Kevin Murphy: Yes Mike, we’re experiencing very much what we thought we would experience. If you do look at what our commodity-based product basket is, it’s about 15% of what we do. And we knew that, that was going to move into a deflationary period, but we also believed that not all those products would move in the same direction at the same velocity. And that’s what we’re seeing. If you look at our commodity-based product basket of PVC pipe and fittings, copper tube and fittings, cast iron, ductile iron, and carbon steel. Yes, they’ve moved into deflationary territory, but haven’t moved at the same velocity for different customer groups. And then to Bill’s point, we do believe that there’s a structural floor principally from labor costs inside of manufacturing around that finished goods portion of our business, which is 85% of what we do, and we’re seeing that play out.
And we don’t think that there are any real catalysts for further abnormal price inflation as we go through our fiscal year, which is why we think that the pricing environment is going to be broadly neutral. And then we’ll get back to a place where annualized price increases will start to flow through on that finished goods side of the business.
Mike Dahl: Okay, got it. That’s very helpful. Thanks for that. Second question, I guess, just on the capital deployment, it’s good to see some of the recent M&A activity, both in terms of, kind of, size and types of business. I know you’re playing across a lot of different verticals with a lot of opportunities. You’ve got plenty of capital, so you don’t necessarily need to pick and choose, but maybe just help us frame up, kind of, you do have some points of emphasis on things that you want to focus on. So kind of where are you seeing the focus and then when you talk about the pipeline being healthy, you know, any additional color on kind of mix and size of deals in terms of types of businesses or again relative size?
Kevin Murphy: Mike, I’ll start with that and then pass it over to Bill to talk a little bit about the pipeline that we’re seeing. If you take a step back and look at our business, we during our strategic planning process are looking at all of our different customer groups, all of our different geographies and finding where we need to invest both organically, as well as through M&A to have the right relationships in the local marketplace that allows us to outperform organically as we go forward. But then if you take a look at where our focus areas have been over the course of the last 12 months to 24 months and where they’ll continue to be, we really are focused on making sure that we are focused on HVAC acquisitions to make sure that we have good HVAC capabilities and good OEM manufacturer relationships across the entirety of the country, so that we have HVAC wherever we’re plumbing and that expertise can be driven for that dual trade HVAC and plumbing contractor that we think is so important to the growth of the market.
We’re also focused on the Waterworks business when you look at our diversification strategy in areas like storm water, urban green infrastructure and soil stabilization. It gives us a great complement to an already incredibly strong Waterworks business where the customers are buying these products. They just may not have been buying them from us and it further offers us an opportunity to drive specification with engineers that allow us to capture the whole of the project. So those are two real strong focus areas for us as we go forward. Maybe Bill can touch on where we’re seeing the pipeline?
Bill Brundage: Yes, the pipeline is still quite full and healthy. It is a good mix of both geographic and capability acquisitions. Most from a size range, as you’ve seen in the past, most of the targets in our industry are in that call it $30 million to $300 million revenue range. And look, we still feel good as we look out at the medium-term outlook that we can add between 1% to 3% annualized revenue growth through consolidating our markets over time. Certainly, that’s going to ebb and flow in any one quarter or any one fiscal year, but we feel pretty positive about the pipeline as we look at it today.
Mike Dahl: Great, thank you.
Kevin Murphy: Thanks, Mike.
Operator: Our next question comes from Ryan Merkel with William Blair. Ryan, please go ahead. Your line is now open.
Ryan Merkel: Hey guys, congrats on the quarter.
Bill Brundage: Thanks, Ryan.
Ryan Merkel: My first question is just a follow-up to what you said earlier about the outlook for non-res in ‘24 down low-single-digits. Can you just unpack that a little bit more? I think you mentioned softness in traditional non-res that then the megaprojects you’re seeing increased bidding activity? How do we think about that?
Kevin Murphy: Yes, that’s exactly right, Ryan. As we look at non-res overall, and obviously there are concerns out there around interest rate and what’s happening with the natural office environment, and that’s really what we’re seeing. We’re seeing some pressure across the country in those traditional areas of commercial, things like office, knock-on retail after residential, and that traditional tailwind that you would have seen after good, strong residential build-out on the non-res side. And then as we discussed previously, we do think that it really is a generational opportunity with some of these megaproject tailwinds, but they’re going to be of bit stretched out. These are long-term projects, three-years plus in terms of what that life cycle looks like.
And if you look at our experience, as well as what we’re seeing from a data perspective, you’re starting to see a ramp up, but we probably won’t see that peak until, call it, ‘25 and ‘26. But what we’re seeing right now is, across multiple customer groups, working together with the owners, engineers, and so forth, we’re ramping up our bidding activity at a pretty substantial rate. We’re starting to see that revenue play through, but there likely will be that air gap, if you will, between that slowdown in traditional commercial and what that pickup is in these large mega projects. And that’s why we think that the market will be down low-single-digits and it’ll start to pick up from there.
Ryan Merkel: Got it. Makes sense. Okay, and then a question on SG&A. You’ve done a really good job controlling expenses. How are you thinking about SG&A in ‘24?
Bill Brundage: Yes, Ryan, thank you for that. We’ve been pretty pleased with the ability to flex the call space. If you look at the actions we took during the year, both on the labor side of the equation, as well as the non-labor side of the equation. The teams did a really nice job, first off managing FTEs, full-time equivalents, down both with some permanent actions, but more importantly managing down overtime and temporary labor. So if you look at where we exited the year and you look at full-time equivalents, year-on-year we were down about 6%, which is right in line with where organic volume decline was. And that 6% was down excluding acquisitions. So we feel like we’re entering the year in a good spot from a headcount perspective and from managing that labor cost perspective.
As we step through the year, we’re still facing wage pressure. Wage inflation has been in that, call it mid to high-single-digit range still. It’s been that way for the last two to three years. We’d expect that to continue to be somewhere in that range as we step through the year. So we’re going to do everything we can to manage volumetric headcount, manage discretionary spend, recognizing that as we set out in our guidance, we think that we’re going to be operating in a broadly flat revenue environment for the year. So you’ll likely see a little bit of pressure from a year-on-year perspective in SG&A through the first-half as we’re expecting more challenging markets. And then as we get back to more supportive markets, we’d expect to get back to better operating leverage in the future.
Ryan Merkel: Very helpful, thank you. Pass it on.
Bill Brundage: Thanks, Ryan.
Kevin Murphy: Thanks.
Operator: The next question comes from John Lovallo with UBS. John, please go ahead. Your line is now open.
John Lovallo: Good morning, guys. Thank you for taking my questions as well. The first one is just going back on the outlook for operating margin of 9.2% to 9.8%. Just curious kind of what drives the high and low-end of that 60 basis point range given, you know, the expectation for relatively flat sales?
