Q2 2024 Core & Main Inc Earnings Call

Hello, everyone and welcome to the Korn <unk> second quarter 2023 earnings call. My name is Bruno and it'll be operating your call today.

During the presentation you can register to ask a question by pressing star one on your telephone keypad.

I will now hand over to your host Robyn Bradbury. Please go ahead.

Thank you. Good morning, everyone. This is Robin Bradbury, Vice President of Finance and Investor Relations for Corning. We are thrilled to have you join US. This morning for our second quarter earnings call I'm joined today by Steve Leclair, Our Chief Executive Officer, and Mark Lukowski, Our Chief Financial Officer.

Steve will lead today's call with a business update followed by an overview of our recent acquisitions.

Mark will then discuss our second quarter financial results and full year outlook, followed by a Q&A session.

We will conclude the call with Steve's closing remarks.

We issued our second 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.

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 release and in our filings with the Securities and Exchange Commission.

We will also discuss certain non-GAAP financial measures, which we believe are useful in assessing the operating results of our business.

A reconciliation of these measures can be found in our earnings press release and in the appendix of our Investor presentation.

Thank you for your interest in Corn me I will now turn the call over to Chief Executive Officer, Steve Leclair.

Thanks, Robin and good morning, everyone. Thank you for joining us today.

Following along with our second quarter Investor presentation, we'll begin on page five with a brief business update.

Coordinating delivered another quarter of solid results as.

As we maintain our focus on driving operational excellence across the business.

Sales of $1 $9 billion were equal to last year's record high and up 43% from the second quarter of fiscal 2021.

End market demand has largely performed as expected through the first half of the year.

Repair and replacement demand has been resilient supported by healthy municipal budgets.

And increased water and wastewater utility rates.

Residential construction has been soft compared to last year's strong performance.

We're optimistic for the second half of the year as there continues to be a limited supply of developed lots and builders look to invest and walk development support continued demand from homebuyers.

The nonresidential market was broadly flat through the second quarter. However, we are beginning to see pockets of softness for new project starts in select markets.

Despite the potential for near term softness in nonresidential starts.

Broad exposure to various project types within this market generally provides stability as demand for these projects can happen on different cycles.

The need for more robust water management solutions remains highly relevant due to the increasing effects of extreme weather events and water scarcity.

<unk> is well positioned to capitalize on these trends over the long term due to our size scale and technical expertise across the water sector.

Okay.

We delivered strong adjusted EBITDA margins of 14, 5% for the second quarter through our disciplined pricing and gross margin execution.

Prices have sustained them through the first half of the year in part due to the non discretionary nature of demand in our industry coupled with the fact that most of our products are either highly specified or made specific for our sector, which provides a resilient pricing framework in our industry.

Unknown Executive: Hello everyone, and welcome to the Core & Main second quarter 2023 earnings call. My name is Bruno, and I'll be operating your call today. During the presentation, you can register to ask a question by pressing star one on your telephone keypad.

Overall, we expect a slightly positive impact from pricing for the full year as we continue to anniversary the prior year price increases.

Robyn Bradbury: I will now hand over to your host, Robyn Bradbury, please go ahead. Thank you. Good morning everyone.

Robyn Bradbury: This is Robin Bradbury, Vice President of Finance and Investor Relations for Core & Main. We are thrilled to have you join us this morning for our second quarter earnings call. I am joined today by Steve LeClair, our Chief Executive Officer, and Mark Witkowski, our Chief Financial Officer.

Gross margins exceeded expectations, yet again as we executed on our gross margin initiatives and continue to benefit from our prior inventory investments.

We expect gross margins to continue normalizing in the second half of the year as our inventory cost catch up with market prices.

Robyn Bradbury: Steve will lead today's call with a business update followed by an overview of our recent acquisitions. Mark will then discuss our second quarter financial results and fill your outlook followed by a Q&A session.

We generated robust cash flow in the second quarter from our inventory optimization efforts, creating balance sheet capacity to reinvest in the business.

Unknown Executive: We will conclude the call with Steve's closing remarks.

Pursue strategic M&A and return capital to shareholders.

Robyn Bradbury: We issued our second 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. 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 release and in our five months.

To that end, we executed a $141 million share repurchase from our majority shareholder during the second quarter.

Reducing diluted share count by 5 million shares.

This marks our second share repurchase transaction this year, having deployed over $470 million of capital and retiring 20 million shares.

Turning to our recent acquisitions on page six we added two high performing businesses to our family during the quarter generating annual net sales of approximately $100 million on a combined basis.

Robyn Bradbury: We will also discuss certain non-gap financial measures which we believe are useful in assessing the operating results of our business. A reconciliation of these measures can be found in our earnings press release and in the appendix of our Investor presentation.

Foster supply as a leading producer installer and distributor of specialty pre cast concrete products storm drainage and other erosion control solutions operating out of seven locations across Kentucky, Tennessee, and West Virginia.

Robyn Bradbury: Thank you for your interest in Core & Main.

Steve LeClair: I will now turn the call over to Chief Executive Officer Steve LeClair. Thanks Robin. Good morning everyone. Thank you for joining us today. If you're following along with our second quarter Investor presentation, we'll begin on page five with a brief business update. Core & Main delivered another quarter of solid results as we maintain our focus on driving operational excellence across the business. Sales of $1.9 billion were equal to last year record high and up 43% from the second quarter fiscal 2021.

Since 1981 the team at Foster supply has been the partner of choice for contractors and municipalities seeking innovative solutions for unique worksite and infrastructure challenges.

Bringing that team to corn may will allow us to combine our collective expertise and differentiated product and service offerings to meet the needs of our shared waterworks and Geo synthetics customers.

The Angelo is a leading provider of fire protection in waterworks products with three locations in southern California.

Steve LeClair: End market demand has largely performed as expected through the first half of the year. Municipal repair and replacement demand has been resilient, supported by healthy municipal budget, an increased water and wastewater utility rates. Residential construction has been soft compared to last year's strong performance. We are optimistic for the second half of the year as there continues to be a limited supply developed locks and builders look to invest in lot development for continued demand from home buyers.

Since 1987 the team at Dangelo has provided underground and fire protection contractors with an extensive product and service offerings.

Including water sewer storm drainage and other related products.

Breadth of knowledge dedication to outstanding customer service and complementary product offering gained through this acquisition will greatly enhance our presence and service capabilities in southern California.

Steve LeClair: The non-residential market would probably flat through the second quarter. However, we are beginning to see pockets of softness for new project starts and select markets. Despite the potential for near-term softness and non-residential starts, a broad exposure to various project types within this market generally provides stability as demand for these projects can happen on different cycles. The need for more robust water management solutions remain highly relevant due to the increasing effects of extreme weather events and water scarcity. Corn main and well-positioned to capitalize on these trends over the long term due to our size, scale and technical expertise across the water sets.

Both of these businesses offer and expansion into new geography.

To enhance our product line and add key talent, while aligning with our strategy of advancing reliable infrastructure.

We are committed to driving sustainable growth through M&A, and we look forward to adding more high quality businesses like the for the core family moving forward.

Turning to page seven.

I will now discuss how we are well positioned to win in our industry.

We play a critical role in the supply chain by connecting a large and diverse set of suppliers with a highly fragmented customer base.

Our customers benefit from our technical expertise.

Customer service.

Steve LeClair: Reactor. We delivered strong adjusted EBITDA margins of 14.5% for the second quarter to our discipline pricing and gross margin execution. Prices have sustained through the first half of the year. In part due to the non-discretionary nature of demand in our industry, coupled with the fact that most of our products are either highly specified or made specific for our sector, which provides a resilient pricing framework in our industry. Overall, we expect a slightly positive impact on pricing for the full year as we continue to anniversary the prior year pricing increases.

Purchasing capabilities.

Product breadth and availability and the convenience of our branch locations, which allows us to provide consistent and timely delivery.

Combined these capabilities provide advantages relative to smaller local competitors.

It allow us to attract business from large multi regional contractors and municipalities with more complex projects.

It allow us to attract business from large multi regional contractors and municipalities with more complex projects.

Our suppliers recognize our value proposition to customers.

We believe the increasingly view us as an integral partner given our ability to extend their sales and geographic reach with deep technical knowledge of local specifications.

Steve LeClair: Gross margins exceeded expectations yet again as we execute on our gross margin initiatives and continue to benefit from our prior inventory investments. We expect gross margins continue normalizing the second half of the year as our inventory costs catch up with market prices. We generated robust cash flow in the second quarter from our inventory optimization efforts, trading balance sheet capacity to reinvest in the business, pursue strategic M&A, and return capital to shareholders.

This enables us to benefit from favorable supplier agreements and product availability.

As well as opportunities for product line exclusivity and restricted distribution arrangements.

Exclusive and restricted distribution rights limit new entrants into our industry and provide a significant and sustainable competitive advantage.

At the local level, our branches carry a range of product lines brands and inventory levels tailored to local specification to effectively respond to our customers' project needs.

Steve LeClair: To that end, we executed a $141 million share repurchase from our majority shareholder during the second quarter, reducing deluded share count by 5 million shares. This marks our second share of repurchase transaction this year, having deployed over $470 million of capital and retiring 20 million shares.

Our associates are specifically trained in project scoping and planning.

Often performing digital take off by Curating, our product list in custom solution.

Leveraging our regional and National network of product specialists to develop a solution tailored to our customers' needs.

We complement this knowledge and sales expertise with our proprietary technology platforms that incorporate decades worth of experience and insights into customers' planning and sourcing needs.

Steve LeClair: Turning to our recent acquisitions on page 6, we added two high performing businesses to our family during the quarter, generating annual net sales with approximately $100 million on a combined basis. Foster Supply is a leading producer, installer and distributor of specialty pre-cast concrete products, storm drainage, and other erosion control solutions, operating at seven locations across Kentucky, Tennessee, and West Virginia. Since 1981, the team that Foster Supply has been the partner of choice for contractors and municipality, seeking innovative solutions for unique work sites and infrastructure challenges. Bringing that team to corn main will allow us to combine our collective expertise and differentiated product and service offerings to meet the needs of our shared water works and geosynthetics customers.

Our proprietary bidding platform and online customer portals build customer loyalty by facilitating a more seamless bidding planning materials management and delivery experience.

We also prioritized investments in the development and well being of our people.

Our award winning training programs enable us to accelerate development of our top talent to drive profitable growth, while maintaining a supportive and mission driven culture.

Our dedication to develop an industry leaders allows us to attract and retain the most qualified and motivated individuals in our industry and.

In addition, we provide attractive career growth opportunities to our associates, while utilizing their knowledge and local expertise.

The role of the specialized distributor within the value chain is becoming increasingly important as our fragmented customer base demand higher levels of availability across a broad set of products, which are procured from a large number of suppliers.

Steve LeClair: The Angela was a leading provider of fire protection and water works products with three locations in Southern California. Since 1987, the team at the Angela has provided underground and fire protection contractors with an extensive product and service offering, including water, sewer, storm drainage, and other related products. The breadth of knowledge, dedication to outstanding customer service, and complimentary product offering gained through this acquisition will greatly enhance our presence and service capabilities in Southern California.

As our industry becomes more complex with new regulations and product specifications are scalable competitive advantages position us to win over our smaller local competitors.

Before I turn the call over to Mark I would also like to announce that we are hosting our inaugural Investor Day in New York City on October 4th.

The event will be hosted both in person and virtually.

We plan to present, our business strategy.

Steve LeClair: Both of these businesses offer an expansion into new geography, enhance our product line, and add key talent while aligning with our strategy of advancing reliable infrastructure. We are committed to driving sustainable growth through M&A, and we look forward to adding more high-quality businesses like these for the corn main family moving forward. Howard.

Growth drivers and financial objectives.

If you have any questions about the event.

Please reach out to us through our Investor Relations team.

With that I will now turn it over to Mark to discuss our financial results and full year outlook.

Go ahead Mark.

Thanks, Steve ill begin on page nine with highlights of our second quarter results.

Steve LeClair: Turning to page seven, we'll now discuss how we are well positioned to win in our industry. We play a critical role that supply chain by connecting a large and diverse set of suppliers with a highly fragmented customer base. Our customers benefit from our technical expertise, customer service, purchasing capabilities, products graphs and availability in the convenience of our branch locations which allows us to provide consistent and timely delivery. Combine the capability provided advantages relative to smaller local competitors and allow us to attract business from large multi-regional contractors and municipalities with more complex projects.

We reported net sales of roughly $1 $9 billion for the quarter, which was in line with the prior year period and consistent with our expectations.

This follows very strong comparative performance in the prior year when net sales grew 43% compared with the first quarter of fiscal 2021.

Aggregate price contributed low single digit sales growth, while organic volumes were down mid single digits acquisitions are performing well and contributed approximately 3% to net sales on a year over year basis.

Gross margin of 26, 9% was consistent with the prior year period, and our performance reflects the execution of our margin enhancement initiatives and the benefit of accretive acquisitions.

Steve LeClair: Our suppliers recognize our value proposition to customers and we believe they increasingly view us as an integral partner given our ability to extend their sales and geographic reach with deep technical knowledge of local specifications. This enables us to benefit from favorable supplier agreements and product availability as well as opportunities for product line exclusivity and restricted distribution arrangements. These exclusive and restricted distribution rights limit new entrance into our industry and provide a significant and sustainable competitive advantage.

Set by selling higher cost inventory compared with the prior year.

As we have discussed in prior quarters, we expect gross margin to normalize in 2023, as our inventory cost catch up with market prices and we have already seen a sequential gross margin reduction from last quarter.

Selling general and administrative expenses increased 4% to $238 million for the second quarter.

The increase in SG&A reflects the impact of cost inflation and acquisitions.

Steve LeClair: At the local level, a branches carry a range of product lines, brands and inventory levels tailored to local specifications to effectively respond to our customer's project needs. Our associates are specifically trained in projects scoping and planning, often performing digital takeoffs by curating a product list and custom solution, leveraging a regional and national network of product specialists to develop a solution tailored to our customers needs. We complement this knowledge and sales expertise with our proprietary technology platforms that incorporate decades worth of experience and insight into customers planning and consourcing needs. Our proprietary bidding platform and online customer portals build customer loyalty by facilitating a more seamless bidding planning materials management and delivery experience.

SG&A as a percentage of net sales increased 40 basis points to 12, 8%.

Interest expense was $22 million for the second quarter compared with $17 million in the prior year period.

The increase was due to higher variable interest rates on the unhedged portion of our senior term loan.

We recorded income tax expense of $40 million for the second quarter compared with $38 million in the prior year period, reflecting effective tax rates of 19, 6% and 17, 3% respectively.

The increase in the effective tax rate was due to a decrease in partnership interests of <unk> holdings held by non controlling interest holders.

<unk>.

We recorded $164 million of net income in the second quarter compared with $182 million from the prior year period. The decrease was due to higher SG&A higher interest expense and higher income taxes.

Steve LeClair: We also prioritize investments in the development and well-being of our people. Our award-winning training programs enable us to accelerate development of our top talent to drive profitable growth while maintaining a supportive and mission-driven culture. Our dedication to developing industry leaders allows us to attract and retain the most qualified and motivated individuals in our industry. In addition, we provide attracted career growth opportunities to our associates while utilizing their knowledge and local expertise.

Diluted earnings per share in the second quarter was 66 down 2% compared with the prior year period. The decrease in earnings per share was due to lower net income partially offset by a lower share count following the repurchase of 20 million shares.

Adjusted EBITDA decreased 3% to $270 million and adjusted EBITDA margin decreased 40 basis points to 14, 5%. The decrease in adjusted EBITDA margin was due to an increase in SG&A.

Steve LeClair: The role of the specialized distributor within the value chain is becoming increasingly important because our fragmented customer base demands higher levels of availability across a broad set of products, which are procured from a large number of suppliers. As our industry becomes more complex with new regulations and product specifications, our scalable, competitive advantages position us to win over our smaller local competitors.

Turning to page 10, we delivered robust operating cash flow in the second quarter of $282 million, reflecting over 100% conversion from adjusted EBITDA.

We continue to benefit from the inventory optimization, we started in the middle of last year generating $150 million of cash from inventory this quarter on.

Steve LeClair: Before I turn the call over to Mark, I'd also like to announce that we're hosting our inaugural investor day in New York City on October 4. First, the event will be hosted both in-person and virtually, and we plan to present our business strategy, growth drivers, and financial objectives.

On a year over year basis, net inventory was down about 23% for the quarter, even with higher product cost inventory acquired through acquisitions and new inventory to support our greenfields.

Steve LeClair: If you have any questions about the event, please reach out to us to our investor relations team.

We have generated over $700 million of operating cash flow over the last four quarters and we expect to continue strong cash generation in the second half of the year as we continue to optimize inventory levels and experienced normal seasonality.

Mark Witkowski: With that, I will now turn it over to Mark to discuss our financial results and full year outlook. Go ahead, Mark. Thanks, Steve.

Mark Witkowski: I'll begin on page 9 with highlights of our second quarter results. We reported net sales of roughly $1.9 billion for the quarter, which was in line with the prior year period, and consistent with our expectations. This follows very strong comparative performance in the prior year, when net sales grew 43% compared with the first quarter of fiscal 2021. In aggregate, price contributed low single-digit sales growth, while organic volumes were down mid single digits.

Net debt leverage at the end of the quarter was one seven times and our available liquidity stands at more than $1 $1 billion. Following the capital allocation actions, we took during the quarter.

The $141 million share repurchase we executed in June was done concurrently with a public secondary offering of 14 million shares by our majority shareholder.

As a result of these transactions, we reduced our diluted share count by 5 million shares while increasing our public float.

Mark Witkowski: Acquisitions are performing well and contributed approximately 3% to net sales on a year-over-year basis. Gross margin of 26.9% was consistent with the prior year period, and our performance reflects the execution of our margin enhancement initiatives and the benefit of accretive acquisitions offset by selling higher cost inventory compared with the prior year.

We maintain ample liquidity and capacity to continue investing in the business and we expect to be a consistent participant in share repurchases from our majority shareholder as opportunities arise.

Before we head to Q&A I'd like to update you on the outlook for the remainder of fiscal 2023 on page 11.

Our results through the second quarter played out as expected with resilient demand and stable pricing.

Mark Witkowski: As we have discussed in prior quarters, we expect gross margin to normalize in 2023 as our inventory costs catch up with market prices, and we have already seen a sequential gross margin reduction from last quarter. Sowing general administrative expenses increased 4% to $238 million for the second quarter. The increase in SGNA reflects the impact of cost inflation and acquisitions. SGNA as a percentage in net sales increased 40 basis points to 12.8%.

In terms of volume growth municipal repair and replacement demand is expected to remain steady through the end of the year.

Residential demand is expected to be stronger in the second half than the first half as builder sentiment continues to improve and we face easier year over year comparisons.

As Steve mentioned earlier, we are now beginning to see pockets of softness for new nonresidential projects starts in select markets.

Based on our backlog bidding activity and order pace, we expect the nonresidential market to be down low single digits for the year.

Mark Witkowski: Interest expense was $22 million for the second quarter compared with $17 million in the prior year period. The increase was due to higher variable interest rates on the unhatched portion of our senior term loan. We recorded income tax expense of $40 million for the second quarter compared with $38 million in the prior year period reflecting effective tax rates of 19.6% and 17.3% respectively. The increase in the effective tax rate was due to a decrease in partnership interest of core main holdings held by non-controlling interest holders.

Pricing in the second quarter was stable sequentially from the first quarter and we expect it to remain resilient in the second half of the year, resulting in a price contribution in net sales that are slightly positive for the full year.

Our margin initiatives and synergies from M&A continue to drive structural gains for our gross margins.

However, we expect gross margins to continue normalizing in the third and fourth quarters as we have sold through most of our low cost inventory.

Taken altogether, we are narrowing our annual outlook based on results to date, we expect net sales to be in the range of six six to $6 $8 billion and we are narrowing our expectation for adjusted EBITDA to be in the range of $850 million to $880 million due to our strong gross margin.

Mark Witkowski: We recorded $164 million of net income in the second quarter compared with $182 million in the prior year period. The decrease was due to higher SGNA, higher interest expense, and higher income taxes. Deluted earnings per share in the second quarter was 66 cents down 2% compared with the prior year period. The decrease in earnings per share was due to lower net income partially offset by lower share counts filing the repurchase of 20 million shares. Adjusted EBITDA decreased 3% to $270 million and adjusted EBITDA margin decreased 40 basis points to 14.5%.

Performance in the second quarter.

We're also raising our expectation for operating cash flow conversion to be in the range of 90% to 110% of adjusted EBITDA due to our accelerated inventory optimization efforts.

As always our focus will be on areas within our control, including customer service technical expertise productivity and pricing execution.

We will continue to deploy capital on initiatives that we expect will result in accelerated growth, including executing on our M&A pipeline and delivering on our organic growth initiatives.

Mark Witkowski: The decrease in adjusted EBITDA margin was due to an increase in SGNA. 30.

Mark Witkowski: During the page 10, we delivered robust operating cash flow in the second quarter of $282 million, reflecting over 100% conversion from adjustity but that. We continued to benefit from the inventory optimization we started in the middle of last year, generating $150 million of cash from inventory this quarter. On a year-over-year basis, net inventory was down about 23% for the quarter, even with higher product costs, inventory acquired through acquisitions and new inventory to support our green fields.

We are well positioned to outperform the market in this complex demand environment, creating value for our stakeholders.

We look forward to helping our customers build more reliable infrastructure as we enter a key part of the construction season.

At this time I would like to open it up for questions.

Ladies and gentlemen, if you'd like to ask a question. Please press star one on your telephone keypad.

Okay Star one on your telephone keypad.

Mark Witkowski: We have generated over $700 million of operating cash flow over the last four quarters and we expect to continue strong cash generation in the second half of the year as we continue to optimize inventory levels and experience normal seasonality. Net that leverage at the end of the quarter was 1.7 times and our available liquidity stands at more than $1.1 billion following the capital allocation actions we took during the quarter. The $141 million share we purchased we executed in June was done concurrently with a public secondary offering of 14 million shares by our majority shareholder.

Do we join your question Press Star followed by two and pleased to also remember too and mutual microphone when it's your turn to speak.

Our first question comes from Matthew Bouley from Barclays.

Your line is now open. Please go ahead.

Okay.

Hey, good morning, everyone. Thanks for taking the questions maybe.

And maybe just one on non res the since you called it out a few times.

Seeing some pockets of softness I'm just curious.

If you can elaborate on that a little bit.

What exactly are you seeing across different verticals and regions.

Mark Witkowski: As a result of these transactions, we reduced our deluded share count by five million shares while increasing our public flow. We maintain ample liquidity and capacity to continue investing in the business and we expect to be a consistent participant and share repurchases from our majority shareholder as opportunities arise.

I think a decline of low single digits for the year is perhaps a little more sanguine than we might be seeing in other areas. So.

Just kind of curious what are some of the puts and takes around that decline of low single digit expectations. There. Thank.

Thank you.

Yes. Thanks for the question Matthew Yes, as we mentioned in the comments were really sore.

Mark Witkowski: Before we head to Q&A, I'd like to update you on the outlook for the remainder of fiscal 2023 on page 11. Our results through the second quarter played out as expected with resilient demand and stable pricing. In terms of volume growth, municipal repair and replacement demand is expected to remain steady through the end of the year. Residential demand is expected to be stronger in the second half than the first half as builder sentiment continues to improve and we face easier year-over-year comparisons.

Pretty much flattened broad across the entire second quarter.

We started to see some pockets of softness geographically, it's been in different pockets around the country. So we certainly seen it out west seen in pockets in the northeast as well for non res.

And it's possible that some of these projects are softening due to tightening lending standards and just keep in mind that we are really on the front edge of a lot of these things so.

What we will be watching closely is how this shapes up with our bidding activities, we get into the back half of the year and but overall, what I would say that we've got pretty broad exposure to various project types.

Mark Witkowski: As Steve mentioned earlier, we are now beginning to see pockets of softness for new non-residential project starts and select markets. Based on our backlog, bidding activity and order pace, we expect a non-residential market to be down low single digits for the year. Pricing in the second quarter was stable sequentially from the first quarter and we expected to remain resilient in the second half of the year, resulting in a price contribution and net sales for the slightly positive for the full year.

Seeing from commercial construction to.

Horizontal construction with roads and bridges and so that generally provides stability for us and we will see as these demand for these projects can happen sometimes on different cycles.

Got it okay. Thank you for that and then.

Mark Witkowski: Our margin initiatives and synergies from M&A continue to drive structural gains for our gross margins. However, we expect gross margins to continue normalizing in the third and fourth quarters as we have sold through most of our low-cost inventory.

Secondly.

Zooming in to the gross margin expectation.

Just curious you call it out expectations for normalization going forward any color on sort of the cadence of that.

Q3 versus Q4 or are we already kind of fully normalize but by Q3 and then maybe you could just kind of step back and sort of talk through some of the success you've been having with your structural on our gross margin initiatives. Thank you.

Mark Witkowski: Taking all together, we are narrowing our annual outlook based on results to date. We expect net sales to be in the range of $6.6 to $6.8 billion and we are narrowing our expectation for adjusted EBITDA to be in the range of $850 to $880 million due to our strong gross margin performance in the second quarter. We are also raising our expectation for operating cash flow conversion to be in the range of 90 to 110% of adjusted EBITDA due to our accelerated inventory optimization, efforts.

Yeah, Thanks, Matthew for the question.

Terms of the cadence of gross margins, we've been pretty consistent with indicating we're looking at about 100 to 150 basis points of gross margin normalization and that was after.

The full year 'twenty two numbers. So you did see in the second quarter sequentially. We were down about 100 basis points off of a really strong Q1 that we had.

Mark Witkowski: As always, our focus will be on areas within our control, including customer service, technical expertise, productivity, and pricing execution. We will continue to deploy capital on initiatives that we expect will result in accelerated growth, including executing in our M&A pipeline and delivering in our organic growth initiatives. We are well positioned to outperform the market in this complex demand environment, creating value for our stakeholders. We look forward to helping our customers build more reliable infrastructure as we enter a key part of the construction season.

So we're really now based on what we're seeing as we finished Q2.

More confident that we're going to see some of that normalization really start to happen in Q3 into Q4, probably kind of a trough at that point.

May be lingering a little bit into Q1 of 'twenty four and then building back off of that base.

As we progressed through 2000 and for US. So that's kind of how we're thinking about it right now based on what we're seeing in <unk>.

Unknown Executive: At this time, I'd like to open it up for questions. Ladies and gentlemen, if you'd like to ask a question, please press star one on your telephone keypad, the star one on your telephone keypad. Do we draw your question, press star followed by two, and please also remember to unmute your microphone when it's your turn to speak.

Continued really good progress on a lot of our initiatives and in particular private label continues to accelerate we did see continued benefit in this quarter and expect that to continue through.

Through the balance of the year.

2024 based on.

The products that we expect to continue to have available there for that that particular initiative I'd say, it's still pretty early innings on a lot of our pricing initiatives.

Matthew Blay: Our first question comes from Matthew Blay from Barclays. Matthew, your line is not open. Please go ahead.

I expect we'll start seeing some benefits from those later this year and into 2004.

Matthew Blay: Good morning, everyone. Thanks for taking the questions. Maybe just want to on non-resy, since you called it out a few times, seeing some pockets of softness. I just curious if you can elaborate on that a little bit. What exactly are you seeing across different verticals and regions? I think a decline of low single digits for the years, perhaps a little more sanguine than we might be seeing in other areas. Just curious, what are some of the puts and takes around that decline of low single digit expectations there and non-resy? Thank you.

That's those.

Really the key key items at this point.

Great. Thanks, Mark Thanks, Steve Good luck guys.

Thank you thanks Matthew.

Our next question comes from David Manthey from Baird. David Your line is now open. Please proceed.

Thank you and good morning, everyone.

First off to clarify Mark I believe you just said that you're expecting 100 to 150 basis points.

Gross margin retrenchment up 27% annual level.

Steve LeClair: Yeah, thanks for the question, Matthew. Yeah, as we mentioned in the comments, we really saw pretty much flat and broad across the entire second quarter, but we started to see some pockets of softness geographically. It's been in different pockets around the country, so we've certainly seen it out west, seen in pockets in the Northeast as well for non-res. And it's possible that some of these projects are softening due to tightening lending standards.

Last year the.

Level closer to 28 in the first quarter here, notwithstanding so youre, implying that gross margin on a quarterly basis should trough.

Felipe.

Fourth quarter of this year that $25, 5% to 26% range and then build from there is that your expectation.

Steve LeClair: And just keep in mind that we're really on the front edge of a lot of these things. So what we will be watching closely is how this shapes up with our bidding activities. We get into the back half of the year. Overall, what I would say that we've got pretty broad exposure to various project types, everything from commercial construction to horizontal construction with roads and bridges. And so it generally provides stability for us, and we'll see how these demand for these projects can happen sometimes in different cycles. Got it. Okay, thank you for that.

Yes, David that's fair, that's how to think about it and do you expect that to really.

Kick in in Q3.

Into Q4.

Depending on.

The progress we make on more of these initiatives hopefully building off that base as we get into early 2024.

Okay, and then second.

If you could talk about the status of the <unk>.

$8 moving into state revolving fund are.

The most nimble of your municipalities already accessing those dollars and how should we think about fiscal year end.

Matthew Blay: And then secondly, kind of zooming into the gross margin expectation. Just curious, you know, you're calling out the expectation for normalization going forward. Any color on sort of the cadence of that, you know, Q3 versus Q4, or we already kind of fully normalized, but by Q3.

With the federal in September certain municipalities are June or December .

Could you talk about how those dollars are flowing how you expect them to build up from here.

Mark Witkowski: And then maybe if you just kind of step back and sort of talk through some of the success you've been having with your structural gross margin initiatives. Yeah, thanks, Matthew for the question. In terms of cadence of gross margins, you know, we've been pretty consistent with indicating, you know, we're looking at about 100 to 150 basis points of gross margin normalization. And that was off the full year, 22 numbers. So you did see in the second quarter sequentially, we were down about 100 basis points off of a really strong Q1 that we had.

Yes, Dave This is Steve So we really haven't seen much through second quarter, we started to see some signs in the first quarter of a couple of projects treatment plant projects and some.

Lead service line replacement, a handful of them and really didn't see much at all evolve from there in the second quarter. So we do think this is going to be a tailwind it's hard to tell how this stuff is going to fall into a lot of these bigger municipalities.

What I would tell you is that we're certainly seeing that the current administration is is really trying to build some urgency on this to get these dollars out to projects and see that start flowing.

So.

Mark Witkowski: So we're really now based on what we're seeing, you know, as we finished Q2, you know, more confident that we're going to see some of that normalization really start to happen in Q3, into Q4, probably kind of the trough at that point, maybe lingering a little bit into Q1, a 24 and then building back off of that base as we progress through 24. So that's kind of how we're thinking about it right now based on what we're seeing and, you know, continued really good progress on a lot of our initiatives and in particular private label continues to accelerate.

We will see kind of how it plays out but as of right now it just.

It has been slow to come and we just haven't seen it trickle through the way, we would would've been anticipated for the back half of the year.

Thank you very much.

Thanks, Dave.

Our next question comes from Kathryn Thompson from Thompson Research Catherine Your line is now open. Please proceed.

Yeah.

Hey, Good morning. This is actually Brian Biros on for Catherine. Thank you for taking my questions.

On the non res outlook can you just touch more on the type of projects that youre seeing softness in light.

Mark Witkowski: We did see continued benefit in this quarter and expect that to continue through the balance of the year into 2024 based on, you know, the products that we expect to continue to have available there for that particular initiative. I'd say still pretty early innings on a lot of our pricing initiatives, you know, do expect. We'll start seeing some benefits from those later this year and into 24. You know, that's, you know, those are really the key items at this point.

Light versus heavy non res or.

Office or something else just any additional color on the types of projects would be helpful.

Yes, Brian what we're seeing is certainly the multifamily projects, which we categorize into non res has been where we've seen a lot of softening happen.

Manufacturing continues to move forward.

We're seeing some early signs right now of large data centers that are being scoped out. So we do think that there is.

Certainly.

Some things on the horizon that are coming.

Matthew Blay: Great. Thanks, Mark. Thanks, Steve. Good luck, guys. Thank you.

But but obviously the multifamily piece has been an area that's really softened in this in this last quarter.

David Mantey: Our next question comes from David Mantey from Beard. David, your lunch.

David Mantey: Now, open. Please proceed. Thank you.

Okay makes sense I guess touching on the yes. The ones you mentioned the manufacturing data centers.

David Mantey: Good morning, everyone. First off, to clarify, Mark, I believe you just said that you're expecting 100 to 150 basis points of gross margin retrenchment up to 27% annual level last year, the level closer to 28 in the first quarter. You're notwithstanding. So you're, you're implying that gross margin on a quarterly basis should drop. Hopefully by the fourth quarter of this year and that 25 and a half to 26% range and then build from there.

And maybe fits into that megaproject category that seems to be a trend going forward for a long time.

We're Ken corn main kind of grow in that Mega project trend. When there is more than just the non res, but there is also just kind of all the stuff going around the project if it infrastructure and residential built out for that category be growing in the the megaproject trend going forward. Thank you.

Yes, there is a number of pockets, where we participate and certainly the most obvious is when we get into these mega projects and the fire protection systems than commercial construction that goes up the underground work that goes in there and then also there is an immense amount of storm drainage activity that goes into preparing a lot of these <unk>.

David Mantey: Is that your expectation? Yeah, Dave. That's fair. That's how to think about it and, you know, do expect that to really, you know, kick in and in Q3 into Q4 and, you know, depending on, you know, the progress we make on more of these initiatives, hopefully build off that base as we get into early 2024. Okay.

<unk> lots and facilities, so a lot of the regulatory.

Changes that have come in place about retaining and detaining storm water from preventing it quick release into the systems.

<unk>.

Steve LeClair: And then a second, if you could talk about the status of the I.I.J.A, dollars moving into state revolving funds are the most nimble of your municipalities already accepting those dollars.

That product category.

Been really big for us and the ability to to provide that product in train a lot of our contractors on how to install that.

Been instrumental so we definitely participate in a lot of those areas. In addition to the project and the surrounding areas as well and then eventually what you see is is that commercial construction and residential continues to grow.

Steve LeClair: And how should we think about fiscal year end with the federal and September, certain municipalities are June or December? Did you talk about how those dollars are flowing, how you expect them to build up? from here. I'm going to talk about this, I'm going to talk about it's going to fall into a lot of these bigger municipalities. What I would tell you is that we're certainly seeing that the current administration is really trying to build some urgency on this to get these dollars out to projects and see that start flowing so we'll see how it plays out but as of right now it has been slow to come and we just haven't seen it trickle through the way we would have anticipated for the back half of the year.

The enhancement and expansion of.

Water treatment and wastewater treatment plants as well.

Thank you.

Our next question comes from Mike Dahl from RBC capital.

Mike Your line is now open. Please go ahead.

Yes.

Good morning, Thanks for taking my questions.

Im going to stick with non res.

So I think just to clarify.

Based on those prior comments I think a lot of the concerns out there on non res are kind of in the broader.

Core non res commercial construction verticals. It seems like you are.

Potentially just calling out that the weakness is in multifamily which.

Some people may categorize kind of separate from from non res. So if you think about kind of stripping out multifamily.

Is your expectation.

That non Red X multifamily it would still be flatter for the year or how would you characterize that.

David Mantey: Thank you very much. Thanks Dave.

Brian Byron: Our next question comes from Catherine Thompson from Thompson Research. Catherine is not open, please proceed. Hey, good morning. This is actually Brian Byron from Catherine. Thank you for taking my questions. On the on the non-res outlook. Can you just touch more on the type of projects that you're seeing softness in if it's light versus heavy non-res or if it's office or something else, just any additional color on the types of projects would be helpful.

Yes, the depth flatter and but we would also see that warehousing is another area that I think we've seen a decline as well too that's been <unk>.

A really strong over the last 12 months to 18 months for sure for fire protection products. So that one has been an area that we've seen a decline as well.

Okay got it and then as a follow up.

Download single digits for the year in non Red It seems like the first half and as <unk> is stable I think one <unk> might have.

Brian Byron: What we're seeing is certainly the multi-family projects which we categorize into non-res has been where we've seen a lot of softening happen. Manufacturing continues to move forward. We're seeing some early signs right now of large data centers that are being scoped out so we do think that there's certainly some things on the horizon that are coming.

I might have even been up a little or stable. So.

Probably implies the second half.

Mid single digit ish.

When we think about the cadence are you already starting to see that hit in <unk>.

<unk> or should we expect that <unk> is kind of somewhat weaker and then kind of a sharper decline as some of this manifests in <unk> any comments on kind of cadence for the second half on the non res piece specifically please.

Steve LeClair: But, but obviously the multi-family piece has been an area that's that's really softened in this in this last quarter. Okay, make sense. I guess touching on the other ones you mentioned the manufacturing data centers kind of maybe fits into the mega project category that seems to be a trend going forward for a long time. Where can corn main kind of grow in that mega project trend when there's more than just the non-res, but there's also just kind of all the stuff going around the project if it's infrastructure even residential built out for that.

Yes, Mike I think as you think about non res.

Also keep in mind I mean, we're fairly balanced between starts and completions. So we're I'd.

I'd say were still seeing strength on the completion side that shows up a lot in our fire protection business. What we're seeing is the beginnings of softness on the start side in particular in multifamily a little bit and commercial and Steve mentioned about warehousing.

Steve LeClair: How does corn main be growing in the mega project trend going forward? Thank you. Yeah, there's a number of pockets where we participate in certainly the most obvious is when we get into these mega projects and the fire protection systems, the commercial construction that goes up the underground work that goes in there. And then also there's an immense amount of storm drainage activity that goes into preparing a lot of these commercial lots and facilities.

So I would expect from a cadence standpoint in Q3, we will still see some volume pressure.

But overall I think that's still a relatively stable end market for us just given the overall mix. So we'll see how the starts plays out could be temporary but it was.

Definitely something we started to see in here recently that we wanted to call out I would say from the.

Steve LeClair: So, a lot of the regulatory changes that have come in place about retaining and detaining stormwater from preventing it quick release into the systems. You know, that that product category has been really big for us and the ability to provide that product and train a lot of our contractors on how to install that has been instrumental. So, we definitely participate in a lot of those areas in addition to the project in the surrounding areas as well. And then eventually what you see is that commercial construction and residential continues to grow is the enhancement and expansion of water treatment and wastewater treatment plants as well. Thank you.

The other factor there is as we get into the second half of the year, we do start to run into much easier.

Easier comps on the residential side.

Still expect a little pressure in Q3, but.

We really saw that start to drop off through the second half of last year. So we think the residential optimism and then just the year over year trends there provide some some offset to some of that volume pressure. So we should see I would say more of the pressure in Q3, and then given some of those offsets should.

And a little better positioned from a volume perspective in Q4.

Okay. That's very helpful. Thanks, Thanks, Mark Thanks, Steve.

Thanks.

Mike Dahl: Our next question comes from Mike Dahl from RBC capsule. Mike Irlein is not open.

Our next question comes from Joe Ritchie from Goldman Sachs. Your line is now open. Please go ahead.

Mike Dahl: Please go ahead. Good morning. Thanks for taking my questions. I'm going to stick with non-RED. So I think just to clarify, see if based on those prior comments, I think a lot of the concerns out there on non-REDs are kind of in the broader core non-RED. As commercial construction verticals, it seems like you're potentially just calling out that the weakness is in multi-family, which some people may categorize kind of separate from from non-RED.

Hi, this is <unk> on for jewelry.

My first question is on.

Just the fire protection sales decline this quarter and basically the pricing dynamics at play between the different product segments.

Five predictions here this was down 9% I think pricing was.

But in the other product segments pricing was actually up so can you provide some color on what's happening between the different pricing across these product and how to think about it in <unk>.

<unk> half of next year.

Mike Dahl: So if you think about kind of stripping out of multi-family, is your expectation that non-RED ex multi-family would still be flatter for the year or how would you characterize that. Yeah, it's a bit flatter, but we would also see that warehouses is another area that I think we've seen a decline as well too. That's been really strong over the last 12 to 18 months for sure for fire protection products. So that one's been an area that we've seen a decline as well.

Yeah sure Vivek. Thanks, Thanks for the question I guess first on the fire protection side.

That's a product line that we do carry steel pipe products that are used for that particular product line that is one of the more I would say commodity type products that we have.

Smaller diameter steel pipe, that's used across various industries, and we've seen I'd say pretty significant.

Pricing declines on that particular product line. So that's really a majority of what youre seeing with the fire protection product line being down.

The 9% to 10% quarter over quarter.

Mark Witkowski: Okay, got it. And then as a follow-up, you know, download single digits for the year and non-REDs. It seems like the first half. I know 2Q was stable. I think 1Q might have even been up a little or stable. So, you know, probably implies that second half is down mid single digits. If when we think about the cadence, are you already starting to see that hit in 3Q, or should we expect that 3Q is kind of somewhat weaker and then kind of a sharper decline as some of this manifests in 4Q.

The other product categories, I would say price has either been stable or up as a whole.

And then.

<unk> been pretty consistent there so.

The big difference with the fire protection.

Steel pipe category that makes up a lot of that revenue.

Thanks, and maybe just shifting gear.

A bit more longer term the $55 billion of water Bill I think previously you guys highlighted about 13 to 14 billion opportunity from this bill.

Mark Witkowski: You know, any comments on kind of cadence for the second half on the non-RED piece specifically please. Yeah, Mike, I think as you think about non-REDs, you know, also keep in mind. I mean, we're fairly balanced between starts and completion. So we're, I'd say we're still seeing strength on the completion side that shows up a lot in our fire protection business. What we're saying is the beginnings of softness on the start side in particular and multi family.

And just doing some back of the envelope math on after you have about 17% market share suggests that our own over $2 billion opportunity for you guys. Specifically from a sales perspective is that a fair way to think about this 13 14 billion opportunity and just could we start seeing some of this.

As early as next year or maybe this will take a bit longer.

Well, we would anticipate that we're going to start seeing those funds flow gear.

Mark Witkowski: A little bit commercial and, you know, Steve mentioned the warehousing. So I would expect, you know, from a cadence standpoint in Q3, we'll still see some volume pressure. But, you know, overall, I think that's still a relatively stable and market for us, just given the overall mix. So, you know, we'll see how the starts plays out could be temporary. But, you know, it was definitely something we started seeing here recently that we wanted to call out.

Up to this point it has been hard to get it in through the state revolving funds. Most of that has been distributed and now the municipalities are starting to draw down on that or will be scoping projects for that.

So our anticipation is that this should have a good tailwind effect for us certainly in 2024 and 25 and beyond.

Great. Thanks.

Mark Witkowski: I'd say from a, you know, the other factor there is as we get into the second half of the year, we do start to run into much easier comp on the residential side. Still expect a little pressure in Q3, but you know, we really saw that start to drop off through the second half of last year. So, we think the residential optimism and then just the year-rear trends there provide some offset to some of that volume pressure. So we should see, I'd say, probably more of the pressure in Q3 and then given some of those offsets should be in a little better position from a volume perspective in Q4.

Thank you.

Our next question comes from Patrick <unk> from J P. Morgan Patrick Your line is now open. Please go ahead.

Hi, good morning.

First one on operating costs SG&A can you just talk about your ability to manage those expenses in the current environment.

And I imagine you are still seeing some.

<unk> with respect to people cost.

As well as facility. So just curious how you think about that.

Bucket of cost, maybe if you want to talk about fixed versus variable.

Hum.

The performance in the quarter as well as your expectations to be able to match.

Next.

Mike Dahl: Okay, that's very helpful. Thanks, Mark. Thanks, Steve.

For the rest of the year I guess.

Unknown Executive: Yeah, thanks.

Yes, Thanks, Patrick for the question operating costs for US is highly variable, but we as you mentioned, we have experienced labor cost inflation.

George Ritchie: Our next question comes from George Ritchie from Goldman Sachs. Tore your lines now. Open, please go ahead. Hi, this is Vivek Srivastava for George Ritchie. My first question is on just the fire protection sales decline this quarter and basically the pricing dynamics that play between the different product segments. Fire protection sales is down 9% I think pricing was an attribute there but in the other product segments pricing was actually up. So can you provide some color on what's happening between the different pricing across these products and how to think about it in second half and next year?

Inflation across a lot of our other facility and distribution costs and some of that.

As even lagged our ability to get some of that pricing into the market. So we're seeing more of that.

Pressure show up but we've also invested and continue to invest in a lot of our growth initiatives Greenfields. As an example that we highlighted for the quarter and we continue to.

Find new opportunities there to to invest in growth.

As we experienced some of the margin normalization that we're anticipating in the back half.

George Ritchie: Yeah, sure, Vivek, thanks for the question. I guess first on the fire protection side, that's a product line that we do carry steel pipe products that are used for that particular product line. That is one of the more I'd say commodity type products that we have smaller diameter steel pipe that's used across various industries and we've seen I'd say pretty significant pricing declines on that particular product line. So that's really a majority of what you're seeing with the fire protection product line being down you know 9% to 10% quarter over quarter.

George Ritchie: The other product categories I'd say price has either been staple or up as a whole been pretty consistent there. So really the big difference with the fire protection is that steel pipe category that makes up a lot of that revenue.

A lot of cost that comes out relatively quickly given our variable cost structure with our incentive comp plans. So that cost comes out very quickly as we experienced some of that normalization so that becomes.

A way to get that operating costs in line fairly quickly. So that's.

Those are some of the easy levers, obviously, we'll continue to look market by market.

See where some of the softness materializes and if we.

Need to make adjustments there, we typically do that on a market by market basis.

Helpful and then.

Maybe just one on <unk>.

The balance sheet and capital allocation.

So the leverage I think is one seven times this quarter, just remind us what the target financial leverage is for the company.

How to think about your priorities for capital allocation.

Vivek Srivastava: Thanks and maybe just shifting gear a bit more longer term the $55 billion water bill. I think previously you guys highlighted about 13 to 14 billion opportunity from this bill and just doing some backup don't develop math on it you have about 17% market share suggests around over 2 billion opportunity for you guys specifically from a sales perspective. Is that a fair way to think about this 13 14 billion opportunity and just could we start seeing some of this as early as next year or maybe this will take a bit longer.

Especially kind of just wondering if you can update us on the pipeline from M&A perspective. Thank you.

Yes.

Yes, Thanks, Patrick Yes, Youre right. We finished the quarter at about one seven times net debt leverage that's definitely.

An area that we're comfortable operating in.

We've said before.

We'd be willing to go up to two to three times.

Leverage for the right opportunities.

In our allocation capital allocation priorities remain in our organic growth initiatives that we have though this is a fairly light capital intensive business from that perspective M&A continues to be.

Vivek Srivastava: Well we wouldn't anticipate that we're going to start seeing those funds flow here you know up to this point it has been hardly get it in through the state revolving funds. Most of that has been distributed and now the municipalities are starting to draw down on that or we'll be scoping projects for that. So our anticipation is that this should have a good tailwind effect for us certainly in 2024 and 25 and beyond. Great thanks.

Next priority pipeline there is very strong very active you've seen what we've completed this year and we've got several other opportunities that we're looking at.

Vivek Srivastava: Thank you.

Currently in the pipeline so.

That continues to be a priority and then obviously we've.

<unk> reinvested in <unk> and the share repurchases that we completed during the quarter that will also continue to be a priority as opportunities arise and then a little longer down the road, we will continue to evaluate dividends.

Patrick Booman: Our next question comes from Patrick Booman from JP Morgan. Patrick, your line's not open please go ahead. The first one on an operating cost, SGNA, just talk about your ability to manage those expenses in a current environment and imagine, you know, you're still seeing some inflation with respect to people costs as well as facility costs.

Another potential opportunity just given the amount of excess capital that we expect to be able to generate.

And complete those growth initiatives and potential share repurchases.

Sorry, just one follow up there just more related to cash on inventory how much.

Inventory.

Still opportunities there.

Normalization perspective.

Mark Witkowski: Could the rest of the year I guess? Yeah, thanks, Patrick, for the question. You know, operating costs for us is highly variable, but, you know, we, as you mentioned, we have experienced labor cost inflation, definitely inflation across a lot of rather facility and distribution costs and some of that, you know, has even lagged our ability to get some of that price into the market. So we're seeing more of that, you know, pressure show up, but, but, you know, we've also invested and continue to invest in a lot of our growth initiatives, green fields as an example, you know, that we highlighted for the quarter and we continue to find new opportunities there to invest in growth.

Yes, I would say we've made a lot of good progress here throughout 2023 and pretty significant progress in Q2, I do expect we'll continue to see.

Inventory right sizing throughout Q3, and then remember Q4 typically were seasonally lowering inventory.

You'd expect.

I'd say, even more inventory right sizing in Q4, just to align with <unk>.

Seasonal nature of the business.

Hard to say, yet if we'll get all the way, where we want to be throughout 2023.

But that could lead us to potentially some more in 2024, but we've been really pleased with the work that we've done here through the first half of this year.

Mark Witkowski: I'd say, you know, as we experience some of the margin normalization that we're anticipating in the back half, we have a lot of costs that comes out relatively quickly given our variable cost structure with our incentive compliance. So that cost comes out very quickly as we experience some of that normalization, so that becomes, you know, a way to get that operating costs in line fairly, fairly quickly.

Great. Thanks, so much best of luck.

As a reminder, if you would like to ask a question. Please press star one on your telephone keypad.

Thats Star one on your telephone keypad.

Our next question comes from Anthony Pettinari from Citi. Your line is now open. Please go ahead.

Mark Witkowski: So that's, those are some of the, you know, easy levers, obviously, we'll continue to look market by market and see where some of the softness materializes and if we, you know, need to make adjustments there, we typically do that on a market by market basis.

Hi, good morning.

On the 23 net sales guidance I guess down 1% to positive two is it possible to.

Don't know put any finer point between price and volume in terms of the underlying assumptions there and then I think in the past you've talked about kind of a growth algorithm.

Mark Witkowski: Helpful, and then maybe just one on the balance sheet and capital allocation. So the leverage, I think, is 1.7 times as of this quarter, just remind us what the target financial leverage is for the company and, you know, how to think about your priorities for capital allocation, especially kind of just wondering if you can update us on the pipeline from Emily perspective. Thank you. Yeah, thanks, Patrick. Yeah, you're right. We finished the quarter to about 1.7 times net debt leverage.

Sort of low single digit market growth and then coordinating maybe outgrowing that you still do you see that is still kind of intact as we think about sort of 2024 and beyond.

I'm, just wondering kind of the long term view there.

Yes, Thanks Anthony.

On the sales guidance down one to positive two for the full year.

Say first one piece of that is acquisitions, we expect that to contribute in the three to four points for the full year and then from our organic standpoint, we do and have seen.

Mark Witkowski: You know, that's definitely an area that we're comfortable operating in. You know, we've said before, you know, we'd be willing to go up to two to three times leverage for the right opportunities. You know, our allocation capital allocation priorities remain, you know, our organic growth initiatives that we have. This is a fairly, you know, light capital intensive business from that perspective. M&A continues to be, you know, our next priority pipeline there is very strong, very active.

Pricing very stable and expect that to be stable here through the second half of the year. So overall price contributing in the low single digit range for the full year.

And then from a volume perspective that leaves.

Down mid single digit range for the full year and again thats, primarily due to the.

The significant softness we've seen with resi in the first half and then as we mentioned some the beginning so some of the softening we're seeing on the non resi side.

Mark Witkowski: You've seen what we've completed this year. We've got several other opportunities that we're looking at currently and in the pipeline. So that continues to be a priority and then obviously we've reinvested in the share repurchases that we completed during the quarter. That will also continue to be a priority as opportunities arise. And then, you know, a little longer down the road, you know, we'll continue to evaluate dividends as another potential opportunity, just given the amount of access capital that we expect to. You'd be able to generate and complete those growth initiatives and potential share repurchases.

In terms of the above market growth, we're very confident in our initiatives that we've got there across a lot of different product categories that long term target of two to three basis points of above market growth I say I would say is intact and we continue to believe we've got that opportunity to.

<unk> to pick up share in that way.

Okay. That's very helpful. And then just following up on an earlier question is there.

Is there a way to think about sort of normalized SG&A margin are or target SG&A margin.

As we think about the long term.

Mark Witkowski: Thanks, sorry, just won't follow up there. Just more related to cash. An inventory, how much inventory, you know, still opportunity is there from a normalization perspective? Yeah, I would say, you know, we've made a lot of good progress here throughout 2023 and pretty significant progress in Q2. I do expect we'll continue to see. Inventory right sizing throughout Q3 and then remember Q4 typically we're seasonally lowering inventory so you'd expect the I would say even more inventory right sizing in Q4 just to align with the seasonal nature of the business and, you know, hard to say yet if we'll get all the way where we want to be throughout 2023.

Yes Anthony.

I think as we think about the SG&A margin, we've been pretty consistent to say as we grow sales, we expect to be able to leverage.

That sales growth either through gross margin enhancement, our SG&A productivity at a rate of about one 3% to one five times that is sales growth. So obviously with some of the gross margin normalization and bouncing around it makes that operating leverage targa.

Target a little a little trickier to look at but overall I'd say, we expect as we grow this business to be able to leverage.

Our SG&A and that fixed cost portion of it so that that can equate to call. It 20 to 30 basis points a year.

Improvement at that SG&A rate standpoint, so I think as you look at our SG&A rate from from last year, and then where we're tracking this year.

Mark Witkowski: But, you know, that could lead us to potentially some more in 2024, but we've been really pleased with the work that we've done here through the first half of this year.

As we see that well.

We will continue to leverage as we can grow the business.

Unknown Executive: Great, thanks so much, Beth Luck.

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

Unknown Executive: As a reminder, if you'd like to ask a question, please press star 1 on the telephone keypad. Let's star 1 on your telephone keypad.

Alright, thank you.

Our next question comes from Andrew <unk> from Bank of America.

Anthony Petinari: Our next question comes from Anthony Petinari from City. Anthony, your lunch now. Open, please go ahead.

Andrew Your line is now open. Please go ahead.

Hi, This is David Ridley Lane on for Andrew Open.

Anthony Petinari: Good morning. On the 23 net sales guidance, I guess down 1 to positive 2, is it possible to, I don't know, put any finer point between price and volume in terms of the underlying assumptions there? And then I think in the past, I mean, you talked about kind of a growth algorithm of maybe sort of low single-digit market growth and then, you know, corn may maybe outgrowing that you still, you see that is still kind of intact as we think about sort of, you know, 2024 and beyond just wondering kind of the long-term view there.

I just wanted to ask if you could bridge the change in adjusted EBITDA guidance, I think was up about $15 million at the midpoint.

How much of that was <unk> outperformance versus the additional acquisitions versus any change in outlook for the back half of the year.

Okay.

Yeah. Thanks, David Yeah, you're right at the midpoint, we raised it from $88 50 to 865 I'd say.

A good portion of it was due to the better than expected gross margin.

Anthony Petinari: Yeah, thanks Anthony. Yeah, on the sales guidance, down 1 to positive 2 for the full year, I'd say first, you know, one piece of that is acquisitions we expect that to contribute, you know, in 3 to 4 points for the full year. And then from an organic standpoint, you know, we do and have seen pricing very stable and expect that to be stable here through the second half of the year. So overall, price contributing in the low single-digit range for the full year and then from a volume perspective that leads down mid single-digit range for the full year.

Rate that we achieved in the second quarter I would say from a.

Say from a pricing standpoint, we narrowed the guidance because we are more confident in the stability of <unk>.

Pricing in the sector and then some.

The offset obviously, we've talked about the non <unk> softness.

There really was a primary factor in terms of why we didn't increase the top end of that range as we kind of watch that end market in particular, but I would say more of that increase at the midpoint was related to the gross margin.

Beat for the quarter.

Got it.

Just maybe.

Anthony Petinari: And that's primarily due to the, you know, the significant softness we've seen with Resi in the first half. And then as we mentioned some beginning to some of the softening we're seeing in the non-resi side. In terms of the above market growth, we're very confident in our initiatives that we've got there across a lot of different product categories that long-term target of 2 to 3 basis points of above market growth. I would say as intact, we continue to believe we've got that opportunity to, you know, continue to pick up share in that way. Okay, that's very helpful.

More for for background.

When you have your pricing or notifications from suppliers.

I would imagine you have a pretty good handle on sort of what the pricing for the back half would be but I just wanted to ask.

How much.

Okay variability could there be in sort of your pricing expectations here.

Over the next call it.

A couple of months.

Thanks, David we've seen the pricing remain really firm and Thats why we have some confidence that will continue through the second half there may be some puts and takes on a couple of different product categories, but for the most part just given the level of.

Mark Witkowski: And then just following up on an earlier question, is there a way to think about sort of normalized SGNA margin or target SGNA margin, as we think about the long term? Yeah, Anthony, you know, I think as we think about the SGNA margin, you know, we've been pretty consistent to say, you know, as we grow sales, we expect to be able to leverage, you know, that sales growth, either through gross margin enhancement or SGNA productivity, you know, at a rate of about 1.3 to 1.5 times that sales growth.

From each of these suppliers many of them are totally dedicated to the sector. So the supply demand characteristics kind of hold true in that area and help carry a more resilient pricing mechanism. So so we're pretty confident that we're going to see sustained pricing through the second half.

Thank you very much.

Okay. Thank you David.

We currently have no further questions. So I would like to hand over back to Steve <unk> for closing remarks, Steve. Please go ahead.

Mark Witkowski: So obviously with some of the gross margin, normalization and bouncing around, it makes that operating leverage target a little, little trickier to look at. But overall, I'd say we expect as we grow this business to be able to leverage our SGNA in that fixed cost portion of it. So that can equate to, call it, you know, 20 to 30 basis points a year of improvement at that SGNA rate standpoint. So I think as you look at our SGNA rate from last year and then, you know, where we're tracking this year, as we see that, you know, we'll continue to leverage as we can grow the business. Okay, that's very helpful.

Thank you all again for joining US today, there was a pleasure to have you on the call our consistently strong performance quarter after quarter and 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.

Our growth platform provides for significant value creation opportunity as our strategy is grounded in agility innovation and execution.

We have a tremendous amount of opportunity ahead of us and we look forward to providing a deeper look during our investor day next month.

Thank you for your interest in corn main operator that concludes our call.

Ladies and gentlemen. This concludes today's call. Thank you for joining you may now disconnect your lines. Thank you.

Unknown Executive: I'll turn it over. All right. Thank you.

David Ridley-Layne: Our next question comes from Andrew Holbin from Bank of America. Andrew, you lunch not open. Please go ahead.

[music].

David Ridley-Layne: Hi, this is David Ridley-Layne on for Andrew Holbin. I just wanted to ask if you could bridge the change in the Adjusted EBITDA guidance. I think it was up about 15 million at the midpoint. How much of that was, you know, 2Q performance versus the additional acquisitions versus any change in the outlook for the back after the year. Yeah, thanks David. Yeah, you're right. At the midpoint, you know, we raised it from 880 to 865.

Okay.

Okay.

David Ridley-Layne: I'd say a, you know, a good portion of it was due to the better than expected gross margin rate that we achieved in the second quarter. I'd say from a, you know, I'd say from a pricing standpoint, we narrowed kind of the guidance because we're more confident in the stability of pricing in the sector. And then, you know, it's an offset, you know, obviously we've talked about the nonressy softness there really with a primary factor in terms of why we didn't increase the top end of that range as we kind of watched that end market in particular.

David Ridley-Layne: But I'd say, you know, more of that increased the midpoint was related to the gross margin, you know, beat for the quarter. Got it. And it just maybe more for background, but when you have your pricing notifications from suppliers, I mean. I would imagine you have a pretty good handle on sort of what the pricing for the back-off would be, but I just wanted to ask, you know, how much variability could there be and sort of your pricing expectations here, you know, over the next couple of months.

David Ridley-Layne: Thanks, David. We've seen the pricing remain really firm, and that's why we have some confidence that will continue through the second half. There may be some puts and takes on a couple different product categories, but for the most part, you know, just given the level of, from each of these suppliers, many of them are totally dedicated to this sector, so the supply demand characteristics kind of hold true in that area and help carry a more resilient pricing mechanism. So we're pretty confident that we're going to see sustained pricing through the second half. Thank you very much.

Unknown Executive: Okay, thank you, David.

Steve LeClair: We currently have no further questions, so I would like to hand over back to Steve LeClair for closing remarks. Steve, please go ahead.

Steve LeClair: Thank you all again for joining us today. It was a pleasure to have you on the call. Our consistently strong performance quarter after quarter has resulted the hard work of our branches and functional support teams, our focus on operational excellence and the diversity of our products and end markets. Our growth platform provides for significant value creation opportunity, as our strategy is grounded in agility, innovation, and execution.

Steve LeClair: We have a tremendous amount of opportunity ahead of us, and we look forward to providing a deeper look during our investor day next month. Thank you for your interest in core and main operator.

Unknown Executive: That concludes our call.

Unknown Executive: Ladies and gentlemen, this concludes today's call. Thank you for joining. You may not disconnect your lines. Thank you.