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DATE

  • Tuesday, June 3, 2025, at 8:30 a.m. EDT

CALL PARTICIPANTS

  • Chief Executive Officer — Kevin Murphy
  • Chief Financial Officer — Bill Brundage

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RISKS

  • Bill Brundage stated, we incurred a nonrecurring business restructuring charge of $68 million in Q3 FY2025, principally related to severance costs as part of targeted actions to streamline operations.
  • Bill Brundage reported, Deflation exceeded 1% year-to-date for FY2025, with a gross margin declined by 10 basis points year-to-date to 30.3% for 9M FY2025 (GAAP) and Operating profit decreased 4.9% year-to-date compared to the prior year.
  • Bill Brundage said, "net sales were 0.3% below last year," attributing this to "Residential activity has continued to be soft."

TAKEAWAYS

  • Net Sales: $7.6 billion in net sales, representing 4.3% growth in net sales, including 5% organic growth, 1% contribution from acquisitions, and a combined 1.7% negative impact from fewer sales days and foreign exchange.
  • Gross Margin: 31.0% gross margin, increasing 130 basis points sequentially and 50 basis points year-over-year, with management citing "actions to better capture the value we deliver to customers" and moderating deflation.
  • Operating Profit: Operating profit of $715 million, resulting in a 9.4% operating margin, which expanded by 20 basis points.
  • Diluted Earnings Per Share: $2.50 diluted earnings per share as a result of operating profit growth and share repurchases.
  • Capital Deployment: $690 million allocated, including $417 million returned to shareholders via share repurchases and dividends, and completion of 3 acquisitions.
  • U.S. Segment Sales: 4.5% sales growth in the U.S. and 5% organic growth for Q3 FY2025, offset by a 1.5% negative impact from fewer sales days; operating profit of $726 million and an operating margin of 10%.
  • Canada Segment Sales: 0.3% decline in net sales in Canada; 3% organic growth in Canada and acquisitions added 2.8% to net sales in Canada, offset by a 4.4% adverse currency impact and a 1.7% negative impact from fewer sales days.
  • HVAC Customer Group: 10% sales growth, with the "vast majority" organic and about 1 percentage point from acquisitions.
  • Waterworks Customer Group: 12% sales growth for Waterworks, driven by activity in public works, municipal, and diversification efforts.
  • Commercial/Mechanical Revenue: 10% growth in the HVAC customer group, supported by large capital project activity and increasing open order levels.
  • Nonresidential Revenue: 7% nonresidential revenue growth, outperforming residential and attributed in part to large capital projects.
  • Residential End Market: Approximately half of U.S. revenue with 2% growth in residential end market revenue, mainly from the HVAC initiative; residential trade plumbing revenue declined 1%, consistent with recent quarters.
  • Net Debt to EBITDA: 1.2x, reflecting ongoing balance sheet strength and supporting further capital allocation.
  • Business Restructuring Charge: $68 million nonrecurring business restructuring charge expensed, including $41 million related to severance affecting 800 positions and consolidation of smaller branches; management expects approximately $100 million in annualized cost savings from these business restructuring actions.
  • Dividend: $0.83 per share quarterly dividend, unchanged sequentially.
  • Updated Fiscal 2025 Guidance: Revenue growth is now expected in the low- to mid-single-digit range for FY2025 and operating margin has been revised upward to 8.5%-9.0% for FY2025.
  • Share Repurchases: $759 million returned to shareholders year-to-date, reducing share count by approximately 4.1 million shares year-to-date, with $1.1 billion remaining authorized.

SUMMARY

Ferguson Enterprises (FERG -0.11%) management increased full-year revenue and operating margin guidance for the year, citing Sequential and year-over-year improvement in gross margin and operating profit. The company delivered double-digit sales growth in both HVAC (10%) and Waterworks (12%) customer groups, while nonresidential and commercial segments drove outperformance relative to residential and Canadian operations. Ferguson plc executed targeted restructuring and strategic cost controls, anticipating $100 million of annualized savings and further SG&A leverage into the next fiscal year. Free cash flow reached $1.15 billion year-to-date, with net debt to EBITDA maintained at 1.2x and a heightened pace of capital return and investment. Segment results highlighted continued softness in Canadian residential activity, while U.S. nonresidential bidding momentum and counter conversion initiatives in HVAC supported the reported performance.

  • Bill Brundage stated, finished goods were up in the low single digits, while commodities were down in the mid-single-digit range, summarizing pricing dynamics during the period.
  • Kevin Murphy described Ferguson Home as a newly unified omnichannel brand from the merger of residential building/remodel and residential digital commerce, aiming to enhance the customer experience and drive project-based growth.
  • Current capital expenditure guidance was updated to $300 million–$350 million, reflecting expected deployment and pace of ongoing network and automation investments.
  • Bill Brundage referenced a "healthy" acquisition pipeline, with 5 acquisitions completed year-to-date and a focus on consolidating fragmented markets through bolt-on geographic and capability acquisitions.
  • Customer bidding activity in U.S. residential new construction was strong over the last 60–90 days, though management cautioned that not all projects may progress to the release phase.
  • Approximately 90% of revenue now comes from branded, predominantly domestic suppliers, with ongoing diversification of own brand sourcing across 31 countries to mitigate tariff risks.
  • The supply chain network continued to expand, with 5 market distribution centers operational and 2 additional facilities due to open within 12 months.

INDUSTRY GLOSSARY

  • Counter Conversion: The process of reconfiguring an existing branch to serve multiple contractor trades, allowing both HVAC and plumbing professionals to access a unified product set and expertise at one physical location.
  • Waterworks: Ferguson's business segment focused on supplying products and solutions for water, wastewater, stormwater, and related public and private infrastructure projects.
  • HVAC: Heating, Ventilation, and Air Conditioning—the customer group and product vertical within Ferguson responsible for climate control solutions, including equipment, parts, and services.
  • Ferguson Home: The unified omnichannel brand combining Ferguson’s showroom and digital commerce offerings for residential building, remodel, and decorative product customers, delivering a seamless project-based experience.

Full Conference Call Transcript

Kevin Murphy: Thank you, Brian, and welcome, everyone, to Ferguson's third quarter results conference call. On today's call, I'll cover highlights of our third quarter performance. I'll also provide a more detailed view of our performance by end market, customer group and our growth initiatives before turning the call over to Bill for the financials. I'll then come back at the end and give some closing comments before Bill and I take your questions. Our associates continue to take care of our customers, outperformed the market and drove strong growth in the third quarter.

Sales of $7.6 billion increased 4.3% over prior year, driven by organic growth of 5% and acquisition growth of 1% despite 1 fewer sales day and foreign exchange, which had a combined 1.7% negative impact. We delivered a 31% gross margin, which strengthened sequentially by 130 basis points. This was driven by our actions to better capture the value we deliver to customers while maintaining market share gains as well as the impact from moderating deflation. Strong volume growth, gross margin improvement, moderating deflation and the early benefits of streamlining our business drove profitable growth. Operating profit increased 6.1% and operating margin expanded 20 basis points to 9.4%. Diluted earnings per share increased 7.8% over the prior year to $2.50.

We continue to execute our capital priorities, deploying approximately $690 million during the quarter, including completing 3 acquisitions and returning $417 million to shareholders through share repurchases and dividends. Our balance sheet remains strong with net debt to EBITDA of 1.2x. While we're in a dynamic and uncertain environment, we remain confident in our markets over the medium term. We continue to balance investment in key strategic opportunities, leveraging multiyear tailwinds in both residential and nonresidential end markets as we look to support the complex project needs of our specialized professional customers. Turning to our performance by end markets in the United States. Net sales grew 4.5% as we drove volume growth with moderating headwinds from deflation.

The residential end market, which comprises approximately half of U.S. revenue, remains subdued. Our teams grew revenue in our residential end market by approximately 2% in the quarter, primarily driven by our HVAC growth initiative. Nonresidential end markets, representing just under half of U.S. revenue, saw stronger growth than residential end markets with increased activity on large capital projects. We continue to grow share with nonresidential revenue growth of approximately 7%. We delivered mid- to high single-digit growth across commercial and industrial end markets with low double-digit growth in civil infrastructure. Our intentional balanced end market exposure and focus on key growth initiatives continue to position us well in both the current environment and well into the future.

Moving now to revenue performance across our customer groups in the United States. Our HVAC customer group continues to deliver strong growth with an increase of 10% in the quarter. I'll expand on our HVAC growth investments in a moment. Residential trade plumbing revenues declined 1%, broadly consistent with recent quarters. The business faced continued headwinds in new construction and ongoing price deflation, while repair, maintenance and improvement is performing better. We've recently merged residential building and remodel and residential digital commerce customer groups into a unified brand called Ferguson Home. Ferguson Home provides a seamless omnichannel experience for our customers. Our focus on the higher-end project is driving growth despite the overall softness in broader remodel activity.

Strong Waterworks growth of 12% in the quarter was driven by activity in public works, municipal and our broader diversification efforts. Both Waterworks and Commercial/Mechanical continue to see strong activity on large capital projects. Commercial/Mechanical revenue grew 10%, and our open order levels continue to grow. Our Industrial, Fire and Fabrication and Facility Supply Customer groups delivered a combined net sales decline of 1% as commodity deflation continued, particularly in our Fire and Fabrication business. Collaboration across multiple customer groups and our unique position in the market continue to be an advantage. Despite near-term headwinds, we continue to be pleased with the results of our 4 key growth areas. The third quarter performance shows ongoing returns from these multiyear investments.

HVAC revenue up 10% in the third quarter reflects our focus and investments to expand our HVAC capabilities, both organically and through acquisitions. Our multipronged approach, which includes leveraging the synergy between our residential trade plumbing and HVAC customer groups continues to drive market outperformance. We've completed more than 550 counter conversions to serve our dual trade contractors. Our HVAC presence continues to grow geographically through both organic expansion and acquisitions. We're addressing the needs of the market by partnering with a variety of HVAC equipment vendors to offer our customers a range of choices, including our own Durastar brand. Waterworks revenue grew 12% in the quarter.

We're committed to diversifying our Waterworks business to create a best-in-class capability set that addresses the nation's infrastructure needs. We provide solutions for water, wastewater and storm water management as well as erosion control, urban green infrastructure, treatment plant construction, meters and metering technology. Our unique approach to large capital projects, bringing together the capabilities of underground waterworks infrastructure, commercial and industrial pipe valve and fitting and fire protection create a compelling solution for large capital projects and has been a driving force behind nonresidential growth of 7% in the quarter.

We believe our early alignment with owners, engineers and general contractors on these projects, combined with our deep contractor relationships, our scale and our ability to offer a suite of value-added solutions uniquely positions us for success in these projects. The February launch of Ferguson Home represents another compelling example of the value our multi-customer group approach brings to the market. We spent years developing best-in-class experience for our showroom and our digital platform for new construction, light remodel and decorative markets. Ferguson Home is the unified brand of residential building and remodel and residential digital commerce, fully integrating our showroom and digital channels to offer our customers a seamless project-based experience.

Our scale delivered locally with the cohesiveness of our customer groups is a true competitive advantage. We continue to invest in key growth areas that capitalize on multiyear tailwinds and drive outperformance. I'll now pass you to Bill, who'll discuss the financial results in more detail.

Bill Brundage: Thank you, Kevin, and good morning, everyone. Net sales of $7.6 billion were 4.3% ahead of last year. Organic revenue increased 5% with an additional 1% from acquisitions, partially offset by 1.7% from 1 fewer sales day and the adverse impact of foreign exchange. During the quarter, we saw deflation moderate with the pricing environment broadly flat. We saw improvement in finished goods pricing, offset by continued weakness in certain commodity categories. While we have seen some instances of pull-forward buying activity from customers in the quarter, this is difficult to quantify, and we do not believe this has had a material impact on the overall performance.

Gross margin of 31% increased 50 basis points over last year, driven by specific actions taken to better capture the value we deliver to customers while also maintaining market share gains as well as the positive impact of moderating deflation. We tightly managed operating costs with the growth being driven by higher volumes, cost inflation and continued selective investments in core capabilities for future growth. As a result, operating profit of $715 million was up 6.1% on the prior year, delivering a 9.4% operating margin with 20 basis points of expansion over the prior year. Diluted earnings per share of $2.50 was 7.8% ahead of last year, driven by operating profit growth and the impact of share repurchases.

And our balance sheet remains strong at 1.2x net debt to EBITDA. As we discussed in the second quarter, we took targeted actions to streamline operations, enhance speed and efficiency to better serve our customers and drive further profitable growth. Consequently, we incurred a nonrecurring business restructuring charge of $68 million, principally related to severance costs. These actions reduce complexity in the organization and will speed up decision-making. We expect the changes to deliver approximately $100 million of annualized cost savings. Moving to our segment results. Net sales in the U.S. grew 4.5% with an organic increase of 5% and a 1% contribution from acquisitions, partially offset by a 1.5% impact from 1 fewer sales day.

Operating profit of $726 million increased $41 million over the prior year, delivering an operating margin of 10%. In Canada, net sales were 0.3% below last year, with organic growth of 3% and a 2.8% contribution from acquisitions, offset by a 4.4% adverse impact from foreign exchange rates and a 1.7% impact from 1 fewer sales day. Residential activity has continued to be soft with nonresidential activity remaining more resilient. Operating profit was $8 million in the quarter, $2 million above the prior year. Turning to our year-to-date results. Our associates delivered volume growth in a period challenged by commodity-led deflation and subdued end markets.

Net sales were 2.7% ahead of last year, with organic growth of 2.2% and an acquisition contribution of 1.1%, partially offset by 0.6% from the adverse impact of 1 fewer sales day and foreign exchange rates. Deflation was over 1% year-to-date. Gross margin was 30.3%, down 10 basis points. Operating profit of $1.9 billion was down 4.9% compared to the prior year, delivering an 8.4% operating margin. And diluted earnings per share of $6.48 was down 3.6%. Next, our cash flow performance. EBITDA of $2 billion was down approximately $80 million on prior year.

Working capital investments of approximately $100 million were above the prior year, driven by investments in inventory, along with an increase in receivables driven by sales growth. Interest and tax were down approximately $110 million on the prior year, driven by timing. As a result, operating cash flow was $1.4 billion. We've continued to invest in organic growth through CapEx, investing $235 million, slightly down in the prior year, resulting in free cash flow of $1.15 billion. Turning to capital allocation. As previously mentioned, we invested $100 million in working capital and $235 million into CapEx to drive further above-market organic growth. Our Board declared an $0.83 per share quarterly dividend.

This is consistent with the second quarter and represents a 5% increase over the prior year, reflecting our confidence in the business and cash generation. We continue to consolidate our fragmented markets through bolt-on geographic and capability acquisitions. We completed 3 acquisitions during the third quarter, including Independent Pipe and Supply, a leading commercial mechanical business in the Northeast; Light Innovations, a residential building and remodel showroom in Arkansas; and National Fire, a market-leading Fire and Fabrication business operating across Eastern and Western Canada. We've now completed 5 acquisitions year-to-date, and the pipeline remains healthy.

And finally, we are committed to returning surplus capital to shareholders when we are below the low end of our target leverage range of 1 to 2x net debt to EBITDA. We've returned $759 million to shareholders via share repurchases year-to-date compared to $421 million in the equivalent prior year period. This year, we have reduced our share count by approximately 4.1 million and now have approximately $1.1 billion outstanding under the share repurchase program. Next, I'll cover our updated guidance for fiscal 2025. We are pleased with our continued market outperformance and solid growth in the quarter. Our markets remain dynamic and uncertain, but given the strong performance in the quarter, we are updating our full year guidance.

We now expect low to mid-single-digit revenue growth, up from our prior expectation of low single-digit growth. And we expect an operating margin range of 8.5% to 9.0%, up from our prior expectation of 8.3% to 8.8%. Interest expense is unchanged at between $180 million to $200 million. Our effective tax rate is expected to be approximately 26%, and we've updated our CapEx estimate to between $300 million to $350 million to reflect the pace of expected capital deployment. We believe we are well positioned as we head into the last quarter of our fiscal year. Thank you, and I'll now pass you back to Kevin.

Kevin Murphy: Thank you, Bill. And let me thank our associates who continue to take care of our customers, outperform the market and are driving strong results. Our ability to serve and support the complex needs of our specialized professional customers continues to allow us to gain market share in a challenging environment. As announced last quarter, we implemented measures to better balance market share gains and capture the value we deliver to our customers. Additionally, we took actions to streamline our business and enhance speed and accountability by reducing complexity and simplifying management structures. We're pleased that these efforts, coupled with deflation moderating a quarter ahead of our expectations, have resulted in operating profit growth and operating margin expansion.

We continue to invest in our key growth areas, including HVAC, Waterworks diversification, large capital projects and the recently launched Ferguson Home. Our third quarter performance shows continued returns from these multiyear investments. We believe our markets remain attractive over the medium term, and we continue to invest in our customer-facing associates and our capabilities to drive growth. We're efficiently delivering scale locally to enable our associates to provide exceptional service to our expert customers on their projects. Thank you for your time today. Bill and I are now happy to take your questions. Operator, I'll hand the call back over to you.

Operator: [Operator Instructions] Our first question comes from John Lovallo with UBS.

John Lovallo: The first one is, organic volume was 5% year-over-year in the U.S., and it's accelerated now for the past few quarters. I mean how much of this strength would you attribute to kind of the internal initiatives versus an improving underlying market? And how sustainable are these levels of organic growth as we move forward?

Kevin Murphy: Yes, John, thank you. We were obviously pleased with 5% organic growth. I think if you look back at what we've been trying to accomplish, especially in the nonresidential side of the world, it is bringing scale benefits and a multi-customer group approach to large capital projects. And that large capital project landscape is really the strength behind the nonresidential market because the rest of the traditional nonres market is still in a challenging space. And as we've said historically, we think that, that market starts to step through '25, peak in '26 and '27.

And so I think we're seeing a little bit of that play through as well as the team delivering value for not only the contractor, but also across contractors from water, wastewater, storm water through commercial mechanical piping through fire suppression. So we're pleased with that on the nonres side.

And then on the residential side, it really has been a focused effort to expand our HVAC capabilities across the nation, make sure that we can offer the best experience for a dual trade contractor inside of our counters, but also with our associate base who deliver real purity of purpose for the unique needs of the HVAC and trade plumbing contractor, but at the same time, giving them one place to shop. And so from that perspective, we think we've been able to outperform the market, and we're really pleased with those initiatives.

John Lovallo: Understood. And then on the gross margin, 31% in the quarter, that was particularly strong, I think, up about 50 basis points year-over-year on sales that were up about 4%. I mean, was there any mix impact to call out there? And how should we sort of think about gross margin from the third quarter to the fourth quarter, given the expected increase in sales?

Bill Brundage: Yes, John, this is Bill. Thanks for the question. Not a significant mix impact there, although given the strength of the non-res business, as we've quoted in the past, that can have a little bit of a headwind on overall gross margin. But given the actions that we took in Q2, if you go back to Q2 when we printed just slightly under 30% gross margin, we had talked about some actions we had taken across our teams with our price matrix, with our sales force, et cetera, to ensure that we were appropriately charging for the value that we provide in the market.

And we had talked about the fact that we had seen early returns of those actions as we exited Q2 and into Q3. We were pretty pleased that those continue to play through into Q3. So those actions, coupled with the fact that deflation did moderate a bit ahead of our expectation in terms of timing, that enabled us to put up a very strong gross margin in Q3. We would anticipate gross margins will remain above 30% as we step through Q4. It is still a very uncertain environment, and there are a lot of factors out there that are out of our control in terms of tariff announcements and price increases.

But we feel pretty confident that our margins will be quite solid in the fourth quarter.

Operator: Our next question comes from Phil Ng with Jefferies.

Philip Ng: Well, guys, congrats on a really strong quarter. You really put together the volume piece and margin, so congrats once again. I guess on the commercial and industrial side, really outsized growth. And I guess we shouldn't be surprised since you've called out share gains and strong bidding activity for some time, but really nice to see that inflect in a much bigger way. Just given the longer lead times, just give us some color on how bidding activity is progressing? And then how do you see this progression, I think you said perhaps 2026 peaking.

Should we expect the year-over-year percentage kind of accelerating here and some of the drag you kind of called out last quarter on margins, is that going to dissipate as we kind of go into this next phase of growth?

Kevin Murphy: Yes. And Phil, when we called out the margin profile for large capital projects, we called out it potentially could be a headwind on gross margin, but the cost to serve should be appropriate such that we can drive similar operating margins. When you look at the bidding activity that's out there, we still see good strength, although it may have changed slightly in terms of what that large capital project landscape looks like. As you can imagine, the data center activity remains strong. And as we look across that funnel of opportunities, the overall landscape appears to continue to grow. Our open order volumes in the commercial mechanical space as well as overall large capital projects continues to grow.

And although we keep our eyes open for any pause in activity or any cancellation of projects, we still feel good about what's going on there. And so that's really the strength in the nonresidential market as the traditional side of the house is still in a challenging spot.

Philip Ng: Super. And then Kevin, you kind of alluded to this and perhaps Bill as well. But it's anything but predictable on the tariffs front, and we got some news yesterday on steel and aluminum. But how are your suppliers managing price increases in that backdrop? And I guess, more importantly, how are you managing price cost and the impact it could have on gross margins? I know plumbing and lighting, a lot of that is coming from China. So when you kind of think about that dynamic, encouraging to hear gross margin is still pretty good in the fourth quarter. But kind of give us a little perspective on that front?

And then how are you managing price gaps versus big box because some of the retailers have actually talked about pushing back on tariffs induced price increases from some of the suppliers?

Kevin Murphy: Yes. Maybe if I take a step back, as you know, we're coming off of 6 consecutive quarters of deflation. And although this is an extremely dynamic environment and as you suggested, the landscape really evolves and changes by the day. Our pricing strategy, though, hasn't changed. As you know, we work really to compete not solely on price, but really on the value that we provide to what is a project-based business. And as we suggested last quarter, the industry was moving back to an annual price increase environment, and we knew that was going to happen, and we saw that play through.

And there is no singular response to how a vendor is going to be approaching both the tariff landscape as well as the overall pricing landscape. As you know, we source product from over 36,000 different suppliers. And so the industry was moving back to annual price increases. As reciprocals were announced, obviously, there was a wide variety of responses. And then as reciprocals were paused, some manufacturers pulled back on those increases. But if we look forward, we still believe that pricing across the industry will be positive, but it is difficult, if not impossible, to predict what that level is going to look like.

For us, what we're going to do is we're going to make sure that we're always working with our customers on bidding activity to make sure that we can put the right product for their application so that they can complete their project on time and on budget and making sure they've got availability as well as the right price and application is paramount to us. And that's what our teams are working on every single day on hundreds of line items for projects in every market across the country. And so that's really the pricing strategy that we've always adopted and we'll continue to adopt.

Bill Brundage: And Phil, maybe just to build on that, as Kevin said, we believe pricing is moving in a positive direction or moving up across the industry. To date, roughly 2/3 of our branded suppliers have announced some sort of increase. So that's across the industry. I'd tell you, on average, those increases, and there is a wide variety of responses, as Kevin suggested. But on average, those have been broadly in the mid-single-digit price increase range. It is hard to say, to Kevin's point, where that's going to settle. And then I'd also just remind you that still through the third quarter, our commodity basket as a basket was still in about mid-single-digit deflation.

So we've got certain commodities that are moving up and certain commodities that are still under pressure. So net-net, as we look forward, we think price is going to move into mild inflation as we step through the fourth quarter. But again, it still remains very much a live action game and very uncertain at this point.

Kevin Murphy: And 90% of our revenue is driven through branded suppliers. And those branded suppliers are principally domestic suppliers here in the U.S.

Philip Ng: But you guys broadly feel pretty good about managing that price cost at least in a neutral fashion and gross margin even positive in this backdrop?

Kevin Murphy: We do. And generally, as price moves up, as you've seen in the past, there can be a bit of short-term gross margin expansion. But over the long term, we expect to maintain our gross margins and then durably grow those gross margins based on the value we provide, the services we provide and charging for that value. So we feel good about our ability to manage gross margins through this period.

Operator: Our next question comes from Sam Reid with Wells Fargo.

Richard Reid: I wanted to dig a little deeper into Waterworks. Look, the growth here continues to accelerate. And you called out a lot of individual buckets behind the strength, wastewater, storm water, meters, erosion control. So just maybe contextualize any relative outperformers within that group of waterworks subcategories just so we have a sense as to whether this sort of growth can persist into the fourth quarter? And then could you drill down a little bit on how bidding activity looks in Waterworks, particularly for the part of this business that's tied to new resi?

Kevin Murphy: Yes, Sam, certainly. And I guess I'll start with -- I couldn't be more proud to be associated with our Waterworks team. They have done a fantastic job of diversifying this business over the years. When I started in Waterworks with this company, we were very much a new residential construction company. And today, we have a broadly diversified business that is very good from, yes, residential, yes, traditional commercial, but heavy public works, water, wastewater treatment plant, urban green infrastructure and soil stabilization and meters and metering technology. And so that diversification has served us well. We saw good growth on the public works side of the business.

We saw good work in water and wastewater treatment plant production, where we continue to invest in capabilities to make sure that we're right for the project. And so that really has pushed the growth, but I've also got to say that their impact on the large capital project being the first in on those large capital projects has also been a source of growth. You asked about residential new construction bidding activity. We actually have been surprised by the supportive level of residential new construction bidding activity that's happened over the course of the last, call it, 60 to 90 days. Now that said, that bidding activity doesn't always translate into projects that are going to be released.

And even if those projects are going to be released, it's very difficult to say whether all sections or phases of those new residential projects are going to be released. So we're cautiously optimistic as to what that can look like on the new res side.

Richard Reid: No, that helps a lot. And then maybe just switching gears. When you look at the updated guidance, which is great to see the increase, it does imply a fairly wide range of potential outcomes for the fourth quarter on the top line. If you do the math, it shows anywhere from something as low as, let's call it, flat to up very low single digits to as high as perhaps low double digits on my math. So could you just frame kind of the upper and lower bounds of those fourth quarter guardrails and sort of what would need to happen to get to the high end and perhaps the low end?

Kevin Murphy: Yes, Sam. And you're right. We still have a fairly wide range for the full year implied in that fourth quarter guide given the low to mid-single-digit guide for the full year. And that's because we're still in an inherently uncertain time with, as we've already alluded to on the call, many uncertain external variables. But with that said, we are expecting a solid fourth quarter from a top line perspective.

If you take the midpoint of the range, we're looking at somewhere in that mid-single-digit growth range as our likely midpoint and just trying to ensure that those factors that are out of our control, such as tariff changes or industry announced price increases that either push forward or roll back in the very near term. It's a bit more dynamic than the typical environment we find ourselves in. So we wanted to recognize that with a slightly wider revenue range. But we're expecting a fairly solid fourth quarter from a top line perspective.

Operator: Our next question comes from Ryan Cooke with Wolfe Research.

Ryan Cooke: So just starting on HVAC and branch conversions. You reported another quarter of outgrowth versus the Hardi market data with HVAC sales up 10% this quarter. Could you maybe share how much of that would be organic? And then secondly, on branch conversions, you've spoken to at least 550 completed so far, expectations for 650 by the end of 2026. Can you maybe just help contextualize that growth for us? Maybe how many branches were serving the HVAC vertical prior to this, so we can understand how much runway there is there? And does it make sense for us to maintain this kind of mid-single-digit outgrowth versus industry sell-through over the next few quarters?

Kevin Murphy: Yes, Ryan, in terms of the growth on HVAC, that 10%, the vast majority of that is organic growth. There's roughly 1 point or so of acquisition growth in there. So the vast majority is organic. And when you refer to branch conversions, we should realize that much of the work that we're talking about is counter conversions so that a contractor who does both HVAC and plumbing can come into a location and find a best-in-class product selection and find expertise from an associate perspective to take care of their jobs and their needs.

As you can imagine, the bulk of the growth that we're seeing is not on the new resi side, but actually on the repair and replace side of the business. And when you look at our balanced investment, yes, we're going to do upwards of 650 counter conversions. The markets that we're going into, in some cases, were new markets from an HVAC perspective. But for the most part, they were markets where we had a separation of HVAC and plumbing, and we needed to bring that together to provide convenience for the customer.

The bulk of our growth as we go forward will be in expansion of existing capabilities, adding associates with great HVAC knowledge to serve that customer and then also expanding into new markets where we may not have had a presence, we may not have had access to an equipment line, where we'll gain access to a leading equipment line, either through negotiations and working with our suppliers or through acquisition. And so it will be a balanced approach of organic expansion, acquisitions, counter conversions for the dual trade to continue with that growth curve.

Ryan Cooke: That's all very clear. And I guess just quickly on the restructuring program for my follow-up. So you announced some onetime costs in the quarter, mainly severance, and this is expected to deliver about $100 million in annualized savings. Can you just give us some detail on maybe the time line of realizing those benefits? Are there further opportunities for headcount reductions ahead of you? And on a similar note, how should we be thinking about OpEx growth in 4Q? It sounded like that growth rate should be tapering down Q-over-Q last quarter. Does that still remain the case?

Bill Brundage: Yes, certainly. So the $68 million charge as we took that roughly $41 million of that related to severance with the remaining portion related to the consolidation and closure of some smaller branches. That resulted in us reducing about 800 positions out of the organization as we look to simplify our structure, eliminate layers and really drive decision-making and accountability back closer to the customer and into our local markets. That work is largely complete. So I wouldn't anticipate anything else material coming through in the fourth quarter. And we're really pleased with the team's execution of that restructure over the last 3 to 4 months.

In terms of the cost growth in the fourth quarter, certainly, we'll be responsive to what the volume market is like or what the volume growth is. But I would expect us to get back to a place where we're generating some SG&A leverage as we start to -- as we finish the year and exit and enter into next fiscal year.

Kevin Murphy: Yes, Ryan, as Bill suggested, that work around the restructuring really wanted to bring that balance back to the best local experience where our local teams, because this business is intensely local, can make decisions in a timely fashion for our customer and provide great service, all with the backing of strong scale, over $4.5 billion worth of inventory, 5,900 trucks, 36,000 different suppliers and giving that strength with best local relationships and allowing them to make decisions fast for the customer and take care of their needs.

Operator: Our next question comes from David Manthey with Baird.

David Manthey: My first question is, if you could discuss the change in fiscal year guidance this quarter, disaggregated into the third quarter outperformance, new acquisitions done during the quarter and then your underlying fourth quarter expectations. I'm focusing on that last item in terms of are you more optimistic? Or are you sort of the same, but the changes that happened prior are leading to the guidance change?

Bill Brundage: Yes. Dave, if you take a step back at the guidance that we had updated at the end of the second quarter, expecting low single-digit growth and an operating margin of roughly 8.3% to 8.8%, that really implied a profit range for the full year, somewhere in that roughly $2.5 billion to $2.7 billion range. We were very pleased with our third quarter performance. I would view most of the upgrade as the flow-through of that third quarter performance flowing through to the full year. And we had always anticipated that the year would get a bit better and strengthened as we moved through the period of deflation that we had talked about.

As we talked about already on this call, that move through deflation back to roughly flat pricing happened about a quarter in advance of our expectations. That, combined with strong gross margins, really good cost control and then the further streamlining actions that we took gave us confidence to increase that full year guidance. So I would chalk most of it up to the third quarter performance as well as the setup that we have looking forward to a fairly solid fourth quarter and a finish to the year.

David Manthey: Yes, that's encouraging. And second, on HVAC, is the refrigerant transition materially worked its way through your inventories in your business as of today, June 3? And if not, when do you think you'll be out of the 410A systems? Mainly, I'm trying to get to the 9% organic HVAC growth that you talked about. How much of that was price/mix this quarter? And what should we expect going forward?

Kevin Murphy: Yes. We've largely come through to the A2L conversion. There's still some 410A inventory that's left out in the system and in the market. And I think that, that will largely play through as we get into, call it, the middle of the fourth quarter of our fiscal year. So that's largely played through.

David Manthey: Okay. And the price/mix you're seeing today, Kevin?

Bill Brundage: Very little price inflation in that 10% HVAC number. I would think of it as low single digits at this point.

Operator: Our next question comes from Matthew Bouley with Barclays.

Anika Dholakia: You have Anika Dholakia on for Matt today. So first off, just going back to flat price for the quarter. Just curious what was maybe better than expected on the commodity front. Or was it more finished goods that came in ahead? And then more specifically, plastic rough plumbing, PVC pipe, is that still deflating more than high diameter? Just any details around that?

Bill Brundage: Yes, sure. If you look at the overall flat pricing, again, finished goods were up low single digits for the quarter and commodities were down in that mid-single-digit range. The commodity side was a bit better than we had anticipated, which is always the hardest piece to anticipate. We certainly saw copper still moving in an upward direction. And then steel prices improved during the quarter, still in deflation as a basket for us for the third quarter, but did improve some of that after the steel import tariffs announcements earlier in the third quarter.

When you look at PVC, there is still deflation pressure on PVC, both on the plumbing side of the business as well as the Waterworks side of the business. And while pricing has been more sequentially stable, it's still in deflation as a basket. So overall, that mid-single-digit deflation as a basket for commodities was a bit better than anticipated. Finished goods, we had expected that to move back towards positive price given the fact that, again, we thought that the industry was moving back towards a more normalized annual price increase across those seasonal price increases.

Anika Dholakia: Got it. That's helpful. And then second, you spoke to some pull forward buying in the quarter. I'm just wondering if you could tell us which categories you saw this in and then if you're seeing similar trends quarter to date?

Kevin Murphy: Yes. We were obviously pleased with organic growth of 5%. But if you consider the timing of what was happening from a tariff perspective, there was maybe some bit of pull-forward, but nothing material from an impact perspective. I mean, as you recall, the lion's share of the tariff activity started around that April 2 time horizon. And so although we may see some pull forward depending on what happens with the tariff environment going forward, it would largely be immaterial in Q3.

Operator: Our next question comes from Mike Dahl with RBC Capital Markets.

Michael Dahl: I want to go back to kind of the competitive dynamics. Last quarter, it was very notable how you were talking about some of the trade-off between market share gains and the gross margin and some competitive dynamics potentially worsening. But then as you -- I think both Kevin and Bill, as you articulated kind of through the quarter, you made some changes to get back into better balance, but it still seemed like you were expecting some trade-off there. Instead fast forward and now it looks like you've both gained share and gross margin expansion.

So can you just help us understand and elaborate a little bit more on the competitive dynamics that you've kind of seen over the last few months. And again, maybe a little more specific around how you were able to both maintain share and get that gross margin up?

Kevin Murphy: Yes. Thank you, Mike. And it is still a very competitive market out there as the market conditions overall, both residentially and non-residentially are in a challenging place. And then obviously, as Bill indicated, you've still got deflationary activity sitting in some of the commodity baskets that we trade in. If you look at the actions that we took, it's no silver bullet. And there are no silver bullets in this business as it relates to gross margin and balancing share gain. We did work around things like price matrix, contract management.

But the bulk of the work was really done with our sales management teams and making sure that from a bidding activity perspective and how we are working with our customers that we implemented our product strategy. And so what does that mean? That means that we've got to make sure that we've got the right product for the application that the contractor is using and that for us, it's the right product in terms of margin contribution and how we're driving efficiencies in the supply chain and able to deliver for our customer. And so that product strategy work together with our sales management teams got us to the right place.

We thought we were getting there as we were moving through the second quarter and exited the second quarter, and we're pleased with the way the team worked with our contractor base to balance growth and a 31% gross margin.

Michael Dahl: And Kevin, just as a follow-up and then dovetails into my second question. But I mean, was there anything in terms of like a more centralized guardrail system that you put into place around the bidding or it's still just more of a kind of message to the field that they've been just executed better against? And the second related part of the question, Bill, I do think you mentioned that typically you can see some gross margin expansion in the early stages of kind of implementing price increases. So maybe just clarify whether that was part of the expansion in 3Q that you were able to actually implement some pricing in the field ahead of taking cost?

Kevin Murphy: Yes, Mike, great question. And I would not consider it to be centralized control. It would be centrally driven data and guidance in terms of price matrix and contract management and contract overrides and delivering tools to those local teams to make sure that we can drive the right balance between what we do with volume growth and what we do with overall gross margin. So centrally driven tools and technique and then real sales management at the local level is how we achieve.

Bill Brundage: And I think, Mike, the majority of that improvement from Q2 to Q3 was attributable to those actions. So stepping again once again over that 30% gross margin range. But yes, there is some piece of that 31% result in Q3 that benefited from price moving up on old cost of goods sold inventory. Very difficult for us to bifurcate the 2. What we are confident in is that the gross margin has moved back above 30% now and that we're positioned well to exit the year.

Operator: Our next question comes from Anthony Pettinari with Citi.

Anthony Pettinari: Good morning. Following up on Sam's earlier question -- following up on Sam's question, I think you said you were pleasantly surprised with bidding for residential new build over the last 60 to 90 days. And I'm just curious if you think it's based on underlying demand improvement or maybe more share gain by Ferguson? And is there any particular region or project type that you're seeing this kind of strength?

Kevin Murphy: Yes. What we were referring to is Waterworks bidding activity since they're the first in on the project and one of the advantages of having that multi-customer group approach for us as a company is to see that playing through. Really, in the last 69 days, we've been pleasantly surprised with the single-family new construction bidding activity. We know we're underbuilt in this country by, call it, 4 million units, and we've got to get back to developing new housing construction in order to get after the price side of the world. So we're encouraged by that over the medium term.

We're not reading a tremendous amount in the new residential growth because as I suggested in the earlier answer, we don't know whether or not that bidding activity is going to play out to the entire project being released, whether it's going to be pieced out by sections or phases but at least it's a positive sign in terms of what that activity looks like across our different markets.

Anthony Pettinari: Got it. Got it. That's very helpful. And then I just -- maybe switching gears, Ferguson Home, I guess it's very early days, but can you talk about how that brand launch has been received by your core contractor customers, maybe homeowners as well. And has anything surprised you positively or negatively?

Kevin Murphy: We've been pleased with the rollout. This has been years in the making. We first purchased a company on the digital commerce side of decorative plumbing years ago. And we've transitioned it over time from Improvement Direct to Build.com to Build with Ferguson and now ultimately Ferguson Home. And we've invested in that platform. We've invested in the associate base behind it in terms of the service offering that they offer to the connected consumer and that project-minded professional.

And so when we look at where we are today, bringing together that platform with our over 230 showroom locations which what we consider to be a best-in-class consultative experience in that showroom location is serving us well coming together so that we have pricing and value being driven in concert. We've got a tremendous amount of our showroom consultations that are beginning with the project tool on Ferguson Home today. And so that transition is being embraced. We'll still work out some of the bumps along the road, but we think it offers us a great omnichannel experience as we go forward and transition this fully.

Operator: We'll take our last question from Will Jones with Redburn Atlantic.

William Jones: Just a couple from me, please. First, if you could just touch on how you're managing the own brand business amid the changing tariff dynamics. Any change of tactics there? And then the second was just perhaps an update on distribution centers and the recent openings, how they're performing and what you've got planned over the next year or 2?

Kevin Murphy: Yes, sure. Well, and on the own brand side of the world, it's probably important to remember that's roughly 10% of our revenue base. 90% of our revenue base is driven with our branded suppliers principally domestic in nature. When you look at that own brand business, our teams have done a very good job of diversifying what that sourcing profile looks like. We source product from over 31 different countries. And so the group has done well to make sure that we have mitigation efforts should tariff situations arise.

When you look at the exposure for China specifically, what you see is principally in the areas of lighting, fan product, some small appliance, some small HVAC and a bit of Vitreous China. But generally speaking, the team has done a good job of diversifying that sourcing structure, both so that we can make sure we have the right supply for our customers and then also to make sure that we are price relevant on the project that they're competing on.

Bill Brundage: And then, Will, the second part of your question on our supply chain and our network optimization efforts. We continue to look across the network and optimize that and invest in the network. So to date, we have 5 market distribution centers that are open. We have 2 more that are in process that will open over roughly the next 12 months. One in Dallas, one outside of Washington, D.C. And then we continue to invest in a mix of those types of buildings, and we have several large format buildings or ship hubs that we've invested in over the last 12 months or so, whether that's Fort Myers or in Boston or Raleigh or in Austin.

So we're going to continue to invest in that network. That will include more automation in those facilities, and we are pleased with the returns on that automation. We're also pleased with the fact that we are bringing what we believe is the industry's largest local inventory into those markets. And so the returns on that inventory investment, particularly over-the-counters in those facilities has been quite good. In terms of looking out in the future, we're going to continue to invest in the network. We have invested a fair amount of capital and capacity over the last 5 years.

And so as we look forward, we're going to continue to base that future investment on where we have capacity needs in those individual localized markets. But quite pleased with the work that the supply chain team has done, quite honestly, over the last 5 years or so to upgrade our network.

Operator: Thank you. That concludes today's Q&A session. So I'll pass you back over to Kevin Murphy, CEO, for closing remarks.

Kevin Murphy: Thank you, and thank you all for your time today. We appreciate it more than you know. And maybe most importantly, thank you to our associates who continue to deliver in what is a challenging and certainly dynamic environment. They delivered good growth and good balance with making sure that we deliver value for our customers that's reflected in our gross margin. We're pleased with what the team has been able to do from a productivity and efficiency perspective to drive good operating margin expansion and operating profit growth.

And we're pleased to be in a position with a balance sheet where we can continue to invest in some real multiyear tailwinds that apply to our Ferguson HVAC efforts, our large capital project efforts, our Waterworks diversification and certainly our Ferguson Home brand. So thank you very much for your time. We look forward to talking to you very soon.

Operator: This concludes today's call. Thank you for your participation. You may now disconnect your lines.