Full Transcript: Ferguson Enterprises Q2 2026 Earnings Call

Ferguson Enterprises (NYSE: FERG ) reported second-quarter financial results on Monday. The transcript from the company's second-quarter earnings call has been provided below. This content is powered APIs. 8% organic growth and 1% acquisition growth, with a strong gross margin of 31%.

The company announced the acquisition of FlowWorks, enhancing its industrial flow control platform and expecting immediate accretive effects to earnings per share. 8%, citing strong non-residential performance and HVAC growth. The company completed five acquisitions in the quarter, investing nearly $600 million to enhance capabilities in water infrastructure, HVAC, and industrial sectors. Management emphasized strong execution in large capital projects and residential HVAC, with expectations of continued growth in these areas despite uncertain market conditions.

Full Transcript Elliot, Operator Good morning, ladies and gentlemen. My name is Elliot and I'll be your conference operator today. At this time I would like to welcome you to Ferguson's second quarter results for the period ended June 30, 2026 conference call. All lines will be placed on mute to prevent any interference with the presentation.

At the end of the prepared remarks there will be a question and answer session. To ask a question at that time, please press STAR and then the number one on your keypad. To withdraw your question, please press STAR and then the number two. Thank you.

I would now like to turn the call over to Pete Kennedy, Ferguson's Vice President of Investor Relations and Sustainability. You may begin your conference call. Pete Kennedy, Vice President of Investor Relations and Sustainability Good morning, everyone, and welcome to Ferguson's quarterly earnings conference call and webcast. Hopefully you've had a chance to review the earnings announcement we issued this morning.

The announcement is available in the investors section of our corporate website and on our SEC filings webpage. A recording of this call will be made available later today. I want to remind everyone that some of our statements today may be forward looking and are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected, including the various risks and uncertainties discussed in our Form 10-K, available on the SEC's website. Also, any forward-looking statements represent the company's expectations only as of today and we disclaim any obligation to update these statements.

In addition, on today's call we will also discuss certain non-GAAP financial measures. Therefore, all references to operating profit, operating margin, diluted earnings per share, effective tax rate and earnings before interest, taxes, depreciation and amortization reflect certain non-GAAP adjustments. Please refer to our earnings presentation and announcements on our website for additional information regarding those non-GAAP measures, including reconciliations to their most directly comparable GAAP financial measures. With me on the call today are Kevin Murphy, our CEO, and Bill Brundage, our CFO.

I will now turn the call over to Kevin. Kevin Murphy, President & Chief Executive Officer Thank you, Pete, and welcome everyone to Ferguson's second quarter results conference call today. I'll cover our quarterly performance highlights, our results by end market and by customer group, and discuss our recent announcement to acquire FlowWorks. Bill will then review our financials and our updated guidance before I wrap up with a few final comments.

We'll then have time to take your questions at the end. Our associates continued to execute for our customers in the second quarter, delivering market outperformance with both revenue and profit growth. 8% and acquisition growth of 1%. We're pleased with our volume growth amid what continues to be a mixed market.

Gross margin was strong at 31%, down just 20 basis points against a tough comparison. We continued to drive productivity by balancing disciplined cost management with investments for future growth. 39. We remain focused on executing our capital priorities.

We've now announced eight acquisitions year to date. This includes five acquisitions that closed in the second quarter investing nearly $600 million, and post quarter end we signed a definitive agreement to acquire FlowWorks, a leading distributor of highly technical valves and flow control solutions. 3 times. While the economic environment remains uncertain, our performance year to date enables the upward revision of our full year guidance, which Bill will cover in more detail later on.

Turning to our performance by end market in the United States, we delivered another strong quarter of non-residential performance with 8% growth on top of a 13% prior year comparable. Our associates drove meaningful share gains by leveraging our scale, multi customer group approach and value-added capabilities. Continued strong activity in large capital projects offset softer activity in traditional non-residential work. We also returned to growth in the residential market, up 2% in the quarter despite persistent headwinds across both new construction and repair, maintenance and improvement work.

Our intentional balanced business mix continues to provide durable growth opportunities and resilience through market cycles. Moving next to the second quarter revenue performance across our customer groups in the United States, Waterworks revenue grew 3% against a 15% prior year comparable. Our diversified exposure across large capital projects plus public works municipal activity and metering technology helped offset weaker residential activity. We continued to execute our Waterworks diversification strategy with the acquisition of Hamlet Environmental Technologies, further expanding our capabilities in water and wastewater treatment.

Commercial Mechanical grew 15% on a 20% prior year comparable. This momentum was driven by the strong execution of our teams on large capital projects such as data centers, pharmaceutical production, biotechnology and general manufacturing. Our scale, breadth of products, diversified supply chain, value-added capabilities and our relationship with project stakeholders including owners, engineers, general contractors and our specialized customers continue to drive market outperformance. Similarly, our Industrial customer group performed very well with 18% growth on top of a 6% prior year comparable.

We continue to see steady demand across key sectors that balance our industrial business including life sciences, pharma, chemical and power generation infrastructure that's critical for supporting large capital projects. Moving to our Facility Supply group, revenue increased 5% while Fire and Fabrication declined 13%. In our residential customer groups, Ferguson Home declined 1% and Residential Trade Plumbing was relatively flat. Growth accelerated in our HVAC customer group with revenue up 11% in the quarter.

This was driven principally by healthy organic performance alongside contributions from M&A. Our ability to outperform the market is driven by our HVAC growth strategy that includes investment in dual trade, greenfield expansion and acquisitions. The scale and breadth of our business across these customer groups positions us well to capitalize on the long-term tailwinds in our end markets. Now let me share more about our recent announcement to acquire FlowWorks, a leading industrial distributor and service provider of highly technical valves and flow control solutions.

Founded in 1961 in Houston, Texas, FlowWorks has more than 65 years of history as a leading flow control distributor with approximately $1 billion in revenue in 2025 and more than 60 locations, including 25 service and repair centers across the United States and Canada. The acquisition will expand our specialty industrial flow control platform, adding technical depth including valves, valve automation, pumps, fluid handling systems and specialty pipe fittings and flanges. We also expect the acquisition to enhance our growth strategy with expanded end market and product exposure while adding significant recurring MRO-driven revenue.

We're excited to welcome the more than 1,000 talented FlowWorks associates to Ferguson. Their capabilities, geographic footprint and portfolio of 15 brands will complement our offering, providing customers even more choice in their product and service selections. In addition, their culture embodies our philosophy with a focus on associate development, exceptional customer service and operational excellence. As one of our largest acquisition announcements to date, we expect to increase our total addressable market from $340 billion to $400 billion.

FlowWorks will strengthen our business as we add additional exposure to key growth areas with secular tailwinds including large capital projects and water infrastructure. FlowWorks will also support the balanced business mix in our Industrial customer group and allow us to further engage with high growth end markets like data centers, semiconductors, biotechnology and pharma, power generation, food and beverage and general manufacturing, while creating powerful cross-sell opportunities across our non-residential customer groups.

We believe FlowWorks will enhance our ability to drive market outperformance by playing an even larger part in the buildout happening across North America. Now let me turn it over to Bill, who will cover some of the financial aspects of the FlowWorks acquisition as well as provide more detail regarding our financial performance and updated guidance. Bill Brundage, Group Chief Financial Officer Thank you, Kevin, and good morning, everyone. We expect to complete the FlowWorks acquisition in our third quarter and believe this transaction creates compelling value for our shareholders.

6 billion, and we expect the deal to be immediately accretive to adjusted earnings per share. The total consideration represents an acquisition multiple of approximately 10 times EBITDA, including expected synergies of approximately $45 million. We expect to drive revenue synergies across industrial, commercial, mechanical, and our Waterworks customer groups, as well as achieving certain cost synergies from network optimization, logistics, and technology. 8x upon closing the acquisition, keeping us within our stated leverage target of one to two times.

We're looking forward to a successful closing that further enhances our business. Now let me highlight the financial performance of the business as well as our updated guidance. 2% from a divestment in Canada. During the quarter, we returned to volume growth as we saw the pace of inflation edge down to low single digits.

Our gross margin was strong at 31%. This was 20 basis points down year over year, which was expected due to the timing and extent of supplier price increases in the prior period. We continue to drive productivity with 10 basis points of operating leverage while investing for future growth. 7% operating margin which was 10 basis points below the prior year.

3x net debt to EBITDA. S. grew 5% with an organic increase of 4% and a 1% contribution from acquisitions. 1%.

6% from a non-core business divestment. Markets have remained challenging in Canada, particularly in residential. Adjusted operating profit of $22 million was $1 million below last year. 1% from foreign exchange and a Canadian divestment.

Gross margin of 31% was flat year over year, and we continue to drive productivity initiatives as we remain diligent on costs. 7% operating margin with 10 basis points of expansion over the prior year. 67. 7 billion was up approximately $90 million on the prior year.

Operating cash flow was $716 million, down approximately $400 million on prior year as we invested in working capital to support growth in areas such as HVAC expansion and large capital projects, and also due to the timing of tax payments which will normalize through the year. We continue to invest in organic growth through CapEx, investing $234 million principally in our supply chain expansion and optimization, branch network, and technology initiatives. The result was free cash flow of approximately $500 million.

Moving to our capital allocation priorities, we continue to allocate capital across four clear priorities of organic growth, bolt-on geographic and capability acquisitions, sustainably growing our dividend, and returning surplus capital to shareholders when we're in the low end of our target leverage range of 1 to 2x net debt to EBITDA. As discussed, we continue to organically invest in the business through CapEx. To drive further above, we completed five acquisitions during the quarter that support our key strategic growth areas including large capital projects, water infrastructure, and climate and comfort.

To expand our multi-brand HVAC offering and dual-trade capabilities, we acquired Carrier Great Lakes, a distributor of residential and commercial products with seven locations across Michigan and Ohio. We also added Dealer Supply Company, which brings HVAC equipment, parts and supplies, and fabrication services across 17 locations in the southeastern United States. , which strengthens our water and wastewater process equipment expertise. In Michigan, we continue to expand capabilities within our commercial mechanical customer group, acquiring New England Applied Products as a manufacturer's representative of commercial HVAC systems.

New England Applied Products supports a variety of traditional and large capital projects including data centers, education, and healthcare systems. And within our Industrial Customer Group, the acquisition of PRD Technologies Group further strengthens our product portfolio with highly technical valves, flow control, and process equipment with 10 locations across the United States. As we shared earlier, subsequent to quarter end, we also announced our definitive agreement to acquire FlowWorks, bringing our year-to-date announced acquisitions to eight.

Collectively, these deals will expand and enhance our capabilities across water and wastewater treatment, HVAC, and industrial valves and flow control. 4 billion in aggregate annualized revenue, and our overall acquisition pipeline remains healthy. 89 per share. 7 million.

As previously discussed, we anticipate leverage will increase towards the upper portion of our target 1 to 2x range upon closing the FlowWorks transaction. As such, we would expect to resume buybacks when leverage moves back into the lower end of this range consistent with our stated approach. And now I'll cover our updated full-year 2026 guidance. While our markets remain uncertain, our year-to-date results enable us to raise our full-year guidance.

We now expect net sales to grow mid-single digits, an increase from our prior expectations of low- to mid-single-digit growth. 8%. Looking at the rest of the P&L, interest expense remains unchanged at approximately $200 million. We've updated our CapEx estimate to a range of $375 to $425 million to reflect the timing of our expected capital deployment, and we anticipate an effective tax rate of approximately 26%.

This guidance does not reflect the expected FlowWorks acquisition. We expect to close the transaction in the third quarter, at which time we will update our guidance alongside our Q3 earnings.