Hello, and welcome to the Core & Main Q4 2021 earnings call. My name is Alex, and I'll be coordinating the call today. If you'd like to ask a question at the end of the presentation, you can press star one on your telephone keypad. If you'd like to withdraw your question, you may press star two. I will now hand over to your host, Robyn Bradbury, with Core & Main to begin. Over to you, Robyn.
Thank you. Good morning, and welcome to the Core & Main fiscal 2021 fourth quarter and full year earnings call. This is Robyn Bradbury, Vice President of Investor Relations and FP&A for Core & Main. Thank you for joining us this morning.
We're excited to share our results with you. Steve LeClair, our Chief Executive Officer, will lead today's call with our fourth quarter and full year execution highlights, followed by a discussion on recent topics of interest. Mark Witkowski, our Chief Financial Officer, will then discuss our financial results and fiscal 2022 outlook, followed by a Q&A session.
We will conclude the call with Steve's closing remarks. For Q&A, please limit to one question and one follow-up. If you have additional questions, you may return to queue. Thank you for your cooperation. Some of the information you will hear today may include forward-looking statements.
Forward-looking statements include all matters that are not historical facts. We may include statements regarding our intentions, beliefs, assumptions, or current expectations concerning our financial position, results of operations, cash flows, or growth strategies.
Forward-looking statements are subject to known and unknown risks and uncertainties, many of which may be outside of our control. We caution you that forward-looking statements are not guarantees of future performance or outcomes, and that they may differ materially from those made in or suggested by the forward-looking statements contained on this call.
These forward-looking statements are made only as of the date of this call. We do not undertake any obligation to update or revise any forward-looking or cautionary statements to reflect changes in assumptions, the occurrence of events, or changes in future operating results.
In addition to providing results that are determined in accordance with U.S. GAAP, we present certain Non-GAAP financial measures to assess the operating results and effectiveness and efficiency of our business. We present these measures because we believe investors consider them to be important supplemental measures of performance.
For a reconciliation of the Non-GAAP measure to the nearest GAAP measure, please refer to the slides in the appendix of the fiscal 2021 fourth quarter investor presentation, which can be found on the investor relations section of our website. Thank you for joining us this morning and for your interest in Core & Main. I will now turn the call over to Chief Executive Officer, Steve LeClair.
Thanks, Robyn. Good morning, everyone. Thank you for joining us today, and welcome to our fiscal 2021 fourth quarter and full year earnings call. Fiscal 2021 was a remarkable year for Core & Main. We delivered record financial performance while delivering on our pledge of dependable service to our customers and suppliers in challenging market conditions.
The strength, flexibility, and resilience of our business model was exemplified as we fulfilled unprecedented levels of demand. We continued to execute on our strategies to grow the business and strengthen our operational capabilities while delivering value to our customers, supporting our associates, and achieving strong financial performance.
We navigated through supply chain challenges while continuing to deliver extraordinary service to our customers. Infrastructure solutions are localized and must meet product specifications and engineering standards that vary from one municipality to another.
Our customers count on us to provide the right solutions to meet these local requirements. Equally important, access to specialty products is critical to our customers' success in completing a project on time and on budget.
We have maintained industry-leading product availability during a period of unsurpassed scarcity, a testament to our value proposition. Our customers choose us for the breadth of our products, extensive industry knowledge, familiarity with local specifications, convenient branch locations, and reliable delivery capabilities.
Throughout the year, we strengthened our connections with existing customers and developed relationships with many new customers across the country. Our success is linked to the quality of our team, the depth of their expertise, and their commitment to overcome any obstacle to achieve our goals.
When confronted with a difficult operating environment, our associates adapted and continued delivering on our promise of providing local knowledge, local experience, and local service nationwide.
I would like to express my sincerest gratitude to all of Core & Main's 4,100 associates for their unwavering dedication, determination, and resilience. Our associates are the best in the industry, and I'm inspired by their exceptional service to our customers, suppliers, communities, and to each other.
In fiscal 2021, we delivered just over $5 billion of net sales, up 37% over fiscal 2020, and $604 million of adjusted EBITDA, up 77% over prior year. Our sales growth was driven by strong demand across each of our end markets, higher average selling prices as we passed along rising material costs, solid performance across our sales initiatives to deliver market share gains, and acquisitions.
We also achieved share gains from having preferred access to products during a period of material shortages. Our teams leveraged the strong sales growth through the expansion of our margin enhancement initiatives and disciplined cost management to achieve record profitability in fiscal 2021.
Our focus on pricing analytics and operational execution at both the corporate and local levels produced solid margin results despite the intensifying inflationary pressures we faced. We finished the year strong from an M&A standpoint, adding five extraordinary businesses to our team in fiscal 2021, and acquiring Dodson Engineered Products subsequent to year-end.
Each of the acquisitions fits well within our M&A strategy, offering expansion to new geographies, access to new product lines, consolidation of existing market positions, and the addition of key talent. Dodson Engineered Products is a single-branch, full-service distributor of water, wastewater, storm drainage, agricultural, and irrigation products based in Western Colorado.
Founded in 1970, Dodson has a long history as a trusted and reliable partner to its customers, suppliers, and associates. The opportunity to bring a company such as this into Core & Main family provides strategic value and will allow us to expand our reach to better serve customers in Central and Western Colorado.
As part of our sales initiatives to deliver above-market growth, we opened three new greenfield locations throughout fiscal 2021. These new locations will allow us to expand into new geographies and expand under-penetrated product lines. Despite our vast geographic footprint, there is significant remaining white space across the country, and our team uses a data-driven strategy to identify and evaluate these markets.
We have a pipeline of priority markets that we are targeting for greenfield expansion, some of which could convert in the coming quarters as we align sales talent and operating facilities. Turning to page six, I'd like to highlight an example of how we deliver significant value to our customers and their projects.
In February 2021, sewage poured into the streets and across the yards of Ventnor Heights, New Jersey, residents due to a major pipeline leak. After inspecting the job site, county engineers consulted with our local team when they discovered the diameter of the pipe was unusual and inconsistent with today's standards.
They needed product expertise and an innovative repair solution. Our local product specialists were able to provide our customer engineered drawings and a quote within 24 hours to let them know exactly what was needed to repair the rupture in the line.
We produced and delivered a custom retrofit solution with specialty fabricated fusible HDPE pipe and fittings. With our HDPE fusion equipment and technician on the job, the solution we provided was a success. Our local New Jersey team embraced their responsibility to their community and their environment to keep our water infrastructure up and running while leveraging our regional product specialists and resources.
We do work like this every day. Our associates live and work in their local communities and partner with them to ensure the best solutions for any water or wastewater infrastructure needs. On page seven, I'll finish with a few topics of interest. Product availability.
Product availability challenges persisted through the fourth quarter and continue today, but given our long-standing relationships with our suppliers and leadership position in our industry, we have been able to gain preferred access to products to continue serving our customers.
Although we believe supply chain disruptions will continue to impact lead times and project cycles throughout at least the first half of fiscal 2022, our overall sentiment remains positive and our strong backlog is indicative of future demand. If supply chains normalize, we expect to release products reserved for jobs held in backlog.
Throughout the course of the year, our inventories and backlog have grown as a result of us holding inventory for customers until we could secure all the necessary parts and components to ship the complete solution and support our customers' installation schedules. Material cost inflation.
We continue to experience rising material costs across nearly all product lines in the fourth quarter due to strong demand, constrained manufacturing capacity, shipping container shortages, and port congestion that has impacted our suppliers.
Our teams continue to navigate the inflationary environment exceptionally well by partnering with our customers to give them timely notice of market price increases and locating the products they need so they can complete their projects as scheduled. PVC pipe prices have inflated more than any of our other product lines and have remained at an all-time high.
While it's possible PVC pipe prices could decline at some point, there are a number of factors that are keeping prices high in the near term, like strong demand, continued supply constraints due to raw material shortages, and tight manufacturing capacity.
It's important to note that every piece of pressurized PVC water pipe has to undergo pressure testing to pass American Water Works Association standards, which is unique to our industry and can cause PVC pipe pricing to move in different cycles than general purpose resin used for other applications.
Additionally, we continue to experience price increases across many other product lines that could offset any potential future deflationary pressure from our commodity-based products like PVC pipe. During the fourth quarter, we continued purchasing inventory ahead of supplier cost increases, resulting in gross margin rate expansion.
If procurement costs stabilize in fiscal 2022 or we don't receive advance notice of material cost increases, we would expect to continue passing along the higher selling prices, although gross margin rates may contract as we lose the benefit of lower cost inventory.
Through the first 2 months of fiscal 2022, we have seen prices remain high and even increase across most product categories. M&A pipeline. We have a strong track record of acquiring and integrating businesses, and we continue to cultivate a solid pipeline of targets for the short and long term.
We have closed 17 acquisitions since becoming an independent company in 2017, adding more than $650 million in annualized net sales. We have a streamlined process identifying attractive bolt-on opportunities, and we are well-positioned to source, acquire, and integrate new businesses.
We believe we are widely viewed as the acquirer of choice due to our long-standing relationships and entrepreneurial culture in our investment in the development of our people. Our industry is large and highly fragmented.
Our pipeline continues to be robust, and as we look ahead, we see a long runway for growth through M&A. Capital allocation priorities. We have significantly improved our financial flexibility as a result of debt repayment from the proceeds of our initial public offering.
We have a stronger balance sheet, lower cash interest payments, and substantially reduced net debt at the end of the fiscal year. The reduction in net debt leverage provides us with greater optionality to invest in value-creating growth opportunities moving forward.
Our current capital allocation priority is to continue investing in organic and inorganic growth opportunities, although we will evaluate other capital allocation options as we generate strong cash flow over the next year and beyond. Over the course of the last few years, we've been able to successfully execute in our growth and M&A strategies while also paying down debt using our cash flow.
We are comfortable operating in the 2-3 times net debt leverage range while making investments to grow the business. Infrastructure bill. We are optimistic about the opportunities provided by the Infrastructure Investment and Jobs Act, a once-in-a-generation bill that makes transformational investment in our nation's infrastructure.
An infusion of funds of this magnitude has immense implications to accelerate the repair and replacement of aging water infrastructure, and it will lead to a more sustainable future for our communities.
While we believe that the new infrastructure bill will provide multi-year tailwinds for the municipal water sector, we also believe it will take time before we see those funds flow through to our business as a result of constrained supply chains and industry-wide labor shortages. It's likely that we may not see incremental volume from the bill until 2023 or beyond.
However, we are well-positioned to capitalize on the favorable tailwinds due to our market leadership position and competitive advantages. Current market events. There are a few recent themes in the global macroeconomic backdrop I'd like to address.
First is the conflict in Ukraine. Core & Main does not have any direct business exposure to either Russia or the Ukraine, but it's still difficult to determine what supply chain or demand impacts could arise from the ongoing conflict.
Given the recent ban on Russian imports, we could see further impacts to our supply chain, and we will most likely be impacted by inflationary pressure on fuel costs. We may also see inflationary pressure in certain product categories linked to supply chain shortages. We are confident that we remain well-positioned to navigate any environment due to our size, scale, and ability to access products.
We have not seen a slowdown in demand related to economic inflation or rising interest rates. Demand has continued to be strong. If inflation or interest rate increases continue, it is possible we could see affordability challenges across our end markets, which could impact demand.
We are not seeing anything like this currently, but if we do, we believe we are well-positioned given our mix of repair and replacement projects in the municipal end market. As I look ahead to fiscal 2022, I am confident that Core & Main is investing in the right areas and at the right time.
We are deepening our competitive advantage and building on our foundation of long-term profitable growth. We have multiple levers for organic growth, continually cultivating ways to grow faster than the market and gain market share. We are poised to benefit from favorable industry trends.
We have an attractive and resilient financial profile with strong return characteristics. We have gained significant market share, built robust capabilities, and are in a good position to deliver strong performance this year and many years to come. I will now turn the call over to our Chief Financial Officer, Mark Witkowski, to discuss our fiscal 2021 fourth quarter and full-year financial results, followed by our fiscal 2022 outlook. Go ahead, Mark.
Thank you, Steve. Good morning, everyone. Turning to page 9, I'll begin by covering our fourth quarter operating results. Net sales in the fourth quarter were $1.2 billion, an increase of approximately 50% over the prior year period.
The increase was driven by higher average selling prices, strong volume growth, and acquisitions. Sales benefited from volume growth across each of our end markets, in addition to more moderate weather this year than last year.
The municipal market continued to experience strong demand due to growth in water and wastewater infrastructure spending. Residential land and lot development continued to be robust in the quarter. We've also started to see growth accelerate across the non-residential market as demand continues to catch up to pre-pandemic levels.
We experienced strong volume growth across each of our product lines in the fourth quarter, except for our meter products, due to shortages of semiconductor chips that are components of certain smart meter products.
Our sales initiatives and our industry-leading product availability allowed us to outperform our end markets and deliver above-market growth during the quarter. Roughly two-thirds of our net sales increase in the fourth quarter was due to higher average selling prices, which was much more than expected and driven by our team's ability to pass along rapidly rising material costs. We continue to experience rising material costs on nearly all product lines due to unprecedented demand and constrained supplier capacity.
Despite these challenges, our teams navigated the inflationary environment well, working closely with our suppliers to secure products and giving advance notice of price increases to our customers.
Acquisitions contributed approximately five points of sales growth in the fourth quarter. Gross profit in the fourth quarter increased 60% to $327 million. Gross profit as a percentage of net sales was 26.2% compared with 24.5% in the prior year period, an improvement of approximately 170 basis points.
The increase was primarily attributable to strategic inventory investments ahead of announced price increases, a favorable pricing environment, and the execution of our gross margin initiatives, such as expanding private label, achievement of growth-based supplier incentives, and accretive acquisitions.
Similar to the third quarter, our gross profit was positively impacted by our inventory purchases ahead of supplier cost increases, which results in a lagging weighted average cost of goods sold relative to current market prices.
We're also operating in a significantly less sensitive pricing environment due to industry-wide product shortages, which we benefited from due to our investments in inventory. We continue to make great strides across our pricing and private label initiatives, delivering sustainable gross margin rate expansion relative to the prior year.
We also achieved gross margin synergies from our recent acquisitions, which we expect to benefit from on a go-forward basis. Selling, general, and administrative expenses for the fourth quarter increased 33% to $183 million.
SG&A as a percentage of net sales was 14.7% compared with 16.6% in the prior year period, an improvement of approximately 190 basis points. The decrease in SG&A as a percentage of net sales was due to our ability to leverage our fixed costs, partially offset by higher variable compensation costs, higher costs from acquisitions, and increases in other variable costs due to volume inflation.
Adjusted net income increased $72 million-$73 million in the fourth quarter. The increase was due to strong sales growth, gross margin rate expansion, and SG&A cost leverage. In preparing adjusted net income, we exclude the effects of non-controlling interest as we evaluate and manage the business as a whole.
Adjusted EBITDA grew 113% to $151 million, improving adjusted EBITDA margin by approximately 360 basis points. The increase in adjusted EBITDA margin was due to strong net sales growth, gross margin rate expansion, and leveraging our fixed cost structure on the sales and gross margin growth.
Turning to page nine, I'll now cover our fiscal 2021 full year results. Net sales for fiscal 2021 were just over $5 billion, an increase of nearly 37% over fiscal 2020. The increase was driven by higher average selling prices due to rising material costs, which contributed approximately half of our net sales increase, strong volume growth, and acquisitions. Our sales benefited from volume growth across each of our end markets throughout the year.
We estimate that the residential end market experienced low double-digit volume growth due to robust land and lot development activity to support housing demand. We've recently seen an acceleration of volume growth across the non-residential construction market as local economies continue to recover and as demand returns to pre-pandemic levels.
We estimate that our non-residential end market grew at a low single-digit rate this year. Municipal repair and replacement volume grew at a low- to mid-single-digit rate due to healthy municipal budgets and better access to low-cost capital. Overall, we believe our end markets delivered mid-single-digit volume growth in fiscal 2021.
We achieved considerable share gains due to our sales initiatives and also from having preferred access to products during a period of material shortages, which allowed us to acquire many new customers. Our product, customer, and geographic expansion initiatives delivered solid performance throughout the year.
We've continued to accelerate the adoption of new products in our industry, such as fusible HDPE solutions to our waterworks customers, like the project Steve discussed earlier, fabrication and kitting assemblies for fire protection contractors, and new water retention and erosion control systems.
We've also increased our share with strategic accounts who typically pursue complex projects that require greater technical expertise and specialized procurement needs. The combination of our growth initiatives and winning new customers allowed us to achieve above-market growth well in excess of our historical average annual share gains. Acquisitions contributed approximately three points of sales growth in fiscal 2021. Gross profit for fiscal 2021 increased 46% to approximately $1.3 billion.
Gross profit as a percentage of net sales was 25.6% compared with 24.1% in fiscal 2020, an improvement of approximately 150 basis points. The increase was primarily attributable to strategic inventory investments ahead of announced price increases, a favorable pricing environment, the execution of our gross margin initiatives, achievement of growth-based supplier incentives, and accretive acquisitions.
We estimate that roughly 50-100 basis points of our fiscal 2021 gross margins may be temporary in nature as a result of our inventory investments, the favorable pricing environment, and resetting of certain growth-based supplier incentives.
However, we have multiple margin initiatives in place to help offset the impact of temporary gross margin rate benefits. Selling, general, and administrative expenses for fiscal 2021 increased 29% to $717 million, while SG&A as a percentage of net sales improved approximately 100 basis points to 14.3%.
SG&A as a percent of net sales declined due to strong cost leverage, partially offset by higher variable compensation costs, $21 million related to higher equity-based compensation expense due to accounting for equity awards, and $5 million due to costs in connection with the IPO and secondary offering. Interest expense for fiscal 2021 was $98 million, compared with $139 million in fiscal 2020.
The decrease was attributable to the redemption of the 2024 Senior Notes, the redemption of the 2025 Senior Notes, and lower interest rates on the senior term loan due to refinancing transactions completed in July. Income tax expense for fiscal 2021 was $51 million, compared with $9 million in the prior year, reflecting effective tax rates of 18.5% and 19.6% respectively.
The effective tax rate declined in the current year due to certain fixed tax expenses and permanent differences, decreasing as a percentage of pre-tax income. During the fourth quarter, a secondary public offering of 20 million shares of Class A common stock was completed by certain of our shareholders. We did not receive any of the proceeds from the offering.
In connection with the offering, approximately 7.5 million partnership interests were exchanged for shares of Class A common stock, together with the retirement of a corresponding number of shares of Class B common stock. As a result of these exchanges, we acquired certain tax attributes held by CD&R and its affiliates.
We expect that these tax attributes will reduce our future cash tax payments to taxing authorities. Under our tax receivable agreements, we recorded a payable that represents 85% of these anticipated tax savings, while we retain the remaining 15% as cash tax savings.
A summary of each TRA is located in the appendix of the presentation. Because we only make TRA payments if we achieve the benefit of a cash tax savings, we do not consider TRA liabilities, current or future, to be debt-like items.
Following the offering, CD&R and its affiliates ownership decreased to roughly 70%. Adjusted net income increased $223 million to $266 million for fiscal 2021. The increase was due to strong sales growth, gross margin rate expansion, and SG&A cost leverage.
Adjusted EBITDA grew 77% to $604 million, improving adjusted EBITDA margin to 12.1% from 9.4% for fiscal 2020 and growing nearly 2x the rate of our sales growth. The increase in adjusted EBITDA margin was due to strong net sales growth, gross margin rate expansion, and leveraging our fixed cost structure on the sales and gross margin growth. On page 11, I'll now cover our cash flow and balance sheet highlights for the year.
We had an operating cash outflow of $31 million in fiscal 2021, with the increase in profitability more than offset by investments in operating capital required for strong sales growth and to ensure product availability for our customers.
We made additional investments in inventory that we believe were prudent and necessary to ensure our customers could complete their projects on time. Additionally, our operating cash taxes were roughly $47 million higher than the prior year period due to higher pre-tax book income.
While we made substantial investments in operating capital this year, our after-tax operating profit, excluding intangible amortization, relative to our year-end balances of accounts receivable, inventory, PP&E, and accounts payable, was just over 40% for fiscal 2021. Our net debt at the end of the quarter was $1.492 billion, bringing our net debt leverage down to 2.5x.
The reduction in net debt leverage compared with the end of fiscal 2020 was attributable to debt repayment from the proceeds of our IPO, in addition to an increase in adjusted EBITDA. We expect to improve our, and maintain our net debt leverage in the near term despite making strategic investments to grow the business.
At the end of the fourth quarter, we had $842 million in total liquidity. We believe that our liquidity and our cash generation from operations will be sufficient in the near term to fund operations, anticipated capital expenditures, schedule principal and interest payments on our term loan, and continue to pursue our growth strategies. I'll wrap up our prepared remarks on page 12 with a discussion on our outlook for fiscal 2022.
Fiscal 2021 was a transformative and record year, and we entered fiscal 2022 with strong backlogs and great optimism. The underlying pace of demand appears favorable across each of our end markets.
We expect residential housing tailwinds to continue given the undersupply of new homes and population shifts despite home builders having to navigate ongoing labor and material shortages. The macro environment for non-residential construction continues to be well supported.
We saw an increase in non-residential construction in the second half of fiscal 2021, and we expect those trends to continue into 2022 as demand returns to pre-pandemic levels and as commercial construction activity expands to support growth and housing development.
We expect municipal repair and replacement activity to remain strong, and we see favorable tailwinds leading into 2022. Municipal budgets are healthy, municipalities have access to low-cost capital, and the need to repair aging infrastructure is growing in importance and significance.
Municipalities have increased water and wastewater utility rates each year over the last decade, highlighting their ability to effectively increase revenue to improve their aging infrastructure systems.
While we're excited about the long-term positive impact the Infrastructure Investment and Jobs Act could have on our water infrastructure, we have not included any incremental benefits associated with the bill in our assumptions for 2022 guidance. We saw some projects scheduled for delivery in fiscal 2021 get delayed and pushed into fiscal 2022 due to supply chain constraints, which could provide tailwinds in the first half of the year.
We will continue to execute on our growth strategies and focus on the controllable areas of our business, including ensuring product availability for our customers, remaining ahead of inflationary or deflationary pressures, and driving productivity gains and effective cost management.
We expect favorable impacts from higher average selling prices to continue through at least the first half of the year, potentially moderating in the second half as we approach more difficult comparisons.
Even with the potential for price deflation if supply chains normalize or if demand softens, we expect to generate a favorable net sales benefit in fiscal 2022 due to the timing and magnitude of price increases in the prior year. In terms of acquisitions, we currently have a strong pipeline of high-quality targets, and we look forward to adding more of these companies to our team throughout the year.
Our recent acquisitions are performing well, and we expect them to contribute two-four percentage points of top-line growth this year. Based on these factors, we expect fiscal 2022 net sales to grow in high single- to low double-digit range, with strong growth in the first half of the year, but moderating in the second half with more difficult comparisons.
Regarding our gross margins, we do not expect to repeat the significant price realization benefits we achieved in 2021 during the rapid rise of inflation. I mentioned earlier that we believe our fiscal 2021 gross margins included roughly 50-100 basis points of potential temporary one-time benefits. However, we have margin initiatives in place to help offset some of the potential pressure related to these one-time benefits.
We expect first quarter gross margins to be weaker sequentially than our fiscal 2021 fourth quarter due to the resetting of growth-based supplier incentives and if inventory costs catch up with market prices.
While we expect to achieve SG&A leverage for the full year, we anticipate our adjusted EBITDA margin may decline modestly in 2022. With all of these factors in mind, we anticipate our fiscal 2022 adjusted EBITDA to be in the range of $595 million-$635 million.
This includes only the contributions from acquisitions that have already closed. At the midpoint of our range, we expect twelve-month adjusted EBITDA to be above our $604 million of fiscal 2021 adjusted EBITDA each quarter throughout the year.
We expect that our fiscal 2022 results could be front-end loaded with stronger performance in the first half, slightly subsiding in the second half if supply chains normalize and commodity prices decline. Additionally, we'll be challenged with tough year-over-year comparisons throughout the second half of the year.
We expect interest expense to be in the range of $58 million-$60 million for the year. Our term loan carries interest at LIBOR plus a margin of 250 basis points on the unhedged portion of the facility. In July 2021, we entered into a five-year fixed interest rate hedge with a notional value of $1 billion to lock in LIBOR rate at 74 basis points. We anticipate an effective tax rate of approximately 20% in fiscal 2022.
This is slightly higher than our 2021 effective rate due to more Class A shares, which result in more taxable income to Core & Main. Regarding our cash flow, we typically convert roughly 60%-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 ensure product availability for our customers.
We expect to convert roughly 85%-100% of our adjusted EBITDA into operating cash flow in fiscal 2022 as we optimize our inventory balances in the second half of the year. We have historically generated the majority of our cash in the back half of the year and as we unwind working capital, and we expect the same trend in fiscal 2022.
To close out our prepared remarks, we are very proud of our record fiscal 2021 fourth quarter and full year financial results. Despite the challenges we faced this year, our teams continued to execute flawlessly. We continue to focus our efforts on delivering sustainable market share gains, improving profitability, and generating strong operating cash flow. That concludes our prepared remarks. At this time, I'd like to turn the call over to the operator for questions.
Thank you. If you'd like to ask a question, you can press star one on your telephone keypad. If you'd like to withdraw your question, you may press star two. Please ensure you're unmuted locally when asking your question. Our first question for today comes from Matthew Bouley of Barclays. Matthew, your line is now open.
Hey, good morning, everyone. Congrats on the results. Thank you for taking the questions this morning. First one, I guess on the gross margin outlook, you know, I think, Mark, you said, you know, Q1 might be down sequentially.
My question is, I mean, a lot of your commentary is around sort of the continuation of tight supply chain and inflation continuing to rise, which has obviously supported the gross margin over the past year. Kinda how are you balancing that? I mean, what's it going to take to really see gross margins to normalize, assuming these positive drivers, you know, seem to continue to be in place? Thank you.
Yeah. Thanks, Matthew, for the question. You know, as you look at the first quarter relative to the fourth quarter, I think we see a slight decline there just sequentially due to resetting some of the growth-based supplier incentives.
Then you're spot on. I mean, it's really gonna take, you know, some freeing up of the supply chain, you know, given kinda what we're seeing. I wouldn't say as we sit here today, that's necessarily the case.
Certainly as we get potentially into Q2, you know, Q3 timeframe, if we see some of those prices start to stabilize, you know, that's maybe when we start to see some of these costs, catch up. Okay. It's a fair characterization that if supply chain and inflation sort of remain at this type of levels then that kind of abnormally high gross margin, you know, may persist?
Yeah, certainly that could persist, Matthew. I think one thing that we're keeping an eye on is our ability to get advanced notice. We're starting to see some of these price increases come even faster at this stage, you know.
That'll be a potential headwind that we face if we are unable to continue to procure these types of products with that advance notice like we've been able to in fiscal 2021. You know, we could see some pressure there. We do expect to continue to get those passed along as timely as we can. Certainly, we did see some very strong gross margin expansion in 2021.
I just don't expect it kind of those levels.
Okay. That's fair. Then second question just on the guide. Maybe just focusing on the revenue guide. Curious if you could sort of break out the assumption of price versus volume in that because obviously you're speaking to some normalization in price, perhaps in the second half. It'd be sort of helpful to understand what you're really assuming on the pricing side as we kind of model the cadence through the year. Thank you.
Yeah, sure. No problem. You know, as you look at volume in the 2022 outlook, we've got a low- to mid-single-digit, you know, with market and our above-market growth initiatives that we've got. Pricing in kind of the mid-single-digit, and then acquisitions contributing about 2 points on top of that.
Perfect. Well, thanks, everyone, and good luck.
All right. Thank you.
Thank you. Our next question comes from Jamie Cook of Credit Suisse. Jamie, your line is now open.
Hi. Good morning, and nice quarter. I guess, you know, two questions. One, I think you talked about some projects that were delayed that could potentially be tailwinds into the first half of the year. I'm just wondering if that's embedded in your guidance and if you could sort of size that.
Understanding some of the near-term, you know, issues that are sort of pressuring or that could potentially pressure, you know, margins in 2022. Can you talk about some of the structural initiatives you guys have put in place to improve margins and what's embedded in the forecast for that for 2022? Thanks.
Jamie, I'll start with some of the projects that we're seeing. You know, for the most part, all of our projects are continuing. Bidding activity continued and remain incredibly strong through the fiscal year-end. You know, a couple of areas where we're seeing real product shortages and exceptionally long lead times in the 6-8 month range get to be large diameter projects that require PVC pipe or large diameter ductile iron, where those lead times can stretch out, you know, to 4-6 months.
Those are some of the ones. They're kind of, I don't want to call anomalous, but they're projects that, you know, are starting to see a push that we're gonna continue to see a push on those as we go forward. They continue to be on the table.
They continue to be in the backlog. Due to the timing constraints of being able to get some of that specialty type large diameter product, it's been very difficult. Mark, do you want to talk a little bit about the margins? Yeah, Jamie, in terms of the gross margin initiatives that we've got that we believe are gonna offset, you know, some of that temporary pressure.
You know, certainly our private label initiative continues to expand. We continue to add more capabilities and products there to roll out through our branch network. You know, our acquisition of L & M Supply really expanded our abilities on the erosion control products, which is a higher margin product for us that we believe we can continue to expand through our branch network.
That is an area that, you know, we'll see a pretty good expansion in 2022. You know, we continue to work on our pricing initiatives, not only to get the pricing into the market and make sure that we're current with that, but also looking at ways to optimize price, especially on some of our non-bid and ancillary type products.
Locally, you know, given you know some of the pricing data that we see across the country, we've been able to optimize that and really get those products priced accurately and at the right levels.
You know, between those three, you know, we typically expect, you know, I'd say 20-30 basis points of gross margin expansion, you know, in any given year. You know, we think that helps offset some of the, you know, the benefits that we've achieved in 2021 that, you know, we said could be temporary.
Okay, thank you.
Thank you. Our next question comes from David Manthey of Baird. David, your line is now open.
Yeah, thank you. Good morning, everyone. I was wondering if you could break down by segment and stack rank from strongest to least strong growth rates in fiscal 2022 and the relative impact of price in those assumptions.
Yeah, Dave, thanks for the question. In terms of, you know, breaking out the end markets, you know, I tell you that, you know, we feel really strong on the residential end market, you know, kind of in that mid-single-digit %, and that's coming off of a low double-digit % growth in 2021. We still see a lot of demand there with lot development.
As I mentioned, non-residential is starting to follow and then kind of return to those pre-pandemic levels. I'd say slightly lower than the resi growth, but kind of right in that mid-single-digit % range. You know, the muni segment still kind of strong and steady but kind of low single-digit % range.
Again, that's coming off of a really strong growth rate in 2021. In terms of price, you know, no major differences across the end market as it relates to price. Think about, you know, like we said, mid-single digit range in terms of the price benefit, with more of that kind of front loaded, and then coming up against more difficult comps, you know, given the pricing levels as we got towards the end of the year.
Okay, thanks. To follow up on that, maybe I misheard this, but did you imply that second half pricing could actually be negative after being more positive in the first half, and then that nets out to mid-single digit? Did I hear that correctly?
Yeah, Dave, that's how we're looking at it right now. Again, that assumes, you know, the supply chain does free up at some point kind of middle of the year. That's the impact of that is, you know, some declining commodity prices. Haven't necessarily seen that yet, but that's kind of how we're looking at it, just given some of the uncertainty in the back half.
Okay. And just to level set that, when we think about guidance you've given previously, you've kind of done the same thing, right? You sort of assume that commodity prices come down, whether they do or not. Is that the case?
Yeah, I'd say it's fairly consistent with how we've looked at it in the past, Dave. You know, we've got pretty good visibility as we get 3-6 months out in terms of the backlog and then the supply chain. Just given that uncertainty, you know, with that, you know, kind of, making those assumptions in the back half that at some point that's gonna come down.
All right. Okay. All right. Thanks very much.
All right. Thank you.
Thank you. Our next question comes from Nigel Coe of Wolfe Research. Nigel, your line is now open.
Thanks. Good morning, everyone. Last quarter. So just on the outlook, I think your EBITDA margins, if I'm not mistaken, I think are about 100 basis points lower year-over-year at the midpoint. So, you know, again, if I'm mistaken there, please correct me.
But I'm just wondering if you could maybe bridge that. W ithin that, you know, I think you've talked about the price cost favorability representing about 40 basis points, you know, in that range, headwinds into 2022. I'm just wondering, you know, how that looks right now based on what you see.
Yeah. Thanks, Nigel. Yeah, I think as you look at the guide for 2022, we've got EBITDA margins coming back, you know, in that kind of 80-90 basis point range with most of that coming from the gross margin line. We do expect to see a little bit of SG&A cost leverage coming into 2022 as we anniversary some of the IPO related one-time costs in there.
So that's kinda kind of the range. I don't think it's coming down a full 100 basis points, but I'd say a majority of it, you know, obviously coming from the gross margin rate line. Then could you ask that second question again, Nigel?
Yeah. The price cost impact, obviously you've got some favorability coming through, this year. How does that shake out into 2022?
Yeah, I think as we think about the price-cost benefit, you know, certainly in the first half, we expect if prices continue to stay high and accelerate, you know, we see a similar opportunity there with some potential headwinds just given the timing of when we get those price increases.
I think, you know, as we get into Q2, Q3, certainly Q4, we start running up against much more difficult comps, and we'll see that. That's really where I see the gross margin benefits starting to get, you know, we start seeing some pressure there year-over-year.
Okay. My follow on is, you know, with all these price increases, and I understand that, you know, PVC, you know, piping is not, you know, a huge proportion of the project values. But do you have a sense on how the overall kind of project inflation is looking for these for the end customers?
You know, is there any concerns on some demand destruction at you know, given the inflation wave on products and labor availability? I'm just wondering on top of that, if you know, the stimulus funding coming through in 2023, if that's causing maybe some of the starts to maybe push to the right.
Yeah, Nigel, this is Steve. You know, I'd share with you right now, we haven't seen any demand deterioration whatsoever in regards to pricing or inflationary activities. The projects, you know, all of them seem to be absorbing this at this point.
You know, one of the key aspects of the, you know, the value of these projects and the materials themselves is that, you know, what's on the mind of most of these contractors and municipalities is the completion of these projects and keeping their crews active.
The material costs aren't as significant as being able to complete the projects and being able to keep their labor fully active in this. I think that's, you know, the primary concern right now and bidding activity and everything else continues to remain very, very strong.
When I look at the funding characteristics, we just have not seen much of the funding get through to the state revolving funds at this point or cause any type of delay along those lines. I think that's still a work in progress, but everything's still working through the backlog right now of all the existing projects that are out there looking at the new bidding activity.
You know, I can tell you as we stand here right now, we haven't seen any impact whatsoever of a delay awaiting, you know, state revolving funds and the infrastructure package making its way through.
Great. Thank you very much.
Thank you.
Thank you. Our next question comes from Patrick Baumann of JP Morgan. Pat, your line is now open.
Oh, thank you. Hi, good morning, guys.
Hey, good morning, Pat.
On the acquisition environment, I think you said 2% is embedded in the outlook for sales growth. Can you talk about the pipeline and whether, you know, the volatility we've seen in the market year to date has delayed any deals from happening? Then you also mentioned something about evaluating additional capital allocation opportunities. Maybe you could kind of talk a little bit more about what you meant by that.
Sure. I'll talk a little bit about the M&A outlook, and I'll let Mark talk about the capital allocation. You know, we just see a very strong, robust pipeline still in M&A activity. You know, if you look at what a lot of these business owners have gone through between COVID, supply chain challenges, and all that environment, it's been very difficult for them, and it's really created a good opportunity for us.
You know, from the standpoint of being able to look at a lot of the different areas where we drive value from M&A, where we look at either consolidating in certain markets or we look at expansion opportunities, and even look at product opportunities, looking at everything from, you know, erosion control products and being able to expand in that area.
There's just a robust pipeline out there, and we continue to work through a pretty strong pipeline out there and are encouraged by what we're seeing as we go into 2022. Mark, do you want to talk a little bit about the capital allocation?
Yeah, Pat, nothing really there to read into. You know, we'll continue to look at, you know, where we allocate capital. You know, more of it's just timing and opportunities on the M&A side. We're gonna continue to focus on our growth strategy there. Nothing really additional to add there.
Okay. Follow-up is on the commodity pipe product. How big is that as a percentage of sales now, given you know the strong environment you saw for price there in 2021? On the non-commodity pipe product, what kind of product cost inflation did you see there last year, and what are you seeing so far this year?
Yeah. Thanks, Pat. On the commodity side, now with, you know, PVC, ductile, you know, steel pipe, some of those categories represents about 32% of our overall net sales. What I would tell you on the non-commodity side is, you know, we've continued to see, you know, very strong pricing on that side as well. I'd say it's slightly under the average, you know, with the commodities being, you know, slightly above the average.
Okay. For that piece of the business, I mean, are you seeing that less tied to kind of like the volatility in, you know, steel, PVC, et cetera? You should see price from that part of the business continue this year? Or is that still gonna be, you know, moving up and down with those commodities, like the commodity part?
You know, Pat, we'll see. It's pretty typical around this time of year to get price increases coming in on a lot of the, you know, non-pipe related products. So we'll see if that there continues to be more price increases and what that frequency is.
Right now, if you look at the demand profiles that are out there and the supply constraints, it's pretty favorable for a pricing environment out there, but it's too early to tell yet whether we'll see that continue on all the way through first quarter and second quarter for the non-commodity products.
Understood. Okay. Thanks for the time. Appreciate it.
Thank you. Our next question comes from Kathryn Thompson of Thompson Research Group. Kathryn, your line is now open.
Hi, thank you for taking my questions today. I know there's been a lot of focus on pricing today, but a little bit more of a conceptual question as we head into 2022.
Strategic buys, in addition to a favorable pricing environment, were an important part to driving top line. You know, it's been two-thirds of your top line gain for the past 2 quarters. As we head into 2022, are you doing the same type of strategic buys, and does that strategy really work in this market? How do you think about those strategic buys that were so favorable in 2021, and how does that really stack into 2022?
You know, Kathryn, we have a couple different ways when we look at this. We look certainly at our backlog of existing projects that we've closed that are due to ship at some point over the next several months.
We also factor in what we're seeing in bidding activity and the price sensitivity associated with the bidding activity. You know, we look at this thing very closely about whether to take longer positions in certain product categories and what the capacity constraints are.
If you do look at, you know, if you understand that many of our suppliers are really dedicated to this sector and the sector alone, we have pretty good feel for what the capacity constraints may be. It allows us to take a position, depending on what we're seeing on those internal metrics that we're looking at for backlog and for bidding activity.
You know, right now we see, you know, very favorable demand environment. We see tight supply constraints. It looks similar to where we ended fourth quarter for sure. I think we're encouraged by that, and we'll continue to take positions where we think we can, you know, continue to find that margin enhancement opportunity and get access to product and be able to pass that price through.
I don't know if it's really post-COVID world, but a world in a COVID world, the feedback that we're getting consistently from a wide variety of industry contracts along the industrial value and construction value chain is just a different approach to carried inventory.
With all the supply chain shortfalls and a growing de-globalization trend, there's just a greater propensity to carry more inventory, really more simply put, and a greater value on business models that inherently carry more inventory. What is your position and thought on that concept versus how you've operated your business pre-COVID and how you intend to operate going forward?
You know, Kathryn, one of the things that we saw really coming out of COVID is. Well, going into COVID, we really felt that demand was really starting to increase while supply was still wide open. I think you saw some suppliers that took some capacity out during COVID, not, you know, given some of the uncertainty.
You know, we've always seen and feel like we have a really good outlook at what the demand profile is gonna be and also what the bidding activity means and the closeness that we have with our customers to understand, you know, what the appetite is and when we're gonna start seeing demand either slip or capacity in our area fall or increase as well, too. So, you know, I don't know if we necessarily have changed our approach in how we operate.
We certainly see the value of inventory, and it has been able to capitalize on that. We continue to see it today. Just given our size and scale in this area, it's really a benefit of ours to be able to do that to support our customers on where we can allocate inventory, get access to it, or find alternative materials for our customers.
Okay. Helpful. Then just looking forward, when you look at your four major operating segments and you look at what's in the pipeline, no pun intended, in terms of jobs in the future, what order patterns are you seeing today that may be different versus a year ago?
You know, I think we continue to see really strong municipal demand, a lot of repair replace work in that area. You know, that aging infrastructure and the ability to fund it for these municipalities is it continues to be very strong and robust.
Residential and lot development continues to be really strong. You know, I think the non-residential construction, particularly for commercial construction for our fire protection products, is you know, we saw really good signs of life last year. We're encouraged by what we're seeing in that sector.
Then, you know, you look at what's happening with DOT, with the infrastructure bill, you know, we support that with storm drainage and erosion control products, and I think, you know, that's an area that we're excited about as we get into 2022 as well.
Great. Thank you very much.
Thanks, Kathryn.
Thank you. That concludes the Q&A today. I will hand back to Steve LeClair for any closing remarks.
Thank you all again for joining us today to participate in our fourth quarter earnings call. Fiscal 2021 was a record-setting year for Core & Main. We are thrilled with the resilience of our business and our teams.
Since becoming an independent company in 2017, we've unlocked our ability to grow well in excess of our end markets, acquire and integrate businesses, and enhance our margin profile. We are entering Fiscal 2022 with a strong team, positive market tailwinds, and extraordinary momentum. We remain confident in our ability to deliver strong results to our stakeholders in 2022 and beyond, and are committed to providing our customers with local knowledge, local experience, and local service nationwide. Thank you for your interest in Core & Main. Operator, that concludes our call.
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