Core & Main Aktie

Hello, everyone. Thank you for joining us, and welcome to the Core & Main First Quarter 2026 Earnings Conference Call. [Operator Instructions] I will now hand the conference over to Landon Althoff, Vice President of Investor Relations. Landon, please go ahead.

Good morning, and thank you for joining us. I'm Landon Althoff, Vice President of Investor Relations at Core & Main. We appreciate you taking the time to be with us today for Core & Main's Fiscal 2026 First Quarter Earnings Call.

Joining me this morning are Mark Witkowski, our Chief Executive Officer; Robyn Bradbury, our Chief Financial Officer; and Brad Cowles, our President. Mark will start with a business update. Brad will then discuss the value of Core & Main is providing across our smart utility and treatment plant solutions initiatives. And Robyn will follow with a review of our financial results and reaffirmed outlook for fiscal 2026. After, we will open the line for questions, and Mark will wrap up with closing remarks.

As a reminder, our press release, presentation materials and the statements made during today's call may include forward-looking statements. These are subject to various risks and uncertainties that could cause actual results to differ materially from our expectations. For more information, please refer to the cautionary statements included in our earnings release and our filings with the SEC. We will also reference certain non-GAAP financial measures during today's discussion. We believe these metrics provide useful insight into the underlying performance of our business. Reconciliations to the most comparable GAAP measures are available in both our press release and the appendix of today's investor presentation.

Thank you again for your interest in Core & Main. I'll now turn the call over to our Chief Executive Officer, Mark Witkowski.

Thanks, Landon, and good morning, everyone. Thanks for joining us today. Before getting into the details of the quarter, it's helpful to frame the broader demand backdrop. The fundamental drivers of water infrastructure investment remained firmly intact, as utilities continue to prioritize essential water infrastructure systems that support public health and community growth creating resilient demand across our business. This demand provides a strong foundation while our diversified end market exposure helps balance near-term uncertainty and supports our performance through cycles.

Against that backdrop, we delivered a solid start to fiscal 2026 with first quarter net sales of $1.9 billion, adjusted EBITDA of $226 million and adjusted diluted EPS of $0.72. These results reflect disciplined execution and the underlying resilience of our business and support our confidence in the full year outlook we communicated in March. Our associates across the business remain focused on execution and serving our customers, leveraging the competitive stress of Core & Main. Our local teams bring the knowledge experience to help customers navigate the most complex projects, simplifying their supply chains and ensuring the efficient flow of materials to keep critical infrastructure projects moving forward. That local relationship-driven model supported by our national scale and capabilities continues to differentiate Core & Main and positions us to deliver long-term value for our customers and shareholders.

Turning to our end markets. Municipal demand remained strong during the quarter and continues to serve as a core source of growth for the business. Activity is supported by aging water infrastructure, essential repair and replacement work and the largely nondiscretionary nature of municipal spending. These needs extend well beyond any single federal funding cycle and reflect a long-term modernization required to keep critical water, wastewater and storm drainage systems operating reliably for communities. Approximately 95% of water infrastructure funding is supported by state and local sources, reinforcing the durable, locally driven nature of this market and we continue to see a sustained pipeline of projects. These characteristics reinforce municipal as our most stable end market and provide a strong foundation through varying economic conditions.

Nonresidential demand remains mixed across project types and geographies, but overall activity has been stable. We are seeing healthy momentum in certain project types, including data centers, in manufacturing facilities with fire protection sales benefiting from strength in data center and multifamily construction activity as well as higher steel prices. Data centers continue to gain momentum, and we are securing a steady stream of new project wins across multiple regions of the country. These projects are particularly attractive for our business given the significant water infrastructure required to support cooling systems as well as the broader downstream demand they create within surrounding communities.

We see data centers as a compelling long-term growth opportunity for Core & Main. These projects require significant investment in water, wastewater, storm drainage and fire protection infrastructure and involve complex multiphase project life cycles that align well with our technical capabilities, product breadth and execution expertise. Our national scale sourcing strength, dedicated project teams and technical resources, combined with the deep relationships and local market knowledge of our branch network, position us well to capture this opportunity. We are seeing strong bidding activity and customer engagement across multiple regions, reinforcing our confidence in this growth driver. Strong data center and manufacturing activity has largely offset softness in traditional commercial construction. Residential markets remain challenged with year-over-year declines against the strong prior year comparison.

As a reminder, residential lot development started out with optimism in the first quarter of fiscal 2025. But activity pulled back as we move throughout the second quarter and softened further in the back half of the year. Since then, conditions have largely stabilized. While we have not seen further deterioration relative to how we exited fiscal 2025, we have also not seen a meaningful improvement, which is in line with our expectations. Near-term activity will continue to be influenced by interest rates and affordability, but we remain optimistic on the long-term outlook given the structural undersupply of housing and meaningful pent-up demand. Our teams remain focused on driving above-market growth through the strength of our value proposition and the execution of our product, customer and geographic expansion initiatives.

For example, treatment plant and smart utility solutions, including advanced metering infrastructure, software, analytics, installation and ongoing support delivered double-digit and high single-digit growth during the quarter, respectively. This performance reflects the breadth of our capabilities, which extend well beyond product distribution, just supporting customers across the full life cycle or infrastructure needs. Over time, we have invested in both local and national resources to deepen our technical expertise, expand project support and broaden customer coverage, enabling us to serve a wider range of projects at greater scale and complexity. It also reflects growing customer demand for solutions that improve system visibility reduce water loss and drive more efficient infrastructure operations.

Brad will cover this in more detail shortly. Technology also continues to be an important differentiator for Core & Main and a key enabler of our long-term growth strategy. We are focused on leveraging our industry-specific proprietary digital tools and developing AI-enabled solutions to improve productivity, enhance the customer experience and simplify workflows for both our associates and customers. Our capabilities in these areas of focus help deepen customer relationships, improve execution across our network and further reinforce our differentiated value proposition. We also continue to expand our geographic footprint, opening 5 new greenfield locations in attractive markets during the quarter. We are well on track to open a record 8 to 10 greenfield locations in fiscal 2026. These openings further strengthen our local service model while extending the benefits of our national scale and capabilities into new or underpenetrated markets.

Alongside our greenfield expansion, we see a best pipeline of acquisition opportunities across our highly fragmented industry. We remain actively engaged on a number of high-quality opportunities to expand our capabilities, extend our geographic reach and add strong local talent and customer relationships. These opportunities would broaden our product and solutions offering, expand our addressable market and deepen our technical expertise further strengthening our position as a trusted partner for municipal water infrastructure projects. We see particular opportunity to continue building out our treatment plant capabilities where we have a strong foundation and a clear path to advancing toward more comprehensive turnkey solutions similar to what we have achieved in smart utility.

While timing can vary, the pipeline remains very active and M&A remains a core pillar of our growth strategy, and we're confident in our ability to execute as these opportunities advance. Our gross margin initiatives continue to deliver structural improvement. In the first quarter, we expanded gross margins 50 basis points year-over-year, driven by continued growth in private label sourcing optimization and disciplined pricing execution, consistent with the trajectory we've demonstrated in recent quarters. We generated strong operating cash flow during the quarter, supporting continued reinvestment in the business while returning meaningful capital to shareholders through share repurchases.

Fiscal year-to-date, we have deployed $125 million in repurchases, approximately 80% of what we did in all of fiscal 2025. Robyn will cover our cash flow and capital allocation in more detail shortly. We're proud of our team's ability to execute in a dynamic environment. their consistent focus and discipline, combined with the strength of our business model positions us well to continue creating value for our customers and shareholders.

I'd like to now turn it over to Brad to spend a few minutes on 2 areas that continue to be important municipal growth drivers for Core & Main, smart utility and treatment plant solutions, which are strong examples of how we create value through differentiated capabilities. Both categories benefit from the breadth of our platform, deep technical expertise, and ability to support larger, more complex customer projects, which continue to drive above-market growth.

Over to you, Brad.

Thanks, Mark, and great to be with you all today. Smart Utility and treatment plant solutions continue to be compelling municipal growth opportunities for Core & Main and clear examples of how we translate differentiated capabilities and targeted investments into sustained above-market growth. Across the country, municipalities and private utilities are increasingly focused on modernizing aging metering infrastructure to improve billing accuracy to reduce nonrevenue water, enhanced system visibility and operate more efficiently as their networks become more complex. These projects are primarily funded through local rate adjustments and operating budgets. Many municipalities are still reliant on manual read or drive by systems and these legacy systems still represent a majority of the connections in the United States.

They are labor-intensive, less reliable and increasingly difficult to manage at scale. Advanced metering solutions with real-time 2-way communication address these challenges while also enabling efficiencies in customer self-service and billing for the back office and advanced analytics, proactive maintenance planning and water loss prevention for the operations staff, but they also introduced complexity around technology integration, project sequencing and long-term life cycle support. As a result, customers are looking for partners that can deliver complete solutions, not just hardware. That's where Core & Main continues to differentiate. We have a leading position in smart utility solutions with access to leading manufacturers and technologies. But what truly sets us apart is how we bring these solutions to market.

We provide an integrated turnkey offering that combines hardware, software, analytics, installation, project management and ongoing service through a single trusted partner. We support customers across the full project life cycle from early assessment and system design through installation and deployment to software integration and long-term maintenance. This model reduces execution risk, shortens implementation time lines and simplifies what are often multiyear mission-critical projects. Our ability to consistently execute at scale has enabled us to win larger, more complex contracts, including multiyear smart utility programs with some of the country's largest municipal and private utilities. When successfully implemented, these projects can often help municipalities reduce future cost increases to their end users.

In our last call, we highlighted being awarded what we believe is the largest smart utility contract in U.S. history. That momentum continues in 2026 with several additional large and multiyear project wins. These municipal customers increasingly rely on Core & Main for system design, network infrastructure, software and analytics, installation and even ongoing support throughout the life of the asset. Our recent wins underscore the demand across municipalities of all sizes from some of the largest utilities in the country to midsized and local communities, reinforcing the broad and durable nature of this opportunity. We have invested significantly to scale and enhance these capabilities. We built dedicated national smart utility and project management teams, expanded our installation and service footprint and strengthened partnerships with leading technology providers.

These partners include over a dozen software and analytics companies, along with a growing network of sensor hardware innovators which we bring together to provide cutting-edge solutions to our municipal customers' biggest challenges. Leveraging metering and acoustic leak detection data, we provide utility operators with advanced analytics and predictive failure models that help optimize capital deployment for proactive waterline replacements, alongside turnkey billing solutions and customer self-service portals. Together, these investments allow us to support projects of virtually any size and complexity level while still leveraging our strong local customer relationships on the ground. A similar execution model underpins the strong municipal growth we're seeing in our treatment plant business.

Treatment plant modernization has become an important priority for utilities as facilities age regulatory requirements increase and communities face greater demands on water and wastewater systems. These projects are supported by a mix of funding sources, including local utility budgets, state revolving funds and other public programs, but they're ultimately driven by the essential need to maintain and modernize critical infrastructure. As a result, we continue to view investment in treatment plant infrastructure as a durable long-term opportunity. Treatment plant solutions are inherently complex, requiring deep technical expertise, precise coordination and the ability to deliver highly specified products. We've made targeted investments to expand dedicated national treatment plant teams with engineering, estimating and project management capabilities.

Our investments are focused on broadening the scope of products, solutions and projects we can support from local facility upgrades to large multiyear regional treatment plants. As we scale, our ambition is to follow the needs of the customer and evolve towards a more integrated solutions and services model similar to the capabilities we have built in smart utility. Organic investment will continue to drive that evolution while M&A provides an opportunity to accelerate the expansion of our treatment plant platform. Today, treatment plant represents one of our fastest-growing product initiatives, consistently delivering double-digit growth as customers increasingly turn to Core & Main to help execute these critical infrastructure projects. Importantly, these projects tend to be less cyclical, highly visible and closely aligned with our core municipal relationships.

Together, smart utility and treatment plant solutions illustrate the power of our model strong local relationships backed by national scale, technical expertise and disciplined investment. This scalable and repeatable approach has supported approximately 15% and 25% net sales CAGRs in smart utility and treatment plant, respectively, over the past 5 years and continues to drive meaningful share gains across both categories. Importantly, the growth we're delivering in these areas is tied to steady, long-term customer needs, modernizing infrastructure, improving system efficiency, reducing water loss and better serving communities. We remain highly confident in the municipal end markets and our ability to continue driving above-market growth as utilities seek partners that can execute complex projects reliably and at scale.

I'll now turn it over to Robyn to cover our financials.

Thanks, Brad, and good morning, everyone. I'll begin on Page 8 of the presentation with an overview of our first quarter results. Net sales were in line with prior year at $1.9 billion. Organic volumes were down approximately 1% year-over-year, while acquisitions contributed about 1 point of growth. As a reminder, this performance is against a strong prior year comparison when we delivered approximately 10% growth in end markets, particularly residential were more supportive. Overall, we estimate end market demand was down low single digits in the quarter, driven primarily by a year-over-year decline in residential lot development on a tough prior year comparison, partially offset by healthy municipal growth.

Municipal volumes were supported by repair and replacement activity, the largely nondiscretionary nature of these projects and continued growth in market share gains across our smart utility and treatment plan initiatives. Nonresidential markets continue to show healthy activity across several project types, including data centers, but were offset by softer demand in light commercial construction, particularly retail and office-related activity. Residential softness was driven by weakness in the Sunbelt markets. This reflects slower lot development activity versus a stronger prior year comparison. We saw steady residential lot development in the first quarter last year before a pullback in the second quarter and further declines in the back half of fiscal 2025.

Sequentially, residential demand was stable relative to the fourth quarter and in line with our expectations. Overall, pricing was stable during the quarter with increases across most of our product portfolio balanced by a year-over-year headwind from PBC. While PVC pricing remained below prior year levels, it has been stable sequentially, and we are beginning to see supplier price increases which could become a modest sequential tailwind going forward. Gross margin in the first quarter was 27.2%, up approximately 50 basis points versus the prior year. This improvement was driven by continued private label growth, sourcing optimization and disciplined pricing and purchasing execution. Total SG&A expenses increased 2% to $299 million. This was primarily driven by strategic investments in growth, acquisition-related costs and impacts of inflationary increases. Excluding the 3-point impact of investments and M&A declined modestly year-over-year, reflecting strong cost management. Adjusted diluted earnings per share increased approximately 6% to $0.72 compared to $0.68 last year.

Growth was driven by higher adjusted net income and the benefit of lower share count from share repurchases. We were pleased with the 6% growth in a soft market, reflecting our continued focus on execution. Adjusted EBITDA of $226 million was 1% above the prior year, and adjusted EBITDA margin increased 10 basis points to 11.8%, driven by 50 basis points of gross margin expansion.

Turning to the balance sheet, cash flow and capital allocation. We ended the quarter with net debt of $2 billion and net debt leverage of 2.2x, well within our target range. Liquidity was nearly $1.4 billion, including $150 million of cash, with the remainder available under our ABL facility. Operating cash flow was $82 million, an increase of $5 million compared to the prior year quarter. Over the last 12 months, we've generated free cash flow yield of 6.4% of our market capitalization. That's more than double the average of S&P 500 companies and meaningfully above specialty distribution peers. It's also worth noting that consistent with the seasonal profile of our business, the majority of our annual cash generation is expected in the second half of the fiscal year. We returned $88 million to shareholders through share repurchases during the first quarter, reducing our share count by roughly 1.8 million shares, our highest level of open market share buybacks in a single quarter. Including additional repurchases after quarter end, we've already repurchased 2.5 million shares through fiscal 2026, representing roughly 80% of our total buybacks for all of fiscal 2025.

This level of capital deployment reflects the strength of our cash generation profile and the confidence we have in our business while maintaining a strong balance sheet and liquidity position. That financial flexibility allows us to continue balancing shareholder returns with continued reinvestment in strategic growth opportunities. Looking forward, we will remain opportunistic with share repurchases, supported by strong cash generation while also maintaining the flexibility to pursue attractive growth investments in M&A that maximize long-term value.

Turning to our outlook on Page 10. We are reaffirming our full year guidance we issued in March, including net sales of $7.8 billion to $7.9 billion adjusted EBITDA of $950 million to $980 million and operating cash flow conversion of 60% to 70% of adjusted EBITDA. We continue to expect overall end market volumes to be roughly flat for the year, with strength in municipal markets, supported by durable funding sources and the nondiscretionary nature of demand. offset by a continued cautious outlook in private construction. Overall, we continue to expect to drive above-market volume growth through our sales and geographic expansion initiatives including strength in smart utility and treatment plant solutions as well as the opening of a record 8 to 10 greenfield locations in attractive markets.

As we previously mentioned, we have seen recent supplier price increases in PBC, which could provide a modest tailwind as we move through the balance of the year. At the same time, elevated geopolitical uncertainty could weigh on end market volumes across residential and certain nonresidential categories through impacts on interest rates, affordability and consumer confidence. Our reaffirmed guidance range reflects these dynamics. On profitability, we continue to expect adjusted EBITDA margin expansion through execution of our gross margin initiatives the realization of benefits from previously announced cost actions and leveraging our fixed cost structure as we grow. Operating cash flow is also expected to remain strong, and our capital allocation priorities remain unchanged.

We will continue to invest in the business to drive long-term growth while returning capital to shareholders through share repurchases. We remain confident in the strength of our business and our ability to execute. Our operating model has proven resilient across varying market environments, and we continue to deliver disciplined pricing, expand margins, generate strong cash flow and gain share.

With that, I'll open the call for questions.

[Operator Instructions] Your first question comes from the line of Matthew Bouley with Barclays.

Maybe just starting off on the guide. So obviously, no change to the full year EBITDA guide. So maybe a fairly simple question here. But I'm just curious if within that guide, if anything, has changed within kind of the moving pieces, whether we're thinking end markets year-to-date, obviously, your comments there on inflation and potential PVC pipe price increases, really just does anything kind of tracking a little bit different versus your initial expectations kind of 90 days into the year.

Matt, thanks for the question. Yes, on the guide, we maintain the guide and left it where it was given that we're still in the first quarter. Everything has come in line come in pretty much in line with our expectations. So the market has been in line with our expectations. Nothing has really changed from a market standpoint on what we're expecting. I would say the only thing that's a little bit different is pricing, and I'll give you a little bit of color on the way that we're thinking about that. But pricing was about flattish in the quarter. Virtually every product category was either flat or up.

PVC was a headwind just given the timing of the declines in the prior year. We have started to see price increase announcements from our suppliers, but we haven't seen that hit our revenue numbers yet. So possible for there to be a little bit of upside in the back half of the year. But as a reminder, PVC will still be down year-over-year even if we do get some uplift. What we have seen is that we've seen it stabilize over the last couple of months, and that's been very positive for us, but not expecting it to be a major driver as we go throughout the rest of the year. So given all of that and the uncertainty still with the macroeconomic environment, we thought it was prudent to leave the guide where it is, could cause some additional inflation or tougher markets. So with all of those things in mind, the guide is maintained.

Okay. Perfect. Secondly, maybe on meters and smart utilities, Brad gave really great detail there around kind of what's differentiated about your strategy. So I'm not going to ask you to rehash that. But maybe to just kind of hit on some of the specific debates, you hear from some of the challenges with the OEMs more specifically over the past 3, 6 months, et cetera. So maybe if you can -- obviously, it's hard to know what's kind of going on exactly at other companies. But maybe you kind of touch on a little bit what you think may be different between what you're actually seeing and why what you're seeing is different than what a lot of these kind of OEMs are saying on the meter side?

Yes. Sure, Matt. I'll take that one. Our meter business has -- is rich with these big projects where we are kind of uniquely positioned to take a number of solutions for different partners and integrate them. And that's where we're winning the really big long-term projects. And that pipeline is strong. I think we have a very high win rate. And I think we're competing at the sort of the top of the heap in that slice of the meter world. But there's also for many, many years and remains -- there's a lot of meter sales that go on in our, call it, our everyday business and a lot of small meter systems that have been in place for years.

And those municipalities purchase meters on an ongoing basis, and that's driven by operations and maintenance, and it's also largely driven by things like residential expansion. And given that the residential market is soft, my suspicion there, and I think we see it in part of our business as well as that is -- that part of the meter market is kind of flattish to not very exciting right now. we are sort of uniquely powering our way through it on the strength of these large projects. And depending on what type of technology platform, you're talking about with different meter manufacturers, they may be more concentrated kind of in that residential small project or just ongoing maintenance of those existing systems, where I can imagine they're seeing a little bit more pressure from just general residential slowness.

Your next question comes from the line of Matt Johnson with UBS.

I guess, first off, from a segment basis, I think fire protection sales were really the standout this quarter, up, I think, 17% year-over-year. And I think there's been some disruption at the OEM level over the past few months. So I guess, how much of the strength would you guys attribute to, call it, kind of share shifts within this vertical as opposed to kind of the core end market strength, I think you guys called out, I think, in multifamily and data centers. And I guess just any other thoughts you can share on the trajectory of your fire protection business this year.

Yes, sure. Thanks for the question. What I would tell you is we're really excited about the performance that we've seen within our fire protection product line. We definitely benefited from a couple of areas that are, I'd say, more market related. As we did point out, we're picking up a good chunk of the data center work there. with that activity. So we've seen some good progress there as those projects get more towards the completion stage as those buildings get finalized those fire protection systems are going in. So we've seen an uptick there. I'd say multifamily has been steady to a positive for us.

We pick up a lot of good fire protection material from a multifamily perspective. And then we have seen an uplift in steel pricing, and that had been I would say, at least about a couple of years of drag on the fire protection performance, as we've pointed out historically, so seeing some positive price there has helped that product line. And then I would tell you, our performance in that product line has also improved over the last, I'd say, 12 to 18 months. And I do believe we're picking up some share there. And for all those reasons, we've been really excited about that performance there.

That's great. I appreciate that, Mark. And then I guess if we could just talk a little more about the meters business, I think sales were up, I think, 9% in the quarter. I think that's relative to, I think, 12% organic volume last quarter. I guess any thoughts you guys can share on just the trajectory of that business moving forward, given I think the comp does get a lot easier next quarter. I enter any other kind of color or quantification you guys can share on some of the additional large contract wins that Brad mentioned.

Yes. I would tell you when you get down into a meter product line and you look at that performance on a quarter-to-quarter basis, it can move around a little bit more than the -- obviously, the overall business just given the very sizable projects that were awarded there. So you'll see that move around from time to time just based on the timing of when those projects release. And when we're shipping or -- obviously, there's a lot of installation that has to happen there, and a lot of things can adjust the timing of when we see those products go out the door.

So I wouldn't glean in anything on kind of a quarter-to-quarter basis as it relates to our meter product line, but as you've seen and what we've laid out for long-term kind of historical growth there. being in that kind of double-digit range is our expectation for the foreseeable future, just given the amount of projects and opportunities we see across the municipal network.

Your next question comes from the line of Joe Ritchie with Goldman Sachs.

I guess my first question is if you think about your different end markets as the year progresses, it seems like you're probably lapping your toughest comp from a residential perspective in Q1? I mean is it fair to assume that like we're at a bottom in volumes and that things should progress better as the year progresses? Just any color around that would be helpful.

Yes, sure, Joe. We tried to lay out a little bit of that in the prepared remarks, but I'll give you a little bit more color on kind of as we sit here today versus where we were last year at this time. Last year at this time, we really started to feel some of the momentum softening, in particular, in the residential end market. We started to see projects getting scaled back and felt like we were starting to lose momentum, and that clearly played out as we got into the second quarter and then more fully into the back half of 2025. I would tell you as we sit here today, while the end markets are coming in kind of as we expected, we do feel some momentum.

There has been a lot of good project activity, a lot of bidding activity. We've been awarded a lot of really good projects. gives us a lot of confidence about the back half of the year. We're just watching right now, just given all the uncertainty the macro and I think a lot of concern around energy cost, really what the timing of release is going to be on these projects. So probably some -- it's still a little bit of near-term uncertainty, but just given the fact that the backlogs are building really across all of our end markets and the bidding activity continues to be strong, that we feel like there's -- the momentum is there. So it's a matter of timing and when some of these things are going to release. So definitely feeling better than I'd say what we did kind of last year at this time.

That's helpful, Mark. And I guess my second question is like, look, really helpful to see the greenfield expansion continuing I guess, maybe just give us a little bit of color on like how you're prioritizing your locations? Are you following customers, a little bit more comment on this call around your data center business. are you now going to try to like overindex your expansion into more data center specific regions to follow that growth? Just any color there would be great.

Yes, sure. What I'd tell you on the greenfield side is, over the last, I'd say, 12 to 18 months, we've really had a, I'd say, a renewed focus on some real key markets across the U.S., and we've wanted to reinforce our position in some of those markets to capture what we believe is our fair share in some of those areas. And some of that has resulted in identification of some new greenfield opportunities. In other cases, it's maybe additional resources or new resources that we felt like we needed in some of those critical markets. And those are critical markets for us, one, because they're large, maybe there's much more of an opportunity that we see or in many cases, yes, there's a lot of good large project activity there that we want to be able to capture.

So we're going about it in all the various ways that you would expect for us to go after just with our organic growth initiatives. But those are kind of the key drivers is our looking at these key markets and developing the path to continue to grow and take the market opportunity that we see.

Your next question comes from the line of Sam Reid with Wells Fargo.

I wanted to touch on the meter business here a little bit more drilling deeper on your analytics and support -- just curious how big is that today in the context of your overall meter business? And did I hear correctly that it was tracking up double digits.

I would tell you in terms of the size, that's not as critical to how we think about it as it is additional capability that we provide the municipality to have another tool as we try to drive the demand of the overall meter upgrades and technology. So still, as you think about our meter product line, the meter, the software, the billing systems is a large chunk of the revenue pieces. But what we bring is a lot of other capabilities with that help drive the demand and get those meter systems in place. I would say it's a big growth area for us, but still relative to what we're driving in terms of meter revenue is still relatively small.

That helps. And then maybe switching gears back to data center, obviously very topical for all of us. Wanted to drill down, though and get a sense for -- are there any new product lines for vendors that you've added recently that are perhaps helping drive that strength in your backlog? And then any context in terms of just how much bigger the backlog is in data center now versus last year?

Yes, Sam, the data center work, there's a couple of things that are working in our favor, I would say, number one, data center markets have expanded like the geography that -- where they're looking for number 1 power and then land and water. So now there's 15 or 18 market concentrations, if you will, where data centers are being built. And because we're present in those markets or we're further investing in those markets, we're aligned really well with where that construction activity is starting to happen across the country.

Also, the data center project type, while what's unique about it is it demands a pretty high degree of precision, project management. You can't make mistakes. There's a high level of execution risk in those projects, and we are well suited to that. That's right in our sweet spot. We are typically aligned with the underground utility contractors in all those geographies who are the most renowned for having the capabilities to also deliver with excellence, and that's just being sought by the general contractors and engineers and owners. But the work itself is very, very much aligned with our core business. It's not requiring us to really move into any particular new product lines or areas or fabrications. We basically have all of the elements for data center underground Waterworks product in the core of our company. So it's playing to us really, really nicely.

Your next question comes from the line of Brian Biros with Thompson Research Group.

On treatment plants, you delivered double-digit growth this quarter. You've talked about how you build out the capabilities to support that great growth, I think 25% CAGR over the last few years. how large is treatment plants as a share of sales now? Kind of what does the backlog look like there? And maybe if there's any margin difference to consider?

I would tell you it's in the mid-single-digit range for us. And we continue to see, like you mentioned, good growth with the treatment plant side of the business and expect that to continue just given the capabilities that we continue to add. We see it as a an area that is going to continue to see good funding as we move forward. So I would tell you the other thing that's that we're focused on is continuing to expand the addressable kind of product that we can distribute into treatment plant facilities. And we've made a lot of good improvements in those capabilities, some of which we've done organically. And then we're also looking at ways to do that through M&A that continue to expand our capabilities, just given the outlook we see there for treatment plan going forward.

Got it. And secondly, if you have a new Board member recently from American Water, does anything change in how you kind of think about the regulated utility customer there or even anything beyond that in capital allocation or just any differences as expected?

Yes. Thanks, Brian. Yes, glad you pointed that out. We did add Susan Hardwick, former CEO of American Water to our Board. He's been a wonderful addition. She brings an incredible kind of customer perspective into our boardroom, and it's already adding I'd say, great value to our discussions. Nothing I would say it would change strategically what we're doing, but just adds a tremendous amount of credibility given her industry background. And I think our focus on municipal and the municipal customer inclusive of private water will continue to be major focuses of ours, and she brings us a great perspective on that.

Your next question comes from the line of Nigel Coe with Wolfe Research.

This is Will Vranka on for Nigel. I was first wondering on -- so the IA is to expire later this year. I was just wondering how material you think this could be for you guys? Is this funding that you'd expect to be funded by Congress. But any thoughts on what the potential impact could be there?

Yes. Thanks for the question, Will. I'll take that one. On IIJA, the remaining funding is expected to hit the state revolving funds this year. That doesn't mean that there's any cliff to the funding or there's any end to the funding. A lot of the funding has already hit the state revolving funds. Only about 1/3 or less of it has hit the municipality level yet. So there's still a lot of funding out there for municipalities to use and they can use that is going to be in the state revolving funds for them to use and utilize.

A portion of that funding is in the grant form and then the other portion is in low interest loan. So a portion of that would get repaid back into those state revolving funds and used for future sources. And then in addition to that, 95% of the funding that municipality is used for their water infrastructure is state and local, and we think that those are really strong. We're seeing municipalities increase water rates to their customers to be able to afford some of the upgrades we're seeing municipal bond growth in the municipal bond issuance that's going out there. So across the board on the federal state and local level, we see ample funding for the municipal infrastructure investments in the short, medium and long term.

Okay. Got it. That's really helpful. And then maybe for my follow-up, just to follow on to a couple of the prior question. Just on the data center and the treatment plant businesses. I know you've had a number of investments and initiatives on going there to grow those -- just any KPIs that you can provide on how those initiatives are progressing? And I guess, specifically as it relates to the number of salespeople that you brought on that you're targeting and what the expected contribution is there.

Yes. I would tell you, more so on the treatment plant side where it becomes much more of a technical sale. We've added, I'd say, dozens of resources into our national teams to support our local execution on those projects. So that's been a good area of growth. Some of those resources can also help with some of the other larger projects like data centers that are out there. But also, again, those projects, while large are really kind of core to what we do locally. So the existing resources, of which we have hundreds of sales teams and support resources in our local teams, support large and small projects that are kind of core to what we do.

So I'd tell you, dozens of additional resources to support those complex projects that then work across the regions and really do a great job of following those projects through from bid through completion.

Your next question comes from the line of Mike Dahl with RBC Capital Markets.

First one, Robyn, just to circle back on pricing and also maybe gross margin dynamics. You mentioned that you haven't seen the PVC price increases flow through to your revenues yet. I do think some of these increases were supposedly effective from the OEMs the past couple of months. So are you have you accepted price increases? And are you seeing that in your inventory? And can you kind of talk through whether there's anything assumed or kind of price cost differentials, either good or bad in the next couple of quarters? And if you could also -- gross margins were strong in the quarter. Was there any Were there any timing benefits on price cost helping that in 1Q?

Yes. Thanks for the question, Mike. So on PVC, we have seen price increases from our suppliers we have sequentially seen since the first quarter, we've seen -- we've started passing along some of those price increases through our bidding and quoting activities, but that's why I said we haven't seen them in our sales activity yet. We did do a little buying ahead of price increases on PVC and some of these other areas that are increasing. But we expect to see some of that in the majority of that would hit in the third quarter of things that we're bidding and quoting now that are sequentially higher on the price side for those PVC items, if that makes sense. And then on the gross margin side, really strong quarter for us for gross margin.

Our initiatives are performing well. Private label is really strong. Fire protection, we talked about being up. There's a lot of private label in our Fire Protection business. So that helps lift those margins up to. We're expecting for the remainder of the year for gross margins to kind of remain at this similar levels to what we exited the first quarter and throughout the year, which would be a gross margin benefit year-over-year for the full year.

Okay. Yes, that's very helpful. Shifting gears, I mean, the SG&A side, it seems like obviously, you've got some investments in there. But the cost outs are -- appear to have kind of provided some control kind of on an underlying basis, can you just update us on kind of the progress against those? What's left to realize as the end markets have remained in kind of relatively in more places? Or how are you thinking about your SG&A here and whether or not there are other actions or opportunities there to drive further leverage?

Yes. So SG&A for the quarter was up about 2%. And what I talked about earlier was about -- there's a point of that, that's M&A related. There's about 2 points that are kind of investments in things like greenfields and some of those resources we talked about to make investments into some of these big projects and complex projects. So we've continued to make investments to support future growth. We did have a couple of points of inflation in there, and then we've got a couple of points of those actions cost out savings that helped to offset some of that increase. So we feel like the -- our SG&A is well positioned. So as we go throughout the rest of the year and start seeing some growth in the back half, we'll be well positioned on our SG&A to see some good performance there. .

On the cost-out, pie, it's in line with what we expected. So we did that $30 million in the back half of last year, and we saw about a 1/4 of that benefit in the first quarter.

Your next question comes from the line of Collin Verron with Deutsche Bank.

I just wanted to circle back on the water treatment plants. Can you just dive a little bit more into what's going on in sort of that end market? Are these new implants? Are they upgrade sort of repair and break I guess just like how meaningful can these individual projects be for you guys from a revenue perspective? And maybe sort of dive a little bit deeper into sort of like the medium to longer-term kind of growth that this could provide you over the next several years?

Yes, I'll give you some color on that. I would say, first of all, treatment plan projects range in size from very, very small, let's call them rehabilitation or minor expansion all the way to completely new treatment plant construction. Actually, that is a rarer case, but a treatment plant facility can get completely retrofit in a sort of rehabilitation which is essentially for us a complete rebuild of all the workings of the plant and all the piping and fabrication and connectivity. So whether it's rehabilitation or completely new construction for us, it's almost the same end market exposure, which is great. .

That's what we see more often than not is new technology, new designs, getting more out of existing facilities by essentially redoing perhaps 1 or 2 lines at a time, the main flows through the treatment plant. We see this as it does not seem to be slowing. The funding has been strong. But I think more importantly, this is just a sort of a nondiscretionary investment that the municipalities are they must do because the demands on both clean water side and the sanitary sewer side, our end separating storm store for that matter, just continue to be constant challenges with movement of the population, some of these large capital projects that are demanding more water than ever. So we see it as a pretty durable long-term trend that is driving good growth for us. Obviously, as it gets bigger, those percentage growth rates are harder and harder to come by, but we still see this as a significant above-market driver of growth for us for the foreseeable future.

That's really helpful color. And then I guess I just wanted to touch on your expect maybe some more near-term expectations here. You called out the tough comp that you saw in the first quarter. I think you still saw like a high single-digit comp in 2Q, but the 2-year stack gets a little bit easier. So I guess I'm just trying to understand what your near-term sales expectations are around 2Q. Can you start to see growth here in the second quarter? And sort of any color on how trends have been in May and the first part of June.

Yes, thanks for the question. So if you remember, last year, we started to see the decline in residential in the -- really the back part of the second quarter. So May and June still had pretty decent performance from a residential standpoint before we really started to see that slowdown in July, we are expecting, I would say, some slight growth in the second quarter, with the majority of that growth kind of in the second half of the year where we have some easier comps and like we mentioned, we've been building momentum with bidding activity and backlog activity and expect a lot of that to release in the back half of the year. So flattish for the first quarter, a slight growth in the second quarter and then kind of that low to mid-single-digit growth in the third and fourth quarter of this year is how we're thinking about the seasonality. .

Your next question comes from the line of Keith Hughes with Truist.

Just one more question on the Trade Center business. You talked about some acquisitions around it. Are there specific entities and branches that just work on that end user market or referring to that or can you give us some detail what you mean there?

Well, first of all, the way that we -- a treatment plant project is ultimately going to be local, and it's going to need material, staging, packaging and generally, the more complex, the project, the more beneficial it is that we have a Core & Main store, if you will, close to the project to do all of that off-site material handling. But the teams that are executing the presale process, the design these alternative funding long iterate processes, they're engaged. Those teams are generally going to be concentrated at either the regional or at the national level, and they work out of various virtual offices around the country.

And as the project approaches execution time, there's sort of a relationship form with the branch that's going to carry the kind of actual logistics load, if you will. When we talk about acquisitions in this space, it's not so much the need for acquisition of our traditional footprint and know to be clear, there's not a branch that specifically does treatment plant product only as all of our branches can do treatment plant product work. the acquisitions are more as we expand our product offering, we're really, really proximate to the next part of the product that goes to the next step inside the plant like actuated valves or engineered pipe stands or different kinds of metal fabrications that make up the bodies of the plant.

And in order to sell those products, you have to have knowledge and credibility and expertise and that's more like what we're talking about when we look at M&A is how can we continue to bring more of that knowledge, expertise, talent and capabilities so that we can offer a more broad offering.

Okay. Let me ask a question on M&A, just a little bigger picture finish this off. M&A has been adding a modest amount in the quarter in recent quarters below what it was several years ago. Are you reaching a size you're very large now a large network. Are you reaching a size where acquisitions are just going to be a smaller amount in terms of added revenue in previous years? Or are we just a lull for deals right now?

Yes. Thanks, Keith. As I've mentioned on previous calls, we've definitely been in a lull from an M&A standpoint. And we haven't really seen a lot of deals in the space. So what we have seen, I'd say, more recently is a pretty notable uptick in the pipeline. There have been a lot more that have come across the desk recently. I would say I couldn't be more excited about some of the opportunities that we've seen that range from small tuck-ins right in the core to larger opportunities like you've seen us complete in the past and then some opportunities that are kind of right in the customer mix that we're talking about with municipal and treatment plan in some of these areas that could be really really great opportunities for us.

So we've advanced, I'd say, a number of them through our process and they're getting in the late stages. So you should expect that will get right back on track and if not overperform some of our M&A goals, there's no shortage of opportunities out there. it's been more of a timing and lumpiness just from an M&A availability standpoint, but really pleased with what I'm seeing right now.

We have reached the end of the question-and-answer session. I will now turn the call back to Mark Witkowski, CEO, for closing remarks.

Thank you again for joining us today. As we close out the quarter, we are in a position of strength to deliver above-market growth, both organically and through acquisitions. While we do not expect near-term tailwinds in residential, we see plenty of opportunities to capture growth within our municipal and nonresidential end markets, and we have the team and experience to deliver on our 2026 outlook.

Importantly, the long-term fundamentals underpinning our business remain firmly intact. The need to modernize aging infrastructure, support population growth and deliver reliable water systems continue to drive sustained demand. Combined with the investments we've made in the business and the depth and experience of our team, we remain confident in our ability to navigate the current environment and continue delivering durable long-term value for shareholders. Thank you for your continued interest in Core & Main. Operator, that concludes our call.

This concludes today's call. Thank you for attending. You may now disconnect.

Hello, and welcome to the Core & Main Q4 and Full Year 2025 Earnings Call. My name is Alex, and I'll be coordinating today's call. [Operator Instructions] I'll now hand it over to Glenn Floyd, Director of Investor Relations, to begin. Please go ahead.

Good morning, and thank you for joining us. I'm Glenn Floyd, Director of Investor Relations at Core & Main. We appreciate you taking the time to be with us today for our fiscal 2025 fourth quarter and full year earnings call.

Joining me this morning are Mark Witkowski, our Chief Executive Officer; Robyn Bradbury, our Chief Financial Officer; and Brad Cowles, our President. Mark will start with a business update and review of our fiscal 2025 performance. Brad will then discuss the investments we are making to drive market share gains and margin expansion over the long term. Robyn will follow with a review of our financial results and outlook for fiscal 2026. We will then open the line for questions, and Mark will wrap up with closing remarks.

Our press release, presentation materials and the statements made during today's call may include forward-looking statements. These are subject to various risks and uncertainties that could cause actual results to differ materially from our expectations. For more information, please refer to the cautionary statements included in our earnings release and in our filings with the SEC. We will also reference certain non-GAAP financial measures during today's discussion. We believe these metrics provide useful insight into the underlying performance of our business. Reconciliations to the most comparable GAAP measure are available in both our press release and in the appendix of today's investor presentation.

Thank you again for your interest in Core & Main. I will now turn the call over to our Chief Executive Officer, Mark Witkowski.

Thanks, Glenn, and good morning, everyone. I'll begin on Page 5 with a brief overview of Core & Main and its market position.

Core & Main is a leading specialty distributor of water infrastructure products and services in North America, supporting the repair, upgrade and expansion of critical water systems. Having a portfolio of more than 225,000 products, many of which are exclusive to our industry with limited distribution rights, we combine local expertise with national capabilities to provide water infrastructure solutions to municipalities, private water companies and professional contractors across municipal, nonresidential and residential end markets.

Our footprint consists of more than 370 branches across the U.S. and Canada, which serves as a crucial link between 5,000 suppliers and a diverse base of more than 60,000 customers. Our end markets are balanced and stable, providing resilience through varying demand environments. Municipal projects represent 44% of our sales, generating steady demand from reliable funding sources. Our nonresidential end market, which represents roughly 38% of sales, benefits from a diverse project mix across commercial, industrial and infrastructure applications. Residential lot development represents approximately 18% of our sales. And while near-term dynamics in this end market remain challenged, we continue to view the long-term outlook as attractive, supported by population growth and a structural undersupply of housing. This diversification, combined with emerging growth drivers like AI-related infrastructure needs and treatment plant modernization provides a strong foundation for our business.

Our competitive advantages, including local market expertise backed by our highly trained sales force, national capabilities and industry-specific technology, position us to lead an attractive $44 billion addressable market across the U.S. and Canada, up roughly $5 billion from last year with the addition of Canada. We estimate our U.S. market share at approximately 20% today with a small but growing share in Canada. This combination gives us significant runway to grow and capture additional share over time.

Our ability to win in the market starts with the value we create for both our customers and our suppliers, which we've highlighted on Slide 6. It begins with our people-first culture, which empowers our associates to operate with an entrepreneurial mindset and build strong relationships in their local markets. For our customers, we provide a broad portfolio of highly specified products, deep technical expertise and a consultative sales approach that helps them navigate complex infrastructure projects.

Our local teams understand the specifications, regulations and project requirements unique to each municipality and job site, allowing us to support customers through early project planning through delivery and installation. At the same time, we differentiate ourselves through our delivery capabilities and proprietary technology tools, which help simplify estimating, procurement and job site logistics. Combined with our national distribution network, this enables us to deliver materials reliably and efficiently, helping customers keep projects on schedule and within budget.

For our suppliers, Core & Main serves as a critical channel to reach a highly fragmented customer base. Our expanded sales force and geographic footprint provide access to tens of thousands of contractors, municipalities and utilities across the country. We also help drive the adoption of new products and technologies by leveraging our local relationships, technical expertise and market insights. Underlying all this is our operating model, which combines local expertise with national capabilities and resources. Our local teams lead customer relationships and project execution, while our scale provides advantages in sourcing, distribution, technology and product availability. This combination allows us to deliver a high level of service to customers while also creating meaningful value for our supplier partners.

Together, these capabilities form a differentiated value proposition that positions Core & Main to consistently gain market share and deliver strong, reliable execution.

Turning to our recent accomplishments on Page 7. Fiscal 2025 was a year of disciplined execution for Core & Main. We delivered our 16th consecutive year of sales growth, a result that reflects the resilience of our business, the long-term strength of our end markets and the consistent performance by our teams across the country. We generated net sales of $7.65 billion, adjusted EBITDA of $931 million, adjusted diluted EPS of $2.97 and operating cash flow of $650 million.

As we talk through the year, I want to frame our performance against the annual value creation targets we use to measure the business, which include end market growth, organic above-market growth, acquisitions, margin expansion and cash flow.

First is our end market growth. Our annual target assumes 2% to 4% market volume growth. And in fiscal 2025, our end markets were roughly flat overall. Municipal volumes were up low to mid-single digits and continue to be a source of strength supported by steady repair and replacement activity and a healthy funding environment. While municipal demand remained resilient, it was not enough to fully offset softness in other areas of our end markets.

Nonresidential volumes were relatively muted throughout the year. Growth from data centers, street and highway projects and multifamily developments provided support, but that strength was offset by softness in more traditional commercial lot development activity. Residential lot development declined low double digits as housing affordability and higher mortgage rates continue to weigh on demand. We expect residential will eventually return to growth to satisfy the significant undersupply of housing in the U.S. While end market trends are outside of our control, we have been proactive in repositioning the business to perform in this environment by strengthening our municipal business while remaining fully committed to the private construction markets. We've had a couple of years of softer-than-normal end markets. And despite near-term softness, we expect growth to resume in the medium term.

Second is our organic above-market growth. Our annual target calls for 2% to 4%. And in fiscal 2025, we delivered squarely within that range. A big driver of that performance was our sales initiatives, which delivered robust results as we broadened our portfolio of solutions to address aging water infrastructure. Collectively, average daily net sales grew double digits in fusible HDPE, treatment plant solutions and geosynthetics. Average daily net sales for meter products grew 12% in the quarter and grew mid-single digits for the year on top of a strong prior year growth comparison of 32%.

We also expanded our footprint during and subsequent to the year to make our products more accessible nationwide, opening 10 new branches in attractive markets. We have a pipeline of additional greenfield locations and expect to open additional locations as we progress throughout the year. Collectively, these sales and geographic expansion initiatives drove 3 points of organic above-market growth in fiscal 2025, reflecting continued share gains across our markets. We are confident in our ability to continue driving above-market growth through these sales, geographic and key talent initiatives in fiscal 2026 and beyond.

Third is our growth from acquisitions. Our annual target is 2% to 4% growth from acquisitions, and in fiscal 2025, we delivered 2%. That includes contributions from acquisitions completed in fiscal 2024, along with 2 complementary acquisitions we completed in fiscal 2025, Canada Waterworks and Pioneer Supply. Together, these acquisitions added 5 branches to our footprint during the year.

Canada Waterworks builds on the platform we established in Canada last year with the HM Pipe acquisition. With these additions, we now operate 7 branches in Ontario, including 2 greenfields opened earlier this year as we continue expanding our presence. Pioneer Supply expands our presence in Texas and Oklahoma, further extending our reach in attractive growth markets. Both businesses bring a strong reputation for quality and service that align with Core & Main's mission. Together, we're extending our reach and creating even greater opportunities for growth and value creation.

More broadly, acquisitions and greenfields are complementary tools we use to expand our footprint and unlock new growth opportunities. In some markets, we establish a presence through greenfields, while in others like Canada, acquisitions provide an initial platform that we can then expand through additional investments over time. We are well positioned to continue driving growth through M&A.

Fourth is margin expansion. In fiscal 2025, we delivered strong gross margin performance, expanding 30 basis points year-over-year, driven by higher private label penetration and disciplined purchasing and pricing execution. Our gross margin performance for the year reflects great execution by our local teams in challenging market conditions, coupled with the benefits of our national scale and initiatives. Flat end market volumes and flat pricing, coupled with higher-than-normal inflation on our operating costs, limited our ability to achieve SG&A leverage this year. Historically, we've offset these impacts with productivity and price increases and expect we will do that going forward.

Our last value creation lever is cash generation. Every year, we target converting 60% to 70% of adjusted EBITDA into operating cash flow. We delivered $650 million of operating cash flow in fiscal 2025, which represents conversion at the high end of the range. Strong cash generation continues to be a differentiator for Core & Main, and it gives us flexibility to invest in the business, pursue strategic M&A and return capital to shareholders.

As we look ahead, our focus is straightforward: extend the advantages we've built, compound market share gains and continue expanding the structural earnings power of the business.

Beginning on Page 8, we'll cover the fundamentals of our end markets and why they remain attractive over the long term. Brad will then walk through why we have confidence in our ability to grow and improve profitability.

We benefit from a large base of aging municipal water infrastructure that drives consistent repair and replacement activity, and that backdrop is complemented by strong local funding and incremental federal and state funding that expands the addressable opportunity. We also continue to see an increasing need for modernization projects, including treatment plant upgrades and metering conversions, which reinforce the multiyear nature of municipal demand.

Our nonresidential end market is supported by a balanced mix between new development and repair and replacement activity, ranging from commercial and industrial construction to less cyclical infrastructure projects like road and bridge rehabilitation activity. As I mentioned earlier, we're seeing mixed demand across project types in the near term, but the long-term themes like onshoring and broader infrastructure investment are expected to support a steady pipeline of work as large projects move from planning to execution.

Lastly is residential. While near-term housing activity can move with interest rates and affordability, the long-term demand drivers are structural. The U.S. has built fewer homes than household formations over the past 2 decades, which has created an undersupply and a long runway for future lot development. Importantly, residential growth can also provide incremental support to our other 2 end markets as communities expand into suburban and rural areas, commercial development follows. And all of that residential and nonresidential growth places a greater strain on local water systems, which drives municipal expansion, upgrades and repairs. We believe the release of pent-up residential activity supports residential, nonresidential and municipal growth.

Next, I would like to welcome Brad Cowles, our President, who will walk through the investments we are making in our products, capabilities, footprint and people and how those initiatives are driving market share gains and supporting margin expansion. Go ahead, Brad.

Thanks, Mark, and good morning, everyone. It's great to be here with you today. Turning to Page 9. I want to share some insights on the sales initiatives and capabilities that are driving consistent above-market growth and market share gains. Building on the foundation of our core business and extensive branch presence, we're bringing additional value to our customers in 2 primary ways with a broader product offering to cover all of their project needs and by bringing complete solutions to their more complex challenges.

Our key initiatives, meters, treatment plant, fusible HDPE and geosynthetics have combined to grow at an average annual rate of approximately 14% over the past 5 years, significantly outpacing underlying market demand. Two of these initiatives are focused on expanding our product offering, fusible HDPE and geosynthetics. These product initiatives require new supplier partnerships, specialized equipment and technicians as well as unique storage and logistics solutions. As we expand these capabilities across our branch network, we can bring these products to our current customers and also pursue new customers who specialize in the installation of these unique products.

Fusible HDPE, for example, is used in water and sewer systems by our current municipal and contractor customers, but the same products, fusion equipment and technicians are also used in agriculture, energy, mining, landfill and other applications, often in the very same geography. Smart meters and treatment plant are sales initiatives focused on solving more complex problems and offering more comprehensive solutions to our customers. We do this by investing in national teams with very specific expertise who complement the efforts of our local branches. We help our customers understand the possible solutions. And in doing so, we often create additional demand.

Smart metering is a great example of how our turnkey solutions are winning with the customers while bringing them solutions they had never imagined. We were recently awarded what we believe is the largest metering contract in U.S. history, reflecting our leading position in the market. We deliver solutions that help utilities improve billing accuracy, reduce water loss and enhance system visibility. These solutions combine metering and other sensor hardware, software, installation, project management and everyday maintenance for metering projects of any size. We are enjoying a high rate of success on large complex projects, and we take that as a sign that we're taking a larger share of the market as municipal customers look for a single partner to deliver end-to-end solutions. As a result, our smart metering business has grown at an average annual rate of approximately 14% over the last 5 years.

Our National Critical Infrastructure Group specializes in complex water treatment and delivery projects consisting of pipes, valves, fittings and fabricated assemblies. Large capital investments are being made in treatment plants and water transmission lines across the country as demand increases from onshoring, data center construction and population shifts, and we are seeing above-market growth across these project types. That momentum, coupled with our differentiated product and service offering has helped drive this initiative to grow at an average annual rate of nearly 25% over the past 5 years. We also see opportunities to continue expanding our capabilities and product lines within water treatment, both organically and inorganically.

As the projects get larger, the customer partnerships become more important and the demands for timely and high-quality execution gets stronger. Our focus on strategic customer accounts positions us to win business as these leading general contractors move across the country, performing work on the most significant capital projects.

Geographic expansion is another important lever in our above-market sales growth. Our market mapping process helps us identify underpenetrated areas with attractive growth characteristics where our brand, product breadth and service model can differentiate us. Greenfields yield strong returns and provide a complementary path when acquisition targets are not available to us in a market we wish to enter. We completed 6 greenfield openings in fiscal 2025, and we expect to open a record 7 to 10 locations in the coming year.

Even in markets where we already operate, we often have the opportunity to add and develop sales talent to strengthen our sales coverage. That includes building the right mix of outside sales, inside sales and product expertise so we can support larger and more complex projects, increase share of wallet with existing customers and capture more opportunities in the markets we already serve.

With that as context, Page 10 highlights how disciplined M&A complements these organic growth levers. Our highly fragmented market creates a long runway for disciplined acquisitions. Over time, we've built a reputation as the acquirer of choice in our industry, grounded by our entrepreneurial culture and the resources we bring to help acquired businesses grow. Since 2017, we have completed more than 40 acquisitions, adding nearly 150 branches and over $1.8 billion of annual sales. Our pipeline is deep and actionable. We evaluate on average more than 50 opportunities each year with roughly a dozen opportunities in active evaluation at any time.

When companies join Core & Main, they gain broader product breadth, industry-specific technology and national capabilities and resources that help them serve customers more effectively. They also gain shared administrative support, which reduces the burden on local teams and allows them to spend more time with customers. And we invest in people through best-in-class training and career development opportunities that help retain and grow talent.

As we evaluate opportunities, we prioritize businesses that expand our presence in new or underrepresented markets, help us add products and service capabilities and bring in key industry talent. Looking ahead, we see a clear path for M&A to contribute 2 to 4 points of annual sales growth over time.

Turning to Page 11. One of the things we are most excited about is the runway we have to expand margins, and this slide summarizes the levers that support that opportunity. Private label is a powerful driver of gross margin expansion. It includes direct sourcing of comparable products and also building differentiated brands. We've developed a meaningful private label capability that is supported by an internal master distribution network, and our private label brands are respected because we invest in quality and enhanced features while ensuring we meet required specifications. We also stay close to the field by soliciting feedback on quality, pricing and packaging and by prioritizing service levels and availability as we service our own branches.

We've been investing in the infrastructure to scale private label adoption. Since the end of last year, we've added distribution capacity and expanded the assortment by more than 6,000 SKUs. Private label represented about 5% of sales in fiscal 2025, and we see a clear path to at least 10% over time.

Sourcing and pricing optimization are another structural advantage. Our scale and buying expertise help us secure access to the most preferred products with favorable terms and improved net product costs. We foster strong partnerships with key suppliers to drive shared growth. At the same time, we leverage centralized resources and transaction data to help guide optimal price points while empowering our local teams with final pricing authority. Together, these capabilities allow us to capture the full value of our purchasing scale while maintaining the local responsiveness that our customers expect.

Technology and innovation tie all these levers together, creating a meaningful opportunity to drive sales, margins and efficiency. We are broadening our agenda to ensure that Core & Main remains the industry's technology leader with continuous investment in step-change productivity and a better customer experience with AI-enabled solutions that reduce administrative burden and free our teams to focus on customers. We believe this creates a durable long-term advantage and supports Core & Main's differentiated value proposition.

To wrap up, these product and solution initiatives are reinforcing each other and strengthening our ability to gain share, expand margins and scale the business with discipline. They help us accelerate greenfield contributions, and they maximize the synergies we can get from acquisitions. We are investing where we see the greatest opportunity, and we are confident in the path ahead.

With that, I will turn it over to Robyn to walk through our fourth quarter and full year financial results. Go ahead, Robyn.

Thanks, Brad. Good morning, everyone. I'll start on Page 13 with some highlights from our fourth quarter results.

Net sales in the fourth quarter decreased 7% to $1.58 billion. As a reminder, we had 1 fewer selling week in the fourth quarter of this year compared to last year. On an average daily net sales basis, sales increased about 1%, driven by roughly 1 point of organic volumes. Pricing remained positive across nearly every product category with the exception of PVC pipe, resulting in roughly flat pricing overall. Sales in the final week of the quarter were also affected by severe winter weather that temporarily limited construction activity in several regions.

Gross margin in the fourth quarter was 27.1%, an increase of 50 basis points year-over-year. The improvement reflects higher private label penetration and disciplined purchasing and pricing execution. Total SG&A for the quarter decreased 5% to $264 million. The year-over-year decline was driven primarily by lower variable costs from 1 less selling week, along with benefits from our previously announced cost actions. Sequentially, SG&A was $31 million lower than the third quarter, reflecting approximately $5 million of realized savings with the remainder due to reductions in variable costs.

Over the course of fiscal 2025, we implemented approximately $30 million of annualized cost actions with roughly $6 million recognized this year and the remainder expected to flow through our results during fiscal 2026. Our approach continues to be measured. We are improving our cost structure without compromising customer service or long-term growth. At the same time, we continue to invest in targeted roles to support product line and geographic expansion. We are highly focused on regaining operating leverage by offsetting SG&A investments with productivity gains while maintaining the service levels and capabilities that support our growth strategy. Adjusted EBITDA in the fourth quarter was $167 million, down 7% versus last year, primarily reflecting 1 fewer selling week. Adjusted EBITDA margin was 10 basis points higher than last year at 10.6%.

Turning to our full year performance on Page 14. For fiscal 2025, net sales grew approximately 3% to $7.65 billion. Sales growth was 5% when adjusted for 1 less selling week. We delivered roughly 3 points of organic market share gains, while our end markets were roughly flat overall with municipal up low to mid-single digits, nonresidential relatively flat and residential down low double digits. Our market outperformance was driven by our sales and geographic expansion initiatives, including metering, treatment plant, fusible HDPE and geosynthetics and investments to expand our coverage in priority markets. We also achieved 2 points of sales growth from acquisitions and prices were overall flat.

Gross margin for the year was 26.9%, up 30 basis points from fiscal 2024, reflecting higher private label penetration and disciplined purchasing and pricing execution. Private label increased 100 basis points in fiscal 2025 to roughly 5% of sales. That mix shift was a meaningful driver of the year-over-year improvement. Total SG&A for the year increased 7% to $1.15 billion. The increase in SG&A was driven by inflation, acquisitions, volume-related growth and strategic investments to support sales growth, margin expansion and future productivity.

While these factors pressured SG&A leverage in the near term, we remain focused on driving both growth and profitability and are confident the actions we have taken position us to return to EBITDA margin expansion over time. Adjusted EBITDA was $931 million, slightly ahead of the prior year, while adjusted EBITDA margin declined 30 basis points to 12.2%. The year-over-year margin decline reflects higher SG&A as a percentage of net sales, partially offset by 30 basis points of gross margin expansion. Adjusted diluted EPS increased 7% to $2.97. Growth was driven by higher adjusted net income from lower interest expense and the benefit of a lower share count from share repurchases. We exclude intangible amortization from adjusted diluted EPS because a significant portion relates to the formation of Core & Main following our 2017 leverage buyout.

Turning to the balance sheet, cash flow and capital allocation. We ended the year with net debt of nearly $1.95 billion and net debt leverage of 2.1x, well within our target range of 1.5 to 3x. Liquidity was $1.45 billion, including $220 million of cash with the remainder available under our ABL facility. We generated $650 million of operating cash flow during the year, reflecting approximately 70% conversion from adjusted EBITDA. Our free cash flow yield was 5.8%, a level that is nearly 3x higher than our specialty distribution peers. We returned $155 million to shareholders through share repurchases during the year, reducing our share count by roughly 3.2 million. And subsequent to the fiscal year, we deployed an additional $39 million to repurchase 800,000 shares. Since our 2021 IPO, we have repurchased over 20% of our original shares outstanding, reflecting our commitment to return capital while continuing to invest in growth.

Next, I will cover our outlook on Page 16. For fiscal 2026, we expect net sales of $7.8 billion to $7.9 billion, adjusted EBITDA of $950 million to $980 million and operating cash flow conversion of 60% to 70% of adjusted EBITDA. We are confident in the strength of the municipal market due to the stability of funding sources and the nondiscretionary nature of demand. We remain cautious on the private construction market given the heightened geopolitical volatility, including the developing Middle East conflict and ongoing tariff uncertainties, along with continued uncertainty around the interest rate environment and overall builder confidence.

Despite this, we still expect our overall end markets to be roughly flat for the year. We do expect to drive above-market volume growth from our sales and geographic expansion initiatives. Drivers include continued strong performance across meters and treatment plant and opening a record 7 to 10 greenfields in attractive markets. Despite softer end market conditions and a neutral pricing environment, we expect to grow adjusted EBITDA margins as we continue to execute our gross margin initiatives and realize the benefits of our previously announced cost actions.

We expect another year of strong operating cash flow, and our capital allocation priorities are unchanged. We will continue investing in the growth of the business, both organically and through strategic M&A while returning capital to shareholders through share repurchases. We remain confident in the strength of our business and our ability to execute. We have delivered consistent results through varying market environments, maintained disciplined pricing, expanded gross margins, generated strong cash flow that enabled us to reinvest in the business and return capital to shareholders and have continued to gain share across our markets.

Our operating model is resilient, and our strategic priorities are clear. In the near term, our municipal end market provides stability. Over the medium term, we expect momentum to return in the residential and nonresidential markets, along with a return to a more typical pricing environment. As these dynamics improve, the structural earnings power we've built positions Core & Main to unlock meaningful long-term profitable growth and value creation. In the meantime, we will continue to drive volume through strong execution and above-market growth.

With that, let's open up the call for questions.

[Operator Instructions] Our first question for today comes from David Manthey of Baird.

My first question is the one that I get from investors most frequently, which is the growth disconnect of Core & Main versus the corresponding segment at your largest competitors. And I know we've talked about this offline. I just was hoping you could maybe just address some of the differences in vertical end market influence and geographic and product mix and why you think there's a slight disconnect between your growth and your biggest competitor?

Yes. Thanks, Dave. Appreciate the question. Dave, I would tell you from an end market perspective, we feel really good about our presence and reach certainly across the municipal end market, nonresidential and the residential end markets. We clearly are, I would say, in every market that our other national competitor is in. We've got -- obviously, we both compete against a large volume of local distributors and regional competitors. So I think both us and our other national distributors are doing a really good job of taking share across the industry with certainly us driving a lot of good share growth with our smart meter business.

Treatment plant is an area, I would say, that we've grown pretty significantly. I would say that's an area that they've been, I would say, a little ahead of us over the years, but we're rapidly, I would say, gaining ground in that area. And then I think certainly, as part of the data center construction that we've seen pop up, I would say they've been in a little better position in some of those markets, particularly the ones that are kind of in their backyard in kind of Northern Virginia area and Texas, in particular, are areas that we're investing in, I'd say, rapidly to kind of catch that.

But what I would tell you is that what I like in terms of our position there is we're seeing more and more of these data centers pop up across the U.S. And given our geographic reach and our strong relationships we have in these local markets, we've seen a lot of good gains here over the last couple of years on those data centers as we've seen those expand much more broadly across the U.S. And I think our exposure there is going to continue to be helpful as we pick up that business.

So we view it as a positive. I think our large national competitors having good results. We're seeing good share gains and good results on our side and feel that that's a good thing overall for the industry.

I appreciate that color. The second question is on costs. So as we think about the cost-out program and the $30 million run rate, I think you said $5 million of the benefit hit in the fourth quarter that would imply that, I guess, we don't lap that fully until we get to the first half of 2027. Can you just correct me on that if I'm wrong, that you'll continue to see year-on-year benefits from that cost-out program diminishing through the year, but still positive through 2026. Is that correct?

Yes. Thanks, Dave. That's what we're expecting. We saw -- we completed all of the $30 million of cost out during FY '25. We got about $1 million of that benefit in the third quarter. We got $5 million of that benefit in the fourth quarter. So that remainder of that $30 million, we'll see all of that really hit in the first, second and third quarter of next year before we annualize those cost-out efforts.

Got it. So if you're at $5 million in the fourth quarter, that implies a $20 million run rate. So there should still be positive, I should say, lower costs in the beginning of '27 as well.

Perfect. Yes.

Our next question comes from Matthew Bouley of Barclays.

So maybe just to address kind of the current market conditions around energy and commodity inflation following the Middle East conflict here. So maybe just kind of near-term diesel surcharges, et cetera, how are you expecting to deal with that? How should we think about modeling all that? And then over these past few weeks, kind of what are you hearing from suppliers around price increases? And how does that play into your guide for flat pricing for the year?

Yes. Thanks, Matt. I'll go ahead and take that one. I would tell you, we're obviously watching things very closely as they develop in the Middle East. We definitely have a direct impact as we see some of the increases in fuel with our delivery operating expenses and that sort of thing, but it's still relatively small, and we've got a lot of that embedded in the guide that we laid out. I would say more indirectly, we're watching closely the effects on the oil and gas market. We have seen that start to, I would say, impact the global resin prices that are out there. So there is some indications that we're going to start seeing some increases coming through on certain product categories related to that. And frankly, just all the -- if fuel and those prices continue to increase, I think we'll see some of that increase flow through some other product categories more broadly.

But specifically, as those resin prices increase globally, we're starting to hear signs that we'll start seeing some increases related to products like PVC, HDPE pipe could definitely be impacted by that and definitely things that we're starting to hear about right now. So those are things that we'll watch closely as this continues to develop, but I view those as kind of positive signs for us as we look to see some stability with pricing in some of those product lines.

So overall, I'd say we kind of view it as neutral to positive if this kind of disruption continues in the market from that standpoint. But obviously, any kind of uncertainty, the rising fuel prices within the global economy, we're definitely concerned that, that could create a little bit of uncertainty in the macro, just demand environment, which is part of why I think you saw the nature of the guidance that we put out there was just given a lot of that overall uncertainty that we could experience.

Got it. Okay. No, that's great color. And then secondly, kind of stepping back around some of the growth investments. I heard you saying you're focusing investments in areas like data center, maybe treatment plants as well, if I heard you correctly, sort of looking to close that gap versus your competition. I guess, number one, just any way to kind of quantify the investments you're putting in there? Just obviously, we're trying to dial in the SG&A outlook. But again, kind of stepping back, what are some of the specifics you're looking to do here, whether it's from -- in terms of your sales force, et cetera? What kind of needs to be done? And what would the kind of resulting impact be on, again, these large projects out there?

Yes, Matt, this is Brad Cowles. I'll take that. The initiatives that I highlighted kind of the biggest movers for us with the most attractive kind of growth dynamics, I'd put smart utility in there, but also the treatment plant. And the resources that we invest in to do treatment plant work adapt very well to all of the -- what I would just generally call higher capacity, more complex water delivery projects, which are on data centers or large plants, water transmission lines and actual water treatment plants themselves. And that structure that we put in place, one of those national complementary team structures that we use to kind of enhance the capabilities of the local branch, we're going to be investing upwards of another 30 people in that initiative this year, just to give you a sense of the scale.

And those are resources that are kind of positioned both regionally and nationally to -- they're a little bit more mobile and cover a little bit more geography than a branch, which is serving generally kind of a fairly tight radius. And so they go where the work is. They follow these strategic national accounts, and they bring that level of expertise that really builds confidence and trust in us and accelerates the ability to win on those bigger projects.

Our next question comes from Joe Ritchie of Goldman Sachs.

So first question maybe for Mark. So you take a look at the guidance of kind of $950 million to $980 million EBITDA guidance for the year implies 2% to 5% EBITDA growth. I guess, how are you thinking about the kind of range of options here between the low end and the high end? And if we can maybe dig in a little bit on some of the main components, whether it's SG&A, gross margins, the investments that you're making, that would be helpful.

Joe, it's Robyn. I'll take that one. Thinking about the guide and what we laid out here, obviously, it's an unusual time with a lot of uncertainty with what's going on in the macro environment. So we felt like we needed to be prudent with what's going on externally. So with the guide, we've got the market kind of flattish. We'll always deliver on that above-market growth. And we do have a little bit of M&A in there that we completed last year. Our -- what we've got embedded in the guide is expecting pricing to be about flattish for the year might look similar to what we saw in FY '25.

Now obviously, with what Mark just mentioned on the price of resin increasing, we could see a little bit of lift there, and that's an opportunity for us. So if you think about the guide and what we've laid out and the opportunities that we have to perform on the high end of that or even outside of that, it's things like if we get a little bit of price that's going to be incredibly helpful for us on the top line, that will help us get more SG&A leverage. We're expecting the residential market to continue to be at the levels that it's been performing lately. So that will be a headwind in the first half of the year for us given where that activity is sitting today.

But if some of the uncertainty settles out and we do see a little bit improvement in the markets, then that could obviously help us as well. Any extra lift we get on the sales side will help us hit those SG&A targets and help us get better leverage there. We have a lot of confidence in gross margin. Our private label initiative has been performing really well. We expect that to continue and expect to continue to deliver on gross margin initiatives.

And then I think you asked also on the low end of the guide. Obviously, if there's higher inflation than what we're expecting, we did see a lot of inflation in FY '25. That was in the mid-single digits range. We typically expect to see that in the low single digit range, which is what we're expecting. But if any of that inflation comes in higher or if any of the markets are a little bit weaker, that would bring us in at the lower end of that guide.

Super helpful, Robyn. And then maybe my follow-on question either for Brad or for Mark. Just on the M&A discussion. So you guys have had just an incredible track record of compounding the M&A over the last several years, you can go back to the HD Supply days. But like the -- when I look at this year, this year was a little bit lighter or the most completed year was a little bit lighter. How are you guys thinking about getting back to maybe that cadence of maybe 2 to 4 points a year? And then also, is that opportunity likely to occur this year? Like just help us walk us through kind of the 2027 expectations for M&A and your ability to maybe kind of get back to what the more normalized cadence was for the company?

Yes. Thanks, Joe. I'll take that. In terms of the M&A, I would tell you, I'm extremely confident in our capabilities there and the pipeline that we have. Even though 2025 for us was a lighter year, we still delivered on the low end of the M&A growth target that we put out from 2% to 4%. And there just has not been a lot trading in our industry, and we are incredibly well positioned with the relationships that we have with the opportunities that are out there. It tends to be choppy. We've had some lighter years in our recent history as well. So -- and we've had some years where it's come well beyond that range. So I do expect that it will be choppier. I do think we've got a really good pipeline of opportunities right now that we're looking at. So expect 2026 will be a year for us where we're kind of right in that range with plenty of opportunities that we're keeping a close eye on that could extend us beyond that.

So I feel really good about the M&A that we've got. And then as you've seen in a lighter year, we're also opening up a record number of greenfields as well. So we've got both levers. We're well positioned to capture that share one way or the other and feel confident in our team's ability to go do that.

Our next question comes from Matt Johnson of UBS.

I guess, first off, if we could just talk about the meters business a little bit. I think you guys have sounded pretty excited about this business for some time now. So I guess, can you guys just give a little more detail on what level of growth you're expecting for this segment in 2026? And also how much of a contribution you guys are expecting from the contracts that you guys talked about this past quarter? And just any kind of more color you could give on the magnitude and the timing of that contract would be great.

Yes. Thanks, Matt. This is Brad. I'll take that. This initiative is -- it's been an exciting area for us. We've just consistently delivered at least low double-digit growth year after year. We continue to invest, and I think we keep getting better. Those large projects that we win can represent in a given year between maybe 1/3 or a little more than 1/3 of kind of our volume. Keep in mind, we have a massive underlying base of municipal sales that drive kind of your more everyday repair and replace and upgrade meter projects. But those large ones have been quite interesting and more substantial as we've become kind of the preferred prime contractor, if you will, for that scale and complexity of project.

In 2025, we had another incredible year. We were comping, I think, 32% growth from the prior year. So it was a bit of a stretch. But I think we're back on our stride. You heard Mark say we pushed a 12% growth in the quarter on the meter initiative. And I'd say early innings in 2026, we feel like we're back on stride even having swallowed that pretty large step change in '24 to 2025. So I'm pretty excited about it. We're investing additional resources there, much like we are in treatment plan to keep our coverage strong. We've got a good pipeline of additional large projects and expect to have that same kind of balance going forward in '26, where we still have a massive base of underlying municipal meter sales and then a nice third to slightly higher coming from those big projects.

That's great. Appreciate that. And then also if we could just ask to get a little more detail on what you guys are expecting for the resi end market this year. I think Robyn said expecting down in the first half before leveling off in the second half. So I guess any kind of color you can give on what level of declines you guys exited the year at? And then how you're kind of expecting that to shape up through the year would be great.

Yes. I would tell you, as we exited 2025, we felt that it was sequentially pretty stable but at low levels. And so we kind of work our way here into early 2026, we're definitely in a different position than we were last year at this time. You go back to the early part of 2025, and there was some optimism out there in the builder and development world. There were projects that were -- that we saw a lot of good bidding activity on, and we saw some good volume in the early part of 2025, which then definitely tapered off as we got into the second quarter and then into the back half.

So I'd say sequentially, it's been stable, but we're definitely in a different position than we were last year at this time, which is kind of what's leading us to believe resi will be relatively soft year-over-year to start the year and should ease in terms of the comparisons as we get into the second half of 2026.

Our next question comes from Mike Dahl of RBC.

Can we just stick with the end market conversation? And Mark, let's just put a finer point on things. So resi was down low double digits for the year in '25 and clearly worse in the second half. Are we -- is this commentary to suggest that given the tough comps, resi is likely down something like mid-teens or worse in the first half of the year and still winds up down high single digits, 10%? I think people are just trying to bridge to the -- like more specifically, yes, the resi, but then also if we step back within the flat blended end markets, the quantitative build of what is resi, what is non-resi, what is muni. So if you could help dial that in. And maybe also just as part of that, quarter-to-date trends, if you could enlighten us a little on how that's shaped up, obviously, a lot of weather dynamics, et cetera.

Yes. Mike, I'll take that. So starting with resi, the way that we're thinking about that is that we had a decent residential end market in the first quarter of last year. As -- like Mark mentioned, there was some optimism for the second half of the year and the homebuilders are still developing some lots during that time. So we saw some good activity in the first quarter. So we're going to be anniversarying that tougher comp in the first quarter. So expecting the first part of the year to be down in the low double digits to mid-teens range for residential and then sequentially improving throughout the year. So the second quarter could look something like down high single digits and then maybe it's flattish in the back half of the year.

Really not expecting at this point that residential gets much better. There's nothing pointing to that yet. Obviously, there's some optimism there and there's some pent-up demand at some point, but the timing of that is uncertain. So a tougher comp in the first half of the year for resi and then that starts to improve and maybe we get to about flattish by the end of the year because those comps get easier.

On the nonresidential side -- sorry, on residential, so we're expecting that all works out to be about -- down about mid-single digits for resi for FY '26. And then on the nonresidential side, we're expecting it to perform somewhat similar to FY '25, which is in the flattish range. There's a lot of project types within our nonresidential and there's some of those project types that are performing well, some of the data centers, some of the street and highway projects, multifamily and then there's a lot of that lighter commercial type of work that's been softer this year, retail, office space, some of those areas -- and we're not expecting a lot of change in what we've seen there. So expecting the nonresidential market to be flattish.

And then on the municipal side, this is an area that's very steady, stable, strong for us, had a really good year in FY '25, expecting that to continue to perform well. In the guide, we've got embedded low single-digits growth there on the municipal side. But this is an area that's got ample funding at the state level, the federal level, at the local level. We feel like this is a really key and important market for us that we think is going to be strong and stable over the short, medium and long term.

That's helpful and makes a lot of sense. On the -- just as a follow-up, -- just in light of the recent uncertainty and some of the early signals that you're seeing where certain categories could have to potentially take price. How are you thinking about inventory management? Because a lot of these categories probably have some slack where if you wanted to lean in, maybe you could buy ahead of some of this. But just curious to get your thoughts on how you're thinking about that.

Yes. I would tell you, that's something that we do really well here at Core & Main is managing kind of the ins and outs of those inventory investments, especially when there's some indications of price volatility. That's always been, I'd say, a really good driver of gross margin expansion for us and that ability to identify where and when we see those price increases and where and when to make those investments from an inventory standpoint. I think our teams do an extraordinary job of getting a lot of that product ahead of those increases and then working to get that into the market at the appropriate time. So I'd say that's been a standard part of our execution playbook and something that we generally do pretty well.

Our next question comes from Nigel Coe with Wolfe Research.

But just wondering if maybe you could comment on what you're seeing through the first quarter. Just given the comments from Robyn on the residential market, it looks like we might be below that 2% to 3% in the first quarter. Just want to make sure that's the case. And then when it comes to the end market outlook, I think it's obviously keeping a conservative stance here makes a lot of sense given the backdrop. I think a lot of investors are surprised that pricing is flat given the acceleration we've seen in inflation before this Iran shock. So just wondering, is it simply the PVC headwinds here? Or are there any other competitive kind of impediments to getting price here?

Yes, Nigel, I'll touch on what we're seeing so far in the first quarter and then hit on the pricing part. In the first quarter, we've got a January 31 year-end. So we've been through February and not quite all the way through March yet. But I would say what we're seeing is pretty well in line with our guide. We are expecting the first quarter to be our toughest comp quarter. So we are expecting sales and EBITDA might be down a little bit slightly year-over-year and then improving as we go each quarter. And that's in line with what we were expecting. We did see about a $15 million to $20 million weather impact the last week of our fiscal year when there was a deep freeze and a lot of winter severe weather. We're getting a lot of that back in the first quarter. So we think all of that will just come back in the first quarter. Gross margins are performing strong. SG&A, we're seeing some of the cost-out impact favorability there.

So feeling good about the first quarter, obviously, on soft markets and probably be down slightly year-over-year on the quarter, but it's coming in really in line with guide and expect it to improve as we get throughout the year.

And then on the pricing side, all of our product categories were basically up in FY '25, except for PVC. PVC was down about 15% in the year. So there's a variety of different outcomes that we could see in FY '26, but we're not counting on a full recovery of PVC. Some of the oil increased prices could help either stabilize that or increase it. But what we're seeing today is PVC will have a -- as it's gone down all throughout the year, we're going to have a headwind at least in the first half to 3 quarters of the year on PVC, even if it stabilizes where it's at today. So that would be the puts and takes. We would expect price increases in all of our other product categories.

That's really helpful. And then just a quick one on buybacks. I think from the K, it looks like you bought back about [ 7,000 ] shares in February, March. That's a decent chunk of shares compared to what you did in 2025. Just wondering if there's any intention to keep stepping on buybacks at these current share prices.

Yes. Yes. Nigel, we did about $155 million last year, almost $40 million in the first quarter. Given where the stock price is at, we've got ample cash flow. We've got tons of cash to be able to reinvest in the business, M&A and do buybacks. So you can expect us to see continued buybacks. We've got about over $600 million still remaining on our authorization. So that will be a big part of our capital allocation going forward.

I'll now hand it back to Mark Witkowski for any further remarks.

All right. Thanks for joining us today. As we wrap up, I want to leave you with a few key points. Fiscal 2025 was another year of disciplined execution. We delivered our 16th consecutive year of sales growth, drove 3 points of above-market growth through share gains and structurally expanded gross margins, all while generating strong cash flow. At the same time, we continue to invest in the product categories, footprint and capabilities that position us to compound these gains over time.

Looking ahead, we see a clear path to growth and improved operating leverage. Our initiatives are working, our actions to address cost pressures are in place, and our end markets remain attractive over the long term. Over the last 12 months, I've spent meaningful time with customers, suppliers and associates across the country. Those conversations reinforce what differentiates this company, our people, our culture and our consistent focus on execution. I'm grateful for our teams and confident in the opportunity in front of us. Thank you for your continued interest in Core & Main.

Operator, that concludes our call.

Thank you all for joining today's call. You may now disconnect your lines.

Hello, and welcome to the Core & Main Q3 2025 Earnings Call. My name is Alex. I'll be coordinating today's call. [Operator Instructions]

I'll now hand it over to Glenn Floyd, Director of Investor Relations. Please go ahead.

Good morning, and thank you for joining us. I'm Glenn Floyd, Director of Investor Relations at Core & Main. We appreciate you taking the time to be with us today for Core & Main's fiscal 2025 Third Quarter Earnings Call. Joining me this morning are Mark Witkowski, our Chief Executive Officer; and Robyn Bradbury, our Chief Financial Officer. .

Mark will begin today's call by sharing an update on our business and recent performance. Robyn will follow with a review of our third quarter results and our outlook for the year. We'll then open the line for Q&A, and Mark will wrap up with closing remarks.

As a reminder, our press release, presentation materials and the statements made during today's call may include forward-looking statements. These are subject to various risks and uncertainties that could cause actual results to differ materially from our expectations.

For more information, please refer to the cautionary statements included in our earnings press release and in our filings with the SEC. We will also reference certain non-GAAP financial measures during today's discussion. We believe these metrics provide useful insight into the underlying performance of our business.

Reconciliations to the most comparable GAAP measures are available in both our press release and in the appendix of today's investor presentation. Thank you again for your interest in Core & Main. I'll now turn the call over to our Chief Executive Officer, Mark Witkowski.

Thanks, Glenn, and good morning, everyone. Before we dive into our results, I want to start by reminding everyone of Core & Main's value proposition. Core & Main is a leading specialty distributor of water infrastructure products and services in North America supporting the repair, upgrade and expansion of our nation's critical water systems.

Our competitive advantages, including national scale and resources, local market expertise backed by the best trained sales force industry-specific technology and comprehensive product solutions position us to lead an attractive secular growth market, driven by aging infrastructure, increasing water demand and ongoing investment needs.

Our business model is built for resilience. Today, municipal projects represent over 40% of our sales providing steady, predictable demand, supported by reliable funding sources. Our nonresidential end market, which represents roughly 40% of sales benefits from a diverse project mix across commercial, industrial and infrastructure applications, many of which are poised for growth.

Residential activity represents less than 20% of our sales. And while near-term dynamics in this market remain challenged, we continue to view the long-term outlook as attractive, supported by population growth and a structural undersupply of housing. This diversification, combined with emerging growth drivers like data centers and treatment plant modernization provides a strong foundation for our business.

Core & Main consistently produces strong free cash flow and compelling returns on invested capital, giving us the flexibility to reinvest in the business, pursue strategic growth opportunities and return capital to shareholders. We continue to control our own destiny through disciplined execution on multiple fronts. For example, expanding into high-growth geographies, broadening our product offering in areas like treatment plants, smart meters, infusible HDPE and deploying our strong balance sheet to pursue accretive M&A opportunities, including our recent expansion into the CAD 5 billion Canadian market.

These strategic investments are expanding our addressable market, strengthening customer relationships, and positioning us to capture above-market growth as near-term headwinds survive. Equally important, our pricing discipline and gross margin expansion in recent quarters demonstrate the strength of our value proposition in addition to our team's ability to execute. We are staying focused on what we can control and building the foundation for sustained growth and profitability.

Turning now to the quarter. We delivered positive net sales growth despite tough residential demand and a tough comparison from last year, driven by contribution from acquisitions and strong performance across our sales initiatives.

Municipal construction remains strong, supported by a highly favorable funding and demand environment. The recent federal government shutdown and little-to-no impact on the municipal projects we support as roughly 95% of funding for these projects comes from state and local sources. Local utility rate revenues and municipal bonds are dependable sources of funding and certain states are also advancing new legislation to repair and upgrade aging infrastructure.

Recent actions include Texas authorizing up to $20 billion of funding for new water supply projects over the next 2 decades. New York deploying approximately $3 billion in new water infrastructure investments and Arkansas committing more than $500 million to water and sewer upgrades, each reinforcing a robust project pipeline. The state revolving funds provide a renewable source of capital to support water and wastewater infrastructure projects with current balances exceeding $100 billion in total.

Supplemental funding from the Infrastructure Investment and Jobs Act remains a multiyear tailwind with roughly $30 billion allocated to the states and more expected next year, but only a fraction deployed by municipality so far. Taken together, these dynamics provide long-term funding for critical water infrastructure projects that can no longer be deferred and remain essential to public health and economic development.

In nonresidential, we continue to see healthy growth in infrastructure projects such as road and bridges, education and health care and data centers. This growth is helping to offset softness in commercial, retail and office space projects. Data centers represent a low single-digit portion of our total sales mix today, but they are becoming a more meaningful driver of our growth as AI-driven capacity expands.

These projects require more water infrastructure than traditional manufacturing facilities due to cooling needs as they draw large volumes from local water supplies. This often necessitates upgrades to municipal systems and in some cases, on-site water treatment facilities to conserve usage. We also see private investment flowing to public utilities to build capacity creating opportunities for Core & Main across the municipal and private end markets.

Data center development doesn't happen in isolation. As these campuses come online, they attract workers and ancillary businesses driving demand for housing, retail and commercial services, all of which drive the need for new water infrastructure. And this concentrated population growth place a strain on local water systems triggering further investment in water distribution and treatment infrastructure. We're seeing this firsthand of the major hyperscale campus near South Bend, Indiana, where project-related demand has been so substantial that our local branches nearly tripled in size over the past few years.

In many cases, the initial investment for data centers unlocks capacity for broader municipal, residential and nonresidential expansion, creating a long-term tailwind across our core markets. As we expected and discussed on last quarter's call, residential lot development softened during the quarter, particularly in the Sun Belt markets. Builders are carefully pacing lab development against housing affordability concerns and consumer uncertainty. But as housing affordability improves in the future, we will be well positioned to capitalize on the release of pent-up demand.

Our growth initiatives continue to lay the foundation for long-term results. Let me highlight a few areas where our execution is creating competitive advantages. First, our product initiatives, including fusible HDPE treatment plant solutions and geosynthetics each achieved double-digit growth in the quarter.

As we expand our ability to deliver integrated solutions for aging water infrastructure. Meter products returned to high single-digit growth in the third quarter. Recent contract awards, including our largest metering contract award to date give us confidence in both near and long-term demand for our advanced metering products. Driving growth through geographic expansion also remains a key priority. We recently opened new branches near Houston and Denver, bringing our year-to-date total to 5 new occasions.

We expect to open more branches for fiscal year-end, and we are evaluating over a dozen additional high-growth markets for future expansion. These new branches enhance our proximity to high-growth markets and increase our service levels, supporting continued market share gains.

In September, we completed the acquisition of Canada Waterworks, further expanding our growth platform in a fragmented $5 billion Canadian addressable market. This acquisition aligns with our core strengths and increases exposure to growing end markets. Canada is a natural adjacency to our U.S. markets, and we're excited to welcome the Canada Waterworks team to Core & Main.

Integration activities are underway with a solid plan to realize synergies. While we continue to invest in growth, we remain equally focused on improving profitability. Gross margins improved by 60 basis points year-over-year to 27.2%, reflecting the success of our private label initiative and disciplined sourcing and pricing execution.

Our private label strategy continues to produce strong results, and we are on track for private label products to represent approximately 5% of our total sales this year. On SG&A, we've implemented roughly $30 million of annualized cost savings in an effort to improve operating leverage and maximize the efficiency of our business. We expect to realize these savings over the next 12 months. We remain disciplined in our headcount decisions by selectively filling critical sales roles, while reallocating resources to areas of the business with the greatest growth potential.

At the same time, we continue to invest in modern technologies to help us drive future SG&A leverage. These tools strengthen customer service, uncover more selling opportunities and expand our ability to take advantage of emerging AI capabilities. We expect these investments to enhance productivity and support margin expansion.

Our strong free cash flow provides flexibility to pursue strategic M&A, invest in organic growth and return capital to shareholders. Profitable growth remains our top capital allocation priority, supported by a robust pipeline of acquisition and greenfield opportunities.

We will remain disciplined on valuation and returns while maintaining balance sheet flexibility to drive shareholder value. As part of our disciplined capital allocation strategy, earlier this morning, we announced a $500 million increase to our share repurchase authorization.

This action reflects our conviction in our growth outlook and free cash flow generation, and the Board shared confidence in our ability to continue creating long-term shareholder value. With this expanded capacity, we can act opportunistically as market conditions present attractive opportunities.

We are gaining momentum across our sales, growth margin and operational initiatives. Strengthening our ability to drive organic growth, expand margins and achieving operating leverage. We remain confident in the attractiveness of our end markets over the medium and long term and we continue to invest in our associates and value-added capabilities to capture growth and market share.

In closing, I want to express my sincere appreciation for our teams across the country. Their dedication and focus on execution have been instrumental in advancing our strategic priorities, and I couldn't be more proud of what we've accomplished together this year.

Thank you for your continued support and confidence in our vision. With that, I'll turn the call over to Robyn to review our third quarter financial results and outlook for the year. Go ahead, Robyn.

Thanks, Mark. Good morning, everyone. I'll start on Page 7 of our presentation with some highlights from our third quarter results. Net sales increased 1% to $2.1 billion. Organic volumes and prices were roughly flat versus prior year, while acquisitions contributed about 1 point of growth. We delivered positive pricing across nearly all product categories in the third quarter. The one exception was municipal PVC pipe where prices are down roughly 15% year-over-year and nearly 40% from the 2022 peak. .

As we've noted in prior quarters, even with the continued moderation in PVC pipe pricing, our discipline has enabled us to sustain a stable price environment overall. We estimate our end markets were down low single digits in the quarter, driven by declines in residential lot development and a tough comparison from last year. The residential decline was concentrated in Sunbelt markets like Florida, Texas, Arizona and Georgia, where developers have slowed the pace of new development.

Activity appears to have stabilized as we moved through the quarter and we remain confident in the attractive long-term fundamentals of these high-growth markets. Our overall portfolio is resilient. demand continues to be a source of strength, and we're seeing solid activity in large complex nonresidential projects where our scale, product breadth and technical expertise give us a strong competitive position.

This balanced mix across end markets flexibility through varying demand environment. Gross margin in the third quarter was 27.2%, up 60 basis points year-over-year. This improvement was driven by benefits from our private label initiative and disciplined purchasing and pricing execution. Total SG&A expenses increased 8% to $295 million. SG&A growth in the quarter was driven by acquisitions, elevated inflation in areas like facilities and fleet higher employee benefits costs and strategic investments to support future growth.

SG&A in the third quarter was $7 million lower than the second quarter, reflecting a reduction in onetime items and disciplined cost management. Cost inflation in our industry typically runs in the low single-digit range annually, but it's trending closer to mid-single digits this year. Against the softer end market backdrop and no incremental pricing, the productivity gains we're delivering aren't enough to fully absorb these pressures, especially given how efficient we already operate from an SG&A as a percentage of sales standpoint. This level of inflation is not typical, and while we expect it to moderate over time, we have moved quickly to address it.

Since the last quarter, we've implemented $30 million of annualized cost savings with roughly $1 million of savings recognized in the third quarter. These savings primarily reflect reductions in personnel-related costs as we've eliminated approximately 4% of nonsales focus full since last quarter.

We expect fourth quarter SG&A to be roughly $25 million lower than the third quarter due to a seasonal reduction in sales and the results of our cost actions. Our approach is measured and focused on stripping resources without compromising customer service or long-term growth.

While we take targeted actions to improve efficiency, we continue to invest in growth-focused roles to support product line and geographic expansion, including greenfields. We have an experienced management team that understands what takes to drive operational excellence through cycles, balancing near-term efficiency with the investments required to continue positioning Core & Main for long-term growth and success.

We are committed to driving annual SG&A rate improvement going forward. Adjusted diluted EPS increased approximately 3% to $0.89 compared to $0.86 last year. Growth was driven by higher adjusted net income and the benefit of a lower share count from share repurchases. As a reminder, we exclude intangible amortization from adjusted EPS because a significant portion relates to the formation of Core & Main following our 2017 leveraged buyout. This adjusted metric better reflects the underlying earnings power and free cash flow generation of our business, which is why we view it as an important indicator of our performance.

Adjusted EBITDA of $274 million was 1% below the prior year, while adjusted EBITDA margin declined 30 basis points to 13.3%, driven by a higher SG&A as a percentage of net sales. This was partially offset by 60 basis points of gross margin expansion. Turning to the balance sheet, cash flow and capital allocation. We ended the quarter with net debt at nearly $2.1 billion and net debt leverage of 2.2x, well within our target range.

Liquidity was $1.3 billion, including $89 million of cash and the remainder under our ABL facility. Operating cash flow was $271 million, reflecting nearly 100% conversion from adjusted EBITDA and highlighting the strength of our cash generation ability. Over the last 12 months, we have generated free cash flow equal to 5.6% of our market capitalization, a level that has more than doubled the average free cash flow yield of S&P 500 companies and meaningfully above specialty distribution peers.

We returned $50 million to shareholders through share repurchases during the third quarter, reducing our share count by roughly 1 million. Year-to-date, we've repurchased approximately 2.9 million shares for $140 million, including an additional $43 million deployed so far through the fourth quarter. We announced a $500 million increase to our share repurchase authorization this morning, bringing our total capacity to approximately $684 million.

Since our 2021 IPO, we have repurchased over 15 million shares, roughly 20% of our original shares outstanding, reflecting our commitment to returning capital to shareholders. We remain opportunistic with share repurchases, and our strong cash-generating ability provides ample capacity to continue evaluating organic and inorganic instruments to maximize long-term value.

Turning to our outlook on Page 9. We are reaffirming the full year guidance we issued in September, including net sales of $7.6 billion to $7.7 billion, adjusted EBITDA of $920 million to $940 million, and operating cash flow $550 million to $610 million. Full year net sales growth is projected at 4% to 5%, excluding the impact of one fewer selling week compared to last year, which represents a roughly 2% headwind for FY '25.

End market volumes are anticipated to be flat to slightly down for the year, reflecting a low double-digit decline in residential lot development, partially offset by low to mid-single-digit growth in municipal volumes and a roughly flat nonresidential market.

Pricing is expected to have a neutral impact on sales growth, and we remain on track to deliver 2 to 4 percentage points of above-market growth. Gross margin is expected to improve year-over-year supported by continued private label growth and disciplined purchasing and pricing execution. We have successfully mitigated a dynamic environment over the last few years, and I'm extremely proud of how consistently our teams have executed.

We've meaningfully expanded our market share while broadening our addressable market through product and service adjacencies. We've demonstrated disciplined pricing, deliver sustainable gross margin expansion and generated strong free cash flow to reinvest in the business and return capital to shareholders. Our next objective is to convert that momentum into stronger growth and improved SG&A leverage.

We have the management team in place to execute on that plan, supported by a long track record of operational excellence and disciplined cost management. We remain confident in the long-term fundamentals of our end markets and with the strategic investments we've made, combined with our balance sheet flexibility and improve execution, we are well positioned to continue growing above the market through disciplined execution, value-accretive M&A and the exceptional service that enables us to support our customers and capture opportunities.

With that, we'll open the call for questions.

[Operator Instructions] Our first question for today comes from Ryan Biros of Thompson Research Group.

Can you talk about the large complex projects that you talked about, if you have any updated market share numbers, growth rates or kind of revenue exposure numbers. Our understanding from a variety of contexts of these projects, depending on how you classify them, are seeing growth rates well above other end markets. And that distributors still play a critical role in these projects, maybe even more so.

As many products are still going through distribution as opposed to OEM direct helping control the flow of products to the site. So just curious to what you're seeing given the value you provide there to these large projects?

Yes, Brian. It's Mark. We're excited about these complex projects, in particular, the data center activity that we've seen out there and for a number of reasons and some of which you mentioned there, I mean, these fit really right into our value proposition where these local relationships with the underground contractors really matter. They really rely on that local distribution to get them all the products that they need, and that's on scale really comes into play as well and having access to all the material that they need to really be that one-stop shop for our customers.

So it really becomes critical, the ability to be able to timely supply all the products that they need, the pace of these projects as quick as you can imagine. And we're in a really good position just given our geographic diversity to capture a lot of that business. And I gave that example on the call about a market that Rob and I recently visited about a year ago to really see this in action and on-site and talking to the customers there about really the value proposition and how they rely on our consistent and quality service that we provide really puts us in a great position, then as these projects pop up in other markets. And in many cases, those customers travel to the next project. And we're really in a great position to capture that.

So yes, we've seen really good growth in communities where these pop up. I'd say, as I've mentioned, this is still kind of a low single-digit overall exposure for us, but we've seen it grow rapidly. And like I said, really excited about really the growth that that's driving in that space. I'd say and what we see as these projects typically put a lot of demands on the water systems. That does a couple of things. One, it increases the value of water in a lot of these communities, which puts money back into the communities for further investment and then obviously puts a strain on the systems as well, which requires additional investment typically, some of which is done by the companies that are building these projects and then turned over to the municipality.

So we've just really seen a lot of characteristics there that drive some long-term demand for us, and I'm excited about that.

Yes. I'd be interested where that goes over the next few years. I guess on the guidance, it looks like it's largely maintained. But I think the municipal outlook was raised slowly, now expected to be up low single digits to mid-single digits, where last quarter, look like it was just low single digits. So maybe just what's causing that slight raise? And is that just a short-term timing kind of for Q4? Or is that maybe signaling we could see an improved municipal market into the mid-single digits going forward for you guys?

Yes. Thanks, Brian. We have a lot of confidence in our municipal end market. There's significant funding going in there all at all levels. So -- on the federal side, there's still ample funding coming in at those levels, very little of the IIJA spending has been spent really at all with the municipalities are using a lot of local water funds to support their projects, and we're seeing them increase rates to customers there. So there are good tailwinds there. And then like Mark mentioned in the prepared remarks, there's a lot of state-level funding going out to support municipalities as well.

So did lift it a little bit, but just feel really good about the municipal end market over the short term, medium term, long term.

Our next question comes from Matthew Bouley of Barclays.

I wanted to follow up on the end market side. Obviously, you just touched on muni. What I'm getting at is if you have any kind of early thoughts on 2026. So given where municipal is, I think I heard you say residential might have been some signs of stabilization in Q3. Obviously, you got non-reservoir it sounds like the data center piece is driving things. So just I don't know, any help on kind of early thoughts and directional trends into 2026 there?

Yes. Thanks, Matt. It's Mark. Yes. As Robyn touched on in terms of the municipal end market, we continue to see that as a really strong, steady growth for us as we wrap up 2025 and into 2026 and beyond. Nonresidential for us is, like we've talked about on previous calls, it's a mixed bag there.

We've seen some really good strength in areas like these more complex projects that we see, and then there's been pockets of softness with the lighter commercial business that tends to follow some of the residential activity. So as we think about the resi side, obviously, we're watching rates closely. There's more decisions here coming up from the Fed in December, and we'll see what they touch on in terms of the outlook.

So we want to see a little bit more on that front before we call residential as we go forward. It clearly softened into the second half of the year, which we warn people at earlier this year. So we're likely to see maybe a bit of a headwind as we start off 2026. But just given the overall levels of residential, I think we've covered most of that risk for any further softening of that. I would expect that at some point here, that pent-up demand is going to release, and we'll be back into really good residential growth that could then spur some of that additional commercial development.

And I think on top of kind of continued investment in these data centers, I don't see that slowing down here anytime soon that provides a really good backdrop here at some point when we see that resi market release.

Okay. Got it. Second one, kind of jumping into the margins. Obviously, a solid gross margin result there above 27%. So if I heard you correctly, I think you said SG&A would be down $25 million sequentially in Q4. And correct me if I'm wrong, but that seems to imply the gross margin probably ends up fairly similar sequentially. So I'm just curious if this kind of 7% level is sort of a new normal here? And any sort of additional color there on what's driving this there?

Yes. Sure. Matt, I'll take that one. So you're right. We had really strong gross margin performance in the quarter, driven by growth in our private label initiative. We did a really good job with some purchasing and pricing execution in the quarter. And we do expect to be able to continue to enhance gross margins from here, leveraging some of those margin initiatives that we've talked about.

Gross margin in the fourth quarter should be -- it's probably going to be more in the range between the second and third quarter. Third quarter will probably be a little bit higher, maybe the peak level for the year as it can move around a little bit, but expecting a good result in the fourth quarter for gross margins, expecting -- you're right, expecting to bring SG&A down by about $25 million as we start to recognize some of the cost actions that we've done already. So should be a good result there. And then we expect to, like I said, continue to expand gross margins annually from there. It might not be exactly perfect sequentially every quarter. But on an annual basis, we expect to get that expansion.

Our next question comes from David Manthey of Baird.

First question on the top line. Last quarter, you said you expected residential to continue to soften through the second half. And Robyn, if I heard you right, you said you're seeing stabilization at the end of the third quarter. I don't want to read too much into that, and I know it's not getting stronger, but is that a slightly more optimistic residential view than you were expecting 90 days ago?

Yes. Thanks, Dave. For resi, we started to see, like we talked about on the last quarter call, we really started to see that soften at the end of July, and it really continued into August, September and October. So for the full quarter, it was soft and it was down in that kind of low double digits to mid-teens range for the quarter. I wouldn't say we've seen good movement there. We've just seen it kind of soften as homebuilders were developing less lots, awaiting some better affordability and some better demand there. So not a lot of movement during the quarter, but it did really perform in line with what we expected. We started to see some of that soften late last quarter and saw that continue throughout the quarter.

Okay. And Second, on gross margin. With private label at 5% of the mix, it doesn't seem large enough to move the needle. I know you talked about it a lot, and I'm sure there's a wide disparity between all other products and private label. But could you maybe talk about the magnitude of that in terms of stack ranking relative to gross margin benefit? And then you mentioned some of the other sourcing and pricing initiatives. Could you really lean into those a little bit and give us an idea of maybe some of those other buckets that are lifting gross margin? And how much opportunity remains in the coming, say, 1 to 3 years? .

Yes, sure. So private label is a big driver for us. And I would say in the quarter, a good portion of that was driven by private label growth and then -- the other half or less than half was driven by our really strong execution on purchasing and pricing. And private label has expanded our margins, I would say, pretty significantly over the last several years since we started getting into this and driving the growth there.

So we're really happy with the 5% of sales that we will have at the end of this year. Our long-term target there is in that 10% to 15% range. So lots of opportunity to continue to expand there. As we move forward into the upcoming years, I would say private label is going to still be a pretty big driver there.

We think that can drive something like 10 to 20 basis points a year, some of our sourcing initiatives can drive additional margin enhancement on top of that. So those are areas that we have a lot of confidence and ability to continue to drive the gross margin improvement. Sourcing is a lot of managing the relationships with our suppliers and spend -- shifting our spend where is the best positioning us in the marketplace. And then on the purchasing side, we did a really nice job this year of buying ahead of price increases similar to how we always do. We see price increases coming to the market kind of in the early spring time frame. And we're always constantly managing our inventory to make sure we're optimizing margin as much as possible.

Our next question comes from Nigel Coe of Wolfe Research.

Just want to go back to SG&A. So the guide for 4Q, does that fully embed the run rate of SG&A savings? That $30 million analyzed that will be baked into 4Q? And then on the one hand, you're talking about you're running very lean right now. But then I think the slides and you referenced you're exploring further opportunities. So it's actually wondering what kind of direction you're moving in, in terms of looking at further productivity?

Yes. Sure, Nigel. Thanks for the question. So the $30 million, a lot of that will hit in Q4 from a run rate perspective, not all of it. I would say it's probably going to be more in the kind of $5 million range of SG&A savings impact in the fourth quarter from some of the actions that we've taken. .

Some of them will go into effect. We've executed on the changes, but we'll realize more of the savings in FY '26. So we won't get the full run rate in Q4, but we'll get the full run rate into FY '26. And then remind me of your second question, Nigel?

Yes. The second part of the question was really around -- on the one hand, you're talking about you're running very lean, you're not going to sacrifice growth initiative, et cetera. But then you also then talk about other productivity actions you're exploring. So I'm just wondering what direction you see above and beyond that $30 million?

Yes, sure. Yes. And we do -- we -- if you compare us to others, we do have a very efficient SG&A rate already. We haven't gotten the operating leverage that we expected lately, and so that's where the cost-out actions came from. We do have a lot of things that we're working on to gain additional productivity in addition to the cost-out actions that we've already taken. And a lot of that stems around technology to make us more efficient to service our customers better, to automate more in the back office.

And so we have made some investments in technology that we believe will result in further productivity and help us get that SG&A leverage starting into next year.

Our next question comes from Joe Ritchie of Goldman Sachs.

So I wanted to touch on the private label discussion again. Can you just -- maybe just elaborate on what the constraint is on potentially moving private label in that initiative since you are seeing some good gains from that? And then where are you seeing the biggest penetration across your product lines or systems?

Yes, Joe, it's Mark. Thanks for the question. Yes, I would tell you on private label, we've been really pleased with the progress that we've made there. We've expanded our capabilities there pretty significantly, things that you need to continue to grow it at that pace, obviously include a lot of the product work that's done. We've got great engineers and researchers that help us on that product development that has to be sourced and vetted to continue to end up through the system. You need the logistics capability. So we continue to invest in distribution space and facilities and equipment to work all that product through the system.

Obviously, you need some customer acceptance on that side. So these are all kind of well-ingrained processes that we have to continue to expand that and has really been the key piece to -- as Robyn mentioned, allow us to expand gross margins here over the past few years. So we've got continued opportunities there. That's big part of what we continue to look at.

I'd say we've got a really solid plan over the next 2 to 3 years to expand that. I think a pace of 1 point or so a year is something that we felt as achievable and something that we've been able to deliver historically. So we'll continue to work down those paths and think should expect to see that growth as we move forward.

Got it. That's helpful, Mark. And then I guess my follow-on question, look, it's interesting to hear you talking about the data center opportunity. Clearly, that is going to continue to accelerate, and there's a lot of momentum in the market. I guess as you think about your positioning, your capabilities, whether you need to make investments in certain regions in order to participate in a more meaningful way going forward. Maybe just kind of talk a little bit through like whether there is additional investment that's necessary. And then also, to some degree, why it's such a small portion of your business today, given that there has been development over the last few years?

Yes. Thanks, Joe. As it relates to the scale, I think we obviously participate on a lot of projects all throughout the country, large-scale water replacement projects, other types of commercial and residential development. So this is still a good and important part of our business that's growing rapidly. I would tell you, we're always looking to make additional investments and improve our market position across the country, but we're -- we've got a great foundation. We have a broad geographic reach.

So wherever these hyperscalers go to make these investments. We're always in a good kind of foundational position based on the local relationships that we have. It's still very much a local business. It's typically some of our best customers that are working on these types of projects because they're so critical to those developers to be successful where we've got the best relationships locally. We tend to get a lot of this work in areas where we need to earn those relationships with the customers that are doing that work.

Those are investments that we make similar that we would operate in other markets where we're trying to improve our market position. So you should expect as there is growth in data centers in certain markets that we're looking to enhance our capabilities, build out our capacity and make sure that we can serve that to the best of the customers' needs.

So I think it looks very similar in terms of the investments. We've also got national relationships with some of the large contractors to get involved in these. So we attack it from various aspects, and we'll continue to invest to make sure that we get more than our fair share of that business.

Our next question comes from Anthony Pettinari of Citi.

Robyn, you had talked about cost inflation running kind of mid-single digit versus maybe more typical low single-digit rate. And I'm wondering if you could give any more context in terms of the drivers there? And then just maybe in terms of cadence, like when those comps get easier when you might expect that rate to normalize or any other color there?

Sure. Yes, I would say the areas that we've seen driving the majority of the inflation this year have been on our facilities, on our fleet and on medical costs. So those are the main drivers. Obviously, those are some big buckets of costs for us are our largest bucket of cost is personnel-related expense and then it's our facilities after that.

So as we go through and renew some leases that we've had in the past that -- we've gotten really good pricing on some of those fair market values are up and causing some inflation there. And then -- similarly on the fleet, we've just seen inflation there over time. And then medical is an area that we've had a big impact last quarter. We had a lot of high-cost claims, but there's also a lot of inflation hitting that area.

So expect that to continue into the fourth quarter. Don't have a lot of that remediating in the fourth quarter yet. But I would say we started -- we'll probably anniversary around that around the second quarter of next year. That's when we started to see the larger impacts of that inflation. So do expect it to moderate at some point in the coming quarters and get back to something that's a little bit more normalized for our industry.

Okay. That's very helpful. And then just following up on data centers. Mark, I think that you made a reference to these being quick projects. I'm not sure if I heard that right. But in terms of kind of visibility into these projects, maybe time line, I'm sure it's hard to generalize, but is it possible to talk about sort of maybe what a typical project looks like in terms of your visibility into the demand and the time line and completing that?

Yes. Thanks, Anthony. Yes, I'm happy to clarify that. These projects are -- they're not completed quickly. They're -- I'd say, the pace of construction of these is at a pace that requires that operational excellence that we provide our customers. So they're fast pace projects, they can last several years based on the nature of the build-out.

We've seen some of the projects that we've worked on just they continue to add phases to these projects. So we'll get pretty good visibility out as we get involved in these, at least kind of a year out of work that's being done, and then those projects can then expand beyond their based on what we've seen. So they can last quite a while, but your pace that you have to execute at is very quick, and that's where the trust that our customers place in us really comes in hand our ability to execute these projects so that they can be successful and they can be a preferred contractor on these projects going forward.

That's when it really becomes a win-win for us and our customers when we're both working to complete those projects as efficiently as possible.

Our next question comes from Patrick Bauman of JPMorgan.

Had a couple cleanups here. Just on pricing, I think you said muni PVC pipe down about 15% in the quarter year-over-year kind of implies everything else was up like low single digits. Is that -- is that right? And then is that kind of that algo? Do you expect that to continue into '26 such that prices on net will remain stable?

Yes. Thanks, Pat. That's right. PVC pricing has kind of come down off its peak levels over time, and that's the right range of what we're seeing. Don't expect -- we don't expect a lot of changes from this point in the year. So pricing flat for the year. And as we get into FY '26, we'll provide more details on the next call. But expecting pricing to be at least flattish for FY '26. We could have some product categories that are down, but expect the majority of them to be up overall. So I feel like that's going to be stable at minimum.

What are you seeing in other commodity products outside of the PVC stock? Yes. .

Yes, well -- yes, if you think about steel and copper are really only true commodities that we have that move with the underlying markets, and those would both have price favorability for the year, they've been price favorable for a while, and I would expect that to continue. So those are small areas of our overall products and sales, but those are up, I would say, virtually every product except where the municipal PVC is up year-over-year.

And is also up?

Yes, that's right.

Okay. And then on the M&A pipeline, can you just talk about like what you're seeing there? We've been a little bit of a lull here in terms of activity what's causing that? And what -- how should we think about you guys deploying capital to M&A over the next 6 to 12 months? .

Yes, Pat, it's Mark. We're still very excited about the M&A pipeline that we've got. We've got some very active deals that we're working right now. We got many opportunities that we continue to see out on the horizon there has been, I'd say, a lull in the deals that are out in the market. We haven't, I'd say, missed out on anything in the market.

I just want to assure you of that. It has been a I'd say, a lull in activity. But we are working some in real time that we're excited about and expect you'll hear some announcements from us soon, and we continue to be very active on that front. So I'd expect from a capital deployment perspective, our priorities haven't changed. We'll continue to invest organically. We will deploy capital for M&A, and we'll continue to look at share repurchases as an authorization that we announced this morning. So continued right along with our strategy and the priorities that we've laid out.

Our next question comes from Sam Reid of Wells Fargo.

Just looking for a little bit more detail on the SG&A cuts. And perhaps could you just give us a sampling of some of the, call it, maybe more back office type jobs that you're eliminating as part of this process? Are they concentrated at the branch level more skewed towards corporate? Just love some additional perspective there.

Yes. Thanks for the question, Sam. We did -- like I said on the call, $40 million of cost out, the majority of that is personnel-related costs. We were able to make reductions in about 4% of our overall. We were not focused on anything that was driving sales.

I mean, we talked about in the last quarter that these were going to be very targeted actions, and we weren't going to do anything to compromise any customer service or long-term growth. And I think we've done a really good job of making sure those were targeted.

On the back office side, I would say, over time, we've been able to leverage technology and become more efficient. So I wouldn't point to any particular role, but I would say we were able to make some changes generally across the board to take cost out overall and then some additional kind of supporting functions.

So it was a mix of head count, which is why we didn't talk about it in a detailed way on the last call because we knew it was going to be a little bit broad in across the board, but also kind of very targeted to specific areas that maybe we've had some overlap from M&A or maybe we've converted systems, and we're able to become more efficient in that way.

That helps, Robyn. And then to switch gears here, just want to drill down a little bit on the muni -- or the meter business, I should say. It sounds like you were awarded a meter contract this quarter, if I'm not mistaken. Just maybe a little additional context on that. And then talk to the high single-digit growth -- just maybe give me some context on whether that's coming from newer projects or whether that's more kind of just recurring from kind of some of your longer-term meter contracts?

Yes. Thanks, Sam. It's Mark. We continue to be really successful on the smart meter front. We've been, I would say, pivotal in advancing the digitization of the municipalities. And this is an area where we can really drive demand by going in and selling the value that we can bring by really converting them from a manual or kind of a legacy maybe first generation system that they put in really provide them the advantages of a modern system.

So we've been, I'd say, very successful in many parts of the country selling some of the largest municipalities now, which have been, I'd say, some of the slower adopters of the technology. So we're really starting to see some movement there and really gain the confidence of our manufacturer partners that we help sell their products for to really be the lead and drive the demand of the system enhancements for the municipality.

So real pleased with the progress there. We have achieved that over the last couple of years, some of the largest projects and not only our company's history, but in the country's history in terms of the size and scale of these. So that's going to be a continued driver of growth for us and just really excited about the performance of our team there and continue to expect good growth ahead of us.

Our next question comes from Matt Johnson of UBS.

Cities, first off, if we could just talk a little bit about greenfields. I think you guys have opened 5 year-to-date is what you said. I guess could you guys provide a little more color on, I guess, your ambitions for the rest of the year. Are there any specific markets that you're targeting, whether it be in the U.S. or Canada? And then its target for FY '26 also to open 5 to 10 new greenfields?

Yes. Thanks for the question. Yes, we are really excited about some of the greenfields that we've got open this year. As we've mentioned on the call, a couple of good markets or we've got coverage today but really looking to continue to expand in both Denver and Houston is really priority markets for us.

We've got I'd say, several more identified, a few of which I expect will get opened between now and the end of the year still and a really good pipeline ahead of us that we're evaluating. We've got over a dozen markets right now that we're assessing for continued attention and growth and expect you'll see continued growth from a greenfield perspective.

As we've talked about on previous calls, we typically are able to get those profitable within at least breakeven within the first year and profitable in years 2 and 3. And we've had really good success there as we've opened more this year. And the ones we've opened in prior years were continuing to perform as well.

So that will be a continued strategy that you see as we look to continue to expand our geographic presence, and that would be both in the U.S. and in Canada.

That's great. And then I guess just one more for me. You guys talked a little bit about some of the different state funding that's gone, I think, across Texas, New York and Arkansas. And I think the number in Texas is far larger around $20 billion. So I guess, could you guys talk a little bit about how large the Texas market is for you guys and kind of what your participation rate looks like in that state and kind of how impactful you think this new bill could be for you guys moving forward?

Yes. Texas is a very important market for us. As you can imagine, as you think about construction spend across the U.S. for us, Florida Texas, California. Those are really important markets and they tend to drive just in those 3 states on can really drive our business. So this additional investment into Texas, I think it will be really important to us. We've got good strong position in Texas and expect us to be able to capitalize on that.

In addition, Texas has had other advancements. One of the elements that we're excited about, which is very long-term oriented that they now provide for corrugated HDPE as a solution for a lot of storm drainage work, and Texas, which has been a heavy concrete market as well.

So as we work to advance a lot of those products into the products that we distribute that can be another good long-term growth driver. That's not -- those investments aren't things that happen overnight, but really set up a good foundation and you'll continue to see us invest in Texas, just like we announced the greenfield in Houston. I'd expect that you'll continue to see us make more investments in the state.

At this time, I'll now pass it back to Mark Witkowski for any further remarks.

Thank you all again for joining us today. Before we close, I want to leave you with a few key points. Over the last several years, Core & Main has executed exceptionally well through an unprecedented environment. We captured benefits from large price increases in 2021 and 2022, committed to holding it, and that is exactly what we've delivered. During that period, we also said we were over earning gross margin by roughly 100 to 150 basis points. We moved through that normalization exactly as we expected, and we're now back to delivering steady structural gross margin expansion.

Today, we're managing through stubborn inflation, higher cost and softer end markets. But we're not standing still. We've executed cost actions and we see a clear path to generate future growth and operating leverage. Our strategic investments and sales initiatives are creating real share gains and our diversified model positions us to generate resilient profitable growth.

We've navigated several unusual years with discipline, consistency and transparency and we're confident in our ability to deliver long-term value as the market returns to a more supportive backdrop. Thank you for your continued interest in Core & Main. Operator, that concludes our call.

Thank you all for joining today's call. You may now disconnect the lines.

Hello, and welcome to the Core & Main Q2 2025 Earnings Call. My name is Alex, and I'll be coordinating today's call. [Operator Instructions] I'll now hand it over to Glenn Floyd, Director of Investor Relations. Please go ahead.

Good morning, and thank you for joining us. I'm Glenn Floyd, Director of Investor Relations at Core & Main. We appreciate you taking the time to be with us today for our fiscal 2025 second quarter earnings call. Joining me this morning are Mark Witkowski, our Chief Executive Officer; and Robyn Bradbury, our Chief Financial Officer. On today's call, Mark will begin by sharing an overview of our business and recent performance. Robyn will follow with a review of our second quarter results and our outlook for the rest of fiscal 2025. We'll then open the line for Q&A, and Mark will wrap up with closing remarks.

As a reminder, our press release, presentation materials and the statements made during today's call may include forward-looking statements. These are subject to various risks and uncertainties that could cause actual results to differ materially from our expectations. For more information, please refer to the cautionary statements included in our earnings press release and in our filings with the SEC. We will also reference certain non-GAAP financial measures during today's discussion. We believe these metrics provide useful insight into the underlying performance of our business. Reconciliations to the most comparable GAAP measure are available in both our earnings press release and the appendix of today's investor presentation.

Thank you again for your interest in Core & Main. I'll now turn the call over to our Chief Executive Officer, Mark Witkowski.

Thanks, Glenn, and good morning, everyone. We appreciate you joining us today. If you're following along with our second quarter earnings presentation, I'll begin on Page 5 with a business update. I'm proud of our associates' dedication to supporting customers and delivering critical infrastructure projects. Our teams drove nearly 7% net sales growth in the quarter, including roughly 5% organic growth. Municipal demand remained healthy, supported by traditional repair and replacement activity, advanced metering infrastructure conversion projects and the construction of new water and wastewater treatment facilities. Our nonresidential end market was stable in the quarter. Highway and street projects remain strong, institutional construction has been steady, and we're seeing continued momentum from data centers. While data centers represent a small portion of our sales mix today, customer sentiment points to continued growth in this space, and we expect it to become a larger portion of our sales mix over time.

On the residential side, lot development for single-family housing, which accounts for roughly 20% of our sales, slowed during the quarter, especially in previously fast-growing Sunbelt markets. We believe higher interest rates, affordability concerns and lower consumer confidence are weighing on demand for new homes. And until these macro headwinds ease, we expect activity in this end market will continue to soften through the second half. As a result, we are factoring in a lower residential outlook into our full year expectations, which Robyn will speak to in more detail. Against this market backdrop, we drove significant sales growth and market share gains across key initiatives, including treatment plant and fusible high-density polyethylene projects, where our technical expertise and consistent execution continue to differentiate Core & Main in the industry.

We are also deepening relationships with large regional and national contractors, especially those pursuing critical infrastructure projects across the country. These customers increasingly value our ability to support them with consistent service, scale and product availability wherever their projects take them. Sales of meter products declined year-over-year, primarily due to project delays in the current year and a difficult comparison to last year's 48% growth rate. However, we have a growing backlog of metering projects we expect to release in the second half of the year, supporting our expectation for strong full year metering sales growth. Additionally, a healthy pipeline of bids and continued project awards gives us confidence in both the near- and long-term outlook for metering upgrade projects.

Gross margins performed well in the quarter at 26.8%, up 10 basis points sequentially from Q1 and up 40 basis points year-over-year. Our gross margins reflect strong execution of our private label and sourcing initiatives, while our local teams continue to capture market share. At the end of the day, our performance is largely driven by how well we support our customers, making sure they have the right products at the right time with the service they need to keep projects on schedule and on budget. At the same time, our operating costs were elevated this quarter. We've experienced unusually high employee benefit costs and inflation in other categories like facilities, fleet and other distribution-related expenses.

We have also carried higher costs from recent acquisitions, which have contributed to sales growth but have not yet reached their full synergy potential. Although we anticipated some of these pressures, certain costs were more pronounced than expected. To address these factors, we have implemented targeted cost-out actions to improve productivity and operating margins. We expect a portion of the savings to be realized in the second half of this year with a larger annualized benefit in 2026. We expect to achieve additional synergies tied to recent acquisitions.

Our integration approach is phased and growth-oriented, starting with people, sales and operations to position each business for success. Once that foundation is in place, we evaluate opportunities in terms of costs and resources and develop plans to drive SG&A synergies. Our approach to cost management will be measured and focused on realigning the business with the demand environment without jeopardizing future performance, growth opportunities or the ability to serve our customers. We remain confident in the long-term growth and profitability prospects of Core & Main, including our ability to drive SG&A improvements and generate substantial value for shareholders.

We continue to be balanced in how we allocate capital. During the quarter, we generated $34 million of operating cash flow and deployed approximately $24 million across organic growth initiatives, share repurchases and debt service. Year-to-date, we have repurchased $47 million of shares, reducing our share count by nearly 1 million. Our growth strategy is driven by organic growth and complementary acquisitions. After the quarter, we announced the acquisition of Canada Waterworks, a 3-branch distributor of pipe, valves, fittings and storm drainage products in Ontario, Canada. We expect the transaction to close later this month, further enhancing our position in the multibillion-dollar Canadian addressable market. With this acquisition, we now have 5 locations in Ontario, all established through value-enhancing M&A. This has created a platform for meaningful growth in Canada.

On the organic side, we're making prudent investments to enhance our capabilities and better serve customers. We recently opened new locations in Kansas City and Wisconsin, strengthening our presence in priority markets. We are also evaluating additional high-growth markets for future expansion. These investments are designed to generate long-term growth, strengthen our market share and support our goal of delivering above-market growth over the coming years. We have plans to open several more locations this year, and I look forward to sharing updates on these initiatives.

Before turning the call over to Robyn, I want to reiterate my confidence in Core & Main's growth and margin expansion opportunity. We are well positioned to benefit from future investments in aging U.S. water infrastructure. We have the right team in place to execute on the opportunities ahead, and we look forward to delivering even greater value to our customers, suppliers, communities and shareholders.

Thank you for your continued support and trust in our vision. With that, I'll turn the call over to Robyn to walk through our financial results and outlook for the remainder of the year. Go ahead, Robyn.

Thanks, Mark. I'll start on Page 7 of the presentation with some highlights from our second quarter results. As Mark mentioned, we grew net sales nearly 7% in the quarter to $2.1 billion. Organic sales were up roughly 5% with the balance of growth coming from acquisitions. Prices continue to be flat overall, and our teams worked diligently to sustain pricing in an evolving tariff and end market environment. In total, we estimate that our end markets grew in the low single digits range. We outperformed the market with significant sales growth and market share gains in our treatment plant and fusible high-density polyethylene initiatives.

Gross margin came in at 26.8%, up 10 basis points from the first quarter and up 40 basis points year-over-year. The sequential and year-over-year improvement were both largely driven by continued execution of our private label and sourcing initiatives and contribution from accretive acquisitions. SG&A expenses increased 13% this quarter to $302 million. Roughly half of the $34 million increase was related to incremental costs from acquisitions and timing of onetime and other nonrecurring costs. The remainder was made up of volume-related growth, inflation and distribution-related costs and investments to drive future growth and market share gains.

We implemented certain productivity and cost-out measures earlier this year, but with higher costs and inflation continuing to pressure our operating margins and our expectation of softer residential demand, we will be taking additional targeted cost reduction actions in areas that won't impact our ability to serve customers. Importantly, we will continue to make strategic investments to strengthen the business. We're seeing strong results from our sales initiatives, and we have opportunities to accelerate that with additional investment. We intend to keep expanding through greenfield locations to better serve customers and capture share while also investing in technology solutions that improve efficiency and support long-term margin expansion.

Interest expense was $31 million in the second quarter, down from $36 million in the prior year. The decrease was primarily driven by lower fixed and variable interest rates on our senior term loan credit facilities and lower average borrowings under our ABL credit facility. Our provision for income tax was $41 million compared to $42 million in the prior year. Our effective tax rate was 22.5% for the quarter versus 25% a year ago. The decrease in effective tax rate was primarily due to tax benefits associated with equity-based compensation.

Adjusted diluted earnings per share increased approximately 13% to $0.87 compared to $0.77 in the prior year. The increase reflects higher adjusted net income as well as the benefit of a lower share count following our share repurchase activity across fiscal years 2024 and 2025. We exclude intangible amortization because a significant portion of it relates to the formation of Core & Main following our leverage buyout in 2017. We believe adjusted diluted EPS better reflects the results of our operating strategy and the value creation we're delivering for shareholders. Adjusted EBITDA increased 4% to $266 million in the quarter, while adjusted EBITDA margin declined 40 basis points to 12.7%. The decline in adjusted EBITDA margin was driven by higher SG&A as a percentage of net sales, which we are taking actions to optimize.

Turning to the balance sheet and cash flow. We ended the quarter with net debt of $2.3 billion and net debt leverage of 2.4x within our stated goals. Total liquidity was $1.1 billion, consisting primarily of availability under our ABL credit facility. Net cash provided by operating activities was $34 million in the quarter, down from $48 million in the prior year. The decline was primarily due to higher investment in working capital, partially offset by higher net income, lower tax payments and timing of interest payments. During the second quarter, we returned $8 million to shareholders through share repurchases, bringing our total for the first half of fiscal 2025 to $47 million and reducing our share count by nearly 1 million shares. As of today, we have $277 million remaining under our share repurchase program.

Next, I'll cover our revised outlook for fiscal 2025 on Page 9. We are very pleased with our sales growth, gross margin expansion and capital allocation efforts through the first half of the year. However, higher operating costs and softer residential demand have resulted in operating margins coming in below our expectations. As a result, we are lowering our guidance to reflect current market conditions and higher operating expenses. We now expect net sales of $7.6 billion to $7.7 billion, adjusted EBITDA of $920 million to $940 million, and operating cash flow of $550 million to $610 million.

We expect end market volumes to be slightly down for the full year. Municipal end market volumes are expected to grow in the low single digits, nonresidential volumes are expected to be roughly flat and residential lot development is expected to decline in the low double digits. Residential volumes were soft in the quarter and have weakened further through August, consistent with our updated guidance. We still expect pricing to have a neutral impact on full year sales, and we remain on track to deliver 2 to 4 percentage points of above-market growth. We expect adjusted EBITDA margins in the second half of the year to be slightly lower than the first half, reflecting continued gross margin performance, offset by a softer residential market and a higher SG&A rate.

In summary, we continue to execute our growth initiatives, expand gross margins and make the strategic investments needed to position the business for long-term success. We have favorable long-term demand characteristics across each of our end markets, many levers to drive organic above-market performance, a healthy M&A pipeline, and numerous opportunities to improve operating margins. We are taking targeted actions to align the business with current demand trends and deploying capital to accelerate growth and enhance shareholder returns. We are confident in our ability to execute on the opportunities ahead, and we look forward to delivering even greater value to our customers, suppliers, communities and shareholders.

With that, we'll open it up for questions.

[Operator Instructions] Our first question for today comes from Brian Biros of Thompson Research Group.

On the guidance changes, I guess, the adjustment to the resi outlook from flat to down low double digits looks to account for maybe a little bit more than the adjustment to total sales overall. So it seems like maybe there's something at least positive partially offsetting that resi impact. Maybe that's slightly better municipal market, maybe it's just recent M&A being added in. Can you just touch a little bit more on the puts and takes to the revenue guidance there? Because it seems like there's more than just the resi impact to the top line.

Yes. Thanks, Brian, for the question. You're right. Resi is the kind of the main driver for the reduction in the sales guide. We were expecting that to be flat kind of earlier in the year. It has declined kind of during the quarter, continued to soften after the quarter, and we're expecting that to be in the low double digits range now. That's the majority of the decline there. And then we do have some other areas of bright spots on the top line that are offsetting some of that. So some of our sales initiatives continue to perform really well, like things like treatment plant. Some of our fusible high-density polyethylene product lines are performing well. The municipal market remains strong with ample funding, and we're seeing a lot of demand there, too. So those are kind of the puts and takes on the top line with the revised guide.

Understood. And then second question for me, I guess, just the water category overall is kind of getting a lot of attention now. It used to kind of be a green initiative angle. Now it's seemingly a crucial part of the AI infrastructure build-out and kind of just the general reindustrialization trend. You highlighted in some of your prepared remarks and I think in the press release, things about your technical expertise, your consistent execution, leading to share gains, focusing on the larger contractors. So I guess just bigger picture here kind of going forward, where do you see, I guess, the biggest opportunities for growth with the way the water market is evolving?

Yes. Thanks, Brian. Great question. And I would tell you, we're obviously very favorable on the overall water market. And we've really seen more and more demands for water as you've seen these data centers going up in certain areas that need energy and water to satisfy those types of projects. So we're seeing the demands with projects like that. I think the value of water has improved. You're seeing rates passed at the local level more and more so that the municipalities are very healthy right now. And that's giving them more opportunities to get projects designed and ultimately improve the aging infrastructure, which is really the key piece that's really behind the multiyear tailwinds that we have in that municipal market.

But then when you throw on top of that some of the demands now for water, which are even more with some of these projects that are going on, obviously sets us up really well. And that's a big part of why we continue to invest in this business, invest in resources, invest in facilities. Those tailwinds are there. We're capturing a lot of those as you're seeing in the municipal results. We're obviously facing some temporary headwinds here with the residential market being softer. We're on the front end of a lot of this with lot development. Our results obviously go into the July period. So I think we're facing some of this a little earlier than some are seeing it on the residential side. But that municipal strength and then that strength that we're seeing with some of these projects in the nonresidential space like data centers is definitely helping offset some of that weakness.

Our next question comes from Matthew Bouley of Barclays.

So just a question on the, I guess, the makeup of the guide. So at the midpoint, I guess, revenue cut by $50 million and EBITDA cut by $45 million. So I guess I hear you on the higher operating expenses, but then you're also taking these targeted cost actions as well. So is it more just -- it just simply takes a lot of time to get these cost actions into place. You mentioned more of a 2026 impact, I believe. Or is the kind of maybe changed mix of business with residential a lot weaker impacting the margin as well? I guess just what else would explain that kind of larger decremental EBITDA margin?

Yes. Thanks, Matt. Yes, we are taking cost out. We have already taken some costs out. We started taking some out in the first quarter. We continue to do so in the second quarter. There is some kind of stubborn inflation and other higher cost areas that are continuing to offset some of that. So we will continue to do additional cost-out actions. We will see some of that in the second half, but the larger majority of that will be seen into FY '26. Some of the cost-out actions that we made earlier in the year were in our fire protection product line that was experiencing some softness given some market pressures on nonresidential at that time and also the steel pricing pressures that we were seeing in the fire protection. That has since rebounded.

So we took some cost out earlier in the year. It was very targeted to certain areas that we knew wouldn't disrupt the business, and now we're seeing that recovery, and we're well positioned for that. So we'll continue to do additional cost out, targeted actions that won't impact our ability to service our customers or service growth. We'll continue to make investments in growth. And Mark and I have been around the business for a long time. So we kind of know where those cost actions can come out and where we need to make investments.

Okay. Got it. And then secondly, just on residential specifically, obviously, a fairly substantial change to the outlook over the past -- relative to 90 days ago. So I guess what I'm trying to get at is sort of, a, your visibility into that end market? And b, maybe how did residential look during both Q1 and Q2? You're talking about kind of low double digits. I'm wondering if the expectation is that it would weaken a lot further in the second half. And so yes, just any color on that kind of cadence of residential and then just more specifically, what you're hearing from customers in that group?

Yes. Thanks, Matt. On the residential side, as we kind of worked our way into 2025, really felt like that market was going to be flat overall as we got into the first quarter. And we actually saw some pretty, I'd say, decent residential performance in Q1. Obviously, wasn't great, but we at least saw some projects going earlier in the year and obviously had a really good first quarter. And some of that was just, I'd say, better performance there than we expected.

If you go back to Q1, we were well over our consensus and expectations on the top line. And really, what we saw as we got into Q2, really saw residential weaken really throughout the quarter. We definitely started to hear some of those signs at the end of the first quarter, but it was more of like scaling back some projects and frankly, just continue to weaken as we got throughout Q2 and definitely into August, as Robyn had mentioned. So that residential really kind of whipsawed from Q1 into Q2.

We do think low double digit is the right way to look at it from here through the end of 2025. Obviously, we're expecting some kind of rate cut here in September. I think that's starting to be reflected a little bit on the mortgage rate side, but we're definitely not seeing the investments in the infrastructure from the builders. That's kind of been a mixed bag. Some are investing in land, some aren't. Definitely, we're not seeing the level of lot development going into those at this point. So the results that we're seeing, I think, are kind of reflective of what obviously we're hearing from the customers, and the scaling down is definitely what we felt in Q2. So we'll work through that. Obviously, we think there's continued significant pent-up demand that that's just creating. At some point, that's going to release, and we want to be well positioned to capture that when it does.

Our next question comes from David Manthey of Baird.

You might have just answered this in relation to one of Matt's questions there. But what was the residential market in the first half in terms of growth rate? And then your down low double-digit outlook, what does that imply for the back half?

Yes. Thanks, Dave. I'd say for the first half of the year, it was kind of down low -- or down mid-single digit to high single digit. And in the second half, obviously, I think that's overall going to be low double digit, slightly worse just to get to the low double digit over the full year.

Got it. Okay. And then maybe back on the SG&A side. I think last quarter, you said that your organic revenues were up mid-single digits and organic same-store SG&A was up 4% year-over-year. Could you provide those organic figures for this quarter as well so we can compare that?

Yes, Dave, when you think about how M&A impacted us in the quarter, it contributed about 2 points of growth to the top line. And then if you think about our growth in SG&A for total company, it contributed about 3 points of that overall growth.

Okay. And then also last quarter, thinking about operating expenses, I believe you sort of implied you're expecting to see improving SG&A as a percentage of sales each quarter as we move through the year, which on the old forecast, I think, sort of implied lower dollars each quarter. But assuming no major M&A from here, do you think that the second quarter will be the high watermark for SG&A dollars this year as you implement these cost-out actions and normal seasonality impacts those numbers?

Yes, Dave, we do. We've got -- as we talked about M&A and the record year we had in M&A that we did in the prior year, we've got a lot of opportunities there on the synergies. Those are things that we're working through. So we expect to continue to work through those and get some of those synergies recognized in the back half of the year and into FY '26. There were some onetime items in the second quarter that we don't expect to continue. So that's contributing to a little bit higher SG&A kind of rate and dollars in the quarter. And so with those things combined, we do expect to start seeing some progress on SG&A. And we do have some seasonality in there. But when you look at the SG&A rate year-over-year each quarter, we do expect that to kind of improve sequentially as we go throughout the rest of this year.

Yes. Okay. And if I could sneak one more in here as we're talking about all the seasonality and 2025 being an unusual year in terms of lack of acquisitions versus all the deals you've done historically. When you think about normal seasonality ex acquisition, sort of the organic progression, how do you think about that? Do you think about it in terms of percentage of total full year sales per quarter? Do you think of sort of quarter-to-quarter growth rate? How do you think about the seasonality? And if you could just give us an idea of what we should expect this year because of the fact that you have very few or no acquisitions other than this Canada deal you just announced?

Yes, Dave, I'll give you some color around that. So I would think about the second and the third quarter are typically similar size-wise. And then we typically see about a 15% to 20% decline in the top line from the third quarter to the fourth quarter. We can see a little bit of uplift in the first quarter from the fourth quarter, but those are typically pretty well in line. So it is a pretty kind of standard bell curve of the second and third quarter being the highest with it being a 15% to 20% decline from there ex any M&A activity.

Our next question comes from Sam Reid of Wells Fargo.

I wanted to touch on your updated guide perhaps from a slightly different perspective. Just on the second half EBITDA margins. So it sounds like you're still expecting favorable year-over-year gross margin, if I heard correctly, Robyn. But can you talk about what that looks like sequentially on the gross margin line relative to Q2? So just basically the guide path for gross margin as we look into Q3 and Q4?

Yes. Yes, we're expecting it to be stable, which would imply up in the 20 basis points range for the second quarter for gross margins. But our gross margin initiatives are performing very well. Private label has been performing well. Sourcing has been performing very well. We expect to continue to make improvements on gross margins. But I would say, as we think about the back half of the year, we're thinking about it as stable to the second quarter. We've made a lot of progress in gross margins kind of already in the first half of the year and expect to see those trends continue and be stable in the second quarter -- or second half.

That helps. And then as a follow-up, so one, could you just give us a rough sense as to the size of private label today, perhaps how much you were able to grow that in the second quarter relative to the first quarter? And then just a follow-up on the SG&A optimization initiatives. Could you just offer up some perspective on sizing those just so we have a rough sense as to where you're going to exit the year into 2026?

Yes. On the private label piece, as Robyn mentioned, we made some really good progress there, continue to drive that through the business. Right now, it's about 4% of our revenue, but I'd say steadily growing and expect that to be even more as we exit 2025. So very pleased with the new products we've introduced. The pull-through to the branch network has been strong. And if we get a little help from the volume in the second half, we'll make even more progress on pulling some more private label through. And I'll let Robyn cover the SG&A question.

I think, Sam, your question was on the sourcing side, right? We've made a lot of progress there, too...

It was on the sizing of the SG&A initiatives.

Okay. Sorry about that. Yes, let me give you a little bit of color on that, on the cost-out actions. So acquisition synergies is a big part of that and a big area that we have begun taking cost out there, and we've got a lot of opportunity. We've talked about that. Taking quite a bit of time to get through as we integrate these businesses. We've got a lot of controllable spend reductions that we've been working on with things like travel and overtime. One thing that we've done a really good job on as a business is managing headcount and any of those controllable expenses. So the sizing of it is really inflation related. Some of our incentive comp increases are a little bit larger given the improvement on gross margin. And so those are some of the big areas that we're looking at. And as you look at the back half of the year, the SG&A rate is a little bit higher than the first half, just given some of these inflationary and trends that we're seeing there.

Our next question comes from Mike Dahl of RBC.

Sorry to keep harping on the SG&A. But in terms of the actual variance versus your expectations, you've noted some things were even more pronounced. Can you just be more specific on what came in worse than expected? And then back to the question of kind of segmenting out actions, when you think about all those different actions, do you have a good way of giving us kind of roughly how much is headcount related versus kind of fleet and infrastructure related in terms of the cost outs?

Yes. Thanks, Mike. Let me break down a little bit for you the kind of the contribution in the quarter. So if you think about the 13% increase in SG&A over the year, what we talked about was about half of that was M&A-related kind of onetime nonrecurring items. So if you think about that 13% growth, about 3 points of that was M&A, and that's an area, like I said, we've got synergy opportunities there. About 1 point of that growth was related to some onetime items, some changes that we're making to improve performance over time. Those are things like retention and severance and relocations. And then we had about 2 points of, I would call it, a surge in the quarter related to just some higher medical claims, insurance costs, things like that, that are a little bit unusual and had some timing impacts in the quarter.

So that's kind of the first half. The second half of the SG&A increase year-over-year was a lot of items related to increased volume, inflation and investments that we're making into the business. So I mentioned incentive compensation. That's up more than our sales, just given our gross margin enhancement and the nature of those compensation plans that's worth about 1 point. We've seen a lot of inflation on our facilities and fleet that's worth about 1 point. On the medical side and some of those insurance claims, we've seen a lot of inflation in that area. We've seen some higher cost claims that's worth about 2 points. And then we've got a little bit of a difference in the way that the equity-based compensation is showing up. We've just got a new run rate there with 3 years of vesting. So that's worth about 1 point.

And then like Mark and I said, we're going to continue to make investments in growth. So we feel good about the long-term dynamics of this business. We're continuing to make investments in greenfields, investments in growth initiatives, investments in technology, and that's worth about a couple of points as well. So that kind of gives you the breakdown for that 13% growth that we saw in the quarter versus what we consider M&A and onetime versus kind of more structural related to volume and inflation.

Some of those inflation items were a lot higher than we were expecting. And so that's what we need to work to offset. So we've got several million dollars of cost-out actions that have been executed in the first half of the year. I would say we've got a meaningful amount of actions that are in process that we're working through. And to date, we've already managed headcount very well. It's not up much on a year-over-year basis. It's kind of more in that flatter range, and we'll take a look at that. But we're looking at areas where we can maybe not backfill, where we can have some selective hiring, where we have underperforming areas where we can take some cost out there. But we feel like we've got a lot of levers to pull here on the SG&A side. We're going to get it under control and offset some of this inflation, but we're also going to continue to make some of those investments for growth because of the long-term market dynamics.

Okay. Got it. My second question, just on pricing. I think you said it was neutral. Can you just give us a better sense of kind of how the commodity side trended through the quarter into 3Q? And as you think about kind of neutral or better for the year, just elaborate a little more on what you're seeing on finished goods versus commodity right now?

Yes, Mike, I'll take that one. On the pricing side, it kind of played out exactly the way we thought it would, neutral for the quarter. We did see some increases come through related to some of the, call them, the non-pipe-related products, some of which are imported by our suppliers. There's a little bit of tariff probably increase there into some of those prices that some of the suppliers passed along to start the year, which ultimately offset some of the moderating of the larger diameter water PVC pipe that we have. We saw some moderation of that pricing through the first half of the year. That will be likely a little bit of a headwind into the second half, but these other product categories that have seen increases has effectively offset that and expect that to continue to be stable like we've talked about for a while.

Our next question comes from Collin Verron of Deutsche Bank.

First, I just wanted to touch on the meter sales. It was a bit surprising just given the magnitude. You called out some project delays. I guess how much of the decline do you think was due to project delays? And what are your expectations for meter sales through the rest of the year and sort of how you're thinking about long-term growth in that category still?

Yes, sure. Thanks for the question. I would tell you on the meter side, the primary driver of the somewhat small decline in the quarter was the substantial growth we saw last year. We were up 48% in a quarter on meter sales. So that just gives you the magnitude of the initiative that we're driving there, and that performance last year was really, really strong. We did have some meter delays in the quarter. But really, I think the way to think about that is really just created a nice backlog for us that we expect to ship out in the back half of the year.

That's helpful color. And you guys also talked about some greenfield opportunities here. I guess how should we think about the decision between greenfield and M&A and sort of the expenses associated with opening these branches and how quickly they ramp to sort of the company average metrics?

Yes, sure. When we think about greenfields, we think about those in conjunction with M&A. So as we look across the U.S. and Canada for priority markets, we're evaluating both of those opportunities. Is there an M&A opportunity? Is there a greenfield opportunity? Both are very attractive to us. We've been able to generate really strong returns, whether we do a greenfield or an acquisition.

Obviously, if you do an acquisition, you're going to pick up that revenue and profitability much quicker. Greenfields will take a little longer, but typically, we're breaking even within the first couple of years and expect to be at kind of the company average in 3 to 5. So there is a little bit of ramp-up in cost when you do greenfields. We're definitely accelerating our greenfield strategy with, I'd say, a renewed focus on driving our organic core growth in the business and I expect that you'll continue to see greenfields open up throughout the country in these priority markets as we review them and continue to have a nice healthy pipeline of M&A as well that we're evaluating. So we like having both of those levers as we look at those priority markets.

Our next question comes from Patrick Baumann of JPMorgan.

A lot has been covered already. Just wanted to go back to the resi side quickly. So the move from flat to down low double just seems like a bigger revision than what we've seen from the starts data. So from that perspective, just trying to understand, was there like an overbuild of lots that are now being reduced at a greater magnitude than what we're seeing in starts? Maybe just address where lot development stands today to provide some context versus history and for the revision.

Yes, sure. If you go back again to the early part of the year, we felt it was going to be flat. That did kind of worsen throughout the first half of the year. I would say we probably saw some buildup in developed lots in the earlier part of the year. Obviously, single-family starts has not really met that early expectation, even though it was only kind of guided to at flat. So I think that's part of it. Obviously, we've seen a phasing down of a lot of these projects. And then we did see in parts of the country where we performed really well, frankly, in parts of Florida and the Southeast, which were pretty hot markets for a while, which was helping kind of keep resi kind of in at least that flat territory really fall off as we got late into Q2 and here to start Q3.

So we've definitely seen the activity weaken on the lot side. And we'll see ultimately when those developers decide to reinvest and get that going. I wouldn't say there's a significant amount of developed lots, but there's definitely been an increase there just given the slowdown that we've seen in single-family. But again, believe that is temporary. We'll work through that this period of time. And then we're going to be really well positioned to capture that growth as it comes back, as these rates ease, you're seeing lumber prices drop. Some of these things may ultimately lend themselves to better affordability, and we'll see that pent-up demand release.

Okay. And then on the acquisition you did, just to clean up here. I assume that's not in the guidance since it hasn't closed. Any perspective on size of that deal? And then any update on how the pipeline for M&A looks these days?

Yes, sure, Pat. The acquisition we did in Canada was a 3-branch acquisition with 2 locations around Toronto and another one in Ottawa. And I would say those branches are typical kind of branch size for us and kind of the $15 million range and really excited about that one. It really builds a great platform for us to grow from in Canada. That's now the second acquisition we've completed there. I think it gives us a really good opportunity to not only build on the synergies there that we think we can bring, but start to put in some greenfields in Canada as well. So expect some continued growth there. So one that we're really excited about. We've got a great management team with that one and it is really going to allow us to capture a lot of that addressable market in Canada that just hasn't been available for us before.

And then the pipeline continues to be healthy. We've got a series of deals that we're looking at right now, I'd say, in various stages and varying sizes. We've got a lot of different opportunities that we're evaluating right now and really excited about it. Obviously, we absorbed a lot of M&A from the 2024 year. You saw us get this one announced in Canada and excited to continue to drive that part of our growth strategy as we go forward.

Our next question comes from Anthony Pettinari of Citi.

This is Asher Sohnen on for Anthony. I just wanted to ask about the current kind of competitive environment, if that's changed at all from the prior quarter. Maybe there's industry response to kind of resi demand slowing. Just any thoughts on competitive environment?

Yes. Thanks for the question. I would tell you there's been no real meaningful change in the competitive environment. It's been pretty typical for several quarters. I expect it to continue along those lines. We've had -- I'd say, in some very limited markets across the U.S., we've had some regional competitors kind of going after each other pretty good, which frankly, plays right into our hands. I think our customers like the stability that Core & Main brings both in service and value. And overall, it's been, I'd say, a pretty typical kind of competitive environment for several quarters now.

Great. And then can you just remind us which of your product groups are kind of most exposed to the resi end markets? And if that softness in resi is making any kind of -- or that you anticipate kind of in the second half as well, kind of driving any shift in the mix or strategy around inventory positioning?

No, I wouldn't say there's a major difference on the resi side outside of -- if you think about our fire protection product category that we have is much more focused on kind of non-resi for us, which includes that multifamily piece, and most of that is kind of steel pipe on that piece of it. But the rest of the end markets for resi, non-resi and municipal really have a kind of a standard mix for the most part of all of our product categories. It's obviously very local. It depends on what those local specifications are.

Really, for us, it's really an assessment of where we're aligning some of those resources. So if resi gets softer in an area, we may move some of that head count and resources into other areas that are driving growth. So when we think about resource allocation, that's really more of how we think about the moves that we've got to make. And as part of the kind of the targeted actions that Robyn was referring to that we're making and putting in place, so we can continue to invest in the business where we're growing. Where there's market headwinds or underperformance, we're shifting some of those resources and ultimately managing the cost that way to make sure we continue to capture the growth that's there.

Our next question comes from Keith Hughes of Truist Securities.

This is Julian on for Keith. I know you already touched on it a little bit, but how should we think about the pricing in third quarter versus fourth quarter?

For pricing, we're expecting it to be flattish for the remainder of the year, and I would think about that for both the third quarter and the fourth quarter. The pricing has been very stable over the last few quarters now, and we're expecting that to continue. So I would say no notable changes expected there.

Our next question comes from Nigel Coe of Wolfe Research.

Yes, look, we've touched on a lot of the stuff here. But I just want to circle back to SG&A, if I may. Just so I understand the guide, if gross margins are going to be fairly flat to second quarter, it seems like SG&A dollars stepped down versus the $302 million in 2Q. Just want to make sure that's correct. And I'm just wondering what the impact of the 53rd week has on SG&A specifically.

Yes. Thanks, Nigel. You're right. The SG&A dollars are going to step down quite a bit in the second half compared to the first half, and that's related to cost-out actions and also just the lower volumes that we're expecting, which then creates a little bit of pressure on the rate in the second half because of the lower volumes. But you're thinking about that the right way. And then the way that we're thinking about the 53rd week, that's an extra -- or 1 less week of sales kind of we categorize it in the fourth quarter in that January time frame. Obviously, there's variable SG&A related to that, that will come out. But when you think about it from an EBITDA perspective, it should be in that kind of $8 million to $10 million range.

Okay. That's helpful. And then obviously, I think we understand the drivers of the residential weakness and maybe the flat outlook was a tad optimistic in hindsight. Nonres, I think, is the big debate, though, and it seems it could go in 2 directions here. We've got a weakening economy, but then we've got a lot of these mega projects, data centers, et cetera. So I'm just curious, Mark, Robyn, how you see, based on, I don't know, feedback from the field, customers, what sort of direction do you think this breaks into as we go into 2026? Do you think nonres as a category gets stronger? Or is there some risk there as you go into '26?

Yes. Thanks, Nigel. I think that's definitely how we're seeing the nonresidential area right now. There's a lot of puts and takes in that market, both by project types and, frankly, by geography as well. So we're seeing a lot of variation there. I do think there's a lot of good things there to be excited about, in particular, on the highway work, street work, that we get a lot of storm drainage product put in place on those types of projects. That's been really strong. The data center activity seems like that's got plenty of legs to it yet, and we pick up, I'd say, more than our fair share of that work, which has really helped cushion some of the softer commercial and retail kind of development in that area, which I wouldn't expect that we're going to see any near-term return of that really until we see some of the pent-up residential start to release.

So I'd expect probably more of the same out of non-resi kind of for us. Just given our exposure there and how those work, it's going to -- kind of just the broad project types that we service, it's going to kind of flatten out, which is what we've experienced in '25. So I wouldn't see a lot of upside or downside as we think about that one going forward, at least in the very near term.

At this time, I'll now hand back to Mark Witkowski for any further remarks.

Thank you all again for joining us today. I want to close out by recognizing our associates for their dedication and commitment to delivering exceptional service to our customers. This quarter, we delivered solid sales growth driven by resilient end market demand, stable pricing and continued market share gains. We're seeing strong results from our growth initiatives, and we believe there's an opportunity to accelerate that momentum with additional investment. We recently expanded our presence with new locations in priority markets and announced an acquisition that broadens our footprint in Canada. These actions reflect our disciplined approach to investing in the business to drive long-term growth.

We're well positioned to capitalize on long-term secular drivers of water infrastructure investment, including aging systems, population growth and increasing regulatory requirements. With the right team in place, a growing platform and a proven strategy, we are confident in our ability to execute on the opportunities ahead and deliver even greater value to our customers, suppliers, communities and shareholders.

Thank you for your continued interest in Core & Main. Operator, that concludes our call.

Hello, and welcome to the Core & Main Q1 2025 Earnings Call. My name is Alex, and I'll be coordinating the call today. [Operator Instructions] I'll now hand it over to Glenn Floyd, Director for Investor Relations. Please go ahead.

Thank you. Good morning, everyone. This is Glenn Floyd, Director of Investor Relations for Core & Main. We are excited to have you join us this morning for our fiscal 2025 first quarter earnings call.

I am joined today by Mark Witkowski, our Chief Executive Officer; and Robyn Bradbury, our Chief Financial Officer.

Mark will begin today's call with a brief business update. Robyn will then discuss our financial results and fiscal 2025 outlook, followed by a Q&A session. We will conclude the call with Mark's closing remarks.

Our press release, presentation and the statements made during this call may include forward-looking statements. These statements are subject to risks and uncertainties that could cause actual results to differ materially 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 Core & Main. I will now turn the call over to Chief Executive Officer, Mark Witkowski.

Thanks, Glenn. Good morning, everyone. Thank you for joining us today. We are proud to deliver another quarter of strong performance at Core & Main, highlighted by first quarter net sales of $1.9 billion and adjusted EBITDA of $224 million, both all-time highs for the first quarter. Achieving these results in a dynamic macroeconomic environment speaks to the resilience of our end markets, the strength of our business model, and most importantly, the commitment of our associates to advance reliable infrastructure with local service nationwide. Our strong local relationships, product and service breadth and product expertise continues to differentiate us and enables long-term value for our customers and stakeholders.

We are seeing steady growth in municipal construction activity and funding from the Infrastructure Investment and Jobs Act continues to generate new opportunities for growth in our end markets. The pipeline of shovel-ready projects utilizing the funding, particularly water and wastewater treatment plants, transmission line replacements and storm water management initiatives is expanding, giving us confidence in our near- and long-term outlook for municipal construction.

Residential lot development was resilient through the first quarter, and we were pleased with the activity we saw at the start of the year. We are beginning to see signs of softening in response to general economic conditions and affordability pressures. Specifically, we are hearing from some of our customers that developers are reducing footprints in an effort to manage their capital investments.

Despite the short-term uncertainty surrounding residential development, the secular fundamentals underpinning the U.S. housing market are strong and we continue to expect builders to keep building homes and a release of pent-up demand as interest rates moderate and affordability improves.

Our diversified mix within the nonresidential end market provided stability despite shifting dynamics across project types. We continue to see strong sales volumes into data center construction and positive trends for institutional buildings, multifamily housing and road and bridge projects. In contrast, activity remained softer for commercial buildings, manufacturing and warehousing.

That said, we're encouraged by the level of bidding activity across our nonresidential portfolio, and we believe our balanced exposure provides us an opportunity to outperform the broader market over time.

Market volume growth in the first quarter was supplemented by robust share gains from the execution of our product, customer and geographic expansion initiatives to deliver mid-single-digit organic sales growth. We drove 10% growth in meters and growth well into the double digits in our treatment plant in fusible high-density polyethylene offerings. This level of execution illustrates our ability to make the right investments in talent, the power of our scale and our role in accelerating the adoption of new products in the industry.

We saw sequential improvement in gross margins in the first quarter driven by disciplined pricing and solid execution in our private label and sourcing efforts. The consistency of our gross margin reflects the value we deliver to our customers and it reinforces the strength of our differentiated value proposition.

While tariffs and trade restrictions between the U.S. and other countries are at the top of everyone's mind, the direct impact on Core & Main supply chain to date has been minimal as the majority of our products are domestically made. We are actively working with our suppliers to mitigate any supply chain disruption and we have taken pricing actions to the extent necessary.

The direct and indirect impacts of tariffs on the broader economy and on private construction specifically remain uncertain, and we are monitoring the environment closely.

We continue to execute on our capital priorities, deploying approximately $58 million during the first quarter between organic capital investments, share repurchases and debt service. Investing in the growth of the business continues to be our highest priority for capital allocation. Our acquisition pipeline is healthy, and we continue to evaluate several opportunities of various sizes.

We are also committed to returning capital to shareholders. And in the first quarter, we bought back nearly 837,000 shares of our stock at an attractive valuation.

Turning to Page 6 of the presentation, I'll wrap up my prepared remarks with a discussion on the levers we have to drive growth and scale our capabilities over the long term. Each of our 370 branches strive to sell more products to more customers and generate more profit every day. We equip the field with data on their markets, their share of wallet and their profitability and they bring us new opportunities for organic growth.

Our operating model generates organic share gains by focusing on local service, combined with a pay-for-performance culture that aligns with our business strategy.

We have an ongoing process to collect and evaluate these ideas, culminating in our annual strategic plan. The strategic plan gives us clarity on which of the many great opportunities to pursue whether they are organic, inorganic or often a combination of both. We work to bring these opportunities to life as initiatives where we resource them for scale and we measure them with a focus on profitability.

Our product initiatives, including meters, fusible HDPE, treatment plant, storm drainage and geosynthetics have allowed us to grow faster than the market historically and we expect they will continue to help drive market share gains in the future. The 10-year growth of these initiatives has been impressive, averaging 13% annually, and they're delivering almost $2.5 billion in combined annual net sales today.

To compete effectively, having a strong physical presence and strong local relationships in every market we serve is critical. No one is better equipped to identify service gaps and local growth opportunities than our local teams. With our local expertise and our market intelligence, we have significantly expanded our footprint since becoming an independent company in 2017 through a series of greenfields and bolt-on acquisitions. Greenfields are a powerful way to expand geographically and we are well positioned to do so given our talent pool, our scale and the lessons learned from our past successes. They require minimal CapEx to open and operate, and each of the 20 greenfields we've opened since 2017 has generated positive operating income within the first 2 years. Together, they are now delivering nearly $300 million of annual net sales.

And of course, none of this is possible without our people, which is why we continue to invest heavily in their growth and development. Our award-winning training program commercializes our go-to-market strategy, deepens industry expertise and ensures our 600-plus field sales reps who averaged 14 years of experience are equipped to drive profitable growth. Our associates learn from the best of the best on the job in our national training center through in-house subject matter experts and with virtual and online learning academies. Our learning team offers a wide range of sales, operations, product expertise, leadership and safety training programs and courses. We also provide customized training and early career rotational programs for college graduates to develop as future leaders. We partner with our suppliers to enhance our knowledge base as new products and best practices are continually introduced in our industry.

Our comprehensive approach and dedication to developing industry leaders earned Core & Main the #23 spot on Training magazine's Global APEX Awards list for excellence in employee training and development.

Because strong local relationships are key to success in new markets, bolt-on acquisitions is often the fastest approach, and you can see that in our results. Since 2017, we've completed over 40 acquisitions, adding approximately 140 branches and $1.8 billion of annual net sales. And we aren't done, with only 19% share of a highly fragmented $39 billion addressable market, our long-term opportunities to grow and gain market share is significant.

We've proven we can add substantial sales and profitability to our business through these initiatives. Then we add sustainable margin expansion to the mix through private label, sourcing optimization, pricing analytics and digitization, and that is an exciting formula for profitable growth.

Thank you all for your ongoing support and trust in our long-term vision. I look forward to what Core & Main will accomplish in the years ahead.

And I'll now turn it over to Robyn to provide our financial update.

Thank you, Mark. I want to start by thanking our teams for their hard work in delivering another record quarter.

I'll begin on Page 8 with some highlights from our first quarter results. We grew net sales 10% to a first quarter record of $1.9 billion. Organic sales were up mid-single digits and acquisitions contributed the balance of growth in the quarter. Pricing improved sequentially from the prior quarter, resulting in a neutral impact to sales growth compared to the prior year. Our end markets were slightly positive in total, and we believe we achieved considerable share gains from the execution of our product, customer and geographic expansion initiatives.

As mentioned on our last call, we estimate that approximately 85% of our sales are products that are domestically manufactured and distributed. For the balance of products that are imported by our suppliers or have imported components, there is usually a domestic alternative. While tariffs did not significantly impact our first quarter results, we are starting to see some tariff-related cost increases from our suppliers, and we expect to pass through these costs as we have done historically.

Gross margins in the first quarter finished at 26.7% compared to 26.6% last quarter and 26.9% in the prior year. The sequential improvement in gross margin was driven by pricing discipline and continued execution of our private label and sourcing initiatives while achieving share gains. The year-over-year decline was expected and is due to a higher average cost of inventory this year compared to last year, partially offset by accretive acquisitions and the success of our initiatives.

Selling, general and administrative expenses increased 14% in the first quarter to $293 million. The increase in SG&A is primarily due to the impact of acquisitions and inflation. Excluding the effect of acquisitions and equity-based compensation, SG&A expenses were up approximately 4% reflecting underlying gains in productivity.

Interest expense was $30 million compared with $34 million in the prior year. The decrease was primarily due to lower average borrowings under our ABL credit facility and a decrease in rates on our variable rate debt.

Provision for income taxes in the first quarter was $36 million compared with $33 million in the prior year, and our effective tax rates were 25.5% and 24.6%, respectively. Our effective tax rate this year reflects a more normalized ongoing rate and the increase over the prior year was due to exchanges of partnership interest that increased the allocation of net income to Core & Main, Inc.

Diluted earnings per share increased approximately 6% to $0.52. The increase in diluted EPS was due to an increase in net income and lower share count following the share repurchase transactions we completed throughout fiscal years 2024 and 2025.

First quarter adjusted EBITDA increased 3% to $224 million. Adjusted EBITDA margins declined 80 basis points to 11.7%, which was in line with our expectations.

Moving to our balance sheet and cash flow. We ended the quarter with net debt of nearly $2.3 billion and net leverage of 2.4x. Total liquidity was $1.1 billion, consisting primarily of availability under our ABL credit facility.

We generated $77 million of operating cash flow and we are pleased with this result in what has historically been a lower cash generation quarter for us. We continued to allocate our cash flow to priorities that we believe will result in growth or returns for shareholders.

We deployed $39 million in the first quarter to repurchase 837,000 shares at an average price of $46.64 per share, finishing the quarter with $285 million remaining under our authorization.

Investing in growth remains our top capital allocation priority, and our M&A pipeline is active. We are actively engaging with dozens of potential targets and we are being prudent in our evaluation to ensure they are the right cultural and strategic fit.

Turning to our outlook. We are reaffirming our full year guidance for net sales of $7.6 billion to $7.8 billion and adjusted EBITDA of $950 million to $1 billion. This reflects our continued expectation for adjusted EBITDA margins in the range of 12.5% to 12.8%.

We have good visibility into demand through the next quarter and expect to finish the first half strong supported by healthy project activity and backlogs. That said, uncertainty associated with tariffs, inflation and interest rates could impact customer sentiment and demand in the back half of the year.

At a high level, we continue to expect our end markets to be roughly flat for the full year, stable in the near term, but with less clarity as we move into the second half. We offer a strong value proposition to the industry, and we are on track to achieve the 2 to 4 points of above market volume growth we communicated last quarter by expanding our presence in under-penetrated geographies, driving product line expansion and acquiring and developing new sales talent.

Pricing improved sequentially, and we believe that the impact to sales growth for the full year will be neutral or better.

We expect to improve gross margins for the full year through the execution of our private label, sourcing optimization and pricing initiatives and our first quarter results support this trend.

While SG&A growth has been outpacing sales growth in recent quarters due to the impact of acquisitions, we have been pleased to see organic productivity gains and have commenced cost-out activities and expect them to drive improvements through the end of the year.

These productivity improvements, combined with our expectation for gross margin expansion, reinforce our confidence in achieving adjusted EBITDA margins in the 12.5% to 12.8% range for the year.

In closing, I want to reiterate that our sector has strong fundamentals and we have a proven strategy to continue strengthening Core & Main's leadership position. The long-term terms underlying our end markets are favorable, and our products and services play a critical role in advancing reliable infrastructure. We expect to outperform the market even as the broader economic environment evolves. Our business is well positioned to capitalize on opportunities for growth, and we remain committed to building on our track record of delivering value to shareholders.

With that, let's open it up for questions.

[Operator Instructions] Our first question for today comes from Matthew Bouley of Barclays.

Actually, I wanted to start on the SG&A side. So Robyn, some helpful color there around how do you think about productivity there for the year. I think you said it was up 4% ex acquisitions and equity comp. So I just wanted to kind of drill in a little bit Q2, second half. Is the implication that you would start to see leverage on the SG&A rate as soon as Q2 here? And also curious if there was anything additional unusual that you might call out in that SG&A expense this quarter.

Thanks for the question. You're right. When we look at the quarter from an organic standpoint, excluding some onetime items or add-backs, we were productive for the quarter. So we gained some productivity there during the quarter. Our overall rate was improved sequentially from the fourth quarter.

So in total, we're making some progress there on some of our SG&A initiatives. And as we get into the second quarter, expecting to see more organic improvement in rate from a year-over-year basis. And as we get into the total company, we'll anniversary some of those acquisitions.

We have been working on some of those M&A synergies. Those are on track, we're really pleased with the execution. But as we've noted before, it can take about 12 to 18 months to get some of those SG&A synergies on the M&A side. So as we go throughout the year, we're looking to see improved SG&A rate as we kind of go through each quarter on a year-over-year basis.

We've made some investments in growth. We've seen some inflation, we're working on offsetting some of those. But feel good with where we're at. Feel like we're making some good progress here and happy to see the gains and leverage on the organic side.

Okay. Got it. And then, yes, just secondly, thinking about the top line guide for the year. Obviously, as you pointed out in Q1, it seems like you had some fairly substantial share gains. I think I heard you say that your inflation outlook is maybe turning to a little bit more positive than it was.

So just kind of given the starting point, given where we are here in the middle of Q2, just kind of wanted to get a sense on the level of conservatism you're building into the back half especially given the comments you made around some uncertainty out there. So just kind of help us sort of put together the first half and second half from an end market and volume perspective.

Sure. Yes, happy to. So if we look at the market for the full year, we're expecting the market to be roughly flat, stronger in the first half of the year and then down a little bit in the back half of the year from where we are today. And that just reflects a level of uncertainty given tariffs, higher interest rates and affordability concerns and things like that.

Feel good -- really good about our bidding and backlog activity and what we're seeing. We feel like it's going to be a good second quarter. And then we'll see what happens in the back half with the macroeconomic environment.

From a pricing standpoint, pricing has improved sequentially from the fourth quarter. We were down slightly in the fourth quarter. In the first quarter, we were roughly flat for pricing and we're expecting pricing to be flat for the year at a minimum. So seeing in the quarter, we saw some ins and outs on pricing in some product categories, but we're starting to anniversary some of the declines in the prior year and expect pricing to be roughly flat at worst for FY '25 overall.

Our next question comes from David Manthey of Baird.

Just to follow on that pricing question. Could you just discuss the situation with commodities versus finished goods? And I don't know if you said what it was in the quarter. Was pricing net 0, a little negative and you expect that to improve through the remainder of the year? And has there been any change in your thinking over the past 90 days as it relates to pricing?

Yes. So we have seen pricing kind of improve sequentially from a year-over-year basis. Like I said, in the fourth quarter, we were slightly down. In the first quarter here, we were basically flattish from a year-over-year perspective.

From different product levels, in the quarter, the steel has been improving. We did see that kind of anniversary and hit flat as we got to the end of the quarter. So that was encouraging. And then PVC has been pretty stable over the last few months here.

So have a good level of confidence for pricing to be flat as we go throughout the year based on some of those scenarios that we're seeing. Like I said, we've seen some down year-over-year for the quarter, but some of those are starting to normalize. And we also have seen some inflation on other product categories and expect that to continue throughout the year. So flat to slightly up for the year is kind of the latest thinking there, Dave.

Got it. And then as it relates to your comments on the first half versus second half, I think the extra week was in the fourth quarter last year and you have -- am I correct in saying that you have 1 less week year-to-year in the fourth quarter this year? But even weeks adjusted, looking at sort of organic growth, it looks like the comps are maybe just a little bit tougher in the back half. So -- but you're talking about the market being uncertain and that's what you're signaling, right? Or should we read a little bit into the fact that maybe there's some unusual movement in your own financials relative to those year-to-year comps?

Yes. Yes, great question. So you're right. We've got the 53rd week in the fourth quarter of this year or the lack thereof, I guess. That will be about a 2-point headwind for the year, given we'll have 1 less week, much higher impact on that quarter. So if you think about seasonality for this year, it's possible that the fourth quarter could be down on a year-over-year basis from total sales just given that we have 1 less week in the quarter.

The second quarter is shaping up good for us. We did have that wet weather in the prior year. So expecting to see some good performance in the second quarter.

And then we had a little bit of recoup of that wet weather in the third quarter. So that will be just a little bit tougher comp if you're thinking about seasonality and how to model that out.

Our next question comes from Nigel Coe of Wolfe Research.

Just wanted to maybe just go back to your comments, Robyn, about the SG&A, the equity comp portion. Just -- maybe just touch on whether that was related to the CEO/CFO transition or if there's anything else driving that?

And then just the kind of the follow-on to that question is the flat to 30 bps of EBITDA margin expansion, are we still expecting that to be primarily gross margin driven with SG&A flat for the year?

Yes. Nigel, I'll touch on the stock equity comp first. Not really a big impact there from anything executive comp related. We did start to accrue that a little bit, but that really wasn't the impact. More of the impact on that was that we've now got 3 years of kind of post-IPO equity vested there. So what you're seeing now is a little bit more of a more normalized run rate going forward on the stock comp piece.

And then the full year framework -- yes, sorry, Mark.

Yes, I'd tell you on the EBITDA expansion and our expectations to continue to grow that. Obviously, we've had a lot of really good execution from a gross margin expansion standpoint, both with private label, a lot of the sourcing optimization we've been doing and the pricing optimization work. So continue to believe that's going to be a good lever and multiple levers there for expansion.

We did expect going into this year that SG&A with some of the carryover from the acquisitions that we did that had much higher gross margin percentages just given some of the product mixes there, also carried some higher SG&A with them that we've continued to optimize.

So I do expect, as Robyn mentioned earlier, we'll get some of that and I would say starting very soon here in the second quarter and into the rest of the year, which will be another good lever for us for EBITDA expansion, but I would still wait more of it for the full year on the gross margin side.

That's great. And then just on the -- obviously, really good working capital performance in what's normally a very weak 1Q. Inventory did build, I think, mid-teens year-over-year, even Q-over-Q was quite a step-up. So I'm wondering, was that intentional to kind of get ahead of some of the supplier price increases? Any thoughts there?

Yes, Nigel. The inventory build is really twofold. I think, one, it represented the confidence in the volume that we saw here in the first half of the year going into the second quarter. And then, yes, just given some of the uncertainty around tariffs, we definitely took an opportunity to bring in some extra inventory to make sure, number one, that we had all that inventory available for our customers and then, obviously, to mitigate against some potential increases that we're seeing just come into the market. So really twofold, I think, from an inventory build standpoint.

Our next question comes from Collin Verron of Deutsche Bank.

I just wanted to talk about the residential construction market a little bit more. You called out the resiliency in the most recent quarter, but things are slowing down, it looks like. Can you put a little more color around that, what you think the slowdown looks like from a magnitude perspective as we move through the rest of the year and when that starts to hit your sales?

Yes, sure. Thanks for the question. From a residential perspective, recognize we do a lot of the lot development work there. And I'd say going into 2025, we weren't really expecting it to be a robust environment in 2025, but we definitely were pleased with the activity that we saw in the quarter. I'd say it kind of came in more neutral to start the year, definitely some positivity in certain parts of the country that we're seeing some really good activity.

As we kind of exited the first quarter and into the second quarter, we started to get a little bit more feedback from the field and certainly our customers that are doing a lot of that lot development work that we're starting to see some of the bidding, some of the jobs that are being awarded just scale down in size. And that led us to believe we could start seeing a little bit of a headwind with residential.

And that was part of our rationale as we thought about the guide for the rest of the year, just taking that from kind of a neutral but potentially down slightly as we work through 2025, just given all the information we're seeing in the field, plus some of the other uncertainty in the macro environment that I think has been well publicized in the media.

So those are some of the factors that I don't view it as really a significant driver for us given it's only about 20% of the business, but something that we're really watching right now.

Great. That's really helpful color. And then just on the meter side, you guys called out 10% growth. Can you just talk about the level of growth you're expecting for that product category going forward? And how you're thinking about the volume-versus-mix equation there with the smart meter adoption by the industry?

Yes. Our smart meter performance continues to be really strong. I would tell you the 10% growth in the quarter is also on top of a prior year quarter where we grew at 30%. So the 2-year stack there has been really impressive. We continue to win large significant meter contracts with the suppliers that we're partnered with from a meter standpoint. I'd say that is mostly volume gains as you think about the nature of meter contracts are generally a little longer term in nature. So really good just solid volume growth there.

I do expect there'll probably be some price increases into that market based on what we're seeing with some of the tariff impacts. But overall, we just continue to see a lot of great opportunity there.

We've invested in a lot of technical resources there to continue to drive the adoption in some of the larger metropolitan areas that are, I would say, a little further behind just with their general adoption of smart meter technology. So very confident with how we're positioned there and expect we'll continue to take more share as we move forward.

Our next question comes from Brian Biros of Thompson Research Group.

On the product breakout, I guess, this quarter has, I think, the best growth in storm drainage, it was 17% compared to the total company at about 10%. And that's kind of played out over the past few quarters here where storm drainage outperformed company total.

I guess can you just talk about what's driving that outperformance there for storm drainage specifically? Is that acquisition that's growing? Is that company initiatives? Is that certain project types that are seeing better growth in the market? Any color there would be helpful.

Yes. Thanks, Brian. For storm drainage, you're right. We've seen really good growth there. A portion of that has been M&A. A really good driver though of organic storm drainage growth for us has been specifically in the road and bridge area. We sell a lot of storm drainage product into that. Some of that has been kind of lifted by the infrastructure bill funding there. There's a good amount out there spreading around related to that road and bridge and street work. So that's been a catalyst. We've been well positioned from the storm drainage standpoint.

One other catalyst would be just the kind of shift in product type. There are some areas that are now opening up and allowing more of the storm drainage product that we sell. And so there's more going through distribution on the storm drainage side versus historically some of that has been some other products like concrete that hasn't typically gone as much through distribution.

So a lot of good dynamics there and expect that to continue to be a good growth driver for us as we move forward.

And then maybe thinking of much longer picture here, but can we maybe just talk about the 2028 targets that were set out in the prior Investor Day. And I guess I'm thinking mainly the margin target of 15% EBITDA margins. I think now it looks like you maybe need like 70 basis points of margin expansion per year to hit that number versus I think it was kind of 40 to 50 per year at the time of the Investor Day and kind of the long-term annual value creation targets. So just trying to think, are there new levers or stronger levers to pull today to continue to progress to that 15% margin?

Yes, sure. Thanks for the question. As you think about the opportunity for us to expand EBITDA margin, the levers that we laid out during Investor Day, I'd say, continue. And I'd say we continue to execute on those. Obviously, a lot of progress made from a gross margin standpoint. And given some of the M&A that we've completed really has provided, I'd say, even more opportunities for us to drive some more synergies and scale.

I would say when we issued those targets during Investor Day, we also did expect, and I think we're very clear, that there were -- there was some margin normalization that we expected to have happened early in the cycle there. So it's not a surprise at all for us to know that we've got annual goals that are higher than that 30 to 50 that we laid out there, and I'm very confident, given the levers that we've laid out and we've continued to execute against, that we can achieve those goals.

Our next question comes from Mike Dahl of RBC Capital Markets.

A follow-up on price and gross margin. I guess if we're sitting here today and it sounds like commodities are basically back to roughly neutral and you talked about some of the non-commodity price increases anecdotally, can you just help ballpark kind of breadth and magnitude of the price increases that you're seeing your vendors put into the market and kind of timing of those? Because it seems like if commodities are flat and you're seeing some cost increases that really we should be in more solidly inflationary territory for yourselves as we go through the year. So that's the first part.

And then maybe just tie it to the sequential cadence in gross margin since you have the inventory position, but then there's moving pieces around some of these dynamics in terms of implementation and timing of price. Any dialing in, you can help us with on sequential gross margin would help.

Yes, sure, Mike. I'd just say, generally, as we think about pricing and then the outlook, obviously, there's still a lot of uncertainty on the tariff side. While I don't expect that will be a major driver for us, and it should be kind of neutral to positive, it's obviously been volatile and something we're going to watch as we go forward.

I'd say, yes, we're pleased with the sequential stability of the commodities. We still do have a headwind with PVC on a year-over-year basis. But we have been pleased with how that stabilized as we go forward. And I do expect, just given some of the discussion with the -- given some of the information that we've received from suppliers related to potential cost increases that we've got an opportunity to get some inventory in like we have to be able to mitigate some of those cost increases. And then we've really worked really hard with our suppliers and our customers to make sure that everybody is very transparent and clear where they're going to see potential price increases as we go forward.

So we're, I'd say, watching that closely. We believe neutral is kind of the right frame of mind, and we've tried to indicate it could be positive if it keeps kind of trending in this direction as we go through the full year and expect that we'll be able to get cost increases passed along such that gross margins are either held neutral or given some of the inventory investments that we could get a benefit out of that as we move throughout the year.

Okay. Got it. And then just as a follow-on, you spent some time talking about greenfields in the opening remarks and the idea isn't new that that's the lever, but it sounded like maybe that could be something that's of increasing focus for you as you've taken on the role. Twenty greenfields over the past 7, 8 years, I think, compared to some other distribution platforms across building products is still relatively modest. Maybe just help us understand what your vision is, specifically on kind of the greenfield strategy and whether you could be leaning in on that.

Yes, sure, Mike. What I would tell you on greenfield is just our general growth strategy is to have both levers and it's to look at M&A and also having the opportunity to do greenfields in selected markets if that's a better opportunity for growth.

And if you go back to 2017 when we became a stand-alone company, obviously, we've had some really strong M&A growth. We've added a lot of locations. We've integrated a lot of locations. And we've been able to complete greenfields during that time.

I would tell you that there is definitely an emphasis on continuing to expand our business through greenfield locations. While that annual average that you referenced may not sound like a lot, I can tell you that over the next year I'd expect us to be opening somewhere between 5 and 10 new greenfields throughout 2025 just based on what we've got in the pipeline right now.

So I'm very confident that given our focus in that area and evaluating whether M&A is the right strategy or greenfields that we're going to continue to make really good progress there and really excited about what's in our pipeline there.

Our next question comes from Anthony Pettinari of Citi.

For your municipal government customers, is it possible to kind of generalize as you talk with them how they're feeling about kind of the upcoming fiscal year and spending on your projects. There's been kind of an effort by the administration to maybe peel back some funding for IRA or maybe some other programs that maybe could put some pressure on munis, but maybe there are parts of the current budget that could be more stimulus.

I'm just wondering if you could talk about kind of the current policy environment and how your muni customers are kind of thinking about the coming year.

Thanks, Anthony, for the question. There's 50,000 municipalities in the U.S., so it's very fragmented, and we do spend some time with their annual budgets going through that. I would say funding for the municipalities is healthy. They've got multiple avenues that they can get funding for their projects. The IIJA is starting to flow more. There's more of that flowing down to the municipalities today than there has been in the past. There's state-level funding that's happening. There's some multibillion dollar funding going out there at the state level for municipalities to gain funding to do some of these projects.

And then at the local level, what we're seeing though is the majority of the spend that municipalities use for their water infrastructure is on their local revenue streams from the utility rates that they charge to their customers.

So across the board, we feel like there's ample funding there for their projects for several years to come. Obviously, the water infrastructure is aged and in need of repair, but I feel like there's a lot of runway there for them to continue to work on projects.

So as we look at the guide and we look at the uncertainty in the back half of the year, municipality is not really in that bucket. Our municipal end market is pretty steady and stable and resilient from that standpoint.

Got it, got it. That's very helpful. And then just following up on the question on greenfields and kind of organic versus inorganic. On the M&A side, are you seeing increased competition for deals. There seems to be a lot of interest in building products, distribution consolidation. I don't know if waterworks is niche enough that you're not seeing a different kind of competitive environment for deals versus a few years ago? Or just wonder if you could kind of characterize the M&A market right now.

Yes, sure. Thanks for the question. I would tell you no real changes from a competitive standpoint on the M&A side. I would tell you, generally, it can just be a little lumpier given when sellers are ready to sell businesses in our industry. It is a little bit more of a niche industry. I would say we've got a lot of really strong relationships across the waterworks space and continue to be viewed as the acquirer of choice there just given those long-standing relationships.

And I think the value we've been able to demonstrate when we do these acquisitions and really making a good home for the associates and really helping them find new opportunities for growth and helping us create value. So that continues to be a strong lever for us. I would tell you our pipeline, as Robyn mentioned on the call, is very healthy. We've got various deals that we're looking at, at various stages and sizes right now and continue to expect that we'll continue to deliver on our growth strategy from an M&A standpoint.

Our next question comes from Andrew Obin of Bank of America.

This is David Ridley-Lane for Andrew. Given some public commentary from your competitors, how has your own employee retention trended over the last 12 months? To put it bluntly, have you seen an uptick in poaching of your field sales representatives?

Thanks, David, for the question. I would tell you, our retention of our associates remains extremely high. I would say it's -- I would be confident in saying it's the best in the industry. We have always been in a position to retain our people.

And from, I'd say, a poaching standpoint, you can see that from time to time in the industry, it can come up. I would say we generally view that as a positive for us because we are generally able to take advantage of those situations and markets where that's happening in the industry.

I wouldn't say it's any heavier or lighter than what we've ever seen historically. And feel really good with the retention of our team and what we're delivering on an overall basis and continue to expect that to be the case as we go forward.

Great. And then on the new cost-out initiatives that you announced on this earnings call, any rough quantification that you could give us in terms of how much you would expect to be realizing in the fiscal year? Just roughly.

David, I would tell you that we've got a kind of a lot of things going on there on the SG&A side. We are continuing to make investments in areas that have good opportunity for growth, making sure that those resources that we are adding are focused on the areas of growth.

If there are areas that maybe are a little bit underperforming, we can make shifts, and we've done some of those things to make sure those resources are aligned to the best areas of opportunity.

But I would say not anything substantial at this point. We've been more focused on scaling some of the recent M&A that we've gotten and getting synergies that way on the SG&A front, and then just making sure our resources are appropriately deployed to the areas that get us the most opportunity. And those have been kind of the biggest areas of focus for us so far.

Sorry, did I mishear that? I mean, when you were talking about the guidance in the guidance commentary, you said SG&A, some cost-out initiatives started, right? I'm just making sure...

Yes. We do have a little bit -- in underperforming areas we do have a little bit of cost out that we did, but that's part of my comments of aligning the resources to the areas of best opportunity.

At this time, we currently have no further questions. So I'll hand back to Mark Witkowski for any further remarks.

Thank you all again for joining us today. It was a pleasure to have you on the call. I'd like to close by thanking our associates for continuing to provide exceptional service to our customers.

We delivered another quarter of record performance driven by resilient demand, above market growth, stable pricing and sequential gross margin expansion. Our local relationships, diverse offerings and investments in talent and new capabilities continue to differentiate Core & Main and drive market share gains.

We are uniquely positioned to capitalize on the long-term secular drivers of water infrastructure investment, including aging systems, population growth and increasing regulatory demands.

Our scale, local expertise and proven growth strategy enable us to deliver critical solutions that support the modernization and resilience of water systems nationwide.

Thank you for your interest in Core & Main. Operator, that concludes our call.

Thank you all for joining today's call. You may now disconnect your lines.