Ferguson Enterprises Inc. (FERG) Q1 2026 Earnings Call Transcript
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Overview
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.
Key Financial Performance
Sales $8.2 billion, increased 5% year-over-year, driven by organic growth of 4% and acquisition growth of 1%.
Gross Margin 30.7%, increased 60 basis points year-over-year, attributed to disciplined execution.
Operating Profit $808 million, grew 14% year-over-year, reflecting disciplined cost management.
Diluted Earnings Per Share $2.84, increased nearly 16% year-over-year, driven by operating profit growth and share repurchases.
Net Debt-to-EBITDA 1.1x, indicating a strong balance sheet.
Net Sales in the U.S. Grew 5.3% year-over-year, with organic growth of 4.4% and acquisition growth of 0.9%.
Net Sales in Canada Increased 2.2% year-over-year, with organic growth of 0.7% and acquisition growth of 4.6%, partially offset by foreign exchange and divestment impacts.
EBITDA $867 million, increased $109 million year-over-year, driven by improved operating performance.
Operating Cash Flow $430 million, up from $345 million year-over-year, driven by timing of working capital investments.
Free Cash Flow $325 million, increased from $274 million year-over-year, reflecting higher operating cash flow.
Dividend $0.89 per share, a 7% increase year-over-year, reflecting confidence in the business.
Share Repurchases $208 million returned to shareholders, reducing share count by nearly 1 million.
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Operating Highlights
Acquisition of Moore Supply Company: Ferguson acquired Moore Supply Company, an HVAC equipment and supplies business in the Chicago metro area, to enhance its HVAC presence.
Nonresidential market growth: Nonresidential revenue increased by 12%, driven by large capital projects, solid shipments, and growth in open order volumes and bidding activity.
Residential market challenges: Residential revenue declined by 1% due to weak new housing starts, permit activity, and soft repair, maintenance, and improvement work.
Revenue and profit growth: Sales reached $8.2 billion, a 5% increase, with operating profit growing 14% to $808 million. Gross margin improved by 60 basis points to 30.7%.
Capital deployment: $511 million was deployed, including $372 million returned to shareholders via share repurchases and dividends.
Focus on fragmented market consolidation: Ferguson continues to consolidate fragmented markets through acquisitions and maintains a healthy acquisition pipeline.
Leverage on structural tailwinds: The company is leveraging multiyear structural tailwinds in residential and nonresidential markets to drive growth.
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Risk or Challenges
Residential End Markets: Residential end markets, which represent approximately half of U.S. revenue, remain challenged due to weak new residential housing starts, permit activity, and soft repair, maintenance, and improvement work. Residential revenue declined by 1% in the quarter.
HVAC Segment: HVAC revenue declined by 6%, impacted by the industry's transition to new efficiency standards, weak new residential construction activity, and a pressured consumer environment.
Canadian Market: Markets in Canada remain subdued, particularly in residential sectors, with operating profit in Canada down $7 million compared to the prior year.
Commodity-Related Categories: Commodity-related categories experienced low single-digit declines in pricing, which could impact profitability.
Foreign Exchange Rates: Adverse foreign exchange rates negatively impacted revenue by 0.1% in the U.S. and 1.6% in Canada.
Economic Uncertainty: The company acknowledges near-term uncertainties in the market, which could impact performance.
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Guidance & Outlook
Revenue Growth: The company expects approximately 5% revenue growth for the calendar year 2025.
Operating Margin: The operating margin is projected to range between 9.4% to 9.6%, an increase from the prior expectation of 9.2% to 9.6%.
Capital Expenditures (CapEx): Estimated CapEx is approximately $350 million, at the upper end of the previous guidance.
Interest Expense: Interest expense is expected to be approximately $190 million for the year.
Effective Tax Rate: The effective tax rate is expected to be approximately 26%.
Market Position and Medium-Term Outlook: The company remains confident in its markets over the medium term and expects to leverage multiyear structural tailwinds in residential and nonresidential end markets.
Nonresidential Growth: Double-digit growth in nonresidential markets is expected to continue, driven by large capital projects such as data centers.
Acquisition Strategy: The company plans to continue consolidating fragmented markets through bolt-on geographic and capability acquisitions, supported by a healthy acquisition pipeline.
Shareholder Returns: The company is committed to returning surplus capital to shareholders, with approximately $800 million outstanding under the current share repurchase program.
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Shareholder Return Plan
Quarterly Dividend Increase: Declared a 7% increase to the quarterly dividend, raising it to $0.89 per share.
Dividend Payment: Paid $164 million in dividends during the quarter.
Share Repurchase: Returned $208 million to shareholders through share repurchases, reducing the share count by nearly 1 million shares.
Outstanding Share Repurchase Program: Approximately $800 million remains outstanding under the current share repurchase program.
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Key Q&A
Q:What portion of the business is represented by data centers and large capital projects, and what is the outlook for this segment?
A:Large capital projects represent mid- to high single digits as a percentage of total company revenue, with data centers accounting for over 50% of that. The pipeline for these projects continues to grow, with increased bidding activity and open order volume. However, there may be some lumpiness in revenue due to the longer gestation period of these projects. The company remains optimistic about growth in this area through 2025 and 2026.
Q:Can you provide insights into the November or quarter-to-date results and early 2026 outlook?
A:For calendar Q4 to date (October, November, and early December), total growth is about 3%, in line with expectations. The company anticipates Q4 growth rates to remain around 3%. For early 2026, no significant market changes are expected, with growth likely continuing at a similar rate. Detailed guidance for 2026 will be provided in February.
Q:What factors contributed to the slowdown in Q4 growth to 3%?
A:The slowdown is attributed to continued pressure on new residential (new res) construction and HVAC markets. Weaker permits and starts earlier in the year are now impacting revenue, and HVAC growth has become more challenging, with a 6% decline in the last quarter.
Q:How did pricing and commodities trend during the quarter, and what is the outlook for supplier price increases?
A:Inflation was about 3% for the quarter, up from 2% in the previous quarter. Finished goods saw high single-digit inflation, while commodities were down in the low single-digit range. PVC prices were in double-digit deflation, steel saw mild inflation, and copper tube and fittings experienced strong inflation. Modest price increases are expected in 2026, aligning with traditional behavior.
Q:Will incremental margins exceed the targeted 11%-13% rate due to positive pricing in the coming year?
A:Operating margins improved from 9.1% in 2024 to an expected 9.4%-9.6% in 2025. While positive pricing may contribute to incremental margins, the company does not expect outsized gross margin gains to repeat in 2026. Modest progression in operating margins is anticipated, depending on market conditions.
Q:What percentage of large projects involve multiple product and customer groups through the One Ferguson effort?
A:While specific percentages were not provided, the company emphasized that large projects often involve multiple customer groups, such as Industrial, Fire & Fabrication, Waterworks, and Commercial/Mechanical. The One Ferguson approach focuses on early engagement with contractors and owners to ensure supply chain efficiency and product availability.
Q:When will HVAC market conditions improve, and what factors are currently impacting this segment?
A:The HVAC market is currently under pressure due to factors like the A2L transition, equipment price increases, a shift to repair over replacement, and reduced multifamily new construction. The company is optimistic about long-term growth in this segment but cannot pinpoint when conditions will improve.
Q:What updates can you provide on SG&A investments, including trainees, HVAC counter expansion, and large project teams?
A:The company added 250-300 trainees this year and plans to expand the program in 2026. Approximately 650 HVAC counter conversions have been completed, integrating plumbing and HVAC products. Investments in technology and digital tools, particularly for HVAC and plumbing contractors, are ongoing. Cost actions earlier in the year have yielded benefits, and the company is managing SG&A effectively while continuing to invest in growth areas.
Q:How is the company managing inventory as it enters 2026?
A:The company believes its inventory levels are well-positioned to support customer needs and market outperformance. No significant changes to inventory levels are expected as the company transitions into 2026.
Q:What is the gross margin outlook for calendar Q4?
A:Gross margins are expected to remain in the normalized range of 30%-31%, consistent with the previous quarter.
Q:What is the typical revenue opportunity for Ferguson in large capital projects?
A:For large capital projects with construction values over $400 million, Ferguson's product and customer group contributions typically represent 2%-4% of the construction value. This excludes costs for items like servers and chips in data centers.
Q:Review of Unclear Management Responses
A:Management avoided providing specific percentages for the involvement of multiple product and customer groups in large projects through the One Ferguson effort. Additionally, they did not pinpoint when HVAC market conditions would improve, citing various factors impacting the segment. Early 2026 guidance was also vague, with detailed insights deferred to February.
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Earnings Word Cloud
The most frequently occurring keywords in this quarter's earning call
CEO Brundage
CFO Welcome
Canada Price
Canada cash
Chicago area
Communications conference
Home class
Markets Canada
Moore Supply
Mr Investor
Plumbing headwind
Price inflation
RMI construction
Repair maintenance
States Waterworks
Strength capital
Supply addition
Waterworks revenue
Welcome result
ability experience
acquisition Moore
acquisition margin
activity Repair
activity approach
activity consumer
activity shipment
addition HVAC
approach customer
approach end
approach value
area market
area share
associate basis
calendar market
conference today
dividend share
market customer
rate divestment
result conference
sheet debt
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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