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

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Ferguson Enterprises

ferguson enterprises

Hello, everyone, and welcome to Ferguson's Third Quarter Results Conference Call. My name is Lydia, and I'll be coordinating your call today. I'd now like to turn the call over to Brian Lance, Vice President of Investor Relations and Communications. The floor is yours. Please go ahead.

Good morning, everyone, and welcome to Ferguson's third 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 ks available on the SEC's website.

Also, any forward looking statements represent the company's expectations 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. Therefore, all references to operating profit, operating margin, diluted earnings per share, effective tax rate and earnings before interest, taxes, depreciation and amortization reflect certain non GAAP adjustments. Please refer to our earnings presentation and announcement on our website for additional information regarding those non GAAP measures, including reconciliations to their most directly comparable GAAP financial measures. With me on the call today are Kevin Murphy, our CEO and Bill Brundage, our CFO.

Thank you, Brian, and welcome everyone to Ferguson's third quarter results conference call. On today's call, I'll cover highlights of our third quarter performance. I'll also provide a more detailed view of our performance by end market, customer group and our 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. Our associates continue to take care of our customers, outperform the market and drove strong growth in the third quarter.

Sales of $7,600,000,000 increased 4.3% over prior year, driven by organic growth of 5% and acquisition growth of 1% despite one fewer sales day and foreign exchange, which had a combined 1.7% negative impact. We delivered a 31% gross margin, which strengthened sequentially by 130 basis points. This was driven by our actions to better capture the value we deliver to customers while maintaining market share gains as well as the impact from moderating deflation. Strong volume growth, gross margin improvement, moderating deflation and the early benefits of streamlining our business drove profitable growth. Operating profit increased 6.1% and operating margin expanded 20 basis points to 9.4%.

Diluted earnings per share increased 7.8% over the prior year to $2.5 We continued to execute our capital priorities, deploying approximately $690,000,000 during the quarter including completing three acquisitions and returning $417,000,000 to shareholders through share repurchases and dividends. Our balance sheet remains strong with net debt to EBITDA of 1.2 times. While we're in a dynamic and uncertain environment, we remain confident in our markets over the medium term. We continue to balance investment in key strategic opportunities, leveraging multi year tailwinds in both residential and non residential end markets as we look to support the complex project needs of our specialized professional customers. Turning to our performance by end markets in The United States.

Net sales grew 4.5% as we drove volume growth with moderating headwinds from deflation. The residential end market, which comprises approximately half of U. S. Revenue remained subdued. Our teams grew revenue in our residential end market by approximately 2% in the quarter, primarily driven by our HVAC growth initiative.

Non residential end markets representing just under half of U. S. Revenue saw stronger growth in residential end markets with increased activity on large capital projects. We continued to grow share with non residential revenue growth of approximately 7%. We delivered mid to high single digit growth across commercial and industrial end markets with low double digit growth in civil infrastructure.

Our intentional balanced end market exposure and focus on key growth initiatives continue to position us well in both the current environment and well into the future. Moving now to revenue performance across our customer groups in The United States. Our HVAC customer group continues to deliver strong growth with an increase of 10% in the quarter. I'll expand on our HVAC growth investments in a moment. Residential trade plumbing revenues declined 1%, broadly consistent with recent quarters.

The business faced continued headwinds in new construction and ongoing price deflation, while repair, maintenance and improvement is performing better. We've recently merged residential building and remodel and residential digital commerce customer groups into a unified brand called Ferguson Home. Ferguson Home provides a seamless omnichannel experience for our customers. Our focus on the higher end project is driving growth despite the overall softness in broader remodel activity. Strong Waterworks growth of 12% in the quarter was driven by activity in Public Works, Municipal and our broader diversification efforts.

Both Water Works and Commercial Mechanical continue to see strong activity on large capital projects. Commercial Mechanical revenue grew 10% and our open order levels continue to grow. Our industrial, fire and fabrication and facility supply customer groups delivered a combined net sales decline of 1% as commodity deflation continued particularly in our fire and fabrication business. Collaboration across multiple customer groups and our unique position in the market continue to be an advantage. Despite near term headwinds, we continue to be pleased with the results of our four key growth areas.

The third quarter performance shows ongoing returns from these multi year investments. HVAC revenue up 10% in the third quarter reflects our focus and investments to expand our HVAC capabilities both organically and through acquisitions. Our multi pronged approach, which includes leveraging the synergy between our residential trade plumbing and HVAC customer groups continues to drive market outperformance. We've completed more than five fifty counter conversions to serve our dual trade contractors. Our HVAC presence continues to grow geographically through both organic expansion and acquisitions.

We're addressing the needs of the market by partnering with a variety of HVAC equipment vendors to offer our customers a range of choices, including our own Durastar brand. Waterworks revenue grew 12% in the quarter. We're committed to diversifying our Waterworks business to create a best in class capability set that addresses the nation's infrastructure needs. We provide solutions for water, wastewater, and stormwater management as well as erosion control, urban green infrastructure, treatment plant construction, meters, and metering technology. Our unique approach to large capital projects, bringing together the capabilities underground waterworks infrastructure, commercial and industrial pipe valve and fitting, and fire protection create a compelling solution for large capital projects and has been a driving force behind non residential growth of 7% in the quarter.

We believe our early alignment with owners, engineers and general contractors on these projects combined with our deep contractor relationships, our scale, and our ability to offer a suite of value added solutions uniquely positions us for success in these projects. The February launch of Ferguson Home represents another compelling example of the value our multi customer group approach brings to the market. We spent years developing best in class experience for our showroom and our digital platform for new construction, light remodel, and decorative markets. Ferguson Home is the unified brand of residential building and remodel and residential digital commerce, fully integrating our showroom and digital channels to offer our customers a seamless project based experience. Our scale delivered locally with the cohesiveness of our customer groups is a true competitive advantage.

We continue to invest in key growth areas that capitalize on multiyear tailwinds and drive outperformance. I'll now pass you to Bill who'll discuss the financial results in more detail.

Thank you, Kevin, and good morning, everyone. Net sales of $7,600,000,000 were 4.3% ahead of last year. Organic revenue increased 5% with an additional 1% from acquisitions, partially offset by 1.7% from one fewer sales day and the adverse impact of foreign exchange.

During the quarter, we saw deflation moderate with the pricing environment broadly flat. We saw improvement in finished goods pricing offset by continued weakness in certain commodity categories. While we have seen some instances of pull forward buying activity from customers in the quarter, this is difficult to quantify and we do not believe this has had a material impact on the overall performance. Gross margin of 31% increased 50 basis points over last year, driven by specific actions taken to better capture the value we deliver to customers while also maintaining market share gains as well as the positive impact of moderating deflation. We tightly managed operating costs with the growth being driven by higher volumes, cost inflation and continued selective investments in core capabilities for future growth.

As a result, operating profit of $715,000,000 was up 6.1% on the prior year, delivering a 9.4% operating margin with 20 basis points of expansion over the prior year. Diluted earnings per share of $2.5 was 7.8% ahead of last year, driven by operating profit growth and the impact of share repurchases. And our balance sheet remains strong at 1.2 times net debt to EBITDA. As we discussed in the second quarter, we took targeted actions to streamline operations, enhance speed and efficiency to better serve our customers and drive further profitable growth. Consequently, we incurred a nonrecurring business restructuring charge of $68,000,000 principally related to severance costs.

These actions reduce complexity in the organization and will speed up decision making. We expect the changes to deliver approximately $100,000,000 of annualized cost savings. Moving to our segment results. Net sales in The U. S.

Grew 4.5% with an organic increase of five percent and a 1% contribution from acquisitions, partially offset by a 1.5% impact from one fewer sales day. Operating profit of $726,000,000 increased $41,000,000 over the prior year, delivering an operating margin of 10%. In Canada, net sales were 0.3% below last year, with organic growth of 3% and a 2.8% contribution from acquisitions, offset by a 4.4% adverse impact from foreign exchange rates and a 1.7% impact from one fewer sales day. Residential activity has continued to be soft with nonresidential activity remaining more resilient. Operating profit was $8,000,000 in the quarter, 2,000,000 above the prior year.

Turning to our year to date results, our associates delivered volume growth in a period challenged by commodity led deflation in subdued end markets. Net sales were 2.7% ahead of last year, with organic growth of 2.2% and an acquisition contribution of 1.1%, partially offset by 0.6% from the adverse impact of one fewer sales day and foreign exchange rates. Deflation was over 1% year to date. Gross margin was 30.3%, down 10 basis points. Operating profit of $1,900,000,000 was down 4.9% compared to the prior year, delivering an 8.4% operating margin.

And diluted earnings per share of $6.48 was down 3.6%. Next, our cash flow performance. EBITDA of $2,000,000,000 was down approximately $80,000,000 on prior year. Working capital investments of approximately $100,000,000 were above the prior year, driven by investments in inventory, along with an increase in receivables driven by sales growth. Interest and tax were down approximately $110,000,000 on the prior year driven by timing.

As a result, operating cash flow was $1,400,000,000 We have continued to invest in organic growth through CapEx, investing $235,000,000 slightly down in the prior year, resulting in free cash flow of $1,150,000,000 Turning to capital allocation. As previously mentioned, we invested $100,000,000 in working capital and $235,000,000 into CapEx to drive further above market organic growth. Our Board declared an $0.83 per share quarterly dividend. This is consistent with the second 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 completed three acquisitions during the third quarter, including Independent Pipe and Supply, a leading commercial mechanical business in the Northeast Light Innovations, a residential building and remodel showroom in Arkansas and National Fire, a market leading fire and fabrication business operating across Eastern And Western Canada. We've now completed five acquisitions year to date and the pipeline remains healthy. 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 EBITDA. We have returned $759,000,000 to shareholders via share repurchases year to date compared to $421,000,000 in the equivalent prior year period. This year, we have reduced our share count by approximately 4,100,000.0 and now have approximately $1,100,000,000 outstanding under the share repurchase program.

Next, I'll cover our updated guidance for fiscal twenty twenty five. We are pleased with our continued market outperformance and solid growth in the quarter. Our markets remain dynamic and uncertain, but given the strong performance in the quarter, we are updating our full year guidance. We now expect low to mid single digit revenue growth, up from our prior expectation of low single digit growth. And we expect an operating margin range of 8.5% to 9%, up from our prior expectation of 8.3% to 8.8%.

Interest expense is unchanged at between 180,000,000 to $200,000,000 Our effective tax rate is expected to be approximately 26%, and we've updated our CapEx estimate to between $300,000,000 to $350,000,000 to reflect the pace of expected capital deployment. We believe we are well positioned as we head into the last quarter of our fiscal year. Thank you, and I'll now pass you back to Kevin.

Thank you, Bill. And let me thank our associates who continue to take care of our customers, outperform the market, and are driving strong results.

Our ability to serve and support the complex needs of our specialized professional customers continues to allow us to gain market share in a challenging environment. As announced last quarter, we implemented measures to better balance market share gains and capture the value we deliver to our customers. Additionally, we took actions to streamline our business and enhance speed and accountability by reducing complexity and simplifying management structures. We're pleased that these efforts coupled with deflation moderating a quarter ahead of our expectations have resulted in operating profit growth and operating margin expansion. We continue to invest in our key growth areas, including HVAC, Waterworks diversification, large capital projects and the recently launched Ferguson Home.

Our third quarter performance shows continued returns from these multiyear investments. We believe our markets remain attractive over the medium term and we continue to invest in our customer facing associates and our capabilities to drive growth. We're efficiently delivering scale locally to enable our associates to provide exceptional service to our expert customers on their projects. 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 you. Our first question comes from John Lovallo with UBS. Please go ahead. Your line is open.

Good morning, guys. Thanks for taking my questions. The first one is organic volume was 5% year over year in The U. S, and it's accelerated now for the past few quarters. I mean, how much of this strength would you attribute to kind of the internal initiatives versus an improving underlying market?

And how sustainable are these levels of organic growth as we move forward?

Yes, John. Thank you and good morning. We're obviously pleased with 5% organic growth. I think if you look back at what we've been trying to accomplish, especially in the nonresidential side of the world, it is bringing scale benefits and a multi customer group approach to large capital projects. And that large capital project landscape is really the strength behind the nonresidential market because the rest of the traditional nonres market is still in a challenging space.

And as we've said historically, we think that that market starts to step through '25, peak in '26 and and '27. So I think we're seeing a little bit of that play through as well as the team delivering value for not only the contractor, but also across contractors from water, wastewater, storm water through commercial mechanical piping, through fire suppression. So we're pleased with that on the non res side. And then on the residential side, it really has been a a focused effort to expand our HVAC capabilities across the nation, make sure that we can offer the best experience for a dual trade contractor inside of our counters, but also with our associate base who deliver real purity of purpose for the unique needs of the HVAC and trade plumbing contractor, but at the same time, giving them one place to shop. And so from that perspective, we think we've been able to to outperform the market, and we're really pleased with with those initiatives.

Understood. And then on the gross margin, 31 percent in the quarter, that was particularly strong, I think up about 50 basis points year over year on sales that were up about 4%. I mean, there any mix impact to call out there? And how should we sort of think about gross margin from the third quarter to the fourth quarter given the expected increase in sales?

Yes, John, this is Bill. Thanks for the question. Not a significant mix impact there, although given the strength of the non res businesses as we've quoted in the past, that can have a little bit of a headwind on overall gross margin. But given the actions that we took in Q2, if you go back to Q2 when we printed just slightly under a 20 30% gross margin, we had talked about some actions we had taken across our teams with our price matrix, with our sales force, etcetera, to ensure that we were appropriately charging for the value that we provide in the market. And we had talked about the fact that we had seen early returns of those actions as we exited Q2 and into Q3.

We were pretty pleased that those continue to play through into Q3. So those actions coupled with the fact that deflation did moderate a bit ahead of our expectation in terms of timing, that enabled us to put up a very strong gross margin in Q3. We would anticipate gross margins will remain above 30% as we step through Q4. It is still a very uncertain environment, and there are a lot of factors out there that are out of our control in terms of tariff announcements and price increases. But we feel pretty confident that our margins will be quite solid in the fourth quarter.

Thank you. Our next question comes from Phil Ng with Jefferies. Please go ahead.

Hello, guys. Congrats on a really strong quarter. You really put together the volume piece and margin, so, congrats once again. I guess on the, commercial industrial side, really outsized growth. And I guess we shouldn't be surprised since you've called out share gains and strong bidding activity for some time, but really nice to see that inflect in a much bigger way.

Just given the longer lead time, so just give us some color on how bidding activity is progressing. And then how do you see this progression? I think you said perhaps 2026 peaking. Should we expect the year over year percentage kind of accelerating here? And some of drag you kind of called out last quarter on margins, Is that going to dissipate as we kind of go into this next phase of growth?

Yes. And Phil, when we called out the margin profile for large capital projects, we called out potentially could be a headwind on gross margin, but the cost to serve should be appropriate such that we can drive similar operating margins. When you look at the bidding activity that's out there, we still see good strength, although it may have changed slightly in terms of what that large capital project landscape looks like. As you can imagine, the data center activity remains strong. And as we look across that funnel of opportunities, the overall landscape appears to continue to grow.

Our open order volumes in the commercial mechanical space as well as overall large capital projects continues to grow. And although we keep our eyes open for any pause in activity or any cancellation of projects, we still feel good about what's going on there. And so that's really the strength in the nonresidential market is the traditional side of the house is is still in a challenging spot.

Super. And then, Kevin, you kinda alluded to this in a press bill as well. But it's anything but predictable on the tariffs front, and we got some news yesterday on steel and aluminum. But how are your suppliers managing price increases in that backdrop? And I guess, importantly, how are you managing price cost and the impact it could have on gross margins?

I know Plumbing, Lighting, a lot of that's coming from China. So when you kind of think about that dynamic, encouraging to hear gross margin is still pretty good in the fourth quarter, but kind of give us a little perspective on that front. And then how are you managing price gaps versus big box because some of the retailers have actually talked about pushing back tariffs induced price increases from some of the suppliers?

Yeah. Maybe if I take a step back, as you know, we're coming off of six consecutive quarters of deflation. And although this is an extremely dynamic environment and as you suggested, the landscape really evolves and changes by the day. Our pricing strategy though hasn't changed. As you know, we work really to compete not solely on price, but really on the value that we provide to what is a project based business.

And as we suggested last quarter, the industry was moving back to an annual price increase environment and we knew that was going to happen and we saw that play through. And there is no singular response to how a vendor is going to be approaching both the tariff landscape as well as the overall pricing landscape. As you know, we source product from over 36,000 different suppliers. And so the industry was moving back to annual price increases as reciprocals were announced. Obviously, there was a wide variety of responses.

And then as reciprocals were paused, some manufacturers pulled back on those increases. But if we look forward, we still believe that pricing across the industry will be positive, but it is difficult, if not impossible to predict what that level is gonna look like. For us, what we're gonna do is we're gonna make sure that we're always working with our customers on bidding activity to make sure that we can put the right product for their application so that they can complete their project on time and on budget And making sure they've got availability as well as the right price and application is paramount to us. And that's what our teams are working on every single day on hundreds of line items for projects in every market across the country. And so that's really the pricing strategy that we've always adopted and will continue to adopt.

And Phil, maybe just to build on that, as Kevin said, we believe pricing is moving in a positive direction or moving up across the industry. To date, roughly two thirds of our branded suppliers have announced some sort of increase, so that's, you know, across the industry. I tell you on average, those increases and there is a wide variety of responses, as Kevin suggested. But on average, this has been broadly in the mid single digit price increase range. It's it is hard to say, to Kevin's point, where that's going to settle.

And then I'd also just remind you that still through the third quarter, our commodity basket as a basket, it was still in about mid single digit deflation. So we've got certain commodities that are moving up and certain commodities that are still under pressure. So net net, as we look forward, we think price is going to move into mild inflation as we step through the fourth quarter. But again, it still remains very much a a live action game and and very uncertain at this point. And 90% of our revenue is driven through branded suppliers, and those branded suppliers are principally domestic suppliers here in The US.

But you guys probably feel pretty good about managing that price cost at least in a in neutral fashion and gross margin even positive in this backdrop?

We do. And generally, as price moves up, as you've seen in the past, there can be a bit of short term gross margin expansion. But over the long term, we expect to maintain our gross margins and then durably grow those gross margins based on the value we provide, the services we provide and charging for that value. So we feel good about our ability to manage gross margins through this period.

Okay. Really great color, guys. Katrina, great work.

Thank you. Our next question comes from Sam Reid with Wells Fargo. Your line is open.

Awesome. Thanks so much. So I wanted to dig a

little deeper into Waterworks. You know, look. The growth here continues to accelerate, and and you called out a lot of individual buckets behind the strength, you know, wastewater, stormwater, meters, erosion control. So just, you know, maybe contextualize any relative outperformers within that group of Waterworks subcategories, just so we have a sense as to whether this sort of growth can persist into the fourth quarter? And then could you drill down a little bit on how bidding activity looks in Waterworks, particularly for the part of this business that's tied to new resi?

Yes, Sam. Certainly. And I guess I'll start with I couldn't be more proud to be associated with our Waterworks team. They have done a fantastic job of of diversifying this business over the years. When I started in Waterworks with this company, we were very much a new residential construction company.

And today, we have a broadly diversified business that is very good from, yes, residential, yes, traditional commercial, but heavy public works, water wastewater treatment plant, urban green infrastructure and soil stabilization, and meters and metering technology. And so that diversification has served us well. We saw good growth on the public work side of the business. We saw good work in water and wastewater treatment plant production where we continue to invest in capabilities to make sure that we're right for the project. And so that really has pushed the growth.

But I've also got to say that their impact on the large capital project being the first in on those large capital projects has also been a source of growth. You asked about non or residential new construction bidding activity. Actually have been surprised by the supportive level of residential new construction bidding activity that's happened over the course of the last, call it, sixty to ninety days. Now that said, that bidding activity doesn't always translate into projects that are going to be released. And even if those projects are going to be released, it's very difficult to say whether all sections or phases of those new residential projects are gonna be released.

So we're cautiously optimistic as to what that can look like on the new res side.

No. That helps a lot. And then maybe just switching gears. You know, you when you look at the updated guidance, which is which is great to see the increase, it does imply a fairly wide range of potential outcomes for the fourth quarter on the top line. You If you do the math, it shows anywhere from something as low as, let's call it, flat to up very low single digits to as high as perhaps low double digits on my math.

So could you just frame kind of the upper and lower bounds of those fourth quarter guardrails and sort of what would need to happen to get to the high end and perhaps the low end.

Yes, Sam. And you're right. We still have a fairly wide range for the full year implied in that fourth quarter guide given the low to mid single digits guide for the full year. And that's because we're still in an inherently uncertain time with, as we've already alluded to on the call, many uncertain external variables. But with that said, we are expecting a solid fourth quarter from a top line perspective.

If you take the midpoint of the range, we're looking at somewhere in that mid single digit growth range as our likely midpoint and just trying to ensure that there those factors that are out of our control such as tariff changes or industry announced price increases that either push forward or roll back in the very near term. It's a bit more dynamic than the typical environment we find ourselves in, so we wanted to recognize that with a slightly wider revenue range. But we're expecting a fairly solid fourth quarter from a top line perspective.

That helps a lot. I'll pass it on. Thanks.

Our next question comes from Ryan Cook with Wolfe Research. Please go ahead.

Morning, and thank you for taking my questions. Just starting on HVAC and branch conversions, you reported another quarter of outgrowth versus the hearty market data with HVAC sales up 10 this quarter. Can you maybe share how much of that would be organic? And then secondly, on branch conversions, you've spoken to at least five fifty completed so far, expectations for six fifty by the end of twenty twenty six. Can you maybe just help contextualize that growth for us?

Maybe how many branches were serving the HVAC vertical prior to this so you can understand how much runway there is there? And does it make sense for us to maintain this kind of mid single digit outgrowth versus industry sell through over the next few quarters? Thank you.

Yes, Ryan. In terms of the growth on HVAC, that 10%, the vast majority of that is organic growth. There's, you know, roughly a point or so of acquisition growth in there. So the vast majority is organic.

And and when you refer to to branch conversions, we should realize that much of the work that we're talking about is counter conversions so that a contractor who does both HVAC and plumbing can come into a location and find a best in class product selection and find expertise from an associate perspective to take care of their jobs and their needs.

As you can imagine, the bulk of the growth that we're seeing is not on the new resi side, but actually on the repair replace side of the business. And when you look at our balance investment, yeah, we're gonna do upwards of 650 counter conversions. The markets that we're going into, in some cases, were new markets from an HVAC perspective. But for the most part, they were markets where we had a separation of HVAC and plumbing, and we needed to bring that together to provide convenience for the customer. The bulk of our growth as we go forward will be in expansion of existing capabilities, adding associates with great HVAC knowledge to serve that customer, and then also expanding into new markets where we may not have had a presence, we may not have had access to an equipment line, where we'll gain access to a leading equipment line either through negotiations and working with our suppliers or through acquisition.

And so it'll be a balanced approach of organic expansion, acquisitions, counter conversions for the dual trade to continue with that growth curve.

That's all very clear. Thank you very much. And I guess just quickly on the restructuring program for my follow-up. You announce some onetime costs in the quarter, mainly severance, and this is expected to deliver about $100,000,000 in annualized savings. Can you just give us some detail on maybe the time line of realizing those benefits?

Are there further opportunities for headcount reductions ahead of you? And on a similar note, how should we be thinking about OpEx growth in 4Q? It sounded like that growth rate should be tapering down Q over Q last quarter. Does that still remain the case?

Yes, certainly. So the $68,000,000 charge as we took that roughly 41,000,000 of that related to severance with the remaining portion related to the consolidation and closure of some smaller branches. That that resulted in us reducing about 800 positions out of the organization as we look to simplify our structure, eliminate layers, and and really drive decision making and accountability back closer to the customer and into into our local markets. That work is largely complete, so I wouldn't anticipate anything else material coming through in the fourth quarter. And we're really pleased with the team's execution of that restructure over the last three to four months.

In terms of the cost growth in the fourth quarter, certainly, we'll be responsive to what the volume market is like or what the volume growth is. But I would expect us to get back to a place where we're generating some SG and A leverage as we start to as we finish the year and and and exit and enter into next fiscal year.

Yeah. Ryan, as Bill suggested, that work around the restructuring really wanted to bring that balance back to the best local experience where our local teams, because this business is intensely local, can make decisions in a timely fashion for our customer and provide great service all with the backing of strong scale, over 4 and a half billion dollars worth of inventory, 5,900 trucks, 36,000 different suppliers, and giving that strength with best local relationships and allowing them to make decisions fast for the customer and take care of their needs.

Thanks, Kevin and Bill. I'll turn it back over.

next question comes from David Manthey with Baird. Please go ahead.

Thank you. Good morning, guys. My first question is if you could discuss the change in fiscal year guidance this quarter disaggregated into the third quarter outperformance, new acquisitions done during the quarter and then your underlying fourth quarter expectations? I'm focusing on that last item in terms of are you more optimistic or are you sort of the same, but the changes that happened prior are leading to the guidance change.

Yeah. Dave, if you if you take a step back at the guidance that we had updated at the end of the second quarter, expecting low single digit growth and an operating margin of of roughly three to eight eight, That that really implied a profit range for the full year somewhere in that roughly 2.5 to $2,700,000,000 range. We were very pleased with our third quarter performance. I would view most of the upgrade as the flow through of that third quarter performance flowing through to the full year. And we had always anticipated that the year would get a bit better and strengthen as we moved through the period of deflation that we had talked about, as we talked about already on this call.

That move through deflation back to roughly flat flat pricing happened about a quarter in advance of our expectations. That combined with strong gross margins, really good cost control, and and then the further streamlining actions that we took gave us confidence to to increase that that full year guidance. So I I would I would chalk most of it up to the the third quarter performance as well as the setup that we have looking forward to a fairly solid fourth quarter and a finish to the year.

Yes. That's encouraging. And second on HVAC. Is the refrigerant transition materially worked its way through your inventories and your business as of today, June 3? And if not, when do you think you'll be out of the four ten systems?

Mainly, I'm trying to get to the 9% organic HVAC growth that you talked about. How much of that was price mix this quarter and what should we expect going forward?

Yeah. We've largely come through to the a to l conversion. There's still some four ten a inventory that's left out in the in the system and in the market. And I think that that'll largely play through as we get into, you call it, the the middle of the of the fourth quarter of our fiscal year. So that's that's largely played through.

Okay. And and the price mix you're seeing today, Kevin?

Very, very little price inflation in that 10% HVAC number. I would think of it as low single digits at this point.

Our next question comes from Matthew Bouley with Barclays. Your line is open.

Good morning. You have Anika Dvakia on for Matt today. Thank you for taking my questions. So first off, just going back to flat price for the quarter. Just curious what was maybe better than expected on the commodity front?

Or was it more finished goods that came in ahead? And then more specifically, plastic, rough plumbing, PVC pipe, is that still deflating more than high diameter? Just any details around that. Thanks.

Yes, sure. If you look at the overall flat pricing, again, finished goods were up low single digits for the quarter, and and commodities were down in that mid single digit range. The commodity side was a bit better than we had anticipated, which is always the hardest piece to anticipate. We certainly saw copper still moving in an upward direction, and then steel prices improved during the quarter. Still in deflation as a basket for us for the third quarter, but did improve some of that after the steel import tariffs announcements earlier in the third quarter.

When you look at PVC, there's still deflation pressure on PVC, both on the plumbing side of the business as well as the waterworks side of the business. And that while pricing has been more sequentially stable, it's still in deflation as a basket. So overall, that mid single digit deflation as a basket for commodities was a bit better than anticipated. Finished goods, we had expected that to move back towards positive price given the fact that, again, we thought that the industry was moving back towards a more normalized annual price increase across those seasonal price increases.

Ferguson Enterprises (FERG) Q3 2025 Earnings Call Transcript

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