Q2 2021 Core & Main Inc Earnings Call
Hello, and welcome to the core nine Q2, 2021 earnings call. My name is Charlie and I will be coordinating your call today. If you wish to ask a question. During the presentation. You May Register to do so by pressing star followed by one on the telephone keypad I will now hand, you over to you.
Hey, Robert Rodriguez from coordinated to begin Robin. Please go ahead.
Thank you.
Good morning, and welcome to the Korn main fiscal 2021 second quarter earnings call. This is Robin Bradbury, Vice President of Investor Relations and asking April one main.
Thank you for joining us this morning to attend our first earnings call as a public company.
I want to share our results with you Steve.
Steve will clear, our Chief Executive Officer will lead today's call with the company overview and our second quarter execution highlights.
Mark Wikowsky, our Chief Financial Officer will then discuss our second quarter financial results and second half outlook, followed by a Q&A, we will conclude the call with Steve's closing remarks.
For Q&A. Please limit to one question and one follow up if you have additional questions. You may return to the queue. Thank you for your cooperation.
Some of the information you will hear today may include forward looking statements. They may include statements regarding our intentions beliefs assumptions, our current expectations concerning our financial position results of operations cash flows prospects our growth strategies.
Forward looking statements are subject to known and unknown risks and uncertainties many of which may be outside of our control. We caution you that forward looking statements are not guarantees of future performance or outcomes and that they may differ materially from those made in or suggested by the forward looking statements contained on this call.
These forward looking statements are made only as of the date of this call. We do not undertake any obligation to update or revise any forward looking or cautionary statements to reflect changes in assumptions the occurrence of events or changes in future operating results.
In addition to providing results that are determined in accordance with U S. GAAP, we present EBITDA adjusted EBITDA adjusted EBITDA margin adjusted net income and net debt leverage all of which are non-GAAP financial measures.
These measures are not considered measures of financial performance or liquidity under GAAP, but we use them to assess the operating results of our business.
For a reconciliation to the nearest GAAP measure please refer to the slides in the appendix of the fiscal 2021 second quarter Investor presentation, which can be found on our Investor Relations website.
Participating on the call and for your interest in core name I will now turn the call over to Chief Executive Officer, Steve Leclair.
Thank you Rob and good morning, everyone. Thank you for joining us today and welcome to our fiscal 2021 second quarter earnings call. Our first earnings call as a publicly traded company. This is an exciting milestone for our company and I am very pleased to be sharing that with you.
I will begin today's call with a brief overview of our business and industry that will then cover our key growth drivers and acquisition strategy followed by a review of our ESG characteristics I will end by discussing our second quarter execution highlights before turning the call over to our Chief Financial Officer, Mark with Koski to discuss our fiscal 2020.
One second quarter financial results and second half outlook.
I'll start on page five of the presentation with a brief overview of core and main.
Core <unk> is a leading specialty distributor water wastewater storm drainage and fire protection products and related services, serving municipalities private water companies and professional contractors across municipal nonresidential and residential end markets nationwide <unk>.
Specialty products and services are used in the maintenance repair replacement and construction of water and fire protection infrastructure. We are one of only two national distributors operating across large and highly fragmented markets, which we estimate to be approximately $27 billion in size.
With more than 285 branches across the U S. We serve as a critical link between over 4500 suppliers and a diverse and longstanding base of over 60000 customers.
We have diversified end market exposure with an estimated 45% municipal 37% nonresidential and 18% residential end market mix in fiscal year 2020.
Furthermore, we had near equal exposure to construction on new projects and existing repair and replace projects in fiscal year 2020.
On page six we provide an overview of our broad product offering and service offering we offer a comprehensive portfolio of over 200000, skus covering a full spectrum of specialized products.
The core of our business are the pipes valves and fittings, which are the fundamental building blocks for underground water infrastructure and water treatment plants.
Above ground and in many types of structures, you will see our fire protection line fire protection infrastructure requires not only a specialized set of products, including sprinklers and valves, but also the ability to fabricate and assemble sprinkler systems and their components were.
We are national distributor swamp, smartwater meters, which brings significant environmental and economic benefits to municipalities and also provide a variety of value added services, including not only project management installation hardware and software, but also lifelong meter system management.
We are also a national provider of storm drainage and Geo synthetics and erosion control solutions, which are growing in importance due to the recent impacts of climate change and increased natural flooding disasters.
On page seven we show the strong value proposition, we offer to both our customers and our suppliers.
We are a trusted source to our customers because of our operational excellence across our broad offering of products and services.
We take a consultative sales approach leveraging our deep understanding of local specifications to help design material project plans and offer key value added services throughout the life of the project.
Our role as the national distributors more than just supplying products, we have access to a broad product offering and have the ability to secure products for any job and in any environment for our customers.
Paired with our National Branch network. We also offer complementary value added services that are key to our value proposition, which we believe differentiate us from our competitors.
We have long standing relationships with our suppliers and in many cases, we benefit from favorable purchasing arrangements and preferred or exclusive access to products, especially darn periods of material shortages.
Our geographic footprint and reach the local communities is essential to our suppliers because we have a highly developed understanding of the market the customer base and the growth opportunities.
We believe we have the ability and expertise to drive the adoption of new products and technologies and offer the logistics of last mile delivery and customer support.
We have a large and highly trained sales force with the ability to reach our highly fragmented customer base.
On page eight we outline the levers that enable us to drive sustainable growth.
Over the past few years, we have invested in people and capabilities to strengthen our ability to drive growth as we look ahead, we see multiple avenues to continue pursuing.
First we see beneficial industry trends supported by secular growth drivers. The traditionally stable municipal end market is poised to accelerate as additional spending is necessary to address historical underinvestment in support population growth.
<unk> construction is currently surging due to population growth demographic population shifts low housing inventory and record low interest rates with the surge in residential construction comes a long tailed rejuvenated nonresidential investment as communities expanded demand increases for our waterworks storm drainage and fire protection.
Products.
We believe we're at the beginning of a new nonresidential construction cycle and see favorable tailwind ahead, particularly in verticals, such as commercial and institutional buildings data centers and warehousing development projects.
We have several organic growth levers, we have demonstrated that we can grow faster than our underlying addressable market. We believe our competitive advantages allow us to continue to gain share at the local level.
With only 14% share across an estimated 27 billion dollar addressable market, we still have significant opportunity to grow we continue to drive organic expansion into underpenetrated geographies through new Greenfield locations.
We have meaningful runway to increase penetration with strategic accounts, we have a specialized team focus on serving strategic accounts, which include large private water companies and national contractors. We believe we are better positioned than ever to serve these national customers are larger projects requiring dedicated sales personnel greater technical expertise.
These are more complex or specialized procurement needs are.
Our size and scale positions us to continue accelerating the adoption of products in our industry, such as smart meters Fusible, HDTV technology, Geo synthetics and erosion control solutions in a number of other developing product categories.
Acquisitions are another key component of our growth strategy, we have a long runway to consolidate our fragmented industry.
Our focus includes consolidation of existing market positions, new geographies and expansion into product categories, where we are clearly underpenetrated I will discuss our acquisition strategy in more detail in the coming slides.
Finally, we have identified a long list of opportunities to enhance gross margins, including private label through global sourcing and pricing and procurement initiatives.
As of fiscal year 2020, private label made up roughly 1% of our total product expenditures. We believe that we have an opportunity to transition several hundred million dollars' worth of ancillary spend to be internally source, but we have no intention of transitioning highly specified products into private label or disrupting any products from our top two.
Our supplier partners.
We have recently built a team of pricing analysts, who have been able to enhance product margins using data to drive pricing decisions and by proactively updating price increases to increased pricing visibility to our branch network.
Additionally, our category management team as opportunities continue shifting spend as suppliers with the best pricing and payment programs in order to optimize gross margins.
We are in the early innings of executing on many of these initiatives and see a long runway of opportunity ahead.
On page nine we provide a timeline of our recent acquisitions.
We have a strong track record of acquiring and integrating businesses. We continue to cultivate a robust pipeline of targets for the short and long term we.
We have executed an integrated 14 acquisitions since becoming an independent company in 2017, adding more than $630 million in aggregate historical annual net sales, including two recent deals that closed subsequent to the second quarter, which I will discuss in more detail shortly.
We have a refined process of identifying attractive bolt on targets that we are well positioned to source acquire and integrate new businesses.
We believe we are widely viewed as the acquirer of choice due to our long standing relationships and entrepreneurial culture and our investment in the development of our people.
We seek to generate margin improvement and synergy value from our acquisitions through purchasing capabilities fixed cost reduction in the use of our scalable platforms, which drive operational efficiencies at our branches.
Our industry is large and highly fragmented as we look ahead, we see a runway for growth through M&A, we maintain a very robust pipeline of future acquisitions, which we pursue through our disciplined approach we.
We prioritize complementary businesses that help us consolidate existing market positions and expand into new geographic areas acquire key talent and offer new products.
On page 10, we show our newest acquisitions, Ellen and bag in supply in specific pipe.
The Pacific pipe acquisition highlights our focus on expanding into underserved geographies.
<unk> is a significant player in modernizing and expanding water infrastructure in Hawaii. The state we had no presence in previously.
Specific pipe has been in operation since 2011, serving municipalities and contractors in the water wastewater storm drainage in irrigation industries with a broad waterworks product offering specific pipe operates four locations spanning the islands of Hawaii, Maui and Oahu.
The O&M bag and supply acquisitions highlight our focus on expanding our presence in underpenetrated product categories. It provides a sizable growth opportunity in the large and fragmented geo synthetics and erosion control market, which we estimate to be roughly $5 billion in size over.
Over the past three decades, <unk> has built itself into one of the nation's leading suppliers of Geo synthetics and erosion control products by joining our teams together, we will expand our expertise to better serve our customers nationwide have a larger reach for our products and services with a dedicated team of specialists, serving the rapidly growing and highly special.
<unk> Geo synthetics and erosion control market.
Annual net sales Pacific pipe and <unk> bag and supply for the fiscal year ended December 31, 2020, we're roughly 70% and $60 million, respectively, and both acquisitions will be incremental to our sales and earnings growth for the majority of the second half of fiscal 2021.
Turning to page 11, we share our ESG characteristics ESG is core to our business model our company and our people are committed to the provision of safe and sustainable water infrastructure throughout the United States preserving the Earth's most valuable resource and providing clean and safe water to our communities are the core of what we do.
Our products and services are integral to building repairing and maintaining essential water wastewater storm drainage and fire protection systems.
Water is a finite resource and community water supply challenges, including natural flooding contamination and drought continue to increase in severity.
We partner with our customers to help ensure water resources and facilities are available to meet each local communities short and long term needs.
We believe our investment in our people through our award winning training and career development is a true differentiator for us we.
We are proud to have seasoned experts who are preparing the industry leaders for tomorrow to continue our tradition of local experts nationwide.
Our deeply committed to our communities and our associates.
Our inaugural ESG report that was published last fall has become a critical piece of communication with all of our stakeholders.
We believe that our focus on ESG matters, and sustainability will benefit our business by enhancing our relationships with our associates, our customers our suppliers and the communities in which we operate we will continue to focus on this area and enhance our communication reporting around ESG overtime.
With that I will now cover our second quarter execution highlights on page 12 of the presentation.
During and subsequent to the second quarter, we successfully completed our initial public offering of approximately 40 million shares of class a common stock generating gross proceeds of approximately $800 million.
Including the full exercise of the underwriters over allotment option.
We used the proceeds from the offering to deleverage the balance sheet positioning us with greater financial flexibility to pursue our growth strategies.
While the IPO was a great milestone for US we remain focused on driving solid business results in a very dynamic environment.
In the second quarter, we delivered record net sales of nearly $4.0 billion growing nearly 36% over the prior year period.
And record adjusted EBITDA of $155 million, which was nearly 57% over the prior year period, we continued to expand our market share and improve our profitability through the execution of our sales and margin initiatives, while using our leadership position in the industry to gain access to hard to find products for our customers.
And purchased Opportunistically ahead of announced product cost increases to expand our gross margins.
Earlier this year PVC resin manufacturers declared force majeure due to raw material shortages stemming from plant closures as a result of unprecedented winter weather in Texas and Louisiana.
It was the second force majeure on PVC resin in less than six months and the ripple effects were felt across the entire supply chain industry wide PVC manufacturing capacity and inventories declined while demand strengthen which puts peak, which pushed PVC pipe prices to an all time high.
In recent months PVC pipe manufacturing returned to full capacity and our PVC suppliers have been working to rebuild inventory.
Demand has continued to be strong and prices rose through the second quarter, the impact of Hurricane Idaho still not fully known but we expect that it will likely further impact availability of PVC products and keep prices at or above those we have experienced so far this year.
On a on a smaller scale, but growing in significance. We're also experiencing supply chain impacts in other product categories due to unprecedented demand constrained manufacturing capacity container shortages port issues and semiconductor chip shortages.
A portion of our smart metering products have chip components that are in short supply net has impacted our ability to satisfy all of the customer demand.
Some of our suppliers import raw materials or finished products and we're beginning to see an impact to the cost and supply of those products due to the declining availability and rising cost of imports shipping containers.
We are also seeing some deferral of shipments as a result of constrained labor capacity across the industry from our suppliers to our customers.
Despite these notable challenges our teams have navigated the environment well, given our long term relationships with our suppliers and our leadership in the industry. We are often able to gain preferred access to products store in periods of material shortages and provide reliable service to our customers nationwide.
Through coordinated efforts with our branches and leadership team. We believe we have gained market share by successfully mitigating the impacts of the supply chain events by ensuring access to products and providing advanced notice of cost increases and reliable information on product availability to our customers.
I'm incredibly proud of the dedication of our customers and suppliers. During this challenging environment more than ever we have served as logistics experts for our customers, helping them find and source products during a period of unprecedented pricing increases and product shortages, while providing credible market information to our suppliers regarding demand.
And to assist them with production planning.
As previously mentioned, we continued to execute on our growth strategy by announcing two new acquisitions during the quarter, LLM bag and supply and Pacific pipe company, both of which closed subsequent to the quarter.
We continue to closely monitor the impacts of COVID-19, and the variants that have surfaced across country.
Throughout the pandemic, we continue to operate as an essential business, providing our customers with the products and services necessary to maintain and improve our nation's water infrastructure.
At the beginning of the pandemic, we put policies and business continuity plans in place to protect our associates customers and suppliers.
Our teams have remained agile and have quickly adapted to new protocols, while increasing efficiency throughout the process.
As vaccines rolled out in mass and our cities began loosening restrictions. We also began easing certain COVID-19 protocols, while still keeping safety our number one priority we.
We are committed to keeping our associates customers and suppliers safe, while continuing to keep all of our branches open.
Subsequent to the end of the quarter. The Senate passed the bipartisan one trillion dollars invest in America Act.
The largest long term federal investment our nation's infrastructure in nearly a century among other things the plan makes transformational and historic investments in clean water infrastructure and infrastructure that provides resilience to the changing climate.
While it's still uncertain, if or when the bill will be signed into law and when the funds will start making their way into our end markets are direct infusion of federal funds for water wastewater and storm drainage infrastructure has immense implications to accelerate repair and replacement activity.
We believe we are well positioned to capitalize on any favorable tailwind created by the additional investment. However, we are well positioned to continue to grow even without this potential infusion of funds.
I will now turn the call over to our Chief Financial Officer, Mark with Caskey discuss our fiscal 2021 second quarter financial results and second half outlook.
Thank you Steve Good morning, everyone turning to page 14, I'll begin by covering our second quarter operating results.
Net sales in the second quarter were nearly $4.0 billion, an increase of approximately 36% over the prior year period.
The increase was driven by volume gains and higher average selling prices relative to the prior year period.
Our sales benefited from demand across each of our end markets residential.
Construction has continued to benefit from strong housing demand and lot development.
The municipal end market has started to see an acceleration of growth.
Our non residential end market, which contains a mix of project types ranging from commercial buildings to roads and bridges saw varying results, but overall experienced positive volume growth in the quarter.
Our execution of sales initiatives and our leadership position in our industry has allowed us to outperform our end markets and deliver solid core share gains by ensuring our customers have access to the products, where and when they needed them.
We believe roughly half of our net sales increased for the quarter was due to price inflation, which was much higher than expected and driven by our team's ability to efficiently pass through rising material costs.
We experienced rapidly rising material costs on PVC pipe. In addition to many other product lines, but to a lesser extent in PBC.
Our teams have done a fantastic job navigating the inflationary environment and working closely with our customers to give them advance notice of these market price increases.
Pipe valve and fitting sales increased nearly 43% compared to the prior year period due to a mix of strong volume gains and price inflation from rising material costs.
The same factors drove growth in our storm drainage and fire protection product lines, which were up 21% and 37% respectively compared with the prior year period.
Our metering product line grew by 9% compared with the prior year period.
Metering growth was tempered by the global semiconductor chip shortage, which is a necessary component in certain smart metering devices.
Gross profit in the second quarter increased 41% to $325 million.
Gross profit as a percentage of sales was 25, 1% compared with 24, 1% in the prior year period, an improvement of approximately 100 basis points.
The increase in gross profit percentage was primarily due to improvements in product sourcing and pricing.
Given our scale, we've been able to make opportunistic inventory purchases ahead of announced price increases which has helped slow the growth of the net cost of our products during an inflationary period.
We believe our initiatives to give better visibility to these cost increases from our vendors to our field teams has resulted in gross margin enhancement.
We also continue to make progress on our private label initiative and doubled the amount of internally sourced products relative to the same quarter last year.
Selling general and administrative expenses for the second quarter increased 40% to $192 million.
The increase was primarily attributable to an increase in personnel expenses driven by higher variable incentive compensation, resulting from higher sales volume and stronger profitability.
In addition, we experienced higher head count and discretionary expenses due to furloughs and spending reductions and the response to COVID-19 in the prior year period.
SG&A expenses also increased by $17 million related to higher equity based compensation expense due to accounting for equity awards and $4.0 million related to costs associated with the initial public offering.
As a result of our debt refinancing we recognized a net loss on debt modification and extinguishment during the quarter of $54.0 million.
This amount consisted of early redemption premiums deferred financing fee write offs settlement of our cash flow interest rates swap instrument and non capitalized third party fees.
Annual interest expense savings as a result of the debt refinancing is expected to be roughly $85 million.
Adjusted EBITDA grew 57% to $155 million, improving adjusted EBITDA margin by approximately 160 basis points.
The increase in adjusted EBITDA margin was due to strong net sales growth gross margin rate expansion and leveraging our fixed cost structure on the sales growth.
Adjusted net income increased 215% to $61 million.
The increase was due to strong sales growth and gross margin rate expansion.
Actually offset by higher SG&A expenses, primarily attributable to higher variable compensation cost during the period.
And preparing adjusted net income we exclude the effects of Noncontrolling interest as we evaluate and manage the business as a whole.
For a reconciliation of net income to adjusted net income refer to the slides in the appendix of the presentation.
On page 15, I will now cover our debt and liquidity position at the end of the quarter.
Our net debt at the end of the quarter was $434.0 million per year net debt leverage down to three three times, which is one nine turns favorable to the prior quarter.
The reduction in net debt leverage is primarily a result of net proceeds generated from the initial public offering the refinancing transactions taken in connection with the IPO and an increase in adjusted EBITDA.
We expect to continue deleveraging the balance sheet similar to what we have accomplished in the past, despite making strategic investments to grow the business, which may include acquisitions.
We closed on the refinancing of our new $6.0 billion term loan in conjunction with the closing of our IPO, which carries interest at LIBOR plus margin of 250 basis points maturing in July 2028.
We correspondingly entered into a five year fixed interest rate hedge with an initial notional value of $1 billion to lock in LIBOR rates at 74 basis points.
The notional value will reduce by $100 million per year, beginning in July 2023 through the end of the hedge term.
As part of the debt refinancing, we also expanded and extended our asset based revolving credit facility from $700 million to $850 million through July 2026.
At the end of the second quarter, we had over 900 million in liquidity, including approximately $67 million of cash and cash equivalents.
We believe that our cash on hand, together with the availability of borrowings under our asset based revolving credit facility and cash generated from operations will be sufficient in the near term to meet our working capital needs anticipated capital expenditures scheduled principal and interest payments on our term loan and to continue pursuing our growth strategy.
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Operating cash flow in the second quarter was less than the prior year periods due to the acceleration of interest payments associated with the debt refinancing along with investments in working capital to support our growth we.
We have continued to invest in inventory to ensure availability and access to products for our customers.
These investments along with the growth in the business compared to last year resulted in a larger working capital build in the current quarter.
Historically, we have generated most of our operating cash in the second half of the year as we unwind working capital with reduced inventory spending and lower customer receivables.
We expect to see a similar seasonal generation of operating cash flow in the second half of this year.
Subsequent to the end of the quarter the underwriters of our initial public offering exercised their over allotment option, which resulted in the issuance of an additional $7.0 million class a shares generating net proceeds of $104.0 million.
We intend to use the net proceeds for general corporate purposes.
Turning to page 16, I will now discuss our outlook for the remainder of fiscal year.
We expect the demand and pricing trends, we experienced in the first half of the year to continue into the second half.
Though tempered against tougher prior year comps and anticipated supply chain constraints.
Last year, we experienced a softer first half due to COVID-19 related restrictions and a snapback in demand in the second half of the city's loosened restrictions end markets began to recover as well as favorable weather environment in the fourth quarter.
Each of our end markets appears poised for continued growth based on bidding activity and order flow and the execution of our defined growth initiatives is expected to continue driving core market share gains.
While we are pleased with our results. So far this year, we believe that our supply chain is experiencing capacity constraints across many product lines, which we anticipate will be further impacted by hurricane either.
We believe this will temper volume growth in the second half of the year, while keeping prices as historically high levels through the end of the year.
We typically experienced a seasonal slowdown throughout the second half of the year and the fourth quarter in particular is susceptible to variability due to cold winter weather in northern geographies.
The Pacific pipe in O&M bag and supply acquisitions will contribute nearly half a year of operating results each with Pacific pipe closing at the beginning of August and <unk> supply closing at the end of August.
On a combined basis these acquisitions generated roughly $130 million of net sales for the fiscal year ended December 31.2020.
We maintain a very strong pipeline of high quality acquisition targets and look forward to adding more of them to the corn main family.
Our acquisitions are performing well and we continue to improve our ability to integrate them into our company and create synergies together.
We expect to.
We continued delivering on our gross margin initiatives generating year over year margin expansion in the second half, though moderated compared to the first half as our product cost catch up with market prices if product cost stabilize.
We also expect to continue leveraging our cost structure delivering year over year SG&A rate improvement in the second half.
However, the SG&A rate improvement will be scaled compared to what we delivered in the first half as a result of approximately $10 million of ongoing annual cost needed to support our company. Following the initial public offering.
Taken altogether, we expect full year 2021, adjusted EBITDA to be in the range of $470 million to $510 million, representing a year over year increase of 37% to 49%.
There are several uncertainties that exists for the balance of the year that could significantly impact our estimates and position us towards the lower or higher end of the range.
The ongoing COVID-19, pandemic product availability constraints labor shortages declining commodity prices and unfavorable weather could position us towards the lower end of the range.
Sustained pricing levels and gross margins continued demand across each of our end markets along with our suppliers' ability to meet demand could result in performance near the top end of the range.
Given the unprecedented pricing demand and product availability challenges, we're experiencing right now we feel that this range represents our best view of where we believe we will finish the year.
I'll now cover a few topics of interest unrelated to our second quarter performance regarding our organizational structure and tax receivable agreements.
In terms of our share structure. We currently have roughly 246 million shares of class a common stock and class B common stock issued and outstanding.
Shares of class, a common stock and class B common stock have the same one for one voting rights class B shareholders do not hold economic interest in corn mean, Inc. However.
However, they have the ability to exchange one share of class B common stock and one partnership interest in <unk> Holdings L. P for one share of class a common stock.
Class B shareholders ownership of partnership interest in Corn main holdings LP is reflected in our consolidated financial statements as Noncontrolling interests.
Over time as these exchanges take place the Noncontrolling interest will reduce in size.
In evaluating and managing the business as a whole we exclude the effects of noncontrolling interests.
As part of our IPO, we reorganize the company as an up C structure.
Which enables us to retain certain favorable tax attributes and potentially generate sizable new favorable tax attributes and.
In an up C organization. It is typical to enter into tax receivable agreements with the pre IPO owners to establish the terms of how the favorable tax attributes will be shared.
A summary of the details of each TRA is located in the appendix of the presentation.
Assuming the full exchange of class B shareholders of their shares of class B common stock and partnership interest to shares of class a common stock at the closing stock price per share of class a common stock as of July 30, 32021, and current tax rates, we anticipate a.
<unk> reduction in our cash tax rate.
Net of the payment obligations under the TRA. We expect this net cash savings to be in the low to mid single digits of pretax book income.
Further TRA payments are not made unless tax benefits are actually realized.
I hope you find this additional detail helpful. As we introduce our business and our structure.
In closing we are very pleased with our second quarter performance and first half results. We continue to focus our efforts on increasing market share improving profitability and generating consistent operating cash flow.
That concludes our prepared remarks at this time I would like to turn the call over to the operator for questions.
If you would like to ask a question. Thank you Christoph <unk> on your telephone keypad now did you change your mind at stall followed by Covid.
Our first question is from David Mcmahon <unk> of Baird. Your line is open. Please go ahead.
Thank you and good morning, everyone.
Of the modern day percent growth.
Of the 43% growth that you saw in PVC can you approximately quantify the impact of inflation versus volume growth and I think you had previously been assuming that PV.
PVC would start to decline in the second half are you now assuming that it will be sustained into 2022 at current price levels.
Yes, Dave I'll answer on the pricing for the quarter on previous on PVC I would tell you a little certainly over over half of PVC was going to be pricing, obviously, we had a bigger impact on PVC and some of the other product categories.
So the kind of the best targeting give you on PVC in terms of the impact there in terms of the go forward Steve.
Steve you want to talk about them, yes, David sure. Yeah. There's certainly PVC has been disrupted significantly over the last year from Hurricane Laura last fall to the deep freeze that happened in Texas.
In the beginning of this year to know Hurricane Aida. So we are seeing demand at all time highs and product availability supply at all time lows. So given those dynamics we feel.
We feel like we're going to see that pricing hold in there through.
Through the duration here at least for the next the next several months and so along those lines.
That was.
Obviously didn't expect to see pricing carry through as strong as we had this year, we expect it to taper down to more stabilized levels, but given some of these external factors.
We think it will probably hold and therefore a bit.
Okay, Thanks, and as it relates to the $65 billion in.
In the current infrastructure Bill.
<unk>.
If that goes through initial dollar start to filter down to the municipalities.
Might there be some crowding out relative to already stretched municipal budgets or do you think thats all incremental and then SEC.
If you could just comment on.
Just.
The debate around infrastructure do you view that as a positive long term that navy there's changing.
Changing attitudes changing priorities in the U S as it relates to infrastructure spending.
Today at any level.
Yes, Dave I would say that even when you go back to the back half of 2019, we started seeing municipal and infrastructure spend starting to really grow and accelerate obviously took a pause in second and third quarter of two.
2020, due to Covid, but it's continued to be remained very strong demand has remained strong.
The municipalities are certainly better positioned now they've been able to get rate.
Unlike they have been able to do a decade ago. So along those lines. We feel those budgets are really strong and secure now obviously, if you throw into an infrastructure bill in $55 billion dedicated to modernizing clean drinking water systems across America, we do think Thats all incremental based on on what we're seeing now if and when that bill gets passed and how.
Those funds get down there, we'll see how that plays out I do think the industry is much better position than when we were a decade ago with infrastructure spending in that sector.
That sounds great. Thanks, very much guys.
Thanks, Dave.
Our next question comes from Jamie Cook of Credit Suisse. Your line is open. Please go ahead.
Hi, good morning, and nice quarter, I guess, just two questions sorry.
PVC pipe again, but your margins in this quarter were really impressive your gross margins.
Might be a record for you guys and I'm just wondering.
With a lot of that PVC pipe and can we can margin sort of sustaining that level in the back half I'm just trying to think about how we get to your increased EBITDA guidance and then can you help us understand what the EBITDA contribution is from the two acquisitions in the back half. Thanks.
Yeah. Thanks, Jamie Thanks for the question in terms of PVC in the gross margin impacts.
We really saw nice margin improvement across really all of our product lines as I mentioned, we did see.
Some material cost increases across the board certainly larger on PVC, but we're able to manage those pretty well across the board.
And in the case of PVC that was no different so we're able to.
Realized some.
Margin improvement there as those prices started to increase we are able to buy PVC pretty well during the environment and get those passed along and at.
The appropriate timeframe, which is certainly much better than we've been able to do in the past when we've seen rapidly rising material increases. So I'd say, it's really across the board, where we were able to pick up some margin enhancement across various product lines.
And sorry, if I can.
Gross margins sustain in that.
At the 25% range in the back half and then just the EBITDA contribution from the two acquisitions in the back half what's implied.
And I think Jamie the way that we're looking at the back half in terms of margins is still being able to sustain those but I would say.
As as these prices stabilize we would we would expect the cost side of the equation that to catch up.
She was a bit of margin compression there typically were a little stronger in the back half anyway, but that's kind of how to think about the back half.
In terms of the EBITDA increment for the acquisitions and I would tell you that post synergy we expect both of those to be accretive.
To the business.
Okay. Thank you.
Yes. Thanks.
Our next question comes from Keith Hughes of Jefferies. Your line is open. Please go ahead.
Do you have a timeframe of what your suppliers are telling you in terms of.
They will know what the situation looks like is this within a week or is it is going to drag on for months.
Yes tough question Keith as we look at it. So certainly when you look at the impact that has had the biggest impact we've seen obviously as PVC. So during that time period. When ita came through it's kind of shuttered about 40% of the PVC capacity in Louisiana and Texas. So.
That's one challenge is getting those plants back up and running.
How are being restored and then the second challenge, which is a little bit more unpredictable is going to be the transportation situation.
Particularly rail and truck in and out of there. So we anticipated somewhere in the neighborhood of four to six weeks somewhere in that ballpark, where we're going to be.
And when we get into <unk> and into areas that have been inundated with wet weather oftentimes.
Our contractors are unable to date.
Saturated soil, so that can push things out a weak, but that's to a much lesser extent than certainly.
That's something that we're used to when we get into weather events like that but the PVC pieces is going to be one we're going to have to be sorted out over the next several weeks.
Just along the same laws are you able to do any substitution with the customers.
Doctor liner HCP or anything to kind of bridge the gap or is that.
It's too much.
Yes, we've certainly seen situations, where either due to price or availability there have been material substitutes at at levels, We haven't quite frankly, I've seen before in the past.
I would share with you also that even ductile iron pipe availabilities at a premium as well too as manufacturers are really at capacity at this point the inventory in the network is at all time lows as well too. So it's going to be a challenge working through all of those product categories to find viable substitutes.
Okay. Thank you.
But I would say that the good the good news is and this really does play to our strengths on this Keith in that one of the things that we've really prided ourselves in one of our Differentiators is access to product and being able to support customers through this and then secondarily is is where appropriate finding substitutes for those products and pulling that through so more so than ever are cut.
<unk> are leaning on us pretty heavily for that.
Okay. Thank you.
Our next question is from Pat <unk> of Jpmorgan. Your line is open. Please go ahead.
I'm sorry.
Yes.
I think I would think.
I was on mute sorry about that good morning, good morning, everyone.
Can you frame for us.
In the in the <unk>.
Quarter relative to that 18% volume growth.
How each of the end market has trended relative to that and assume Reggie was above that maybe I don't know.
I'll, let you answer that and then.
And as a follow up to that can you give a sense on expectations for second half volume growth across these end markets like which ones are being most impacted by the supply constraints I'm. Just curious can you flesh that out a little bit more.
Yes, Pat Thanks for the question. Good morning, yes for the for the quarter I would tell you right <unk> certainly the strongest of the end markets I would say well into double digit category there and then.
Non non resi in Muni.
Certainly nice growth in the quarter, it's a muni typically that are stronger than our typical kind of low single digits.
We did see some nice strength in beauty.
And then nonresident, Canada that same same range so.
Really good.
Performance across those I would say going into the back half.
Everything we see right now is fairly consistent across those end markets with continued demand in <unk> no real impact due to product availability.
That would impact any end market more than the other.
Okay.
And.
Relative to kind of the volume versus price growth in the second half like how.
How would you.
Could you frame kind of it sounds like you'll get more price growth and volume growth, but I. Just wanted I wanted to ask a question on enrollment as well.
On the revenue side.
Yes.
Yes, I think it will look a lot like the first half of the year with the exception being the fourth quarter, where we started to see pricing picked up last year.
Due to the effects of.
The Hurricanes last fall and Thats, when we really started to see.
Some of the initial price increases come through and PVC. So youll see price be a little less of a story most likely in the fourth quarter relative to the at least the second and third quarters.
Okay and then my follow up is on the M&A pipeline can you guys just update us on the size of the pipeline.
And then kind of your opportunity to execute on that given.
The current balance sheet leverage.
Post these recent deals.
Ex Canada.
Yes, Thanks, we've got a really strong pipeline and continue to.
Really find opportunities out there. So if you look at the deals that we just closed subsequent in Europe really good indicators of what we've been able to do with bolt on acquisitions in new geographies and then new product enhancement. So our pipeline continues to be robust I think in the short and medium term youll see profit youll see probably deals.
Smaller range of the 5% to $30 million revenue.
Over the next next few quarters.
But we continue to see a lot of opportunity out there certainly the tax situation and the potential legislation. That's being contemplated has really started a lot of interest and a lot of potential sellers as well too. So we continue to be encouraged by what we're seeing in that pipeline from a capital structure really no impact whatsoever with going public so we <unk>.
To have ample liquidity to pursue all of our M&A targets. In addition to just great cash flow characteristics for the business, So really well positioned to continue the M&A pipeline.
Great. Thanks for the color best of luck.
Thank you thanks Pat.
Our next question is from Joe Ritchie of Goldman Sachs. Your line is open. Please go ahead.
Thanks, Good morning, everybody.
Hey, good morning, Joe.
My first question is really just around pricing for 2020, Q2, clearly a lot of pricing going through this year I'm just curious.
How does that outlook, then potentially for 2020 give back a little bit.
<unk> your customers on price, if we start to see commodity prices kind of stabilize and then also I'm just curious on how to think about the gross margin implications as well.
Yes, Joe really difficult assess what's going to happen in 2020 to certainly what we've seen is pricing has remained firm.
It's a little better than expected certainly than we saw in second quarter and then we anticipate that to carry through in the short term, but as for 2022, we'll just have to wait and see how this plays out there's so many different dynamics in play right now in terms of demand and capacity constraints and everything else, that's where it's really hard to to give color on that at this point.
Okay.
That's fair I guess I guess, maybe just maybe one follow on to that though I mean, I guess, Steve would you expect there to be some stickiness to price.
Depending on what happens with commodities, if commodities were to let's say flatten from here or is there typically some type of.
Yes, you are getting double digit pricing. This year I don't know you have got to get back like half of that next year I'm just trying to figure out if there's a heuristic around it.
Yes, typically we do see some stickiness to that so the pricing will be while costs may deflate, a little the pricing in the market does tend to be a little bit more sticky over over several months and so that's pretty traditional of what we've seen so there definitely would be a lag on there in terms of when the deflation starts hitting.
<unk>.
Got it that makes sense.
My one follow on and free cash flow.
Clearly building.
Building, a little bit of working capital this year, just given the environment that we're in.
Again, I know probably really difficult to answer for 2022, but down at some point if we if the supply chain environment again kind of stabilizes here should we get some type of working capital release.
From your business.
Yes, Joe that's something we'll obviously be watching really closely here, especially as we get through to the end of the year Youll certainly see a release just due to our typical kind of seasonal wind down to some extent in the northern geographies. So we typically release a little working capital.
But as you look forward and beyond we'll just we're going to have to watch the supply constraints very closely and make some decisions about when and where we make those investments.
Got it that makes sense, thanks, everybody and congrats.
Alright, Thanks, Joe Thanks, Joe.
Our next question is from Matthew <unk> of Barclays. Your line is open. Please go ahead.
Good morning, everyone. Thanks for taking the questions.
First one on the on the gross margin side.
You talked about some of that opportunistic.
Are you buying I guess ahead of the price increases.
I think at the same time I heard you say that in the second half you expect costs to more so catch up. So my question is is there any reason why we wouldn't see kind of similar pre buy benefit in the second half given some of these.
More near term inflationary trends.
How do you balance those two together thank you.
Hey, Matt. Thanks. Thanks for the question I think as we look into the second half, it's really about product availability and what happens to those pricing levels.
Sustained pricing, so pricing tennis, I'd say stabilizes.
And flattens, we would expect that cost side to catch up a little and see probably a little pressure there in the second half.
They continue to rise like they have been we will continue to take advantage of those buying opportunities.
We get a little benefit out of that in the back half so some of those challenges.
Five in Canada.
The range that we gave for the second half is just really seeing what ultimately happens on availability and price in the second half.
Understood. Okay. That's very helpful. There and then second one on the on the nonresidential end market I think you made a comment at the top.
You said that relatively confident.
Being I think you said at the beginning of a non Reg cycle I'm just curious.
What you've seen in your own business in terms of.
Whether its backlog are quoting in certain verticals actually seeing a tangible uptick yet or are you, making sort of a longer term call.
Based on some of the longer term indicators, you're seeing thank you.
Yes, we look at nonresidential really in two ways. So there are certainly.
Roads, and bridges, which is been storm drainage, which has continued to be very strong and then for commercial construction.
Which really are fire.
Protection products are obviously instrumental and a lot of commercial construction.
That was an area that was hit pretty hard during COVID-19 and what we're starting to see and we did anticipate a big resurgence this year.
But we're already starting to see a lot of quoting activity, we're already starting to see that area firm up we've been doing a lot of warehousing and data center work for fire protection systems, and that's continued to carry through and we're actually now starting to see a lot more commercial construction and some of these markets that we are.
Really challenged during COVID-19. So that's encouraging to us we think that has some really good tailwind is ahead of us and the start of a new cycle.
Alright, well, thank you, Steve and thank you Mark.
Thanks, Mike Our next our next question is from Kathryn Thompson of Thompson Research Group. Your line is open. Please go ahead.
Alright, Thank you for taking my questions today.
There has been some focus on the headwinds from weather events like Ida.
Mccain.
The opportunities in hydro of weather events like these highlight corn meal solutions, particularly around climate change and other constructions like events.
Yeah. Thanks, Catherine Yes, one of the things that we're seeing as the climate change situations have really emanated. Some bigger large scale projects that are out there that may not be as visible to everybody, but we look at water source projects, where theres been drought areas.
You look at projects like in Lake Mead for example.
We've been very active in a number of these big treatment plant and water source projects same thing in the Wisconsin and some of these areas that are really struggling and a lot of ways to be able to find new water source the strategic.
<unk> account teams that we had worked with a lot of the large national contractors and engineering firms.
I have really.
Enhanced our business and the ability to pull through those products and what they like about <unk> is the ability to work at a national level and then have the local expertise and fulfillment capability. So that's given us a real advantage. We will continue to see that too is a lot of the flooding situations as more infrastructure investment goes into storm drainage and water.
Our retention systems and things along those lines, we're right at the forefront of that we work with a lot of our vendor partners in helping to establish specs for new detention and retention systems for more more efficient commercial construction and prevent water runoff into streams and other waterways. So those things are all <unk>.
Really playing into some of the.
The strength that we built as a business and particularly with the strategic accounts and then couple that with our local presence.
Given us a big advantage to continue to be able to support those needs as climate change has more impact.
Okay. Thank you and then my follow up question.
<unk> provided a lot of detail today on supply chain, how you're managing it.
Everything from meters.
PVC have been impacted.
But against this backdrop youre not alone from a distribution standpoint, and managing supply chain.
What if any waste have you been able to determine if you are gaining market share given your size your search.
<unk> nature and your national footprint.
Yes, Catherine there is no doubt that.
Given our size and scale, we're able to get preferred access to a lot of products that are really in short supply right now.
And I just share that a lot of our smaller competitors. Unfortunately don't have that ability to be able to do that and we've been able to pick up quite a bit of business associated with that.
Secondarily is when there are big material shortages like this working on the consulting way in which we do with our sales process.
We work diligently to try and find if we can't get the product.
Whether it's the alternative types of materials that can be used in this to complete these projects and that's a big part of the value that we provide there and understanding a lot of the local specifications and being able to provide.
Provide them solutions to how to complete these projects. If you look at our we've talked a little bit about labor shortages, our contractors right now have pretty significant labor challenges as well too. So when they have a crew they do not want that crew sitting idle waiting on materials and so.
That's an opportunity where we can really help them in so many different ways and being able to either get access to that product or find alternative material choices for them to complete those projects and keep their their workforce active.
Okay, and then just one final follow up just on your guidance, which means.
Better than expectations.
But what it is.
What has been relatively better.
And what has been relatively worse versus your expectations as you were planning for this fiscal year.
Yes, Katherine Thanks for the question I would tell you is we were planning for the year initially.
Certainly the rapid increase in the continued increase in.
Product pricing that we've seen from our suppliers is certainly at the levels that we had never seen and that we certainly didn't anticipate.
One thing we were able to do.
That I think was.
<unk> unique to this year than what we've done in the past was the ability to get that pricing into the hands of our field teams faster than we will the cma's grew.
Gross margin improvement through this rapidly inflationary environment. So I'd say both of those items, while we were preparing for this environment and ready for it.
Certainly we executed I think better than we could have even anticipated through this.
Those are two of the big areas and then obviously the strength in demand coming out of Covid as well, while we saw some nice increases in <unk> coming.
Certainly has been nice to see for our industry. So.
Those are all areas really combined to the.
Ultimately, where we're at here with the full year guidance.
Perfect. Thank you very much.
Okay.
Alright, Thank you Catherine.
Our next question is from Anthony Pettinari of Citi. Your line is open. Please go ahead.
Good morning.
Amit.
The organic issues.
Hey, good morning.
With the availability issues that we've seen in PBC and other materials and the labor challenges you just mentioned.
Are you seeing any outright demand destruction or is this a matter of <unk>.
Maybe getting pushed out a few months or few quarters I'm. Just wondering if you could talk a little bit about how your customers have responded to shortages you talked about substitution earlier.
And is there a big difference between new construction versus repair and replace or different customer types or regions. Just wondering if you can give any more color there.
Yes, Anthony up to this point, we really have seen no cancellations of projects due to material shortages at this point or even price increases at this point. So the demand has continued to remain very robust as we've gone through this period, we've been able to fulfill.
Albeit with a lot of work Triple class last quarter. So.
I think we have certainly some caution out there about where some of these shortages may have a more significant impact in coming quarters, but so far demand has remained incredibly strong.
We've been able to work through the supply constraints.
Okay. That's very helpful. And then apologies if I missed this but what was your organic volume growth ex M&A in <unk> and is there a way to think about what level of organic volume growth is embedded for the guidance for 2021, and then understanding you're not giving guidance for 'twenty, two but is that kind of.
'twenty, one organic growth rate.
Is there any reason to think it's not directionally sustainable for 'twenty two.
Yeah, Anthony Thanks for the for the quarter I would tell you. It was mostly organic growth, we had RMB company, which was our larger acquisition in 2020 anniversary in the first quarter and then LNG supply.
Supply in Pacific pipe closed after the second quarter. So those you should expect obviously see come through in the back half of the year combined they were about 130 million historical annual sales. So you should see I would say roughly a little less than half for about half of that come through in the back half of 2020.
One.
<unk>.
We won't necessarily forecast M&A out into 2022 that we haven't completed yet, but obviously you'd expect another half year of those coming through in the first half of 2022.
Okay. That's helpful I'll turn it over.
Thank you.
The next question is from Nigel Coe with Wolfe Research. Your line is open. Please go ahead.
Thanks, Good morning, everyone and thanks for the question.
We've got a lot of ground so there's not a.
On a whole lot to go here, but the kind of margins, but clearly very good, especially given the commodity inflation and the price pass through it seems like again the margin on that commodity push and that's that's very unusual so is that normal.
When you see these swings in commodity so is it a function of you pre buying some of the inventory and then im curious in the backend of that how do you think income and our margins might look in the back half of the year relative to <unk>.
Nigel I would say a couple of things number one certainly pre buying has helped us with margins, but probably more importantly than that is our ability to get a lot of these price increases through we've put in a dedicated team in pricing and category management last year to help drive a lot of that we felt.
Like many cases, we may be lagging the market in terms of.
The cost increases that we're heading in getting that translated to price.
It just so happened that as we started seeing a lot of this inflation had across all of these product categories, our ability to translate that faster really had a substantial impact as we got into the first half of this year and it was absolutely critical to seeing the performance that you've seen we think a lot of that will carry through certainly it is a little difficult.
<unk> to tell how.
As we start depleting some of the inventory to fulfill current demand and buying it.
More elevated costs as we would expect to see some type of compression associated with that but we do see a lot of opportunity continuing forward with margin enhancement both organically with some of the challenges in the.
The processes that we've improved in and certainly looking at some of our private private label activity, which is a relatively small part of what we're doing but.
The rapidly expanding that as well too.
Great. Thank you my follow on is supply chain related and you alluded to this in your commentary around <unk> and that we certainly seen particularly acute challenges in especially in smart meters.
So I'm just curious.
<unk> seen sort of a stable supply and meters he'll do you expect there to be able to the deterioration in second half of the improvements in any any color there would be helpful.
Yes.
The supply for certain types of meters right now is really at a premium and we've been prioritizing the available inventory to really serve a good portion of our <unk>.
Higher most most critical projects out there that would demand that type of that.
That type of meter. So I think what we're seeing is a little bit of a push in some of the meter projects.
That will be dependent upon a bit.
Broader availability of those products. So we will see in that sub sector that we've got a meters, particularly for <unk>, particularly for a few types of those meters, where that supply is going to be constrained and that will push some of these projects.
Into into next year.
Great. Thanks, Steve.
Thank you.
Our next question is from Mike Dahl of RBC capital markets. Your line is open. Please go ahead.
Good morning, Thanks for fitting me in just wanted to start out.
As a follow up to the supply chain question. It seems like by and large it's still been able to serve the customer and serve the products even with.
Some of the challenges, but wondering if you could put a finer point on maybe quantifying what some of these constraints have been from a volume standpoint.
How much it's negatively impacted your expectations for this year and maybe as a part two.
The question.
Other thing we've heard.
Recently, some renewed issues on the labor side and an uptick in absenteeism.
Can you comment on what Youre seeing on puts and takes around labor right now.
I'd share with you that certainly through the first half of this year, while the supply has been tight we've not run into real situations here, where we've been unable to meet demand other than a handful of projects that were involving smart meters. So.
And that's been relatively immaterial so.
We anticipate supply will continue to be tight through the second half.
Obviously provided some guidance here that we will continue to see demand strong and growth strong and that will work through some of that.
That's yet to be determined we certainly have some caution areas with PVC et cetera, so but for.
For the most part we've been able to work through a lot of that and we anticipate we will continue to do that now you had a second question I'm sorry.
Mike could you repeat the second question.
Labor is really organic sorry.
Yes.
Yes.
Labor has been a real challenge there is no yes.
Tight labor market for us we operate.
Personally as part of corn, Maine. The situation, we operate very lean branches, that's been challenging to be able to staff up in every possible area across the country, while continuing to provide a lot of incentives to attract talent and here, we've been pretty successful at being able to do that when we look at labor for our Contra.
<unk> and our suppliers they are all.
All having the same challenges right now.
And.
It's hard to speculate whether theres going to be any changes associated with the.
To that labor pool, and being able to get more people back to work but.
We will continue to work through that and I think it'll be a bit of a challenge as we get through the back half of this year no doubt, but we will continue to work through it.
Got it got it Okay and then my follow up question, it's still kind of a related track but.
Understand private label is currently small, but when you think about your growth plans.
But then balanced by some of the supply constraints that you're seeing in some of these product availability constraints, our global supply constraints.
<unk>.
Kind of rollout or expansion of your private label efforts.
It hasn't been material at this point.
So we continue to build we built some supply in here to be able to internally serve a lot of our branches, particularly with fire protection products. So we've had a comfortable inventory level to carry through on that so far we're continuing to work through sourcing as well to expand the product offerings that we have in there.
So so far we've been able to do a lot of that virtually it hasn't impeded our progress up to this point, we hope to continue that certainly over the next several quarters.
Okay, great. Thank you.
Thank you.
They are a nice I had a question from the line so I'll hand, the call back over to Steve.
Well. Thank you all again for joining us today in our for our first earnings call as a publicly traded company to close it out I would like to share a few of the key items that may core in Maine, a leading specialized distributor we are a market leader with size and scale in an attractive and fragmented market, we have a strong value proposition.
Playing a pivotal role in shaping our industry, we have multiple levers for organic growth continually cultivating ways to grow faster than the market and gain share.
We have a proven ability to execute and integrate acquisitions with a large pipeline and additional runway we are poised to benefit from favorable industry trends in each of our end markets. We.
We have an attractive and resilient financial profile with strong return characteristics and to close it out and I'm incredibly proud and want to thank all of our associates for their continued commitment to our customers and our communities, especially given the disruption related to COVID-19 product availability challenges and labor shortages were committed to.
Aiding our customers with local knowledge local experience and local service nationwide.
Thank you for your interest in corn main operator that concludes our call.
Thank you for joining today's call you may now disconnect your lines.
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