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Ferguson ranks 125 with $29.7 billion in revenue (up 4.1%). The Britain-headquartered wholesaler has 35,000 employees and made a profit of $1.9 billion (down 11%).

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Founded in 1953, Ferguson Enterprises distributes plumbing, HVAC, lighting, and waterworks products, as well as appliances in the North American construction market, serving both residential and nonresidential customers through a network of distribution centers, branches, and e-commerce channels. The company offers expertise, solutions, and products in areas such as infrastructure, fire protection, fabrication, and specialist water and wastewater treatment, along with customized services such as virtual design, project management, and after-sales support.

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Q2 2025

Ferguson Enterprises (FERG): Company Profile, Stock Price, News, Rankings

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Ferguson Enterprises

ferguson enterprises

Good morning, ladies and gentlemen. My name is Lydia, and I'll be your conference operator today. At this time, I'd like to welcome you to Ferguson's Second Quarter Conference Call. All lines have been placed on mute to prevent any interference with the presentation. Thank you.

I'd now like to turn the call over to Mr. Brian Lam, Ferguson's Vice President of Investor Relations and Communications. You may begin your conference call.

Good morning, everyone, and welcome to Ferguson's second quarter earnings conference call and webcast. Hopefully, you've had a chance to review the earnings announcement we issued this morning. The announcement is available in the Investors section of our corporate website and on our SEC filings webpage. A recording of this call will be made available later today. I want to remind everyone that some of our statements today may be forward looking and are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected, including the various risks and uncertainties discussed in our Form 10 K available on the SEC's website.

Also, any forward looking statements represent the company's expectation only as of today, and we disclaim any obligation to update these statements. In addition, on today's call, we will also discuss certain non GAAP financial measures. Please refer to our earnings presentation and announcement on our website for additional information regarding those non GAAP measures, including reconciliations to the most directly comparable GAAP financial measures. With me on the call today are Kevin Murphy, our CEO and Bill Brundage, our CFO. I will now turn the call over to Kevin.

Thank you, Brian, and welcome everyone to Ferguson's second quarter results conference call. On the call today, I'll cover highlights of our second quarter performance. I'll also provide a more detailed view of our performance by end market, customer groups and growth initiatives before turning the call over to Bill for the financials. I'll then come back at the end and give some closing comments before Bill and I take your questions. During the second quarter, our associates executed well for our customers, delivering continued volume growth driven by market outperformance.

A sequential step up in our volume growth rate generated sales of $6,900,000,000 an increase of 3% over prior year despite continued commodity led deflation of approximately 2%. We delivered adjusted operating profit of $449,000,000 as we managed through the sixth consecutive quarter of overall deflation in what was a subdued market. We continue to execute our capital priorities, deploying approximately $500,000,000 in capital during the quarter. And the $1,000,000,000 increase to our share repurchase authorization reflects our confidence in our business. We remain confident in both our residential and non residential end markets over the medium term, and we continue to balance investment in our customer facing associates, our capabilities and our value added solutions.

That said, we are taking near term actions to increase speed and efficiency to better serve our customers and to better position the organization for future profitable growth. Turning to our performance by end market in The United States. Net sales grew by 3% despite continued deflation driven by commodity products across both residential and non residential end markets. The residential end market, which comprises approximately half of U. S.

Revenue, remains subdued across both new construction and repair maintenance improvement. Our team grew revenues in our residential end market by approximately 2% in the quarter. The non residential market was slightly more resilient with continued activity on large capital projects where we saw healthy levels of shipments, bidding activity and open order volumes. We continue to take share with our total non residential revenue growth of approximately 4%. Sales grew modestly in both commercial and industrial with particular strength in civil infrastructure.

Our intentional balanced market exposure, new versus repair, maintenance and improvement and residential versus non residential continues to position us well, both in the current environment and well into the future. Moving now to revenue performance across our customer groups in The United States. We are pleased with the continued sales growth in our HVAC customer group, an increase of 17% in the quarter, building on growth from prior year, as we continue to strategically invest in distinct growth initiatives, which I'll cover in a bit more detail later. Residential Trade Plumbing revenues were flat, broadly consistent with recent quarters. The business faced continued headwinds in new construction and ongoing price deflation, while repair maintenance and improvement is performing slightly better.

We saw similar trends in residential building and remodel and residential digital commerce, where the higher end project is holding up better than the broader remodel market. We'll discuss later how these groups are coming together to create a unique experience in the market. Waterworks revenues were up 10% with robust activity in public works, general municipal and meters and metering technology, offsetting weaknesses in residential. Additionally, our diversification efforts continues to drive incremental growth positioning us well for the long term. The commercial mechanical customer group grew 2%, driven by large capital projects such as data centers, partially offset by weaker activity in traditional non res projects.

We're optimistic as we enter the third quarter as our open order book continues to grow. Our industrial, fire and fabrication and facility supply customer groups delivered a combined net sales decline of 6% heavily impacted by commodity deflation in steel pipe, particularly in our fire and fabrication business. We remain committed to driving productivity for our specialized professional customers and maximizing value to the total project across each of our customer groups. Despite near term market headwinds, we're very pleased with the results of our investments in key growth areas. Within HVAC, our markets are large, fragmented and highly attractive.

We're taking a three pronged approach to growth with a combination of dual trade counter product conversions, geographic expansion of our HVAC network and strategic acquisitions. We're meeting the needs of the rapidly growing dual trade professional by completing over 500 counter conversions that now better serve both plumbing and HVAC professionals. We're ahead of our pace to complete our goal of over six fifty dual trade counters in fiscal twenty twenty six. We deploy a multi equipment brand strategy partnering with a number of branded suppliers to ensure our customers have access to the product choice that they require. Additionally, our private label APAC line Durastar has shown solid growth and is building momentum as a high quality equipment line that's accessible across The United States for our customers.

Our Waterworks business is both our largest and most diversified customer group. We're involved from the design stage through project management. Our diverse business provides solutions for water, wastewater and stormwater management as well as erosion control, urban green infrastructure, treatment plant construction and metering technology. And we've expanded our capabilities to offer more holistic solutions for our customers. Day in and day out, we're solving problems to support the nation's aging infrastructure.

With the use of artificial intelligence, we advise our customers in areas such as preventative maintenance and leak detection. Our knowledgeable Waterworks associates leveraged the scale of our business and our supply chain to provide outstanding service and deliver comprehensive solutions for our customers. Waterworks is also a unique and critical piece of our focus on large capital projects, an area where tailwinds have emerged in an otherwise muted nonresidential end market. Our multi customer group approach on large capital projects drives collaboration and expertise across our waterworks, commercial, mechanical, industrial and fire and fabrication customer groups to solve complex project requirements. The sophistication and size of these projects, particularly data centers demand extensive expertise, proficiency and the ability to scale.

By engaging early in the project lifecycle, we partner with owners, architects, engineers and general contractors. We influence and address project challenges effectively leading to successful outcomes. Finally, the recent launch of Ferguson Home represents another area of growth as a unified brand that fully integrates our showroom and digital channels, offering customers a seamless project based experience. This best in class omni channel approach is the next step for the evolution of our digital footprint, while leveraging the expert consultative approach within our showrooms. For our customers, this results in a more consistent and connected experience that simplifies and enhances residential projects, bringing additional value to our residential building and remodel and residential digital commerce customer groups.

We're pleased with the progress of these key growth areas and we'll continue to invest in them to drive long term growth and returns. I'll now pass you over to Bill who will discuss the financial results in more detail.

Thank you, Kevin, and good morning, everyone. Net sales of $6,900,000,000 were 3% ahead of last year. Organic revenue increased 2.1% with an additional 1.2 increase from acquisitions.

Total volume increased by 5%, offset by continued commodity led price deflation of approximately 2%. This represents our fourth consecutive quarter of volume growth. Gross margin was 29.7%, a decrease of 70 basis points over last year, impacted by weak end market demand and persistent deflation, along with the sales mix impact of outside growth in HVAC and Waterworks. Operating costs grew largely in line with our 5% sales volume growth. The 60 basis point decline in operating leverage was largely driven by the impact of price deflation on sales, along with the impact from continued selective investments in core capabilities for future growth.

As a result, adjusted operating profit of $449,000,000 was down $71,000,000 on the prior year, delivering a 6.5% adjusted operating margin. Adjusted diluted earnings per share of $1.52 was 12.6% lower than last year, driven by lower adjusted operating profit, partially offset by the impact of share repurchases. And our balance sheet remains strong at 1.2 times net debt to adjusted EBITDA. Moving to our segment results. Net sales in The U.

S. Grew 3% with an organic increase of 2% and a 1% contribution from acquisitions. Adjusted operating profit of $455,000,000 decreased $70,000,000 over the prior year, delivering an adjusted operating margin of 6.9. In Canada, net sales were 3.2% ahead of last year with organic growth of 3.1% and a 5.4% contribution from acquisitions, partially offset by a 5.3% adverse impact from foreign exchange rates. Markets have been broadly similar to that of The United States with non residential activity remaining more resilient than residential.

Adjusted operating profit was $11,000,000 in the quarter, $2,000,000 above the prior year. Turning to our first half results. The year has been challenged by persistent commodity led deflation and subdued end markets. Despite this, we have consistently outperformed our markets. Net sales were 1.8% ahead of last year with organic sales up 0.8% and an acquisition contribution of 1.2%, offset by 0.2% from the adverse impact of foreign exchange rates.

Gross margin was 29.9%, down 40 basis points. Adjusted operating profit of $1,200,000,000 was down 10.7% compared to the prior year, delivering a 7.9% adjusted operating margin. And adjusted diluted earnings per share of $3.98 was down 9.5%. Next, our cash flow performance. Adjusted EBITDA of $1,260,000,000 was down approximately $130,000,000 on the prior year.

Working capital investments of $200,000,000 were above the prior year by $87,000,000 driven by investments in HVAC to support our growth initiatives as well as the transition to new equipment efficiency standards along with an increase in receivables driven by sales growth. Interest and tax were down approximately $40,000,000 in the prior year. As a result, operating cash flow was $685,000,000 We have continued to invest in organic growth through CapEx, investing $158,000,000 slightly down in the prior year as projects are taking longer to complete, resulting in free cash flow of $545,000,000 in the first half. Turning to capital allocation. As previously mentioned, we invested $158,000,000 into CapEx during the first half to drive further above market organic growth.

Our board declared an $0.83 per share quarterly dividend. This is consistent with the first quarter and represents a 5% increase over the prior year, reflecting our confidence in the business and cash generation. We continue to consolidate our fragmented markets through bolt on geographic and capability acquisitions. We announced one completed acquisition during the second quarter, Templeton and its affiliate Tempsco. In addition, subsequent to quarter end, we signed a definitive purchase agreement to acquire Independent Pipe and Supply, a leading commercial mechanical business in the Northeast.

And finally, we are committed to returning surplus capital to shareholders when we are below the low end of our target leverage range of one to two times net debt to adjusted EBITDA. We returned $5.00 $8,000,000 to shareholders via share repurchases during the first half compared to $250,000,000 in the first half of the prior year, reducing our share count by approximately 2,600,000. And today, we've announced an increase to our share repurchase program by an additional $1,000,000,000 reflecting our confidence in the business. As a result, we have approximately $1,400,000,000 outstanding under the share repurchase program. Next, I'll cover our revised outlook for fiscal twenty twenty five.

We are pleased with our continued market outperformance, but challenging end markets and persistent commodity led deflation have resulted in adjusted operating margins coming in below our expectations in the first half. While we continue to expect improvement in the second half, we believe our markets will remain somewhat subdued and are therefore updating our full year outlook. Our fiscal twenty twenty five guidance is as follows: We maintain our view of total sales growth in the low single digit range, with the continued assumption of markets being down low single digits, inclusive of pricing being slightly down for the year, driven by ongoing deflation in commodity based products. We expect continued market outperformance and just under a 1% contribution from already completed acquisitions, which is partially offset by one fewer sales day in the third quarter. We expect an adjusted operating margin range between 8.3 to 8.8%.

Interest expense will be between $180,000,000 to $200,000,000 Our adjusted effective tax rate will be approximately 26%. And we've revised our CapEx estimate to be between $325,000,000 to $375,000,000 to reflect the extended project delivery timeline and pace of expected capital deployment. Also, as Kevin mentioned earlier, we are currently taking actions to increase speed and efficiency to better serve our customers and deliver value. While we have been disciplined in managing costs in relation to volume growth, there is additional opportunity to reduce complexity, simplify management structures and drive greater speed and accountability within the organization. These actions we are taking will better position the organization for profitable growth.

Thank you, Bill. As we conclude our remarks, let me reiterate our thanks to our associates whose continued execution has driven further share gains despite a backdrop of market headwinds and commodity led price deflation. With leading positions in large highly fragmented markets, we expect to continue to outperform our markets as we leverage our size, scale and strategy. We're operating in a unique time where we must continue to drive disciplined cost management. And we're taking actions to better position the organization for future profitable growth.

We differentiate ourselves on service levels focusing on value added solutions, a suite of digital tools backed by the strength of our knowledgeable associates and a supply chain that delivers the best breadth and depth to our customers where and when they need it. In residential markets, we continue to see strong long term fundamentals with an aging and under built housing stock in addition to our structural growth opportunity in HVAC. On the non residential side, our diverse exposure coupled with multi year tailwinds from large capital projects are expected to drive continued growth. We're well positioned for this growth as we engage in a more holistic involvement earlier in the design phase to leverage our scale, our value added solutions and our digital capabilities. We believe our markets remain attractive over the medium term and we continue to balance investment in our core customer facing associates and our capabilities, focusing on the principles that underpin our strategy for sustained growth and market leadership.

Thank you for your time today. Bill and I are now happy to take your questions. Operator, I'll hand the call back over to you.

Thank Our first question today comes from Matthew Bouley with Barclays. Please go ahead. Your line is open.

Good morning, everyone. Thank you for taking the questions. I wanted to ask first around the growth investments in OpEx and a lot of these areas you've been speaking about for a while, kind of the large capital projects and the HVAC counter conversions and now it sounds like you've got a few more growth initiatives beyond that as well as you guys sort of invest for growth despite a bit of a choppy end market backdrop here. So basically where are we in the cycle of these growth investments? I'm curious if you can maybe quantify any of the kind of year over year OpEx in the second half and then maybe balance that with some of the areas that where you're looking Thank you.

Yes, Matt, this is Kevin. I'll start and then pass it over to Bill. When you look at the investments that we're making, you're right to call out both ATAC and large capital projects and I probably spread that into Waterworks as well as the rest of our traditional business. If you take ACAC and we've talked about this in the past, we want to make sure that we're building out counter locations across the entirety of The United States that can take care of not only specialized HVAC contractors with a great product offering and experience sets, but also the dual trade contractor that does all HVAC employment. And so, we're well on our way to that conversion.

And so, the investments in both people, product and expansion have been across 500 counters and we're probably on track to north of six fifty as we look towards the next fiscal year. We've also been growing organically because as you know, we want to make sure that we have great HVAC capabilities across all markets in the nation. And so, we've actually expanded over 20 new markets from an HVAC perspective, again, complementing that traditional plumbing business and complementing the dual trade contractors that's growing in the market. So that's been a good source of that investment. And then the third prong obviously being from an M and A perspective.

On the large capital project side, it really has been taking the complexity and the scale of these projects and making sure that we're there to add productivity to the contractor base in areas like fabrication, valve and automation, what we're doing with digital product content for BIM models. We're also engaged in more up funnel work together with the general contractor, the owner, the engineer to make sure that across multiple customer groups, we're bringing value to the job as a whole. And then you look at the Waterworks side, and both from an M and A perspective as well as what we're doing organically is bringing more capabilities to water and wastewater treatment plant and infrastructure, so that we can be more valuable to the project as a whole, more product sets, more execution, more up funnel engagement. And I think you're seeing that play out. We're pleased with that from a growth perspective, not only in the core Waterworks business, but across the Civil Infrastructure space.

So, it really is across multiple customer groups and balancing that with driving the volumetric exposure that we have inside the business. And we're pleased with what that has been. But additionally, when you look at a business across time, there are areas that we can address from spans and layers perspective to make sure that we're more streamlined, we're more accountable and we're driving focus for our customers.

Yes, Matt, maybe just to build on to that a bit from a quantification standpoint. As we mentioned in the prepared remarks, if you look at the cost growth that we had in the second quarter, cost growth was about 5.5%.

The vast majority of that was driven by that 5% volume growth. And the teams to Kevin's point are doing a really nice job managing that volume. In fact, if you look at our full time equivalent headcount, it's about flat year over year versus that volumetric growth of 5%. So, we're driving good underlying productivity in the core business. And if you think about that 60 basis point deleverage and you think about a 2% top line impact from deflation, it's worth about $130,000,000 of sales from a pricing perspective is the 2% equivalent.

That's driving roughly 40 of that 60 basis points of deleverage in the quarter. So, the remainder is the fact that we're driving underlying productivity offset by some cost inflation and those investments. So with a really an underlying 20 basis point step up in OpEx deleverage or OpEx cost as a percentage of sales in the quarter, We're quite pleased with how that was managed in a tough environment. When you look forward to Kevin's point, we are taking some actions and we're right in the midst of those actions, really focused on non customer facing roles, layers and structure. That work is well underway.

We plan to execute most of that work in the third quarter and into the fourth quarter. And while I won't give an exact number, our intention is to slow the rate of cost growth as we move through the second half, again, still against that backdrop of a challenging market.

Excellent. Perfect. Thank you for that comprehensive answer. Secondly, I wanted to ask about the two customer groups, HVAC up 17% and Waterworks up 10%. And I'm sure the growth investments you've been making is part

of the answer to this question. But I guess, firstly, any way

to quantify how much M and A is in those kind of roughly versus organic? And then we'd just love to hear further elaboration on what drove the acceleration in both of those customer groups, maybe from a market perspective beyond your growth investments? And kind of if you're expecting those to remain above the company average in terms of your second half guide? Thank you.

Yes. Matt, the vast majority of the growth in both of those customer groups is organic. You can probably pencil in a couple of points of acquisition growth. So again, with 1710% respectively growth from those customer groups, the vast majority is organic.

And I thought I'll take it in reverse, Matt, in Tuck Water and then HVAC.

From a Waterworks perspective, the group has heard me talk over and over again, couldn't be more pleased with the balanced business mix that our Waterworks business operates in and drives. And so if you look across residential, commercial, municipal, public works, that balance is serving us quite well. And we called out civil infrastructure as being a big part of the growth in this past quarter. If you look at our meter and automation group, our geosynthetics, our municipal sales, our water and wastewater treatment, that's all up double digits on a pretty sizable number. And so, the investments that we're making to be great in that area are serving us well in the current period.

And then I go back to on the HVAC side, it really is execution of the strategy. M and A, geographic organic expansion and then counter expansion for the dual trade professional. And so, yes, maybe there's a little bit of pull forward of product in residential new construction as you see the equipment conversion or there may be a bit of small bit of inventory build. That's not the real drivers of what you're seeing out in the marketplace. It really is execution of what that multi year strategy is.

Our next question comes from Philip Ng with Jefferies. Please go ahead.

I have a question on gross margins. Certainly a little softer in the quarter and you've lowered your full year guide for EBIT margins. So I guess perhaps where is some of the downward surprise you're seeing? Is that more less price more pricing headwinds on the commodity side and or limited pricing on your finished goods? Just looking out to the back half this year, I just want to get any update on how price increases are shaping up whether it's finished good or commodity side?

And especially in the backdrop where tariffs are being implemented, how does that kind of impact your ability to push price in good or bad?

Yes. Phil, thanks for the question. If you look at that 70 basis point decline from prior year second quarter, it really is a confluence of a few factors. Firstly, we are still operating in an overall market that's down year on year with compressed volumes. We have persistent deflation and I would point to that driving the majority of the decline year over year.

If you think about the fact that we're now in our sixth quarter of deflation and that lasted a bit longer than we expected at the beginning of the fiscal year and is lasting a bit longer as we turn to the second half. The deflation is a big component of that, really all on the commodity side, not on the branded product side. And then last but certainly not least, we just got done talking about a bit more explanation on the expanded growth in HVAC and Waterworks. And so there's some mix pressure there from a gross margin perspective that's driving the remainder of that gross margin pressure year on year.

Any color on the pricing side of the back half? And then certainly there's tariffs right being implemented on metal and stuff like that. Is that a good guy on your commodity side? And then, any price increase on the finished goods side that you're seeing happening?

Yes. So as Phil indicated, the persistent deflation really is driven by commodity input based deflation. And so, you think about PVC resin or hot rolled coil on the steel side, that's really driving what that deflation looks like and that's the biggest cause of what we're seeing from an overall margin perspective. If you look at how the market is affecting, we compete in the market every day and we're very pleased with the market outperformance from a revenue perspective. And our teams are constantly and consistently working to make sure that we balance share gains, long term customer relationships, price and margin and what we're doing with our vendor community around getting the right cost of control position for the value that we add in the marketplace.

And that happens in every market, every day across every customer group on every project. And so, we're pleased with the way that's progressing and we're making sure that we manage that over time. When you look at the tariff impact, that certainly will have some degree of a stabilizing effect on what that deflation looks like. And if you think about the steel market and what we're seeing in price increases that have already been announced in the steel pipe side of the business. So we think that that could be a stabilizing effect, but there's a great deal of uncertainty and it's a pretty dynamic process as we look forward.

Okay, that's helpful. And just depending on demand trends, any color on fiscal 3Q intra quarter trends? Certainly feels like the consumer has weakened a bit in February. All the commentary around your commercial, especially your mega projects infrastructure side of things sounds pretty encouraging. Admittedly, there has been choppiness from what we're hearing on tariffs and new policies with those on that front.

Are you seeing any choppiness on the heavy commercial side as well?

Yes. First off, Phil, from a February perspective, February top line was largely in line with the second quarter. So you can think of that as somewhere around that 3% overall growth rate. So pretty consistent as we step out of Q2 into Q3. With that said, February is a twenty day billing month that's always got some weather impact.

So I wouldn't read too much from a trend perspective. If you look at if you take a step back and you think about the guidance we set out for the full year, we've said we expect to deliver low single digit growth for the full year. We're sitting just under 2% growth in the first half. I'd tell you that we still think the market overall will be down in the low single digit range like we set out at the beginning of the year, but probably a bit more pressured towards the lower end of that low single digit than we thought at the beginning of the year. Just to your point, as the market has just been a bit more muted and as we just talked about, deflation is lasting a bit longer.

So that really sets us up for an expectation that the second half will still be in somewhere from a growth perspective in that low single digit range pretty consistent with the first half.

Our next question comes from Quinn Fredericksen with Baird.

Can you give us any details on what individual commodities are doing in terms of large diameter versus small diameter PVC, copper tubing, steel pipe, etcetera, and maybe how those are trending here quarter to date?

Yes, sure. If you think about, if we start with copper tube and we mentioned this in the last quarter call, copper had been in a bit of the inflation through the first quarter and that continued into the second quarter and we would expect that to continue. That was really exiting the first quarter. That was really the only commodity category that was in inflationary territory. As we just talked about, steel has been one of the biggest pressure points that we've had and that's impacted the Commercial Mechanical business and the Fire and Fabrication business in particular.

That's still in deflation today. As Kevin just alluded to, we've seen some announcements of price increases largely on the backs of tariff announcements. So, we would expect that deflation to lessen as we move through the second half. But it remains to be seen what happens with those tariffs. We could have a change in that while we're on this call, quite frankly.

And then PDC, as you outlined, is still probably the biggest commodity deflation category for us. A bit more deflation still on the plumbing side than on the waterworks side, but both are still facing some pressure. We expect that pressure to continue in the second half, which is driving some of that expectation of deflation lasting a touch longer.

Okay. Thank you for that. And then secondarily, just the back half operating margin sequential improvement that's embedded in the guide. Would that be consistent with just normal seasonal uptick or just maybe some of the lessening commodity deflation and some of the cost actions that you've mentioned support better than seasonally normal? Thanks.

Yes. I think the majority is seasonal. But if you look at the first half operating margin that we delivered of 7.9% And the full year guide of 8.3% to 8.8% implies a second half that's going to be somewhere in the mid 8% to mid 9% operating margin range. So seasonally, we generally take a step up to your point in the second half. But also, we're actioning every day, as Devin mentioned earlier, to ensure that we're charging for our value from a gross margin perspective.

And while gross margins were pressured in the second quarter, that pressure was particularly early in the second quarter in November and December. And we've been encouraged by the movement and the progress that we've made in January and exiting February. And then to your point on the cost side, while the cost growth has been about 5% for the first half and we expect that cost growth to continue particularly in the third quarter, as we do take some of these actions, again, our intention is to slow that rate of cost growth in relation to sales as we exit the year. Of course, some of that will be driven by the volume environment that we find ourselves in the second half.

Our next question comes from John Novartolo with UBS. Please go ahead.

Good morning. Thank you for taking my questions as well. The first one is, are you seeing any DOGE impacts in any of the water infrastructure, construction or institutional markets? And do any of

Yes, John, thanks for the question. No, we're not seeing any near term impact from a dose perspective. There is some conversation around what the federal funding structure might look like. Today, when you look at the civil infrastructure growth that we experienced, the Water Works growth in general, it's not coming from a flood of federal dollars. It is coming from the focus that we've got on helping our aging infrastructure around public line work, water and wastewater treatment plant construction, meters and metering technology and general infrastructure repair maintenance and improvement.

It's difficult right now to understand what the federal plumbing picture is going to look like, but we're bullish on what the needs of that overall infrastructure investment has to be, especially in light of what we're seeing around the country. And so we will invest in that both organically and inorganically to make sure that we are part of that solution.

Understood. And then is there any way to help us kind

of think about or quantify the mix impact of gross margin from the higher HVAC and waterworks sales? And I guess in addition to that, are you seeing any customers kind of trade down?

Yes, John, broadly, I'd say two thirds of the impact on gross margins was from the market and deflation with the remaining close to one third being driven by mix. Again, that's going to vary quarter in quarter out and depending on the mix of that business.

And from a trade down perspective, I wouldn't attribute much of that to trade down. We talked about ACAC. Just like we saw in 02/2008, '2 thousand and '9, we're seeing a bit of focus on the repair versus the replace.

That probably will continue, especially as we go through the Refrigerant changes in, call it, the back half of our Q3 and the front half of our Q4. That's to be expected, but we aren't seeing a very large amount of trade down because of consumer balance sheet.

The next question comes from Sam Reid with Wells Fargo. Please go ahead.

Awesome. Thanks so much. So I wanted to drill down a bit on Waterworks. You're obviously executing quite well in this category, but you also alluded to some weakness on the resi side. Wanted to understand was that weakness a little bit more pronounced sequentially?

Are you starting to see the large builders pull back on community count growth in response perhaps to lower demand? Just want to unpack that comment in greater detail.

Yes, Sam. It really is around just what the growth in the market looks like. We haven't seen a pronounced turndown. We haven't seen any real change in builder activity. In fact, if we're looking forward, the bidding activity that we're seeing on the residential side of our Waterworks business has been encouraging.

Now, that's just bidding activity. And so, we need to make sure that that A plays out in actual projects being released and that when those projects are released that all phases and sections are going to be released. So, it's a bit too early to tell, but it isn't a pronounced movement downward. It really is a bit of a mix shift in what our Waterworks business has experienced from a growth perspective in Public Works versus Residential. And again, I'll go back to we are really pleased with the balanced business mix that exists in that Water business because it's not dependent on one particular sector inside the market.

And then maybe switching gears here, I wanted to dig a little deeper on finished goods pricing, perhaps following up a bit from Phil's question. When I talk through realization on list price increases versus what you're actually seeing in the market, are there any categories where you're getting something close to the list price increase, any categories where you're notably not getting we're not seeing pricing flow through in line with those price increases? Thanks so much.

Yes, thank you. And when you think about the finished goods side, we're still fairly early in the year in terms of what those annual price increases look like, And we're still a little bit early in tariff realization, because you've got multiple things playing out at the same time in a pretty dynamic environment. And so if I were to take a step back and look at us, not only from our annual price increase perspective, but also in the tariff environment, we've got the broadest supplier base in the industry. It gives us the ability to navigate solutions for our customer that match price and value. We've got people and systems in place that we can react pretty quickly to what is a dynamic environment right now.

We always take the opportunity to proactively communicate with our customers and our customers' customer to make sure that we're understanding what that price move looks like. And that's hard work as we go through, especially when you think about tariff and annual price increase, because you've got to address projects that are already in flight line by line, project by project. And generally speaking, we will pass through that price. There are going to be some pressure points, but generally speaking, that's what we do. And so, it's a bit early to tell how that is going to sit and it's a bit early to tell what tariff is going to play with annual, but we're encouraged by that being a stabilizing effect as we think about what deflation has meant to the first half of our fiscal year.

The next question comes from Mike Dahl with RBC. Please go ahead.

Good morning. Thanks for taking my questions. Kevin, I want to go back to the gross margins again. Interesting comment in terms of the sequential dynamics kind of being worse than November, December and then a little bit better coming through Jan Feb. And it kind of your comments kind of married your prior ones, which talked about balance and share and getting paid for your product.

Can you just talk about did you reach a point where you thought that balance had gotten out of whack in November, December? I mean, you certainly gained share from a top line standpoint. But did you feel like you were giving up too much to do that? And now you're rebalancing a little bit as you kind of think about that trade off in the back half of the year? Or how else would you characterize the competitive dynamics right now?

Yes, like you're right. We did experience November and December a bit more challenged and we're encouraged by what January and February look like. As Bill said, it really was a mix of three different areas. You got sales mix with ACAC and water, you got persistent deflation that's playing out and then you've got some challenging markets. And the group is out there, especially when we think about the commodity side of the world and the input commodity deflating and making sure that we're right for our vendor partners, making sure that we're right for our customers that we have long term relationships with, and making sure that we're marrying that value with price and margin.

And we're working that every day and we're working at every customer and across customer groups. And so, we need to make sure that we're addressing that in real time. I feel good about where we went through January and where we are in February. And quite frankly, the quarter, particularly November and December, was a pretty unique time in the market with all those things coming together. And so I feel good about where we're going.

And as we look forward, we intend this business to be a 30 plus percent gross margin business based on the value that we provide, assuming business mix stays reasonably similar, because we're going to continue to add value added services that we charge for and make sure that we're adding productivity to our contractor customer. So, yes, I think generally speaking, as we're moving into the third quarter, we feel good about where we're headed.

That's helpful. Thanks. And then secondly, I know

a lot of questions have already been asked about the pricing dynamics. But I guess to be more specific in your prior guide, I think you contemplated that second half would get back to flat to slightly positive. Now you're saying deflation lingers a little bit longer, but you do have some of these kind of tariff based increases out there. Can you just help us dial in what the pricing cadence should look like in the second half of the year, if it's still down each of 3Q and 4Q order of magnitude? Anything you can give us quantify would be great.

Ferguson Enterprises (FERG) Q2 2025 Earnings Call Transcript

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