Core & Main, Inc.

Welcome to the Core and Main Fourth Quarter 2022 Earnings Call. My name is Harry and I'll be coordinating your call today. If you would like to ask a question during Q&A, please press star followed by one on your telephone keypad. And I would now like to hand over to Robin Bradbury to begin the presentation.

Thank you. Good morning, everyone. This is Robin Bradbury, Vice President of Finance and Investor Relations for Core and Main. Core and Main is a leader in advancing reliable infrastructure with local service nationwide. We are thrilled to have you join us this morning for our fourth quarter earnings call. I am joined today by Steve LeClair, our Chief Executive Officer, and Mark Wieckowski, our Chief Financial Officer. Steve will lead today's call with a review of our fiscal 2022 execution highlights, followed by a discussion on our growth strategy. Mark will then discuss our financial results and fiscal 2023 outlook, followed by a Q&A. We will conclude the call with Steve's closing remarks. We issued our fourth quarter and full year earnings press release this morning and posted a presentation to the investor relations section of our website. As a reminder, our press release presentation and the statements made during this call include forward looking statements. 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 our earnings press release and in our filings with the Securities and Exchange Commission. Additionally, we will discuss certain non-GAAP financial measures which we believe are useful to assess the operating results of our business. A reconciliation of these measures can be found in our earnings press release and in the appendix of our investor presentation. Thank you for your interest in Core and Main. I will now turn the call over to Chief Executive Officer Steve LeClair.

Thanks, Robin. Good morning, everyone. Thank you for joining us today. We're excited to share our results with you. Starting on page five of the presentation, fiscal 2022 was an impressive year for Core and Main. We achieved a record 6.7 billion of net sales, which was 33% higher than last year and 83% higher than fiscal 2020. Our ability to grow the business over the last several years is a testament to the investments we've made, our ability to execute with agility, and our associates' relentless focus on our customers. Our teams executed at a high level to deliver these results while improving our operating capabilities and solidifying our platform for growth. We made tremendous progress on our organic growth strategy and margin initiatives in fiscal 2022. Our product and customer initiatives produced solid results throughout the year. We've continued to accelerate the adoption of new products in our industry, like fusible HDPE solutions to our Waterworks customers, fabrication, and kitting assemblies for fire protection contractors, and advanced stormwater management and erosion control systems. We've also increased our share with strategic accounts who typically lead large projects that require greater technical expertise and specialized procurement needs. The combination of these products and customer initiatives delivered consistent above-market growth and share gains during the year. We are an industry leader, Yet we estimate we have only 17% share of a very fragmented $40 billion addressable market. Accordingly, our future growth opportunity remains significant, and we have identified several priority markets where we believe we are underpenetrated. We have been successful expanding in various markets by having the ability to pursue greenfield expansion or M&A opportunities. We opened three new locations in underserved markets in fiscal 2022. throwing our footprint to approximately 320 branches across the United States and building on our commitment to make our products and expertise more accessible nationwide. Over the last five years, we've opened 15 new locations, all of which continue to mature and offer additional growth opportunities. We have the ability to efficiently open new branches and attractive markets due to our size and scale, talent pool, and advanced training programs. In addition to our organic growth, we also welcomed eight new companies to Corn, Maine during and subsequent to the year with approximately 175 million of historical annualized net sales. These businesses have talented teams, strong customer relationships, and in certain cases, they brought us new capabilities or provided opportunities for growth in adjacent markets. With a strong balance sheet and experienced integration team, and the reputation as the acquirer of choice in our industry, we remain well positioned to grow sustainably through acquisitions. We have deployed over $800 million of capital to M&A since 2016 to enhance our geographic footprint, bolster our product lines, enter adjacent markets, and acquire key talent. While these businesses are highly integrated into our business model, We estimate that this group of acquisitions generated over $1 billion of sales in 2022 and over $200 million of adjusted EBITDA. This is a testament to the significant value we gained from M&A, and it reflects tremendous synergy improvement. We generate synergistic value from the business we acquire through our favorable purchasing advantages, fixed cost leverage, facility optimization, preferred and often restrictive access to products, regional and national sales initiative resources, and a scalable IT platform. We have completed several acquisitions where we extended our product lines into their offerings, thereby expanding our overall sales opportunity. We've also acquired businesses that provided access to new products and technologies, and we were able to pull those products through to our nationwide branch network. Over the past several years, these synergies have been a key driver of our growth and profitability. As we look ahead, our M&A pipeline remains very active. We expect to continue adding strong businesses to the core and main family throughout 2023 and beyond. On the gross margin side, we continue to build out a highly scalable assortment of private label brands and products used throughout the water, wastewater, geosynthetics, and fire protection industries. These products typically yield gross margins that exceed our core products by one and a half to two times. We ended the year with private label representing approximately 2% of our total COGS, with opportunity for it to grow to 10 to 15% over the next several years. We believe our direct sourcing capabilities, brand recognition, and diversified domestic and international supplier relationships will continue to create cost advantages and improve product availability in the future. Our private label efforts are focused on a wide array of spend on ancillary products that support our customers' projects but not the highly specified products from our key supplier partners. We've also made great progress in optimizing system-wide pricing through IT enhancements and data-driven analysis, which enables us to identify pricing opportunities and mitigate the impact from rapid cost changes. We expect these initiatives and others to contribute positively to our gross margin in the years to come. Turning to our productivity initiatives, We made strategic investments during the year aimed at improving our customer experience while making our teams more efficient, thereby driving organic growth and improving SG&A leverage. In addition to our technology-driven initiatives, we now have a dedicated strategic operations team who partners with our field to develop and implement operational best practices across the company. Not only do these solutions improve our efficiency to help drive EBITDA growth and EBITDA margin expansion, They also improve customer service through better communication and responsiveness with our customers. We are excited about increasing the capacity and efficiency of our branches, and we see continued improvement ahead. As a leading specialty distributor that provides products, services, and solutions with a national footprint, we also have an excellent balance across our offering and geographies. Our strategy to fill in existing product lines and geography, both organically and through acquisitions, reinforces this balance over time. Our end market mix, broad product portfolio, and vast geographic footprint offers us multiple avenues to grow and more ways to create value for our customers and suppliers, while providing resiliency in softer markets. I have great confidence in our ability to operate this business and outperform in any economic environment. The resilience of our municipal end market including the non-discretionary repair and replacement nature of our business and our ability to generate strong cash flow, even in weaker economic environments, sets us apart. While we expect a more challenging residential end market compared to where it has been performing in recent years, we have multiple levers to pull for continued growth. We have seen pricing stabilize and remain elevated for several months across our municipal pipe products. We expect to see continued inflation in other product categories. Overall, we don't expect a notable impact from pricing in fiscal 2023, either positive or negative. As we move into fiscal 2023, we'll continue executing on our growth and margin expansion strategies. Turning to page six, you can see our strong track record of performance over the last five years, with annual sales growth averaging approximately 20%, including 300 basis points above market growth, and 600 basis points of EBITDA margin expansion. We've done this while investing heavily in our teams and in new systems and technologies to develop the foundation for core and main. We remain confident in our ability to gain market share and drive profitable growth over the long term. On page seven, we've outlined our value creation targets. Historically, our end market volumes have grown to low to mid-single-digit range annually. and we have grown in excess of the market by at least two to three percentage points. We drive above-market growth through the execution of our product and customer initiatives, growth in under-penetrated geographies, the addition of key sales talent, and local share gains. M&A is also central to our growth strategy. We have a robust pipeline and a proven playbook we utilize in pursuing and executing acquisitions. Our acquisitions have historically delivered two to five percentage points of sales growth annually, and we are confident in our ability to deliver similar results over the long term. We complement our sales growth with margin expansion initiatives, fixed cost leverage, and productivity gain, which has allowed us to grow our profitability 1.3 to 1.5 times faster than our sales. Because of our fixed cost structure, we naturally gain operating leverage as we grow, often having significant capacity to expand within our existing buildings, yards, and delivery fleet. Our margin expansion initiatives include private label, category management, pricing analytics, and productivity and innovation. In addition to margin enhancement from accretive M&A, are expected to continue driving sustainable margin improvement in the years to come. Lastly, we have a track record of strong operating cash flow due to the low capital requirements of our business and our effective working capital management. We expect to convert between 55% and 65% of our adjusted EBITDA into operating cash flow. providing ample liquidity to fund our growth strategies, or returning capital to shareholders. On page eight, we outline the secular growth trends that underpin each of our end markets. Municipal demand has exhibited steady growth over the long term due to the critical and immediate need to replace aged water infrastructure. However, due to limited available funding over the last decade, the pace of investment has significantly lagged the need for investment. In recent years, access to capital, Increased water utility rate and necessity have increased municipal investment in water, and we expect these trends to continue for the foreseeable future. Each year, billions of gallons of treated water is lost through the United States due to our aging water infrastructure. Our secular focus on water, coupled with the commitment from our associates to advance reliable infrastructure, helps mitigate these challenges over time. Our exposure to the resilient municipal end market positions us well to outperform the broader market in the event of a deeper short-term decline in residential lot development. We also believe we can capitalize on the anticipated long-term growth in residential and non-residential development, both of which remain below long-term historical averages and are expected to benefit from population growth. The historical underbuild of housing versus household formations, demographic population shifts, and the need for commercial, institutional, industrial, and other non-residential developments to support population growth. Our non-residential end market consists of a balanced mix of project types, including commercial buildings, healthcare facilities, schools, industrial complexes, and less cyclical road and bridge rehabilitation projects, which provide stability through the ups and downs of economic cycles. Our broad exposure to the non-residential end market generally provides stability as demand for these projects can happen on different cycles. Our residential exposure, which is just over 20% of net sales, is nearly all new land development, and supply of developed lots is at a historically low level. As such, we believe that continued lot development will be critical to support long-term housing supply needs. Turning to page 9, our end markets are backed by critical investment in the U.S. infrastructure from the Infrastructure Investment and Jobs Act. which we estimate to be an addressable product sales opportunity exceeding $15 billion. In the coming years, we expect funding associated with the bill to have a core focus on the upgrade, repair, and replacement of municipal water systems. We are positioned to capitalize on this significant opportunity. We also anticipate that the $110 billion of funding earmarked for road and bridge work will be a tailwind for our non-residential end market, as we will have opportunity to sell our storm drainage products on these projects, including geosynthetics and erosion control. The first wave of funding has been allocated to state revolving funds, where municipalities can apply for the grants or loans. We are also seeing some allocation of funds, and while not material at this point, it is encouraging to see. There are over 55,000 municipalities across the U.S. some of which lack the knowledge and resources to apply for the funding, which could delay the process in getting it into the hands of the municipalities. We expect to play a key role in assisting municipalities to obtain this funding to help advance reliable infrastructure in the communities we serve. Once funds are awarded and allocated, municipalities will build them into their fiscal budgets. At that point, we'll begin to see it flow into our end markets, likely in the second half of 2023. As I wrap up my prepared remarks, I want to share that I'm extremely proud to see our vision of advancing reliable infrastructure realized through the achievement of our growth strategies. Our teams have worked diligently to transform core Maine into an industry leader that can be relied on to consistently deliver local knowledge, local experience, and local service nationwide. We remain confident in our ability to navigate challenging market conditions, outperform the market and continue to grow the business both organically and through M&A. Now I'll turn the call over to our Chief Financial Officer, Mark Wieckowski, to discuss our financial results and fiscal 2023 outlook. Go ahead, Mark.