Core & Main, Inc. (CNM) Q1 2026 Earnings Call Transcript

Hello, everyone. Thank you for joining us, and welcome to the Core & Main First Quarter 2026 Earnings Conference Call. 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 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 remain 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 strengths of Core & Main. Our local teams bring the knowledge and 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 the 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 and 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 a 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 moved 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 to supporting customers across the full life cycle of their 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 robust 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 two 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, reduce nonrevenue water, enhance 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 two-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 introduce 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 timelines 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 five 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 and 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 plant 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 Sun Belt 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 PVC. 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, SG&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 and 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 PVC, 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.

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 is 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 maintained the guide and left it where it was given that we're still in the first quarter. Everything has 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. 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 there is the possibility 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 it's stabilized over the last couple of months, and that's been positive for us, but we're 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. It could be affected by 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 utility. 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 three, six 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 OEMs are saying on the meter side.

Yes. Sure, Matt. I'll take that one. Our meter business is rich with large projects where we are uniquely positioned to integrate solutions from different partners. That's where we're winning the really big long-term projects. That pipeline is strong. I think we have a very high win rate, and I think we're competing at the top of the heap in that slice of the meter world. But there is also a long-standing segment of meter sales that is part of our everyday business and a lot of small meter systems that have been in place for years. Those municipalities purchase meters on an ongoing basis driven by operations and maintenance, and it's also driven by things like residential expansion. Given that the residential market is soft, my suspicion, and what we see in part of our business as well, is that that part of the meter market is flat to not very exciting right now. We are powering through it on the strength of these large projects. Depending on what type of technology platform you're talking about with different meter manufacturers, they may be more concentrated in that residential small project or ongoing maintenance of existing systems, where they could be seeing more pressure from 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, 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. We're really excited about the performance we've seen within our fire protection product line. We benefited from a couple of market-related areas. We are picking up a good portion of the data center work as that activity progresses toward completion and the fire protection systems are installed. Multifamily has been steady to positive for us, and we pick up a lot of fire protection material from a multifamily perspective. We have also seen an uplift in steel pricing, which had been a drag on fire protection performance historically. This positive price environment has helped the product line. Our performance in that product line has improved over the last 12 to 18 months, and I do believe we're picking up some share there. For all those reasons, we've been really excited about the performance.

That's great. 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. So 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? And I guess, just any other kind of color or quantification you guys can share on some of the additional large contract wins that Brad mentioned.

When you look at the meter product line, performance can move around more quarter-to-quarter than the overall business because of very sizable projects being awarded and timing of shipments and installations. You'll see movement based on when projects release and when we ship. There's a lot of installation activity that affects timing. I wouldn't draw conclusions from quarter-to-quarter swings in meters. Long-term, the expectation for double-digit growth in meters is consistent with 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.

So 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.

We tried to lay out some of that in the prepared remarks. Last year at this time, we started to feel momentum softening, particularly in the residential end market, with projects getting scaled back. That played out through the back half of 2025. As we sit here today, end markets are coming in as we expected, and we do feel momentum. There has been good project and bidding activity and a lot of awarded projects, which gives us confidence about the back half of the year. We're watching near-term timing given macro uncertainty and energy cost concerns, but backlogs are building across end markets and bidding activity remains strong. We feel better than we did a year ago at this time, though there is still near-term uncertainty around timing of releases.

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 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 over-index your expansion into more data center-specific regions to follow that growth? Just any color there would be great.

On the greenfield side, over the last 12 to 18 months we've renewed focus on key markets across the U.S. We aim to reinforce our presence in markets where we see significant opportunity, including markets with large project activity. In some cases this identifies new greenfield opportunities; in others it means additional resources in critical markets. These are key markets because they're large or have attractive project opportunities. We pursue organic growth initiatives in these markets and prioritize developing the path to capture the market opportunity 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?

In terms of size, the analytics and support capabilities are an important growth area but are still relatively small compared with overall meter revenue. The meter products, software and billing systems are a large piece of revenue. What we bring is additional capability that helps drive demand for meter upgrades and technology. It's a significant growth area, but still small relative to total meter revenue.

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 or 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?

The data center work is benefiting from several factors. Data center markets have expanded geographically; there are now 15 to 18 market concentrations where data centers are being built. Because we're present or investing in those markets, we're aligned with where that construction activity is happening. Data center projects demand a high degree of precision and project management; they can't have mistakes, and there's a high level of execution risk. We're well suited to that, which is our sweet spot. We're typically aligned with leading underground utility contractors in those geographies, who are sought by general contractors, engineers and owners. The work itself aligns with our core business and doesn't require us to move into new product lines or fabrications. We already have the core underground waterworks product elements. So it's playing to our strengths.

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? What does the backlog look like there? And maybe if there's any margin difference to consider?

Treatment plants are in the mid-single-digit share of sales for us. We continue to see good growth in treatment plant and expect that to continue as we add capabilities. We view it as an area with strong funding and continued opportunities. We're focused on expanding the addressable products we can distribute into treatment facilities. We've made improvements organically and are considering M&A to further expand capabilities given the outlook for treatment plant activity.

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

We added Susan Hardwick, former CEO of American Water, to our Board. She's been a wonderful addition and brings an incredible customer perspective to the boardroom. She is already adding great value to our discussions. This doesn't change our strategy, but it adds credibility given her industry background. Our focus on municipal and private water customers will remain a major focus, and she brings a valuable 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 just wondering on the IIJA, which is set to expire later this year, how material you think this could be for you guys? Is this funding that you'd expect to be funded by Congress? Any thoughts on what the potential impact could be there?

Thanks for the question, Will. On IIJA, the remaining funding is expected to hit the state revolving funds this year. That doesn't mean there's a cliff to the funding or an end to the funding. A lot of the funding has already hit the state revolving funds. Only about one-third or less has hit the municipality level yet. So there's still a lot of funding out there for municipalities to use. The funding will be in the state revolving funds for them to utilize. A portion of that funding is in grant form and the other portion is in low-interest loans. A portion of that would be repaid back into those state revolving funds and used for future sources. In addition to that, 95% of the funding that municipalities use for their water infrastructure is state and local, and we think those are really strong. We're seeing municipalities increase water rates to customers to afford upgrades, and we're seeing municipal bond issuance. So across federal, state and local levels, we see ample funding for municipal infrastructure investments in the short, medium and long term.

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

On the treatment plant side, which is more of a technical sale, we've added dozens of resources to our national teams to support local execution on those projects. Those resources can also support other large projects, like data centers. Our local teams, which include hundreds of sales and support resources, support large and small projects core to what we do. So we've added dozens of resources to support complex projects that work across regions and follow projects 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 in the past couple of months. So have you accepted price increases? Are you seeing that in your inventory? Can you talk through whether there's anything assumed or 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 timing benefits on price, cost helping that in Q1?

Thanks, Mike. On PVC, we have seen price increases from our suppliers. We have started passing along some of those price increases through bidding and quoting activities, but we haven't seen them in our sales yet. We did buy ahead of price increases on PVC and some other areas that are increasing. We expect to see the majority of that hit in the third quarter for items we're bidding and quoting now that are sequentially higher in price for those PVC items. On the gross margin side, it was a really strong quarter. Our initiatives are performing well. Private label is strong. Fire protection was up, and there's a lot of private label in our fire protection business, which helps lift margins. We expect gross margins for the remainder of the year to remain at similar levels to what we exited the first quarter, which would be a gross margin benefit year-over-year for the full year.

Okay. That's very helpful. Shifting gears, the SG&A side appears to have cost control. Can you update us on progress against those cost actions? What's left to realize as the end markets remain relatively similar? How are you thinking about SG&A and whether there are other actions or opportunities to drive further leverage?

SG&A for the quarter was up about 2%. About 2 points of that are M&A related, and about 2 points are investments in things like greenfields and resources to support big, complex projects. Those investments support future growth. We also had inflationary impacts and realized some cost-out savings that offset some increases. We feel SG&A is well positioned so that as we see growth in the back half of the year, we'll be in a good position to leverage SG&A. On the cost-out piece, it's in line with what we expected. We completed $30 million of cost actions in the back half of last year, and we saw about one-quarter of that benefit in the first quarter.

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

I wanted to circle back on the water treatment plant. Can you dive a little bit more into what's going on in that end market? Are these new treatment plants? Are they upgrades, sort of repair and replace? How meaningful can individual projects be for you guys from a revenue perspective and the medium- to longer-term growth this could provide over the next several years?

Treatment plant projects range in size from very small rehabilitation or minor expansion to completely new treatment plant construction, the latter being rarer. Rehabilitation can essentially be a complete rebuild of plant workings, piping and fabrication. Whether rehabilitation or new construction, the market exposure is similar for us. We often see new technology and designs that get more out of existing facilities by redoing one or two lines at a time. Funding has been strong and the investment is nondiscretionary; municipalities must maintain water and sanitary systems amid population growth and shifting demands. We see this as a durable long-term trend and a significant above-market driver for us. As the base grows, percentage growth rates will be harder to sustain, but we expect sustained above-market growth for the foreseeable future.

That's really helpful color. And then, I just wanted to touch on your near-term expectations. You called out the tough comps you saw in the first quarter. I think you still saw a high single-digit comp in Q2, but the two-year stack is a little bit easier. So I'm just trying to understand near-term sales expectations around Q2. Can you start to see growth in Q2 this year? Any color on trends in May and early June?

Remember that last year we began to see residential declines in the back part of Q2, with May and June still showing decent residential performance before the slowdown in July. We expect slight growth in the second quarter, with the majority of growth in the second half of the year when comps are easier. We've been building momentum with bidding activity and backlog and expect a lot of that to release in the back half. So flattish for Q1, slight growth in Q2, and low-to-mid-single-digit growth in Q3 and Q4 is how we're thinking about seasonality.

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

On the treatment plant business, you talked about some acquisitions around it. Are there specific entities and branches that just work on that end market? Can you give some detail on what you mean there?

A treatment plant project is ultimately local and requires material staging and packaging. Generally, the more complex the project, the more beneficial it is to have a Core & Main store close to the project for off-site material handling. The presale, design and iterative processes are often supported by regional or national teams working virtually across the country. As a project approaches execution, relationships form with the branch that handles logistics. We don't have branches that only do treatment plant product; all our branches can do treatment plant work. When we speak of acquisitions in this space, it's less about branch footprint and more about expanding our product offering closer to the next element of plant construction—actuated valves, engineered pipe stands, metal fabrications, and other specialized components. To sell those products, we need knowledge, credibility and expertise. That's what we're looking to add via M&A: knowledge, expertise, talent and capability to offer a broader treatment plant offering.

Let me ask a question on M&A. M&A has been adding a modest amount in recent quarters, below what it was several years ago. Are you reaching a size where acquisitions will add a smaller amount in terms of revenue than in previous years, or are we just in a lull for deals right now?

We've definitely been in a lull from an M&A standpoint and haven't seen many deals in the space. Recently, we've seen a notable uptick in the pipeline and a lot more opportunities coming across our desk. I'm excited about opportunities ranging from small tuck-ins to larger opportunities similar to past deals. We have several opportunities advanced through our process, some in late stages. You should expect us to get back on track and potentially overperform our M&A goals. There's no shortage of opportunities; it's been a matter of timing and lumpiness in deal availability. I'm really pleased with what I'm seeing 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.