exists inside of there.
Coupling that with the.
Hey.
Reduction in volatility in the supply chain side of things, obviously, not not absolute reduction in volatility but.
Certainly waning a bit is providing some higher confidence as we continue monitoring overall cost inputs.
With the continuing 1% price increases that Rebecca mentioned earlier.
We have the ability to absorb some of the additional inflationary pressures without impacting margin on a high level. So.
As we go forward, we see from a modeling perspective and from from kind of the strength of our backlog and the inputs that we have a solid understanding of.
That will continue to see some increase in overall margin as we progress throughout the year.
Okay.
Great. Thank you I'll hop back into them to Q I appreciate it.
Thank you.
And our next question will come from Chris Moore with CJS Securities.
Good afternoon, guys. Thanks for taking a couple of questions. So yeah, maybe back to the to the guide for a second obviously volume was very strong, especially the second half of the year.
Any thoughts in terms of of volume growth for 'twenty, three with those comps in mind.
Kind of a range.
Yeah.
Yes, Chris this is Joe.
Thanks.
So we're not giving volume guidance at this point in time, we gave you the price contribution to help you sort of narrow price out of the equation.
And then you know you know where our backlog is in the trend of our volumes are and you can sort of put two and two together, but at this point in time, we're not providing volume guidance.
Okay and anything else that you could say on that front just in terms of maybe puts and takes you know what why.
Just not sure where to hit at this at this moment.
You know why low single digit would make where it wouldn't make sense why.
Any other color there that you might be able to provide.
Okay.
Well, what I would tell you is that the backlog is very strong.
The order trends have trended very positively as we have entered 2023.
So the first half of the year, it's positioned really good as you get into the second quarter. The comps start to get very tough and certainly when you get into the back half of the year. The comps are become much tougher. So you should see substantial volume growth early in the year.
Just based on the comps and the strength in the backlog and then the back off for the back half of the year should should slope.
I'm not going to we're not going to go that's fine, yes actual guidance on it but hopefully that helps.
That's helpful. I appreciate that.
It was $16 $2 million data center contract that you guys have been talking about for a while is that.
It's something that has started to.
Two to ship at this point in time is that does that something that happens in Q1.
Yeah that project is in production.
Overall shipping scheduling and basically having a product out the door is basically imminent. So as we continue producing that product throughout the year it'll it'll have an impact on the basically the first half of the calendar year.
Got it and I guess, most importantly from that is there is there is kind of a theme that you've talked about in terms of these bigger orders.
Likely coming that's still something that you're.
Is it that you have some visibility on.
Yes, so from an opportunity perspective, and visibility perspective, the the ability to leverage the Longview facility for basic data center product remains extremely extremely strong.
And as you indicated the overall scale of those projects continue to be of a.
Highly attractive scale.
Hey got it yes.
Just wanted to add one other thing regarding that $16 million order that you were referring to.
Like Matt said it is on schedule.
To some extent however.
It has gotten pushed a little bit.
So.
It will end up hitting some partially in the second half of the year as well just don't want you to fully sort of think about modeling that fully shipped.
By the end of the second quarter.
Got it that's helpful.
I will I'll leave it there I appreciate it guys.
Okay.
And our next question will come from Jon Braatz, with Kansas City capital.
Good afternoon, everyone.
Good afternoon, Matt.
Strategic question.
You talked about the pricing.
Within the industry and your premium narrowing a little bit how do you think about maybe as.
And as things continue to maybe returning to more of a premium a premium price.
And maybe given up some volume how do you think about strategically about.
Going back to a higher premium price given what we're seeing in the industry at this time.
Yeah sure as we indicated on the call so.
We're certainly evaluating pricing from a market based pricing perspective, and with that obviously continuing to focus on the value proposition that Aon provides.
So we certainly expect there to be a continued values basically.
Additional value provided by Aegon product and we'll price that accordingly.
As we move forward, we certainly want to understand.
And really where we've always been successful as an organization is selling the overall value of the product beyond just first cost him. So the aon product, even given the pricing dynamics in the market.
The <unk> product continues to provide a superior overall total value to our end user.
We will continue to market and price accordingly for that consideration.
So would you would use <unk>.
Victor is it has maybe been there that there is some upside potential.
To pricing based on market dynamics.
Yeah, there certainly is the opportunity for some upside on the overall pricing as we look at how a product is positioned in the marketplace. Okay. Alright. Thank you Rebecca.
Quick question.
Kept capital spending is pretty heavy this year of $135 million I take it.
There may be some timing differences between cash flow and so on that you might have to.
Go to the bank and borrow some money in your debt balances may move up and down a little bit.
From the current levels.
Yeah, certainly so we do expect to see our operating cash flows resume.
Their normal level.
I can say our capex spend is.
Heavily weighted to the first half of the year. So we do have some negative free cash flow in Q1.
But after Q1, we kind of start to see our free cash flow get back towards more normal level.
About the 70% to 75%.
Earnings free cash flow ratio by the second half of the year.
And so I think it will.
We don't anticipate needing to get any additional liquidity under our credit agreement.
Factory.
Somewhat anticipate it could be paid off by the end of the year. Okay. Alright. Thank you very much.
Okay.
As a reminder, if you would like to ask a question you can signal by pressing star one at this time.
And we'll take a follow up question from Julio Romero with Sidoti <unk> Company.
Thanks, Jim.
I assume you realized all of the Marsh increase by now Yeah, where did you guys exit December in terms of realizing the monthly price increases.
Well so julio.
I think this will answer your question I have in front of me.
January backlog sounds like.
At the end of January we have less than 1% of the backlog that.
March our January price increase.
Everything now.
Pretty much left our backlog is the various 1% price increases that will be flowing out.
Over the next year.
Right.
Gotcha Okay.
I appreciate you taking the follow up.
Okay.
And once again Thats star one if you'd like to ask a question and we'll pause for just a moment to allow everyone an opportunity to signal.
Yeah.
Yeah.
And it appears there are no further questions at this time, Mr. Mondale I'll turn the call back to you for any closing remarks.
Alright, I would like to thank everyone for joining us on today's call. If anyone has any other questions over the coming days and weeks, please feel free to reach out to myself.
As Matt mentioned at the closing of his remarks.
We have our Investor day on May 17th and 18th our attending the Sidoti Conference on March 22nd and will be at the Wells Fargo Conference. Later in June 13th So hope to see you at those events and again, if you have any other questions.
Over the next few days feel free to reach out and have a great day.
This concludes today's conference call. Thank you for attending.
The host has ended this call goodbye.