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Operator
Hello and welcome to the Core and 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 1 on your telephone keypad. If you'd like to withdraw your question, you may press star 2. I'll now hand over to your host, Robin Bradbury, with Core and Main to begin. Over to you, Robin.
Alex
Thank you. Good morning and welcome to the Core and Main fiscal 2021 fourth quarter and full year earnings call. This is Robin Bradbury, Vice President of Investor Relations and FP&A for Core and 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 Wieckowski, 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 Q. 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 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 foreign maids. I will now turn the call over to Chief Executive Officer Steve LeClair.
Robin Bradbury
Thanks, Robin. 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 in Maine. 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 in 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 customer 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 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 get adapted and continue 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 Corn Main's 4,100 associates for their unwavering dedication, determination, and resilience.
Robin
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.
Robin Bradbury
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 positions.
Robin
We also achieved share gains from having preferred action access to products during a period of material shortages. Our team's expansion of our margin enhancement initiative and disciplined cost management to achieve record profitability in fiscal 2012 produced solid margin results despite the intensifying inflationary pressures we faced. We finished the year strong from an M&A standpoint.
Robin Bradbury
adding five extraordinary businesses to our team in fiscal 2021, and acquiring Dotson engineered products subsequent to year end.
Robin
Each of the acquisitions, access to new product lines, consolidation of existing market positions, and the engineered products is a single branch, full service distributor of water, wastewater, agricultural, and irrigation products based in western Colorado. Dotson has a long history as a truck. trusted and reliable partner to its customers, suppliers, and associates. The opportunity to bring a company such as this into core and main family provides strategic value and will allow us to expand our reach to better serve customers in Central and Western Colorado.
Robin Bradbury
As part of our sales initiatives to deliver throughout fiscal 2021,
Robin
These new locations will allow us to expand into new geographies and expand into under-penetrated product lines.
Robin Bradbury
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, and across the yards of Ventnor Heights, New Jersey residents due to a major pipeline leak. After inspecting the job day standards, They needed product expertise and an innovative repair solution. Customer engineered drawings and a quote.
Robin
Exactly what was needed to repair the rupture in the line.
Robin Bradbury
We produced and delivered a custom retrofit solution with specialty fabricated fusible HDPE pipe and fittings.
Robin
With our HDPE, we 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.
Robin Bradbury
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 longstanding relationships with our suppliers and leadership position in our industry, we have been able to gain preferred access to products to continue serving our staff 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.
Robin
Our inventories and backlog have grown as a result of us holding inventory for customers to ship the necessary parts and components to ship the complete solution and support our customers' installation schedules.
Robin Bradbury
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 poor congestion that has impacted our suppliers. Our teams continue to navigate the inflationary environment exceptionally well by partnering with our customers and locating the products they need so they can.
Robin
PVC pipe price.
Robin Bradbury
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 supply constraints due to raw material shortages and tight manufacturing capacity.
Robin
It's important that PVC water pipe has to undergo pressure testing to pass American which is unique to our industry and can cause PVC pipe pricing to move in different cycles and applications.
Robin Bradbury
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, resulting in gross margin rate expansion. If procurement costs stabilize in fiscal 2020, but if the 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 two months of fiscal 2022, we have seen prices remain high in those 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 of identifying attractive bolt-on opportunities, and we are well positioned to source, acquire, and integrate.
Robin
great new businesses.
Robin Bradbury
We believe we are widely viewed as the acquirer of choice due to our longstanding relationships and entrepreneurial culture in our investment in the development of our continues to be robust. And as we look ahead, we see a long runway for growth through M and 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 reduce net debt. 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 to increase 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, in our growth and M&A strategies while also paying down debt using our cash flow. We are comfortable operating in the two to three times net debt leverage range. 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 our nation's infrastructure. An infusion of funds of this may accelerate the repair and replacement of aging water infrastructure, and it will lead to a more sustainable future for our country.
Robin
We believe that the new infrastructure bill will help the water sector. We also believe it will take time before we see those funds flow through to our business as a result of industry-wide labor shortages. It's likely that we may not see
Robin Bradbury
2023 or beyond. However, we are well positioned to capitalize on the favorable tailwinds due to our market leadership position. 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.
Robin
Direct business exposure to either Russia. Difficult to determine what supply chain or demand. and impacts could arise from the ongoing recent ban on Russian imports, we could see further impacts to our supply chain, and we will most likely be impacted by inflationary pressure in certain product categories linked to supply chain shortage.
Robin Bradbury
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 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 corn is going to be an advantage in building on our foundation of long-term profitable growth.
Robin
We have multiple levers for organic growth and gain market share. We're poised to benefit from favorable industry trends.
Robin Bradbury
We have an attractive and resilient financial profile with strong return characteristics. We have gained significant market share, built robust capabilities, and many years to come.
Robin
I will now turn the call over to our Chief Financial Officer, Mark Wachowski, to discuss our fiscal 2021 fourth quarter and full-year financial results, followed by our fiscal 2022 outlook.
Robin Bradbury
Go ahead, Mark.
Mark
thank you steve good morning everyone turn to page nine i'll begin by covering 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 and wastewater infrastructure
Robin
Residential land and lab development continued to be robust in the quarter. Accelerate across the non-residential catch up to pre-pandemic levels. Wrong 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.
Mark
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 price and rapidly rising material costs.
Robin
We continue to experience rising material costs on nearly all product lines. lines due to unprecedented demand and constrained supplier capacity.
Mark
Despite these challenges, our teams navigated the suppliers to secure products and giving advance notice of price increases to our customers. Acquisition in the fourth quarter.
Robin
Gross profit in the fourth quarter increased 60%. Net sales was 26.4.5% in the prior year. period, an improvement of approximately 170 basis points.
Mark
The increase was primarily attributable to strategic inventory investments ahead of a favorable pricing environment and the such as expanding private layers, 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.
Robin
We also achieve 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.
Mark
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 to $70 million due to strong sales growth, gross margin rate expansion, and SG&A cost leverage. In preparing adjusted net income, we exclude the effect of 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 9, 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 feasible HDPE solutions to our Water Works 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 in 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 to 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 in net sales improved approximately 100 basis points to 14.3%. SG&A as a percent in 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 two times 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. 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, PT&E, and accounts payable, was just over 40% for fiscal 2021. Our net debt at the end of the quarter was $1,492,000,000, bringing our net debt leverage down to 2.5 times, 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 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 22 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 of the year over the last decade, highlighting their ability to effectively increase revenue to improve their aging infrastructure systems. While we are 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'll 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 to 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 to 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 to $635 million. This includes only the contributions from acquisitions that have already closed. At the midpoint of our range, we expect 12-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 to $60 million for the year. Our term loan carries interest at LIBOR plus a margin of 250 basis points on the ant-hedge portion of the facility. In July of 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 corn maintenance. Regarding our cash flow, we typically convert roughly 60% to 70% of our adjusted EBITDA into operating cash flow, with fiscal 2021 being an exception as we invested heavily in working capital to support growth and ensure product availability for our customers. We expect to convert roughly 85% to 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 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.
Operator
Thank you. If you'd like to ask a question, you can press star 1 on your telephone keypad. If you'd like to withdraw your question, you may press star 2. Please ensure you're unmuted locally when asking your question. Our first question for today comes from Matthew Booley of Barclays. Matthew, your line is now open.
Matthew Booley
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, you know, I think Marky 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. 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, you know, seem to continue to be in place? Thank you.
Mark
Yeah, 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, you know, some freeing up of this supply chain, you know, 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, 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.
Matthew Booley
Okay, but it's a fair characterization that it's supply chain and inflation sort of remain at this type of levels then the that kind of abnormally high gross margin may persist.
Mark
Yeah, certainly that could persist. Matthew, I think one thing that we're keeping an eye on is our ability to get advance 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 to procure these types of products with that advance 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 it at those levels.
Matthew Booley
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 it would 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.
Mark
Yeah, sure, no problem. You know, as you look at volume in the 2022 outlook, we've got it kind of 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 two points on top of that.
Matthew Booley
Perfect. Well, thanks, everyone, and good luck.
Operator
All right, thank you. Thank you. Our next question comes from Jamie Cook of Credit Suisse. Jamie, your line is now open.
Jamie Cook
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 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.
Robin Bradbury
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 continued 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 to four to six months. So those are some of the ones that are kind of, I don't want to call anomalous, but they're 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 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?
Mark
Yeah, 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. 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.
Jamie Cook
Okay. Thank you.
Operator
Thank you. Our next question comes from David Manthey of Baird. David, your line is now open.
David Manthey
Thank you. Good morning, everyone. If you could break down by segment and stack rank from strongest to least strong growth rates in fiscal 22 and the relative impact of price in those assumptions.
Mark
Yeah, Dave, thanks for the question. In terms of breaking out the end markets, I tell you that we feel really, really strong on the residential end market, kind of in that mid- That's coming off of a low double-digit growth in 2021, so we still see a lot of demand there with a lot of development. As I mentioned, non-residential is starting to follow and then kind of return to those pre-pandemic levels, so I'd say slightly lower. slightly lower than the resi growth but kind of right in that mid single digit range and then you know the muni segment uh still kind of strong and steady but kind of low low single digit range and again that's coming off of a really strong uh growth rate in 2021 In terms of price, no major differences across the end market 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.
David Manthey
Okay, thanks. And then to follow up on that, maybe I misheard this, but did you imply that second half pricing could actually be negative for being more positive in the first half and then that nets out to mid-single digit? Did I hear that correctly?
Mark
Yeah, Dave, that's how we're looking at it right now. And, again, that assumes, you know, the supply chain does free up at some point kind of middle of the year, and 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.
David Manthey
And just to level set that, when you 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?
Mark
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 three to six months out in terms of the backlog and then the supply chain. And just given that uncertainty, you know, with that, you know, kind of making those assumptions in the back half, but at some point that's going to come down.
David Manthey
All right. Thanks very much.
Operator
All right. Thank you. Thank you. Our next question comes from Nigel Coe of Wolf Research. Nigel, your line is now open.
Nigel Coe
Thanks. Good morning, everyone. Nice 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 this point. Again, if I'm mistaken there, 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.
Mark
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 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 one-time costs in there. So that's kind of the reason. 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. And then could you ask that second question again, Nigel?
Nigel Coe
Yeah, sorry, the price-cost impact. Obviously, you've got some favorability coming through this year. How does that shake out into 2022?
Mark
Yeah, 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, you know, as we get into Q2, Q3, certainly Q4, we start running up against much more difficult times, and we'll see that. That's really where I see the gross margin, you know, benefits starting to get, you know, we start seeing some pressure there year over year.
Nigel Coe
Okay. Okay. And then my follow-on is, you know, with all these price increases, I understand that, you know, PVC piping is not, you know, a huge problem. portion 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 availability? And I'm just wondering, on top of that, if the stimulus funding coming through in 2023, if that's causing maybe some of the starts to maybe push to the right.
Robin Bradbury
Yeah, Nigel, this is Steve. You know, I 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 seem to be absorbing this at this point. And, you know, one of the key aspects of, 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 and 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. I think that's 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 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. So, you know, 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, you know, state revolving funds and the infrastructure package making its way through.
Nigel Coe
Great. Thank you very much.
Operator
Thank you. Thank you. Our next question comes from Pat Bauman of J.P. Morgan. Pat, your line is now open.
Pat Bauman
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 the volatility we've seen in the market year-to-date has delayed any deals from happening? And then 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.
Robin Bradbury
Sure. I'll talk a little bit about the M&A outlook, and I'll let Mark talk about capital allocation. You know, we just see a very strong, robust pipeline still in M&A activity. And, 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 capital allocation?
Mark
Yeah, Pat, nothing really there to read into. You know, we'll continue to look at, you know, where we allocate capital. But, you know, 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.
Pat Bauman
Okay. And then 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?
Mark
Yeah, 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 is 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.
Pat Bauman
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, you know, moving up and down with those commodities, like the commodity pipe?
Robin Bradbury
You know – Yeah, 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. So we'll see 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 continue on all the way through first quarter and second quarter for the non-commodity products.
Pat Bauman
Understood. Okay. Thanks for your time. Appreciate it.
Operator
Thank you. Our next question comes from Katherine Thompson of Thompson Research Group. Katherine, your line is now open.
Katherine Thompson
Thank you for taking my questions today. 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 price environment, were an important part to driving top line. You know, it's been two-thirds of your top line 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 that were so favorable in 2021, and how does it really stack in 2022?
Robin Bradbury
You know, Catherine, 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 shift 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 and understand that many of our suppliers are really dedicated to this 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 differently. depending on what we're seeing on those internal metrics that we're looking at for backlog and for bidding activity. So, 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. So 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.
Katherine Thompson
And as we – I don't know if it's really a 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. So with all the supply chain shortfalls and a growing deglobalization trend, there's just a greater 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?
Robin Bradbury
You know, Catherine, 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, given some of the uncertainty. We've always seen and feel like we have a really good outlook at 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 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 have 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.
Katherine Thompson
Okay. Helpful. And then just looking forward, when you look at your four major operating segments and you look at what's in the pipeline, in terms of jobs in the future, what order patterns are you seeing today that may be different versus a year ago?
Robin Bradbury
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 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, 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.
Katherine Thompson
Great. Thank you very much.
Operator
Thanks, Catherine. Thank you. That concludes the Q&A today, so I will hand back to Steve LeClair for any closing remarks.
Robin Bradbury
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 and 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 and local experience and local service nationwide thank you for your interest in core and main operator that concludes our call thank you for joining today's call you may now disconnect
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