Core & Main, Inc.

Hello, everyone, and welcome to the CoraMain third quarter 2021 earnings conference call. My name is Victoria, and I'll be coordinating your call today. If you'd like to ask a question during the presentation, you may do so by pressing star 1 on your telephone keypad. If you have joined us online, please press the red flag icon. I'll now pass over to your host, Robin Bradbury from CoraMain, to begin. Robin, please go ahead.

Thank you. Good morning, and welcome to the Core and Main Fiscal 2021 Third 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. We're excited to share our results with you. Steve LaClaire, our Chief Executive Officer, will lead today's call with a brief company overview and our third quarter execution highlights. Mark Wieckowski, our Chief Financial Officer, will then discuss our third quarter financial results and revise full year guidance 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. 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, 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 outcome 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 after 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 US 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 US GAAP, but we use them 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 to the nearest gap measure, please refer to the slides in the appendix of the fiscal 2021 third quarter investor presentation, which can be found on the investor relations section of our 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 LeClaire.

thank you robin good morning everyone thank you for joining us today and welcome to our fiscal 2021 third quarter earnings call i will begin today's call with a brief business overview followed by our third quarter execution highlights starting on page five of the presentation i'll begin with an overview of corn main corn main is a leading specialty distributor water wastewater storm drainage and fire protection products and related services servicing 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 approximately 300 branches across the U.S., we play a critical role in driving the adoption of new products and technologies throughout our industry, and we offer the logistics of last-mile delivery and support for our 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. Our business is well positioned for scaled growth, margin enhancement, and strong cash generation. We have a secular focus on water infrastructure with ESG at our core. On page six, I will now cover our third quarter execution highlights. Our teams delivered exceptional performance in the third quarter by capitalizing on strong end market trends, proactively managing inflation, and continuing to execute on our margin initiatives, all while operating in a very dynamic environment. We achieved record net sales of just over $1.4 billion, growing nearly 40% compared with the prior year. We continue to expand our market share through the execution of our sales initiatives and by gaining preferred access to products during a period of material shortages, in addition to closing four new acquisitions during and subsequent to the quarter. We delivered another solid quarter of gross margin rate expansion as a result of our margin initiatives, a favorable pricing environment, and by purchasing opportunistically ahead of announced product cost increases. We have a team of pricing analysts who use data to drive pricing decisions and proactively update our prices for market cost increases, which enhances pricing visibility for our branch network and has delivered sustainable gross margin rate expansion over the last several quarters. As a result of our strong execution in the third quarter, we grew adjusted EBITDA by over 80% compared with the prior year to approximately $189 million. We continue to experience rapidly rising material costs across several product lines in the third quarter, resulting from unprecedented demand, constrained manufacturing capacity, container shortages, and port issues, but our teams are navigating the environment exceptionally well. PVC manufacturing capacity has been limited throughout the year due to raw material shortages stemming from plant closures as a result of severe weather events and other factors. Our PVC pipe suppliers have been working to rebuild inventory, but the current levels of demand continue to create product availability issues. Some of our suppliers import raw materials or finished goods, and we continue to see an impact to the cost and supply of those products due to the declining availability and rising costs of imported shipping containers. Despite these challenges, our associates have been working tirelessly to ensure our customers have access to products and solutions when and where they need them to complete their jobs on time and maintain our nation's critical water infrastructure. As a result of their dedication and execution, our associates have delivered tremendous value to our customers by mitigating the impact of these supply chain events, which we believe has allowed us to gain market share throughout the quarter. We continue to execute on our growth strategy by opening a new greenfield location in Austin, Texas, and by completing four acquisitions during and subsequent to the third quarter, Pacific Pipe, L&M Bag & Supply, CES Industrial Piping Supply, and Catalone Pipe & Supply. Our new branch in Austin, Texas, is our third greenfield location this year and offers the opportunity to expand our fire protection product lines in a large and growing market. It also allows us to lower our logistical costs by not having to service the area from our surrounding branches. Our two other new greenfield locations, West Phoenix, Arizona, and Logan, Utah, which opened in the first and second quarter of this year, demonstrate our commitment to driving growth and expansion in under-penetrated and attractive geographies. Despite our wide geographic footprint, there is significant remaining white space across the country, and we use a data-driven strategy to identify and evaluate these markets. We have a pipeline of priority markets that we are targeting for the greenfield expansion, some of which had already been improved and will likely convert in the coming quarters. These new locations will offer us the opportunity to expand into new geographies and strengthen already existing market positions. We've had a great success with our greenfield strategy as we have the ability to capitalize on our scale and talent pool because our greenfields have an attractive financial return profile. Turning to our recent acquisitions, 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 Water Works product offering. Pacific Pipe operates four locations spanning the islands of Hawaii, Maui, and Oahu. L&M bag and supply acquisition highlights 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 manufacturers and suppliers of geosynthetics and erosion control products. complete with seven locations across the country. 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. The CES industrial piping supply acquisition expands our fusible HDPE product and service offerings in the Midwest, CES Industrial Piping and Supply is a single branch distributor located near Kansas City, Missouri, who offers a full line of fusible HDPE pipe, fittings, and fusion machines. The team serves various markets, including industrial, oil and gas, water, wastewater, landfill, mining, environmental, and power plant industries. We are excited to grow our team in that area of the country and provide customers with added expertise in fusible pipe applications. Catalone Pipe and Supply is a single branch distributor in Pennsylvania who offers a spectrum of water, wastewater, and concrete catch basins, among other products, and distinguishes itself on supplying its customers with custom solutions to minimize installation time and costs. Grupa Catalon Type and Supply works hard to exceed their customers' expectations and deliver high quality products, which aligns with the dependable expertise we offer throughout the waterworks industry. We're excited to have them join our team and expand our waterworks footprint in the Northeast. On a combined basis, these four acquisitions generated roughly 145 million of net sales for the fiscal year ended December 31st, 2020. Each acquisition will be additive to our sales and earnings growth in the fourth quarter. The integrations of these acquisitions are progressing according to plan. Employee engagement is very positive, and the feedback from our customers and suppliers has been great. We are continuing to execute on synergy opportunities through our combined sales expertise and sourcing strategies. We have a strong and highly experienced integration team in place to seamlessly tuck in acquisitions, as we've been able to do historically. we continue to maintain a robust pipeline of hundreds of identified actionable acquisition targets that provide a long runway for future growth, which we pursue through our disciplined approach. We prioritize complementary businesses that help us consolidate existing market positions, expand into new geographic areas, acquire key talent, and offer new products. As we move into the fourth quarter, we enter our robust virtual and in-person training season, Last year, thanks to the agility of our learning and development team, we remained committed to the development of our associates despite obstacles created by the COVID-19 pandemic. Our learning team quickly developed a comprehensive, academy-based virtual training program known as Core Maine University that provides our associates with instructor-led and role-specific training. This year, associates have the option to enroll in both in-person and virtual training courses created to develop skills and build leaders from within. Our investment in our people through best-in-class training and career development is a true differentiator for us. We are deeply committed to the development of our associates, whether virtual or in-person, as it offers us the opportunity to attract and retain top talent and fuel future growth. our associates customers and industry partners can learn and grow with core domain we are training the industry's next generation of leaders and we foster a diverse talent pipeline to our industry we have continued our evolution towards developing more robust environmental social and governance strategies and goals we recently developed an esg oversight committee which will be responsible for governing and driving our esg initiatives forward We have an independent board of directors that champions the importance of ESG, and we are in the process of adding a new position to our organization that will be focused solely on sustainability. We are building on the foundation we established in our inaugural 2020 ESG report, and I'm excited to share our progress with you in our next report, which we expect to publish by the middle of next year. Lastly, subsequent to the end of the quarter, the Infrastructure Investment and Jobs Act was signed into law, a once-in-a-generation bipartisan infrastructure bill that makes transformational investments in our nation's infrastructure. I'll now discuss our anticipated benefits of the infrastructure bill on page seven. Among other things, the infrastructure bill makes historic investments in clean water infrastructure, an infrastructure that provides resilience to the changing climate. It sets aside $55 billion to expand access to clean drinking water for households, businesses and schools. The bill also provides funding to make our infrastructure more resilient to the impacts of climate change, with an investment of over $50 billion aimed at protecting against droughts, floods, heat and wildfires. The bill additionally provides for a major investment in weatherization. We expect these areas of the bill to benefit our business directly. The bill also appropriates funds to other construction verticals we would expect to benefit from, such as investments in roads and bridges, which could benefit our storm drainage product line, and investments in airport upgrades and expansions that could benefit our fire protection product lines. While we believe that the new infrastructure bill will provide multi-year tailwinds for the municipal water sector, we also believe it will take time before we see those funds flow through to our business. as a result of the current constrained manufacturing capacity and industry labor shortages. It's likely that we may not see incremental volume as a result of the infrastructure bill until 2023 or beyond, but we believe we are well positioned to capitalize on the favorable tailwinds due to our market leadership position and operational capabilities. Once the funds from the infrastructure bill begin to flow, and supply and labor shortages are resolved, we believe the investments from the infrastructure bill could drive roughly one to two points of additional municipal end market growth each year. I'm extremely proud of the strong performance we delivered throughout the third quarter, especially given the supply chain uncertainty, the unprecedented demand, resource constraints, and inflationary trends that continue to exist. While these challenges may persist through the fourth quarter, our branches and leadership teams remain dedicated to working with our suppliers to provide consistent, reliable products and services to our customers nationwide. I will now turn the call over to our Chief Financial Officer, Mark Lukowski, to discuss our fiscal 2021 third quarter financial results and revised full-year guidance.