Ferguson's Q4 2025: Contradictions Emerge on Market Outlook, Gross Margins, Commodities, and Operating Margins

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 diluted EPS, 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.
• Calendar 2025 operating margin expected at 9.2%–9.6% (up 10–50 bps vs prior year).
• Interest expense: $180M–$200M.
• Effective tax rate: ~26%.
• CapEx: $300M–$350M.
• H2 2025 growth to be softer than H1 due to weaker new resi and HVAC; nonres large projects remain resilient.
• Fiscal year-end shifts to Dec 31; 3-month results (Aug–Oct) on Dec 9; 5-month transition results in late Feb.

Business Commentary:

• Revenue Growth and Market Performance:
• Ferguson reported revenue of $8.5 billion for the fourth quarter, an increase of 6.9% over the prior year, with organic growth of 5.8% and acquisition growth of 1.1%.

• The growth was driven by strong performance in nonresidential markets, particularly in large capital projects, and strategic acquisitions in HVAC expansion and Waterworks diversification.

• Operating Profit and Margin Expansion:

• The company achieved an operating profit of $972 million, up 13.4% from the previous year, resulting in an operating margin of 11.4%.

• This improvement was due to disciplined cost management and strategic investments in growth areas, such as HVAC and Waterworks.

• Nonresidential Market Strength:

• Ferguson's nonresidential end markets showed resilience with a 15% increase in revenue, driven by growth in commercial and civil infrastructure end markets.

• Large capital projects and the rise in domestic production initiatives were key drivers for this performance.

• Challenges in Residential Market:

• The residential end market remained subdued with flat revenue in the quarter, affected by weakened new construction starts and soft demand in repair, maintenance, and improvement.
• The residential plumbing business faced headwinds from new construction activity and ongoing PVC price deflation.

Sentiment Analysis:

• “Sales of $8.5 billion increased 6.9% over prior year… EPS… up 16.8%.” “We would expect the overall growth rate to maybe be a touch softer in the second half.” “We expect mid-single-digit revenue growth in calendar 2025… operating margin range of 9.2% to 9.6%.” “New residential construction weakness continues… movement to more repair versus replace.”

Q&A:

• Question from Matthew Bouley (Barclays): How do price/volume trends and changing end markets inform your mid-single-digit 2025 growth outlook?
  Response: H2 growth will be softer than H1 as new resi and RMI weaken and HVAC skews to repair; nonres large projects stay resilient; August sales/day +5% after a strong July.

• Question from Matthew Bouley (Barclays): How does your multi-customer approach win large capital projects, and what’s the data center pipeline?
  Response: Ferguson sells best-in-class to each trade while engaging owners/engineers upstream; data center activity is accelerating with no pauses, supported by valve automation, fabrication, and VDC services.

• Question from Philip Ng (Jefferies): What’s the momentum and bidding backdrop in nonres, and how are price/margins trending?
  Response: Overall pricing turned modestly positive (~2%); copper up, steel flattish/up, PVC still deflationary; Q4 gross margin (31.7%) benefited from supplier pricing timing and should normalize to 30%–31%.

• Question from John Lovallo (UBS): Why is implied H2 operating margin lower than H1 despite slightly higher sales?
  Response: Seasonality; H2 is typically lighter (Nov/Dec holidays). Margins still improve year-over-year versus last calendar H2.

• Question from John Lovallo (UBS): Update on $100M annual restructuring savings cadence?
  Response: Roughly $25M year-over-year benefit per quarter over the next three quarters; cost base improved with faster field decision-making.

• Question from David Manthey (Baird): Pricing by segment and gross margin normalization timing?
  Response: Nonres has more inflation; Waterworks slightly down due to PVC; expect gross margin to normalize to 30%–31% as temporary supplier price timing benefits wane.

• Question from David Manthey (Baird): HVAC pricing and refrigerant transition impact?
  Response: A2L transition lifts equipment prices; overall HVAC inflation is low single digits as repair mix dampens; most R410A inventory is sold through.

• Question from Sam Reid (Wells Fargo): Is high-end remodel demand weakening and how are backlogs?
  Response: Higher-end remodel remains resilient; Ferguson Home grew 3% with healthy showroom traffic; lower-end trade plumbing down 2% on new-build softness and PVC deflation.

• Question from Ryan Merkel (William Blair): How weak is new residential, especially Sunbelt, and what’s embedded in guidance?
  Response: New resi softens further in H2, making overall H2 growth below H1’s 5%, but no cliff; balanced mix and growth areas mitigate.

• Question from Michael Dahl (RBC Capital Markets): How does the guide reflect OEM-indicated HVAC volume pressure and price/mix?
  Response: Guide embeds near-term HVAC softness (low-single-digit declines) and softer H2 vs H1; regional performance bifurcated, but expansion continues via counters, locations, and M&A.

• Question from Michael Dahl (RBC Capital Markets): Will leverage rise toward the upper range for more deployment?
  Response: Company prefers the low end of 1–2x; would scale up for attractive organic/M&A opportunities; no large deals in the pipeline currently.

• Question from Anthony Pettinari (Citi): What’s the M&A pipeline/valuation landscape and competition in water/air?
  Response: Pipeline is healthy but focused on bolt-ons; competitive market with valuations toward the upper end of 7x–10x EV/EBITDA.

• Question from Anthony Pettinari (Citi): Do you expect tariff-driven price increases to influence inflation and margins near term?
  Response: Modest inflation expected; tariffs largely embedded with uncertainty remaining; PVC deflation offsets; suppliers initially moved then paused on reciprocals.