Hello, and welcome to the Core & Main Q4 2021 Earnings Call. My name is Alex, and I will be coordinating the call today. [Operator Instructions] I'll 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 are 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, represent 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 measures 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 continue to execute on our strategies to grow the business and strengthen our operational capabilities, while delivering value to our customers, supporting our associates and achieving strong financial performance. We navigated through supply chain challenges, while continuing to deliver extraordinary service to our customers. Infrastructure solutions are localized and must meet product specifications and engineering standards that vary from one municipality to another. Our customers count on us to provide the right solutions to meet these local requirements. 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 &…

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 advanced notice of price increases to our customers. Acquisitions contributed approximately 5 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…

Thank you. [Operator Instructions] 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. So first one, I guess, on the gross margin outlook. I think, Mark, you said Q1 might be down sequentially. But 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. So kind of how are you balancing that? I mean, what's it going to take to really see gross margins to normalize, assuming these positive drivers seem to continue to be in place? Thank you.

Yes. Thanks, Matthew, for the question. As you look at the first 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. And then you're spot on. I mean it's really going to take some freeing up of the supply chain, given kind of what we're seeing. So I wouldn't say as we sit here today, that's necessarily the case. But certainly, as we get potentially into Q2, Q3 timeframe, if we see some of those prices start to stabilize, that's maybe when we start to see some of these costs catch up.

Okay. But it's a fair characterization that if supply chain and inflation sort of remain at this type of levels, then the – that kind of abnormally high gross margin may persist?

Yes. 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. So that will be a potential headwind that we face if we are unable to continue to procure these types of products with that advanced notice like we've been able to in fiscal 2021. We could see some pressure there. But we do expect to continue to get those passed along as timely as we can. But certainly, we did see some very strong gross margin expansion in 2021. I just don't expect at kind of those levels.

Okay. That's fair. And 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. So 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.

Yes, sure. No problem. As you look at volume in the 2022 outlook, we've got a kind of low to mid-single-digit 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 two 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. Nice quarter. I guess 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? And then understanding some of the near-term issues that are sort of pressuring or that could potentially pressure margins in 2022. Can you talk about sort of 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. For the most part, all of our projects are continuing. Bidding activity continue to remain incredibly strong through the fiscal year-end. A couple of areas where we're seeing real product shortages and exceptionally long lead times in the six to eight month range get to be large diameter projects that require PVC pipe or large diameter ductile iron, where those lead times can stretch out four to six months. So those are some of the ones. They're kind of – I don't want to call anomalous, but there are projects that are starting to see a push that we're going to continue to see a push on those as we go forward. They continue to be on the table. They continue to be in the backlog. But due to the timing constraints on 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?

Yes, Jamie. In terms of the gross margin initiatives that we've got that we believe are going to offset some of that temporary pressure, certainly, our private-label initiative continues to expand. We continue to add more capabilities and products there to roll out through our branch network. Our acquisition of L&M Supply really expanded our abilities on the erosion control products, which is a higher-margin product for us, and we believe we can continue to expand through our branch network. So that is an area that we'll see a pretty good expansion in 2022. And then 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, given 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. So between those three, we typically expect, I'd say, 20 to 30 basis points of gross margin expansion in any given year. And we think that helps offset some of the benefits that we've achieved in 2021 that we said could be temporary.

Okay. Thank you.

Thank you. Our next question comes from David Manthey of Baird. David, your line is now open.

Yes. Thank you. Good morning, everyone. I was wondering if you could break down by segment and stack rank from strongest to less strong growth rates in fiscal 2022 and the relative impact of price in those assumptions?

Yes, Dave, thanks for the question. In terms of breaking out the end markets, I'd tell you that we feel really, really strong on the residential end market kind of in that mid-single digit, and that's coming off of a low double-digit growth in 2021. So we still see a lot of a lot of demand there with lot development. As I mentioned, nonresidential is starting to follow and then kind of return to those pre-pandemic levels. I'd say slightly, slightly lower than the resi growth, but kind of right in that mid-single-digit range. And then the muni segment still kind of strong and steady, but kind of low single-digit range. And again, that's coming off of a really strong growth rate in 2021. In terms of price, no major differences across the end markets as it relates to price. Think about like we said, mid-single-digit range in terms of the price benefit, with more of that kind of front-loaded and then coming up against more difficult comps given the pricing levels as we got towards the end of the year.

Okay. And then just to follow-up on that. Maybe I misheard this, but did you imply that second half pricing could actually be negative if you're being more positive in the first half and then that nets out to mid-single digit? Did I hear that correctly?

Yes, Dave, that's how we're looking at it right now. And again, that assumes the supply chain does free up at some point kind of middle of the year and that the impact of that is some decline in 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.

And just to level set that, if we think about guidance you've given previously, you've kind of done the same thing, right? You sort of assumed that commodity prices come down, whether they do or not, is that the case?

Yes, I'd say it's fairly consistent with how we've looked at it in the past, Dave. We've got pretty good visibility as we get three to six months out in terms of the backlog and then the supply chain and just given that uncertainty with that kind of making those assumptions in the back half. But at some point, that's going to come down.

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. Best quarter. So just on the outlook, I think your EBITDA margins, if I'm not mistaken, I think, about 100 basis points lower year-over-year at the midpoint. Again, if I'm mistaken that, please correct me, but I was wondering if you could maybe bridge that. And then within that, I think you've talked about the price cost favorability representing about a 40 basis points in that range, headwinds into 2022. I'm just wondering how that looks right now based on what you see?

Yes. Thanks, Nigel. Yes, I think as you look at the guide through for 2022, we've got EBITDA margins coming back in that kind of 80 to 90 basis point range, with most of that coming from the gross margin line. We do expect to see a little bit of SG&A cost leverage coming into 2022 as we anniversary some of the IPO-related onetime costs in there. So that's 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 obviously coming from the gross margin rate line. And then could you ask that second question again, Nigel?

Yes. The price/cost impact, obviously, you've got some favorability coming through this year. How does that shake out into 2022?

Yes. I think as we think about the price/cost benefit, certainly, in the first half, we expect, if prices continue to stay high and accelerate, we see a similar opportunity there with some potential headwind just given the timing of when we get those price increases. But I think 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 – we start seeing some pressure there year-over-year.

Okay. And then my follow-on is with all these price increases, I understand that PVC piping is not a huge proportion of the project values. But do you have a sense on how the overall kind of project inflation is looking for the end customers? And is there any concerns on some demand destruction given the inflation wave on products and labor, labor availability. And I'm just wondering, on top of that, if the similar funding coming through in 2023, if that's causing maybe some of the starts to maybe push to the right?

Yes. Nigel, this is Steve. I'd share with you right now, we haven't seen any demand deterioration whatsoever in regards to pricing or inflationary activities. The projects all seem to be absorbing this at this point. And one of the key aspects of the value of these projects and the materials themselves is that what's on the mind of most of these contractors and municipalities is the completion of these projects and keeping their crews active. So the material costs aren't as significant as being able to complete the projects and being able to keep their labor fully active in this. And I think that's 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 haven't just – we just have not seen much of the funding get through to the state revolving funds at this point or cause any type of delay along those lines. I think that's still a work in progress, but everything is still working through the backlog right now of all the existing projects that are out there, looking at the new bidding activity. So I can tell you as we stand here right now, there really hasn't – we haven't seen any impact whatsoever of a delay awaiting 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 Pat Baumann of JPMorgan. Pat, your line is now open.

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 the volatility we've seen in the market year-to-date has delayed any deals from happening? And then you also mentioned something about evaluating additional capital allocation opportunities. Maybe you could kind of talk a little bit more about what you meant by that?

Sure. I'll talk a little bit about the M&A outlook, and I'll let Mark talk about capital allocation. We just see a very strong robust pipeline still in M&A activity. And if you look at what a lot of these business owners have gone through between COVID, supply chain challenges and all that environment, it's been very difficult for them, and it's really created a good opportunity for us. From the standpoint of being able to look at a lot of the different areas where we drive value from M&A, where we look at either consolidating in certain markets or we look at expansion opportunities and even look at product opportunities, looking at everything from erosion control products and being able to expand in that area, there'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 capital allocation?

Yes, Pat. Nothing really there to read into. We'll continue to look at where we allocate capital, but more of it's just timing and opportunities on the M&A side. We're going to continue to focus on our growth strategy there. So nothing really additional to add there.

Okay. And then a follow-up is on the commodity pipe product. How big is that as a percentage of sales now, given the strong environment you saw for price there in 2021? And then 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?

Yes. Thanks, Pat. On the commodity side, now with PVC, ductile, steel pipe, some of those categories represents about 32% of our overall net sales. And what I would tell you, on the non-commodity side, as we've continued to see very strong pricing on that side as well, I'd say it's slightly under the average with the commodities being slightly above the average.

Okay. And for that piece of the business, I mean, are you seeing that less tied to kind of like the volatility in steel, PVC, et cetera, so you should see price from that part of the business continue this year? Or is that still going to be moving up and down with those commodities, like the commodity pipe product?

Pat. We'll see. It's pretty typical around this time of year to get price increases coming in on a lot of the non-pipe-related products. And so we'll see if that – if 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 through continue on all the way through first quarter and second quarter for the non-commodity products.

Understood. Okay. Thanks for your 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 were an important part of – in addition to a favorable pricing environment, were an important part to driving topline. It's been two-thirds of your topline gain for the past two quarters. But as we head into 2022, are you doing the same type of strategic buys? And does that strategy really work in this market? And how do you think about those strategic buys on that versus favorable in 2021? And how does it really stack into 2022?

Yes. Kathryn, we have a couple of different ways when we look at this. We look certainly at our backlog of existing projects that we've closed that are due to 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. So we look at this thing very closely about whether to take longer positions in certain product categories and what the capacity constraints are. And if you do look at, understand that many of our suppliers are really dedicated to the sector and the sector alone, we have a 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. So right now, we see a very favorable demand environment. We see tight supply constraints. It looks similar to where we ended fourth quarter, for sure. So I think we're encouraged by that. We'll continue to take positions where we think we can continue to find that margin enhancement opportunity and get access to product and be able to pass that price through.

And as we – I don't know if it's really post-COVID world, but a world and a COVID world, the feedback that we're getting consistently from a wide variety of industry contracts along the industrial value in construction value chain is just a different approach to carried inventory. So with all the supply chain shortfalls and a growing deglobalization trend, there's just a grand propensity to carry more inventory, really more simply put, and a greater value on business models that do – 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?

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 given some of the uncertainty. We've always seen and feel like we have a really good outlook of what the demand profile is going to be and also what the bidding activity means and the closeness that we have with our customers to understand what the appetite is and when we're going to start seeing demand either slip or capacity in our area falls or increase as well, too. So I don't know if we necessarily have changed our approach in how we operate. We certainly see the value of inventory and has been able to capitalize on that. We continue to see it today. And just given our size and scale in this area, it's really a benefit of ours to be able to do that to support our customers on where we can allocate inventory, get access to it or find alternative materials for our customers.

Okay. Helpful. And then just looking forward, when you look at your four major operating segments and you look at puts 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?

I think we continue to see really strong municipal demand, a lot of repair replace work in that area, that aging infrastructure and the ability to fund it for these municipalities continues to be very strong and robust. Residential in land and lot development continues to be really strong. I think the nonresidential construction, and particularly for commercial construction for our fire protection products is – we saw really good signs of life last year. We're encouraged by what we're seeing in that sector. And then you look at what's happening with DOT with the infrastructure bill, we support that with storm drainage and erosion control products. And I think 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. So 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, and 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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