Q3 2025 Ferguson Enterprises Inc Earnings Call
Yes.
Speaker Change: Hello, everyone and welcome to <unk> third quarter results Conference call.
Lydia: My name is Lydia onto the coordinating Yoko today.
Speaker Change: I would now like to turn the call over to Brian Lantz, Vice President of Investor Relations and communications. The floor is yours. Please go ahead.
Brian Lantz: Good morning, everyone and welcome to <unk> third quarter earnings conference call and webcast hopefully you've had a chance to review the earnings announcement, we issued this morning the.
Lydia: The announcement is available in the investors section of our corporate website and on our SEC filings webpage.
Recording of this call will be made available later today.
Lydia: 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.
Lydia: Including the various risks and uncertainties discussed in our Form 10-K available on the Sec's website.
Lydia: 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.
Lydia: Therefore, all references to operating profit operating margin diluted earnings per share.
Lydia: <unk> tax rate and earnings before interest taxes, depreciation and amortization reflects 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.
Kevin Murphy: With me on the call today are Kevin Murphy, our CEO and Bill <unk> our CFO.
Lydia: I will now turn the call over to Kevin. Thank you, Brian and welcome everyone to <unk> third quarter results conference call on today's call I'll cover highlights of our third quarter performance I will 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.
Lydia: I'll then come back at the end and then give some closing comments before bill and I take your questions.
Lydia: Our associates continue to take care of our customers outperformed the market and drove strong growth in the third quarter.
Lydia: Sales of $7 6 billion increased four 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 one 7% negative impact.
Lydia: We delivered a 31% gross margin, which strengthened sequentially by 130 basis points.
Lydia: 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.
Lydia: Strong volume growth gross margin improvement moderating deflation and the early benefits of streamlining our business drove profitable growth.
Lydia: Operating profit increased six 1% and operating margin expanded 20 basis points to nine 4%.
Lydia: Diluted earnings per share increased seven 8% over the prior year to $2 50.
Lydia: We continued to execute our capital priorities deploying approximately $690 million during the quarter, including completing three acquisitions and returning $417 million to shareholders through share repurchases and dividends.
Lydia: Our balance sheet remains strong with net debt to EBITDA of one two times.
Lydia: While we're in a dynamic and uncertain environment, we remain confident in our markets over the medium term.
Lydia: We continue to balance investment in key strategic opportunities leveraging multiyear tailwind in both residential and nonresidential end markets as we look to support the complex project needs of our specialized professional customers.
Lydia: Turning to our performance by end markets in the United States.
Lydia: Net sales grew four 5% as we drove volume growth with moderating headwinds from deflation.
Lydia: The residential end market, which comprises approximately half of U S revenue remained subdued.
Lydia: Our teams grew revenue in our residential end market by approximately 2% in the quarter, primarily driven by our hvac's growth initiatives.
Lydia: Nonresidential end markets, representing just under half of U S revenue saw stronger growth in residential end markets with increased activity on large capital projects.
Lydia: We continued to grow share with non residential revenue growth of approximately 7%.
Lydia: We delivered mid to high single digit growth across commercial and industrial end markets with low double digit growth in civil infrastructure.
Lydia: 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.
Lydia: Moving now to revenue performance across our customer groups in the United States.
Lydia: Our HVAC customer group continues to deliver strong growth with an increase of 10% in the quarter.
Lydia: I'll expand on our Hvac's growth investments in a moment.
Lydia: Residential trade plumbing revenues declined 1% broadly consistent with recent quarters.
Lydia: The business faced continued headwinds in new construction and ongoing price deflation, while repair maintenance and improvement is performing better.
Lydia: We've recently merged residential building in remodel and residential digital commerce customer groups into a unified brand called Ferguson home.
Lydia: Ferguson home provides a seamless omnichannel experience for our customers.
Lydia: Our focus on the higher end project is driving growth. Despite the overall softness in broader remodel activity.
Lydia: Strong waterworks growth of 12% in the quarter was driven by activity in public works municipal and our broader diversification efforts.
Lydia: Both waterworks and commercial mechanical continue to see strong activity on large capital projects.
Lydia: Commercial mechanical revenue grew 10% and our open order levels continue to grow.
Lydia: Our industrial fire in 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.
Lydia: Collaboration across multiple customer groups and our unique position in the market continue to be an advantage.
Lydia: Despite near term headwinds, we continue to be pleased with the results of our four key growth areas.
Lydia: Third quarter performance shows ongoing returns from these multiyear investments.
Lydia: HVAC revenue up 10% in the third quarter reflects our focus on investments to expand our HVAC capabilities, both organically and through acquisitions.
Lydia: Our multi pronged approach, which includes leveraging the synergy between our residential trade plumbing and HVAC customer groups continues to drive market outperformance.
Lydia: We've completed more than 550 counter conversions to serve our dual trade contractors.
Lydia: Our HVAC presence continues to grow geographically through both organic expansion and acquisitions.
Lydia: 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 Neurostar brand.
Lydia: Waterworks revenue grew 12% in the quarter.
Lydia: We're committed to diversifying our waterworks business to create a best in class capability set that addresses the nation's infrastructure needs.
Lydia: We provide solutions for water wastewater and storm water management as well as erosion control urban green infrastructure treatment plant construction meters and metering technology.
Lydia: 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 nonresidential growth of 7% in the quarter.
Lydia: 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.
Lydia: The February launch of Ferguson home represents another compelling example of the value of our multi customer group approach brings to the market.
Lydia: We spent years developing best in class experience for our showroom and our digital platform for new construction light remodel and decorative markets.
Lydia: Ferguson home is the unified brand of residential building in remodel and residential digital commerce fully integrating our showroom and digital channels to offer our customers a seamless project based experience.
Lydia: Our scale delivered locally with the cohesiveness of our customer groups as a true competitive advantage.
Lydia: We continue to invest in key growth areas that capitalize on multiyear tailwind and drive outperformance.
Bill: I'll now pass you to Bill who will discuss the financial results in more detail.
Bill: Thank you, Kevin and good morning, everyone.
Lydia: Net sales of $7 6 billion were four 3% ahead of last year.
Lydia: <unk> revenue increased 5% with an additional 1% from acquisitions, partially offset by one 7% from one fewer sales day in the adverse impact of foreign exchange.
Lydia: During the quarter, we saw deflation moderate with the pricing environment broadly flat we.
Lydia: We saw improvement in finished goods pricing offset by continued weakness in certain commodity categories.
Lydia: 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.
Lydia: 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.
Lydia: 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.
Lydia: As a result operating profit of $715 million was up six 1% on the prior year delivering.
Lydia: Delivering a nine 4% operating margin with 20 basis points of expansion over the prior year.
Lydia: Diluted earnings per share of $2 50.
Lydia: Was seven 8% ahead of last year, driven by operating profit growth and the impact of share repurchases.
Lydia: And our balance sheet remains strong at one two times net debt to EBITDA.
Lydia: 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.
Lydia: Consequently, we incurred a nonrecurring business restructuring charge of $68 million principally related to severance costs.
Lydia: These actions reduced complexity in the organization and will speed up decision, making.
Lydia: We expect the changes to deliver approximately $100 million of annualized cost savings.
Lydia: Moving to our segment results net sales in the U S grew four 5% with an organic increase of 5% and a 1% contribution from acquisitions, partially offset by a one 5% impact from one fewer sales day.
Lydia: Operating profit of $726 million increased $41 million over the prior year delivering.
Lydia: Delivering an operating margin of 10%.
Lydia: In Canada net sales were <unk>, 3% below last year with organic growth of 3% and a two 8% contribution from acquisitions.
Lydia: Offset by a four 4% adverse impact from foreign exchange rates and a one 7% impact from one fewer sales day.
Lydia: Residential activity has continued to be soft with nonresidential activity remaining more resilient.
Lydia: Operating profit was $8 million in the quarter.
Lydia: $2 million above the prior year.
Lydia: Turning to our year to date results our associates delivered volume growth in a period challenged by commodity led deflation and subdued end markets.
Lydia: Net sales were two 7% ahead of last year with organic growth of two 2% and an acquisition contribution of one 1%, partially offset by <unk>, 6% from the adverse impact of one fewer sales day in foreign exchange rates.
Lydia: Deflation was over 1% year to date.
Lydia: Gross margin was 33% down 10 basis points.
Lydia: Operating profit of $1 9 billion was down four 9% compared to the prior year delivering an eight 4% operating margin.
Lydia: And diluted earnings per share of $6 48 was down three 6%.
Lydia: Next our cash flow performance.
Lydia: EBITDA of $2 billion was down approximately $80 million on prior year.
Lydia: Working capital investments of approximately $100 million were above the prior year driven by investments in inventory along with an increase in receivables driven by sales growth.
Lydia: Interest and tax were down approximately $110 million on the prior year driven by timing.
Lydia: As a result operating cash flow was $1 4 billion.
Lydia: We've continued to invest in organic growth through capex investing $235 million slightly down in the prior year, resulting in free cash flow of $1 5 billion.
Lydia: Turning to capital allocation as previously mentioned, we invested $100 million in working capital and $235 million into Capex to drive further above market organic growth.
Lydia: Our board declared an <unk> 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 our business and cash generation.
Lydia: We continue to consolidate our fragmented markets through bolt on geographic and capability acquisitions.
Lydia: We completed three acquisitions during the third quarter, including independent pipe and supply our leading commercial mechanical business in the northeast.
Lydia: Innovations are residential building in remodel showroom in Arkansas and National Fire a mall.
Lydia: <unk>, leading fire and fabrication business operating across eastern and Western Canada.
Lydia: We've now completed five acquisitions year to date and the pipeline remains healthy.
Lydia: 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.
Lydia: We have returned $759 million to shareholders via share repurchases year to date compared to $421 million in the equivalent prior year period.
Lydia: This year, we have reduced our share count by approximately $4 1 million and now have approximately $1 $1 billion outstanding under the share repurchase program.
Lydia: Next I'll cover our updated guidance for fiscal 2025.
Lydia: We are pleased with our continued market outperformance and solid growth in the quarter.
Lydia: Our markets remain dynamic and uncertain, but given the strong performance in the quarter, we are updating our full year guidance.
Lydia: We now expect low to mid single digit revenue growth up from our prior expectation of low single digit growth.
Lydia: And we expect an operating margin range of eight 5% to 9.0% up from our prior expectation of eight 3% to eight 8%.
Lydia: Interest expense is unchanged at between $180 million to $200 million.
Lydia: Our effective tax rate is expected to be approximately 26% and we've updated our capex estimate to between $300 million to $350 million to reflect the pace of expected capital deployment.
Lydia: We believe we are well positioned as we head into the last quarter of our fiscal year. Thank.
Lydia: Thank you and I'll now pass you back to Kevin.
Kevin Murphy: Thank you Bill.
Kevin Murphy: Let me, thank our associates, who continue to take care of our customers outperformed the market and are driving strong results.
Kevin Murphy: 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.
Kevin Murphy: As announced last quarter, we implemented measures to better balanced market share gains and capture the value we deliver to our customers. Additionally.
Kevin Murphy: Additionally, we took actions to streamline our business and enhance speed and accountability by reducing complexity and simplifying management structures.
Kevin Murphy: 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.
Kevin Murphy: We continue to invest in our key growth areas, including HVAC.
Kevin Murphy: Waterworks diversification large capital projects and the recently launched Ferguson home.
Kevin Murphy: Our third quarter performance shows continued returns from these multiyear investments.
Kevin Murphy: 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.
Kevin Murphy: We're efficiently delivering scale locally to enable our associates to provide exceptional service to our export customers on their projects.
Kevin Murphy: 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.
Kevin Murphy: Thank you.
Speaker Change: Q&A, if you'd like to ask a question. Please press star one on your telephone keypad now.
Speaker Change: Have you changed your mind Presto for the Apache.
Kevin Murphy: When comparing to ask your question. Please consolidated devices on mute lately.
John Roy: Our first question comes from John Roy with UBS.
Speaker Change: Please go ahead your line is open.
John Roy: 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 accelerating 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.
Speaker Change: As we move forward.
John Roy: Yes, John Thank you and good morning.
John Roy: We were obviously pleased with 5% organic growth.
John Roy: If you look back at what we've been trying to accomplish especially in the non residential side of the world. It is bringing scale benefits and a multi customer group approach to large capital projects and large capital project landscape is really the strength behind the nonresidential market because the rest of the traditional.
John Roy: Non res market is still in a challenging space.
John Roy: And as we've said historically, we think that that market starts to step through 25 peak in 2006 and 27, one so I think we're seeing a little bit of that play through as well as the <unk>.
John Roy: Delivering value for not only the contractor, but also across contractors from water wastewater and storm water through commercial mechanical piping through fire suppression. So we're pleased with that on the non res side.
John Roy: On the residential side. It really has been a focused effort to expand our HVAC capabilities across the nation to make sure that we can offer the best experience for adult trade contractor inside of our counters, but also with our associate base, who deliver real purity of purpose for the unique needs of the HVA and trade plumbing.
John Roy: Factor, but at the same time, giving them one place to shop and so from that perspective, we think we've been able to outperform the market and we're really pleased with with those initiatives.
Speaker Change: Understood and then on the gross margin, 31% in the quarter that was particularly strong I pick up about 50 basis points year over year on sales that were up about 4% I mean was 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.
Speaker Change: Yes.
Bill: Yes, John This is bill thanks for the question.
Bill: A significant mix impact there, although given the strength of the non res business as we've 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, we printed just slightly under 30% gross margin.
Bill: We had talked about some actions we have taken across our teams with our price matrix with our sales force et cetera 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 have seen early returns of those actions as we exited Q2 and into Q3, we're pretty pleased that those continue to play through.
Bill: Into Q3.
Bill: These 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.
Bill: We would anticipate.
Bill: 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 that are out of our control in terms of tariff announcements and price increases.
Bill: But we feel pretty confident that our margins will be quite solid in the fourth quarter.
Speaker Change: Okay. Thanks, very much guys.
John Roy: Thank you John.
John Roy: Thank you.
John Roy: Next question comes from Phil <unk> with Jefferies.
Speaker Change: Please go ahead.
Speaker Change: Hello, guys. Congrats on a really strong quarter it really put together the volume piece in margin. So congrats once again.
John Roy: I guess on the.
John Roy: Commercial and industrial side really outsized growth.
John Roy: 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 reflected a much bigger way.
John Roy: Just given the longer lead times, 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 up should we expect the year over year percentage.
John Roy: Accelerating here and some of the drag you guys kind of called out last quarter on margins as that kind of dissipate as we go into this next phase of growth.
Speaker Change: 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.
Speaker Change: Slightly in terms of what that large capital project landscape looks like as you can imagine the data center activity remained strong and as we look across that funnel of opportunities.
Speaker Change: <unk>.
Speaker Change: Overall landscape.
Speaker Change: Appears to continue to grow.
Speaker Change: Our open order volumes.
Speaker Change: 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.
Speaker Change: So that's really the strength in the nonresidential market as the traditional side of the house is still in a challenging spot.
Speaker Change: Super.
Kevin Murphy: And then Kevin you kind of alluded to this.
Speaker Change: Perhaps bill as well.
Speaker Change: But it's anything but anything but predictable on the tariffs right and we got some news yesterday on steel and aluminum, but how are your suppliers managing price increases that backdrop and I guess more importantly, how are you managing price cost and the impact it could have on gross margins Danielle plumbing lighting, a lot of that's coming from China.
Speaker Change: So when you kind of think about that.
Speaker Change: That dynamic encouraging to hear gross margins still pretty good in the fourth quarter, but kind of gave us a little perspective on that front and then how you're managing price gaps versus big box you get some of the retailers have actually talked about pushing back.
Speaker Change: And these price increases from some of the suppliers.
Speaker Change: Yes, maybe if I take a step back as you know, we're coming off of six consecutive quarters of deflation.
Speaker Change: Dan.
Speaker Change: This is an extremely dynamic environment and as you suggested the landscape really evolves and changes by the day, our pricing strategy, though hasnt changed.
Speaker Change: 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.
Speaker Change: 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 is.
Speaker Change: Well as the overall pricing landscape as you know we source product from over 36000 different suppliers and so the industry was moving back to annual price increases.
Speaker Change: Reciprocals were announced obviously there was a wide variety of responses.
Speaker Change: And then as reciprocals, where pause some manufacturers pulled back on those increases.
Speaker Change: If we look forward, we still believe that pricing across the industry will be positive, but it is difficult if not impossible.
Speaker Change: Predict what that level is going to look like.
Speaker Change: For us what we're going to do is we're going to make sure that we're always working with our customers.
Speaker Change: Bidding activity to make sure that we can put the right product.
Speaker Change: 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 Thats. What our teams are working on every single day.
Speaker Change: Hundreds of line items for projects in every market across the country and so thats really the pricing strategy that we've always adopted and we will continue to adopt and Phil maybe just to build on that as Kevin said, we believe pricing is moving in a positive direction are moving up across the industry to date roughly two third.
Speaker Change: <unk> of our branded suppliers have announced some sort of increase so that's.
Speaker Change: Across the industry I would tell you on average those increases and there is a wide variety of responses as Kevin suggested.
Speaker Change: But on average has been broadly in the mid single digit price increase range.
Speaker Change: 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 was still in about mid single digit deflation.
Speaker Change: We've got certain commodities that are moving up and certain commodities that are still under pressure.
Speaker Change: 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.
Speaker Change: Very much a live action.
Speaker Change: Game 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 U S.
Speaker Change: But you guys broadly feel pretty good about managing that price cost at least seen it neutral fashion.
Speaker Change: Margin EBIT positive in this backdrop.
Speaker Change: We do and generally as price moves up as you've seen in the past there.
Speaker Change: There can be a bit of short term gross margin expansion, but over the long term.
Speaker Change: 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.
Speaker Change: Okay really great color guys continue to do great work.
Phil: Thank you Phil.
Speaker Change: Thank you. Our next question comes from Sam Reed with Wells Fargo. Your line is open.
Phil: Awesome. Thanks, so much I wanted to dig a little deeper into waterworks. The growth year continues to accelerate and you called out a lot of individual buckets behind that strength wastewater and storm water meters erosion control.
Speaker Change: Maybe contextualize any relative outperformers within that group waterworks about category is that we have.
Phil: As to whether this sort of growth.
Speaker Change: Just into the fourth quarter.
Speaker Change: Could you drill down a little bit on how bidding activity looks in water work, particularly for the part of the business that's tied to new ready.
Speaker Change: Yes, Sam certainly.
Speaker Change: I guess I'll start with <unk>.
Speaker Change: Would it be more proud to be associated with our waterworks team.
Speaker Change: I have done a fantastic job.
Speaker Change: <unk> this business over the years.
Speaker Change: I started in waterworks with this company, we were very much in new residential construction company and today, we have a broadly diversified business that is.
Speaker Change: Very good from yes, residential yes, traditional commercial but heavy public works water wastewater treatment plant urban green infrastructure until stabilization and meters and metering technology and so that diversification has served us well.
Speaker Change: Saw good growth on the public works side of the business. We saw good work and water and wastewater treatment plant production, where we continued to invest in capabilities to make sure that were right for the project and so that really has pushed the growth but.
Speaker Change: 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 residential new construction bidding activity actually have been.
Speaker Change: Surprised by the supportive level of residential new construction bidding activity. That's happened over the course of the last call. It 60 to 90 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 its very difficult to say, whether all sections or.
Speaker Change: <unk> of those new residential projects are going to be released so we're cautiously optimistic as to what that can look like on the new Rev side.
Speaker Change: No that helps a lot and then maybe just switching gears when you.
Speaker Change: Look at the updated guidance.
Speaker Change: Which is great and TV increase it does imply a fairly wide range of potential outcomes for the fourth quarter on the top line.
Speaker Change: 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 digit might not so could you just frame kind of the upper and lower bound of.
Speaker Change: Of those fourth quarter guardrail.
Speaker Change: And sort of what would need to happen to get to the high end and perhaps the low end.
Speaker Change: Yes, Sam and Youre right.
Speaker Change: We still have a fairly wide range for the full year implied in that fourth quarter guide.
Speaker Change: Given the 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.
Speaker Change: External variables, but with that said.
Speaker Change: We are expecting a solid fourth quarter from a top line perspective.
Speaker Change: If you take the midpoint of the range, we're looking at somewhere in that mid single digit growth range as our likely midpoint.
Speaker Change: And just trying to ensure that they are 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.
Speaker Change: A bit more dynamic than the typical environment, we find ourselves in so we wanted to.
Speaker Change: Recognize that with a slightly wider revenue range, but we're expecting a fairly solid fourth quarter from a top line perspective.
Speaker Change: So that helps a lot I'll pass it on thanks.
Speaker Change: Thank you.
Speaker Change: Our next question comes from the line Cook with Wolfe Research. Please go ahead.
Speaker Change: Good morning, and thank you for taking my questions.
Speaker Change: So just starting off back and branch conversions.
Speaker Change: Reported in the third quarter of outgrowth versus the Hardy market data with <unk> sales up 10%. This quarter can you maybe share how much of that would be organic.
Speaker Change: Then secondly on branch conversions, you've spoken to at least 550 completed so far expectations for 650 by the end of 2026.
Speaker Change: Just help contextualize that growth for us maybe how many branches were serving the HVAC vertical prior to this so we can understand how much runway. There is there 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.
Speaker Change: Yes, Brian in terms of the growth on HVAC that 10%. The vast majority of that is organic growth. There is roughly a point or so of acquisition growth in there. So the vast majority is organic and when you referred to branch conversions, we should realize that much of the work that we're talking about is counter <unk>.
Speaker Change: Versions, so that a contractor who does both HVAC and plumbing can come into a location and find the 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 resin side, but actually on the repair replace side.
Speaker Change: Of the business and when you look at our balanced investment, yes, we're going to do upwards of 650 counter conversions.
Speaker Change: 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, we will be an expansion of existing <unk>.
Speaker Change: <unk>, 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, we will gain access to leading equipment line.
Speaker Change: 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.
Speaker Change: That's all very clear. Thank you very much and I guess just on the restructuring program for my follow up.
Speaker Change: So you announced some onetime costs in the quarter, mainly severance and this is expected to deliver about $100 million in annualized savings can you just give us some detail on maybe the timeline of realizing those benefits are there further opportunities for head count reductions ahead of you.
Speaker Change: On a similar note how should we be thinking about opex growth in <unk>. It sounded like that growth rate should be tapering down Q over Q last quarter does that still remains the case.
Speaker Change: Yes, certainly so the $68 million charge.
Speaker Change: As we took that roughly $41 million of that related to severance with the remaining portion related to the consolidation and closure of some smaller branches.
Speaker Change: That resulted in us reducing about 800 positions out of the organization as we look to simplify our structure.
Speaker Change: Eliminate layers and really drive decision, making and accountability back closer to the customer and into into our local markets.
Speaker Change: That work is largely complete so I wouldn't anticipate anything else material coming through in the fourth quarter.
Speaker Change: 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 will 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&A leverage.
Speaker Change: As we start to finish.
Speaker Change: We finished the year and exited enter into next fiscal year, Yes, Ron 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 <unk>.
Speaker Change: Backing off.
Speaker Change: Strong scale over $4 $5 billion worth of inventory 5900 trucks, 36000 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.
Speaker Change: Thanks, Kevin and Bill I will turn it back over.
Speaker Change: Thank you.
Speaker Change: Our next question comes from David Manthey with Baird.
Speaker Change: Please go ahead.
David Manthey: Thank you good morning, guys.
Speaker Change: My first question is if you could discuss the change in fiscal year guidance.
David Manthey: This quarter this aggregated into the third quarter outperformance new acquisitions done during the quarter and then your underlying fourth quarter expectations.
David Manthey: Focusing on that last item in terms of are you more optimistic or are you sort of the same but the <unk>.
David Manthey: Does that happen prior leading to the guidance change.
David Manthey: Yes, David if you take a step back at the guidance that we had updated at the end of the second quarter, we're expecting low single digit growth.
David Manthey: And an operating margin of roughly 3% to eight eight.
David Manthey: That really applied our profit range for the full year somewhere in that roughly two 5% to $2 $7 billion.
David Manthey: Range.
David Manthey: We're very pleased with our third quarter performance I would view most of the upgrade as the flow through of that third quarter performance.
David Manthey: 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.
David Manthey: As we've talked about already on this call that move through deflation back to roughly flat pricing happened about a quarter in advance of our expectation that combined with strong gross margins really good cost control.
David Manthey: And then the further streamlining actions that we took gave us confidence to increase that full year guidance.
David Manthey: I would chalk most of it up to the.
David Manthey: Third quarter performance as well as the setup that we have looking forward to a fairly solid fourth quarter and our finish to the year.
David Manthey: Yes, that's encouraging.
Speaker Change: Second on HVAC is the refrigerant transitional materially worked its way through your your inventories and your business as of today June 3rd and if not when do you think you'll be out of the <unk> systems, mainly I'm trying to get to the 9% organic HVAC growth that you talked about how much of that was price mix.
Speaker Change: Mix this quarter and what should we expect going forward.
Speaker Change: Yes, largely come through to the <unk> conversion.
Speaker Change: There is still some <unk> inventory that's left out in the system and in the market.
Speaker Change: <unk>.
Speaker Change: I think that that will largely play through as we get into call. It the middle of the fourth quarter of our fiscal year. So thats largely played through.
Speaker Change: Okay, and the price mix Youre seeing today Kevin.
Speaker Change: Okay.
Speaker Change: A little price inflation in that 10% HVA number I would think of it as low single digits at this point.
Speaker Change: Okay Alright.
Speaker Change: Alright, thanks, guys.
Speaker Change: Thank you.
Speaker Change: Our next question comes from Matthew Bouley with Barclays. Your.
Speaker Change: Your line is open.
Speaker Change: Good morning, do you have any could lock in on for Matt today. Thank you for taking my questions.
Speaker Change: So first off just going back to flat price through the quarter. Just curious what was maybe better than expected on the commodity front or was it more finished goods that came in ahead.
Speaker Change:
Speaker Change: And then more specifically plastic rough plumbing PVC pipe is that still deflating more than high dynamic diameter or just any details around that.
Speaker Change: Yes, sure. If you look at the overall flat pricing again finished goods were up low single digits for the quarter.
Speaker Change: 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.
Speaker Change: We certainly saw copper still moving in an upward direction.
Speaker Change: And then steel prices.
Speaker Change: Proved during the quarter still and 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.
Speaker Change: 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.
Speaker Change: And that while pricing has been more sequentially stable is 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.
Speaker Change: 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.
Speaker Change: <unk> seasonal price increases.
Speaker Change: Got it that's helpful. Thanks.
Speaker Change: And then second you spoke to some pull forward buying in the quarter I'm. Just wondering if you could tell us which categories. You saw basin and then youre seeing similar trend quarter to date. Thanks.
Speaker Change: Yes, we were obviously pleased with organic growth of 5%.
Speaker Change: Consider the timing of what was happening from a tariff perspective, there was maybe some bit.
Speaker Change: All forward, but nothing material from an impact perspective, and as you recall the lion's share of the tariff activity started around that April 2nd time horizon and so although we may see some pull forward depending on what happens with the tariff environment going forward.
Speaker Change: It would largely be immaterial in Q3.
Speaker Change: Great Thanks and goodbye.
Speaker Change: Thank you.
Speaker Change: Our next question comes from Mike Dahl with RBC capital markets. Your line is open. Please go ahead.
Mike Dahl: Good morning, and thanks for taking my questions.
Speaker Change: Good morning, I wanted to go back to kind of.
Speaker Change: Good morning.
Speaker Change: The dynamics I think last quarter. It was it was very notable how you were talking about some of the trade off between.
Speaker Change: Market share gains and the gross margin.
Speaker Change: Competitive dynamics potentially worsening, but then as you think.
Speaker Change: Kevin and Bill as you articulated kind of through the quarter you made some changes to get back into it but our balance but it's still it still seemed like you were expecting some trade off there.
Speaker Change: Fast forward and now it looks like both gain share and.
Speaker Change: Gross margin expansion. So can you just help us understand.
Speaker Change: And elaborate a little bit more on the competitive dynamics that you've kind of seen over the last few months.
Speaker Change: Again, maybe a little more specific around.
Speaker Change: Around how you were able to both maintain share and get that gross margin.
Speaker Change: Yes. Thank you Mike It is still a very competitive market out there as the market conditions overall, both residential and nonresidential or in a challenging place and then obviously as Bill indicated you still got deflationary activity sitting in some of the commodity baskets that we trade in if you look at the actions that.
Speaker Change: We took it as no silver bullet.
Speaker Change: And there are no silver bullets in this business as it relates to gross margin and balancing share gains we did work around things like price matrix contract management, but the bulk of the work was really done with our sales management teams and making sure that from a bidding activity perspective, and how we're working with our customers.
Speaker Change: We implemented our product strategy and so what does that mean that means that we've got to make sure that we've got the right product for the application that the contractor is using.
Speaker Change: And that for US it's the right product in terms of margin contribution and how we are driving efficiencies in the supply chain enable to deliver for our customer and so that product strategy work together with our sales management teams.
Speaker Change: As to the right place we thought we were getting there as we were moving through the second quarter and exited the second quarter and we're pleased with the with the way the team worked with our contractor base to balanced growth and a 31% gross margin.
Kevin Murphy: And Kevin just as.
Kevin Murphy: A follow up.
Kevin Murphy: Sales into my second question, but.
Kevin Murphy: Was there anything in terms of like a more centralized the hard rail system that you've put into place around the bidding or it's still just more of a kind of message.
Kevin Murphy: So the field that they've been just executed better again in the second.
Kevin Murphy: Part related part of the question do you think you'd mentioned that typically.
Kevin Murphy: And see some gross margin expansion in the early stages of.
Kevin Murphy: Implementing price increases so maybe just.
Speaker Change: Clarify whether that was part of the expansion of <unk> that you were able to actually implement some pricing in the field ahead of taking costs.
Kevin Murphy: Yes.
Kevin Murphy: Great question, and I would not consider it to be centralized control it would be centrally driven data.
Kevin Murphy: And guidance in terms of price matrix and contract management and contract overrides and delivering tools to those local teams to make sure that we can drive the right balance between what we do with volume growth and what we do with overall gross margin, so essentially driven tools and techniques.
Kevin Murphy: Then real sales management at the local level is how we achieve and I think Mike the majority of that improvement from Q2 to Q3. It was attributable to those actions so stepping.
Kevin Murphy: Once again over that 30% gross margin range, but yes, there is some piece of that 31%.
Kevin Murphy: In Q3.
Kevin Murphy: Fitted from price moving up on old cost of goods sold inventory very difficult for us to bifurcate. The two but we are confident in is that gross margin has moved back above 30% now and that we're positioned well to exit the year.
Speaker Change: Very helpful. Thank you.
Mike Dahl: Thanks, Mike.
Speaker Change: Our next question comes from Anthony Pettinari with Citi. Please go ahead.
Anthony Pettinari: Hi, good morning.
Speaker Change: Following up on Sam's earlier question Hey.
Speaker Change: Following up on Sam's question I think you said you were pleasantly surprised with bidding for residential new build over the last 60 to 90 days and I'm. Just curious if you think it's based on underlying demand improvement or maybe more share gain by Ferguson and is there any particular region or project type.
Anthony Pettinari: Youre seeing this this kind of strength.
Anthony Pettinari: Yes, what we were referring to is waterworks bidding activity since they are the first in on the project and one of the advantages of having multi customer group approach for us as a company is to see that playing through really in the last 60 90 days we have been.
Anthony Pettinari: Pleasantly surprised with the single family New construction bidding activity. We know we're under built in this country by call. It 4 million units and we've got to get back to developing new housing construction in order to get after the price side of the world. So we're.
Anthony Pettinari: We're encouraged by that over the medium term.
Anthony Pettinari: We're not reading a tremendous amount in the new residential growth because as I suggested in the earlier answer we don't know whether or not that bidding activity is going to play out to the entire project being released whether it's going to be pieced out by sections or phases, but.
Anthony Pettinari: At least it's a positive sign in terms of what that activity looks like across our different markets.
Anthony Pettinari: Got it got it that's very helpful.
Anthony Pettinari: And then just maybe switching gears Ferguson home I guess, it's very early days, but can you talk about how that brand launch has been received by your core contractor customers, maybe homeowners as well anything has anything surprised you positively or negatively.
Anthony Pettinari: We've been pleased with the rollout this has been years in the making.
Anthony Pettinari: First.
Anthony Pettinari: Purchased a company on the digital commerce side, a decorative plumbing.
Anthony Pettinari: Years ago, and we've <unk>.
Anthony Pettinari: Transitioned it over time from improvement direct to build dot com to build with Ferguson Enel ultimately Ferguson Hall, and we've invested in that platform. We've invested in the associate base behind it in terms of the service offering that they offer to the connected car.
Anthony Pettinari: Consumer and that project minded professional and so when we look at where we are today, bringing together that platform with our over 230 showroom locations.
Anthony Pettinari: What we consider to be a best in class consultative experience in that showroom location is serving us well coming together, so that we have pricing and value being driven in concert we've got a tremendous amount of our showroom consultations that are beginning with the project tool on Ferguson home today.
Anthony Pettinari: And so that transition is being embraced will still work out some of the bumps along the road, but we think it offers us a great omni channel experience as we go forward and transition this fully.
Anthony Pettinari: Okay. That's helpful I'll turn it over.
Speaker Change: Thank you. Thank you.
Speaker Change: Thank you, we'll take our last question from James with bets on Atlantic.
Speaker Change: Please go ahead.
Speaker Change: Thank you good morning.
Speaker Change: Couple from me. Please firstly could you just touch on how you're managing the umbrella business.
Speaker Change: <unk> tariff dynamics.
Speaker Change: And then the second was just perhaps an update on distribution centers.
Speaker Change: The recent openings, how theyre performing and what you've got planned over the next year. Thank you.
Speaker Change: Yes sure.
Speaker Change: The owned brand side of the World.
Speaker Change: Probably important to remember that's roughly 10% of our revenue base.
Speaker Change: 90% of our revenue basis, driven with our branded suppliers principally domestic in.
Speaker Change: In nature, when you look at that own brand business.
Speaker Change: Our teams have done a very good job of diversifying what that sourcing.
Speaker Change: Profile it looks like we source product from over 31 different countries and so the group has done well to make sure that we have mitigation efforts.
Speaker Change: Tariff situations arise.
Speaker Change: When you look at the exposure for China, specifically.
Speaker Change: What you see is principally in the areas of lighting fanned product some small appliance some small HVAC and a bit of vitreous, China, but generally speaking the team has done a good job of diversifying our sourcing structure bulk so that we can make sure we have the right supply for our customers.
Speaker Change: And then also to make sure that we are price relevant on the project that they are competing on.
Speaker Change: And then the second part of your question on our supply chain and our network optimization efforts, we continue to.
Speaker Change: Look across the network and optimize that and invest in the network so to date.
Speaker Change: We have five market distribution centers that are open we have two more that are that are in process that will open in over roughly the next 12 months one in Dallas, one outside of Washington D. C. And then we continue to invest in a mix of those types of buildings and we have several large format buildings.
Speaker Change: Our ship hubs that we've invested in over the last 12 months or so whether that's fort Myers are in Boston are Raleigh, or and often so we're.
Speaker Change: We're going to continue to invest in that network that will include more automation in those facilities and we are pleased with the returns on that automation. We're also pleased with the fact that we are bringing what we believe is the industry's largest local inventory into those markets.
Speaker Change: So the returns on that inventory investment, particularly over the counters and those facilities has been quite good.
Speaker Change: In terms of looking at in the future, we're going to continue to invest in our network.
Speaker Change: We have invested a fair amount of capital in capacity over the last five years and so as we look forward, we're going to continue to base that future investment on where we have capacity needs in those individual localized markets, but but quite pleased with the work that the supply chain team has done quite honestly over the last five years or so to upgrade.
Speaker Change: Our network.
Speaker Change: Alright, thank you.
Speaker Change: Thank you.
Speaker Change: Thank you.
Speaker Change: Concludes today's Q&A session. So I'll pass you back over to Kevin Murphy CEO for closing remarks.
Kevin Murphy: Thank you and thank you all for your time today, we appreciate more than you know and maybe most importantly, thank you to our associates, who continue to deliver in what is a challenging and certainly dynamic environment. They delivered good growth and good balance with making sure that we deliver value for our <unk>.
Kevin Murphy: Customers that's reflected in our gross margin.
Speaker Change: We're pleased with what the team has been able to do from a productivity and efficiency perspective to drive good operating margin expansion and operating profit growth and.
Speaker Change: And we're pleased to be in a position with a balance sheet, where we can continue to invest in some real multiyear tailwind that.
Speaker Change: Apply to our Ferguson Hvac's efforts, our large capital project efforts, our waterworks diversification and.
Speaker Change: And certainly our Ferguson home brand. So thank you very much for your time, we look forward to talking to you very soon.
Speaker Change: This concludes today's call. Thank you for your participation you may now disconnect your lines.
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