Ferguson's Q1 2026: Contradictions Emerge in Data Center Growth, Residential Construction, Inventory Strategy, and Pricing Outlook

Date of Call: December 9, 2025

Financials Results

• Revenue: $8.2B, up 5.1% YOY
• EPS: $2.84 per diluted share, up 15.9% YOY
• Gross Margin: 30.7%, up 60 basis points YOY
• Operating Margin: 9.9%, up 80 basis points YOY

Guidance:

• Approximately 5% revenue growth for calendar 2025.
• Operating margin expected to be 9.4% to 9.6% (raised from prior 9.2%–9.6%).
• Interest expense expected ~ $190 million for the year.
• CapEx expected ~ $350 million (upper end of prior guide).
• Effective tax rate expected to be ~ 26%.
• Calendar 2026 guidance to be provided in February.

Business Commentary:

* Revenue and Profitability Growth: - Ferguson Enterprises reported a revenue of $8.2 billion for Q1 2026, increasing 5% over the prior year, driven by organic growth of 4% and acquisition growth of 1%. - The company's operating profit grew by 14% over the prior year, reaching $808 million. - This growth was attributed to disciplined cost management and strong execution in challenging market conditions.

• Large Capital Projects and Segment Performance:
• Ferguson's Commercial/Mechanical segment grew 21%, and the Waterworks segment grew 14%, with these increases largely driven by large capital projects like data centers.
• The company estimates that large capital projects contribute between mid- to high single digits as a percentage of total revenue, with data centers accounting for over 50% of this.

• The growth in these segments is due to a strong pipeline of projects, increased bidding activity, and advantages in project execution and supply chain management.

• Operating Margin and Gross Margin Improvement:

• Ferguson's operating margin increased to 9.9%, up 80 basis points from the prior year, contributing to a 9.4% to 9.6% guidance range for the full year.
• The gross margin improved to 30.7%, an increase of 60 basis points over the prior year.

• These improvements were driven by disciplined cost management, operating leverage, and strategic pricing efforts.

• Share Repurchases and Dividend Payout:

• Ferguson repurchased approximately $208 million of shares during the quarter, reducing the share count by nearly 1 million.
• The company declared a 7% increase in its quarterly dividend to $0.89 per share.
• These actions reflect the company's commitment to returning surplus capital to shareholders and maintaining a strong balance sheet position.

Sentiment Analysis:

Overall Tone: Positive

• Management reported sales of $8.2B (+~5%), gross margin of 30.7% (+60 bps), operating profit $808M (+14%) and EPS $2.84 (+~16%). CEO: "we're poised to deliver a strong calendar 2025 performance"; CFO raised the operating margin guide and reiterated capital returns and M&A activity.

Q&A:

• Question from Matthew Bouley (Barclays Bank PLC): Can you quantify the portion of the business that large capital projects (including data centers) represent today, how that could grow, and whether revenue lumpiness is a risk?
  Response: Large capital projects are mid- to high-single-digit % of company revenue today; data centers are just over half of that segment, the pipeline and open orders are growing, but revenue can be lumpy due to long project gestation.

• Question from Matthew Bouley (Barclays Bank PLC): Any color on November or quarter-to-date results and directional thoughts into early 2026 across end markets and carryover inflation?
  Response: Calendar Q4 to date (Oct–early Dec) growth is about 3%; this is in line with expectations given new-resi and HVAC pressure, and early 2026 is expected to look similar—formal 2026 guidance will be given in February.

• Question from Ryan Merkel (William Blair & Company L.L.C.): The slowdown to ~3% growth in Q4—anything standout or just seasonal softness?
  Response: The slowdown is driven primarily by continued weakness in new residential permits/starts and pressure in HVAC demand.

• Question from Ryan Merkel (William Blair & Company L.L.C.): Pricing came in better—how are commodities trending and should we expect supplier price increases into next year?
  Response: Overall inflation ~3% this quarter (up from ~2% prior); finished goods moved higher, commodities down low-single-digits overall with PVC deflation, steel mild inflation and copper strong inflation; modest finished-goods price increases are expected into 2026.

• Question from David Manthey (Robert W. Baird & Co.): With positive pricing comps, should we expect incremental margins to run ahead of targeted 11%–13% rate next year?
  Response: Updated 2025 operating margin guide midpoint is ~9.5% (9.4%–9.6%); management expects modest margin progression (30–50 bps this year) but cautions outsized gross-margin gains seen earlier are not expected to repeat; 2026 margin outlook will be set in February.

• Question from David Manthey (Robert W. Baird & Co.): For the ~$2B-ish in major-project revenues, what % involve multiple product/customer groups under the One Ferguson approach?
  Response: Large projects (construction value >$400M) typically engage multiple nonresidential customer groups; Ferguson works early with owners/GCs to supply multi-product solutions across groups, though exact % varies by project.

• Question from Julian (Truist): On HVAC, when do comps ease from the preshipment impact ahead of last year's standard change?
  Response: HVAC is in a tough patch due to A2L transition pull-forward, recent equipment price increases and a pressured consumer shifting to repair; timing for comps to ease is uncertain—management remains bullish long-term.

• Question from Scott Schneeberger (Oppenheimer & Co. Inc.): Update on trainees, HVAC counter expansion, large-project teams and impacts of these SG&A investments?
  Response: Company added ~250–300 trainees this year, completed ~650 counter conversions to support dual-trade offerings, and continues technology/digital investments—these investments are driving outperformance while SG&A leverage is maintained.

• Question from Scott Schneeberger (Oppenheimer & Co. Inc.): How are you managing inventory entering 2026 given supplier price changes?
  Response: Inventories are in a good position; teams managed pricing changes well and no significant inventory profile changes are expected entering 2026.

• Question from Nigel Coe (Wolfe Research, LLC): Any sense of how gross margin has trended Q-to-date?
  Response: Gross margin Q-to-date is expected to be in the normalized 30%–31% range, similar to the reported quarter.

• Question from Nigel Coe (Wolfe Research, LLC): On a typical large project, what's Ferguson's approximate product/content as a % of construction value?
  Response: As a general ballpark for large projects (> $400M), Ferguson's product/content is roughly 2%–4% of construction value, though it varies significantly by project type.

Contradiction Point 1

Large Capital Projects and Data Center Growth

It involves differing expectations for the growth of large capital projects, particularly in data centers, which are crucial areas for the company's future growth.

Can you quantify the portion of your business in data centers and large capital projects and comment on their growth and potential lumpiness? - Matthew Bouley (Barclays)

2026Q1: Large capital projects are mid- to high single digits as a percentage of total revenue, with data centers being over 50% of that. The project pipeline and bidding activity are growing. Although there is potential for revenue lumpiness due to the gestation period of these projects, we remain bullish on this growth area. - Bill Brundage(CFO)

What's the momentum in non-residential markets, particularly in data centers, and how far are you bidding? - Philip Ng (Jefferies LLC, Research Division)

2025Q4: Backlogs are building in commercial, fire protection, and industrial PVF, driven by large capital projects like data centers. Pharma, healthcare, and wastewater treatment plants are active areas. The gestation period varies, but projects are building healthily. - Kevin Murphy(CEO)

Contradiction Point 2

New Residential Construction Outlook

It concerns the outlook for new residential construction, which significantly impacts the company's revenue and growth potential.

What caused the 3% growth slowdown in Q4? - Ryan Merkel (William Blair)

2026Q1: The slowdown is due to ongoing pressure in new residential starts and HVAC sales, which have been challenging towards the end of the quarter. Despite these pressures, we are optimistic about HVAC and residential markets over the medium to long term. - Bill Brundage(CFO)

What is the current state of the remodel market, and is there a demand crack from high-income consumers? - Richard Reid (Wells Fargo Securities, LLC, Research Division)

2025Q4: New residential is expected to weaken further, impacting calendar year growth. Though, it's not a dramatic drop-off. - Bill Brundage(CFO)

Contradiction Point 3

Inventory Management Strategy

It involves the company's inventory management strategy, which is critical for maintaining operational efficiency and cash flow.

How are you approaching inventory management in 2026? - Scott Schneeberger (Oppenheimer)

2026Q1: Inventory levels are currently good, and we don't anticipate significant changes as we enter 2026. Current levels support continued market outperformance and customer needs. - Bill Brundage(CFO)

How does pricing vary across segments, and what are expectations for future gross margins? - David Manthey (Robert W. Baird & Co. Incorporated)

2025Q4: Our current inventory levels provide us with great flexibility and opportunity to continue to perform exceptionally well within our markets. - Bill Brundage(CFO)

Contradiction Point 4

Pricing Strategy and Inflation Expectations

It involves the company's strategy and outlook for pricing and commodity inflation, which are critical factors in financial performance and cost management.

Can you outline pricing and commodity trends and expectations for next year? - Ryan Merkel (William Blair)

2026Q1: Pricing inflation was around 3% for the quarter, with finished goods up more and commodities down in low single digits. PVC remains in deflation, while steel shows mild inflation. We expect modest price increases in line with traditional behavior for finished goods in 2026. - Bill Brundage(CFO)

How are suppliers handling price increases, and how are you managing cost pressures on gross margins? - Philip Ng (Jefferies)

2025Q3: We work on value, not just price. Pricing strategy remains unchanged. Industry is returning to annual price increases. About 2/3 of branded suppliers have announced increases, with mid-single-digit price hikes averaging. We expect mild inflation in Q4. - Kevin Murphy(CEO), Bill Brundage(CFO)

Contradiction Point 5

Large Capital Projects and Bidding Activity

It directly impacts expectations regarding the growth and revenue impact of large capital projects, which are a strategic focus area for the company.

Can you break down the portion of your business in data centers and large capital projects and comment on their growth and potential lumpiness? - Matthew Bouley (Barclays)

2026Q1: Large capital projects are mid- to high single digits as a percentage of total revenue, with data centers being over 50% of that. The project pipeline and bidding activity are growing. Although there is potential for revenue lumpiness due to the gestation period of these projects, we remain bullish on this growth area. - Bill Brundage(CFO)

How is bidding activity progressing, and will year-over-year growth accelerate? - Philip Ng (Jefferies)

2025Q3: Bidding activity remains strong, particularly in data centers. Open order volumes continue to grow. Traditional nonres market remains in a challenging space, but large capital projects drive the nonres market. - Kevin Murphy(CEO)