Ferguson Enterprises Inc Q4 2025 Earnings Call Transcript

The following is excerpted from the question-and-answer section of the transcript.

Question: Matthew Bouley - Barclays Services Corp - Analyst : So kind of a broad question on growth and the end market outlook here. Obviously, a lot of crosscurrents recently around new residential, HVAC, et cetera, all of that. Meanwhile, you showed this strong nonresidential result and inflation is improving. So really I'm asking, looking ahead, kind

Question: Matthew Bouley - Barclays Services Corp - Analyst : Okay. Yes. That's all super helpful, exactly what I was looking for, given these, again, clearly dynamic end markets here. So that leads to the second question. Kevin, you really touched on it, the large capital projects. It just seems like all your efforts are coming to fruition here. So around this kind of multi-customer group approach, you mentioned Waterworks, commercial PBF, fire protection, et cetera, with these large projects. Can you go into maybe just some more specifics, number one, just around how do you go to market with these customers, with the different types of contractors around actually leveraging your multi-customer group approach and kind of how that actually all comes together? And then just more specifically, anything around kind of data center and what the pipeline going forward of these large capital projects looks like for you guys? Unidentified Company Representative Thank you, Matt. And we really did build the organization to be better together than a part and a multi-customer group approach, and it plays quite well in large capital construction projects, which, as we've discussed, are really driving the day in nonresidential activity. We go to market being best-in-class for the individual contractor or trade professional for that particular customer group, whether it be commercial mechanical, waterwork, fire protection, industrial pipe valve and fitting, making sure that we're the best provider on that job for the contractor. But we then elevate and go towards the source of funds, if you will, the engineer, the architect owner to try and make sure that we are engaged from a supply chain perspective, from a design perspective to make sure that, that project can get completed on time and on budget. And so that work up funnel, closer to the source of funds, allows us to be a best solution for the individual trade on the job, and it served us well. And as we look at Waterworks being up 15% in the quarter, commercial mechanical being up 21% and our industrial business and our fire protection business being up 5%, it's paving the way for future growth. You asked a bit about what we see in the end markets. And just like the rest of the world, we're seeing that activity from a data center construction perspective, continuing to accelerate. We haven't seen pauses or cancellations and that activity is stepping up and stepping up in a variety of geographies across the nation. Those are great projects for us. They're great projects for us on piping systems as well as valve and automation, fabrication and virtual design, which are some of the other value-added services that we're bringing to the market that help us to earn that business from the local contractor as well as the trust of the owner and the engineer.

Question: Philip Ng - Jefferies LLC - Analyst : Congratulations on a really impressive quarter in a tough environment. Kevin, I just want to drill down a little bit more on the nonres piece. It sounds like the data center side of things remain really strong, but we appreciate comps to get a little tougher in the coming quarters. But just give us a little perspective, what are you seeing on the momentum side of things? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. SEPTEMBER 16, 2025 / 12:30PM, FERG.N - Q4 2025 Ferguson Enterprises Inc Earnings Call You talked about bidding activity still being strong. Just give us a little more color on where you're seeing the strength, the bidding activity within non-res? And how far are you bidding out in just the backlogs in general?

Question: Philip Ng - Jefferies LLC - Analyst : Okay, great color, Kevin. And then from a price and margin standpoint, both really impressive pricing inflected, nicely in this quarter. Bill, I guess question for you, should we expect pricing to kind of build from here, or this is a kind of good run rate? I know the commodity side of things were still negative. Are you starting to see that stabilize and essentially we got an avenue for that to infect. And then on the gross margin side, strong, nice expansion there. Was there any timing nuances with like inventory profit gain? So should we see some moderation or we can build off these gross margins, assuming obviously normal seasonality.

Question: John Lovallo - UBS AG - Analyst : And you may have answered this partly with Phil's question, but sort of back of the envelope at the midpoint, it seems like the implied calendar year second half operating margin is expected at about 9.2 percentage-ish versus 9.6% in the first half, and that comes despite what looks to be about a 1% improvement in sales half-over-half. So what's sort of driving that expected margin decline? Is it the timing of the pricing that you just mentioned? Or is there other factors as well? Unidentified Company Representative Yes, it's a great question, John. And I think we'll -- as we get more used to calendar quarters, we'll get more used to the seasonality of the business. But I would point mostly to that seasonality. If you go back to last calendar year in the second half, we delivered about an 8.8% operating margin. And your back of the cocktail mapping math is spot on in terms of the guide for the full year at 9.2% to 9.6% implies that the second half will be somewhere in the upper 8% to, call it, mid 9% range in the back half of the year. So we are expecting continued improvement year over year. And I'd point a bit more towards seasonality that the second half of the calendar year will be typically a touch lighter given November and December with the holidays from a seasonality perspective.

Question: David Manthey - Robert W. Baird & Co Inc - Analyst : Kevin, Bill. First question, Bill, you gave some nice detail on commodities pricing. I was wondering if you could just give us an idea by segment sort of high end versus low end of the pricing spectrum by segment, just so we understand how that sort of lays across your reporting segments. And then you mentioned the kind of the reversion of the gross margin to that 30%, 31%. And I guess that kind of implies 100 basis points maybe of incremental benefit in the period because of some of the inventory gains that would be temporary. Is that in the range? And then is there anything left over as we look to the October quarter, should we expect some residual benefit as well there? Or are we pretty much worked through now?

Question: David Manthey - Robert W. Baird & Co Inc - Analyst : Okay. And then specifically on HVAC, you didn't mention that as it relates to pricing. But maybe if you could help us understand the benefit from pricing and acquisitions in HVAC segment that added to the number we saw. And any comments you have regarding the refrigerant transition? Like do you have any R40 systems left at the end of July? And then multifamily is a hot topic lately. Any other commentary around HVAC would be helpful.

Question: Sam Reid - Wells Fargo Securities LLC - Analyst : So you called out a little earlier some softness in resi remodel. And I just wanted to unpack that a bit more because you've got a really strong presence in remodel with higher income consumers. And that's historically insulated you from some of the category slowness. So are you starting to see demand crack from that higher income consumer? And then can you just give us a sense as to where remodel backlog sit today versus, say, one to two quarters ago?

Question: Sam Reid - Wells Fargo Securities LLC - Analyst : That helps. And then just switching gears and drilling down a little bit more on Waterworks, I mean really strong results here, especially in the context of some peer REITs. Can you just talk to more specifically what you're hearing from your large homebuilder customers? It sounds like there was a pullback that accelerated in August in demand for, let's call it, new residential subdivision projects. But I just want to confirm that. And then can you just give us a rough sense as to where your resi Waterworks business sits from a geographic standpoint? Do you under-indexed, for instance, in markets like, say, Florida? Just love some additional context there. Unidentified Company Representative Yes. I'll start with we don't under index in Florida. But if I take a step back and look at our business, clearly, we're really pleased with a plus 15% in the quarter, we're really pleased with a plus 20% on a two-year stack inside that Waterworks business. It's a testament to what the group has built over time. and that diverse business mix that they have, residential, commercial, public works, municipal spend, water wastewater treatment plant, storm water management, geosynthetics and even moving closer to that engineering environment, as I referenced earlier, with pumps, valve packages, process equipment and controls. And so that continues to play well for us. Perhaps the biggest impact that we've seen though is in that large capital project, nonresidential space as the water piece of that business is quite impactful. And then the multi-customer group approach on non-resis playing out. If I then shift to your residential portion of the question, we have a pretty broad-based business residentially across the US. We're very -- we have strength in the Southeast. We have strength in the South, but it's pretty broad-based. If you look at what we're seeing, I'll take aside conversations with the large builder. We've clearly seen pressure on that new residential construction space as has the rest of the country. If you look at our bidding activity, we have not seen a significant fall off in residential bidding activity. But that said, we have no idea how that work will be released. Will it be released at all? And what does that look like in terms of sections or phases and how that plays out? But we do anticipate that in the near term, we'll see some continued pressure on that new residential waterworks insulation space.

Question: Mike Dahl - RBC Capital Markets Inc - Analyst : Just to go back on HVAC for a minute. I wanted to dive a little bit deeper. Obviously, a lot of concern from some of the OEMs and invoicing some much sharper declines in the near term. So a similar question as you just answered on Waterworks. But when you think about what the guide embeds for the balance of the year, the OEMs seem to suggest that the near term is going to be quite pressured on HVAC volumes, but then potentially even better price mix than what you've articulated. Just give us a little more detail on how your guide embeds kind of that HVAC growth in the second half. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. SEPTEMBER 16, 2025 / 12:30PM, FERG.N - Q4 2025 Ferguson Enterprises Inc Earnings Call

Question: Mike Dahl - RBC Capital Markets Inc - Analyst : Okay. That's helpful. And then shifting gears just on the balance sheet and capital allocation. You've done a good job deploying a decent amount of capital. That said, your balance sheet is still being pretty conservatively managed around the low end of your target range. There's obviously a lot of differing views on where we are in the cycle right now. But from your standpoint, what would it take for you to deploy capital even more aggressively towards the midpoint or upper end of your leverage range? And is that more likely as you sit here today and look at your M&A pipeline? Is that more likely to come through increased focus on M&A or a step-up in buybacks? Unidentified Company Representative Yes. I'll start with -- we try to be very consistent, and I think we've delivered consistency when it comes to capital allocation. We like having a strong balance sheet. It gives us that optionality to scale up and to go after growth investments. And so we intend to operate towards the low end of that leverage range of one to two times net debt to EBITDA on an ongoing basis. In terms of scaling up, you would see us scale up where there were really good organic growth opportunities or maybe more so in the near term, where there would be more M&A opportunities. There's nothing large in the pipeline right now, but we have that balance sheet flexibility to take advantage of those opportunities should they occur.

Question: Anthony Pettinari - Citibank Cameroon SA - Analyst : Just following up on the last question on M&A. I think you indicated there's nothing large in the pipeline, but I wonder if you could talk more -- maybe more generally about what the pipeline looks like as we get closer to the end of the year. I guess, specifically, valuations, seller expectations, whether you're seeing any increased competition for assets in water and air, maybe from new parties? Just is there anything that's kind of changed about the landscape in the model? Unidentified Company Representative Yes, Anthony, no real significant changes in the landscape. I mean it's been a pretty competitive environment in water and air for a number of quarters and years, quite honestly. But valuations still probably towards the upper end of our typical, call it, 7 to 7 to 10 enterprise value to EBITDA range. We have a good actionable pipeline. As I mentioned, yet nothing really large in that pipeline. But quite frankly, that's what the industry is. The industry lends itself to 10,000-plus small- to medium-sized competitors that are out there. And our focus has been on consolidating those markets over time. So our strategy is very consistent. Our pipeline is pretty healthy. And we think we have a good opportunity to continue to consolidate the industry.