Q3 2023 Core & Main Inc Earnings Call
Hello, everyone and welcome to the call remain Q3 2023 earnings call. My name is <unk> and I'll be the operator for your call today.
If he would like to ask a question on today's call you may do so by pressing star one on your telephone keypad or if you would like to withdraw your question. Please press star two.
I'll now hand, the floor over to Robyn Bradbury VP finance and Investor Relations. Please go ahead. Thank you. Good morning, everyone. This is Robin Bradbury, Vice President of Finance and Investor Relations for Courtenay.
We're excited to have you join us this morning for our fiscal 2023 third quarter earnings call.
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 business update followed by an overview of our recent acquisitions and long term value creation targets.
Mark will then discuss our third quarter financial results and full year outlook, followed by a Q&A session.
We will conclude with Steve's closing remarks.
We issued our fiscal 2023 third quarter earnings press release, this morning, and posted a presentation to the Investor Relations section of our website.
As a reminder, our press release presentation and the statements made during this call include forward looking statements.
These statements are subject to risks and uncertainties that could cause actual results to differ from our expectations and projections.
Such risks and uncertainties include the factors set forth in our earnings press release and in our filings with the Securities and Exchange Commission.
We will also discuss certain non-GAAP financial measures, which we believe are useful in assessing the operating results of our business.
A reconciliation of these measures can be found in our earnings press release and in the appendix of our Investor presentation.
Thank you for your interest in corny I will now turn the call over to Chief Executive Officer, Steve Auclair.
Thanks, Robin and good morning, everyone. Thank you for joining us today.
If youre following along with the third quarter Investor presentation I'll begin on page five with a brief business update.
Core main delivered another quarter of strong results.
Sales in the third quarter were just ahead of the prior year and up 30% from the third quarter of fiscal 2021 demand from our customers remains resilient and we continue to execute our organic and inorganic growth initiatives.
Municipal repair and replacement activity in the third quarter remained stable on a year over year basis.
Despite still being below prior year levels, new residential lot development improved sequentially from the second quarter.
There continues to be a shortage of existing homes for sale.
Which is driving a need for new lot development and new home construction.
Many national Homebuilders have been reporting resilient results by providing incentives such as interest rate buy downs to ease affordability challenges and attract prospective buyers, which provides a tailwind for our business.
We began to see nonresidential volumes stabilize late in the third quarter due to our balanced exposure across various nonresidential project types. We continue to see good growth in highway and street projects and increasing trend of mega projects across the country.
All of which are included in our non residential end market and have offset some of the softness in multifamily and warehouse work.
Price contribution to net sales was flat for the quarter when compared to the prior year.
Most of our products are either highly specialized where it made specific for our sector, which provides a resilient pricing framework for our industry, especially when roughly half of the demand for our products and services as non discretionary in nature.
Gross margin in the third quarter was 50 basis points lower than last year as inventory costs continue to catch up with the current market prices.
So while we expect to see additional gross margin normalization in the fourth quarter, we have confidence in our ability to offset a portion of it through underlying gains from our margin initiatives.
Cash generation is a key strength of our business.
We have delivered nearly $1 1 billion of operating cash flow over the last four quarters.
This cash flow has provided us with significant capacity to reinvest in organic growth pursue.
<unk> strategic M&A and return capital to shareholders we.
We opened two new greenfields in the third quarter, one in Spokane, Washington, and another in Fontana, California. These.
These new locations extend our product offerings and Underpenetrated markets.
Building on our commitment to make our products and expertise more accessible in every region we serve.
Greenfields are a powerful way for us to expand geographically, we are well positioned to do so given our scale and talent pool.
Each time, we add a new location, we are adding new sales resources and reducing the average distance in time for us to serve our customers' orders.
This enhances our overall value proposition given us the opportunity to gain local market share.
We have opened four greenfield so far this year, we will continue to use greenfield as a lever to drive above market growth in attractive markets going forward.
We continue to target attractive M&A opportunities using our disciplined approach announcing three new acquisitions after the quarter.
And virus scape.
Granite waterworks and lease supply company. So far this year, we have signed or closed eight acquisitions with combined annualized net sales grew over $330 million.
These acquisitions enhance our product offering and help us achieve a leading position in desirable markets.
We are committed to our goal of driving 2% to 4% annual net sales growth from M&A each year over the next several years.
And I will provide more details on our recent acquisitions shortly.
Lastly on capital deployment we.
We executed one share repurchase transactions during the quarter and another after the quarter deploying nearly $300 million of capital to retire 10 million shares.
We have deployed $770 million of capital so far this year to repurchase and retire 30 million shares in total.
Our capital allocation strategy is clear, we expect to continue investing in organic growth and margin enhancement.
Execute on a robust M&A pipeline and return excess cash back to shareholders through share repurchases or dividends.
Now turning to page six I will provide an overview of our recent acquisitions.
And virus Cape is a leading provider of Geo synthetics and erosion control products operating out of one location in Ohio.
Since 2003, the team at and virus Scape has established himself as a trusted partner within the Geo synthetics market due to their expertise and reputation for first class service.
There are specialty products complement our existing business and this opportunity provides additional capacity to expand our geo synthetics reach and capabilities.
Granite waterworks is a leading distributor pipes valves and fittings and storm drainage products for contractors and municipalities in Central Minnesota.
Since 1990, Theyre experienced team has consistently delivered high quality products and personalized service to their customers from their weight Park, Minnesota location.
The local relationships and commitment to dependable service that granite waterworks will bring the core name will greatly to amplify our capabilities and presence throughout Minnesota.
Lee supply as a leading specialty distributor and fabricator of high density polyethylene pipe and other related services, including <unk> fusion equipment rentals and custom fabrication capabilities.
For nearly 70 years lease supply company, that's been delivering innovative solutions and providing top quality products to municipalities contractors and other environmental and industrial customers.
They operate out of four locations in Pennsylvania, South Carolina, and West, Virginia, primarily serving the eastern United States.
There are products and fabrication capabilities significantly enhance our HDD product offering while providing our customers with additional expertise and fusible pipe applications.
Each of these businesses offer expansion into new geographies enhance our product lines and that key talent, while aligning with our strategy of advancing reliable infrastructure across the U S.
Our pipeline of potential acquisitions remains robust and we expect to continue adding and integrating businesses and support our growth.
Given the fragmented nature of our industry and our modest market share we have a significant opportunity to continue growing through acquisitions for many years to come.
On page seven we highlight the value creation story, we discussed at our recent Investor day.
Our long term growth algorithm starts with our end markets.
We have diversified end market exposure between municipal nonresidential and residential construction markets nationwide, we maintain a balanced mix of sales between new development in repair and replacement projects each of our end markets have grown in the low single digit range historically can.
Can we expect the fundamental demographic trends and drivers of growth in our markets to continue.
We expect multiyear tailwind in the residential and nonresidential end markets.
When coupled with healthy municipal budgets and the potential for significant federal proceeds we.
We believe end market volume growth over the long term will be between 2% to 4% per year.
We've also demonstrated a history of organic above market volume growth producing three points of market outperformance over the last five years.
And we believe that our long runway of growth opportunities in underpenetrated geographies in Underpenetrated product lines.
Coupled with our industry, leading capabilities and operational excellence.
We will continue to drive organic above market growth in the range of 2% to 4% annually.
Our M&A pipeline is robust and we continue to acquire businesses in our highly fragmented markets through bolt on and complementary acquisitions.
We are confident we can continue to drive another 2% to 4% of annual net sales growth from M&A over the next several years.
Collectively our end markets above market growth capabilities and M&A strategy result in average annual net sales growth ranging from 6% to 12%.
In terms of margins.
We expect to continue executing on our private label sourcing optimization and pricing analytics initiatives, while leveraging our scale productivity and operational excellence to drive 30 to 50 basis points of adjusted EBIT margin expansion annually.
We believe that our profitable growth agile business model and focus on efficiency will continue to generate strong operating cash flow at a rate of 60% to 70% of adjusted EBITDA underpinned by our strong balance sheet to provide robust capital deployment.
We are better positioned than any other distributor in our industry to capitalize on these growth levers and we are excited about the opportunities ahead.
As part of our Investor Day event, we released five year financial targets and provided additional details on the growth profitability and cash flow initiatives. We have in place to continue operating this business with success, while driving shareholder value.
I'd like to thank everyone, who either attended in person or listened virtually.
If you haven't seen it yet the replay is posted on the Investor Relations section of our website and I highly encourage you to watch it to get a deeper understanding of what makes our business. So special and the opportunities that we have for long term profitable growth.
With that I will now turn it over to Mark to discuss our financial results and full year outlook go.
Go ahead Mark.
Thanks, Steve and good morning, everyone. Our third quarter results reflect our operational excellence and the resilience of our business model we.
We maintain a healthy balance sheet and are prudently deploying capital to the highest return opportunities.
We're leveraging our sustainable competitive advantages and financial position to drive future growth and value creation.
I will cover a few topics with you. This morning first I'll recap our third quarter earnings followed by an update on our cash flow and balance sheet highlights.
I will provide our updated financial outlook for fiscal 2023, and a preliminary framework for fiscal 2024.
I'll begin on page nine with highlights of our third quarter earnings.
We reported net sales of just over $1 $8 billion for the quarter, which was just above the prior year period and consistent with our expectations.
Price contribution was flat for the quarter, while organic volumes were down low single digits.
The cumulative effect of acquisitions over the past year contributed approximately three points of growth to net sales.
Gross margin of 27% was 50 basis points lower than last year as inventory costs continue to catch up with current market prices.
Our local teams have executed very well to sustain our margins by optimizing inventory levels reacting with discipline the market prices and continuing to drive our gross margin initiatives.
Selling general and administrative expenses increased 4% to $240 million for the third quarter. The increase in SG&A reflects the impact of acquisitions and cost inflation.
Interest expense was $20 million for the third quarter compared with $16 million in the prior year period.
The increase was due to higher variable rates on the unhedged portion of our senior term loan.
We recorded income tax expense of $39 million for the third quarter compared with $40 million in the prior year period, reflecting effective tax rates of 19, 8% and 18, 3% respectively.
The increase in effective tax rates was due to a decrease in partnership interests held by non controlling interest holders.
We recorded a $158 million of net income in the third quarter compared with $178 million in the prior year period. The decrease was primarily due to lower operating income.
Diluted earnings per share in the third quarter was <unk> 65, which was in line with the prior year period.
Diluted earnings per share decreased due to lower net income offset by lower share count following the share repurchase transactions executed throughout the year.
Adjusted EBITDA decreased approximately 5% to $260 million and adjusted EBITA margin decreased 90 basis points to 14, 2%. The decrease in adjusted EBITDA was due to the reduction in gross margin and the impact of cost inflation on SG&A.
Turning to page 10, we delivered excellent operating cash flow in the third quarter of $373 million, reflecting over 140% conversion from adjusted EBITDA.
We continue to optimize inventory levels now that supply chains have improved.
On a year over year basis, net inventory was down about $325 million or roughly 28%, even with higher product costs inventory acquired through acquisitions and new inventory to support Greenfields. We expect strong operating cash flow conversion again in the fourth quarter as we continue to optimize inventory.
Lori levels and deliver a normal seasonal reduction of working capital.
Net debt leverage at the end of the quarter was one five times and our available liquidity stands at more than $1 $3 billion.
Providing ample liquidity to continue investing in growth and returning capital to shareholders.
The share repurchases, we executed in September and November we're done concurrently with public secondary offerings by our largest shareholder.
As a result of these transactions, we retired 10 million shares while increasing our public float.
As Steve mentioned earlier, we have deployed $770 million of capital for share repurchases. So far this year and we will continue to evaluate share repurchases as opportunities arise.
Before we head to Q&A I'd like to update you on our outlook for the remainder of fiscal 2023 on page 11, and provide a preview of our views on fiscal 2024.
Our sales results through the third quarter have largely played out as expected.
<unk> ahead, we expect normal seasonal volume trends in the fourth quarter, which tend to be impacted by colder weather and shorter daylight hours.
Municipal repair and replacement activity in the fourth quarter is expected to remain stable on a year over year basis.
We expect new residential lot development growth to improve sequentially and benefit from easier year over year comparisons.
Furthermore, we expect nonresidential volumes in the fourth quarter to be flat to slightly down on a year over year basis similar to what we experienced in the third quarter.
Price contribution to net sales growth was flat in the third quarter and we expect it to be roughly flat again in the fourth quarter, resulting in low single digit price contribution for the full year.
We expect additional gross margin normalization in the fourth quarter as we cycle through the rest of our low cost inventory.
However, we now expect full year gross margins to be better than previously anticipated due to strong performance across our margin initiatives and synergies from M&A.
Taken altogether, we are narrowing our expectation for fiscal 2023 net sales to be in the range of $6 65 to $6 $75 billion.
We're raising our expectation for adjusted EBITDA to be in the range of $890 million to $910 million due to our margin performance in the third quarter as well as confidence in our ability to better sustain margins through the end of the year.
We're also raising our expectation for operating cash flow conversion to be in the range of 110% to 115% of adjusted EBITDA due to our disciplined inventory optimization efforts.
As we look beyond this year, we plan to provide our full year outlook for fiscal 2024. During next quarter's earnings call. However, as we sit here today, we generally expect end market volumes to be roughly flat to up low single digits, depending on the broader economic conditions, including the effects of interest rate movements and.
Progress on the federal infrastructure proceeds.
We remain committed to our market outperformance driven by our organic and inorganic growth strategies from a margin perspective, we anticipate further margin normalization that wasn't fully realized this year would impact our results in the first half of fiscal 2024, while we continue to drive our margin initiatives to offset these impacts.
Our focus will continue to be on the areas within our control, including customer service technical expertise productivity and pricing execution.
We will continue deploying capital in initiatives that will result in accelerated growth, including executing on our M&A pipeline and delivering on our organic growth strategies.
We will maintain significant liquidity and expect to continue driving shareholder value through share repurchases or dividends.
We are well positioned to outperform the market in this complex demand environment, creating value for all our stakeholders, we look forward to helping our customers build more reliable infrastructure as we close out fiscal 2023 at.
At this time I would like to open it up for questions.
Thank you if you'd like to ask a question. Please press star one on your telephone keypad oil prices start to if he would like to withdraw your question.
Our first question today comes from Joe <unk> from Deutsche Bank. Please go ahead.
Okay.
Yes, thanks very much for taking my question and congrats on the strong results.
Can you guys hear thanks, Joe Thanks for the question Yeah, I can hear you now thanks.
Sure Okay, great. Yeah. Thanks, a lot for the early insights into next year's volumes flat to up low singles Thats pretty good.
As you said and just kind of getting into what the.
Yes.
Around the end markets, maybe at the low end of that and at the high end, what kind of what you see R&R them on RASM.
It's doing next year.
Yes, sure Joe Thanks for that question and yes, we did.
For 2024, we think overall the end markets or at least at this point looking to be kind of flat to low single digits and as we've talked about our municipal based switch.
It's roughly 40% or so of the business. We believe is going to continue to be very stable going into next year.
And that kind of low single digit range, we're coming off a really weak residential year.
Talked about on prior quarters calls so we do expect some growth coming out of resi now that does assume that we do see.
Mortgage rates in <unk>.
Environment, where maybe those come down a little bit here as the.
Fed stabilize some of the rate movements that they've been looking at and then from a nonresidential exposure like we talked about.
It's a very broad exposure for us and while there is different.
Pockets within there, we believe thats going to be flattish as we go into 2024.
Yeah.
Understood. Thanks, a lot for that detail and then just thinking about the share repurchase commentary I'm wondering in a year, where going forward M&A activity may be below your annual target in any given year would you be sort of more programmatic about letting that equity capital flow to the purchases kind of thinking about.
Philosophy around letting cash flow leverage come down.
Yes, Joe the way, we're thinking about capital deployment right now is.
As you've seen we've really generated some really strong cash flow here throughout 2023 expect 2024 and beyond to be really strong cash flow generation years for us and with our current debt leverage at about one five times I believe that provides us ample.
Our.
Capital to be able to deploy not only to M&A, which.
I heard Steve talk about the healthy pipeline that we have.
But also give us that opportunity to be opportunistic with share repurchases.
As opportunities arise there and then.
Beyond that potentially being able to do dividends and at some point in the future. So we're going to look to do all those things to return capital to shareholders. We think those are all attractive opportunities for us and we'll continue to look at it that way.
Alright, Thanks for all the details good luck in the fourth quarter.
Yes, Thanks, Joe.
Our next question is from David Manthey from Baird. Please go ahead.
Okay.
Hello, David Your line is now open could you please check in Amit.
Unfortunately, we're not able to hear anything from David's line. So we will move on to the next question. Our next question comes from Kathryn Thompson Thompson Research Group Catherine. Please go ahead.
Yeah.
Okay.
Hi, Thank you for taking my questions today.
Have you seen looking forward into next year.
Tagging on the question on M&A.
First could you give a little bit more color.
In terms of.
How the appetite may have changed.
Four targets as you go into next year and what's the difference.
And how do you feel about M&A over the next year.
Then.
Have your priorities changed in terms of pipes at the end markets.
Given the changing landscape for Mega projects. Thank you.
Hey, Thanks, Catherine Yes, as we look at this.
Certainly the existing pipeline that we had and that we've executed on this year and what we've got in store.
As we look through and the future here, we really haven't seen much of a change at all and what our appetite as we continue to see great businesses out there across a broad spectrum, whether they are simple bolt ons or are getting us access to new products and new categories for us. So I think we'll continue to build on that and so we don't really see.
Change in that and our appetite for that.
And then <unk>.
Sorry can you.
Give me your second part of that question again.
Yeah.
It's really.
Has the appetite changed given any changes in terms of your targets in terms of being.
Being more or less open.
M&A.
Yes, I would say that.
Just to give business environment.
Yes, the business environment of the sellers have operated in and many of our competitors are operating in a pretty challenging. So I would say, we're starting to see that break loose a little bit more and certainly if you look at the volume of deals that we've done this year.
We think thats pretty indicative of what we see in the pipeline ahead, we've been.
If you look back over the last several years.
It looks pretty consistent in terms of the amount of volume we have been able to do accretively to each each year and that 2% to 4%. We're certainly in the high end of that.
At this point and I think we continue to see that going into it certainly 'twenty four and beyond.
Okay, and then finally.
We're getting a ton of them just based on our industry contacts getting a wide range of feedback in terms of on the non res in terms of <unk>.
Cancellations are pushing out projects, but in general.
On your lighter non res you are seeing some push out or cancellations that for larger not what are you seeing in terms of project delays.
And or cancellations in the more traditional.
Non res end market. Thank you.
Yes, we saw softness really continue in Q3, but we did see the volume stabilize late in the quarter.
If you look at a couple of the areas that have been very strong for US. We look at highways Street projects have been very robust while we've had some had to offset obviously warehouse construction and multifamily has been softer than normal, but I think if you look at what a broad category that is for us with nonresidential or.
It gives us a lot of stability as we as we go forward and we think we're incredibly well positioned as.
As we get into 2024.
Okay. Thank you.
Thanks Catherine.
Our next question comes from Nigel Coe from Wolfe Research. Please go ahead.
Okay.
Thanks, Good morning, Thanks for the question.
Sneak another one on the back end of that the.
The unit cost of inventory.
Not definitely not see it Nigel.
Nigel you cut out on us if you wouldn't mind.
And for asking that question again.
Sure just on the inventory.
Good good progress on working down inventory from where it was this time last year.
How much for that to go on this inventory rebalancing process now.
A follow up question.
Great. Thanks for the question Nigel.
Yes, we heard John that one I appreciate the question on inventory I would tell you that we did make a lot of good progress in the third quarter on inventory, we've had I'd say some movement on.
Certain product categories, Thats really allowed us to work through a lot of the excess.
Stock that we had what we're cushioning for some of the supply chain challenges I would say, there's still a handful of product categories that were working down yet that I expect us to make continued progress in the fourth quarter, but as we've talked about seasonally volumes to come down in the fourth quarter. So it's hard to say how much <unk>.
<unk> will make against those remaining product categories as we wrap up this year so.
I think we'll make good progress, but there could be some of that leaks into 2024, yet that will continue to work to optimize.
Okay. So it sounds like that might be a slight tailwind in 'twenty four but it looks like we're in good shape, but then on the second part of that question is really around the cost of inventory.
And what I'm trying to get out here is let's see where it seems like we're getting close to the backend of the price cost sort of headwinds I'm. Just curious if we're now at the point now where we're seeing the unit cost of inventory stabilizing <unk> at this point.
Yes, Nigel thanks for the question on that.
Yes.
Yes, I think I think similarly as it relates to margins. The inventory is worked in some early I mean, we have experienced some of that gross margin normalization across certain product categories. So we've been able to really flushed through and get current on.
There's still a handful of categories that we're still carrying some.
Some low cost inventory and expect we will work through the remainder of that.
As we get into Q4 and into next year, So still think theres, a little bit of normalization.
It's going to happen here.
But we've been able to offset a lot of that we've been we've had some accretive M&A come through here in 2023.
We've been able to deliver synergies on top of that that the gross margin level and then frankly made a lot of really good progress on some of our gross margin initiatives, especially here.
In the third quarter. So those are some areas. We will continue to work to offset that normalization, but I do expect some of that to continue here into Q4 and into the first half of 2024.
Okay I'll leave it there thank you.
Okay. Thanks Nigel.
Our next question is from Anthony Pettinari from Citigroup. Please go ahead.
Okay.
Yes.
Hi, This is Ashley <unk> on for Anthony Thanks for taking my question you talked about volumes flat to up low single digits in 2024, but I was just wondering if you could share your outlook maybe for price in 2024 at least Directionally, if you've announced or planning any kind of pricing actions.
Yes, we continue to watch the price obviously in the current market and spend a lot of time talking to our suppliers about what what their plans are going forward and at this point were.
As we look into 'twenty four we're really assuming a neutral price environment. So we could see some ups and downs in any particular product category, there, but really believe overall from a price contribution standpoint, it should be really a neutral environment into 2024, but we will provide some more color on that as we get them.
Into next quarters.
Earnings call and whether or not we see any other price movements, especially as we roll into the early part of 2024.
Yes.
Got it that's Super helpful. And then just another one.
Can you provide maybe an update around what youre seeing in terms of Iga <unk> flow through to your end markets.
Expectations around that for 'twenty, so far maybe how that plays into your volume framework for 2024.
Yes. Thanks.
<unk> funds has certainly been slower than we would have liked our anticipated as we've gotten into the back half of this year, what I would say that we're starting to see some green shoots in this particularly in the upper Midwest is a couple of the states are starting to see projects break loose and actually funding go through particularly in.
Michigan, Wisconsin in the Dakotas or spent some projects that have been utilizing that funding. So we're really anticipating that we'll see some some more volume start to break loose in 2024 and that should be some tailwind for us on the municipal side.
Thanks, that's very helpful I'll turn it over.
Thank you.
Our next question is from Joe Ritchie from Goldman Sachs. Please go ahead.
Hi, This is <unk> on for Joe and thank you for that question maybe.
Maybe just starting the gas margins.
<unk> performance has been pretty impressive.
It's a few quarters and just wanted to understand how much of these countries.
It's really up to you.
Yeah.
When do you start realizing some of the gross margin.
Oh geez.
Yeah. Thanks, Vivek for the question.
As we've talked about we expected some gross margin normalization throughout 2023 kind of in that 100 to 150 basis point.
Range and we did definitely experienced some of that pressure on some of these product categories like I've talked about that.
Flushed through that lower cost inventory.
And really the offsets that we've seen there have been as you mentioned.
Some of the accretive M&A, which has also brought some some synergy with it I'd say probably more so just given the timing of some of those acquisitions more of it's just been the accretive nature of it there is.
Some work that we'll do yet to deliver on some of those synergies to drive some more of the gross margin improvement and then I.
I'd say a lot of good progress in the quarter and some of our sourcing optimization work.
That's brought in some nice.
Over performance more so than I would say we were expecting in the third quarter. So those are really the elements of it in terms of breaking them all out specifically, we're not necessarily going to do that but.
Just wanted to give you some additional color there on what some of those drivers are.
Yeah.
That's helpful. Thanks for that and just on the G&A front.
It looks like last quarter.
It has been growing faster than the revenue growth how long can this 10 continue and when do you expect it to normalize.
Yeah sure as it relates to SG&A, there's really a handful of factors in there I would say some of these.
M&A.
Acquisitions that we've done while they've brought us higher gross margins.
Many of those also have had a little higher SG&A base. So thats put a little more pressure on SG&A and then I would say some of the cost inflation.
SG&A has trailed some of the product cost inflation that we've seen so there's still a little bit more I think the flow through from an SG&A perspective and then.
We've made a handful of I'd say growth investments that have been SG&A impacting until their results. So I'm expecting some more SG&A pressure in Q4, and I think normally we would expect some SG&A productivity for a full year in 2024, but just given the timing of the M&A that I talked about in some of these <unk>.
Investments, we're probably going to see a little bit more pressure as we look out throughout 2024, but those are really the drivers of it.
Great. Thanks.
Yep. Thank you.
Our next question is from Brian Connors from Northcoast Research. Please go ahead.
Yeah.
Yeah.
Great. Thanks for taking my question I wanted to ask about.
The private label side, and if you could give us an update on your progress there it looks like a virus scape is a private label deal.
And also I assume the Greenfields help you to accelerate that somewhat so you've talked about going from 2% to 10% private label.
Can you talk about where like if we're 12 months from now 24, what the vision is to some of these things move the needle and where.
What inning are we going to be and as we move through 'twenty four is it a material improvement from the 2%.
Yes, Ryan this is Steve So I appreciate the question, yes, certainly in virus scape has.
Some private label.
Content to it for our Geo synthetics business for sure.
As we look at how we expand that Theres, just a broad assortment of products and accessories out there that we've been able to to develop beyond certainly geo synthetics, but when we get into other accessory kits and things along those lines. So we will continue to do that the long term plan. We had was getting into this 10 plus percent.
A private label so it will be making investments that will continue to enhance that performance through next year, and we'll have a little bit more color to share on that as we wrap up the year end.
Got it Okay and then my other question was specific line, which is water metering.
Any can you give us any update on what youre seeing there both in terms of the near term near term.
Demand cadence and also M&A. It seems like metering was more of an M&A focus a few years ago, but kind of the recent deal flow doesn't seem like metering has really been as much of a part of that so is that just curious whether that's intentional or whether that's just a function of what's for sale out there.
Yes, if you look at our quarterly results that we had meters was an incredibly strong quarter and a lot of that was.
Backlog that we've had for projects that were executed where now we're starting to see that supply chain ease up with a couple of our key manufacturers and getting that product out to go to go execute bidding activity remains incredibly strong youre certainly seeing where.
Yeah.
And advanced metering has become much more broadly accepted.
We play a key role in helping to get that out to those customers whether they are small rural customers looking at Ami systems or even some of the large metropolitan areas. So we continue to see really.
A lot of strength in that end market from an M&A perspective, we did a couple of acquisitions early on to get access to certain lines.
As we look across the country right now.
We certainly have coverage of many different lines all across the country at this point so from an M&A perspective.
You may not see a whole lot of activity and that is we feel pretty secure with.
The access to the products that we've got across the broad portion of the country.
Yeah.
Got it very helpful. Thanks for your time this morning.
Thanks, Brian.
Our next question comes from David Manthey from Baird. Please go ahead.
Okay.
Yes. Thank you good morning, guys.
Mark Good morning flat to up low single digits.
Understanding that clearly I believe you're talking about market volume growth there.
If you can just give us a little bit of color in terms of what informs that outlook understanding it's preliminary but is this discussion with your larger builders some visibility into municipalities fiscal year budget. How do you how do you build that up.
Yes, Dave Thanks for the question because we got you got you back.
Yes, we look out into 2020 for Dave its really all those factors, we look at a large amount of external data sources.
Which is important for us, but we are.
Have a large volume of internal data that we look at from bidding activity.
Likely to.
Produce results into 2024.
And then a lot of discussion with our local teams that are looking out and talking to their customers.
About what to expect for 2024, and then obviously also comparing those expectations relative to the numbers that have flown through in 2023. So it's a lot of lot of different sources that we're looking out there I would say, we always placed the most reliance on the internal data that we get from our teams.
And that we track, which really helps inform us for like we talked about at least at this stage what to expect for 2024, but we do plan to update everybody on that in our in our call here for the full year of 2003 on next quarter's call.
Got it thank you.
A little bit more of a broad question here could you talk about technology and how important that is relative to your long term outgrow versus your competition.
Yes, I would say from a technology standpoint.
A major driver of our business is productivity and effectiveness of quoting our customers. That's really the starting point, we'd laid out a lot of that technology in our Investor day presentation, and then we have a number of tools available for our customers to really drive some sticky.
Yes.
From our perspective with those customers. So just make it easy to do business with us I'd say less so from a driver of revenue growth third e-commerce related.
While we have capabilities for that that's really not a driver of majority of the revenue.
We have as a company so really I think as it relates to being more productive getting in front of our customers faster than our competitors and then having technology that drive stickiness with tools like online advantage.
And others that really provide that stickiness is how do we think about it from a technology perspective.
Perfect. Thank you.
Alright, Thanks, Dave.
Okay.
Our next question comes from Andrew <unk> of Bank of America. Please go ahead.
Yes.
Hi, This is David Ridley Lane on for Andrew <unk>.
At the Investor day, the slide on the bridge to the 15% EBITDA margin call included.
A 30 basis point decline fiscal 'twenty four.
Some of the gross margin normalization.
Given you're raising fiscal 'twenty, three EBITDA margin by about 55 basis points.
Should we think about that as being.
More like an 80% to 90 basis points decline in 'twenty four.
Or are some of these margin improvements.
Sustainable I E is this sort of a timing impact or have you been sustainably outperforming your plan on gross margin.
Yes, David Thanks for the question on that and I'd say, we've definitely been.
Pleasantly surprised with the gross margin performance throughout 2023, and definitely the pricing stability that we've seen in the market has helped drive some of that so while we're seeing some low cost inventory catch up with market prices.
Stability of pricing I would say is provided better results than we had anticipated early on when we kind of laid out.
Gross margin normalization.
There's still risk and we'll watch that while prices are stable that can put some pressure on margins. So we're still guiding towards gross margin normalization in Q4 and some of that.
Spilling into 2024, but if we can keep executing on our on our gross margin initiatives, we're going to be in a good position to offset.
As much of that as we can and hopefully minimize what that impact looks like in these out years.
Sure.
Got it I mean, I guess another way of asking it you talked I think in the past about 100 and 150 basis points.
One time gross margin benefit.
Are you are you thinking now.
More closely to the 100 basis point piece of that range.
Yes, David.
Like I said I think with.
The pricing stability, that's resulting in better margins than we had anticipated I Wouldnt say, we are ready to update that range yet.
Expectations, but definitely something that'll be a focus as we lay out our kind of more detail planning for 2024 on next quarter's call but.
I think you can gauge from my comments that at this point, we're pleasantly surprised with how thats, how thats come in here for 2023.
Got it if I could sneak one more in you did mentioned sourcing observation that's been helpful. I'm just thinking.
All your.
You your peers, everyone is destocking and so.
So I'm wondering if some of the better.
Their suppliers.
Suppliers offered any incentive to take product right because you know that.
All of the distributors are destocking and the suppliers are seeing lower orders right.
Are you seeing any of that kind of incentive activity.
Yes, I would say as we think about sourcing optimization and the benefits. We saw they are definitely going into a year, where we were reducing inventory pretty.
Pretty significantly and you've seen our inventory come way down we do have certain volume incentive tiers with suppliers and we kind of think about it as getting spend into the most preferred programs and getting into the right buckets and as we started the year I think we had some concerns that we could really is.
<unk> all of the benefits there that are suppliers provide us just given the reductions in volume, but I think the.
Sourcing teams have really done a great job of getting the spend in the right buckets and that's driven some better margin performance than we had anticipated.
Thank you very much.
Alright, thank you.
Yeah.
Our next question comes from Patrick Baumann from JP Morgan. Please go ahead.
Yes.
Hi, Thanks for taking my question.
Sorry, I missed some of the call but.
Did you provide any update on kind of what youre seeing from a non res perspective in terms of multifamily I know that that was the reason why you.
<unk> tweaked down your outlook.
Maybe that was a quarter ago from a topline perspective. So wondering if you have an update on what youre seeing in terms of starts activity.
In specific verticals like like multifamily.
Yes, Patrick this is Steve yes.
But we definitely saw softness coming into Q3, and we saw it stabilize as we got into the back half of the quarter. So multifamily was challenging as was warehousing, but really starting to see some good growth in highways and projects and so when we looked out across the whole spectrum that we cover.
Particularly look at some of these big Mega projects.
We really saw that stabilize towards the back half of the quarter and were pretty pleased with kind of how that came in.
Okay and then the 24 outlook. There you had you described I'm just looking at notes that someone sent me thats kind of flattish for non res is that the way you're describing 24.
Yes, I would say we provided a range of market for 2024 kind of saying flat to up low single digit I think on the on the low end of that is probably down a little on the high end of that is probably flattish in that range.
That's non RASM, that's total markets.
Non res overall market would be flat to up low single digits.
Yeah.
Okay got it got it thank you sorry for having to rehash that and then.
In terms of.
Not to beat the dead horse on the gross margin.
But so 27% or so in 2022 and like year to date similar to that has been.
Level that you've been able to achieve.
So youre still so youre not ready to update kind of that 100 to 150.
At this point of drag so.
Potentially we should.
For lack of an update kind of assume that that is.
That's.
A reasonable base case to think about for gross margin in terms of drag from that and then maybe some offset will come from your initiatives.
Something down.
<unk> hundred basis points in terms of gross margin next year is kind of like.
A reasonable base case is that fair.
Pat the way I would think about it is we've experienced some of that gross margin normalization in 2023, which we've been able to offset and we will experience some of that into 2024.
So.
It kind of gets split period over period, so it's probably not the full amount into 2024, but that's the piece. We do plan to provide obviously a lot more guidance on as we get into our full year release for 'twenty four but that's the way we're thinking about it right now as we definitely know we've experienced some of it a lot of which we've been able to offer.
Asset and are likely to experience the balance of it in 2024, but it's probably not a full year impact of it.
Okay.
That's.
That's different than I interpreted so I appreciate the color there. Thanks, a lot and best of luck.
Alright, thank you.
Okay.
We have no further questions on the call. So I will hand back to Steve The classic closing remarks.
Yeah.
Thank you all again for joining us today. It was a pleasure to have you on the call.
Our consistent execution quarter after quarter as a result of the hard work of our branches and functional support teams our focus on operational excellence.
And the diversity of our products and end markets.
We have more levers than ever for driving growth and profitability the cash flow generation to capitalize on it and the team to execute on it.
Thank you for your interest in corn main operator that concludes our call.
Thank you all for joining today's conference call you may now disconnect your lines.
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Yeah.