Core & Main Q3 2024 Earnings Call Transcript

Quartr
Provided by Quartr
December 5, 2023

There are 13 speakers on the call.

Operator

I will now hand the floor over to Robin Bradbury, VP, Finance and Investor Relations. Please go ahead.

Speaker 1

Thank you. Good morning, everyone. This is Robin Bradbury, Vice President of Finance and Investor Relations for Coramain. We are excited to have you join us this morning for our fiscal 2023 Q3 earnings call. I'm joined today by Steve LeClair, our Chief Executive Officer and Mark Wachowski, our Chief Financial Officer.

Speaker 1

Steve will lead today's call with a business update followed by an overview of Our recent acquisitions and long term value creation targets. Mark will then discuss our Q3 financial results and full year outlook followed by a Q and A session. We will conclude with Steve's closing remarks. We issued our fiscal 2023 3rd quarter 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.

Speaker 1

These statements are subject to risks and uncertainties that could cause actual results to differ from our Expectations and projections. Such risks and uncertainties include the factors set forth in our earnings press And in the filings with the Securities and Exchange Commission. We will also discuss certain non GAAP financial measures, which we believe are useful in assessing the 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 Coronain.

Speaker 1

I will now turn the call over to Chief Executive Officer, Steve Leclair.

Speaker 2

Thanks, Robin. Good morning, everyone. Thank you for joining us today. If you're following along with the Q3 investor presentation, I'll begin on Page 5 with a brief business update. Corn Maine delivered another quarter of strong results.

Speaker 2

Sales in the Q3 were just ahead of the prior year and up 30% from the Q3 of fiscal 2021. Demand from our customers remains resilient, and we continue to execute our organic and inorganic growth initiatives. Municipal repair and replacement activity in the Q3 remained stable on a year over year basis. Despite still being below prior year levels, new residential lot development improved sequentially from the 2nd quarter. There continues to be a shortage of existing homes for sale, which is driving a need for new lot development and new home construction.

Speaker 2

Many national homebuilders have been reporting resilient results by providing incentives such as interest rate buydowns to ease affordability challenges And attract prospective buyers, which provides tailwinds for our business. We began to see nonresidential volume stabilize late in the 3rd quarter Due to our balanced exposure across various nonresidential project types, we continue to see good growth in highway and street projects An increasing trend of mega projects across the country, both of which are included in our nonresidential end market and have offset some of the softness in multifamily and warehouse Price contribution to net sales was flat for the quarter when compared to the prior year. Most of our products are either highly specialized We're made specific for our sector, which provides resilient pricing framework for our industry, especially when roughly half of the demand for our products and services It's non discretionary in nature. Gross margin in the 3rd quarter was 50 basis points lower than last year As inventory costs continue to catch up with the current market prices. And while we expect to see additional gross margin normalization in the 4th quarter, We have confidence in our ability to offset a portion of it through underlying gains from our margin initiatives.

Speaker 2

Cash generation is a key strength of our business. We have delivered nearly $1,100,000,000 of operating cash flow over the last four quarters. This cash flow has provided us with Significant capacity to reinvest in organic growth, pursue strategic M and A and return capital to shareholders. We opened 2 new greenfields in the 3rd quarter, one in Spokane, Washington and another in Fontana, California. These new locations extend our product offerings in underpenetrated markets, building on our commitment to make our products and expertise More accessible in every region we serve.

Speaker 2

Greenfields are a powerful way for us to expand geographically. We are well positioned to do so given our scale and talent pool. Each time we add a new location, we are adding new sales resources Reducing the average distance and time for us to serve our customers' orders. This enhances our overall value proposition, given us the opportunity to gain local market share. We have opened 4 greenfields so far this year.

Speaker 2

We will continue to use greenfield as a lever to drive above growth in attractive markets going forward. We continue to target attractive M and A opportunities using our disciplined approach, Announcing 3 new acquisitions after the quarter: Enviroscape, Granite Water Works and Lease Supply Company. So far this year, we have signed or closed 8 acquisitions with combined annualized net sales of over $330,000,000 These acquisitions enhance our product offering and help us achieve a leading position in desirable markets. We are committed to our goal of driving 2% to 4% annual net sales growth from M and A each year over the next several years, And I will provide more details on our recent acquisitions shortly. Lastly, on capital deployment, We executed 1 share repurchase transaction during the quarter and another after the quarter, deploying nearly $300,000,000 of capital To retire 10,000,000 shares, we have deployed $770,000,000 of capital so far this year To repurchase and retire 30,000,000 shares in total.

Speaker 2

Our capital allocation strategy is clear. We expect to continue investing in organic growth and margin enhancement, execute on our robust M and A pipeline To return excess cash back to shareholders through share repurchases or dividends. Now turning to Page 6, I'll provide an overview of our recent acquisitions. EnviroScape is a leading provider of geosynthetics and erosion control products operating out of one location in Ohio. Since 2003, the team at EnviroScape has established themselves as a trusted partner within the geosynthetics market due to their expertise and reputation for 1st class service.

Speaker 2

Their specialty products complement our existing business, And this opportunity provides additional capacity to expand our geosynthetics reach and capabilities. Granite Water Works is a leading distributor of pipes, valves and fittings and storm drainage products for contractors and municipalities in Central Minnesota. Since 1990, their experienced team has consistently delivered high quality products and personalized service to their customers from their Wake Park, Minnesota location. The local relationships and commitment to dependable service that Granite Water Works will bring to core in Maine will greatly amplify our capabilities And presence throughout Minnesota. Lee Supply is a leading specialty distributor and fabricator of high density polyethylene pipe and other related services, including HDPE fusion equipment rentals and custom fabrication capabilities.

Speaker 2

For nearly 70 years, Lee Supply Company has been delivering innovative solutions and providing top quality products to municipalities, contractors And other environmental and industrial customers. They operate out of 4 locations in Pennsylvania, South Carolina and West Virginia, Primarily serving the Eastern United States. Their products and fabrication capabilities significantly enhance our HDPE product offering, While providing our customers with additional expertise in fusible pipe applications. Each of these businesses offer expansion in new geographies, Enhance our product lines and add key talent, while aligning with our strategy of advancing reliable infrastructure across the U. S.

Speaker 2

Our pipeline of potential acquisitions remains robust. We expect to continue adding and integrating businesses to support our growth. Given the fragmented nature of our industry and our modest market share, we have a significant opportunity to continue growing through acquisitions for many years to come. On Page 7, we highlight the value creation story we discussed at our recent Investor Day. Our long term growth algorithm starts with our end markets.

Speaker 2

We have diversified end market exposure between municipal, nonresidential In residential construction markets, nationwide, we maintain a balanced mix of sales between new development and repair and replacement projects. Each of our end markets have grown in the low single digit range historically, and we expect the fundamental demographic trends and drivers of growth in our markets to continue. We expect multiyear tailwinds in the residential and nonresidential end markets. When coupled with healthy municipal budgets And the potential for significant federal proceeds, we believe end market volume growth over the long term will be between 2% to 4% per year. We've also demonstrated a history of organic above market volume growth, producing 3 points of market outperformance over the last 5 years.

Speaker 2

And we believe that our long runway of growth opportunities and underpenetrated geographies and underpenetrated product lines, Coupled with our industry leading capabilities and operational excellence, we'll continue to drive organic above market growth In the range of 2% to 4% annually. Our M and A pipeline is robust, and we continue to acquire businesses in our highly 2% to 4% of annual net sales growth from M and A over the next several years. Collectively, Our end markets, above market growth capabilities and M and A strategy result in average annual net sales growth Ranging from 6% to 12%. In terms of margins, we expect to continue executing on our private label, Sourcing optimization and pricing analytics initiatives, while leveraging our scale, productivity And operational excellence to drive 30 to 50 basis points of adjusted EBITDA margin expansion annually. We believe that our profitable growth, agile business model and focus on efficiency will continue to generate strong operating cash flow At a rate of 60% to 70% of adjusted EBITDA, underpinned by a strong balance sheet to provide robust capital deployment.

Speaker 2

We are better positioned than any other distributor in our industry to capitalize on these growth levers, and we are excited about the opportunities ahead. As part of our Investor Day event, we released 5 year financial targets and provided additional details on the growth, profitability And cash flow initiatives we have in place to continue operating this business with success while driving shareholder value. I'd like to thank everyone who either attended in person or listened virtually. If you haven't seen it yet, The replay is posted on the Investor Relations section of our website, and I highly encourage you to watch it to get a deeper understanding of what makes our business so special and the opportunities that we have for long term profitable growth. With that, I will now turn it over to Mark to discuss our financial results and full year outlook.

Speaker 2

Go ahead, Mark.

Speaker 3

Thanks, Steve, and good morning, everyone. Our 3rd quarter results reflect our operational excellence And the resilience of our business model. We maintain a healthy balance sheet and are prudently deploying capital to the highest return opportunities. We're leveraging our sustainable competitive advantages and financial position to drive future growth and value creation. I will cover a few topics with you this morning.

Speaker 3

First, I'll recap our Q3 earnings, followed by an update on our cash flow and balance sheet highlights. Then I'll provide our updated financial outlook for fiscal 2023 and a preliminary framework for fiscal 2024. I'll begin on Page 9 with highlights of our Q3 earnings. We reported net sales of just over $1,800,000,000 for the quarter, Which was just above the prior year period and consistent with our expectations. Price contribution was flat for the quarter, While organic volumes were down low single digits, the cumulative effect of acquisitions over the past year contributed approximately 3 points of growth to net sales.

Speaker 3

Gross margin of 27% was 50 basis points lower than last year as inventory costs continue to catch up with current market prices. Our local teams have executed very well to sustain our margins by optimizing inventory levels, reacting with discipline to market prices And continuing to drive our gross margin initiatives. Selling, general and administrative expenses increased 4% to $240,000,000 For the Q3, the increase in SG and A reflects the impact of acquisitions and cost inflation. Interest expense was $20,000,000 for the Q3 compared with $16,000,000 in the prior year period. The increase was due to higher variable rates on the unhedged portion of our senior term loan.

Speaker 3

We recorded income tax expense of $39,000,000 for the 3rd quarter compared with $40,000,000 in the prior year period reflecting effective tax rates of 19.8% 18.3%, respectively. The increase in effective tax rates was due to a decrease in partnership interest held by non controlling interest holders. We recorded $158,000,000 of net income in the 3rd quarter compared with $178,000,000 in the prior year period. The decrease was primarily due to lower operating income. Diluted earnings per share in the 3rd quarter was 0 point 6 $5 Diluted earnings per share decreased due to lower net income, offset by lower share counts following the share repurchase transactions Executed throughout the year.

Speaker 3

Adjusted EBITDA decreased approximately 5% to $260,000,000 And adjusted EBITDA margin decreased 90 basis points to 14.2%. The decrease in adjusted EBITDA was due to the reduction in gross margin and the impact of cost Turning to Page 10, we delivered excellent operating cash flow in the Q3 of $373,000,000 reflecting over 140 percent conversion from adjusted EBITDA. We continue to optimize inventory levels now that supply chains have improved. On a year over year basis, net inventory was down about $325,000,000 or roughly 28%, even with higher product costs, Inventory acquired through acquisitions and new inventory to support Greenfields. We expect strong operating cash flow conversion again in the 4th quarter as we to optimize inventory levels and deliver a normal seasonal reduction of working capital.

Speaker 3

Net debt leverage at the end of the quarter was 1.5 times and our available liquidity stands at more than $1,300,000,000 providing ample liquidity to continue investing in growth And returning capital to shareholders. The share repurchases we executed in September November We're done concurrently with public secondary offerings by our largest shareholder. As a result of these transactions, we retired 10,000,000 shares We're increasing our public float. As Steve mentioned earlier, we have deployed $770,000,000 of capital for share repurchases So far this year, and we'll continue to evaluate share repurchases as opportunities arise. Before we head to Q and A, I'd like to update you on our outlook for the remainder of fiscal 2023 on Page 11 and provide a preview of our views on Our sales results through the Q3 have largely played out as expected.

Speaker 3

Looking ahead, we expect normal seasonal volume trends in the 4th quarter, which tend to be impacted by colder weather and shorter daylight hours. Municipal repair and replacement activity in the 4th quarter is expected to remain stable on a year over year basis. We expect new residential lab development growth to proved sequentially and benefit from easier year over year comparisons. Furthermore, we expect nonresidential volumes in the 4th quarter to be flat So slightly down on a year over year basis, similar to what we experienced in the Q3. Price contribution to net sales growth was Flat in the Q3, and we expect it to be roughly flat again in the Q4, resulting in low single digit price contribution for the full year.

Speaker 3

We expect additional gross margin normalization in the 4th quarter as we cycle through the rest of our low cost inventory. However, we now expect full year gross margins to be better than previously anticipated due to strong performance across our margin initiatives and synergies from M and A. Taken altogether, we are narrowing our expectation for fiscal 2023 net sales to be in the range of 6.65 To $6,750,000,000 We're raising our expectation for adjusted EBITDA to be in the range of $890,000,000 to $910,000,000 Due to our margin performance in the Q3 as well as confidence in our ability to better sustain margins through the end of the year. We're also raising our expectation for operating cash flow conversion to be in the range of 110% to 115% of adjusted EBITDA due to our disciplined inventory optimization efforts. As we look beyond this year, we plan to provide our full year outlook For fiscal 2024 during next quarter's earnings call.

Speaker 3

However, as we sit here today, we generally expect end market volumes to be roughly flat to up low single digits depending on the broader economic conditions, including the effects of interest rate movements And progress on the federal infrastructure proceeds. We remain committed to our market outperformance driven by our organic and inorganic growth strategies. From a margin perspective, we anticipate further margin normalization that wasn't fully realized this year to impact our results in the first half of fiscal twenty twenty four, while we continue to drive our margin initiatives to offset these impacts. Our focus will continue to be on the areas within our control, including customer service, Technical expertise, productivity and pricing execution. We'll continue deploying capital and initiatives that will result in accelerated growth, Including executing on our M and A pipeline and delivering on our organic growth strategies.

Speaker 3

We'll maintain significant liquidity and We are well positioned to outperform the market in this complex demand environment, creating value for all our stakeholders. We look forward to helping our customers build more reliable infrastructure as we close out fiscal 2023. At this time, I'd like to open it up for questions.

Speaker 4

Thank you.

Operator

Please go ahead.

Speaker 5

Yes. Thanks very much for taking my question, and congrats on the strong results. Can you guys hear me?

Speaker 3

Thanks, Joe. Thanks for the question. Yes, we can hear you now. Thanks.

Speaker 5

Hey, sure. Okay, great. Yes, thanks a lot for the early insights into next year's volumes, flat to up low singles. That's pretty good. I'm interested in just kind of getting into what the different thoughts are around the end markets, maybe at the low end of that and at the high end of that, Kind of what you see R and R on res and new res doing next year?

Speaker 3

Yes, sure, Joe. Thanks for that Question. And yes, we did for 2024, we think overall the end markets are at least at this point looking to be kind of flat To low single digit and as we've talked about our municipal base, which is roughly 40% or so of the business, we believe is going to continue to be very Going into next year, in that kind of low single digit range, we're coming off a really weak Residential year, as we've talked about on prior quarters' calls, so we do expect some growth coming out of resi. Now that does assume that We do see mortgage rates in an environment where maybe those come down a little bit. Here is the Fed stabilizes some of the rate movements that they've been looking at.

Speaker 3

And then from a non residential exposure, like we talked about, that's A very broad exposure for us. And while there's different pockets within there, we believe that's going to be flattish as we go into 2024.

Speaker 5

Understood. Thanks a lot for that detail. And then just thinking about the Share repurchase commentary. I'm wondering, in a year where, going forward, M and A activity may be below your annual target in any given year, Would you be sort of more programmatic about letting that excess capital flow to repurchases, kind of thinking about your philosophy around letting cash build and letting leverage come down?

Speaker 3

Yes, Joe, the way we're thinking about capital deployment right now is, as you've seen, we've really generated some really Strong cash flow here throughout 2023, expect 2024 and beyond to be really strong Cash flow generation years for us and with our current debt leverage at about 1.5 times, I believe that provides us ample Capital to be able to deploy not only to M and A, which you've heard Steve talk about the healthy pipeline that we have, But also give us that opportunity to be opportunistic with share repurchases as opportunities arise there. And then beyond that potentially being able to do dividends at some point in the future. So we're going to look to do all those things To return capital to shareholders, we think those are all attractive opportunities for us and we'll continue to look at it that way.

Speaker 5

All right. Thanks for all the detail. Good luck in the Q4.

Speaker 3

Yes. Thanks, Joe.

Operator

Our next question is from David Manthey from Baird. Please go ahead. Hello, David. Your line is now open. Could you please check you're not on mute?

Operator

Unfortunately, we're not able to hear anything from David's line, so we'll move on to the next question. The next question comes from Kathryn Thompson at Thompson Research Group. Kathryn, please go ahead.

Speaker 6

Hi. Thank you for taking my questions today. Focusing looking forward into next year, I'm thinking tagging on the question on M and A. First, could you give a little bit more color in terms of how the appetite may have changed For targets as you go into next year, what's different? And how do you feel about M and A environment next year?

Speaker 6

And then Have your priorities changed in terms of types of end markets given the changing landscape for mega projects? Thank you.

Speaker 2

Hey, thanks, Catherine. Yes, as we look at certainly the existing pipeline that we had and that we've on this year and what we've got in store as we look through in the future here. We really haven't seen much of a change at all And what our appetite is, we continue to see great businesses out there across a broad spectrum, whether they're simple bolt ons Or getting us access to new products and new categories for us. So I think we'll continue to build on that. And so we don't really see a change in that And our appetite for that.

Speaker 2

And then, sorry, can you give me your second part of that question again?

Speaker 6

And so it's really how has the appetite changed? Or has there been any changes in terms of your targets in terms of I'd be more or less open to M and A.

Speaker 2

Yes. I would say that the business environment Yes. The business environment many of the sellers have operated in and many of our competitors have operated in have been pretty challenging. So I would say we're starting to see that break loose A little bit more. And certainly, like you look at the volume of deals that we've done this year, we think that's Pretty indicative of what we see in the pipeline ahead.

Speaker 2

We've been if you look back over the last several years, It looks pretty consistent in terms of the amount of volume we've been able to do accretively to each year And that 2% to 4%, we're certainly in the high end of that at this point. I think we continue to see that going into certainly 2024 and beyond.

Speaker 6

Okay. And then finally, we're getting from just based on our getting a wide range of feedback in terms of on the non res, in terms of cancellations or pushing out projects. But in general, On your lighter non res, you are seeing some push out or cancellations, but for large are not. What are you seeing in terms of project delays And or cancellations in the more in the traditional non res end market? Thank you.

Speaker 2

Yes. We saw softness really continue in Q3, but we did see the volume stabilize late in the quarter. If you look at a couple of the areas that have been very strong for us, we look at highways and street projects have been very robust, While we've had some had to offset, obviously, warehouse construction and multifamily has been softer than normal. But I think if you look at What a broad category that is for us with nonresidential. It really gives us a lot of stability as we go forward.

Speaker 2

And we think we're incredibly well positioned As we get into 2024.

Speaker 6

Okay, great. Thank you.

Speaker 2

Thanks, Catherine.

Operator

Our next question comes from Nigel Coe from Wolfe Research. Please go ahead.

Speaker 4

Thanks. Good morning. Thanks for the question. Sneak another one on the back end of that. The unit cost of inventory, not on the definition of the

Speaker 3

Nigel, you cut out on us, if you wouldn't mind answering or asking that question again.

Speaker 4

Sure. Just on the inventory, good progress on working down inventory from where it was this time last year. How much further does it go on this inventory rebalancing process? And I'll ask a follow-up question.

Speaker 3

Yes, great. Thanks for the question Nigel. Yes, we heard you on that one. Appreciate the question. On inventory, I would tell you that we did make a lot of good Progress in the Q3 on inventory.

Speaker 3

We've had, I'd say, some movement on Certain product categories that's really allowed us to work through a lot of the excess stock that we had while we were Cushioning for some of the supply chain challenges. I'd say there's still a handful of product categories that we're working down yet. Expect us to make continued progress In the Q4, but as we've talked about seasonally volumes do come down in the Q4. So it's hard to say how much Progress we'll make against those remaining product categories as we wrap up this year. So, I think we'll make good progress, but there could be some of that Leaks into 2024, yes, that will continue to work to optimize.

Speaker 4

Okay. So it sounds like there might be a slight tailwind in 2024, but It looks like we're in good shape. But then on the second part of that question is really around the cost of inventory. And what I'm trying to get at here is, obviously, it seems like we're getting close to the back end of the price cost sort of headwinds. I'm just curious if we're now at the point now where we're seeing the unit cost of inventory really stabilizing Q over Q at this point?

Speaker 3

Yes, Nigel, thanks for the question on that. Yes, I think similarly as it relates to margins, The inventory is working similarly. I mean, we have experienced some of that gross margin normalization Across certain product categories that we've been able to really flush through and get current on, there's still a handful of categories that we're still carrying Some low cost inventory and expect we'll work through the remainder of that as we get into Q4 and into next year. So So I think there's a little bit of normalization that's going to happen here, but we've been able to offset a lot of that. We've had some accretive M and A Come through here in 2023, we've been able to deliver synergies on top of that at the gross margin level And then, frankly, made a lot of really good progress on some of our gross margin initiatives, especially here in the Q3.

Speaker 3

So Those are some areas we'll continue to work to offset that normalization, but I do expect some of that to continue here into Q4 and into the first half of twenty twenty four.

Speaker 4

Okay. I'll leave it there. Thank you.

Speaker 3

Okay. Thanks, Nigel.

Speaker 4

Our next

Operator

question is from Anthony Pettinari from Citigroup. Please go ahead.

Speaker 7

Hi. This is Asher Sonnen on for Anthony. Thanks for taking my questions. You talked about volumes flat to up low single digit in 2024. But I was just wondering if you could share your outlook maybe for Price in 2024, at least directionally and if you've announced or planning any kind of pricing actions?

Speaker 3

Yes. We continue to watch the price obviously in the current market and spend a lot of time talking to our suppliers about What their plans are going forward and at this point we're as we look into 2024, we're really assuming a neutral price environment. We could see some ups and downs in any particular product category there, but really believe overall from a price contribution standpoint, It should be really a neutral environment into 2024, but we'll provide some more color on that as we get into next quarter's Earnings call and whether or not we see any other price movements, especially as we roll into the early part of 2024.

Speaker 7

Got it. That's super helpful. And then just another one. Can you provide maybe an update around what you're seeing in terms of IIJA spending flow through to your end markets, Your expectations around that for 2024 and maybe how that plays into your volume framework for 2024?

Speaker 2

Yes, thanks. The IIJA funds have certainly been slower than we would have liked or anticipated as we've got into the back half of this year. What I would say is that we're starting to see some green shoots in this, particularly in the upper Midwest as a couple of the states have started to see projects break loose And actually, funding go through, particularly in Michigan, Wisconsin and the Dakotas, there's been some projects that have been utilizing that funding. So we're really anticipating that we'll see some more volume start to break loose in 2024 and that should be some tailwind for us on the municipal side.

Speaker 7

Thanks. That's very helpful. I'll turn it over.

Speaker 2

Thank you.

Operator

Our next question is from Joe Ritchie from Goldman Sachs. Please go ahead.

Speaker 8

Hi. This is Vivek Srivastava on for Joe, and thank you for the question. Maybe just starting with gross margins. Your gross margin performance has been pretty impressive for the last few quarters. And just wanted to understand how much are synergies Typically, after you close a deal, when do you start realizing some of those gross margin synergies?

Speaker 3

Yes. Thanks Vivek for the question. As we talked about, we expected some gross margin normalization throughout 2023 kind of in that 100 to 150 basis point range and we did definitely experience Some of that pressure on some of these product categories like I've talked about that we've flushed through that lower cost inventory. And really the offsets that we've seen there have been as you mentioned some of the accretive M and A Which has also brought some synergy with it. I'd say probably more so just given the timing of some of those acquisitions, more of it's just been the accretive nature of it.

Speaker 3

There's Some work that we'll do yet to deliver on some of those synergies to drive some more of the gross margin improvement. And then I'd say a lot of good progress in the quarter and some of our sourcing optimization work that's brought in some nice Overperformance more so than I'd say we were expecting in the Q3. So those are really the elements of it. In terms of breaking them all out Specifically, we're not necessarily going to do that, but I did want to give you some additional color there on what some of those drivers are.

Speaker 8

That's helpful. Thanks for that. And just on the SG and A front, it looks like last 4 quarters, your SG and A has been growing Faster than the revenue growth, how long can this trend continue and when do you expect it to normalize?

Speaker 3

Yes, sure. As it relates to SG and A, there's really a handful of factors in there. I'd say some of these M and A Acquisitions that we've done while they've brought us higher gross margins, many of those also have had a little higher G and A based, so that's put a little more pressure on SG and A. And then I would say some of the cost inflation SG and A has trailed some of the product cost inflation that we've seen. So there's still a little bit more, I think, to Flow through from an SG and A perspective.

Speaker 3

And then, we've made a handful of, I'd say growth investments that have been SG and A impacting And to the results, I'm expecting some more SG and A pressure in Q4. And I think normally we'd SG and A productivity for a full year in 2024. But just given the timing of the M and A that I talked about and some of these investments, We're probably going to see a little bit more pressure as we look out throughout 2024, but those are really the drivers of it.

Speaker 8

Great. Thanks.

Speaker 3

Yes. Thank you.

Operator

Our next question is from Brian Connors from Northcoast Research. Please go ahead.

Speaker 9

Great. Thanks for taking my question. I wanted to ask about the private label side and if you can give us an update On your progress there, it looks like Enviroscape is a private label deal. And also, I assume the greenfields help you to accelerate that somewhat. So You've talked about going from 2% to 10% private label.

Speaker 9

Can you talk about where like if we're 12 months from now, kind of 24% what the vision is? Some of these things move the needle and we're what inning are we going to be in as we move through 2024? Is it a material improvement from the 2%?

Speaker 2

Yes, Ryan, this is Steve. So I appreciate the question. Yes, certainly Enviroscape has some private label Content to it for our geosynthetics business for sure. As we look at how we expand that, there's just a broad assortment of products Accessories out there that we've been able to develop beyond certainly geosynthetics, but when we get into You know other accessory kits and things along those lines. So we'll continue to do that.

Speaker 2

The long term plan we had was getting into this 10% -plus Terms of private label, so we'll be making investments, and we'll continue to enhance that performance through next year. We'll have a little bit more color to share on that As we wrap up the year end.

Speaker 9

Got it. Okay. And then my other question was on specific Line, which is water metering and AMI. Any can you give us any update on what you're seeing there both in terms of the near term Demand cadence and also M and A, it seems like metering was more of an M and A focus a few years ago, but kind of the recent deal flow doesn't seem like Metering has really been as much of a part of that. So is that just curious whether that's intentional or whether that's just a function of what's for sale out there?

Speaker 2

Yes. If you look at our quarterly results that we had, meters was an incredibly strong quarter and a lot of that was backlog that we've Had for projects that were executed where now we're starting to see that supply chain ease up with a couple of our key manufacturers and getting that product out to go execute. Bidding activity remains incredibly strong. You're certainly seeing where AMI and advanced metering has become Much more broadly accepted. We play a key role in helping to get that out to those customers, whether they're small rural customers looking at AMI systems Some of the large metropolitan areas.

Speaker 2

So we continue to see really a lot of strength in that end market. From an M and A perspective, We did a couple of acquisitions early on to get access to certain lines. As we look across the country right now, We certainly have coverage of many different lines all across the country at this point. So from an M and A perspective, You may not see a whole lot of activity in that as we feel pretty secure with the access to the products We've got across the broad portion of the country.

Speaker 9

Got it. Very helpful. Thanks for your time this morning.

Speaker 2

Thanks, Ryan.

Operator

Our next question comes from David Manthey from Baird. Please go ahead.

Speaker 10

Yes. Thank you. Good morning, guys. Mark, let me flat to up low single digits, Just so understanding that clearly, I believe you're talking about market volume growth there. And if you can just give us a little bit of color in terms of what Informs that outlook, understanding it's preliminary, but is this discussion with your larger builders, some visibility in

Speaker 2

How do you build that up?

Speaker 3

Yes, Dave, thanks for the question. Glad we Got you back. Yes, as we look out into 2024, Dave, it's really all those factors. We look at a Large amount of external data sources, which is important for us, but we have a large volume of Internal data that we look at from bidding activity that's likely to produce results into 2024 And then a lot of discussion with our local teams that are looking out and talking to their customers about what to expect for 2024. And then obviously also comparing those expectations relative to the numbers that have flown through in 2023.

Speaker 3

So it's a lot of different sources that we're looking at there. I'd say we always place the most reliance on the internal Data that we get from our teams and that we track, which really helps inform us for like we talked about at least at this stage what to for 2024, but we do plan to update everybody on that in our call here for the full year of 'twenty three and next quarter's call.

Speaker 10

Got it. Thank you. And second, a little bit more of a broad question here. Could you talk about technology and how important that is relative to your long term outgrowth versus your competition?

Speaker 3

Yes, I'd say from a technology standpoint, a major driver of our business is Productivity and effectiveness of quoting our customers, that's really the starting point. We've laid out a lot of that Technology in our Investor Day presentation. And then we have a number of tools available for our customers to really drive some stickiness From our perspective with those customers, it just make it easy to do business with us. I'd say less so from A driver of revenue growth or e commerce related, while we have capabilities For that, that's really not a driver of majority of the revenue that we have as a company. So really, I think as it relates So being more productive, getting in front of our customers faster than our competitors and then having technology that drives stickiness With tools like online advantage and others that really provide that stickiness is how we think about it from a technology perspective.

Speaker 10

Perfect. Thank you.

Speaker 3

All right. Thanks, Dave.

Operator

Our next question comes from Andrew Obin of Bank of America. Please go ahead.

Speaker 11

Hi. This is David Ridley Lane on for Andrew Obin. At the Investor Day, the slide on the bridge The 15% EBITDA margin goal included a 30 basis point decline in fiscal 2024 Given some of the gross margin normalization, given you're raising fiscal 2023 EBITDA margin by about 55 basis points. Should we think about that as being more like an 80 to 90 basis points decline In 2024, or are some of these margin improvements sustainable, I. E, is this sort of a timing Impact or have you been sustainably outperforming your plan on gross margin?

Speaker 3

Yes, David, thanks for the question on that. I'd say we've definitely been pleasantly surprised with The gross margin performance throughout 2023 and definitely the pricing stability that we've seen in the market has helped Drive some of that. So while we're seeing some low cost inventory catch up with market prices, the Stability of pricing, I would say, has provided better results than we had anticipated early on when we kind of laid out the Gross margin normalization, there's still risk and we'll watch that while prices are stable that can put some pressure On margins, so we're still guiding towards gross margin normalization in Q4 and some of that spilling into 2024. But If we can keep executing on our gross margin initiatives, we're going to be in a good position to offset As much of that as we can and hopefully minimize what that impact looks like in these out years.

Speaker 11

Got it. I mean, I guess another way of asking it, you talked, I think, in the past about 100 basis points to 150 basis points of onetime gross margin benefit. Are you thinking now more closely to the 100 basis point piece of that range?

Speaker 3

Yes, David. Like I said, I think with the pricing stability that's And better margins than we had anticipated. I wouldn't say we're ready to update that range yet of expectations, But definitely something that will be a focus as we lay out our kind of more detailed planning for 2024 on next quarter's call. But I think you can gauge from my comments that at this point, we're pleasantly surprised with how that's come in here for 2023.

Speaker 11

If I could sneak one more in. You did mention sourcing optimization. It's been helpful. I'm just thinking all your You, your peers, everyone is destocking. So I'm wondering if some of the benefit there is suppliers have Suppliers offered any incentive to take product, right?

Speaker 11

Because if all the distributors are destocking, the suppliers are seeing lower orders, Great. So are you seeing any of that kind of incentive activity?

Speaker 3

Yes, I would say as we think about Sourcing, optimization and the benefits we saw there definitely going into a year where we were reducing inventory Pretty significantly, and you've seen our inventory come way down. We do have certain volume incentive tiers with Suppliers and we kind of think about it as getting spend into the most preferred programs and getting into the right As we started the year, I think we had some concerns that we could really achieve all of the benefits there that our suppliers provide us Just given the reductions in volume, but I think the our sourcing teams have really done a great job of getting the spend in the right buckets, and that's driven some better Margin performance than we had anticipated.

Speaker 11

Thank you very much.

Speaker 3

All right. Thank you.

Operator

Our next question comes from Patrick Baumann from JPMorgan. Please go ahead.

Speaker 12

Hi. Thanks for taking my question. Sorry, I missed some of the call. But Did you provide any update on kind of what you're seeing from a non res perspective in terms of multifamily? I know that that was a reason why You tweaked down your outlook,

Speaker 9

maybe that was a

Speaker 12

quarter ago from a top line perspective. So wondering if you An update on what you're seeing in terms of starts activity, in specific verticals like multifamily?

Speaker 2

Yes, Patrick, this is Steve. Yes, we definitely saw softness coming into Q3 and we saw it stabilize as we got into the back half of the quarter. So multifamily was challenging as was warehousing, but really started to see some good growth in highways and projects. And so when we looked out across the whole spectrum that what we cover, particularly look at some of these big mega projects, We really saw that stabilize towards the back half of the quarter, and we're pretty pleased with kind of how that came in.

Speaker 12

Okay. And then the 2024 outlook there, you described, I'm just looking at notes that someone sent me, that's kind of flattish for non res. Is that the way you're describing

Speaker 3

Yes, I would say we provided a range of market for 2024 kind of saying flat Low single digit, I think on the low end of that it's probably down a little, on the high end of that it's probably flattish in that range.

Speaker 12

That's non res or that's total markets?

Speaker 3

Not non res. Overall market would be flat to up low single digit.

Speaker 12

Okay. Got it. Got it. Thank you. I'm sorry for having to rehash that.

Speaker 12

And then In terms of not to beat the dead horse on the gross margin dynamic, but so 27% or so in 2022 and like year to date similar to that, has been the level that you've been able to achieve. So you're still so you're not ready to update kind of that 100 to 150 basis point of drag. So potentially, so we should, for lack of an update, kind of assume that, that is That's a reasonable base case to think about for gross margin in terms of drag from that. And then Maybe some offset will come from your initiatives, but something down in the 100 basis points in terms of gross margin next year is kind of like A reasonable base case, is that fair?

Speaker 3

Pat, probably the way I would think about it is we've experienced Some of that gross margin normalization in 2023, which we've been able to offset and we'll experience some of that into 2024. So it kind of gets split period over period. So it's probably not the full amount into 2024, but that's the piece we do Plan to provide obviously a lot more guidance on as we get into our full year release for 2024. But that's the way we're thinking about it right now as we definitely know we've Some of it, a lot of which we've been able to offset and we're likely to experience the balance of it in 2024, but it's probably not a full year impact of it.

Speaker 4

Okay.

Speaker 12

That's different than I interpreted. So I appreciate the color there. Thanks a lot and best of luck.

Speaker 3

All right. Thank you.

Operator

We have no further questions on the call. So I will hand back to Steve LeClair for closing remarks.

Speaker 2

Thank you all again for joining us today. It was a pleasure to have you on the call. Our consistent execution quarter after quarter As a result of the hard work of our branches and functional support teams, our focus on operational excellence and the diversity of our products and end markets, We have more levers than ever for driving growth and profitability, the cash flow generation to capitalize on it and the team to execute on it. Thank you for your interest in Core and Main. Operator, that concludes our call.

Operator

Thank you all for joining today's conference call. You may now disconnect your lines.

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Key Takeaways

  • Coramain delivered Q3 net sales slightly above last year, with acquisitions contributing ~3% growth offsetting low-single-digit organic volume declines, flat price contribution, and a 50 bps gross margin reduction due to cost normalization.
  • The company generated $373 million in operating cash flow in Q3 and nearly $1.1 billion over the past twelve months, resulting in net leverage of 1.5× and over $1.3 billion of available liquidity to fund growth.
  • Strategic expansion included opening two new greenfield locations in Spokane, WA, and Fontana, CA, and completing eight acquisitions YTD with combined annualized net sales of $330 million, targeting 2%–4% annual sales growth from M&A.
  • Full-year 2023 guidance was raised to net sales of $6.65 billion–$6.75 billion, adjusted EBITDA of $890 million–$910 million, and operating cash flow conversion of 110%–115% of adjusted EBITDA.
  • For fiscal 2024, Coramain anticipates end-market volumes to be flat to up low single digits, neutral price contribution, continued gross margin normalization in H1, and a focus on organic growth, inorganic deals, and capital deployment.
A.I. generated. May contain errors.
Earnings Conference Call
Core & Main Q3 2024
00:00 / 00:00