Gregg Sengstack: Yes. Ryan, I’d say that we were a little surprised at the lack of appetite in Q4. Like many others, we’ve been talking about destocking and figuring like, okay, now it’s over, now it’s over. It seems to kind of extend. So, we talked again with major marketers. A couple of them are public. And so, again, with the public major marketers, they’re putting out their bid schedules – their build schedules, and they have a say-do commitment to the street like we do. And so you get that visibility. With some private firms, things kind of move to the right. And so with that and with the really, again, improved lead times, if you think about it, you’re in Distribution in the fueling space. You’ve got to have that product available when that station starts to build because you have a relatively tight schedule and build schedule.
So you’re going to buy ahead. And now, with the lead times improving, they really – distributors had little appetite. We didn’t see the normal kind of year-end activity that we would see many people to hit, rebate levels. There was very little incentive or very little interest in hitting rebate levels at the end of the year. So I think that’s – they kind of, our customers kind of looked at the year and said, look, we’re going to let this go by and we’re going to, restart in ’24, the refresh. Certainly, there were good station builds even through COVID with all the challenges, but I think that what we’re looking at is station builds maybe being kind of more like, again, 2019, 2020 levels, which are down a little bit from the last couple years.
But, again, the major marketers – because, again, two-thirds of the stations out there in the United States, for example, there are 150,000 stations. Call it 100,000 or people that operate 10 stores or less. And, and those number of operators are declining. They’re being bought up or replaced by the major marketers. Those are the companies that we’re focused on with spec. And that’s why we’re encouraged to say that with major marketers consolidating, with us gaining spec with them, is why we feel that we’re going to have a reasonable ’24. But, like you said, I think we were even a little surprised at the kind of lack of appetite in the fourth quarter. But the marketers are telling us that they’re going to have a good schedule built in 2024, the best that we’ve seen.
Ryan Connors: Got it. That’s very thorough. I appreciate the detail. And then – and I did have one last one, if I might.
Gregg Sengstack: Sure.
Ryan Connors: This issue of price and destocking and these commodity-oriented products, as you call them in the Distribution business, can you just unpack that for us a little bit? Some additional color on what proportion of the total line card for headwaters are we talking about here? Just kind of scale it for us. And then, you also mentioned that you expect that to abate as the year progresses. So any, any kind of additional sequencing color there would be helpful as well?
Gregg Sengstack: Sure, Ryan. So call it commodity-type product in the groundwater channels called around a half, 40% to maybe half of the products that are handled. And so what we were seeing in ’23 in particular with pipe, which is a large portion of that, both plastic and steel, but certainly with plastic, is that capacity came online and the manufacturers really wanted to shift in big ways. So it began a bit of a price war. And so anything you had on hand became worth less and where we got the squeeze. The fourth quarter is disappointing as the results were on an absolute basis, on a relative basis, down about 120 basis points, I think, Jeff, from the fourth quarter of last year. And compared to a 300 basis point decline overall during the year, so it seems to be slowing and, and margins pressure seems to be – or pressure on margins seems to be abating a bit.
And so I think that, again, Q1, always tough in the groundwater business. We’re expecting normal weather. But as you know, it’s been well-documented in January. We’ve got one of the wettest months again in the West, flooding in California, East Coast. We’ve got big snowstorms. These things will impact the start of the year. But I think as we go through the year again, as inventories have normalized, as supply has matched demand, we should see a more normal pricing environment. What I did mention to Matt earlier was that in the sale of pumps and pumping systems in the groundwater channel, we tend to see more kind of, as I said, one-offs, specials, promos, and you’re responding to competitive threat there. Somebody is responding to our competitive threat.
So you see kind of more – that’s more normal or indicative of behavior before the pandemic.
Ryan Connors: Got it. I appreciate the time this morning.
Gregg Sengstack: Sure, Ryan.
Operator: Thank you. One moment, please, for our next question. One moment, please. And our next question comes from the line of Walter Liptak with Seaport Research.
Walter Liptak: Hi, thanks. Good morning, guys.
Gregg Sengstack: Good morning, Walter.
JeffTaylor: Good morning.
Walter Liptak: Just wanted to ask about pricing and, if it is a more normal year for pricing and inflation, what’s the timing for any actions and maybe, what kind of magnitude are you looking at?
JeffTaylor: Yes. We, we certainly see pricing becoming more like it has been, several years ago in terms of the industry, certainly in the water business, but fueling to some extent as well. They had more annual price increases. And so, I think we see that returning to more normal versus really the environment in late ’21 and ’22 where we were doing monthly or quarterly price increases just to stay on top of inflation that was happening out there. So the frequency of it will, we think, return more than normal. Obviously, we’ll manage that off. And if, inflation kicks up again, we’ll manage our business and, and, work through them. Typically, price, we’re going to get in that, 2% to 3% to 4% price, assuming that inflation is in check at a more normalized level.
We certainly want to recover our costs and maintain our margins. And so – but it depends on where we are in the world. And we have a global business. And so outside of the U.S., the environment is much different than what we see inside the U.S. We tend to talk about the inflation numbers inside the U.S. much more frequently. But, there are parts of our business outside of, outside of North America, where, inflation and currency devaluation are, double digits and in some cases, high double digits. We’re managing through those environments as well, and our teams do a really nice job of going out and recovering that lost sales or, or currency devaluation impact in terms of pricing. So hopefully, that answers your question.
Walter Liptak: Okay. Yes, that’s great. And then maybe, on the cash flow looks great. Balance sheet is in great shape. I wonder if you could just talk about, the capital structure and anything that you’re looking at that, to utilize your balance sheet? Are you going to try and increase the number of M&A deals? Is there something else that you can do?
JeffTaylor: Yes. So, first of all, capital structure, I, I really like our capital structure, Walt. We effectively have no leverage on the balance sheet. Net debt leverage is 0.1 times. And so, that, that gives us a lot of flexibility in the Company. And so we’re pretty pleased with that. We’re very happy with the strong cash flow generation that we saw in the year and certainly really excited that that free cash flow conversion at 142%, certainly was well north of what we say we target every year north of 100% free cash flow conversion. And I didn’t mention it, but full-year EBITDA was over $300 million of EBITDA. I think it was $306 million to be exact. So great, great, performance from, from the balance sheet perspective and from a cash flow perspective for the Company.
Gregg can comment here as well. But, obviously, we generated strong cash flow throughout our history. We expect to continue to do that. And that gives us a great, we’re well positioned to take advantage of opportunities as they present themselves. I think we would be excited to see more deals and be more active on the M&A front. And, certainly, we’ve got our attention and focus on those opportunities. And – but we’re going to, we’re going to maintain our discipline in terms of how we evaluate those and, and make sure that they make sense for us and it’s a good deal for our shareholders overall. To the extent that we have excess cash flow, then, we’ve got a long history of paying a reasonable dividend. We’ve increased that dividend for 32 years.
The board and the management team, I think, have, a lot of commitment to continue paying the dividend and hopefully increasing as we move forward. Obviously, the board makes that decision. And, to the extent that we can repurchase shares and it’s accretive, it makes sense for our shareholders as we continue to grow the business, and that’s, that’s also an area where we can deploy some of that excess, excess cash, but we certainly want to continue to invest in growing the business through acquisition as well as organic growth opportunities that we have.
Walter Liptak: Okay. Great. Thank you.
Operator: Thank you. One moment, please, for our next question. And our next question comes from the line of Michael Halloran with Baird.
Unidentified Analyst: Hi. Good morning, everyone. You have Pez on for Mike. So I wanted to take a look at fueling again. Can you perhaps size how much of a headwind the declines in destocking versus the pushouts were in the quarter? And then, is there any green shoots you’re seeing that, there’s light at the end of the tunnel on destocking within fueling specifically?
JeffTaylor: Yes. I think the, the short answer is probably no, but let me, let me take an attempt at here Pez. In terms of, in terms of fueling, if we, if we look at the business and the, and the, pullback that we’ve seen in volume there, we certainly believe that destocking is the largest factor that’s, that’s driving that decrease in volume. And, and that’s based on, discussions that our team is having with, with our customers and who we sell to in terms of the distributors that sell through in this market as well as the major marketers that are out there. But we also know that, there have been delays. There have been pushouts, higher interest rates. Gregg talked earlier about the major marketers and as they continue to grow in size, they get more sophisticated.
And so they understand that higher financing cost impacts their ability to, carry high levels of inventory and they’ve all pulled back on that. And, and as certainly as supply availability and lead times have improved, that certainly played a, played a big factor in it as well. So, I think those are the big factors we talk about. Demand in 2024 in fueling is, is normalizing and, and let me maybe unpack that just for a quick second because, if you replay the last several years, right, 2021 coming out of the pandemic, there was, there was certainly some recovery there. Because if you recall, fueling was most impacted during the pandemic and, capital got shut down at the major marketers. And so, when that came back, there was some level of recovery that came through in 2021 and obviously hindsight is always 2020.
But in, in 2022, we know that the demand was solid and strong in the, in the fueling business, for new to industry installations, but also for replacement demand for upgrades of existing stations. But there was, there was this factor in 2022. That was this buildup of stocking inventory in the channel. And I think we see that more clearly today than maybe we did when it was happening, but, there was this big buildup of inventory and then the big reset happened in 2023. And so, as we move into 2024, we, based on our discussions with our, our customers and the, and the major marketers, we see that demand is normalizing. But it’s not going to normalize back to where it was in 2022, right? It’s not going to have that buildup of inventory that drove sales, a strong record sales that we saw in 2022.
