Greetings, and welcome to the SiteOne Landscape Supply Fourth Quarter and Full Year 2021 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, John Guthrie, Executive Vice President and Chief Financial Officer for SiteOne Landscape Supply. Thank you. You may begin..

Thank you. And good morning, everyone. We issued our fourth quarter and Full-Year 2021 earnings press release this morning and posted a slide presentation to the Investor Relations portion of our website at investors.siteone.com.

I am joined today by Doug Black, our Chairman and Chief Executive Officer, and Scott Selman, Executive Vice President Strategy and Development.

Before we begin, I would like to remind everyone that today's press release, slide presentation, and the statements made during the call include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections. Such risks and uncertainties include the factors set forth in the earnings release and in our filings with the Securities and Exchange Commission.

Additionally, during today's call, we will discuss non - GAAP measures which we believe can be useful in evaluating our performance. A reconciliation of these measures can be found in our earnings release and in the slide presentation. I would now like to turn the call over to Doug Black..

1. be a great place to work for our associates, 2. deliver superior value to our customers, 3. be the distributor of choice for our suppliers, 4. deliver attractive performance and growth to our shareholders, and 5. be a good neighbor in our communities. 2021 report includes expanded disclosures of our team's progress across these objectives.

We look forward to updating you on our progress annually and continuing to enhance our disclosures going forward. In summary, 2021 was a breakthrough year in many respects. And we are excited about the significant momentum that we carry into 2022.

I could not be prouder of our teams and the way in which they worked through the many challenges that we faced in 2021, and yet executed our strategy at a very high level. To take care of each other, serve and support our customers, and deliver tremendous value for our suppliers, shareholders, and communities.

The passion, commitment, and teamwork across SiteOne is second to none. And we remain excited about both the short and long-term opportunities to achieve excellent performance and growth for all our stakeholders. Now John will walk you through the quarter and full year in more detail. John..

Thanks, Doug, I'll begin on Slide 9 with some highlights from our fourth-quarter results. We reported a net sales increase of 19% to $805 million in the quarter. There were 61 selling days in the fourth quarter, which is four fewer days than the 65 days we had in the fourth quarter of 2020.

This translates into roughly $41 million in reduced sales in the fourth quarter of 2021 compared to 2020 for the full year, net sales increased 29% to $3.5 billion. We had 253 selling days in 2021 compared to 256 selling days in 2020. Organic daily sales increased by 21% in the fourth quarter and 22% for the full year.

Organic daily sales continued to benefit from robust residential and commercial new construction, as well as stay -- the stay-at-home trend in which homeowners are spending more on maintaining and upgrading their outdoor living spaces.

Like last quarter, our organic daily sales growth benefited from strong price inflation resulting from rising product costs. Price inflation contributed approximately 18% to the organic daily sales growth for the quarter.

While price inflation played a large role in the quarter, we were pleased with 3% volume growth despite some very challenging comps from last year, where the year we saw volume growth of 11% and price inflation of 11%. The strong volume growth for the year is indicative of not only the strength of the market, but also our ability to gain share.

We experienced double-digit growth across all major product lines and geographic regions. We were also pleased that we achieved strong growth with our professional contractor, as opposed to the DIY cut customer, who contributed significantly in 2020.

Organic daily sales for landscaping products, which includes irrigation, nursery, hardscape, outdoor lighting, and landscape accessories, was strong again this quarter, increasing by 18% in the fourth quarter, and 21% for the full year.

Organic daily sales growth for agronomic products, which includes fertilizer, control products, ice-melt, and equipment, was also strong, increasing 28% for the quarter, and 24% for the full year.

Both landscaping products and agronomic products were significantly impacted by cost inflation, as the prices for products like fertilizer, grass seed, and PVC pipe, remained elevated relative to 2020.

We expect this trend to continue through the first half of 2022, and then moderate when we start to comp the higher prices that we are now seeing in the market.

Acquisition sales, which reflect the sales attributable to acquisitions completed in both 2020, and 2021, contributed approximately $44 million or 7% to the overall fourth quarter growth rate. For the full year, acquisitions contributed $242 million in net sales or 9% to the overall growth. We are pleased with the performance of our acquisitions.

Scott will provide more details regarding our acquisition strategy later in the call. Gross profit increased 27% to $282 million for the fourth quarter, and gross margin increased 220 basis points to 35.1%.

Similar to the third quarter, our gross margin was positively impacted by supply chain initiatives, price realization, and increased supplier incentives. With regards to the supply chain initiatives, we benefited from our proactive management of freight costs as well as strategic inventory purchases ahead of the supplier cost increases.

Supplier incentives are kind of for a little over 80 basis points of their improvement in the fourth quarter with the remaining improvement primarily attributable to the combination of price realization and strategic inventory purchases.

For the year, gross profit increased 35% and gross margin increased 160 basis points to 34.9%, primarily attributable to our supply chain initiatives and price realization. We do not expect a rapid price inflation to repeat this year, and so we do not expect to get the same gross margin benefit from price realization in 2022.

As Doug will discuss in the outlook, we expect a modest gross margin reduction in 2022 as our gross margin improvement initiatives, like private label and small customer growth are more than offset by the loss of the price realization benefit. Selling, general and administrative expense, or SG&A increased 22% to $247 million for the fourth quarter.

SG&A as a percentage of net sales increased 70 basis points to 30.7%. The increase in SG&A as a percentage of net sales, primarily reflects increased investment in our strategic initiatives and higher marketing and administrative costs.

For the full year SG&A increased 24% to 901 million and SG&A as a percent of sales increased to 100 basis points to 25.9% the improvement in SG&A as a percentage of net sales was primarily due to operating leverage resulting from our strong organic sales growth combined with disciplined expense management.

For the fourth quarter, we recorded income tax expense of $2.7 million compared to $1.6 million in the prior year period. With the full year, income tax expense was $56.1 million compared to $27.5 million in the prior year. Our effective tax rate was 19% for the 2021 fiscal year, compared to 18.5% for the 2020 fiscal year.

The increase in the effective tax rate was due primarily to an increase in net income before taxes, partially offset by an increase in the amount of excess tax benefits from stock-based compensation.

Excess tax benefits of approximately $20 million were recognized for the 2021 fiscal year, as compared to approximately 11 million for the 2020 fiscal year. We expect the 2022 fiscal year effective tax rate will be between 25.5% and 26.5%, excluding discreet items such as excess tax benefit.

We recorded net income for the fourth quarter of $27.5 million, compared to $11.5 million for the prior year period. The improvement was primarily driven by our strong sales growth and gross margin improvement.

Net income for the 2021 fiscal year grew 97% to $238.4 million, compared to a $121.3 million for the 2020 fiscal year, primarily driven by higher sales, gross margin and SG&A leverage. Our weighted average diluted share count was 45.8 million for the 2021 fiscal year compared to 44.1 million for the 2020 fiscal year.

The increase in the weighted average diluted share count was primarily attributable to our equity offering completed in August 2020. Adjusted EBITDA increased by 41% to $61.8 million for the fourth quarter compared to $43.9 million for the same period in the prior year.

For the full year, adjusted EBITDA increased 60% to $415.1 million compared to $260.2 million for the 2020 fiscal year. Adjusted EBITDA margin reflecting our SG&A leverage and gross margin improvement increased 230 basis points to 11.9% for the 2021 fiscal year.

Now I'd like to provide a brief update on our balance sheet and cash flow statement as shown on Slide 11. Networking capital at the end of the year was $616 million compared to $483 million at the end of the 2020 fiscal year.

The increase in net working capital is primarily attributable to higher receivables resulting from our strong sales growth and an increase in inventory resulting from cost inflation and increased safety stock. We are carrying more inventory to mitigate the risk of supply chain disruptions, ensure that we can satisfy our customer's demand.

In addition, in the third quarter of 2021, we opened a new DC in the Dallas area and started the relocation of our Atlanta area DC to a new larger facility. As I mentioned last quarter, we believe the new DC will increase the efficiency of our network by bringing inventory closer to market, as well as reduce our freight expense.

In the short term, we're also carrying additional inventory in our DC to reduce the potential risk of disruption caused by the transition. Cash flow from operations increased to approximately $51 million in the fourth quarter of 2021 compared to approximately $49 million in 2020.

The increase in cash flow was primarily driven by our increased profitability. Cash flow from operations decreased to approximately $211 for the full year 2021, compared to approximately $229 million in the prior year. The decrease was primarily attributable to our increased investment in working capital.

We made cash investments of $85 million for the quarter, compared to $97 million in the same quarter last year. And $182 million for the 2021 fiscal year, compared to $184 million in the 2020 fiscal year. The decrease in cash investments reflects slightly lower spend on acquisitions in 2021, compared to 2020.

Net debt at the end of the 2021 fiscal year was approximately $247 million compared to approximately $250 million at the end of the prior year period. Leverage decreased 0.6 times our trailing 12 months adjusted EBITDA compared to one time at the end of the 2020 fiscal year. The lower leverage reflects our improved profitability.

Our target net debt to adjusted EBITDA range is one to two times at year-end, but it's dependent upon our investment in acquisitions for a given year.

At the end of the year, we had available liquidity of $418 million, which consisted of approximately $54 million of cash on hand and approximately $364 million in available capacity under our ABL facility.

In summary, a priority from a balance sheet perspective, is to maintain our financial strength and flexibility without sacrificing long-term growth or market opportunities. I will now turn the call over to Scott for an update on our acquisition strategy..

Thanks, John. As shown on Slide 12, we acquired two companies in the fourth quarter, bringing our total to eight for 2021 with the combined trailing 12 months net sales of approximately $155 million. Since 2014, we had acquired 64 companies with approximately $1.2 billion in trailing 12-month net sales added to SiteOne.

Turning to Slide 13 and 14, you will find information on our most recent acquisition. On November 12th, we acquired Semco Stone, one of the largest natural stone distributors in the Midwest, with four wholesale locations across Ohio and Missouri.

This acquisition further expands the number of markets in which we provide a full range of landscaping products and services to our customers. Also, on December 1st, we acquired Seffner Rock & Gravel located in Tampa, Florida. Seffner of establishes our first hardscape and bulk landscape materials location in the Florida market.

By teaming up with these two high performing partners, we continue to deliver on our strategy to expand the products, services, and overall value, we offer our customers across all of our markets. Summarizing on Slide 15, our acquisition strategy continues to create significant value for SiteOne.

Our pipeline remains strong across all lines of business and geographies, giving us confidence that we will be able to add many more outstanding companies to SiteOne in 2022. We are pleased that so many owners continue to choose SiteOne as a great home for their family businesses.

These strong leaders and innovators are a powerful force within SiteOne as they help us to improve the value that we deliver to customers and suppliers. As they bring us fresh ideas and help us to grow and improve. We provide the resources and flexibility for them and their teams to pursue both their personal and professional passions.

Ultimately, we all win. Stronger together. I want to thank the entire SiteOne team for their passion and commitment to making SiteOne a great place to work and for welcoming the newly acquired teams when they joined the SiteOne family.

I am confident in our ability to keep adding more outstanding new companies through acquisitions in 2022, creating terrific value for all our stakeholders. I will now turn the call back to Doug..

Thanks, Scott. I'll wrap up on Slide 16. As mentioned, we are carrying a significant amount of momentum into 2022 and are cautiously optimistic about the year despite the tough comparison that we faced from last year.

As John mentioned, we expect the high inflation to continue through the first half of the year and then moderate in the second half as we start to comp the higher prices that we're experiencing now and as some of our commodity product prices return to more normalized levels.

Combined with the healthy underlying demand for professional landscaping services, the market should provide a reasonable environment for us to execute our commercial and operational initiatives and drive further growth in sales and profits in 2022.

In terms of markets, we are currently seeing solid demand trends in all of our end markets, maintenance, repair and upgrade, and both residential and commercial new construction. Our contractors remain busy and have strong backlogs to start 2022.

We understand that there is currently a lot of economic uncertainty associated with inflation, but we have not yet seen this translate into lower demand.

Furthermore, we expect to gain market share as we deliver higher value to our customers and further execute our customer and product growth strategies, including our marketing and digital initiatives. Taken together with the anticipated inflation, we would expect to achieve high single-digit organic daily sales growth for the full year 2022.

As John discussed, we do not expect to repeat the significant price realization benefits that we achieved last year with the rapid run-up and inflation. However, we expect to mitigate this reduction in price realization with our gross margin improvement initiatives. Overall, we would expect gross margin to be in the range of 34% to 34.5% in 2022.

While we will be able to achieve some SG&A leverage, we expect our adjusted EBITDA margin to decline modestly in 2022. In terms of acquisitions, as Scott mentioned, we currently have a strong pipeline of high-quality companies and look forward to adding more of these to the SiteOne family during the year.

Our acquisitions are performing very well and we continue to improve our ability to integrate them into our company. Accordingly, we expect acquisitions to contribute strongly to our performance and growth in 2022 and the years ahead.

With all of these factors in mind, we anticipate our fiscal 2022 adjusted EBITDA to be in the range of $430 million to $450 million, which represents year-over-year growth of 4% to 8%. This range does not factor any contribution from unannounced acquisitions.

In closing, I would like to sincerely thank all our SiteOne associates who continue to amaze me with their passion, commitment, teamwork, and selfless service. We have a tremendous team. And it is an honor to be joined with them as we deliver increasing value for all our stakeholders.

I would also like to thank our suppliers for supporting us so strongly. And our customers for allowing us to be their partner. Operator, please open the line for questions..

Thank you. At this time, we'll be conducting a question-and-answer session. [Operator Instructions] For participants using speaker equipment, it may be necessary to pick up your handset, handset before pressing the star keys. And in the interest of time we ask that you each keep to one question and one follow-up. Thank you.

Our first question comes from the line of Ryan Merkel with William Blair. Please proceed with your question..

Thanks. Good morning and congrats on the strong finish to 2021..

Thanks, Ryan..

Doug, first half on the sales guide for '22, can you just break out price versus volume? And then I'm also curious about your estimate for industry growth in '22..

Yes. So as we look out in '22, as we mentioned, our customers have good backlogs. They're busy. We think that the economy will hang in there. Residential is probably going to be slower than this year, but still some growth. New commercial, we think, will be very solid. Then repair and remodel right now on the professional side is pretty robust.

So our guide of high single-digits, we do expect high inflation to continue as we mentioned through the first half, it will moderate in the second half, we would say that the majority of that is -- will be inflation, but we'll still get a little bit of volume growth. We think, again, the market's going to be fairly solid.

And there should be some growth in the market, although we're cautious about that. And we feel like we'll pick up our consistent 1 or 2 points of growth through market share gains, as we add more value across the product portfolio. But for the total growth for the year, you consider most of that inflation with some volume growth..

Got it. That's helpful and I think makes sense after such a strong FY '21. And then just turning to gross margin, I guess a couple of questions there.

How much did the strategic inventory buys help gross margins in FY '21? And then how should we think about the cadence of gross margins, maybe more flattish year-over-year in the first half '22, and then down slightly second half?.

Well, if you look in Q4, price and the strategic inventory buys were about 130 basis points and the specific -- our guide going forward with the 34% to 34.5% really has us going backwards on that component of the gross margin. So it is somewhere in that range.

With regards to the cadence for next year, we would expect it would go down similarly to what Doug reflected in his discussion about price, and really kind of Q1 will probably still be a positive margin outlook, and then tailing off as we go out throughout the year with Q3 and Q4.

In Q3, we were up 310 basis points, a significant portion of that was -- one, was the price realization. And then, obviously, this quarter also, a significant portion of the gross margin beat was due to price realization. What we have going forward, is those 2 pickups trailing off and not necessarily repeating.

We don't think the opportunity for that benefit will occur again next year..

Okay. Got it. So it sounds like a little bit more of a decline second half, first sort of my comment about modest as what you're saying..

Yes..

All right. Great, guys. I'll pass it on. Thanks..

Thanks, Ryan..

Thank you. Our next question comes from the line of David Manthey with Baird. Please proceed with your question..

Thank you. Good morning, everyone..

Good morning..

So to start here, Doug, maybe you could orient us on contribution margins as we move toward that 13 to 15 goal. In 2020, you ran about 17% and that was before the unusual uptick in pricing that we saw last year.

So once gross margin is normalized here in 2022, as you look out to the first, say, 1 to 3 years, re-accelerating toward that new 13% to 15% EBITDA goal.

What are you thinking in terms of contribution margins at least early in that curve?.

Yes. I think you should see contribution margins that are -- that were typical for us as we were going from 8.5% up through, let's call it 11.5%. We're obviously 11.9% this year but there were some extra gain in there. And through that period, John, correct me if I'm wrong, we would normally be in kind of 17% to 18% incremental EBITDA on sales.

And we think we should be able to be in that range, maybe call it 15% or 16% to 18%, gets down to the bottom line once we get settled this year going forward.

[Indiscernible] John, any color on that?.

No, I think, those are the numbers. And we should be able to continue to eke out our move forward on our overall EBITDA. If EBITDA margins have to reset this year..

Okay. And then, second in terms of acquisitions, since the IPO, you've averaged about high single-digit growth contribution. The first few years was low double-digit, lately it's been more mid-single to high-single. And, I think, in the monologue, Doug, you mentioned you expected higher growth via acquisition.

And so I'm trying to parse out that definition.

Do you mean higher than the mid-single digit growth contribution we've seen in the last few years or something else? I'm trying to get a finer point on what you mean by higher growth via acquisition?.

Right. I mean, good question. Obviously, we got the law of big numbers going on here as we approached $4 billion and $5 billion. We need to be able to do more dollar acquisitions to stay in that range of 7% to 13%.

And so that's what I was referring to is that we've added a couple of key members to Scott's team in order to up our sourcing of deals and also to take the integration burden off of our acquisition professionals so that they can focus on courting and finding and getting deals done. And so we still feel that 7% to 13% range is a solid range.

To hit the high part of that range, you would have to have a bigger deal. There is probably a dozen companies out there that are 100 million or north of a 100 million. We'd need one of those to drop to be an upper part of that range.

But without that, we feel we can be in 12% to 7% to 10% range with a normal cadence of acquisitions, without that larger deal that will come every couple of years. Does that makes sense? We need to up the dollar amount of acquisitions that we're doing and integrating.

And quite frankly, if we look back over the last 4, 5 years, there were times where our ability to integrate and digest deals were the things that were holding us back. And so we've alleviated some of those bottlenecks so that we can keep up with our growth..

All right. Thanks, Doug. Appreciate it..

Okay. Thank you..

Thank you. Our next question comes from the line of Stephen Volkmann with Jefferies, please proceed with your question..

Hi. Good morning, guys. I wanted to go back to the gross margin for a second and just talk a little bit about some of the moving pieces. Do you think that there are certain classes of items that will actually go down in price in '22? And if that were to happen, I guess it will happen at some point with some of the chemicals maybe.

But do you -- would you then lower your prices or do you sort of hold price when that happens? Just how does that dynamic work?.

Well, there is a component of our business that is has a commodity nature to it. Say for instance, fertilizer. And if raw ingredients play a large component of what that price is. So as prices drop, we would follow the market down. Eventually would -- there is a temporary -- there may be timing issues both on the up and down.

But in general, the market will settle out at a lower price with regards to where we are at right now.

We have some of that built into our model, into our guidance that for those components that have really risen over the past year especially in the second half that they actually may go down and maybe camping in the second half of this year on a slightly negative number..

Okay. Thank you. And then anything to call out on the commercial side of the business? Does that grow more quickly in '22 or just any trends there would be great. Thanks..

We're seeing good growth in commercial as we have had, starting I think, a year-and-a-half ago. The market is strong and our customers have good backlogs. We have a project services group that bids on those types of projects for our customers.

So we provide bids for our customers in that group so that the numbers are up in the fourth quarter versus last year. We do anticipate that there will be growth in the commercial side. It's a smaller part of our business, 15% when you combine that with the recreational. That's commercial new construction. But we do think it will be healthy this year..

Thank you..

Thank you..

Thank you. Our next question comes from the line of Matthew Bouley with Barclays. Please proceed with your question..

Hey, good morning. This is Q - Ashley Kim on for Matt.

So my first question is just are you hearing anything from customers on constrained labor capacity within their own operations? And then any concerns there that could cat grows even if demand remains supportive?.

We've been hearing about labor constraints for about 3 years. It's been an issue. It's going to continue to be an issue. And it does cap growth in the short-term. In other words, if the weather's particularly good, or you have a hot market like we've had over the last couple of years, and repair and remodel. There's only so much the contractors can do.

So, yes. We anticipate that constraint, but it's not anything that we haven't seen. Our customers are finding ways to grow. When you look at an annual basis, as they automate their business as they use more equipment and quite frankly, some of our services and products are aimed at helping them to be more efficient and get more done with fewer people.

So they're continuing to get more productive. And they manage that constraint. But yes, there's constraints there. It's tough to find labor for everyone. And we don't feel that that's going to go away in 2022. But it's nothing that we haven't seen in the last couple of years..

Thanks for that.

And then are you seeing any release in supply or are you still finding yourself operating in a pretty tight backdrop?.

KyIt's still tight and it's been specific products across the spectrum and so -- and again, that's been the case in the last 18 months or really since the COVID ramp came back in 2020. As we mentioned, we've got our fourth DC that's up and running. We use our distribution centers to cushion ourselves against the supply chain disruptions.

And in general, our category and purchasing teams do a great job of staying ahead of that. So yes, the supply chain constraints are still there. We think they're going to be with us for most of the year. SiteOne, we're built to be able to navigate those and in fact, it gives us a strategic advantage over our smaller regional competitors in some ways.

So -- and as we mentioned, we have our inventory well stocked for the year, so we've anticipated that those constraints are going to continue and are prepared to grow despite them..

Thanks for that and good luck..

Thank you..

Thank you. Our next question comes from the line of Mike Dahl with RBC Capital Markets. Please proceed with your question..

Hey, guys. This is Q - Ryan Frank on for Mike. Question on the long-term EBITDA guide. I think previously you guys have said gross margins in the mid-30s and SG&A in roughly the low-20s.

Gross margins, basically there given the guide that you said this year and you've done a good job leveraging SG&A, but it sounds like you're going to continue to invest in the near-term.

I guess my question is, what drives the SG&A leverage over time, and when do you really think you guys can start seeing those significant benefits again?.

Right. Good question. As we look out forward, we do expect to improve our EBITDA margin on both sides. So we do expect gross margin to continue to improve. Although as you mentioned, we think there's an end game there that we'll reach eventually. And then on the SG&A efficiency side, we still have a lot of ways to make our field more efficient.

Our seller with our CRM, our CRM's brand-new, and we've just rolled that across. And as we begin to use that more effectively, that will help make our customers more efficient and us more efficient. Digital; we're embryonic in digital and as we ramp that up, that makes, again, both our customers and us more efficient.

And then in our field, things like TMS and Mobile Pro are designed to, first and foremost, enhance our customer experience but they also make our field more productive and we're perfecting those and we've got upgrades to those and we're learning as we go.

So we feel that there's still -- and if you look -- I guess the final aspect is, if you look back at 2014, we were $2.9 million per branch, today, we'd be almost $6 million per branch. And we're going to continue to increase the revenue per branch and that brings its own economies of scale on a local level.

So when you put all that together, we do expect to be able to drive SG&A as a percent of sales down significantly and we will be working on that for the next five to seven years..

Got it.

And then would it be safe to say that maybe less leverage in the next one to two years and probably more leverage further out, or is it even spread?.

I think it would be fairly even. If you look at this year, we're investing heavily still. We're also working hard to make sure that we have full staffing. And I would add the final thing is that we're seeing labor inflation that's in excess of what we've seen before. And so those factors work against leverage. We'll still get SG&A leverage this year.

But it will probably be lower, when I say 2022. We'll probably be lower than we would anticipate getting in '23 and beyond. But in the large scheme of things, we think it should be fairly well spread out.

John?.

I think one of the things that as we approach kind of improving margins, each year we look at improving the business and identifying different things that are going to add efficiency, improve either gross margin or SG&A leverage. And so there's not one big, I would say, cliff out there. That's going to -- that's going to do it.

But as we continue to expand in private label each year, as we continue to increase their share with small customers, each one of those things has an incremental growth. And as we get and better and better with digital, driving additional organic sales growth. The natural gearing of the business comes through.

I don't think that we're awaiting for some year where it just jumped, obviously, that's what happened this year. But more so that distribution to grind in every year where you look at and making incremental improvements in your business that drive out 30 basis points of EBITDA margin improvement..

Got it. That's very helpful. Congrats on the quarter and I'll pass it on. Thank you..

Thank you..

Our next question comes from the line of Damian Karas with UBS, please proceed with your question..

Good morning, everyone. Congrats on the great year..

Thank you, Damian..

I had a follow-up question on price.

Would you guys maybe be able to provide a little bit of color on where the incremental price is coming from since the third quarter, which product categories? And what's the timing of your most recent price actions you've taken? And just curious if there's any conversation around whether there's any possible further price inflation from here..

So we saw really what you saw. It was in the second half of the year, prices ramp up here in the first quarter of this year. A lot of those manufacturers who don't -- what we saw in the second half of last year, there was a lot of increase with things like PVC pipe and fertilizers that ramp up, that re-priced regularly.

In the First Quarter of this year, prices continued. We're seeing continued price increases, but more from I would call them more highly manufactured products, where the suppliers increase their price Gen -- put out a new price for the year.

We're seeing some of that coming in right now and price has not dropped off here in here in what we've seen so far and probably won't in the first quarter.

But then in the second half of the year, as Doug alluded to, we start comping the higher prices, maybe even some of those commodity type items with, say, fertilizer PVC pipe may even go down a little a year-over-year. But let's say 80% of our business where it's kind of more stable products.

Those A haven't risen as dramatically as some of the other products, more consistent pricing increases, and those products we would expect kind of the price that's going in year at the beginning of 2022 would probably we would expect those to hold for the full year..

Okay. That's really helpful. And then I just want to ask you about free cash flow. I think you alluded to some working capital investments, maybe led to a little bit lower the 75% net income conversion.

How are you thinking about free cash flow this year? What are your expectations there?.

We generally think that we want to hit net income with free cash flow, so 100%. I think if you look at our three-year average, we're at about 110%. Last year was like 170%, was really lumpy, if you will. And so we -- this year with our investments and working capital, kind of really preparing us for the DC transition.

In addition, everything we're buying now is significantly higher in inventory costs than it was last year. So that inflation increased at the end of the year for our purchases also kind of negatively impacted it. So in general, I -- we look at cash flow kind of on a multiyear basis. But our goal each year is -- is a 100% conversion of net income..

Understood. Thanks, guys. Best of luck..

Thank you..

Thank you..

Thank you. Ladies and gentlemen, that concludes our question-and-answer session. I will turn the floor back to Mr. Black for any final comments..

Thank you. And thank you all again for joining us today. We appreciate your interest in SiteOne. We're excited about where we are today and where we're going.

And we look forward to speaking to you again after our first quarter of 2022, I'd like to take this opportunity again to thank our tremendous associates for all that they do for us and our customers and suppliers. It's really been a great partnership as we've navigated in the landscape industry. Have a great day..

Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation..