Core & Main, Inc. Q3 FY2025 Earnings Call

Hello, and welcome to the Core & Main Q3 2025 Earnings Call. My name is Alex, and I'll be coordinating today's call. 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 and fusible HDPE, and deploying our strong balance sheet to pursue accretive M&A opportunities, including our recent expansion into the $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 subside. 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 soft 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 had 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 two 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 municipalities 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 into 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 places strain on local water systems, triggering further investment in water distribution and treatment infrastructure. We're seeing this firsthand at a major hyperscale campus near South Bend, Indiana, where project-related demand has been so substantial that our local branch has 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 lot 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 five new locations. We expect to open more branches before 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's 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 achieve 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 the 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 Sun Belt markets like Florida, Texas, Arizona and Georgia, where developers have slowed the pace of new development. Activity appears to have stabilized as we move through the quarter, and we remain confident in the attractive long-term fundamentals of these high-growth markets. Our overall portfolio is resilient. Municipal 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 provides stability through varying demand environments. 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 initiatives 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 one-time 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 non-sales focused roles 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 shifting 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 it 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 is more than double 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 50 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 investments 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 of $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 navigated 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, delivered 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 proven 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 new opportunities. With that, we'll open the call for questions.

Our first question for today comes from Brian Biros of Thompson Research Group.

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? Our understanding from a variety of contexts that 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 complex 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 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.

It'd be interesting to see 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 slightly, now expected to be up low single digits to mid-single digits, where last quarter, it looked 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 at all levels. So on the federal side, there's still ample funding coming in at those levels with very little of the IIJA spending has been spent really at all. 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's 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. 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?

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 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. 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 27% level is sort of a new normal here? And any sort of additional color there on what's driving the strength there?

Sure, Matt. I'll address that. You are correct that we had strong gross margin performance this quarter, primarily due to the growth of our private label initiative. Our purchasing and pricing execution were effective. We anticipate further enhancements to our gross margins moving forward by leveraging the margin initiatives we've discussed. For the fourth quarter, we expect gross margins to fall between the second and third quarter levels, with the third quarter potentially being the highest for the year. We are looking forward to a positive outcome for gross margins in the fourth quarter as well, along with a reduction in SG&A by about $25 million as we begin to see the impact of the cost actions we've implemented. This should lead to strong results in that area. As for annual gross margin expansion, we expect to see it continue, although it may not be perfectly consistent every quarter. Overall, we are optimistic about our annual growth in this regard.

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 residential, we started to see a decline at the end of July, which continued into August, September, and October. Overall, the quarter was soft, with a decline in the low double digits to mid-teens range. I wouldn't say we've seen positive movement; rather, it has continued to soften as homebuilders have been developing fewer lots in hopes of better affordability and demand. There wasn't significant movement during the quarter, but performance aligned with our expectations, as we anticipated this decline would persist from late last quarter into this one.

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 talk 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?

Private label is a significant contributor for us. During this quarter, much of the growth can be attributed to private label, while the remainder was due to our strong purchasing and pricing strategies. Private label has improved our margins considerably over the last few years since we began focusing on it. We are pleased with achieving 5% of sales by the end of this year, and our long-term goal is to reach between 10% and 15%, indicating substantial opportunities for further growth. Looking ahead, private label will continue to be a major contributor, with expectations of driving an additional 10 to 20 basis points annually. Our sourcing initiatives are also expected to improve margins further. Effective sourcing involves managing relationships with our suppliers and strategically directing our expenditure to enhance our competitive position. On the purchasing front, we successfully bought in advance of price increases, as we routinely do. We anticipate these price increases to emerge in early spring. We are also continuously managing our inventory to optimize margins effectively.

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 annualized, is that fully 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 this, you're exploring further opportunities. I'm just actually wondering what kind of direction you're moving in, in terms of looking at further productivity?

Yes. Sure, Nigel. Thanks for the questions. 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 your question was really about how, on one hand, you're operating very efficiently and not willing to compromise on growth initiatives. On the other hand, you're considering additional productivity measures. I'm curious about what further actions you envision beyond the $30 million.

Yes, of course. Comparing us to others, we already have a very efficient SG&A rate. Recently, we haven't achieved the operating leverage we anticipated, which is why we've implemented cost-reduction measures. We are actively working on various initiatives to improve productivity alongside the cost-saving actions we've taken. Much of this focus is on technology to enhance our efficiency, better serve our customers, and automate processes in the back office. We have made technology investments that we believe will lead to increased productivity and help us achieve SG&A leverage starting next year.

Our next question comes from Joe Ritchie of Goldman Sachs.

I wanted to revisit the private label discussion. Can you elaborate on any constraints that might be slowing down the progress of that initiative, especially since you're seeing some positive results? Also, where are you noticing the largest 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 have to be sourced and vetted to continue to advance that 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, as Robyn mentioned, to allow us to expand gross margins here over the past few years. So we've got continued opportunities there. That's a big part of what we continue to look at. And 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 is achievable and something that we've been able to deliver historically. So we'll continue to work down those paths, and I think you 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?

Thank you, Joe. Regarding our scale, we are involved in numerous projects across the country, including large-scale water replacement initiatives and various commercial and residential developments. This remains an essential and rapidly growing segment of our business. We're constantly seeking opportunities for further investment to enhance our market presence nationally, supported by a solid foundation and extensive geographic reach. This positions us favorably as hyperscalers invest in different regions, supported by our strong local relationships. Our best customers, who rely on us for these critical projects, often turn to us due to those local connections. In areas where we need to build partnerships, we focus on investments similar to our approach in other markets, aiming to strengthen our position. As the demand for data centers grows in specific areas, we plan to enhance our capabilities, expand our capacity, and ensure we meet our customers' needs effectively. Our investment strategy remains consistent, and we also maintain national partnerships with major contractors to engage in these projects. We take a multifaceted approach, and we will continue investing to capture a significant share of this 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 a 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. I would say the main areas contributing to the inflation this year have been our facilities, our fleet, and medical costs. These are our largest cost categories. Personnel-related expenses are the highest, followed by facilities. As we renew some of our leases that were previously at favorable rates, we are facing increased fair market values, leading to inflation in that area. We have also seen ongoing inflation related to our fleet. Additionally, medical costs had a significant impact last quarter due to high-cost claims, and we are seeing inflation affecting that as well. We expect this trend to continue into the fourth quarter. Currently, we don’t see much improvement for the fourth quarter, but we anticipate that the larger impacts of this inflation will start to ease around the second quarter of next year. We expect the situation to normalize in the coming quarters back to rates more typical 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 timeline, 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 timeline and completing that?

Yes, I appreciate the question. I want to clarify that these projects do not get completed quickly. The pace of construction is demanding operational excellence, which we provide to our customers. While they are fast-paced projects, they can extend over several years depending on the complexity of the build-out. We have seen projects that continue to add phases as we progress. Therefore, we typically have good visibility on about a year’s worth of work, and these projects can continue to grow beyond that. They may last a considerable time, but the execution pace has to be very quick. This is where the trust our customers have in us is crucial, as it allows us to execute these projects successfully, ultimately making us a preferred contractor for future initiatives. It truly becomes a win-win scenario for both us and our customers when we collaborate to complete these projects as effectively as possible.

Our next question comes from Patrick Baumann of JPMorgan.

I noticed a couple of things here. Regarding pricing, you mentioned that municipal PVC pipe prices fell about 15% year-over-year this quarter, which suggests that other prices were up by low single digits. Is that correct? Also, do you anticipate this trend continuing into 2026, meaning that net prices 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 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 stuff...

Yes, if you consider that steel and copper are the only true commodities we have that move with the underlying markets, both of them have been favorably priced for the year and I expect that trend to continue. While they represent a small portion of our overall products and sales, both are up. I can also say that nearly every product, with the exception of municipal PVC, is up year-over-year.

And ductile iron is also up?

Yes, that's right.

Can you discuss the current status of your M&A pipeline? There's been a noticeable slowdown in activity lately. What do you think is behind that, and how should we anticipate your capital deployment toward M&A in the next six to twelve 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 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 you saw our additional 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, $30 million of cost out. The majority of that is personnel-related costs. We were able to make reductions in about 4% of our roles 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 and 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. I want to focus on the meter business. It sounds like you were awarded a meter contract this quarter, if I'm correct. Could you provide a bit more context on that? Also, regarding the high single-digit growth, could you clarify whether that is primarily coming from new projects or is it mostly recurring revenue from 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 to 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 to 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 these system enhancements for the municipalities. So real pleased with the progress there. We have achieved, I'd say, over the last couple of years, some of the largest projects in 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.

I guess, first off, if we could just talk a little bit about greenfields. I think you guys have opened five 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 is the target for FY '26 also to open 5 to 10 new greenfields?

Yes, thank you for the question. We are very excited about the new opportunities we've established this year. As we mentioned earlier, we have strong coverage in key markets and are focused on further expansion in Denver and Houston, which are our priority areas. We've identified several additional markets, some of which we anticipate will open by the end of the year, and we have a promising pipeline to assess moving forward. Currently, we are evaluating over a dozen markets for potential growth and continued expansion, and we expect to see ongoing growth from these new sites. Historically, we have managed to achieve breakeven within the first year and profitability in the second and third years. Our recent openings have been successful, and those opened in previous years continue to perform well. This will remain a key strategy as we seek to broaden our geographic reach, both in the U.S. and 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, at 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?

Texas is a very important market for us. When considering construction spending across the U.S., Florida, Texas, and California stand out as key markets that significantly influence our business. Our additional investment in Texas will be crucial, as we have a strong position there and anticipate leveraging that. Texas has also seen advancements, such as the introduction of corrugated HDPE as a storm drainage solution, which could shift some of the heavy concrete usage. As we integrate these products into our offerings, it presents a promising long-term growth opportunity. These investments take time to materialize but are building a solid foundation, and we will continue to invest in Texas, as we've already announced with the greenfield in Houston. More investments in that state are expected in the future.

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 costs 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.