Core & Main, Inc.

Robin Bradbury, Senior Vice President of Finance and Investor Relations for Core and Main. We're excited to have you join us this morning for our fiscal 2024 first quarter earnings call. I am joined today by Steve LeClair, our Chair and Chief Executive Officer, and Mark Wieckowski, our Chief Financial Officer. Steve will lead today's call with an overview of our first quarter execution highlights. Mark will then discuss our financial results and updated fiscal 2024 outlook, followed by a Q&A session. We will conclude the call with Steve's closing remarks. We issued our 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. We will also discuss certain non-GAAP financial measures, which we believe are useful in assessing 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 Chair and Chief Executive Officer Steve LeClair.

Thanks, Robin. Good morning, everyone. Thank you for joining us today. If you're following along with our investor presentation, I'll begin on page five with an overview of our market position. CornMaine is the leading specialty distributor of water, wastewater, storm drainage, and fire protection products, 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. Customers partner with Core and Main for our breadth of products and services, extensive industry knowledge, familiarity with local municipal specifications, convenient branch locations, and project management capabilities. We serve both smaller local customers and larger regional or national customers with relevant expertise. And our sales associates take a consultative approach to provide customer specific solutions for projects of all sizes. We are often involved in our customers' planning processes all the way from project design to project completion. Our footprint consists of more than 350 branches across 49 states, which serves as a critical link between approximately 5,000 suppliers and a diverse base of over 60,000 customers. We are an industry leader, yet we estimate we have only 17% share of a fragmented $39 billion addressable market. Accordingly, our long-term growth opportunity is significant. Turning to page six, we are pleased with our start to fiscal 2024. Net sales grew 11% to a first quarter record of $1.74 billion. This performance was indicative of supportive end market volumes and an earlier start to the selling season in some northern geographies. Residential lot development improved sequentially from the fourth quarter, This was the first quarter in more than a year that residential volumes improved on a year-over-year basis. We are encouraged by our backlog and bidding activity across this market. We're seeing solid activity across the non-residential construction landscape. While some verticals in this market remain soft, like office space and retail, others continue to be strong, such as highway and street projects, data centers, battery plants, and other large industrial manufacturing projects. We are seeing good momentum in municipal projects being bid and coming online during an important part of the construction season. Though still relatively small in scope, we are also seeing projects funded by the Infrastructure Investment and Jobs Act make their way into our backlog and bidding activity in certain parts of the country. These projects are primarily related to new water treatment plant facilities and service line replacements. While we're pleased to see projects utilizing the federal funding, we've seen limited progress on major municipal repair and upgrade activity, and it does not appear we are seeing any incremental benefits so far this year. Market volume growth in the quarter was supplemented by the execution of our product, customer, and geographic expansion initiatives to deliver above-market growth. We achieved 31% growth in metering products this quarter, highlighting our ability to drive the adoption of new products and technologies throughout the industry. While this growth reflects some improvement in the supply chain for meters, we are pleased with the magnitude of new projects being bid and awarded. Beyond our product initiatives, our recent green fields are also performing well. Every time we add a new branch, we add sales resources and reduce the average time it takes for us to reach our customers. This enhances our value proposition, giving us the opportunity to earn market share. Each of our green fields continues to mature and offer additional growth opportunities. We are actively evaluating a pipeline of new locations to expand into. Acquisitions are an important part of our long-term growth strategy, and our team continues to execute on an active pipeline of opportunities. During and after the quarter, we added five complementary businesses to the core and main team, one of which was our largest acquisition to date. These acquisitions offer expansion to new geographies, access to new product lines, and the addition of key talent. Gross margin came in at 26.9% versus 27.9% in the prior year. While underlying product margins were impacted as expected, gross margins continue to be strong, supported by the robust performance of our private label and sourcing initiatives and benefits from M&A. Mark will walk you through the various components impacting margins later in his financial commentary. Turning to our cash flow and capital allocation priorities, we were pleased with the $78 million of operating cash flow achieved in the first quarter. Given the seasonal pattern of working capital needs for our business, we typically generate most of our cash in the second half of the year. Our cash generation this quarter reflects a lower than normal seasonal inventory build resulting from our continued inventory optimization efforts. We continue to balance capital allocation between organic and inorganic growth opportunities, as well as returning capital to shareholders. During and after the first quarter, we deployed over $600 million to acquire five complementary businesses. We are also prioritizing organic investments in green fields, in addition to upgrading our fleet, facilities, and technology tools that will benefit us in 2024 and beyond. Our ability to invest in organic growth and value-creating acquisitions is underpinned by our strong operating cash flow, balance sheet capacity, and liquidity. On page seven, we highlight the exceptional businesses recently added to the core and main family. Eastern Supply is a distributor and fabricator of a wide variety of storm drainage products, operating out of locations in Virginia and Pennsylvania. For close to 30 years, the team at Eastern Supplies provided drainage products and related services to contractors, engineers, and municipalities across the Northeast. Dana Kepner is a multi-region distributor of water, wastewater, and storm drainage products, operating out of 21 locations across Arizona, Colorado, Nevada, Texas, Wyoming, and New England. They are a highly credible partner in the waterworks industry, and their core values align with our own at Core and Main. Dana Kepner offers opportunities to generate synergies through our combined purchasing capabilities, facility optimization, and fixed cost leverage as we drive new revenue generating opportunities by providing our customers with broader access to products and services. ACF West is the distributor of geosynthetics and erosion control products with six locations across Oregon, Washington, Idaho, and Utah. For over three decades, the team at ACF West has offered their municipal and contractor customers solutions for geosynthetics, erosion control, stormwater management, and terrain stabilization. ACF West is a trusted distributor with a longstanding and loyal customer base. and their product and service offerings are an excellent complement to our business. EGW Utilities is a distributor of products and services to underground utility contractors and municipalities in Texas. The team at EGW Utilities has been providing underground infrastructure products and services since 2001. Their commitment to delivering value-added solutions and maintaining strong customer relationships has enabled them to provide customers with the resources and support needed to complete projects successfully. We are happy to have the EGW team a part of the core and main family, and we look forward to the additional private label capabilities and capacity this acquisition brings us. Our most recent acquisition, Geothermal Supply Company, is a distributor and fabricator of high density polyethylene pipe and other related products. They primarily serve the geothermal, water, and sewer industries from a single location in Kentucky. Adding GSC to the corn main family will create exciting new opportunities for us in an important and expanding area of HDPE. Their expertise in the industry fits well with our existing fusible product offering, and we are confident this will be a positive partnership for both new and existing customers. The integration of these businesses is progressing according to plan, and our acquisition strategy continues to create tremendous value for Core and Main. We have a very active M&A pipeline and expect to continue adding value-creating businesses to the Core and Main family throughout 2024 and beyond. To wrap up my prepared remarks, we are pleased with our performance in the first quarter. We have generated significant momentum for the business in recent months, and we are well positioned to achieve our objectives by continuing to execute our growth strategies as we enter an important part of the construction season. Thank you to our associates for advancing the reliable infrastructure in the communities in which we live, work, and play. It is becoming more and more apparent that our communities need a partner to help repair and upgrade our nation's fragile water infrastructure. And I am proud that we are there and ready to answer the call. With that, I will now turn it over to Mark to discuss our first quarter financial results and fiscal 2024 outlook. Go ahead, Mark.

Thanks, Steve, and good morning, everyone. I'll begin on page nine with highlights of our first quarter results. We achieved nearly 11% net sales growth in the first quarter, with organic sales growth of roughly 3% and approximately 8% added through acquisitions. Organic sales volume grew mid-single digits as our teams continued to drive market share gains to supplement modest end market growth. Pricing was a minor headwind for the quarter as we continue to experience deflation on certain products and our end markets have remained competitive. Our gross margin in the first quarter came in at 26.9% compared to a record 27.9% in the prior year. As expected, underlying product margins were impacted by a higher average cost of inventory in 2024 compared to 2023. This unfavorable impact was partially offset by strong private label performance, our sourcing optimization efforts, and benefits from M&A. Selling general and administrative expenses increased approximately 15% in the first quarter to $257 million. Excluding acquisitions, SG&A increased mid-single digits, with most of that increase attributable to inflation and investments and personnel to support current volumes and future growth. Interest expense in the first quarter was $34 million compared with $17 million in the prior year period. The increase was primarily due to the addition of the incremental $750 million term loan that's due in 2031, higher borrowings under our senior ABL credit facility, and an increase in interest rates on our variable rate debt. The provision for income taxes in the first quarter was $33 million compared with $31 million in the prior year period. Our effective tax rates in the first quarter this year and last year were 24.6% and 18.9% respectively. The increase in the effective tax rate was primarily due to the exchanges of partnership interests in conjunction with the secondary offerings and repurchase transactions we completed last year. We recorded $101 million in net income for the first quarter compared with $133 million in the prior year period. The decrease in net income was primarily due to lower operating income and an increase in interest expense. Diluted earnings per share in the first quarter decreased 2% to 49 cents, compared with 50 cents in the prior year period. Diluted earnings per share decreased primarily due to a decline in net income, partially offset by lower share counts following our repurchase of 45 million shares during fiscal 2023. Adjusted EBITDA in the first quarter decreased approximately 1% to $217 million, and adjusted EBITDA margin decreased 150 basis points to 12.5%. The decrease in adjusted EBITDA margin was primarily due to lower gross profit as a percentage in net sales and higher SG&A due to the impact of cost inflation and investments to drive growth. Now I'd like to provide an update on our cash flow and balance sheet on page 10. Net cash provided by operating activities in the first quarter was $78 million. We were pleased with this level of cash flow in what has historically been a lower cash generation quarter. We experienced an inventory build this year, though less than typical as we continue to optimize inventory levels. We supplemented our operating cash flow with additional borrowings to make significant investments in the growth of the business. with over $600 million of cash spent on M&A during and after the quarter. We remain committed to the capital allocation priorities we previously laid out. In the near term, we expect to generate additional cash flow from operations to fund our organic initiatives and M&A, while working to enhance our liquidity and reduce our net debt leverage. As we progress throughout the year, we expect to provide additional details on our plans for returning capital to shareholders. which may include additional share repurchases and the potential for a future dividend program. As a reminder, we deployed $1.3 billion on share repurchases during fiscal 2023. We entered into a new $750 million term loan during the quarter to expand our capital structure. The new term loan matures in February 2031 and carries interest that term so far plus a margin of 225 basis points. Concurrent with the issuance of the term loan, we extended the maturity of our existing ABL facility to 2029, and we also entered into an interest rate swap with an all-in fixed rate of approximately 6.2%. The interest rate swap has a starting notional amount of $750 million that increases to $1.5 billion on July 27, 2026, through the instrument's maturity in 2028. Excluding the pro forma effects of acquisitions, net debt leverage at the end of the quarter was 2.7 times, and our current available liquidity is more than $1 billion. The year-over-year increase in net debt leverage was primarily due to higher borrowings to fund investments in organic growth, acquisitions, and share repurchases. On May 21st, we closed on the refinancing of our senior term loan due 2028. and reduced our applicable margin rate from 260 basis points to 200 basis points, resulting in interest expense savings of approximately $9 million annually. There were no other changes to terms or maturities. Before we head over to Q&A, I'll wrap up our updated outlook for fiscal 2024 on page 11. With one quarter of the year behind us, our outlook for low single-digit end market buying growth remains unchanged. And we expect to continue gaining market share through the execution of our product, customer, and geographic expansion initiatives. We continue to expect new residential construction to grow modestly in 2024. Our residential bidding activity and orders continue to show strength despite higher interest rates and the expectation that they will remain higher for the foreseeable future. We are pleased to hear optimism from the public home builders and continue to believe there is a shortage of available homes. which supports multi-year tailwinds for our products. Non-residential construction has been solid thus far, and our bidding activity and order pace in this market continues to be positive. We expect to see continued strength in highway and street projects, data centers, battery plants, and other large manufacturing projects, with some continued softness in office space and retail construction. Overall, we expect the non-residential market to be flat to slightly up for the year. Municipal repair and replacement activity, which represents over 40% of our net sales, is resilient due to healthy municipal budgets and the critical need to upgrade aged water infrastructure. We continue to believe this end market will grow low single digits in 2024. Based on our visibility and the long term length of projects funded by the Infrastructure Investment and Jobs Act, we are continuing to evaluate when we may see incremental volume from these investments. We expect sales volume to more than offset a slight headwind from pricing in fiscal 2024, yielding a low single-digit average daily sales growth, excluding acquisitions. We expect the M&A we completed through today will contribute 7 to 8 percent of total sales growth in fiscal 2024. We maintain a strong pipeline of opportunities, and we expect to continue adding more high-quality businesses to the Corn Main family as we move through the year. Gross margins performed well in the first quarter, with the negative effect of normalizing inventory costs mostly behind us on a sequential basis. We've seen fairly stable market costs in recent quarters, which can increase the level of competitiveness on the projects we bid. We expect that these competitive pressures could impact gross margins for the balance of the year as we look to maintain and grow our market share, but not by more than what we guided to previously of 30 to 50 basis points. We'll continue to work to offset any potential compression through the execution of our gross margin initiatives. Taken all together, we are narrowing and raising our annual outlook based on results to date and recent acquisitions. We now expect net sales to be in the range of $7.5 to $7.6 billion, reflecting year-over-year growth of 12 to 13%. We are also narrowing and raising our outlook for adjusted EBITDA to range from $935 to $975 million, reflecting year-over-year growth of 3% to 7%. We are confident in our ability to continue delivering strong performance in 2024. Our unique business model, commitment to driving shareholder value, and ability to successfully navigate changes in the macro environment position us extremely well for the long term. At this time, I'd like to open it up for questions.