Ferguson Enterprises Inc. /DE/ Q3 FY2026 earnings call

• Overall Performance: Delivered strong Q3 results with revenue up 9.5% to $9 billion, driven by 7% organic growth and 2.7% acquisition growth. Gross margin remained robust at 30.9%, and diluted EPS grew nearly 8% to $3.43.
• U.S. Market Dynamics: Non-residential sales surged 15%, outperforming the market due to strength in large capital projects (data centers, pharma, biotech) and industrial demand. Residential sales grew 6% despite a weak backdrop, supported by HVAC growth (15%) and resilience in trade plumbing.
• Customer Group Highlights:
  • Industrial: Exceptional 55% growth (32% organic), led by life sciences, mining, power generation, and data center construction. The inclusion of FlowWorks enhanced technical capabilities.
  • Commercial Mechanical: Grew 17%, driven by disciplined execution on large infrastructure projects.
  • Waterworks: Grew 5%, benefiting from diversified exposure to municipal and wastewater treatment, offsetting weak new residential construction.
  • HVAC: Robust 15% growth via dual-trade expansion, acquisitions (Rogers Supply), and OEM relationships.
• Capital Allocation & M&A: Deployed $2 billion in capital, including $1.7 billion for three acquisitions (notably FlowWorks, Brax Company, Rogers Supply). Net debt-to-adjusted EBITDA is 1.7x, within the 1x-2x target range. Share buybacks are temporarily paused pending deleveraging.
• Balance Sheet Strength: Maintained a strong balance sheet with free cash flow of ~$1.1 billion for the first nine months, supporting continued investment in organic growth and strategic acquisitions.

• U.S. Business: Net sales of $8.6 billion, up 10.2% year-over-year (YoY), driven by 7.4% organic growth and 2.8% acquisition contribution. Operating profit was $952 million, an increase of 8.8% YoY, with an operating margin of 11%. The U.S. segment represents the vast majority of total revenue.
• Canada Business: Net sales decreased 4.5%, impacted by a 3.2% headwind from non-core business divestments and a 1.9% foreign exchange headwind, partially offset by 0.6% organic growth. Operating profit was $23 million, $1 million ahead of the prior year.

• Full-Year 2026 Net Sales: Raised guidance to approximately 7% growth (previously mid-single-digit), reflecting YTD performance and the full-year impact of FlowWorks.
• Operating Margin: Raised the lower end of the range; now expected to be between 9.6% and 9.8% (previously implied lower).
• Interest Expense: Increased expectation to ~$235 million (from ~$200 million) due to higher debt balances from recent acquisitions.
• Capital Expenditures: Expected to be approximately $425 million.
• Tax Rate: Adjusted effective tax rate remains unchanged at approximately 26%.

• Residential Construction Pressure: Continued weakness in new residential construction permits and starts is expected to build pressure on residential customer groups entering next year.
• Interest Rate Sensitivity: Rising interest rates may impact consumer spending and project financing, though current order patterns remain resilient.
• Commodity Price Volatility: Fluctuations in copper, steel, and plastics prices create uncertainty for gross margins, with commodities currently showing mixed inflation/deflation trends.
• Macro Policy Uncertainty: Potential changes in tax incentives or infrastructure funding post-election could affect large capital project pipelines, although no material pauses have been observed yet.
• Integration Risks: Early-stage integration of major acquisitions like FlowWorks carries inherent risks regarding synergy realization and cultural alignment.

Q: Analyst asked for a breakdown of Industrial segment growth drivers, specifically distinguishing data center contributions from other categories like life sciences/pharma, and outlook for 2027. / A: CEO clarified that organic industrial growth is roughly half large capital projects and half MRO. While data centers drive some activity, the primary large-cap drivers are power generation, refining, mining, and minerals. Growth is broad-based organically. CFO noted that open orders and backlog continue to accelerate, expressing bullishness on the industrial future, though not expecting 32% organic growth every quarter.

Q: Analyst inquired about potential delays or choppy order patterns in large capital projects (especially data centers) due to rising interest rates and political discourse, and the status of backlogs. / A: CEO stated it is early to tell if there will be pauses, but no significant cancellations have occurred yet. Backlogs remain strong and growing, covering six to nine months of visibility. He emphasized the balanced mix (50/50 res/non-res) provides durability. CFO added that while non-res open orders are strong, new residential construction pressure is building and will likely impact residential groups more in 2027.

Q: Analyst questioned how the company manages rising freight and fuel cost headwinds against solid margins, and expectations for gross margin expansion in 2027 as the 'inventory of profit gains' lapses. / A: CFO explained that teams are balancing value charging on the gross margin side with SG&A productivity initiatives to offset freight and healthcare costs. He reaffirmed the normalized gross margin range is 30-31%, likely in the upper half. CEO added that value-added services like fabrication and valve automation allow them to charge for labor productivity and value engineering, supporting margin maintenance.

Q: Analyst sought details on share gain drivers in Ferguson Home and Residential Trade Plumbing amidst a weak residential market, and the customer mix (residential vs. commercial/municipal) in Waterworks. / A: CEO highlighted that share gains come from the dual-trade capability serving repair contractors and the consultative showroom approach in Ferguson Home targeting premium/luxury remodels. For Waterworks, he noted ~25% of revenue comes from new residential construction, with the rest diversified across large capital projects, municipal, and light commercial, providing resilience against residential downturns.

Q: Analyst asked for an update on FlowWorks integration milestones regarding synergies and the timeline for resuming share buybacks given the 1.7x leverage ratio. / A: CEO noted it is only 60 days into integration, but customer reception is strong, and teams are working well together without diluting specialized capabilities. CFO stated that buyback resumption depends on the M&A pipeline. Without significant new deals, they expect to de-lever quickly and resume buybacks sometime in 2027. The pipeline remains healthy for bolt-on acquisitions.