Core & Main, Inc.

Welcome to the Core and Main Q2 2021 earnings call. My name is Charlie and I will be coordinating your call today. If you wish to ask a question during the presentation, you may register to do so by pressing star followed by one on your telephone keypad. I will now hand you over to your host, Robin Bradbury from Core and Main to begin. Robin, please go ahead.

Thank you. Good morning and welcome to the Core and Main Fiscal 2021 Second Quarter 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 to attend our first earnings call as a public company. We're thrilled to share our results with you. Steve LeClair, our Chief Executive Officer, will lead today's call with a company overview and our second quarter execution highlights. Mark Rakowski, our chief financial officer, will then discuss our second quarter financial results and second half outlook, followed by a Q&A. 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 the queue. Thank you for your cooperation. Some of the information you will hear today may include forward-looking statements. They may include statements regarding our intentions, beliefs, assumptions, or current expectations concerning our financial position, results of operations, cash flows, prospects, 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 EBITDA, adjusted EBITDA, adjusted EBITDA margin, adjusted net income, and net debt leverage, all of which are non-GAAP financial measures. These measures are not considered measures of financial performance or liquidity under GAAP, but we use them to assess the operating results of our business. For a reconciliation to the nearest gap measure, please refer to the slides in the appendix of the fiscal 2021 second quarter investor presentation, which can be found on our investor relations website. Thank you for participating on the call and for your interest in Core and Main. I will now turn the call over to Chief Executive Officer Steve LeClair.

Thank you, Robin. Good morning, everyone. Thank you for joining us today, and welcome to our fiscal 2021 second quarter earnings call, our first earnings call as a publicly traded company. This is an exciting milestone for our company, and I am very pleased to be sharing it with you. I will begin today's call with a brief overview of our business and industry. I will then cover our key growth drivers and acquisition strategy, followed by a review of our ESG characteristics. I will end by discussing our second quarter execution highlights before turning the call over to our Chief Financial Officer, Mark Wieckowski, to discuss our fiscal 2021 second quarter financial results and second half outlook. I'll start on page five of the presentation with a brief overview of core and main. CornMaine is a leading specialty distributor of water, wastewater, storm drainage, and fire protection products and related services, serving municipalities, private water companies, and professional contractors across municipal, non-residential, and residential end markets nationwide. Our specialty products and services are used in the maintenance, repair, replacement, and construction of water and fire protection infrastructure. We are one of only two national distributors operating across large and highly fragmented markets, which we estimate to be approximately $27 billion in size. With more than 285 branches across the U.S., we serve as a critical link between over 4,500 suppliers and a diverse and long-standing base of over 60,000 customers. We have diversified end market exposure with an estimated 45% municipal, 37% non-residential, and 18% residential end market mix in fiscal year 2020. Furthermore, we had near equal exposure to construction on new projects and existing repair and replace projects in fiscal year 2020. On page six, we provide an overview of our broad product offerings and service offerings. We offer a comprehensive portfolio of over 200,000 SKUs covering a full spectrum of specialized products. At the core of our business are the pipes, valves, and fittings, which are the fundamental building blocks for underground water infrastructure and water treatment plants. Above ground and in many types of structures, you will see our fire protection line. Fire protection infrastructure requires not only a specialized set of products, including sprinklers and valves, but also the ability to fabricate and assemble sprinkler systems and their components. We are a national distributor of smart water meters, which bring significant environmental and economic benefits to municipalities and also provide a variety of value-added services, including not only project management, installation, hardware, and software, but also lifelong meter system management. We are also a national provider of storm drainage and geosynthetics and erosion control solutions, which are growing in importance due to the recent impacts of climate change and increased natural flooding disasters. On page seven, we show the strong value proposition we offer to both our customers and our suppliers. We are a trusted source to our customers because of our operational excellence across a broad offering of products and services. We take a consultative sales approach, leveraging our deep understanding of local specifications to help design material project plans and offer key value-added services throughout the life of the project. Our role as a national distributor is more than just supplying products. We have access to a broad product offering and have the ability to secure products for any job and in any environment for our customers. Paired with our national branch network, we also offer complimentary value-added services that are key to our value proposition, which we believe differentiate us from our competitors. We have longstanding relationships with our suppliers, and in many cases, we benefit from favorable purchasing arrangements and preferred or exclusive access to products, especially during periods of material shortages. Our geographic footprint and reach to local communities is essential to our suppliers because we have a highly developed understanding of the market, the customer base, and the growth opportunities. We believe we have the ability and expertise to drive the adoption of new products and technologies and offer the logistics of last-mile delivery and customer support. We have a large and highly trained sales force with the ability to reach our highly fragmented customer base. On page 8, we outline the levers that enable us to drive sustainable growth. Over the past few years, we have invested in people and capabilities to strengthen our ability to drive growth. As we look ahead, we see multiple avenues to continue pursuing. First, we see beneficial industry trends supported by secular growth drivers. The traditionally stable municipal end market is poised to accelerate as additional spending is necessary to address historical underinvestment and support population growth. Residential construction is currently surging due to population growth, demographic population shifts, low housing inventory, and record low interest rates. With the surge in residential construction comes a long tail of rejuvenated non-residential investment as communities expand and demand increases for our waterworks, storm drainage, and fire protection products. We believe we're at the beginning of a new non-residential construction cycle and see favorable tailwinds ahead, particularly in verticals such as commercial and institutional buildings, data centers, and warehousing development projects. We have several organic growth levers. We have demonstrated that we can grow faster than our underlying addressable market, and we believe our competitive advantages allow us to continue to gain share at the local level. With only 14% share across an estimated $27 billion addressable market, we still have significant opportunity to grow. We continue to drive organic expansion to underpenetrated geographies through new greenfield locations. We have meaningful runway to increase penetration with strategic accounts. We have a specialized team focused on serving strategic accounts, which include large private water companies and national contractors. We believe we are better positioned than ever to serve these national customers on larger projects requiring dedicated sales personnel, greater technical expertise, and more complex or specialized procurement needs. Our size and scale positions us to continue accelerating the adoption of products in our industry, such as smart meters, fusible HDPE technology, geosynthetics, and erosion control solutions, and a number of other developing product categories. Acquisition is another key component of our growth strategy. We have a long runway to consolidate our fragmented industry. Our focus includes consolidation of existing market positions, new geographies, and expansion into product categories where we are clearly under-penetrated. I'll discuss our acquisition strategy in more detail in the coming slides. Finally, we have identified a long list of opportunities to enhance gross margins, including private label through global sourcing and pricing and procurement initiatives. As of fiscal year 2020, private label made up roughly 1% of our total product expenditures. We believe that we have an opportunity to transition several hundred million dollars worth of ancillary spend to be internally sourced, but we have no intention of transitioning highly specified products into private label or disrupting any product from our top-tier supplier partners. We have recently built a team of pricing analysts who have been able to enhance product margins using data to drive pricing decisions and by proactively updating price increases to increase pricing visibility to our branch networks. Additionally, our category management team has opportunities to continue shifting spend to suppliers with the best pricing and payment programs in order to optimize gross margins. We are in the early innings of executing on many of these initiatives and see a long runway of opportunity ahead. On page nine, we provide a timeline of our recent acquisitions. We have a strong track record of acquiring and integrating businesses, and we continue to cultivate a robust pipeline of targets for the short and long term. We have executed and integrated 14 acquisitions since becoming an independent company in 2017, adding more than $630 million in aggregate historical annual net sales, including two recent deals that closed subsequent to the second quarter, which I will discuss in more detail shortly. We have a refined process of identifying attractive bolt-on targets, and we are well-positioned to source, acquire, and integrate new businesses. We believe we are widely viewed as the acquirer of choice due to our longstanding relationships and entrepreneurial culture and our investment in the development of our people. We seek to generate margin improvement and synergy value from our acquisitions through purchasing capabilities, fixed cost reduction, and the use of our scalable IT platforms, which drive operational efficiencies at our branches. Our industry is large and highly fragmented. As we look ahead, we see a runway for growth through M&A. We maintain a very robust pipeline of future acquisitions, which we pursue through our disciplined approach. We prioritize complementary businesses that help us consolidate existing market positions and expand into new geographic areas, acquire key talent, and offer new products. On page 10, we show our newest acquisitions, L&M Bag & Supply and Pacific Pipe. The Pacific Pipe acquisition highlights our focus on expanding into underserved geographies. Pacific Pipe is a significant player in modernizing and expanding water infrastructure in Hawaii, a state we had no presence in previously. Pacific Pipe has been in operation since 2011, serving municipalities and contractors in the water, wastewater, storm drainage, and irrigation industries with a broad WaterWorks product offering. Pacific Pipe operates four locations spanning the islands of Hawaii, Maui, and Oahu. The L&M bag and supply acquisitions highlight our focus on expanding our presence in under-penetrated product categories. It provides a sizable growth opportunity in the large and fragmented geosynthetics and erosion control market, which we estimate to be roughly $5 billion in size. Over the past three decades, L&M has built itself into one of the nation's leading suppliers of geosynthetics and erosion control products. By joining our teams together, we will expand our expertise to better serve our customers nationwide, have a larger reach for our products and services, with a dedicated team of specialists serving the rapidly growing and highly specialized geosynthetics and erosion control market. annual net sales pacific pipe and l m bag and supply for the fiscal year ended december 31st 2020 for roughly 70 and 60 million dollars respectively and both acquisitions will be incremental to our sales and earnings growth for the majority of the second half of fiscal 2021. turning to page 11 we share our esg characteristics ESG is core to our business model. Our company and our people are committed to the provision of safe and sustainable water infrastructure throughout the United States. Preserving the Earth's most valuable resource and providing clean and safe water to our communities are the core of what we do. Our products and services are integral to building, repairing, and maintaining essential water, wastewater, storm drainage, and fire protection systems. Water is a finite resource, and community water supply challenges, including natural flooding, contamination, and drought, continue to increase in severity. We partner with our customers to help ensure water resources and facilities are available to meet each local community's short- and long-term needs. We believe our investment in our people through award-winning training and career development is a true differentiator for us. We are proud to have seasoned experts who are preparing the industry of leaders for tomorrow to continue our tradition of local experts nationwide. We are deeply committed to our communities and our associates. Our inaugural ESG report that was published last fall has become a critical piece of communication with all of our stakeholders. We believe that our focus on ESG matters and sustainability will benefit our business by enhancing our relationships with our associates, our customers, our suppliers, and the communities in which we operate. We will continue to focus on this area and enhance our communication reporting around ESG over time. With that, I will now cover our second quarter execution highlights on page 12 of the presentation. During and subsequent to the second quarter, we successfully completed our initial public offering of approximately 40 million shares of Class A common stock, generating gross proceeds of approximately $800 million, including the full exercise of the underwriter's over-allotment option. We used the proceeds from the offering to deleverage the balance sheet, positioning us with greater financial flexibility to pursue our growth strategies. While the IPO is a great milestone for us, we remain focused on driving solid business results in a very dynamic environment. In the second quarter, we delivered record net sales of nearly $1.3 billion, growing nearly 36% over the prior year period, and record-adjusted EBITDA of $155 million, which was nearly 57% over the prior year period. We continue to expand our market share and improve our profitability through the execution of our sales and margin initiatives, while using our leadership position in the industry to gain access to hard-to-find products for our customers and purchase opportunistically ahead of announced product cost increases to expand our gross margins. Earlier this year, PVC resin manufacturers declared force majeure due to raw material shortages stemming from plant closures as a result of unprecedented winter weather in Texas and Louisiana. It was the second force majeure on PVC resin in less than six months, and the ripple effects were felt across the entire supply chain. Industry-wide PVC manufacturing capacity and inventories declined, while demand strengthened, which pushed PVC pipe prices to an all-time high. In recent months, PVC pipe manufacturing returned to full capacity, and our PVC suppliers have been working to rebuild inventory. Demand has continued to be strong, and prices rose through the second quarter. The impact of Hurricane Ida is still not fully known, but we expect that it will likely further impact availability of PVC products and keep prices at or above those we have experienced so far this year. On a smaller scale but growing in significance, we are also experiencing supply chain impacts in other product categories due to unprecedented demand, constrained manufacturing capacity, container shortages, port issues, and semiconductor chip shortages. A portion of our smart medium products have chip components that are in short supply, and that has impacted our ability to satisfy all the customer demand. Some of our suppliers import raw materials or finished products, and we're beginning to see an impact to the cost and supply of those products due to the declining availability and rising cost of import shipping containers. We are also seeing some deferral of shipments as a result of constrained labor capacity across the industry from our suppliers to our customers. Despite these notable challenges, our teams have navigated the environment well. Given our long-term relationships with our suppliers and our leadership in the industry, we are often able to gain preferred access to products during periods of material shortages and provide reliable service to our customers nationwide. Through coordinated efforts with our branches and leadership team, we believe we have gained market share by successfully mitigating the impacts of these supply chain events by ensuring access to products and providing advanced notice of cost increases and reliable information on product availability to our customers. I'm incredibly proud of the dedication of our customers and suppliers during this challenging environment. More than ever, we have served as logistics experts for our customers, helping them find and source products during a period of unprecedented pricing increases and product shortages, while providing credible market information to our suppliers regarding demand to assist them with production planning. As previously mentioned, we continue to execute on our growth strategy by announcing two new acquisitions during the quarter, L&M Bag & Supply and Pacific Pipe Company, both of which closed subsequent to the quarter. We continue to closely monitor the impacts of COVID-19 and the variants that have surfaced across the country. Throughout the pandemic, we continue to operate as an essential business, providing our customers with the products and services necessary to maintain and improve our nation's water infrastructure. At the beginning of the pandemic, we put policies and business continuity plans in place to protect our associates, customers, and suppliers. Our teams have remained agile and have quickly adapted to new protocols while increasing efficiency throughout the process. As vaccines rolled out en masse and as cities began loosening restrictions, we also began easing certain COVID-19 protocols while still keeping safety our number one priority. We are committed to keeping our associates, customers, and suppliers safe while continuing to keep all of our branches open. Subsequent to the end of the quarter, the Senate passed the bipartisan $1 trillion Invest in America Act, the largest long-term federal investment in our nation's infrastructure in nearly a century. Among other things, the plan makes transformational and historic investments in clean water infrastructure, an infrastructure that provides resilience to the changing climate. While it's still uncertain if or when the bill will be signed into law and when the funds will start making their way into our end markets, a direct infusion of federal funds for water, wastewater, and storm drainage infrastructure has immense implications to accelerate repair and replacement activity. We believe we are well positioned to capitalize on any favorable tailwinds created by the additional investment. However, we are well positioned to continue to grow even without this potential infusion of funds. I will now turn the call over to our Chief Financial Officer, Mark Wieckowski, to discuss our fiscal 2021 second quarter financial results and second half outlook.