Core & Main, Inc. Q3 FY2025 earnings call

• Core & Main is a leading specialty distributor of water infrastructure products in North America, with competitive advantages like national scale, local market expertise, industry-specific technology, etc. - Municipal projects provide steady demand, nonresidential end market has growth in infrastructure projects such as data centers, and residential activity, though softened in the near term, has an attractive long-term outlook. - Product initiatives like fusible HDPE, treatment plant solutions, and geosynthetics achieved double-digit growth in the quarter. - Opened new branches near Houston and Denver, and completed the acquisition of Canada Waterworks. - Implemented $30 million of annualized SG&A cost savings, and strong free cash flow allows for strategic investments and share repurchases.

Net sales increased 1% to $2.1 billion. Municipal projects account for over 40% of sales, nonresidential around 40%, and residential less than 20%. Gross margin in the third quarter was 27.2%, up 60 basis points year-over-year, driven by private label initiatives and disciplined purchasing and pricing execution. Organic volumes and prices were roughly flat compared to the prior year, with acquisitions contributing approximately 1 percentage point to growth.

• Reaffirmed full-year guidance: net sales expected to be $7.6 billion to $7.7 billion, adjusted EBITDA $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, which is a roughly 2% headwind for FY '25. - Gross margin is expected to improve year-over-year supported by continued private label growth and disciplined purchasing and pricing execution.

• Cost inflation running in the mid-single digits, which is higher than the typical low single-digit range in the industry, potentially impacting margins. - Soft end market conditions in segments like residential lot development.

Q: Can you talk about the large complex projects that you talked about? Do you have any updated market share numbers, growth rates or kind of revenue exposure numbers?

A: 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 when 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 Robyn 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, in addition, what we see is 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 municipalities. So we've just really seen a lot of characteristics there that drive some long-term demand for us and excited about that.

Q: 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. And obviously, you got non-res, where 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?

A: Yes. Thanks, Matt. It's Mark. Yes. As Robyn touched on in terms of the municipal end market, we continue to see that as 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 warned people out 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 of 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.