Release Date: June 04, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Core & Main Inc (CNM, Financial) achieved nearly 11% net sales growth in the first quarter, with organic sales growth of roughly 3% and approximately 8% added through acquisitions.
- The company reported a record $1.74 billion in revenue, driven by strong end market volumes and an earlier start to the selling season in northern geographies.
- Core & Main Inc (CNM) saw a 31% growth in metering products, highlighting their ability to drive the adoption of new products and technologies.
- The company successfully integrated five complementary businesses, including its largest acquisition to date, enhancing geographic reach and product offerings.
- Operating cash flow was strong at $78 million, reflecting effective inventory optimization efforts and a lower than normal seasonal inventory build.
Negative Points
- Gross margin decreased to 26.9% from 27.9% in the prior year, impacted by higher average cost of inventory and competitive pressures.
- Interest expense increased significantly to $34 million from $17 million in the prior year, primarily due to higher borrowings and increased interest rates on variable rate debt.
- Net income decreased to $101 million from $133 million in the prior year, mainly due to lower operating income and higher interest expenses.
- Diluted earnings per share decreased to $0.49 from $0.50 in the prior year, affected by a decline in net income despite a lower share count.
- Selling, general, and administrative expenses increased by approximately 15%, driven by inflation and investments in personnel to support current volumes and future growth.
Q & A Highlights
Q: Can you clarify the impact of competitive pressures on gross margins and the 30 to 50 basis points guidance?
A: The 30 to 50 basis points guidance is sequential, starting from Q2. Competitive pressures arise when market costs stabilize, leading to tighter margins on projects. However, we expect to offset this with volume growth and our gross margin initiatives.
Q: Where are you seeing deflationary pressures, and are there any inflationary offsets?
A: Deflationary pressures are primarily in commodity-based products like steel piping and municipal PVC. While these areas face price declines, we are offsetting this through volume growth and strategic initiatives like private label growth and sourcing optimization.
Q: What is the visibility on pricing trends and the risk of broader price deflation?
A: We have good visibility and expect market costs to remain stable. Any minor price adjustments are to stay competitive in price-sensitive segments. We do not foresee significant trends towards broader price deflation.
Q: How should we think about SG&A growth and leverage for the remainder of the year?
A: SG&A growth will be influenced by M&A activities and investments in personnel and technology. We expect 30 to 50 basis points of SG&A rate pressure over the next few quarters, with potential leverage improvements later in the year.
Q: Can you clarify the 30 to 50 basis points gross margin guidance and its impact on the full year?
A: The 30 to 50 basis points guidance is sequential, starting from Q2. We aim to offset this through our gross margin initiatives. The impact on the full year will depend on our ability to drive these initiatives effectively.
Q: How do recent acquisitions impact your guidance and capital allocation priorities?
A: Recent acquisitions contribute 7% to 8% of total sales growth for fiscal 2024. We are focusing on organic growth, M&A, and returning capital to shareholders. The acquisitions are expected to be neutral from an EBITDA standpoint.
Q: What is driving the price pressure from more price-sensitive customers?
A: The price pressure is due to the competitive nature of large projects and the normalization of supply chains. We are offsetting this through private label growth and other pricing initiatives.
Q: Can you provide an update on the municipal, non-residential, and residential end markets?
A: Municipal markets are expected to grow low single digits. Non-residential markets are showing strength in highway and street projects, while residential markets are expected to grow low to mid-single digits despite higher interest rates.
Q: What is the annualized revenue contribution from recent acquisitions?
A: Recent acquisitions contribute approximately $450 million in annualized revenue. The EBITDA contribution is expected to be neutral, with higher gross margins offset by higher SG&A rates.
Q: What are the trends in the fire protection segment?
A: The fire protection segment is facing price declines due to steel pipe deflation. However, we are offsetting this with acquisitions and expect this segment to be a growth area in the future.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
