Company Overview
Core & Main, Inc. (CNM) is a leading specialty distributor dedicated to advancing reliable infrastructure with local service, nationwide. As a key player in the water, wastewater, storm drainage, and fire protection industries, the company provides essential products and services to municipalities, private water companies, and professional contractors across the United States.
History and Evolution
Founded in 1994 and headquartered in St. Louis, Missouri, Core & Main has evolved over the decades through strategic acquisitions and organic growth to become a national leader in its field. In its early years, the company established itself as a regional player in the Midwest, steadily expanding its geographic footprint through a series of strategic acquisitions to serve customers across an increasing number of states.
A key milestone in the company's history occurred in 2011 when it was acquired by funds affiliated with private equity firm Clayton, Dubilier & Rice (CDR). This transaction provided Core & Main with additional resources and expertise to accelerate its growth trajectory. Under CDR's ownership, the company continued to expand its nationwide footprint, adding over 100 new locations through acquisitions.
In 2021, Core & Main completed an initial public offering, transitioning to a publicly traded company listed on the New York Stock Exchange under the ticker symbol CNM. This important milestone provided the company with access to public capital markets to support its ongoing expansion plans.
Operational Challenges and Resilience
Throughout its history, Core & Main has faced various operational challenges, including supply chain disruptions, labor shortages, and fluctuations in commodity prices. However, the company has demonstrated resilience in navigating these headwinds, leveraging its diversified customer base, supplier relationships, and flexible cost structure to maintain financial stability. Core & Main's ability to provide mission-critical infrastructure products and services has been a key factor in its continued success.
Current Operations
Today, Core & Main operates a nationwide network of over 350 branches across 49 states, serving a diverse customer base of over 60,000 clients. The company's product portfolio includes a wide range of specialized items such as pipes, valves, fittings, storm drainage solutions, fire protection equipment, and smart meter systems. By integrating these products with value-added services, Core & Main has positioned itself as a trusted partner in addressing the growing infrastructure needs of communities across the country.
Core & Main's business is primarily focused on four main product segments:
1. Pipes, Valves & Fittings (PVF): This is the company's largest segment, accounting for approximately 67% of net sales in the first half of fiscal 2024. PVF products are used in the maintenance, repair, replacement, and new construction of water, wastewater, and fire protection infrastructure.
2. Storm Drainage: Accounting for 15% of net sales in the first half of fiscal 2024, this segment includes corrugated piping systems, retention basins, manholes, grates, geosynthetics, and erosion control products used in storm drainage infrastructure projects.
3. Fire Protection: Representing 8% of net sales in the first half of fiscal 2024, this segment includes fire protection pipes, sprinkler heads and devices, as well as custom fabrication services.
4. Meter Products: This segment, which accounted for 9% of net sales in the first half of fiscal 2024, includes smart meter products, meter sets, meter accessories, installation, software, and other services used in water infrastructure projects.
Core & Main estimates it has a 17% market share in a $39 billion addressable market, positioning the company as a significant player in the industry.
Financials
Financially, Core & Main has demonstrated strong performance in recent years. For the fiscal year ended January 28, 2024, the company reported revenue of $6.70 billion, a 7.9% increase from the prior year. Net income for the same period stood at $371.0 million, with diluted earnings per share of $2.15. The company's operating cash flow (OCF) for fiscal 2024 was $1.07 billion, with free cash flow (FCF) of $1.03 billion.
In the most recent quarter (Q2 2024), Core & Main reported revenue of $1.96 billion, representing a year-over-year growth of 5.5% compared to Q2 2023. However, net income for Q2 2024 was $126 million, with OCF of $48 million and FCF of $39 million. The decline in net income, OCF, and FCF in Q2 2024 compared to Q2 2023 was primarily due to higher operating expenses, higher interest expense, and the impact of wet weather conditions that led to project delays.
Growth Strategies
One of Core & Main's key growth drivers has been its focus on acquisitions. Over the past few years, the company has strategically acquired several regional distributors, expanding its geographical footprint and product capabilities. In the first half of fiscal 2024, the company completed five acquisitions with an aggregate transaction value of $623 million, including EGW Utilities, Geothermal Supply Company, and HM Pipe Products, among others, further strengthening its position in the market.
Additionally, Core & Main has been at the forefront of technological advancements in the water and wastewater industries. The company's smart utility solutions, which include advanced metering infrastructure and data analytics, have enabled municipalities to optimize resource allocation, enhance system efficiency, and improve service delivery to end-users.
Recent Performance and Challenges
However, the company has not been immune to the challenges faced by the broader industry. In the second quarter of fiscal 2024, Core & Main's results were impacted by unusually wet weather conditions and sluggish end-market demand, particularly in the residential and non-residential construction sectors. The company estimated that wet weather and saturated grounds caused a $50 million headwind, or around a 3% impact on sales in Q2 2024.
In response to these challenges, Core & Main has revised its full-year guidance for fiscal 2024. The company now expects net sales in the range of $7.3 billion to $7.4 billion, down from their previous expectation of flat to slightly up. Adjusted EBITDA guidance has been lowered to a range of $900 million to $930 million. However, the company has raised its operating cash flow conversion guidance to 65% to 75% of adjusted EBITDA, up from the previous target of 60% to 70%.
The revised guidance is primarily due to lower than expected end-market volumes, with the $200 million reduction in the sales outlook split roughly evenly across municipal, non-residential, and residential end-markets. Core & Main expects some of the growth they anticipated in the second half of 2024 to be pushed into 2025 as project owners and developers continue to assess the macroeconomic landscape.
Long-term Outlook
Despite these near-term headwinds, Core & Main remains confident in the long-term fundamentals of its business. The company cites the aging and fragile state of the nation's water infrastructure, as well as the growing emphasis on sustainability and water conservation, as key drivers for future growth. The recently passed Infrastructure Investment and Jobs Act (IIJA), which includes $55 billion in funding for water infrastructure projects, is also expected to provide a tailwind for the industry in the coming years.
Liquidity
Core & Main's liquidity position remains strong, supported by its healthy cash flow generation and access to credit facilities. The company's current ratio of 2.29 and quick ratio of 1.34 indicate a solid ability to meet short-term obligations, while its debt-to-equity ratio of 1.51 suggests a manageable level of leverage. As of July 28, 2024, the company had $13 million in cash and cash equivalents, with $250 million outstanding on its $1.25 billion Senior ABL Credit Facility, which matures in February 2029. The company had available borrowing capacity of $986 million under the Senior ABL Credit Facility, subject to borrowing base availability. This financial flexibility allows Core & Main to pursue strategic investments and acquisitions while maintaining a stable capital structure.
Risks and Challenges
Regarding risks, Core & Main's highly fragmented and competitive market, as well as its exposure to fluctuations in commodity prices and interest rates, pose ongoing challenges. The company also faces the inherent risks associated with its acquisition strategy, including the successful integration of new businesses and the realization of expected synergies.
Conclusion
In conclusion, Core & Main's position as a leading specialty distributor in the water, wastewater, storm drainage, and fire protection sectors, coupled with its strategic initiatives and technological advancements, make it a compelling investment opportunity. While the company navigates near-term market headwinds, its long-term growth prospects remain strong, driven by the critical need for infrastructure modernization and the company's ability to provide comprehensive solutions to its diverse customer base. Despite the current challenges, Core & Main remains optimistic about the long-term demand characteristics of its end-markets and its ability to drive above-market growth.