Core & Main, Inc.

Hello and welcome to the Core and Main Q2 2024 Earnings Core. My name is Alex and I'll be coordinating the Core today. If you'd like to ask a question once the presentation has finished, please press star followed by one on your telephone keypad. And I'll hand it over to your host, Robin Bradbury, to begin. Please go ahead.

Thank you. Good morning, everyone. This is Robin Bradbury, Senior Vice President of Finance and Investor Relations for Core and Main. We are happy to have you join us this morning for our fiscal 2024 second quarter earnings call. I am joined today by Steve LeClair, our chair and chief executive officer, Mark Wieckowski, our chief financial officer, and Brad Coles, president. Steve will lead today's call with a business update and an overview of our recent acquisitions. Brad will then discuss the evolution of our smart utility solutions and how we drive the adoption of the latest and most effective technologies to improve efficiency for our municipal customers. We will then turn it over to Mark to discuss our second quarter 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. Our press release presentation and the statements made during this call may 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, and thank you for joining us today. I'll begin with a brief company overview and business updates for the quarter. followed by an overview of our recent acquisitions. Beginning with our company overview, Korn Main is the leading specialty distributor of water, wastewater, storm drainage, and fire protection products. We serve municipalities, private water companies, and professional contractors across municipal, non-residential, and residential end markets. Our specialty products and services are used in the maintenance, repair, replacement, and construction of water and fire protection infrastructure. Our footprint consists of more than 350 branches across 49 states, which serves as a critical link between 5,000 suppliers and a diverse base of over 60,000 customers, none of which account for more than 1% of our annual revenue. We are an industry leader, yet we estimate we have only 17% share of a fragmented $39 billion addressable market. Therefore, we believe our long-term growth opportunity is significant. Our products and solutions play a critical role in improving water quality, reducing water scarcity, and preventing floods, all in support of ensuring quality of life in the communities in which we live, work, and play. US water infrastructure is in a fragile state, with aging pipes, treatment plants, and other systems increasingly prone to failure. In 2023, for example, 20% of water mains across the U.S. and Canada were beyond their useful lives, up from 16% in 2018. There are approximately 260,000 water main breaks every year, representing the equivalent of a water main break every two minutes. It is also estimated that the water utilities lose 2.1 trillion gallons of water annually from leaky pipes and aging infrastructure, equivalent to roughly $8 billion of lost revenue. Many of our existing water systems built decades ago are now struggling to meet modern demands and environmental standards. Without significant investment in modernization, the risk of service disruptions, water contamination, and inefficiencies will continue to grow. Core and Main supports these growing needs by providing modern materials, innovative technologies, and expertise to repair, strengthen, and maintain critical infrastructure. Turning now to our business update, starting first with the leadership changes we announced in July. After serving as President of Corps in Maine for the last six years, Jack Schaller has now transitioned into his new role as Executive Vice President. Jack will continue to support the integration of newly acquired businesses, leading supplier relations, and assisting with the organizational transition. Brad Coles is expanding his role to lead more of the core waterworks product line, which was previously led by Jack. Brad has more than 18 years of leadership experience in the organization, most recently leading the fire protection product line. In addition to bringing new expertise and a fresh perspective to our waterworks product line, Brad will continue to have responsibility for several of our growth and margin enhancement initiatives. I am also excited to have Mike Hubert join the company as president, overseeing fire protection and certain other high growth initiatives. Mike most recently served as Executive Vice President of Sales for Advanced Drainage Systems, where he oversaw field sales and engineering, national accounts, and retail sales teams. He brings a wealth of experience, having led business development, commercial operations, and sales strategies in prior leadership roles. We are thrilled to have Mike on board, and we believe his proven track record and new perspective will be critical in helping us capture the long-term growth opportunities that exist for core and main. By aligning our strengths and opening new opportunities for profitable growth, the ongoing evolution of our leadership team is key to our strategy to drive shareholder value. We achieved an important milestone in August, expanding our operations into Canada through the acquisition of HM pipe products. This move marks our first venture into the Canadian waterworks market, allowing us to broaden our footprint and enhance our service offering to a new customer base. This acquisition underscores our commitment to becoming a leading provider of water, wastewater, storm drainage, and fire protection solutions, and it expands our addressable market opportunity by roughly $5 billion. integrations of recent acquisitions are progressing as anticipated with acquisitions contributing approximately nine percent of our top line growth for the quarter and the year our integration process and playbook are well defined scalable and highly flexible based on the needs of each company we welcome into the core and main family we have been successful in driving synergies with nearly all of our acquisitions and more importantly we've also been able to successfully attract strong talent and gain access to new platforms to compound growth. Moving to our end markets, our second quarter results were below our expectations, primarily due to project delays from wet weather conditions and comparably lower end market volumes. Heavy rain and flooding blanketed many parts of the country during the quarter, complicating the operation of heavy machinery and making underground construction a challenge for contractors. Persistent precipitation and flooding often requires underground utility contractors to stop operations until job sites can be secured and dewatered, inevitably leading to project delays, which is what we experienced during the quarter. During last quarter's call, we indicated we were experiencing wet weather in May, and the wet weather and saturated grounds persisted into June. We included a page in the appendix of our investor presentation to highlight the severity of the wet weather. and the geographies that were impacted. July returned to more typical weather patterns, but we did not see a recovery of the sales we lost in May and June. Generally, the labor capacity of our customers does not allow for an immediate surge of construction activity when weather patterns improve, but we may see a benefit if we experience a longer selling season in the fourth quarter. Otherwise, we expect some of these projects will be pushed into 2025. Residential lot development continued its positive momentum for most of the quarter, but it began to weaken in July. We began to see residential projects delayed or divided into smaller phases, likely due to the anticipation of the potential for lower interest rates. Given the significant pent-up demand for housing and the growing need for developed land to support that demand, we remain optimistic that the trends we saw late in the quarter are temporary. Municipal volumes have been slightly lower than expected, primarily due to project delays at the local level. We remain optimistic about this end market given our current bidding activity, project backlogs, and the existing state of the aging infrastructure. But given the wet weather in the quarter, it is difficult to assess the timing in the near term. As we expected, non-residential construction activity has seen mixed performance recently. Toward the end of the quarter, we began to see fewer non-residential projects break ground and the start dates of existing projects get pushed back, which is reflected in our fire protection performance for the quarter. We believe some of this trend could relate to the prospect of an easing interest rate environment where project owners and developers are assessing the macroeconomic landscape and waiting for financial conditions to improve before starting new projects. Despite the challenging weather and market conditions, we saw our meter initiative continue to outpace the growth of our end markets, highlighted by the 48% growth we achieved in meter sales this quarter. We are thrilled with the number of new projects being bid on and awarded this year, as well as the improved supply chain that is supporting the volumes we are driving. Gross margins in the second quarter were in line with our expectations, driven primarily by solid performance of our private label and sourcing initiatives, as well as the synergies we've been able to realize through M&A. Turning to our recent acquisitions, we maintain a deep and expanding pipeline of actionable M&A opportunities that we expect will drive sustainable growth over the long term. We acquired five new businesses during and shortly after the quarter, each of which offers expansion in new geographies, access to new product lines, or the addition of key talent. EGW Utilities is a distributor of products and services to underground utility contractors and municipalities operating out of a single location in Texas. The team at EGW 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 as part of the core and main family. We look forward to the additional private label capabilities and capacity this acquisition brings us. 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 GSE to the core and main family will create exciting new opportunities and an important and expanding area of fusible HDPE. Their expertise in the industry fits well with our existing fusible HDPE product offering, and we are excited about the positive impact this partnership will have on both new and existing customers. HM Pipe Products is a distributor of water and wastewater products operating in two locations in London and Kitchener, Ontario. The team at HM Pipe has extensive market knowledge, an excellent reputation in the industry, and strong customer connections. By utilizing our collective resources and combined expertise, we can help address Canada's water and wastewater infrastructure needs. This acquisition provides an initial catalyst into Canada, which we believe we can leverage to drive significant growth opportunities in a new roughly $5 billion addressable market. Grow Green Solutions is a leading provider of erosion control and geotextile products for professional and industrial projects. They consistently deliver value-added solutions to meet their customers' construction site needs from four locations, two in Georgia, one in Florida, and one in Mississippi. Their industry expertise and product offering complement our portfolio exceptionally well. Grow Green shares our commitment to being a dependable partner, and we look forward to partnering with them to accelerate growth in the Southeast. Green Equipment Company is the distributor of underground utility protection equipment, operating out of a single location in Fort Worth, Texas. Since 1982, the team at Green Equipment Company has served contractors, municipalities, and utilities across eight states, offering customers a variety of damage prevention products, along with ongoing support, industry-leading training, and comprehensive repair services. Their strong client relationships and expertise enhances our ability to provide customers with robust solutions to their underground utility needs. We are excited to welcome them to the Korn main team. Before wrapping up, I want to address some recent reports about pricing in our industry. As we discussed on previous calls, We operate in a highly fragmented and competitive industry where supply and demand characteristics are the primary drivers of the pricing dynamics. Most of our sales are project-based and our customers often look to us for a full suite of products delivered in sequence to efficiently complete the project. These products must meet local specifications and are subject to various local, state, and federal requirements. Our bids are nearly all completed by the local field teams and they are provided to the customer with fair, competitive, and transparent pricing. Pricing can be based on many different factors, including demand and competition in the local market, the complexity of the project, local specifications, and the price for which we procured the product. Over the course of the last few years, We have experienced price increases in various product categories as a result of supply chain disruption, strong demand, and increasing operating costs. Our municipal pipe products are made specific for our industry. They must meet specific water industry regulations and specifications, and we typically sell them as part of an overall water infrastructure solution. In our experience, municipal pipe pricing is more resilient than what we consider to be true commodity products like steel pipe and copper tubing, which are not as highly specified or regulated as municipal pipe and are often sold across different industries. Not only do we provide fair and transparent pricing, but we also provide our customers with alternative products to help them reduce their overall project cost. Some of you may have seen the statements made against some of the PVC manufacturers regarding PVC pipe pricing. We are not aware of any price fixing going on in our industry. And to be clear, any statements made suggesting that corn main was involved are baseless. We take great pride in our commitment to working with our customers to be a valued member of their supply chain. This includes providing prices in a fair and ethical manner. We will not comment further on any unsubstantiated claims or statements made against corn main related to this matter. As we look ahead to the remainder of 2024, we will be focused on executing against our long term strategy. This quarter presented us with many challenges from disruptive weather to sluggish end markets. But despite those challenges, our teams rose to the occasion and I'm proud of their resilience and ability to stay focused and execute. We are confident in our ability to leverage our strengths to drive long-term growth. We'll continue to do so regardless of near-term economic conditions. Thank you for your continued support and trust in our long-term vision. I will now turn it over to Brad Coles to discuss our position as one of the nation's leading providers of advanced metering solutions.