Core & Main, Inc. (CNM) Earnings

Management highlights

### Overall Business & Demand Backdrop - The company delivered a solid start to FY2026, with resilient performance backed by the durable fundamental drivers of water infrastructure investment. Diversified end market exposure helps balance near-term uncertainty. - Q1 FY26 net sales came in at $1.9 billion, flat year-over-year, with organic volumes down 1% and acquisitions contributing 1% growth. Adjusted EBITDA was $226 million (up 1% YoY), adjusted diluted EPS was 72 cents (up 6% YoY), and gross margin expanded 50 basis points to 27.2% YoY. ### End Market Dynamics - **Municipal**: Demand remains strong, driven by aging infrastructure, non-discretionary repair/replacement work, and long-term modernization needs that extend beyond federal funding cycles. The sustained project pipeline reinforces this as the company's most stable end market. - **Non-residential**: Demand is mixed across segments but overall stable. Healthy momentum in data center and manufacturing construction has offset softness in traditional commercial (retail/office) construction. Data centers are a targeted long-term growth opportunity, requiring significant water infrastructure that aligns well with the company's capabilities. - **Residential**: Demand remains challenged year-over-year against a strong prior comp, but has stabilized with no further deterioration after declines in the back half of FY2025, in line with expectations. Long-term demand is supported by structural housing undersupply and pent-up demand. ### Strategic Growth Initiatives - **High-growth solutions expansion**: The company is building out integrated turnkey solutions for smart utility and treatment plant projects, moving beyond basic product distribution to offer end-to-end support from design to long-term maintenance. This full-lifecycle model differentiates Core and Main from hardware-only competitors, and has driven sustained above-market growth. - **Geographic expansion**: Opened 5 new greenfield locations in Q1 FY26, and is on track to open a record 8-10 new locations in full FY2026, expanding into new or under-penetrated attractive markets. - **M&A**: The fragmented industry provides a robust pipeline of high-quality acquisition opportunities, with a notable recent uptick in deal flow. Management is particularly focused on acquisitions to expand treatment plant capabilities and move toward a full turnkey solutions model similar to smart utility. M&A remains a core growth pillar. - **Digital/technology**: Proprietary industry-specific digital tools and AI-enabled solutions improve productivity, enhance the customer experience, and deepen customer relationships as a key differentiator. ### Margin & Capital Allocation - Gross margin expanded 50 basis points YoY, driven by private label growth, sourcing optimization, and disciplined pricing execution. Adjusted EBITDA margin expanded 10 basis points to 11.8% YoY. - SG&A increased 2% YoY, driven by strategic growth investments, acquisition costs, and inflation. Excluding investments and M&A, SG&A declined modestly YoY reflecting strong cost management. - Generated $82 million in operating cash flow (up $5 million YoY). The company repurchased $88 million in shares in Q1 FY26, the highest quarterly open market repurchase level in its history, with $125 million repurchased year-to-date (representing ~80% of full FY2025 repurchases). Net debt leverage is 2.2x, well within the company's target range, with total liquidity of nearly $1.4 billion.

Guidance

Management reaffirmed the full FY2026 guidance initially issued in March, with no upward or downward revisions to the core ranges: - Net sales guidance is maintained at $7.8 to $7.9 billion - Adjusted EBITDA guidance is maintained at $950 to $980 million - Operating cash flow conversion guidance is maintained at 60% to 70% of adjusted EBITDA - Management continues to expect full year overall end market volumes to be roughly flat, with strength in durable, non-discretionary municipal demand offset by continued caution in private construction. The company still expects to deliver above-market volume growth driven by expansion initiatives and growth in smart utility and treatment plant solutions. - Management notes recent PVC supplier price increases could create a modest sequential tailwind in the back half of the year, but PVC will still be down year-over-year overall. - Adjusted EBITDA margin expansion is still expected for the full year, driven by gross margin initiatives, prior cost action benefits, and fixed cost leverage as the business grows.

Segment performance

Core and Main does not break out formal segment revenue, but provided performance updates for its key product/initiative segments: 1. **Municipal water infrastructure (core end market)**: Volumes grew year-over-year, supported by non-discretionary repair and replacement work, market share gains, and growth in high-growth initiatives. This segment is the company's most stable, representing the majority of the business, with ~95% of funding from durable state and local sources. 2. **Smart Utility Solutions**: Delivered high single-digit revenue growth in the quarter, with a 15% net sales CAGR over the past five years. This segment continues to win large, multi-year contracts, including the largest smart utility contract in U.S. history awarded in the prior quarter, with additional large wins in Q1 FY26. 3. **Treatment Plant Solutions**: Delivered double-digit revenue growth in the quarter, with a 25% net sales CAGR over the past five years. Currently represents mid-single digits percentage of total company net sales. 4. **Fire Protection**: Grew 17% year-over-year in the quarter. Strength was driven by end market demand from data center and multifamily construction, higher steel prices (reversing prior year headwinds), and market share gains. 5. **Residential**: End market demand declined year-over-year against a strong prior year comparison, but stabilized sequentially from the end of FY2025, in line with management expectations.

Risks & headwinds

- Elevated geopolitical uncertainty could weigh on end market volumes in residential and certain non-residential categories via impacts on interest rates, housing affordability, and consumer confidence - Residential demand remains near-term sensitive to interest rate and affordability conditions, with no meaningful improvement seen to date after stabilization - Softness in traditional non-residential commercial construction (retail and office) continues to offset strength in other non-residential segments like data centers - PVC pricing remained a year-over-year headwind in Q1, and while prices have stabilized, any future unexpected price volatility could impact margin performance - M&A opportunity timelines are variable, and there is no guarantee that current late-stage opportunities will close on expected terms

Analyst Q&A

• Q: With the full-year EBITDA guidance unchanged, are there any shifts in underlying expectations 90 days into the year, particularly around pricing? /

  A: All end market trends have come in line with management's initial expectations. The only notable shift is that PVC prices have stabilized after prior year declines, and the company has begun seeing new supplier price increases, though these have not yet hit revenue. There could be modest upside to back half results from these increases, but PVC will still be down year-over-year overall. Management chose to maintain guidance given lingering macro uncertainty. (203 characters)

• Q: OEM meter manufacturers have reported recent weakness; how is Core and Main's smart utility business faring differently? /

  A: Most OEM weakness is concentrated in the small-scale, residential O&M meter segment, which is tied to soft residential lot development. Core and Main's strength comes from its differentiated position in large, long-term integrated smart utility projects, where it wins by combining multiple partner technologies into a single turnkey solution. This large project pipeline remains very strong, offsetting any softness in the small meter segment. (287 characters)

• Q: Fire protection sales grew 17% this quarter; how much of this is share gain versus end market strength? /

  A: Strength comes from three main sources: strong end market demand from data center and multifamily construction, an uplift from higher steel prices that reversed two years of headwinds for the segment, and incremental market share gains the company has captured over the past 12-18 months through improved performance. All three factors combined drove the strong result. (241 characters)

• Q: With IIJA federal infrastructure funding expiring later this year, what impact do you expect? /

  A: Only a third of the total IIJA funding allocated to state revolving funds has actually been disbursed to municipalities so far, so there is no near-term funding cliff. Unused funding will remain available in state revolving funds, and repaid loans will be recycled for future projects. Critically, 95% of municipal water infrastructure funding comes from state and local sources, which remain very strong, so ample funding is available for projects long-term. (282 characters)

• Q: M&A volumes have been lower in recent quarters; is this a permanent shift or a temporary lull? /

  A: The lower activity of recent quarters was a temporary market lull, not a permanent change. Management has recently seen a notable uptick in high-quality deal flow, with multiple opportunities ranging from small tuck-ins to larger transformative deals advancing to late-stage processes. Many of the current opportunities are focused on expanding treatment plant capabilities, a key strategic priority, and management expects to return to target M&A levels soon. (275 characters)