Ferguson Enterprises Inc. (FERG) Q4 2025 Earnings Call Transcript
Access earnings results, analyst expectations, report, slides, earnings call, and transcript.
Overview
The company exhibits a robust strategic plan, with expected revenue growth and operating margin expansion. The focus on nonresidential growth, particularly in data centers, and a strong acquisition strategy are positive indicators. The Q&A reveals confidence in the Waterworks sector and a promising M&A outlook for 2026. Despite flat margins due to normalization, the overall guidance is optimistic. Shareholder returns via share repurchases further enhance sentiment. While there are some uncertainties in management responses, the positive aspects outweigh them, suggesting a 2% to 8% stock price increase.
Key Financial Performance
Revenue $31.3 billion, 5% increase year-over-year. Growth attributed to organic revenue growth of 4.5% and acquisition growth of 1%, partially offset by fewer sales days and adverse foreign exchange impacts.
Operating Profit $3 billion, 11.3% increase year-over-year. Improvement due to diligent management of gross margins and streamlined business operations.
Operating Margin 9.6%, 50 basis points expansion year-over-year. Driven by disciplined execution and supplier price increase timing.
Diluted Earnings Per Share (EPS) $10.58, 13.4% increase year-over-year. Growth driven by operating profit growth and share repurchases.
Operating Cash Flow $2.2 billion, $110 million increase year-over-year. Strong cash generation supported investments in growth areas and capital allocation priorities.
Return on Capital 31%, strong performance for the year. No specific reasons for change mentioned.
Net Sales in the United States 5% growth year-over-year. Residential revenue flat due to weak markets, while nonresidential revenue grew 11% driven by large capital projects and share gains.
Waterworks Revenue 13% growth year-over-year. Strength in large capital projects, public works, general municipal, and metering technology offset residential weakness.
Ferguson Home Revenue 1% growth year-over-year. Outperformance in challenging new construction and remodel market due to unified showroom and digital experience.
Residential Trade Plumbing Revenue 3% decline year-over-year. Impacted by headwinds in new construction and RMI construction.
HVAC Revenue 1% decline year-over-year. Affected by transition to new efficiency standards, weak new residential construction, and pressured consumer demand.
Commercial/Mechanical Revenue 18% growth year-over-year. Driven by large capital projects like data centers, partially offset by weaker traditional nonresidential projects.
Fire & Fabrication, Facilities Supply, and Industrial Customer Groups Growth year-over-year. Benefited from multi-customer group approach and market share gains.
EBITDA $3.2 billion, $338 million increase year-over-year. Growth supported by selective working capital investments and stable interest and tax expenses.
Free Cash Flow $1.9 billion, $100 million increase year-over-year. Resulted from strong operating cash flow and disciplined capital investments.
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Operating Highlights
Revenue: Revenue of $31.3 billion, a 5% increase from last year.
Operating Profit: Operating profit of $3 billion, up 11.3%, representing a 9.6% operating margin.
Earnings Per Share: Diluted earnings per share of $10.58, a 13.4% increase.
Acquisitions: Welcomed associates from 8 acquisitions, continuing market consolidation strategy.
Residential Market: Residential revenue remained flat due to challenges in new housing starts and repair/maintenance activities.
Nonresidential Market: Nonresidential revenue grew by 11%, driven by large capital projects and strong bidding activity.
Waterworks: Waterworks revenue grew by 13%, supported by large capital projects and public works.
Commercial/Mechanical: Commercial/Mechanical customer group grew 18%, driven by large capital projects like data centers.
Cash Flow: Generated $2.2 billion in operating cash flow, enabling investments in growth and shareholder returns.
Gross Margin: Gross margin increased by 70 basis points to 31%.
Capital Allocation: Returned $1.6 billion to shareholders via dividends and share repurchases.
Market Positioning: Positioned as the largest value-added distributor of water and air solutions in North America.
Structural Trends: Focused on large capital projects, water infrastructure, climate systems, and aging housing stock as growth drivers.
Customer Group Integration: Integrated multi-customer group approach to provide end-to-end solutions for complex projects.
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Risk or Challenges
Residential End Markets: Residential end markets, which represent approximately half of revenue, remain challenged. New residential housing starts and permit activity were down on the prior year, and repair, maintenance, and improvement work also remained soft.
HVAC Segment: The HVAC segment declined by 1%, impacted by the industry's transition to new efficiency standards, weak new residential construction activity, and a pressured consumer environment.
Residential Trade Plumbing: Residential Trade Plumbing declined by 3% due to headwinds in both new construction and repair, maintenance, and improvement (RMI) construction.
Economic Environment: Price inflation was low single digits for the year, with improvement in finished goods pricing offset by deflation in certain commodity-related product categories. This mixed economic environment could pose challenges to profitability.
Skilled Labor Shortages: The industry faces a trade-starved environment with skilled labor becoming increasingly scarce, putting pressure on contractors to do more with less.
Aging Water Infrastructure: America's water systems are aging, underfunded, and in need of modernization, requiring significant investment to upgrade and replace critical infrastructure.
Residential Market Challenges: The residential market remains challenged in the short term due to aging housing stock and a housing shortage, which underpins strong demand but also creates operational challenges.
Regulatory and Efficiency Standards: The HVAC industry transition to new efficiency standards has created market disruptions and challenges for the segment.
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Guidance & Outlook
Revenue Growth: The company expects low to mid-single-digit revenue growth for calendar year 2026.
Operating Margin: Operating margin is projected to range between 9.4% and 9.8% for 2026.
Market Conditions: Markets are expected to be broadly flat for 2026, with residential markets down low to mid-single digits and nonresidential markets up low to mid-single digits.
Capital Expenditures: Estimated CapEx for 2026 is approximately $350 million to $400 million.
Interest Expense: Interest expense is expected to be approximately $200 million in 2026.
Effective Tax Rate: The effective tax rate is projected to be approximately 26% for 2026.
Long-Term Revenue Growth: Over the long term, the company expects annual revenue growth of 6% to 11%, driven by market growth, share gains, and acquisitions.
Operating Margin Expansion: The company anticipates incremental operating margin expansion of 10 to 30 basis points annually over the long term.
Earnings Per Share Growth: Earnings per share growth is expected to be in the low double-digit to mid-teens range over the long term.
Revenue Milestone: The company aims to achieve $40 billion in revenue with over $4 billion in adjusted operating profit at over a 10% operating margin in the medium term.
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Shareholder Return Plan
Dividends declared: Quarterly dividend of $0.89 to be paid in April.
Total dividends returned to shareholders: $656 million returned to shareholders in dividends during the year.
Share repurchases: Repurchased 4.5 million shares for $902 million during the year.
Total shareholder returns: $1.6 billion returned to shareholders via dividends and share repurchases during the year.
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Key Q&A
Q:How is the company positioned for long-term growth in the nonresidential capital project sector?
A:The company has developed a multi-customer group approach, leveraging local relationships and engaging early in the project design process. They focus on delivering the right product on time and on budget. The competitive landscape is attractive, especially in areas like data centers, where they complement contractor activities with fabrication, valve automation, and off-site construction. This approach is expected to serve the company well for decades.
Q:Why are margins expected to remain flat despite strong top-line growth in 2026?
A:Margins are expected to remain flat due to normalization of gross margins after outsized gains in 2025 driven by supplier price increases. Gross margins are expected to compress slightly, but SG&A leverage is anticipated to offset this. Operating margins are projected to range between 9.4% and 9.8%, depending on market conditions.
Q:What is the company's long-term EBIT margin expansion outlook?
A:The company expects to expand operating margins by 10 to 30 basis points annually if growth aligns with their 6% to 11% long-term growth target. If growth is lower, they aim to maintain operating margins or achieve slight SG&A leverage in mid-single-digit growth scenarios.
Q:What is the split between new construction and RMI (repair, maintenance, and improvement) in the company's business?
A:The business is about one-third new construction and two-thirds RMI. The split is broadly similar across residential and nonresidential sectors, with slightly more new construction in nonresidential due to large capital projects.
Q:How are sales trending in the first quarter of the calendar year?
A:Sales are trending in the low single-digit range, slightly weaker than Q4, due to new residential construction weakness, HVAC pressure, and weather-related impacts. Modest improvement is expected throughout the year.
Q:Why is volume growth expected to be slower in 2026 compared to 2025?
A:Volume growth is expected to be slower due to continued headwinds in new residential construction, HVAC pressure, and weather impacts early in the year. However, strong volume growth is anticipated in the nonresidential sector.
Q:Is the company anticipating price pressure due to changes in tariffs?
A:No, the company does not anticipate deflation or price pressure from tariff changes. They continue to see normal annual price increases across finished goods, with PVC pipe remaining in deflationary territory.
Q:What is the company's outlook for the Waterworks sector?
A:The company is bullish on the Waterworks sector, which includes residential, commercial, public works, water, wastewater treatment, and stormwater management. They see strong tailwinds from public works projects, data center-related water needs, and investments in water and wastewater treatment infrastructure.
Q:What is the company's guidance for nonresidential growth in 2026?
A:The company guides for low to mid-single-digit growth in the nonresidential market, with expectations to outperform the market due to their multi-customer group approach and strong backlog in commercial mechanical and Waterworks spaces.
Q:Why was M&A activity lower in 2025, and what is the outlook for 2026?
A:M&A activity was lower in 2025 due to timing and availability of assets. The company expects a more active year in 2026, with a strong pipeline of opportunities focused on HVAC in residential and capabilities like fabrication and process equipment in nonresidential.
Q:Why are the company's long-term growth and margin expectations similar to those presented in 2022?
A:The company maintains similar long-term growth and margin expectations due to consistent market growth assumptions and a focus on outperforming the market. Slight adjustments reflect near-term residential pressure and increased productivity investments.
Q:What are the typical margins for large capital projects, and how does the company perform in this area?
A:Large capital projects typically have slightly lower gross margins but also lower costs to serve, resulting in strong operating margins and returns on capital. The company has outperformed in this area, with strong growth in commercial mechanical, Waterworks, and industrial businesses.
Q:What is the company's approach to capital allocation and M&A?
A:The company has moved M&A up in its capital allocation priorities, reflecting growth aspirations and strong returns from acquisitions. They aim to balance M&A with sustainable dividend growth and have a healthy pipeline of opportunities.
Q:Review of Unclear Management Responses
A:Management avoided providing specific details on the exact margins for large capital projects and the precise market share or win rates in those categories. Additionally, they did not elaborate on the specific timing or scale of expected M&A deals in 2026.
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Earnings Word Cloud
The most frequently occurring keywords in this quarter's earning call
North America
Waterworks
air solution
calendar
case
chain network
climate
comfort
complexity
construction productivity
coordination
decision
design
distributor
fire
flow cash
footprint
foundation
home
housing
labor
life cycle
margin expansion
market opportunity
mile
model
partner
people
product solution
return
shareholder value
size scale
solution life
track record
trade world
trend market
update market
value solution
water air
water infrastructure
year
FERG Transcript
Ferguson Enterprises Inc. (FERG) Q1 2026 Earnings Call Transcript
Positive5-5
The earnings call summary indicates strong financial performance with revenue, operating profit, and EPS all showing healthy growth. The operating margin also improved, suggesting effective cost management. Despite a slight decline in cash flow from operations, the overall financial health appears solid. The absence of negative sentiment or concerns in the Q&A section further supports a positive outlook. Given these factors, the stock price is likely to experience a positive movement in the short term.
Ferguson Enterprises Inc. (FERG) Q4 2025 Earnings Call Transcript
Positive2-24
The company exhibits a robust strategic plan, with expected revenue growth and operating margin expansion. The focus on nonresidential growth, particularly in data centers, and a strong acquisition strategy are positive indicators. The Q&A reveals confidence in the Waterworks sector and a promising M&A outlook for 2026. Despite flat margins due to normalization, the overall guidance is optimistic. Shareholder returns via share repurchases further enhance sentiment. While there are some uncertainties in management responses, the positive aspects outweigh them, suggesting a 2% to 8% stock price increase.
Ferguson Enterprises Inc. (FERG) Q1 2026 Earnings Call Transcript
Unknown12-9
The earnings call summary and Q&A indicate several concerns: a slowdown in Q4 growth due to residential and HVAC market pressures, unclear guidance for early 2026, and vague responses regarding large projects and HVAC recovery. While there is optimism for long-term growth, the immediate outlook is uncertain, with only modest margin improvements expected. The negative sentiment is compounded by the lack of specific guidance and ongoing market challenges, suggesting a likely negative stock price reaction over the next two weeks.
Ferguson Enterprises Inc. (FERG) Q4 2025 Earnings Call Transcript
Unknown9-16
The earnings call presents a mixed picture: financial performance and market strategy show positive growth in key areas like Waterworks and HVAC, but challenges in residential construction and remodel markets temper enthusiasm. While guidance indicates low to mid-single-digit growth, uncertainties in pricing, inflation, and residential sectors create a balanced outlook. The Q&A reveals healthy backlogs and strategic focus but lacks clarity on specific challenges, suggesting a neutral sentiment with potential for slight positive or negative adjustments.
FERG Slides
FERG Report
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