8-K: Core & Main Announces Fiscal 2023 Results, Net Sales Reach $6.7 Billion

Core & Main reported a 0.8% increase in net sales to a record $6.702 billion for fiscal year 2023, alongside a decrease in adjusted EBITDA.

Summary

• Core & Main's net sales for fiscal year 2023 reached a record $6.702 billion, a 0.8% increase compared to the previous year.
• The company's gross profit margin increased slightly to 27.1%, up from 27.0% in fiscal 2022.
• Net income for the year was $531 million, a decrease from $581 million in the prior year.
• Diluted earnings per share increased slightly to $2.15, up from $2.13 in fiscal 2022.
• Adjusted EBITDA decreased by 2.7% to $910 million, with the adjusted EBITDA margin decreasing to 13.6%.
• Operating cash flow was a record $1.069 billion, a significant increase from $401 million in the previous year.
• The company deployed $1.3 billion to repurchase and retire 45 million shares at an average price of approximately $30 per share.
• Net debt leverage ended the year at 2.1x, up from 1.4x the previous year.
• For the fourth quarter of fiscal 2023, net sales increased by 4.8% to $1.440 billion, while net income decreased to $76 million.
• The company opened 4 new locations and closed 10 acquisitions during and after the year.

Sentiment

Score: 6

Explanation: The sentiment is moderately positive due to record sales and operating cash flow, but tempered by decreased profitability and increased debt leverage. The company's strategic initiatives and future outlook provide some optimism, but the current financial results are mixed.

Positives

• The company achieved record net sales and operating cash flow for the fiscal year.
• Core & Main successfully deployed a significant amount of capital to repurchase shares, enhancing shareholder value.
• The company made strategic acquisitions to expand its geographic footprint and product offerings.
• Net sales increased in the fourth quarter, driven by volume growth and acquisitions.
• Diluted earnings per share increased in the fourth quarter due to lower share counts following share repurchases.
• The company improved operating cash flow significantly due to inventory optimization efforts.

Negatives

• Adjusted EBITDA decreased for both the full year and the fourth quarter.
• Net income decreased for both the full year and the fourth quarter.
• Gross profit margin decreased in the fourth quarter.
• Selling, general, and administrative expenses increased, impacting profitability.
• Net debt leverage increased due to higher borrowings to fund investments and share repurchases.
• The company experienced a decrease in net sales for pipes, valves & fittings due to lower end-market volumes.

Risks

• The company faces risks related to declines and volatility in the U.S. construction markets.
• Slowdowns in municipal infrastructure spending and delays in federal funding could impact the business.
• The company is exposed to price fluctuations in product costs and supply chain disruptions.
• There are risks associated with acquisitions and integrating new businesses.
• The company operates in a fragmented and highly competitive market.
• Increases in interest rates could impact the company's financial performance.
• The company's indebtedness could restrict operating flexibility.
• There are risks related to cybersecurity threats and interruptions in IT systems.

Future Outlook

The company expects net sales to range from $7.4 to $7.6 billion and Adjusted EBITDA to range from $925 to $975 million for fiscal year 2024. They anticipate end market volumes to improve and expect 6-7% sales growth from acquisitions. They also expect a further 30 to 50 basis points of gross margin normalization from the fiscal 2023 fourth quarter results.

Management Comments

• Fiscal 2023 was an exceptional year for Core & Main given the extraordinary performance we achieved during the preceding two years and considering the softer market conditions that have followed.
• Our teams navigated the dynamic environment to deliver strong financial performance, including net sales of over $6.7 billion, Adjusted EBITDA of $910 million and record operating cash flow of approximately $1.1 billion, providing us the capacity to make significant investments in organic and inorganic growth while returning capital to shareholders.
• We have generated a significant amount of momentum for the business in recent months between the acquisitions we completed, the internal investments we made and the value we returned to shareholders, and we look forward to capitalizing on that momentum in fiscal 2024.
• We have never been better positioned to compete in this highly fragmented industry and execute our strategy to capture market share while driving long-term profitable growth.
• We expect end market volumes to improve in fiscal 2024, providing a foundation for us to gain market share through the execution of our product, customer and geographic expansion initiatives.

Industry Context

Core & Main operates in a fragmented industry, and the results reflect the challenges of navigating a dynamic market with normalizing supply chains. The company's focus on acquisitions and strategic growth initiatives aligns with the broader trend of consolidation in the distribution sector. The company is also positioned to benefit from the Infrastructure Investment and Jobs Act.

Comparison to Industry Standards

• Core & Main's performance is being compared to other industrial distributors, such as Ferguson and Watsco, which also operate in fragmented markets.
• While Core & Main achieved record sales, the decrease in adjusted EBITDA and net income is a concern, especially when compared to companies that have maintained or increased profitability.
• The company's net debt leverage of 2.1x is higher than some of its peers, indicating a higher level of financial risk.
• The company's focus on acquisitions is similar to other companies in the sector, but the success of these acquisitions will be key to future growth.
• The company's operating cash flow conversion of 60-70% is a key metric that will be watched closely by investors.

Stakeholder Impact

• Shareholders will be impacted by the share repurchase program and the company's financial performance.
• Employees will be affected by the company's growth initiatives and acquisitions.
• Customers will benefit from the company's expanded product offerings and geographic reach.
• Suppliers will be impacted by the company's strategic sourcing initiatives.
• Creditors will be impacted by the company's debt levels and financial performance.

Next Steps

• The company plans to capitalize on the momentum generated in recent months.
• Core & Main will focus on executing its strategy to capture market share and drive long-term profitable growth.
• The company will continue to deploy capital to initiatives that will result in accelerated growth or value creation for shareholders.
• The company will host a conference call and webcast on March 19, 2024, to discuss the financial results.

Key Dates

Keywords

infrastructure, water, wastewater, storm drainage, fire protection, distribution, acquisitions, share repurchase, EBITDA, net sales, operating cash flow