Contradictions Emerge in Pricing, Residential Construction, and Gross Margins During Q4 2025 Earnings Calls

The above is the analysis of the conflicting points in this earnings call

Date of Call: September 16, 2025

Financials Results

• Revenue: $8.5B, up 6.9% YOY
• EPS: $3.48 per diluted share, up 16.8% YOY
• Gross Margin: 31.7%, up 70 bps YOY
• Operating Margin: 11.4%, up 60 bps YOY

Guidance:

• Calendar 2025 revenue expected to grow mid-single digits.
• Operating margin expected at 9.2% to 9.6% (10–50 bps improvement YOY).
• Interest expense expected at $180M–$200M.
• Effective tax rate ~26%.
• CapEx expected at $300M–$350M.
• Second half growth and margin expected slightly softer than first half due to residential/HVAC softness and seasonality, but still growing YOY.

Business Commentary:

* Revenue and Profit Growth: - Ferguson Enterprises Inc. reported revenue of $8.5 billion for the fourth quarter, an increase of 6.9% over the prior year. - The growth was driven by organic revenue increase of 5.8% and 1.1% from acquisitions, with a strong performance in large capital projects.

• Nonresidential Market Performance:
• Nonresidential end markets showed resilience with increased activity on large capital projects, contributing to a 15% revenue increase.

• This was attributed to continued demand in commercial and civil infrastructure segments, despite a subdued residential market.

• HVAC and Waterworks Expansion:

• HVAC revenue increased 8% for the year, with recent acquisitions and dual trade counter conversions contributing to growth.

• Growth was driven by strategic acquisitions and geographic expansion, leveraging the synergy between residential trade plumbing and HVAC customer groups.

• Operating Profit and Margin Expansion:

• Operating profit rose by 13.4% to $972 million, with an operating margin expansion of 60 basis points.
• Improvements were due to strong execution, cost management, and the timing of supplier price increases, despite a modest recovery in inflation.

Sentiment Analysis:

• Q4 sales rose 6.9% with gross margin up 70 bps and EPS up 16.8%. Operating margin expanded 60 bps to 11.4%. Management guided mid-single-digit 2025 revenue growth and higher operating margin (9.2%–9.6%). While noting residential softness and a slightly softer H2, they emphasized strong nonresidential large-project demand, healthy backlogs, and continued capital returns.

Q&A:

• Question from Matthew Bouley (Barclays): With mixed trends across residential and HVAC versus strong nonresidential and improving inflation, how should we think about price/volume and assumptions behind mid-single-digit 2025 growth?
  Response: H2 growth will be slightly softer than H1 due to residential and HVAC softness, but full-year mid-single-digit growth holds; August sales/day up ~5% with modest inflation (~2%).

• Question from Matthew Bouley (Barclays): How do you execute the multi-customer group strategy on large capital projects, and what’s the data center outlook?
  Response: They engage early with owners/engineers to deliver integrated solutions across trades; data center demand is accelerating with no pauses, supporting strong nonres growth.

• Question from Philip Ng (Jefferies): What’s the momentum and bidding/backlog picture in nonresidential?
  Response: Backlogs are healthy and building across commercial, fire, waterworks, and industrial, with strength beyond data centers (biotech/pharma, hospitals, water/wastewater).

• Question from Philip Ng (Jefferies): Outlook for pricing and gross margin; any inventory/timing benefits to normalize?
  Response: Expect modest overall inflation; commodities mixed (PVC deflation, copper/steel firmer); Q4 gross margin had timing benefits and should normalize to 30%–31%.

• Question from John Lovallo (UBS): Why is implied second-half operating margin below first half despite slightly higher sales?
  Response: Seasonality drives lower H2 margin; still an improvement versus last year’s H2.

• Question from John Lovallo (UBS): Cadence of the ~$100M annual restructuring savings?
  Response: Roughly $25M YoY benefit per quarter over the next three quarters is expected and embedded in the cost base.

• Question from David Manthey (Baird): Pricing by segment and the extent/remaining impact of gross margin timing benefits?
  Response: More inflation in nonres (copper/steel); Waterworks slightly down (PVC); temporary GM uplift fades, reverting toward 30%–31%.

• Question from David Manthey (Baird): HVAC pricing dynamics, refrigerant transition, and inventory status?
  Response: HVAC shows very low single-digit inflation overall; A2L transition underway with most R410A sold through; demand skewed to repair over replace.

• Question from Richard Reid (Wells Fargo): Are high-end remodel customers weakening and how are remodel backlogs?
  Response: High-end remodel remains resilient; Ferguson Home grew 3% with healthy showroom traffic, while lower-end residential trade lags amid PVC deflation and new-build softness.

• Question from Richard Reid (Wells Fargo): Waterworks context by geography and homebuilder pullback in subdivisions?
  Response: Waterworks strength is broad-based; residential new construction is pressured and releases are uncertain, though bidding hasn’t fallen off; no under-index in Florida.

• Question from Ryan Merkel (William Blair): Sunbelt/new residential trends and guide assumptions for Aug–Dec?
  Response: New resi expected somewhat weaker in H2; overall H2 growth below H1 (~sub-5%) but no sharp drop-off.

• Question from Ryan Merkel (William Blair): Industrial up 5% versus stronger commercial/civil—why and outlook?
  Response: Industrial and fire faced commodity deflation; industrial is collaborating on valve/automation for large projects—don’t over-interpret the gap versus commercial.

• Question from Michael Dahl (RBC Capital Markets): HVAC outlook vs OEMs’ sharper near-term volume declines; how embedded in guidance?
  Response: Guide embeds modest HVAC softness (down low single digits) given new res weakness; equipment price lift from A2L expected; network expansion continues.

• Question from Michael Dahl (RBC Capital Markets): Will leverage rise toward the range midpoint for more capital deployment—M&A vs buybacks?
  Response: They plan to stay near the low end (1–2x); would scale for compelling organic/M&A opportunities; pipeline healthy but no large deals.

• Question from Anthony Pettinari (Citi): M&A pipeline, valuations, and competitive dynamics?
  Response: Pipeline is actionable but focused on small/mid-sized deals; valuations at the upper end of 7–10x EV/EBITDA; competitive landscape largely unchanged.

• Question from Anthony Pettinari (Citi): Are tariff-related price increases embedded in expected modest inflation?
  Response: Yes—tariff effects are largely reflected but volatile; overall modest inflation expected, with PVC deflation offsetting copper/steel.