Ferguson Aktie

Good morning, ladies and gentlemen. My name is Adam, and I will be your conference operator today. At this time, I would like to welcome you to Ferguson's first quarter results for the period ended March 31, 2026 Conference Call.

[Operator Instructions]

I would now like to turn the call over to Pete Kennedy, Ferguson's VP of Investor Relations. You may begin your conference call.

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 web page. 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 reflects certain non-GAAP adjustments. Please refer to our earnings presentation and announcement 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.

Thank you, Pete. And welcome, everyone, to Ferguson's first quarter results conference call. Today, I'll cover our quarterly performance highlights, the results by end market and by customer group. Bill will then review our financials and our guidance before I wrap up with a few final comments. We'll then have time to take your questions at the end.

We are thankful for our expert associates who continue to execute our growth strategy and delivered another quarter of solid results despite a challenging market. Sales of $7.5 billion increased 3.6% over the prior year, driven by organic growth of 2.8% and acquisition growth of 0.8%. Gross margin expanded by 30 basis points to 31%, reflecting solid execution across the business. Operating profit increased by 8.4% and expanding operating margins by 40 basis points to 8.7%. This drove a 9.1% increase in diluted earnings per share to $2.28. We continued to execute our capital priorities. As Bill will outline in further detail, we've closed on 3 acquisitions and signed definitive purchase agreements on 3 more since the beginning of the year. We also returned $410 million to shareholders through share repurchases and dividends, and our balance sheet remains strong with net debt to EBITDA of 1.0x. While the economic environment remains uncertain, we expect to continue to outperform the market by deploying scale locally while leveraging the long-term growth drivers of water infrastructure, large capital projects, climate and comfort and aging and underbuild housing.

We're confident in our ability to capitalize on these growth drivers as we provide essential water and air solutions for the complex project needs of the specialized professional. Turning to our performance by end market in the United States. The residential end market, representing approximately half of revenue remain challenged. New residential construction activity remain weak and repair, maintenance and improvement work also remain soft. Overall, we continue to outperform weak markets with residential revenue down 1% for the quarter. Although the overall nonresidential market remains mixed, our scale, expertise, multicustomer group approach and value-added solutions drove strong share gains with nonresidential revenue up 8% this quarter. We're pleased with the ongoing large capital project activity and continue to see solid shipments, along with growth in bidding activity and open orders. Our intentional balanced approach to end markets continues to position us well. Moving next to the first quarter revenue performance across our customer groups in the United States.

Waterworks revenue grew by 5% against an 11% comparable as our highly diversified customer group drove outperformance in large capital projects, public works, municipal activities, meters and metering technology. This allowed us to offset weaker residential activity. The commercial mechanical customer group grew 18% on top of a 9% prior year comparable. Strong performance in large capital projects such as data centers drove this growth, helping to balance weaker activity in traditional nonresidential construction. Industrial delivered strong growth of 10% in the quarter. Our balanced business delivered growth in key sectors such as power generation, life sciences, pharma and chemical. Our facility supply revenue increased 3%, while Fire and Fabrication declined 6%. Ferguson Home revenue declined 2%. However, we outperformed the challenging residential market, combining best-in-class showrooms with a digital experience serving the more resilient higher-end segment of the market.

Residential trade plumbing revenue declined by 2%, reflecting headwinds in both new and RMI construction. Our HVAC customer group returned to growth, up 1% against the 5% comparable. We continue to drive our HVAC growth strategy. We're investing in expert associates, counter retrofits, greenfield expansion and M&A. All of this supports the HVAC specialist as we're uniquely positioned to serve the growing dual trade contractor population. Our customer groups performed better together, sharing expertise to provide end-to-end solutions that helps simplify complex projects and drive construction productivity. Now let me pass the call over to Bill for the financial results in more detail.

Thank you, Kevin, and good morning, everyone. Net sales of $7.5 billion were 3.6% ahead of last year, driven by organic revenue growth of 2.8% and acquisition growth of 0.8%, with mid-single-digit price inflation. Gross margin increased 30 basis points over last year to 31%. We continue to drive productivity initiatives and cost discipline in the business while we invest for future growth. Operating profit grew 8.4% to $647 million, delivering an 8.7% operating margin with 40 basis points of expansion over the prior year. This profit growth, combined with the impact of our share repurchase program, drove a 9.1% increase in diluted earnings per share to $2.28.

Moving to our segment results. In the U.S., net sales grew 3.5% with an organic increase of 2.9% and a 0.6% contribution from acquisitions. Operating profit of $656 million increased $45 million over the prior year, delivering an operating margin of 9.2%. In Canada, net sales increased by 5.5% with a 5.8% contribution from acquisitions, offset by an organic decline of 0.3%. Markets have remained subdued in Canada, particularly in residential. Adjusted operating profit of $5 million was $1 million below last year. Next, we continue to generate solid cash flow in the quarter. EBITDA of $711 million was $60 million ahead of the prior year. Operating cash flow was $772 million, down $100 million on prior year as we invested in working capital to support growth, partially offset by the timing of cash tax payments. We continue to invest in organic growth through CapEx, investing $92 million in the quarter, resulting in free cash flow of $688 million. Moving to capital allocation. We continue to allocate capital across 4 clear priorities of organic growth, bolt-on geographic and capability acquisitions, sustainably growing our dividend and 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. In the first quarter, as we previously mentioned, we invested $92 million into CapEx to drive further above-market organic growth. We completed 2 acquisitions within our Waterworks customer group during the first quarter, including Technology Sales Associates Chesapeake Environmental Equipment. Subsequent to quarter end, we acquired Carrier Great Lakes within our HVAC customer group.

We also signed definitive purchase agreements for 2 additional HVAC acquisitions, Dealer Supply Company and New England Applied Products as well as PRD Technologies Group within our Industrial customer group. We anticipate closing these 3 acquisitions during the second quarter. Collectively, these acquisitions will expand and enhance our capabilities across water and wastewater treatment, residential, commercial and applied HVAC and industrial valves and flow control. The aggregate annual revenue impact of these 6 acquisitions is approximately $350 million. Our overall acquisition pipeline remains healthy. Our Board declared an $0.89 per share quarterly dividend, and we purchased $236 million in shares during the first quarter. Furthermore, given our strong financial position, the Board has approved a new $2 billion share repurchase authorization, which replaces the existing program.

Now turning to guidance. we are reaffirming our full year 2026 guidance. While we continue to navigate an uncertain environment, we expect our markets to remain broadly flat for the year, with residential down low to mid-single digits and nonresidential up low to mid-single digits. We expect net sales to grow in the low to mid-single digits. We expect an operating margin range of 9.4% to 9.8%. We also expect interest expense to be approximately $200 million, CapEx of approximately $350 million to $400 million and an effective tax rate of approximately 26%. We believe our strong balance sheet, agile business model, balanced end market exposure and continued strategic investments position us well as we enter the second quarter. Thank you, and I'll now pass back to Kevin.

Thank you, Bill. As we wrap, let me again thank our expert associates who continue to execute in a challenging environment by serving the specialized water and air professional. Our multiyear investments position us to succeed in water infrastructure, large capital projects, climate and comfort and aging and underbuild housing. And our unique multicustomer group approach and scale deployed locally give us a distinct advantage to continue to outperform.

Despite the market uncertainty, we remain well positioned to continue to capitalize on the structural trends shaping our residential and nonresidential markets. And we'll continue to invest in our associates and our value-added capabilities to drive productivity in a trade start world. 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 Instructions]

Our first question comes from Phil Ng from Jefferies.

Unpacking your top line outlook, is there a different view in terms of how the makeup is going to look like, whether it's volumes by end markets or pricing, certainly, a very inflationary backdrop of some of the tariff changes as well as the Middle East War. So just kind of help us think through the components building up to that top line profile you have laid out for us.

Yes. Thanks, Phil. Thanks for the compliment and the question. If I take a step back and go back to the guide that we set out at the end of the calendar year for the full year, we talked about a belief that our markets would be broadly flat for the year with certainly pressure on the residential markets and maybe those residential markets will be down low to mid-single digits with the nonres markets up low to mid-single digits. So a broadly flat market for the year. And we talked about us continuing to outperform that market organically, somewhere in the range of low to mid-single-digit total growth.

We also talked about our best view of the overall inflationary environment at that point being about low single-digit inflation for the calendar year. And we said that we would come into the year with a bit more inflation but as we lap those step-ups from last year, that we thought that would probably moderate back into that low single-digit range for the full year. So low single-digit inflation with a bit of volume gets us to that low to mid-single-digit total revenue growth for the year with very little acquisition activity. coming into the year. If we play through what we've seen to date in the first quarter, we've certainly seen inflation step up a touch more than we expected. So we delivered mid-single-digit inflation in the first quarter with volumes being a bit more pressured, really driven in that new residential side of the business. as well as the expected volume pressure that we had in HVAC in the first quarter. And I think as we look out for the rest of the year, we'd still expect that volume pressure to continue, particularly on new residential. If you look at starts and permits across the first quarter, they're still weaker this calendar year in Q1 than they were last year, which indicates that we'll still have maybe a touch more pressure on new resi as we go through the year.

And then on inflation, we have seen a touch more price increase announcements coming through. I'd tell you, it still remains a bit early, particularly when we start to look at the commodity basket in areas such as PBC. There are a lot of cost input pressures on PBC today, whether that's oil leading to resin prices and transportation costs. And so we've seen a fair amount of price increase announcements, but it's still early, it remains to be seen how long that lasts and how that sticks and plays through the market. So maybe taking a broad step back. Our overall guidance hasn't changed. We probably would say there might be a touch more inflation with a touch more volume pressure than we originally anticipated, but still think the broad revenue environment is going to be pretty similar.

Got you. And then, Bill, just to kind of button that up. In terms of the inflation, you're expect potentially expected to see what type of impact do you think it's going to have on demand disruption? It sounds like on the nonres business as usual, any more choppiness on the resi side because of this inflation?

And then net-net, I think coming in the year, you're expecting gross margins to be pretty muted because you're lapping some nice inventory profit gains. Is that potentially an opportunity just given the inflation you're seeing across the board and even some of the commodity categories that was a little more of a drag last year.

Yes. I think first off, on demand, demand and volume strength in nonresi still remains quite strong, driven as we've talked about by large capital projects is we're still seeing quite a bit of pressure on traditional nonresi. So I don't think we view the demand picture or demand -- a risk of demand destruction on the non-resi side, any different than we did a quarter ago. Again, on resi, probably a touch more volume pressure. Whether you call that demand destruction or just a variety of factors that are pressuring the residential environment, not the least of which is mortgage rates that still remain high. uncertainty around oil prices and fuel costs for the consumer and pressured balance sheets.

So I'm not sure I would call that demand destruction, but I think it's a bit of a weaker new res environment than we originally anticipated stepping into the year. In terms of gross margin, we were really pleased with the 31% gross margin in the first quarter. Certainly, solid execution across the business. The teams are executing really well across our pricing teams, leveraging tools and technology, executing our product strategy and certainly delivering great customer service and charging for that value. We also had pretty good owned brand growth in the first quarter, and the owned brand is now above -- slightly above 10% of our total revenue. And so we're continuing to execute that product strategy. And then last, there was a bit of benefit from the sequential step-up in inflation from Q4 to Q1. So you package that all together, Phil, it's a really solid 31% gross margin in the quarter.

We would still expect that gross margins could tick down a bit as we get into Q2 and Q3. And principally driven by the seasonal customer groups of HVAC and Waterworks, which are 2 of our most seasonal customer groups. Those will pick up a bit in the summer and become a larger share of the business, and those have carried lower gross margins than the overall total. So we still would expect that gross margins could come in a bit from 31%. And then when you take a step back from the year, that's very much how we thought and talked about the year playing out. A bit of year-over-year gross margin pressure principally because of the outsized benefit we had last year with price increase. And then we'd offset that with SG&A leverage and then land in that 9.4% to 9.8% range for overall operating margins.

The next question comes from Sam Reid of Wells Fargo.

I wanted to drill down a little bit more on the Waterworks business. Just looking at the growth rate here, 5% is solid, but it does represent a slowdown versus where you landed in the fourth quarter and throughout much of last year. Maybe just give us a finer point on the breakdown between volume and price in this segment here? And then perhaps talk to the magnitude of the residential decline that you're seeing in the Waterworks segment.

Yes. Sure, Sam. I'll start. First off, on the Waterworks volume versus price. You should consider that all volume with actually a touch of deflation. So volume is a bit greater than that 5%, and there's really no acquisition in that. So really all organic volume, and that's true of the prior year comparable as well.

Yes. And Sam, if you look at plus 5%, all volume, all organic against a plus 11% comp, that's pretty strong performance. And as we said in the earlier comments, that was really driven by the diversification of the Waterworks business and the continued backlog that we are building across some of our strategic businesses like municipal, private water authorities, meters and metering technology, public works, erosion control and storm water management. And that diverse business is performing well against what are candidly quite challenged normal nonres and residential markets. And so you add that together with a multi-customer group approach on large capital construction, and we're really pleased with what that volume performance looks like inside that Waterworks business, again, specifically against what was a challenging PVC pipe pricing environment that will likely see some degree of support as the changes with the current market play out.

Absolutely, guys. No, very strong results in the context of what you're seeing in the market. So congratulations there. Maybe just switching gears, I would love to hear perhaps a bit more color on the trajectory split between commodity and finished good pricing in Q1. And then remind me, did the guidance contemplate unannounced price increases? Or do you think there could be some upside to your price expectations if some of the OEMs attempt to push through more price?

Sure, Sam. If you look at the split today, so finished goods, a reminder, this is roughly 85% of our total revenue. And overall inflation was in that mid-single-digit range for the quarter. And commodities as a basket had moved back into slight inflation. So I'd call that very low single-digit inflation in the quarter. In terms of what we're seeing in price increases, I would go back to some of my earlier comments, we have seen a bit more price increase announcements coming through on the branded side of the world, some of that driven by, call it, 232 tariffs that has been announced recently. So we probably expect a bit more inflation coming through than we originally anticipated.

Our guide, however, did try to contemplate how we thought the inflationary environment would play out through the year. So again, I thought that we'd have low single-digit inflation for the full year. Stepping into the year, it might be a touch higher than that. But the big question mark and always the hardest thing to predict is that commodity basket. So that's 15% of our revenue. As I just said, it's ticked into the low single-digit inflation range. Each of those commodities is still -- has a different dynamic around it, and they're moving at different paces and different velocity. So if you unpack the largest component of our commodities, which would be plastic pipe. That's roughly half of that commodity basket split between Waterworks pipe as well as plumbing, small diameter pipe. We have seen -- both of those have been in deflation for some period of time.

They were still in deflation for the first quarter, so still down low double digits as a basket of plastic commodities. We have seen, as I mentioned, price increase announcements coming on the back of resin and transportation costs. that have moved up in results of the Iran conflict. It still is early though. It remains to be seen how that plays through and how that plays through in terms of those prices sticking in the market and then how long that lasts. But we would anticipate at the current price increase announcements that negative or deflationary environment on plastic would start to minimize as we step through the year. Copper tube and fittings has been the strongest inflationary product category for us. We are starting to lap the outsized increases from last year. So I think that will still be an inflationary territory, but we would anticipate that inflation coming down a bit.

And then steel, different components of steel are moving at different paces, but still, call it, in that low to mid-single-digit inflation overall as a basket. And again, we'll see how that plays through. So overall, again, maybe a touch more inflation than we originally anticipated, and we'll continue to monitor that month in, month out.

The next question comes from John Lovallo from UBS.

The first one on the HVAC business return to growth of about 1%, which was encouraging. I mean what are your expectations for the business as we move through the year? And any thoughts you can share on Home Depot's recent entrants into the space?

Yes. Thank you, John. The HVAC business, as we said, we were pleased to see it come back to growth. You look at a plus 1 against a plus comparable and 6% growth on a 2-year stack, a pretty good result, all things considered against what is a tough residential new construction market against what is a pretty challenged consumer right now in terms of pressure in their balance sheet and that consequential movement to more repair versus replace. And all of that against the change from a regulatory environment and what that looked like against some degree of pull forward of demand. We think we're largely through that and we're back into an environment where we can grow inside the HVAC business.

If you look at where we're headed, from an HVAC perspective. We talk about Climate and Comfort as one of the real growth areas for us as a company. you see us continuing to focus on the specialist trade professional and making sure that we're adding expertise across the country in terms of associate base. You see us adding locations. You see us adding counter build-outs to really service that dual trade growing contractor base more effectively than anyone else. And you see us using M&A as a good growth area to bring in talented associates with great relationships in local markets, and that was really evident during the quarter and as we move into quarter 2. If you talk about the [Mingledorf ] acquisition in the Southeast, clearly, we respect our retail competitor incredibly well. And that HVAC growth area was on their road map. So it really wasn't a surprise for us.

If you look at where we stand, we have a really strong position inside the Southeast in both plumbing as well as HVAC. And we continue to build that out both organically through counter build-out, and now further strengthened by the acquisition of dealer supply with 17 locations in the Southeast. So we're really pleased with what we're able to do inside that market and more broadly across HVAC and plumbing as we look at the growth of the repair professional in dual trade across the United States.

Okay. That's helpful. And then how should we think about your diesel cost exposure? And do you have any hedging mechanisms in place and have you implemented fuel surcharges?

Well, we have not implemented fuel surcharges, and we do not intend to. We do not pass along surcharges as a matter of principle from a pricing perspective. If you think about diesel and overall fuel cost for us, it's certainly a headwind, John, but not one that I would consider overly material to the financials. And it is one that we are working every day very hard to offset with our productivity initiatives. One of those largest initiatives that we've been really pleased with the results has been our fleet optimization and our fleet rationalization program. And so today, we have effectively offset that increase in fuel, but it will remain a bit of a headwind that we will continue to work hard to offset.

And maybe to put a finer point on Bill's comments regarding fuel surcharge, John, we have historically taken the position that we need to make sure that we get the broadest product offering to our customers where and when they need it. That includes our final mile trucking fleet of over 5,900 trucks. And that's roughly half of our revenue is being delivered on those trucks. And we need to make sure that, that value-added service, that service that we offer is in the price of product, and that's always been the way we've looked at it. And additionally, you see some degree of inflation inside of our product categories that should allow us, together with the productivity measures that Bill highlighted to keep that expense in a right controlled spot.

The next question comes from David Manthey from Baird.

Yes. Thank you. Good morning everyone. First question for you guys is large commercial projects, clearly doing really well at the moment. And given the visibility of those types of jobs, could you discuss backlog as you see it and what your outlook is for the remainder of 2026 as I assume some of those are rolling off and new ones are starting up?

Yes, Dave. The backlog continues to grow. Our open order volume continues to grow, particularly in that commercial mechanical business. So again, really pleased with that 18% growth on top of a 9% comparable. Those comparables get tougher and tougher as we move through the year. We're going to start to lap some 18% comparables on commercial mechanical and double-digit growth comparables in overall nonres. But I can tell you the commercial mechanical backlog is up greater than that 18%. Certainly, there can be some lumpiness on how those projects play out in terms of revenue delivery. But we don't see any slowdown still on the large capital project space and continue to believe it's going to be a strong multiyear tailwind still to come.

Yes, Dave, as we've discussed earlier in the call, that multicustomer group approach and engaging early with the owner engineering community and the contractor base is serving us well. And as we talked about Waterworks earlier, a plus 5 on a plus 11, all volume, good result, again, 18% growth in commercial mechanical on a 9% comp growth inside the industrial space. We feel good about across those customer groups that activity level. And as Bill said, we continue to build that open order volume and that bidding activity, again, understanding that there can be some lumpiness in terms of how those projects play out given their size, scale and the amount of projects that are going on.

For us, one of the things that we're really focused on is making sure that as that large amount of activity plays through that we've got the right inventory levels, the right supply chain solutions n large diameter steel pipe, weld fittings, flanges especially in the current environment that we find ourselves in geopolitically that we've got that right inventory level to keep those projects moving on time and in full.

Second, going back to last year, I know you were working through this hundred million in cost savings. I'm just trying to -- with the change in fiscal year sort out where we are, is that all behind us now? Anything left over and/or any new cost efforts as you enter calendar 2026?

Yes, Dave, it's a great question. We executed the vast majority of that in the month of April last year. So by May 1st, we were fully recognizing that annualized rate. So we're just about through the end of that. Really pleased with the cost position of the business today. If you look in Q1, costs were up just about 3%. So we got about 10 basis points of leverage on what was still a challenged revenue environment, with revenue up 3.6%. So very pleased with how the teams have executed, very pleased with some of the productivity initiatives, both from a technology an automation perspective as well as the fleet program that I mentioned before.

So I think we're well positioned. With that said, as we're going to lap those comparables on the cost side, I would expect that cost growth rate could step up just a touch as we move into Q2 and Q3, but believe that we're well positioned to continue to generate a bit of cost leverage as we look across the full calendar year.

The next question comes from Ryan Merkel from William Blair.

Nice job this quarter. I want to start with a question on the shape of the quarter. It seems maybe you exited at a better growth rate in March? And then can you just tell us what you're seeing so far in April?

Yes. The quarter, Ryan, I will tell you, it was a little choppy. We talked about this on our stub period call back in February with just given the weather that we saw in January, February. So it's a little hard to get a read on it. But I would tell you that April has played out pretty similar to the shape of the overall quarter. So we're still, for the month of April in that low to mid-single-digit total growth range. So not a significant shift as we came out of Q1 and into April.

Got it. Okay. And then just a high-level comment on data centers. I'm just curious, what are you seeing out there? Are you winning your fair share is growth accelerating? And then are you also seeing like stronger orders or earlier look at orders because that's what we're hearing from some of the peers.

We are seeing earlier looks, but that has been a real conscious effort for us over the course of the last several years as we've started to engage earlier in the process to make sure that we've got the right product set to make sure that the supply chain can take care of delivering on that project, as I referenced earlier. The open order and bidding activity, again, continues to be robust. We feel very good about our ability to win inside the data center environment. Early interaction with the owner's engineering communities and the general contractors, allowing us to make sure that we've got the right product set, a multi-customer group approach and then adding value-added services that help to drive construction productivity. Things like fabrication, valve and automation it allows that project to get finished more on time and especially in light of what is a trade stars world and the resources available out there.

We see our larger contractors inside the commercial mechanical space and specific growing faster. And so making sure that we can handle that volume with them is very important. So we think especially as we move to liquid cooled, that continued acceleration will play on.

We'll now take our final question from Keith Hughes at Truist.

I guess the question back on some of the commercial industrial. We talked a lot about data centers. if you could talk about nondata center business, how much that's contributing to the numbers you're reporting here this quarter and previous periods?

Yes, Keith, we've been really pleased with overall large new construction capital projects. But additionally, as we've really grown in the area of maintenance, repair and operations in our core industrial business, we very pleased with that. So the broad-based growth of Waterworks commercial mechanical industrial across that nonres space has been good. When we look at data center activity, we see a knock-on effect of power generation and what that means with combined cycle power plants and the construction of those across the country as well as the need for water and what that means for a water source and water treatment.

And all of that dovetails nicely into the investments that we've been making over time in our industrial business, our Waterworks diversification and then driving that multicustomer group approach. Additionally, we've seen good activity levels in traditional onshoring of manufacturing capacity as well as the growth in pharma around things like GLP-1 production. So it has been more broad-based, and we think it's got a longer runway, especially when we look at water and energy inside the space.

Okay. Just one other quick one on HVAC. I know in the past year or so, we've seen a lot of instances where the accessories sorry, repair parts are growing faster than the unit themselves from affordability issues. Is that still the case heading into '26?

Keith, it is still the case. We still see more repair than we do replace for a variety of reasons, and that continued to play out through the quarter, and we think that continues to play out as we go through the year.

I'll now pass back to Kevin Murphy, CEO, for closing remarks.

Yes. Again, thank you for your time, and we appreciate the attention, and we'll talk to you as we go forward. Suffice it to say, we again want to thank our associates who have driven another fantastic performance inside the quarter as you look at growth and improvement across what is still an uncertain market. We continue to invest in those areas of construction productivity for the water and air specialized professional, and continue to play out a multi-customer group approach that engages early to drive specification and product reference to make sure that we can get a project done on time and on budget. Thank you again, and we look forward to talking to you soon.

This concludes today's call. Thank you very much for your attendance. You may now disconnect your lines.

Hello, and welcome, everyone, to the Ferguson's results for the Year Ended December 31, 2025, Earnings and the Market Opportunity and Strategy Update. My name is Becky, and I will be your operator today. [Operator Instructions]

I will now hand over to your host, Brian Lantz, to begin. Please go ahead.

Good morning, everyone, and welcome to Ferguson's Earnings Conference Call and Webcast. Today's call will also cover an update on our market opportunity and strategy. Hopefully, you 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 web page. 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 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 reflects certain non-GAAP adjustments. Please refer to the appendix of the accompanying presentation for additional information regarding those non-GAAP measures, including reconciliations to the most directly comparable GAAP financial measures. Further, please note that some of the information discussed on this call is derived from third-party sources. We have not independently verified this data and make no representation as to the accuracy of this data nor do we undertake to update such data after the date of this presentation. Please refer to the accompanying presentation for additional information.

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.

Thank you, Brian, and welcome, everyone, to Ferguson's conference call. Before we begin, we'd like to flag something from this morning's release. I'd like to congratulate Brian on his decision to retire in May and thank him for his significant contribution to Ferguson over the past 5 years. He has been instrumental in our transition from the United Kingdom to the United States, in setting up our New York Stock Exchange listing and in establishing a strong investor relations presence here in the U.S.

We're also pleased to announce that Pete Kennedy has been promoted to Vice President of Investor Relations, based out of our headquarters in Virginia. He's been with Ferguson for more than 10 years, initially in finance in the past 7 years within Investor Relations. Thank you both. And again, congratulations, Brian.

Moving back to today's call. We'll initially cover highlights of our recent performance and our calendar 2026 guidance before moving on to a broader update on how we are uniquely positioned to provide essential water and air solutions for the complex needs of the specialized professional looking specifically at how our scale and capabilities combined with multiyear market opportunities allow us to continue outperforming the market and deliver shareholder value over the longer term. We'll have time to take your questions at the end.

Turning to our full year performance. Our associates delivered another strong year, while faced with a challenging market. Revenue of $31.3 billion was 5% ahead of last year. The actions we took to diligently manage gross margins and streamline our business resulted in operating profit of $3 billion, up 11.3% and represents a 9.6% operating margin for the calendar year. Diluted earnings per share came in at $10.58, a 13.4% increase over last year. Cash generation was strong with $2.2 billion of operating cash flow which allowed us to continue investing in our growth areas and executing our capital allocation priorities. We welcome associates from 8 acquisitions, continuing our strategy of consolidating our fragmented markets while also returning $1.6 billion to shareholders via dividends and share repurchases during the year. And we continue to deliver a strong overall return on capital of 31% for the year.

We're also pleased to declare a quarterly dividend of $0.89, which will be paid in April. Despite the challenging environment, we drove continued outperformance in our markets and delivered strong profit expansion in calendar year '25.

Turning to our performance by end markets in the United States. Net sales grew by 5%. Residential end markets representing approximately half of revenue remain challenged. New residential housing starts and permit activity were down on the prior year, and repair, maintenance and improvement work also remains soft. Overall, we continued to outperform weak markets with residential revenue flat for the year. Nonresidential end markets performed better than residential. Our scale, expertise, multi customer group approach and value-added solutions drove strong share gains with nonresidential revenue up 11%. Large capital project activity remains good, and we've seen solid shipments with growth in open order volumes and bidding activity. Our intentional balanced approach to end markets continues to position us well.

Moving next to the full year revenue performance across our customer groups in the U.S. We grew Waterworks revenues by 13% as our highly diversified customer group saw strength across large capital projects public works, general municipal and metering technology, offsetting weakness in residential. Ferguson Home grew 1% in a challenging new construction and remodel market. Our ability to present a unified experience combining best-in-class showrooms with a digital experience as we cater to higher-end projects drove outperformance against the broader market. Residential trade plumbing declined by 3% due to headwinds in both new construction and RMI construction. HVAC declined by 1% against a strong 10% comparable and weaker end markets impacted by the industry's transition to new efficiency standards, and weak new residential construction activity as well as a pressure consumer.

We remain pleased with our execution of our counter build-out for the dual trade, our greenfield expansion and M&A opportunities. The commercial mechanical customer group grew 18% on top of a 5% prior year comparable, driven by large capital projects such as data centers and partially offset by weaker activity in traditional nonresidential projects. Our Fire & Fabrication, facility supply and industrial customer groups all saw growth during the year as we take share and leverage the benefits of our unique multicustomer group approach. Our customer groups are better together as we share expertise to provide end-to-end solutions that help simplify complex projects and drive construction productivity.

Now let me pass the call over to Bill for the financial results in more detail.

Thank you, Kevin, and good morning, everyone. Calendar year 2025 net sales of $31.3 billion were 5% ahead of last year, driven by organic revenue growth of 4.5% and acquisition growth of 1%, partially offset by 0.4% from 1 fewer sales day and 0.1% from the combined adverse impact of foreign exchange rates and a divestment in Canada.

Price inflation was low single digits for the year, with improvement in finished goods pricing, offset by deflation in certain commodity-related product categories. Gross margin of 31% increased 70 basis points over last year, driven by our associates' disciplined execution as well as the timing and extent of supplier price increases. Operating profit of $3 billion was up 11.3%, delivering a 9.6% operating margin with 50 basis points of expansion over the prior year. Diluted earnings per share of $10.58 was 13.4% above last year, driven by operating profit growth and the impact of share repurchases. And our balance sheet remains strong at 1.1x net debt to EBITDA.

Now turning to the calendar fourth quarter results. Net sales of $7.5 billion were 3.6% ahead of last year driven by organic revenue growth of 3% and acquisition growth of 0.9%, partially offset by 0.3% from the combined adverse impact of foreign exchange rates and a divestment in Canada. Price inflation was low to mid-single digits. Gross margin of 30.6% increased 90 basis points over last year. Operating profit of $625 million was up 13.8%, delivering an 8.3% operating margin with 70 basis points of expansion over the prior year. Diluted earnings per share of $2.10 was 11.7% above last year, driven principally by operating profit growth.

Moving next to our calendar fourth quarter revenue performance across our customer groups in the U.S. Many of the trends that Kevin highlighted for the full year have remained consistent during the quarter. We've continued to see strong Waterworks growth, up 9% on top of a 10% growth comparable. Commercial mechanical also saw a strong performance with 18% growth against a 5% growth comparable. The more residential exposed customer groups have been more pressured due to weaker markets. Ferguson Home was flat. Residential trade plumbing was down 4%, and HVAC was down 7% against a very strong 16% comparable. We're pleased with the continued growth of Fire & Fabrication, facility supply and industrial as we rounded out the year. Across our 2 end markets, our residential revenue was down 2% and nonresidential revenue was up 10% in the quarter. Once again, our multi-customer group approach and balanced end market exposure continue to serve us well.

Moving next to our cash flow performance for the year. EBITDA of $3.2 billion was $338 million ahead of prior year. Working capital investments of $294 million were up from $106 million in the prior year as we selectively invested to support growth areas in the business. Interest and tax remained broadly stable year-over-year, resulting in operating cash flow of $2.2 billion, up $110 million on prior year. We continue to invest in organic growth through CapEx, investing $354 million during the year, resulting in free cash flow of $1.9 billion compared to $1.8 billion in the prior year. We also invested $276 million in M&A, returned $656 million to shareholders in dividends and repurchased $4.5 million of our shares for $902 million during the year.

Now turning to our calendar 2026 guidance. While our markets remain mixed as we enter 2026, we expect another year of outperformance strong operational execution and continued investment to expand our market-leading capabilities and scale. We expect markets to be broadly flat for the year, with residential down low to mid-single digits, and nonresidential up low to mid-single digits. Against this backdrop, we expect low to mid-single-digit revenue growth, and we expect an operating margin range of 9.4% to 9.8%. Interest expense is expected to be approximately $200 million. We estimate CapEx of approximately $350 million to $400 million, and we continue to expect an effective tax rate of approximately 26%. We believe we are well positioned as we head into the new calendar year.

Now let me pass the call back to Kevin to give an update on our market opportunities and strategy.

Thank you, Bill. Moving on to our update on market opportunities and strategy. Our goal today is to provide a clear view of who Ferguson is, our core strengths and the structural trends that we believe will drive continued market growth over the medium and long term. Ferguson is the largest value-added distributor of essential water and air solutions, and we are proud to partner with our customers as they build and maintain the infrastructure that keeps North America running on projects, big and small, in communities across the country.

Together, our residential and nonresidential construction markets represent a $340 billion market opportunity. And even with our current size and scale, there's still tremendous growth opportunities ahead. Our intentionally balanced business mix allows us to capitalize on the full spectrum of demand across our markets. Our balance of 50% residential and 50% nonresidential with 2/3 repair, maintenance and improvement and 1/3 new construction help provide durability and resilience regardless of market conditions.

Our strategy is built on a foundation of core strengths that allow us to leverage our size and scale to provide exceptional service in our local markets as this is an intentionally local business. Our business strategy is aligned with structural trends that are shaping the North American construction market in the short, medium and long term. We're well positioned to take advantage of these structural tailwinds to deliver a strong and consistent financial performance. Ferguson is operating from a position of strength today and our business model will allow us to continue to compound growth and deliver shareholder value.

One of our most powerful differentiators is our ability to integrate across multiple customer groups and provide products and solutions across the full life cycle of water and air applications from water treatment and transmission to storm water management to plumbing and HVAC systems to industrial pipe valve and fittings, fire suppression and much more. Our associates collaborate as experts on the entirety of the project, partnering with our customers in early stages of the design and engineering process. We aid decision-making while providing products and solutions throughout the life cycle of the project, whether new construction or RMI.

Our comprehensive water and air expertise allow us to help simplify complexity for our customers and provide end-to-end solutions that our communities rely on every day. The ability to deliver these solutions is made possible by where we are positioned in the broader supply chain. We connect 37,000 suppliers with over 1 million customers, providing them with choice of over 1 million products, all delivered through our extensive supply chain network. We strive to be the best path to market for our suppliers.

Be the best path to market for our suppliers. Our scale allows us to offer customers more product options with shorter lead times and convenient delivery options. And our relationships in the local market ensure our customers receive the right product at the right time from people they like and trust. Additionally, our markets are highly fragmented with more than 10,000 small and midsized competitors serving individual geographies or specific customer types. This creates opportunity for consolidation and reinforces the relevance of our scale and enabling us to deliver differentiated value to both customers and suppliers. The projects we support demand the expertise of specialized professionals, plumbers, HVAC technicians, Waterworks contractors, fire protection installers, commercial mechanical contractors and the many skilled traits that keep water flowing buildings functioning and essential infrastructure operating across North America.

The tangible value we provide is even more important when you consider the environment our customers are operating in, essentially, a trade starved world. Skilled labor is increasingly scarce. Demand continues to rise and the pressure on contractors to do more with less has never been greater. As these labor pressures intensify, our ability to unlock productivity becomes even more valuable to the over 1 million customers that we serve. Our job is to make their job easier. We help the industry overcome these challenges and unlock construction productivity through our ability to deliver the right products, the right solutions guided by our people when and where our customers need them.

Our strategic footprint puts 95% of our customers within 60 miles of a Ferguson location and allows us to deliver same day or next day. Our product strategy includes access to over 1 million products with a multi-brand offering in almost every major category. This includes 21 owned brands that make up approximately 10% of our overall revenue and span multiple product categories across our customer groups. The backbone of our business is the 35,000 associates that bring deep industry knowledge, technical expertise and strong long-term customer relationships. Our training program is designed to build a solid pipeline of talent and our culture emphasizes long-term career development and an unrelenting commitment to service.

Our multi-customer group strategy allows us to serve customers and have a greater impact on the entire project, whether it's a multimillion dollar data center or a residential remodel. We currently hold leading positions in the markets that we serve. We believe we are uniquely positioned to take advantage of the growth opportunities created when these groups come together on large, more complex jobs, jobs that are tailor-made for our business, jobs that require scale, product breadth and the ability to coordinate across multiple trades.

For our customer, it means fewer handoffs, fewer delays, tighter coordination and a level of integration that drives meaningful construction productivity. In a trade starve world, our customers don't just need product. They need productivity. And that's exactly what our value-added solutions deliver. We're continually looking for ways to save our customers' time on the job and deepen our partnership with them based on the unique needs of that project. We have intentionally added or expanded services like virtual design and construction, custom fabrication and valve automation to streamline design, bidding, ordering, staging and overall project management. And our digital tools give customers the ability to transact with us 24/7, making it easy to do business with us when and wherever they need.

Shifting to a more macro view. We've identified 4 structural trends that are shaping the residential and nonresidential markets. Large capital projects, water infrastructure, climate and comfort and aging and underbuilt housing, each represent fundamental trends that are tailwinds for our business and catalyst for future growth. We are well positioned to capitalize on these trends, providing a foundation for long-term consistent above-market growth. Across the U.S., we're in the middle of a once-in-a-generation build-out of large capital projects with more than 4,000 projects planned through 2031 and an estimated $6 trillion of projected spend. This represents a potential market opportunity across our customer groups of approximately $90 billion.

Data centers, semiconductor facilities, advanced manufacturing, energy, biotech. These are long cycle, high-complexity projects that require the very best in water and air solutions. The demand we're seeing for these types of projects goes beyond incentives. It's demand from onshoring, reshoring, GLP-1 production, AI infrastructure and power generation, demand that we believe will continue well into the future. We're not securing these jobs by being a distributor moving boxes from point A to point B. It's because of the value Ferguson can uniquely bring to projects of this size and scale, from our multi-customer group expertise and our speed of our supply chain to full project management capabilities and value-added solutions. These projects are tailor-made for Ferguson.

As an example, this data center project demanded scale, highly technical precision and coordination across multiple trades. We partnered with the general contractor and the contractor on the virtual model design and led the development of the liquid cooling build strategy in early stages of the project. Our skilled associates are using industry-leading fabrication technology to preassemble the custom design piping system. This project will deliver 5,700 liquid cooling assemblies, 57,000 valves, 12 miles of copper pipe and over 19 miles of water and fire lines.

To date, we've generated over $40 million in revenue with over $100 million in open orders. By combining the expertise and capabilities of our 4 specialized customer groups with our project management capabilities, we will seamlessly support coordination and execution throughout every phase of the project, both on and off-site.

As we shift to water infrastructure, the reality is America's water systems are aging, underfunded and in need of modernization. Significant investment is required to upgrade and replace critical water, wastewater and storm water infrastructure. Our Waterworks business engages early in the project with both public and private utilities as well as engineers to offer solutions for the entire life cycle of water from collection and treatment to transmission and distribution. We're also on the forefront of smart technology in the water space providing the metering, monitoring and intelligent infrastructure tools that help utilities manage usage, detect leaks and improve efficiency. Wherever water flows, we play a vital role and we're well positioned to take advantage of one of the most durable, high priorities and essential needs in the country with scale, capabilities and customer reach to lead it.

Warmer summers, higher cooling loads, changing regulations and rising expectations for indoor comfort, it's changing how we heat, cool and ventilate our homes and buildings. We don't see this as a one-season trend, but as a long-term shift in how climate systems are being designed, installed and serviced. Demand is moving more toward efficient equipment, smarter systems and dual trade capabilities that blend HVAC and plumbing.

Consolidation in the industry has led to larger multi-trade businesses with broader footprints and the need for a partner that understands this evolution and can scale with them. Ferguson now has over 650 full-service dual trade HVAC and plumbing locations that offer broad access to multiple equipment lines, parts and supplies and includes Ferguson's own brand products as well as national partnerships with the industry's leading manufacturers. We continue to invest in additional counter expansion, greenfield locations and M&A to drive further growth while expanding our digital tools to help our customers be more productive. We view climate and comfort as a durable structural growth driver for Ferguson and our investment in initiatives, along with our strong position in both HVAC and plumbing, provide us with a unique opportunity to capitalize on this industry evolution.

While the residential market remains challenged in the short term, we believe the combination of aging housing stock and a housing shortage underpins strong demand over the longer term. The average home in America is now more than 4 decades old, and we're still millions of units short of meeting our current demand. That gap isn't closing quickly. It's a long-term challenge and a long-term opportunity. Older homes need repair. They need replacements. They need upgrades. And when new homes are built, they require everything from water delivery and metering to rough and finished plumbing to HVAC, appliances, lighting and in some cases, residential fire protection. Ferguson is uniquely positioned to serve both new construction and repair, maintenance and improvement through our multi-customer group approach.

At Ferguson Home, and we're known for our strong relationship-driven approach. Once again, with our multi-customer group approach, we're poised to take advantage of a residential recovery. Ferguson combines the reach, resources and capabilities of North America's largest value-added distributor serving the water and air specialized professional with the speed, relationships and decision-making of a local partner. It's how we leverage our scale, earn trust in the local market and drive organic growth while also helping our customers be more productive in today's trade starved world.

And when you look at it, the favorable long-term structural trends in front of us, our strategy, capabilities and value-added solutions position us to take advantage of the demand created by these tailwinds. These are multiyear, multi-decade opportunities where we believe Ferguson is uniquely positioned to lead. The result is a sustainable business model that's designed to deliver strong, consistent financial performance driven by above-market organic growth.

And I'll now hand over to Bill, who will expand on our financial opportunity.

Thank you, Kevin. You've heard today about who we are, how we win and the significant opportunities ahead of us. At our foundation, we have a long-term proven track record of consistent execution and strong financial performance.

Looking back over the past decade, we've generated annual revenue growth of 8% with operating profit growth of 11% and operating margin expansion of 210 basis points to 9.6%. Over this time, our sustainable business model with balanced end market exposure has proven an ability to perform against a wide range of market conditions. From a more steady market growth period to a hyperinflationary supply chain constrained period to a deflationary period with a more challenging market in recent years. Through this time, we've reached record sales of $31.3 billion, record operating profit of $3 billion and a new level of operating margin while delivering a 545% total shareholder return, and we've done this while generating strong cash flow and cash conversion.

We take a disciplined approach to working capital investment, balancing the growth needs of the business while continuing to optimize our supply chain network. Over the past 5 fiscal years, we've generated approximately $9 billion in operating cash flow with an operating cash flow to net income conversion of 107%, we allocate that cash across 4 clear capital priorities. First and foremost, we make the investments necessary to drive above-market organic growth. Next, we invest in bolt-on geographic and capability acquisitions. We've moved this up in our allocation framework ahead of the dividend. While we've not had to choose between acquisitions and sustainably growing our dividend, we believe this repositioning more appropriately reflects our growth focus and the returns we can generate for shareholders on quality acquisitions. Next, we look to sustainably grow the dividend over time.

And finally, if we're below the low end of our target leverage range of 1 to 2x net debt to EBITDA, we return capital to shareholders via share repurchases. That consistency of capital allocation has enhanced growth and shareholder value. Over the past 5 fiscal years, we've deployed nearly $12 billion of capital and we've done this while driving strong returns on capital and maintaining a strong balance sheet that will provide great resilience should we encounter a tougher economic cycle and also optionality to further invest as opportunities arise.

Turning now to acquisitions. We have a proven track record of success buying quality businesses in our highly fragmented markets. Over the past 5 fiscal years, we've completed over 50 acquisitions bringing in over $2 billion of revenue and accounting for just under 2% of our annual growth over that period. We acquired these companies at attractive multiples that leverage our scale to drive revenue, gross margin and operating cost synergies to generate strong returns.

Our strategy targets 2 types of bolt-on acquisitions. First, geographic, which allow us to expand and fill in our existing footprint, consolidate our markets and bring in local associate expertise and customer relationships. We have a repeatable process that allows us to quickly integrate these acquisitions, leverage our scale and generate synergies. In addition to geographic opportunities, we look for capability acquisitions in which we bring in new products, new value-added solutions, associate expertise and new vendor relationships that we can leverage across our platform.

In both cases, while we're acquiring physical assets such as locations, trucks and inventory, the real gain we have is from the people, their expertise and the customer and vendor relationships they bring into our business. We spent significant time evaluating cultural fit and alignment of values to support successful acquisitions. As we look forward, our pipeline remains healthy and acquisitions will continue to be a core component of our growth focus.

Now turning to our financial opportunity in the future. We are and will continue to be an organic growth first company. Historically, our markets have outgrown GDP and we believe a reasonable expectation of market growth over the long term is approximately 2% to 4% a year, and we will continue to take share and outpace these markets. We've demonstrated a track record of above-market organic growth, and we believe our market-leading capabilities and favorable structural trends will drive continued above-market growth in the range of 300 to 400 basis points a year. We'll continue to consolidate our fragmented markets through acquisitions, driving a further 1% to 3% incremental annual growth. Our markets are over market growth in our acquisition strategy, collectively result in a total annual growth expectation over the long term in the range of 6% to 11%.

In addition to continued growth, we have a wide variety of initiatives focused on driving sustainable margin expansion. We're utilizing analytics and dynamic pricing tools to enhance project bids and quotes while tailoring pricing based on segment, service level and job complexity. We're expanding value-added solutions and ensuring that we charge for that value. We guide our customers to the right product for their project. In doing so, we can drive higher margin products, leveraging our vendor partnerships and, in some cases, own brand to enhance overall gross margins. And we're focused on improving the productivity of our operations, leveraging technology and AI to drive labor and cost productivity and we're further investing in and optimizing our supply chain network and automation to drive efficiencies to reduce the cost to serve our customers.

As we invest in these areas, we expect to incrementally expand our operating margins over time. As we bring all this together, we will continue to execute our growth and improvement strategy. Over the long term, we expect revenue growth rates of 6% to 11%, combined with flow-through in the range of 11% to 14% resulting in operating margin expansion of roughly 10 to 30 basis points a year. As we do this, we will continue to deliver strong cash flow and cash conversion. We'll remain disciplined in the deployment of that cash across our 4 capital priorities, all while maintaining a strong balance sheet. Collectively, this will drive continued strong earnings per share growth which we estimate would be in the low double-digit to mid-teens range.

To give a sense of our growth trajectory, we believe the combination of our large, fragmented and growing markets, our ability to deploy scale locally, our ability to capitalize on structural market trends and our disciplined approach to capital allocation will propel us over the medium term to deliver our next milestone of $40 billion in revenue, with over $4 billion in adjusted operating profit at over a 10% operating margin. We have laid a firm foundation and believe we are strongly positioned to continue generating additional shareholder value.

Thank you again for your time. And now let me hand it back to Kevin to wrap up.

Thank you, Bill. Ferguson is North America's largest value-added distributor of essential water and air solutions, from water treatment and transmission to storm water management, to plumbing and HVAC systems to industrial pipe valves and fittings, fire suppression and more. We operate in large fragmented and growing markets, and we believe our business is well positioned to take advantage of durable, long-term structural trends across large capital projects, water, climate and housing.

What differentiates us is a set of core strengths to allow us to win in the marketplace while driving construction productivity for our customers. Scale deployed locally, a multi-customer group approach and a strong combination of supply chain capabilities, value-added solutions and expert associates. This has resulted in a long track record of growth and outperformance. And combined with our disciplined capital allocation, positions us to compound growth and drive shareholder returns over the medium and long term.

Thank you for your time. Bill and I are happy to take your questions.

[Operator Instructions] Our first question comes from Phil Ng from Jefferies. Please go ahead.

Congrats, Pete and Brian, and then Kevin thanks for all the great color in terms of how you guys are positioned longer term. I think what has been standing out in your really strong performance in the past year is certainly the nonres capital project side of things. Give us a little more color on how you're thinking about the outgrowth in that category when we think about 2026, are you starting to see share gains there accelerate? Give us a little perspective in when you bid for these projects, is that competitive landscape pretty limited just because we figure there's not a lot of competitors have that ability or that's not even how the process works. I mean, you foster a relationship where it's pretty sticky. It's really just you in some of these projects.

Yes. Thank you, Phil. Thank you for both the comments as well as the question. When we look at large capital construction projects, it really does take a structural trend that is very attractive and put it together with what our business strategy has been over the past 5-plus years as we've looked to develop a multi-customer group approach, bring scale to best local relationships and then engage earlier in the project to help with the design process so that we can deliver the right product at the right time, on budget. And all that's come together well. Is there a competitive dynamic that's different than the general market that we compete in from a nonresidential perspective? Slightly. We still compete with great local competitors in every one of our different customer groups. But we think that we offer something different collectively as we engage with the GC, the owner, and we think we bring something different when you talk about the supply chain, being able to deliver on those local relationships.

Additionally, what we've seen, especially in the data center market is the need to complement some of the activities of the contractor base in areas like fabrication, valve and automation and off-site construction to make sure that they can deliver on that project on time. So the competitive landscape, albeit different is very much attractive for the business model that we've built. And people ask us all the time about the large capital construction project tailwind when that goes away, then what does that mean? It really is a new way of operating for us as a company that we think will serve us well for decades to come.

And Phil, you're seeing that in the growth rates on nonres over the last 3 quarters, 3 quarters in a row of double-digit growth rates and back to the multi-customer group approach, as Kevin outlined, real strength in not only the commercial mechanical business, up 18% in the quarter, up 18% for the calendar year, but also in the Waterworks business, up 9% in the quarter and 13% for the year. So really seeing that strength play across that multicustomer group approach.

Okay. Super. Question for you, Bill. The outlook for 2026 top line looks really good. Margins look quite good, but you're calling for more flattish margins, you typically do see some sort of flow-through with organic growth. Are there any things that you want to call out from an investment standpoint that you're making that mitigate some of these gains from a top line standpoint? Or the mix dynamics? Perhaps we're not really appreciating.

Yes. Maybe to give a little bit of context and color on it. First off, if you take a step back, Phil, we grew the operating margin of the business from 9.1% in calendar '24 to 9.6% in calendar '25. So we had a 50 basis point very strong step up during the year. As we went throughout the year, we did highlight that we had some outsized gross margin quarters driven by the timing and extent of supplier price increases that came through the middle part of the year, and we flagged that, that there was going to be some normalization on that gross margin. And that's what you've seen as we've stepped through the back half of the calendar year.

So for the full year, we delivered 31% gross margins. As we exited the year, you saw that gross margin come back into a more normalized range at about 30.6%. So if you just roll that forward into next year, there's going to be a little bit of year-over-year gross margin compression, which we tried to flag as we went through those summer months as that being a bit of an outsized gain. So there'll be a touch of gross margin pressure. We do expect to generate good SG&A leverage to offset that. And then, of course, we've provided a range of operating margin outcomes. So [ 9.4 to 9.8 ] the top end and the bottom end of that range are largely going to be bookended and driven by what kind of market we find ourselves operating in. So if we find ourselves operating in a bit of a stronger market and growth is a bit on the higher end of our expectation, we would expect to expand those operating margins and get a little bit more SG&A leverage.

And then if markets are a bit weaker, we'd expect to be towards the bottom end of that range. But regardless, when you take a step back and you look at the progression of the operating margin of this business over time, we continue to improve it over the long term, and that's our expectation as we look forward.

Our next question comes from Sam Reid from Wells Fargo.

Brian, congrats on the forthcoming retirement. Just wanted to stick on the -- awesome. Just wanted to stick on the EBIT topic here for a second. So looking at your long-term growth target on top line, I believe it's 6% to 11%. Just want to contextualize that in the context of your long-term EBIT margin expansion outlook. And maybe talk to how EBIT margins look over the long term in a scenario where growth tracks at the low end or below the low end of that top line growth target. Just want to think through how EBIT could look let's just say, if growth doesn't always cooperate.

Yes. Sure, Sam. Thanks for the question. And to your point, we've provided that long-term growth algorithm of 6% to 11%. And if we're within that range, we expect to expand those operating margins in that roughly 10 to 30 basis points a year range. Look, if growth is a bit lower than that, certainly, there are continued investments that we make in the business. Certainly, there's a bit of wage inflation that we expect to have in the business. And generally, we say if we're growing in the low single-digit range, we will work very hard and can kind of hold serve on operating margin. When you get to that mid-single-digit growth range, we can generally generate a touch of SG&A leverage.

And then when you get obviously into that call it, mid-single to low double-digit range, that's the growth algorithm. That's where we get a bit more flow-through and operating cost leverage. Certainly, we're continuing to add value-added services and solutions and so we do expect each of our businesses, each of our customer groups to incrementally grow those gross margins over time. But clearly, we expect the progression of operating margins, as I said earlier, to be expansionary as we look forward over the medium to long term.

And as we've said, we believe that as the specialized professional in the trades for water and air continues to be pressured from a headcount perspective and growth of those trades. Productivity inside the construction space is going to become even more paramount. And if we can add those value-added services that Bill referenced, we believe that we can expand our gross margins over time because we're more valuable to the supply chain as a whole.

That helps, guys. And then maybe one, let's call it, a bigger picture question here. It looks like the business is about 1/3 new construction today. I believe you brought that down over the last decade and by comparison also brought your mix of RMI up as well, which is great. What I'd love to hear though would be the split that 1/3 new construction between residential and nonresidential just so we have a rough sense as to how much of your business is being driven by new commercial construction, maybe contrast that with the new build channel on the resi side?

Yes, Sam, it's broadly similar across residential and nonresidential in terms of that 1/3, 2/3 split. Today, to your point, there's probably a touch more new construction slightly higher than 1/3 on the nonresidential, just given the large capital projects. But a lot of the work that we're doing in the nonres space, particularly when you look at things like Waterworks infrastructure is still repair, replace, remodel.

Our next question is from Ryan Merkel from William Blair.

My first question is just on calendar first quarter and if sales is trending in that low single-digit to mid-single-digit range or we've had a bit of weather, and I know the new resi construction is soft. So just a little clarity on what you're seeing would be helpful.

Yes, Ryan. To date, in the first quarter, revenue has been a touch weaker than Q4 so we're trending in that low single-digit range. To your point, we're continuing to face that new residential weakness along with a bit of HVAC pressure. And look, while we never want to blame the weather, there's certainly been some year-on-year negative impact from the number of severe storms that we've seen in January and February. So a touch softer at the start of the year than Q4, but we expect modest improvement in growth as we move throughout the year, and that's embedded in our low to mid-single-digit guidance for the full calendar year.

Got it. All right. That's helpful. And then my second question is on the '26 guide. It looks like volumes are kind of up in that 1% range. So correct me if that's not correct. But -- and then could you just talk about -- you did 5% volume growth in '25. So frame for us why it's a bit slower as you're thinking about '26. I realize the market is muted. But just talk about why the volumes are a bit slower in the outlook.

Yes. To your point, with a low to mid-single-digit overall revenue guidance, look, there's very little acquisition tail in that. So the vast majority of that is organic. From a planning assumption perspective, and it's -- look, it's really hard to predict, but we are expecting, call it, low single-digit inflation. So that does imply a little bit of volume growth through the calendar year. But it really goes back to why has that stepped down from last year. It goes back to those same headwinds that we're facing, particularly early in the year on new residential along with HVAC and then a touch of weather at the start of the year.

So we would still expect volume growth but maybe a bit on the lighter side versus last year, again, driven by that resi pressure as we're still seeing good, strong volume growth on nonres.

And clearly, we are seeing across the market, the pressure on movement to repair versus replace on the HVAC side of the world when it comes to equipment sales. And we enter the calendar year with that pressure that we think will start to alleviate as we go through the calendar year.

Our next question is from Keith Hughes from Truist.

The question on pricing with the tariffs changing is -- are you anticipating any price pressure assuming tariffs fall away on some of the imported goods as you progress through the year?

Yes, Keith, I mean, the short answer is , and thank you for the question. Sitting here today, we don't anticipate deflation. We continue to see normal annual price increase announcements across our finished goods spectrum. And if you recall, when we had deflation back in '23 and '24, that was driven by commodities, not finished goods. And as we've said earlier, PVC pipe still remains in deflationary territory but we have seen a mild step-up in inflation across finished goods. And if you go back to some previous quarters when we were talking about tariff impact, we told you that the vast majority, if not all of the realized price increases that we saw were not attributable to tariffs, but we're part of like a normalized price increase environment after what was really several quarters of flat or deflating pressure.

And in fact, as you know, going back to that commodity side, during '23 and '24, we experienced 6 straight quarters of deflation. So we're not sitting here today anticipating deflation.

Okay. Great. I guess a little bit long-term question. You had the 4 pillars of growth. Waterworks was one of them. If you could talk about what kind of growth you would expect out of the sector and then maybe your growth on top of that over the next several years? What role does it play in the 6% to 11% that you highlighted as your long-term growth goals?

Maybe I'll take a step back, Keith and just talk about why we are bullish on that trend and the business generally. If I take our business, we have worked very hard to make sure that we have a diversified Waterworks business coming from a place years ago where we were very much a new residential construction business, to one that is broadly based in residential, commercial, public works, water, wastewater treatment, soil stabilization, storm water management, and that served us very well.

And then as we look out, not only is Waterworks a key component to a large capital projects, and we are performing well with that multicustomer group approach and how we're driving up funnel. But we're also seeing when you think about data center activity that's out there today, there is a knock-on effect for power generation needs as well as water. And when you look at water and wastewater treatment and what that investment looks like that is a very good place for again, that diversified Waterworks business. So we think the public work side of our Waterworks business will be a strong tailwind for us as we go forward and set up well for the company.

And when you say diversified Waterworks, are you talking [indiscernible], fresh and wastewater what exactly is entailed in that?

I mean transmission mains and the reinvestment in transmission and distribution, water and wastewater treatment plant construction as well as rehabilitation, what we look at in controls, pumps and process equipment inside of those water and wastewater treatment plants. And as we see that moving maybe to even private installations adjacent to data center construction. There are good tailwinds that are out there that play well to the business.

And final thing on that. You're really talking about a combining of the traditional wastewater with some of your commercial and industrial capabilities. Is that what I'm hearing and what you just listed out?

That and in addition, new product categories that expand the addressable market and allow us to be involved in specifying complex projects that would normally not lend themselves well to distribution.

Our next question comes from Matthew Bouley from Barclays.

Congrats to Brian and Pete. So on nonresidential really helpful color there. You updated the TAM for large capital projects to $90 billion. I think it was $50 billion a couple of years ago. So my question is maybe just kind of link that with the next 12 months, your nonresidential guidance for low to mid-single digit in 2026. You just grew 10% in Q4. Obviously, everything you're saying today, it sounds like that portion of non-res continues to be strong. Is this just sort of tougher comps, kind of light commercial activity a little bit choppy or is there scope to maybe outperform that low to mid-single digits as you look out kind of giving -- in light of that large capital projects business?

Yes. Thanks for the question, Matt. When you look at our guidance and on the low to mid-single-digit growth for nonresidential, that is our market guide, clearly. And that does assume that large capital project strength is still there. But to your point, light commercial, traditional nonres is still a bit pressured as we go through the year. Against that backdrop, we do continue to expect to outperform that market. And not to repeat everything that we've said today, but we do believe we're well positioned to continue outperforming that market given our investments in the multi-customer group approach.

As you look forward to what does that mean for actual growth rates for us on nonres as we go through calendar '26, certainly, there is some reality to those tougher comps. I just talked about earlier, three quarters in a row of low double digit to mid-double digit or to mid-teens growth rates that we're going to comp against. But regardless of that, we are expecting strong nonres growth out of our business. When you take a step back further, our open orders and our backlogs are continuing to build, particularly in the commercial mechanical space as well as the Waterwork space. So we feel pretty optimistic about another strong year out of our nonres customer groups.

Perfect. Okay. That's very helpful color. And yes, so the expectation is to continue to outperform that market guide. Perfect.

I wanted to ask a second question on M&A. I think you did basically 1% in 2025. Obviously, you're talking about 1% to 3% going forward. I guess just if you look back kind of what drove you towards the lower end of that in 2025 in terms of target availability, anything along those lines? And then when you look at these, I think you said 100 top targets. Where are you focusing that M&A investment by customer group? Where is it you want to continue to lean into?

Yes. If you look at the historically on M&A, and we highlighted this throughout the prepared comments, we delivered roughly 50 acquisitions over the last 5 years, roughly 2%. Certainly, over the last 12 to 18 months, that delivery, the number of deals that we've executed has been a bit on the lighter side. But our pipeline still remains extremely healthy. We're still very bullish about our opportunity to consolidate our markets. And quite frankly, with M&A, sometimes you just can't control the timing, what assets are available, when those assets come to market. But as we look forward, we do expect calendar '26 to be a more active year from an M&A perspective than what we had in calendar '25.

And it's fair to say that we have a pretty full pipeline right now of opportunities that are out there. And if you look across our customer groups and where our focus areas are, although all of our customer groups are growth engine businesses, as we look at them, we have a fairly good focus on the residential side of our house within the HVAC space as we look to build out our capabilities, build out our equipment brands across the country and build out those local relationships.

And then on the nonresidential side of the house, we are focused on those areas of capabilities that we can then leverage across the nation and across our customer groups to add construction productivity, areas like fabrication, valve and automation, process equipment and applied services. So there's a good pipeline that's ahead of us, both on the nonres side as well as on HVAC on the residential side.

Our next question comes from Mike Dahl from RBC Capital Markets. Please go ahead.

Great thanks for taking my questions and the mini Investor Day here. Obviously, some of these long-term dynamics, your growth algorithm, the opportunities, it's all really compelling. I think if I had to maybe critique or question one thing the opportunity that has grown so dramatically over the past few years and your capabilities have improved so much. Your execution has been great when we think about all these large capital projects, the HVAC and water. And if I compare your set of midterm expectations today versus your virtual Investor Day in '22, all of those assumptions are largely similar. I think growth is actually a touch lower. The margin assumptions are pretty similar.

So I think the question would be why not -- why are they similar? What are some of the puts and takes and things that have kind of held you back on maybe even stronger growth outside of, obviously, the near-term macro or more specifically, margin progression. I would think some of the scale benefits your margins even more so over time given how things have evolved. Maybe just walk us through how you thought about that.

Yes. Sure, Mike. When you take a step back and you look at the overall growth algorithm, certainly what underpins that is the assumption on what the market growth is going to be. And you look at historically, our markets have outperformed GDP, we do expect that to continue as we look forward based on some of the tailwinds that we talked about today, we think our markets are going to be healthy over the longer term.

As we think more near term, there's certainly more short-term residential pressure. And so we've maybe been a touch conservative on our expectation of market growth of 2% to 4%. That's where that slight difference came from our Investor Day a few years back. But regardless, I think all of us would have a difficult time predicting what the market is going to be with precision over the long term. So regardless of that, the key for us is continuing to outperform that on an organic basis. And we believe 300 to 400 basis points is still a strong performance, and it still gives us the right -- it's still the right place for us to be as we think about approaching this with a balance of continued investment for the long term as well as we develop those capabilities and outperforming a strong underlying market.

So we still believe that somewhere in that mid-single digit to low double-digit growth rate over the long term is a good place for us to be. We believe we can generate strong operating margin leverage there and real high-quality EPS growth as well as returns for shareholders. And if you look at that progression going back a few years, I mean, this was a sub 8% operating margin business. We've built it to a, call it, mid 9%, 9.6% operating margin business and we intend to continue to expand that over time.

Okay. Yes. That's helpful. I think just then dovetailing to that, again, obviously, it's all been really strong, particularly on the large project work. Maybe on -- still on that margin dynamic. I know there's a different mix of business that goes into that, that might be lower gross margin, but then cost to serve or scale benefits kind of offset that. Can you just update us on kind of directionally what are your typical margins on jobs like that, on data centers or large capital projects?

And then if you have any updated figures to give us on kind of what your relative market share or win rates have been in those categories versus maybe the last couple of years or your broader business overall?

Yes. And it's one of the reasons -- the mix of our business, the type of jobs that we have will clearly vary across our customer groups. It's one of the reasons that we really focus on guiding to operating margins rather than the components of gross margin and SG&A leverage. So when you look at large capital projects, in general, given the size and scale of them, they have slightly lower gross margins, but also a slightly lower cost to serve. And so net operating margins are very strong and returns on capital are very strong for them. So we could see some mix impact on the gross margin line over time within our business. But overall, we, again, intend to and expect to continue to grow those operating margins regardless of the mix across those customer groups.

And Mike, we've been very pleased with our outperformance and it being even better than our traditional outperformance in the nonresidential space. If you look at plus 18 on the commercial mechanical side of our business, plus 9 on the Waterworks business, plus 7 on the Industrial business, that plays out to a better share performance inside that large capital construction project space. And so we'll continue to press that advantage as we look at working up funnel, making sure that we've got access to the best product breadth and we're going to continue, as Bill said, on the working capital side of the large capital project space. We're going to make sure that we've got the right product at the right time for that customer in the local market. because this is a unique opportunity, and we want to make sure that we take advantage of it.

We will now take our final question from David Manthey from Baird.

Thank you. Kevin, Bill, good morning. And congratulations, Brian and Pete. My first question, as we look at the long term, it looks like Slide 22 is pretty well unchanged versus what you said previously. But Slide 24, I think we've talked about a little of this, but the revenue growth is down just a touch. The contribution margin up slightly on the high end. I know these are minor changes, and you talked about these. But I just I'm interested always in these long-term trajectory changes because they matter when you're launching satellites. Can you just talk about the thought process behind those slight changes in that -- in the growth outlook?

Yes. I think, Dave, we just talked about with Mike, the slight changes in the market growth assumptions, but no changes in the underlying outperformance expectation and the acquisition expectation. To your point, we did take the flow-through or the incremental operating margins up slightly on the higher end as we're continuing to invest in the business. And we talked about some of the margin expansion opportunities we have where we're driving additional productivity within the business. So that has moved up a touch.

Now given the fact that our baseline operating margins are now 9.6%, we've got to continue to expand that over time to keep that 10 to 30 basis point year in, year-out expansion. So no real significant change, but we are trying to drive and do expect to drive a touch more productivity particularly with technology and AI investments in the core of the business.

Okay. That's clear. Moving M&A up the capital allocation hierarchy, is that a reflection of a better pipeline or just a change in strategy if you -- Bill, earlier you mentioned that the pipeline was strong, but I'm not sure if you mean it's stronger relative to a year or 2 years ago or if it's just characteristically strong normally today?

I would judge it as more characteristically strong. I mean it does -- M&A does ebb and flow. And so we're at a point now, as Kevin said, the pipeline is very healthy, and we would expect 2026 to be a more active year. So I would characterize it as that.

In terms of the movement from bucket #3 in our capital priorities to bucket #2. I think that just reflects the growth aspirations that we have and the growth focus that we have, but also is probably a more appropriate reflection of the returns we expect we can generate on M&A versus shareholder returns. I think it's important to go back and we said this in the prepared comments, we've never had to choose historically between doing a specific deal or doing acquisitions and growing the dividend sustainably over time. We don't expect to have to make that decision or choice. It's not a binary choice in the future. But we think it more appropriately reflects growth and returns that we can generate.

Okay. Small changes around the edges, but a good strategic update. Thank you very much for doing this.

Thank you. I will now hand the call back to Kevin Murphy, CEO, for closing remarks.

Thank you, operator. And I'll close with a special thank you to our associates who delivered another strong year while faced with overall what is a challenging market. And I then thank you to our customers and suppliers for their ongoing support of our company as we go through these markets. We're really pleased with the continued growth and improvement inside the business and what it delivered in calendar year '25, but we're more pleased with what the future can hold with large capital projects with Water Infrastructure, wastewater Infrastructure with climate and comfort and with what will be a residential rebound, both in RMI as well as in new construction in time.

And so we want to say thank you to all that are on the call for your time. We appreciate it more than you know. Please take care, and we'll talk soon. Thank you.

This concludes today's call. Thank you for joining us. You may now disconnect your lines.

Good morning, ladies and gentlemen. My name is Harry, and I will be your conference operator today. At this time, I would like to welcome you to the Ferguson results quarter ended Stember 31, 2025, conference call. [Operator Instructions] I would now like to turn the call over to Mr. Brian Lantz, Ferguson's Investor Relations and Communications. You may begin your conference call.

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 web page. 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 reflects certain non-GAAP adjustments. Please refer to our earnings presentation and announcement on our website for additional information regarding those non-GAAP measures, including reconciliations to the 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.

Thank you, Brian. Welcome, everyone, to Ferguson's quarterly results conference call. On today's call, we'll cover highlights of our quarterly performance. I'll also provide a more detailed view of our performance by end market and customer group. And I'll turn the call over to Bill to review financials, our updated guidance before I wrap up with a few final comments. We'll have time to take your questions at the end.

During the quarter, once again, our expert associates delivered strong results continuing to execute our growth strategy in a challenging market environment. Sales of $8.2 billion increased 5% over prior year, driven by organic growth of 4% and acquisition growth of 1%. Gross margin of 30.7% increased 60 basis points over the prior year. We remain disciplined on cost and generated $808 million of operating profit, which grew 14% over last year. Diluted earnings per share increased nearly 16% over the prior year to $2.84. We continued to execute our capital priorities, deploying $511 million this quarter.

We declared a 7% increase to our quarterly dividend to $0.89 per share, and we acquired more supply company, HVAC equipment and supplies business in the Chicago metro area. We also returned $372 million to shareholders via share repurchases and dividends. Our balance sheet remains strong with net debt-to-EBITDA of 1.1x. While we continue to operate in a challenging environment, we remain confident in our markets over the medium term, and we'll stay focused on leveraging multiyear tailwinds in both residential and nonresidential end markets as we support the complex project needs of the water and air specialized professional.

Turning to our performance by end markets in the United States. Net sales grew by 5.3%. Residential end markets representing approximately half of U.S. revenue remained challenged. New residential housing starts and permit activity have been weak. Repair, maintenance and improvement work has also remained soft. We continue to outperform the markets with residential revenue down 1% in the quarter. Nonresidential end markets performed better than residential. Our scale, expertise, multi-customer group approach and value-added services drove continued share gains with nonresidential revenue up 12% during the quarter. Strength in large capital project activity has continued, and we've seen solid shipments with growth in open order volumes and bidding activity. Our intentional balanced approach to end markets continues to position us well.

Moving next to revenue performance across our customer groups in the United States. We grew Waterworks revenues by 14% as our highly diversified customer group saw strength in large capital projects, public works, general municipal and meters and metering technology offsetting weakness in residential. Ferguson Home, which brings together our best-in-class showroom and digital experience, grew 1% in a challenging new construction and remodel market. Our ability to present a unified experience and cater to higher-end projects drove outperformance against the broader market. Residential Trade Plumbing declined by 4% due to headwinds in both new and RMI construction.

HVAC declined by 6% against a strong 9% comparable and weaker markets impacted by the industry's transition to new efficiency standards and weak new residential construction activity as well as a pressured consumer. We remain pleased with our execution, our counter build-out for the dual trade and M&A opportunities. Commercial/Mechanical customer group grew 21% on top of a 1% prior year comparable, driven by large capital projects such as data centers, partially offset by weaker activity in traditional nonresidential projects.

Our Fire & Fabrication, Facilities Supply and Industrial customer groups all saw growth during the quarter as we continued to take share and leverage our unique multi-customer group approach. Our customer groups are better together, sharing expertise to provide end-to-end solutions to help simplify complex projects and maximize contractor productivity.

Now let me pass the call over to Bill for the financial results in more detail.

Thank you, Kevin, and good morning, everyone. Net sales of $8.2 billion were 5.1% ahead of last year, driven by organic revenue growth of 4.2% and acquisition growth of 1%, partially offset by 0.1% from the adverse impact of foreign exchange rates and from a divestment in Canada. Price inflation was approximately 3%. Modest sequential improvement in finished goods pricing, offset by commodity-related categories being down low single digits.

Gross margin of 30.7% increased 60 basis points over last year, driven by our associates disciplined execution. Operating costs grew slower than revenue, delivering 20 basis points of operating leverage and operating profit of $808 million was up 14.4%, delivering a 9.9% operating margin with 80 basis points of expansion over the prior year. Diluted earnings per share of $2.84 was 15.9% above last year, driven by operating profit growth and the impact of share repurchases. And our balance sheet remains strong at 1.1x net debt to EBITDA.

Moving to our segment results. Net sales in the U.S. grew 5.3% with organic growth of 4.4% and a further 0.9% contribution from acquisitions. Operating profit of $806 million increased $109 million over the prior year. delivering an operating margin of 10.4%. In Canada, net sales were 2.2% ahead of last year, with organic growth of 0.7% and a 4.6% contribution from acquisitions, partially offset by a 1.6% adverse impact from foreign exchange rates as well as 1.5% from a noncore business divestment. Markets have remained subdued in Canada, particularly in residential. Operating profit of $16 million was $7 million below last year.

Moving next to our cash flow performance for the quarter. EBITDA of $867 million was $109 million ahead of last year. Working capital investments of $440 million during the quarter was up slightly from $376 million in the prior year, principally driven by timing. Operating cash flow was $430 million compared to $345 million in the prior year. We have continued to invest in organic growth through CapEx, investing $118 million in the quarter, resulting in free cash flow of $325 million compared to $274 million in the prior year.

Turning to capital allocation. As previously mentioned, we invested $440 million in working capital and another $118 million in CapEx to further build on our competitive advantages and drive above-market organic growth. We paid $164 million of dividends during the quarter and our Board declared an $0.89 per share quarterly dividend, representing a 7% increase on the prior year and reflecting our confidence in the business. We continue to consolidate our fragmented markets through bolt-on geographic and capability acquisitions. As Kevin mentioned, we completed the acquisition of More Supply Company during the quarter, a great addition to our HVAC presence in the Chicago area. Our markets remain very highly fragmented, and our acquisition pipeline is healthy. And finally, we are committed to returning surplus capital to shareholders, and we are below the low end of our target leverage range of 1 to 2x net debt to EBITDA. We returned $208 million to shareholders via share repurchases during the quarter, reducing the share count by nearly 1 million, and we have approximately $800 million outstanding under the current share repurchase program.

Now turning to our updated calendar 2025 guidance. We are pleased with our continued market outperformance and solid growth in the quarter. We are well positioned to deliver a strong calendar year 2025 performance and remain confident in our markets over the medium term despite near-term uncertainties. We now expect approximately 5% revenue growth for the year, and we expect an operating margin range of between 9.4% to 9.6%, up from our prior expectation of between 9.2% to 9.6%. Interest expense is expected to be approximately $190 million for the year. We estimate CapEx of approximately $350 million, the upper end of our previous guide. We continue to expect our effective tax rate to land at approximately 26%.

We believe we are well positioned as we finish the year and head into the new calendar year. Thank you, and I'll now pass back to Kevin.

Thank you, Bill. As we conclude our remarks, let me first reiterate our thanks for the hard work and diligence of our expert associates who continue to execute on our growth strategy as we work to drive construction productivity for our customers. We're particularly pleased with the double-digit nonresidential growth as our teams closely collaborate to simplify projects, bring order to chaos and deliver end-to-end solutions to help maximize customer success. We're poised to deliver a strong calendar 2025 performance and our strong balance sheet enables us to invest in organic growth, consolidate our fragmented markets through acquisitions and return capital to our shareholders.

We'll continue to operate at the lower end of our target leverage range, maintain flexibility to capitalize on strategic opportunities as they arise. We remain confident in our markets over the medium term and expect to continue to outperform our markets as we leverage multiyear structural tailwinds. With our size, scale and strategy, we believe we're well positioned to take advantage of opportunities in the underbuilt and aging U.S. housing market, nonresidential large capital projects and the growing demand for water and air specialized professionals.

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 Instructions] And our first question today will be from the line of Matthew Bouley with Barclays.

I wanted to start on the data center and large capital projects. I'm wondering if at this point, given all the growth you've seen, you're able to quantify perhaps what portion of the business that is for you today and maybe kind of where that can get to? But also, I'm curious if you can kind of, I don't know, give us a little bit of color on timing of bidding and the momentum and if there's any risk of kind of lumpiness given how those projects work and how you ship to them or if we should kind of think that this is going to be more of a, I don't know, smoother kind of outlook for that business?

Yes, thanks for the question. I'll -- this is Bill. I'll start with that one. If you take a step back and look at overall large capital projects for us, we would estimate that, that is somewhere between mid- to high single digits as a percentage of our total company revenue at this point, with data centers, specifically being a bit over 50% of that, so a bit over half of that overall large capital project revenue. In terms of what we're seeing in the market, the pipeline does continue to grow. So we're seeing additional projects coming into planning. We're then seeing that continue to flow into additional bidding activity and our open order volume on large capital projects does continue to grow. And you're seeing that.

You saw it come through revenue this quarter, principally in the Commercial/Mechanical business, which was up 21% and then a portion of that Waterworks business, which grew 14%. So we are continuing to see that activity grow. Certainly, the gestation period of these projects is much longer than maybe our traditional projects. And so yes, there could be some lumpiness in terms of revenue rates as we move into the future. But overall, we remain bullish that this is a continued growth area for us and we'll continue to be driving revenue as we exit '25 and step into '26.

And Matt, as Bill said, the lumpiness will likely be there and the gestation period for these projects is going to be longer. But that's part of the reason why we're reasonably pleased with our progress. As you look at our ability to deliver scale, a multi-customer group approach, a broad base of vendors that can bring product to the site on time and in full. The impact of modular construction on data center work, that's all serving us well in terms of what those share gains look like, especially against a backdrop where traditional nonres is in a pretty challenging spot.

All right. That's perfect. And then secondly, kind of jumping into the outlook, I guess, maybe this is since a bit of an unusual period here where you're guiding to just kind of the sub period. I guess I'm curious if you can kind of give us any color on the November or quarter-to-date results. But just given this is sort of a smaller and again, an unusual guidance outlook here, if you're willing to kind of give any early 2026 thoughts across the end markets, kind of carryover inflation, et cetera, to sort of help us point us directionally a little bit into next year.

Sure. Yes, Matt, as we -- maybe as we take a step back, if you recall when we set out our calendar '25 guidance at the end of our fiscal year in July, we had talked about the first half of the calendar year growth being about 5%. And our expectation that we believe that, that growth was going to get a bit more challenging as we worked through the calendar year, particularly towards the end of the calendar year as we were expecting additional new res pressure and HVAC pressure to step up. And that's what we've started to see play through, so very much in line with our expectations.

Maybe I'll shift to the calendar quarter as we're going to try to get to the calendar year reporting now. If you look at calendar Q4 to date, so October, November and basically the first week and a half of December. Our total growth is sitting at about 3% for that period. Again, very much in line with our expectations with that additional pressure on new resi and HVAC. And so clearly, now with about 3 weeks to go, I would expect our calendar Q4 growth rates to be somewhere in that 3% range as we round out the year.

And then as we look forward to '26, we will set out our calendar '26 guidance in February, and we're back with you in a couple of months as we get on to that calendar year cycle. But the early part of '26, we wouldn't expect much change from a market perspective or much different as we exit the year at about that 3% range and then step into the new year. But again, we'll set out our views on the market and our views on our guidance in February.

Next question today will be from the line of Ryan Merkel with William Blair.

Want to follow up on the last comment on 4Q. Just a little bit of a slowdown there to growth up 3%. Is there anything that stands out? Or is it just maybe just seasonally, it's just a bit softer at this point?

It is that new res pressure continuing to play through, Ryan. If you go back, permits and starts, as everybody is well aware, had continued to weaken through the calendar year. Outside of our Waterworks business, there's a little bit of a lag of those slower starts coming through the rest of our customer groups to then play through on revenue. So I think we're just seeing that playing through on those weaker starts. And then certainly, there's more HVAC pressure, which we talked about during our last quarterly conference call. Our HVAC business was down about 6% for our first quarter or for the quarter ended October 31. That growth got a little bit more challenging towards the end of the quarter as the market is in a pretty tough spot.

So I think those are the 2 pressure points we would point to. Still, as you look through that, we're very bullish and optimistic on the HVAC market overall over the medium to long term. And we would believe that residential at some point, will stabilize on the new resi side.

Got it. That makes sense and pretty consistent with what we're hearing. Let me shift to pricing. It looks like it came in a little better than you thought. Maybe talk about that and then talk about how the commodities are trending and if you expect supplier price increases as we head into the new year.

Yes. Overall, in the quarter, inflation was about 3%. So to your point, it stepped up from about 2% in the previous quarter to 3% this quarter. Finished goods was up a little bit more than it was in the prior quarter. I'd still consider that kind of at the high end of that low single-digit range. And commodities were down in the low single-digit range still as a basket. If you look at commodities, 3 main baskets within that group. PVC, which is our largest commodity basket is still in deflation, down in the double-digit range, kind of that low double-digit range. Steel is up. I would call that mild inflation. And then we're still seeing strong inflation on copper tube and fitting.

So overall, pretty consistent with what we expected as we round out the first quarter and enter into the end of the calendar year. And if we look at entering the calendar '26, we would expect modest price increases that are in line with traditional behavior on the finished goods side of the world. and those announcements are coming through right now. Hard to say what's going to happen with all of the different dynamics that are involved in the market right now. But our expectation is that it will be a more normalized pricing environment knowing full well that we had 6 quarters of deflation before we got back to flat and then plus 2 in the previous quarter.

Next question today will be from the line of Dave Manthey with Baird.

Along the lines of the pricing discussion here with price looking like it's going to represent a pretty positive factor year-over-year through the coming calendar year against what appears to be pretty easy deflation affected comps last year. Should we continue to expect incremental margins to run ahead of that sort of targeted 11% to 13% rate given the contribution from positive pricing over the course of the next 4 quarters?

Maybe to step back, Dave. Very pleased with the operating margin improvement that the business has delivered this calendar year. If you go back to calendar '24, we delivered a 9.1% operating margin. We've just given our updated guidance, which is 9.4% to 9.6%. So call that a 9.5% at the midpoint. So we're expecting a very solid progression on operating margins this year of call it, somewhere in that 30 to 50 basis point range. Now I would remind you, we did have a bit of outsized gross margin gain during the middle part of this calendar year. Recall, we had a quarter with 31% and then 31.7% gross margins. And we had flagged that there was some impact of the timing and extent of supplier price increases.

And then we expected that gross margin to normalize. And you've seen that play through now in this last quarter. So we wouldn't expect that kind of outsized gain to repeat next year. So probably actually a little bit of a headwind in the middle part of the calendar year versus the prior year, '26 to '25. We'll set out our guidance for overall operating margins next year. And certainly, that will be dependent on what the market environment is like. Assuming that we have a supportive market, and we have decent growth, we would expect some modest progression on operating margins next year. But again, we'll be back with you in February and give you a more clear view of what we expect at that point.

Makes sense. And second, as it relates to the $2 billion-ish in revenues from major projects that you discussed, it seems like you've been having a lot of success there because of the One Ferguson effort. Could you maybe, I don't know, if you can quantify or bigger than a bread basket, tell us what percentage of those projects do you get more than 1 product and customer group via the One Ferguson effort versus not? Is that something you could share with us?

Yes, Dave, thank you. And certainly, when we talk about large capital projects, we're talking about those projects north of $400 million in overall construction value. And so it's a varied group certainly, data center gets a lot of the attention today, but it's beyond that to pharma, biotechnology, onshoring, reshoring and manufacturing and others. And so the projects do vary. I will say and people ask us quite a bit about what happens after large capital projects aren't the talk of the day. And the answer to that is really a new way of working for Ferguson. And so we are engaged early on in the construction process, early on with general contractors and owners around what specifications look like, how we can make sure that we have supply chains that stand up to timelines.

And so doing that together with the contractors on the job, we are engaging most of our nonresidential customer groups on these projects, whether that be Industrial, Fire & Fabrication, Waterworks, Commercial/Mechanical and they vary, again, depending on the kind of job. But that's the way we intend to work as we move forward, never abandoning the local relationships that we have with our core contractor base, but we're also making sure that we can deliver on tight timelines and make sure that we got the right product set for the job to deliver.

Next question will be from the line of Keith Hughes with Truist.

This is Julian on for Keith. Just in terms of the HVAC, when do you think comps are going to start to ease the preshipment ahead of the standard change from last year?

Yes. I'd say, again, to build on what Bill has already said, the market is in a tough spot right now. We saw it get a bit worse as we went through the quarter and exited October, it's a variety of factors, though. You've got a bit of the A2 transition as you had pull forward. You certainly have equipment price increase playing in now as the majority of the sell-through is in that new equipment standard. And then you've got a pressured consumer that is moving a bit to repair versus replace environment. And then you had some degree of play through on multifamily new construction that has now passed.

And so we're pleased with the overall execution. When does that start to get back to a replace environment? When do we start to see a bit of residential life? That's tough to pinpoint. For us, we're bullish on what that market looks like over time, and we're going to continue to build out convenient locations across the United States, continue to build out our OEM brand representation. We're going to continue to focus on M&A expansion as we capitalize on what we think is a growing trend with that dual trade contractor.

Next question will be from the line of Scott Schneeberger with Oppenheimer.

I want to touch on some SG&A topics. Last fiscal year, you made investments in trainees, HVAC counter expansion, large project teams. Could I get an update on how these investments have been trending, what you're looking for maybe going out over the coming year and impacts of these investments to date?

Yes. Scott, thanks for the question. First off, from a trainee perspective, our trainee program is something that's been really foundational to the success of this company over decades now. And it's an area that we invest in, in good markets and in bad markets. So we continue to add trainees year in, year out to fuel our pipeline of talent. This year, we added roughly 250 to 300 trainees in our classes throughout the year, and we would expect to continue that program and expand that program as we step into calendar '26.

In terms of additional investments, Kevin just talked about our HVAC expansion plans and the build-out of convenient locations. We have now completed roughly 650 counter conversions so that is both taking HVAC counters and adding plumbing products as well as taking plumbing counters and adding HVAC products. And it's not just the products. It's also the expertise and our associates that we train to ensure that we have experts serving experts. We believe that is yielding real fruit. So despite a very challenging HVAC environment, we believe we are outperforming that HVAC market and have done so for the last several quarters. And we will continue, as Kevin said, to fuel that growth to ensure that we expand that HVAC footprint.

And maybe lastly, we're continuing to invest from a technology and a digital standpoint and so we continue to invest in new technology tools, digital tools, principally in the areas of HVAC and for the repair, replace and plumbing contractor, and we're very pleased with the progress that we've made with many of those investments. If you take a step back from an overall SG&A perspective, we've been able to continue to invest in those types of areas to fuel future growth while we've managed the cost base. And we did take some cost actions earlier in this calendar year that we talked about a couple of quarters ago. Those cost actions have played through, we've received the benefits of that.

And so while even though we're operating and still a bit of a challenging top line market environment, we're delivering good quality SG&A leverage, while we're continuing to invest in the business for the future. So we feel good about where the cost base sits as we exit calendar '25 and enter calendar '26.

And maybe to just build on what Bill was saying, certainly, the training aspect is a long-term investment in the business and making sure that we have a pipeline of talented associates to grow this. business over time. He spoke about the HVAC business, so won't be repetitive there. But when you look at what investments we've made in Waterworks diversification and making sure that we have a broad book of business from residential to public works, to water wastewater treatment plant, to geosynthetics and soil stabilization that is serving us well. And certainly, we're pleased with a plus 14% growth rate. We're pleased with the large capital project space.

We talked about a multi-customer group approach and engaging early on in the project, but we're also investing in value-added services like fabrication, valve actuation and automation and virtual design. And so that's serving us well, obviously, with a plus 21% in the Commercial/Mechanical business. We're pleased. And then lastly, when you talk about Ferguson Home and bringing together what is a best-in-class digital platform with a showroom experience and a consultative approach and a builder outside sales force that's driving growth with the connected consumer that builder, designer and remodeler.

And so we think all of those investments are proving to be successful as we move through it is a challenging environment.

Great. And just a follow-up. You spoke a little bit earlier, you were asked about supplier pricing going into next year. I'm just curious how -- from a high level, how are you thinking about managing inventory as you enter 2026?

Yes. We think our inventories are in a good spot right now. Teams are doing a really nice job and have done so managing through a unique environment with price increases coming through the system this year. So I wouldn't expect significant changes to the inventory profile as we exit calendar '25 and enter calendar '26. We think we have the right levels of inventory to take care of our customers and to support continued market outperformance.

Our final question will come from the line of Nigel Coe with Wolfe Research.

So you gave a bit of color on the calendar fourth quarter. I missed any gross margin commentary. I was just wondering if there's any sense on how that's been trending Q to date?

Yes. I would think of it, Nigel, in a pretty similar range to the quarter that we just reported. And as we had talked about coming out of the summer months that we had expected to get back more into that normalized range of somewhere between 30% and 31%. So I think you can expect it in that range as we exit the calendar year.

Great. And then a lot of helpful commentary on the larger project side. In terms of -- I know this would probably been quite a range, but any sense on what's the one sort of opportunity would be on a typical large project? And again, I know there's no typical large project, but any sense on what the kind of content might be for Ferguson?

Yes. Well caveat it will vary significantly depending on the type of project. But -- and as Kevin talked about -- when we talk about large capital projects, we're talking about those projects that have construction value north of $400 million. As a general ballpark, you take that construction value at somewhere between 2% and 4% of the construction value would generally make up our product set and our customer group set. But again, that will vary pretty significantly. And that certainly doesn't include in the likes of the data center, that wouldn't include the cost of the servers and chips and those types of interior pieces of equipment to run the data center. It's more just that construction value.

This concludes today's Q&A session. I'll now hand over to Kevin Murphy for closing remarks.

Thank you, operator. And let's end the call in the way that we began with a strong thank you to our associates for their hard work and diligence in what is clearly a challenging market. As you heard today, we're pleased with the quarter. 5% revenue growth, expansion of growth in operating margin, 16% EPS growth, operating profit growth of 14%, continued investment in the business and a strong balance sheet. We're pleased with the execution of the teams and the continued investment in key growth areas that are yielding solid results as we [indiscernible] here today.

We'll continue to focus on driving construction productivity for the water and air specialized professional. We're going to leverage scale with the best local relationships. We're going to continue investing in value-added services and digital tools. So thank you very much for your time today. Have a happy holidays, and we'll talk to you soon. Thank you.

That concludes Ferguson's results for the quarter ended October 31, 2025, conference call. I'd like to thank you for your participation. You may now disconnect your lines.

Good morning, everyone, and welcome to Ferguson's Fourth Quarter 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 web page. 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. Although 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 reflects certain non-GAAP adjustments. Please refer to our earnings presentation and announcement on our website for additional information regarding those non-GAAP measures, including reconciliations to the 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.

Thank you, Brian, and welcome to Ferguson's Fourth Quarter Results Conference Call. On today's call, we'll cover highlights of our fourth quarter and full year performance and our market performance for fiscal year '25, including additional details on our customer groups and growth focus areas. Then we'll turn the call over to Bill to review financials, the change in our fiscal year and our new calendar year financial outlook before I wrap up with a few final comments. We'll have time to take your questions at the end.

In the fourth quarter, once again, our expert associates drove market outperformance and strong growth as they continue to serve our customers in a challenging market environment. Sales of $8.5 billion increased 6.9% over prior year, driven by organic growth of 5.8% and acquisition growth of 1.1%.

Gross margin of 31.7% increased 70 basis points over the prior year. We remain disciplined on cost and generated $972 million of operating profit, which grew 13.4% over last year. Diluted earnings per share increased 16.8% over prior year to $3.48. We continue to execute our capital priorities, deploying $483 million this quarter. Our investments in key growth areas, HVAC expansion, Waterworks diversification, large capital projects in Ferguson Home yielded solid results.

We also announced 4 acquisitions in the quarter and 1 subsequent to the quarter, which focused primarily on HVAC and Waterworks diversification. We'll provide more details on these growth areas and the recent acquisitions later on the call.

We're pleased to return $354 million to shareholders through share repurchases and dividends our balance sheet remains strong with net debt-to-EBITDA of 1.1x. While we continue to operate in an uncertain environment, we remain confident in our markets over the medium term, leveraging multiyear tailwinds in both residential and nonresidential markets as we invest to support the complex project needs of the water and air specialized professional.

Turning to our performance by U.S. end market in the fourth quarter. Net sales increased 7.1%, driven by our strong growth in nonresidential markets. The residential end market, which makes up about half our U.S. revenue has remained subdued due to weakened new construction starts and permit activity as well as soft demand in repair, maintenance and improvement. Residential revenue was flat in the quarter.

Nonresidential end markets, representing the other half of U.S. revenue showed continued resilience with increased activity on large capital projects. We continue to grow share with nonresidential revenue growth of approximately 15%. We delivered 17% and 13% growth across commercial and civil infrastructure end markets, respectively, while Industrial grew 5%.

Our intentional balanced end market exposure and focus on key growth initiatives continue to position us well both in the current environment and into the future. Moving to our U.S. performance by customer group for the quarter. HVAC revenue was slightly down due to softer market conditions impacted by the industry's transition to new efficiency standards and weak new residential construction activity.

Despite these conditions, we were pleased with market outperformance during the quarter, particularly given the strong prior year comparable. Residential trade plumbing revenues decreased 2%. The business continues to face headwinds in new construction and ongoing PVC price deflation, while repair, maintenance and improvement is performing better.

As we previously shared, we've merged our residential building and remodel and our residential digital commerce customer groups into a unified brand called Ferguson Home. This customer group accounts for approximately 19% of U.S. sales and focuses on the higher-end project market, which delivered Ferguson Home revenue growth of 3% in the fourth quarter.

Both Waterworks and commercial mechanical continued to drive strong activity on large capital projects. Commercial mechanical revenue grew 21%, and Waterworks revenues increased 15%, both on top of prior year growth comparables. Our industrial, Fire and Fabrication and Facilities Supply customer groups delivered a combined net sales growth of 5%. Our multi-customer group approach uniquely positions us to solve complex project requirements and drive market outperformance.

Turning to our full year performance. Our teams delivered solid results while faced with challenging markets and periods of deflation. Revenue of $30.8 billion was 3.8% ahead of last year. The actions we took to streamline our business and manage costs more diligently resulted in operating profit of $2.84 billion up 0.6%, representing a 9.2% operating margin for the year.

Diluted earnings per share came in at $9.94, a 2.6% increase over last year. Cash generation was strong with $1.9 billion of operating cash flow, which allowed us to continue investing in our growth areas and executing our capital allocation priorities. We returned $1.4 billion to shareholders via dividends and share repurchases during the year while also welcoming associates from 9 acquisitions, continuing our strategy of consolidating our fragmented markets. And we continue to deliver strong overall returns on capital of approximately 29.4% for the year. Despite the challenging environment, we outperformed our markets, delivered solid volume growth and drove profit expansion in fiscal '25.

Next, our performance against the broader end markets for the year. Our residential end markets declined approximately 3%, a combination of weak new construction and softer RMI markets. We outperformed with organic revenue up 1%. Nonresidential markets were approximately flat as large capital project activity offset the weaker traditional [indiscernible] like warehouse and office space.

As we discussed in the past, we believe our scale, our size and our multi-customer group approach uniquely position us to provide value on large capital projects. We delivered 6% organic growth in the year, outperforming our typical 300 to 400 basis point market outperformance. And our balanced end market exposure continues to serve us well, and we've continued to take share across both end markets.

Now let me highlight our 4 key growth areas that continue to show ongoing returns from our multiyear investments. Our HVAC revenue increased 8% for the year, driven primarily by organic growth and approximately 1% from acquisitions. By leveraging the synergy between our residential trade plumbing and HVAC customer groups, we continue to outperform the market. Dual trade counter conversions, geographic expansion of our HVAC network and strategic acquisitions make up the multipronged approach of our HVAC everywhere strategy. We've completed over 600 counter conversions, nearing our goal of 650, which we expect to achieve in early 2026.

Our dual trade counters are uniquely positioned to serve approximately 65,000 dual trade contractors, which continue to make up a growing share of HVAC and plumbing markets. Our recent acquisitions of manufactured [indiscernible] Supply Company out of Atlanta in the fourth quarter and more supply out of Chicago, which was subsequent to year-end, further strengthen our HVAC strategy by expanding our footprint and continuing to support this dual trade professional. For Waterworks, our revenue grew 10% in fiscal year '25, driven by our diversification efforts as we expanded our capabilities to deliver a more integrated solution and address the nation's aging infrastructure.

We've expanded our role as a strategic partner by collaborating with engineers and construction professionals during initial project stages and broadened our product offerings to include process equipment solutions. Specifically, our recent acquisitions of [ Templeton ] and [ Richie ] Environmental strengthened our expertise in water and wastewater treatment plant design. This adds to the existing breadth of solutions we already provide for water, wastewater and green storm water management as well as erosion control, treatment plant construction and metering technology.

Our unique approach to large capital projects and the rise in number of projects helped drive 7% total nonresidential growth for the year. We're pleased to be a trusted partner in managing these complex projects that require expertise, scale, operational agility and value-added solutions. By bringing together the capabilities of underground Waterworks infrastructure commercial and industrial PVF and fire protection create a compelling solution, particularly for data centers, large manufacturing operations, life science and health care facilities.

Onshoring and restoring initiatives aimed at growing domestic production are further driving activity of large capital projects. We believe our early alignment with owners, engineers and general contractors combined with our deep contractor relationships, our scale and our ability to offer a suite of value-added solutions will continue to position us for success with these projects.

Ferguson Home began its rollout in February and is a key milestone in delivering a seamless customer experience across all touch points, including online and in person. It represents another compelling example of the value our multi-customer group approach brings to the market. In addition to enhancing the experience for residential customers, Ferguson Home is supported by a network of dedicated outside sales and showroom consultants who serve our specialized professional customers.

These associates bring deep product expertise and personalized service to builders, designers and other trade professionals, helping meet their unique project needs with precision and care. Bringing together residential building and remodel and residential digital commerce reinforces Ferguson's role as a trusted partner for the professional.

We're pleased with the ongoing success of these growth areas and we'll continue investing in them to leverage the unique advantages we can bring to the market that drive outperformance. I'll now pass to Bill, who will discuss the financial results in more detail.

Thank you, Kevin, and good morning, everyone. Let me start by covering our fourth quarter financial results in a bit more detail. Net sales of $8.5 billion were 6.9% ahead of last year. Organic revenue increased 5.8%, with an additional 1.1% coming from acquisitions.

During the quarter, we saw a return to mild inflation with pricing contributing approximately 2%. We saw improvement in finished goods pricing, while commodity-related categories were down low single digits. Gross margin of 31.7% increased 70 basis points over last year, driven by our associates' strong execution and the timing and extent of supplier price increases. We tightly managed operating expenses, benefiting from the streamlining actions we took earlier in the year while we continue to invest in core capabilities for future growth.

As a result, operating profit of $972 million was up 13.4% on the prior year, delivering an 11.4% operating margin with 60 basis points of expansion over prior year. Diluted earnings per share of $3.48 was 16.8% above last year, driven by operating profit growth and the impact of share repurchases. And our balance sheet remains strong at 1.1x net debt to EBITDA.

Moving to our segment results. Net sales in the U.S. grew 7.1% with an organic increase of 6.1% and a 1% contribution from acquisitions. Operating profit of $962 million increased $118 million over the prior year, delivering an operating margin of 11.9%. In Canada, net sales were 4.8% above last year, with organic growth of 0.3% and a 4.9% contribution from acquisitions partially offset by a 0.4% adverse impact from foreign exchange rates.

Residential activity has continued to be softer than nonresidential, where the market has remained more resilient. Operating profit of $24 million in the quarter was $2 million above the prior year.

Turning to our full year results. Our associates delivered growth amid a challenging market backdrop. Net sales were 3.8% above last year, with organic growth of 3.2% and an acquisition contribution of 1%, partially offset by a 0.4% adverse impact of 1 fewer sales day. Pricing for the year was slightly down as a result of deflation in certain commodity-related categories, particularly early in the year. Gross margin of 30.7% was up 20 basis points. Operating profit of $2.8 billion grew 0.6% over the prior year, delivering a 9.2% operating margin and diluted earnings per share of $9.94 was up 2.6% on the prior year.

Next, our cash flow performance. EBITDA of approximately $3.1 billion was up $44 million on the prior year. Working capital investments of approximately $300 million and interest and tax of approximately $800 million were generally in line with the prior year. As a result, operating cash flow was $1.9 billion, up $35 million on the prior year. We invested $305 million in CapEx and generated $51 million in proceeds from asset sales, resulting in free cash flow of $1.654 billion, an increase of $132 million over the prior year.

Turning to capital allocation. As previously mentioned, we invested approximately $300 million in working capital and another $300 million in CapEx to drive further above-market organic growth. Our Board declared a $0.83 per share quarterly dividend. This is consistent with the third 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.

As Kevin mentioned, we completed 4 acquisitions during the fourth quarter, including HPS Specialties, a manufacturer's representative of HVAC plumbing and hydronic supplies serving commercial mechanical and industrial engineering professionals in the Northeast and Mid-Atlantic regions. [ Ritchie ] Environmental Solutions, a process equipment manufacturer's representative serving the water and wastewater treatment market in Virginia, [ manufacturer duct and supply company ] and HVAC supplies and parts distributor covering the Atlanta and Southeast markets and [ Water Resources, Inc. ] an exclusive distributor of Neptune Technology Group products and water meters in the Greater Chicago metro area.

In total, we completed 9 acquisitions in the fiscal year. Subsequent to year-end, we purchased more supply, an HVAC distributor based in Chicago that serves HVAC and dual trade professionals. As we look forward, our acquisition 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 returned $948 million to shareholders via share repurchases this year compared to $634 million in the equivalent prior year period. This year, we have reduced our share count by approximately 5 million and still have approximately 1 billion outstanding under the current share repurchase program.

Now let me address the change of fiscal year-end from July 31 to December 31. This move shifts year-end activities from our seasonally busiest time of the year to our slowest, allowing our associates to remain focused on our customers during their peak season. A 5-month transition period will span from August 1 through December 31, 2025. During this time, we will release earnings on December 9, covering the 3-month period of August 1 through October 31.

We plan to announce our 5-month transition period results in late February, and our new fiscal year will begin on January 1, 2026. As a result of this change, we are providing guidance for the 2025 calendar year. But before I move to the guidance, we have presented our first half performance on a calendar year basis for background. For the 6 months ended June 30, sales of $15.6 billion grew 5% over the prior year. Operating profit of $1.5 billion increased 8%, resulting in an operating margin of 9.6% and an improvement of 30 basis points from 9.3% in the prior year. Further historical financial information for calendar quarters with relevant reconciliations can be founded in the appendix at the end of the slide deck.

Now turning to our guidance for the 2025 calendar year where we have provided the relevant comparative results from calendar 2024. We expect mid-single-digit revenue growth in calendar 2025, and we expect an operating margin range of 9.2% to 9.6%, an improvement of between 10 and 50 basis points over the prior year.

Interest expense is expected to be between $180 million to $200 million. Our effective tax rate is expected to be approximately 26% and we estimate CapEx will be between $300 million to $350 million. Despite the market uncertainty, we are leveraging the strength of our supply chain tailored value-added solutions, innovative digital tools and the expertise of our associates, enabling us to capitalize on multiyear tailwinds and drive outperformance. Thank you, and I'll now pass you back to Kevin.

Thank you, Bill. And let me again thank our expert associates who delivered strong results to finish this challenging year by continuing to take care of our customers and execute our strategy. Our ability to offer a scaled, multicustomer group approach on a project is unique and important to our key growth areas, including HVAC expansion, Waterworks diversification, large capital projects and Ferguson Home.

Our performance continues to deliver results from these multiyear investments as we help meet our customers' needs. While we continue to operate in an uncertain environment, we believe our markets remain attractive over the medium term, and we continue to invest in our expert associates and our value-added capabilities to drive growth. We're committed to supporting the project needs of our water and air specialized professional customers by delivering scale locally and providing exceptional customer service.

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 Instructions]. And the first question goes to [ Matthew Bouley ] of Barclays.

So kind of a broad question on growth and the end market outlook here. Obviously, a lot of crosscurrents recently around new residential, HVAC, et cetera, all of that. Meanwhile, you showed this strong nonresidential result and inflation is improving. So really I'm asking, looking ahead, kind of thinking about this mid-single-digit growth for the total calendar year.

Just trying to put all these trends together kind of it would -- I guess, it would be helpful on kind of price and volume quarter-to-date to sort of help us out there. But then really, what are your assumptions going forward on these kind of changing end markets here over these next few months?

Thank you for the question. Maybe I'll take a little bit about the market and then let Bill fill in with a bit of color.

If I take a step back, if we look at when we entered fiscal year '25, we came into the year believing that our markets would be down low single digits. We thought that the residential markets would be down low to mid-single digits, and we thought nonres would be roughly flat. And so suffice it to say, we're pretty pleased with Q4 plus 7% and a year-to-date of plus 3.8%. And probably even more pleased that our key growth areas that we wanted to focus on drove that growth, whether it's HVAC expansion, Ferguson Home Waterworks diversification.

And then what we were doing with what we believe is a strong value proposition on large capital projects in nonresidential, and that really did drive the growth. If we then take a shift into where we are currently and how we view, call it, the back half of calendar year '25 or this stub period of 5 months, we can that growth could be a bit softer in half 2 of calendar year.

And we really recognize that new residential construction weakness continues. We've seen continuation of softer RMI or repair remodel markets. And then candidly, when we look at some of our larger growth areas like HVAC, we have an affordability issue with a pressured consumer and a movement to more repair versus replace.

Now the nonresidential markets really continue as traditional nonresidential activity isn't going to step up or we don't see that step up happening. But the strength of large capital projects and that being our growth area does play out. But we do recognize that, that residential new construction in RMI market can be a bit more challenged.

Yes. And Matt, maybe just to build on that. If you look at the first half calendar results that we just walked through and that we put in the slide deck, revenue was up about 5% for the first half. I would tell you, July was a strong month, a solid month in line largely with what we saw in Q4.

But as we stepped into August, we did see that growth come down a touch. August sales per day were up about 5%. And I say sales per day because we had 1 fewer sales day which we'll pick back up in September, but it did step down to 5%. And to Kevin's point, as we look into the back half of the year, and we've provided a full year guide of mid-single digits, we would expect the overall growth rate to maybe be a touch softer in the second half, the market dynamics that Kevin outlined are certainly the driving force of that.

And then if you just look at our comparables, our volume comparables do step up as we go through Q1 and into our old fiscal Q2, which would be November, December. So we feel good about the guide that we've provided. We think we will continue to have good growth in the second half, but probably a touch softer than half 1.

Okay. Yes. That's all super helpful, exactly what I was looking for, given these, again, clearly dynamic end markets here. So that leads to the second question. Kevin, you really touched on it, the large capital projects. It just seems like all your efforts are coming to fruition here.

So around this kind of multi-customer group approach, you mentioned Waterworks, commercial PBF, fire protection, et cetera, with these large projects. Can you go into maybe just some more specifics, number one, just around how do you go to market with these customers, with the different types of contractors around actually leveraging your multi-customer group approach and kind of how that actually all comes together? And then just more specifically, anything around kind of data center and what the pipeline going forward of these large capital projects looks like for you guys?

Thank you, Matt. And we really did build the organization to be better together than a part and a multi-customer group approach, and it plays quite well in large capital construction projects, which, as we've discussed, are really driving the day in nonresidential activity. We go to market being best-in-class for the individual contractor or trade professional for that particular customer group, whether it be commercial mechanical, waterwork.

fire protection, industrial pipe valve and fitting, making sure that we're the best provider on that job for the contractor. But we then elevate and go towards the source of funds, if you will, the engineer, the architect owner to try and make sure that we are engaged from a supply chain perspective, from a design perspective to make sure that, that project can get completed on time and on budget. And so that work up funnel, closer to the source of funds, allows us to be a best solution for the individual trade on the job, and it served us well.

And as we look at Waterworks being up 15% in the quarter, commercial mechanical being up 21% and our industrial business and our fire protection business being up 5%, it's paving the way for future growth. You asked a bit about what we see in the end markets. And just like the rest of the world, we're seeing that activity from a data center construction perspective, continuing to accelerate. We haven't seen pauses or cancellations and that activity is stepping up and stepping up in a variety of geographies across the nation. Those are great projects for us. They're great projects for us on piping systems as well as valve and automation, fabrication and virtual design, which are some of the other value-added services that we're bringing to the market that help us to earn that business from the local contractor as well as the trust of the owner and the engineer.

The next question goes to Phil Ng of Jefferies.

Congratulations on a really impressive quarter in a tough environment. Kevin, I just want to drill down a little bit more on the nonres piece. It sounds like the data center side of things remain really strong, but we appreciate comps to get a little tougher in the coming quarters. But just give us a little perspective, what are you seeing on the momentum side of things? You talked about bidding activity still being strong. Just give us a little more color on where you're seeing the strength, the bidding activity within non-res? And how far are you bidding out in just the backlogs in general?

Yes. First, just to start on price and margin. We were pleased to see price inflect positive. As we've talked about over the last couple of quarters, -- we came into this year expecting our suppliers and the industry to return to, call it, low single-digit inflation and passing through annualized price increases. We saw that step up a bit with initial announcements of tariffs. We then saw that pull back a bit when the reciprocal was pulled back and pause. So we've seen a lot of noise in the system. But overall, movements in the different product categories. Clearly, copper tube and copper fittings are in, I would call it, healthy levels of inflation. We have seen with -- as steel tariffs came through, we have seen steel pipe, carbon steel and stainless steel move back towards flattish, maybe up a little bit. And then there's still pressure on PVC, both on the plumbing side of the world and Waterworks, which is still in deflation.

So as a basket, those are still in modest deflation, and it's difficult to predict how that plays forward. But if I take a step back from that, again, our best view is that probably some modest level of inflation as we round out the calendar year.

On gross margin, we were really pleased with the 31.7% gross margin delivery in the quarter. we did see the benefits of the actions that we took earlier in the fiscal year. We talked a lot as we came out of Q2 and into Q3 that we had focused our sales teams. We had made some pricing tweaks and we had made some adjustments to ensure that we are properly charging for the value that we provide in the market every day. And we saw that start to play through as we exited Q3 -- exited Q2 into Q3 and then certainly through Q4. But there's no doubt we saw some temporary benefit in the quarter based on the timing and the extent of supplier price increases. So when we take a step back, we've been, I think, pretty consistent with our view that this -- the overall underlying ongoing normalized gross margin of this business is somewhere in that 30% to 31% range.

And we would expect that we would settle back down into that range as we move into the future. And in fact, if you look at -- we talked about August revenue, but if you look at August gross margins, we started to see that normalization play through. So we're very confident with the underlying gross margins of the business, and the teams are doing a great job executing every day for our customers.

The next question goes to John Lovallo of UBS.

And you may have answered this partly with Phil's question, but sort of back of the envelope at the midpoint, it seems like the implied calendar year second half operating margin is expected at about 9.2-ish percent versus 9.6% in the first half, and that comes despite what looks to be about a 1% improvement in sales half-over-half. So what's sort of driving that expected margin decline? Is it the timing of the pricing that you just mentioned? Or is there other factors as well?

Yes, it's a great question, John. And I think we'll -- as we get more used to calendar quarters, we'll get more used to the seasonality of the business. But I would point mostly to that seasonality. If you go back to last calendar year in the second half, we delivered about an 8.8% operating margin. And your back of the cocktail mapping math is spot on in terms of the guide for the full year at 9.2% to 9.6% implies that the second half will be somewhere in the upper 8% to, call it, mid 9% range. in the back half of the year. So we are expecting continued improvement year-over-year. And I'd point a bit more towards seasonality that the second half of the calendar year will be typically a touch lighter given November and December with the holidays from a seasonality perspective.

Okay. That's helpful. And then last quarter, I think you guys talked about $100 million of expected annual savings from restructuring actions and there wasn't expecting much impact in the fourth quarter -- fiscal year fourth quarter. So how should we sort of think about the cadence of those savings as we move forward here?

Yes. We are pleased with the execution of those streamlining actions and the cost savings are playing through in the underlying cost base of the business. But maybe more importantly, the speed and agility of decision-making has improved in the field. And that was really the primary reason for some of the organizational design changes that we made, moving those decisions closer to the customer.

We did quote about $100 million of annualized cost benefits. We did see that play through in the fourth quarter. And I would expect that, call it, roughly $25 million year-over-year to play through over the next 3 quarters. If you look at the fourth quarter and just take a step back, our cost as a percentage of sales were roughly 20.3%, which is roughly flat to last year.

So we got good underlying cost reductions from the streamlining actions. We had a bit of cost increase driven by sales volume and a touch of cost inflation. And then certainly, every one of our associates has a variable component of their pay that's linked to performance. And given the strong financial performance in the second half, our associates were appropriately awarded for that performance. So we very much believe that the cost base is positioned well as we look to the second half and would expect a bit of operating leverage, assuming that the sales environment plays out like we expect.

The next question goes to David Manthey of Baird.

Kevin, Bill. First question, Bill, you gave some nice detail on commodities pricing. I was wondering if you could just give us an idea by segment sort of high end versus low end of the pricing spectrum by segment, just so we understand how that sort of lays across your reporting segments? And then you mentioned the kind of the reversion of the gross margin to that 30%, 31%.

And I guess that kind of implies 100 basis points maybe of incremental benefit in the period because of some of the inventory gains that would be temporary. Is that in the range? And then is there anything left over as we look to the October quarter, should we expect some residual benefit as well there? Or are we pretty much worked through now?

Yes. I'll start with the commodities and pricing. And if I go back to my comments earlier, having seen a bit more inflation in copper and then steel returning towards flat to up a little bit. You should expect that our nonres business has a bit more inflation in it right now than our residential business.

It does vary by customer group, and we generally don't provide a lot of detail by customer group. But I would consider that Waterworks is slightly down on price, largely driven by PVC and with the majority of our customer groups, slightly up from an overall inflation standpoint and maybe again, a touch more inflation on the commercial mechanical side of the world, given copper and steel.

In terms of the gross margin, we do expect again to land somewhere in that normalized range of 30% to 31%. If I look at last year in the second half of the calendar year, we were right about the mid-30% range, 30.4%, I believe. So we would expect there to be some relative performance to last year. But we would expect, again, the temporary benefit that we've seen over the last quarter, 1.5 quarters, driven by the timing and extent of supplier price increases to start to wane as we go through the back half.

Okay. And then specifically on HVAC, you didn't mention that as it relates to pricing. But maybe if you could help us understand the benefit from pricing and acquisitions in segment that added to the number we saw. And any comments you have regarding the refrigerant transition? Like do you have any R40 systems left at the end of July? And then multifamily is a hot topic lately. Any other commentary around HVAC would be helpful.

Yes. HVAC overall, on equipment, we are going through the transition, as you noted, from 410A to ATL. And so clearly, ATL systems have a higher price point, but we are clearly working through that transition as we went through the back half of the calendar year. So there was a bit of inflation on overall equipment, but we're also seeing a lot of repair replace and so not nearly as much inflation on parts and supplies. I would consider HVAC. You should think about it as very low single-digit overall inflation in the overall business, again, a bit more on equipment, a bit less on supplies and parts.

And when you look at the overall market and what our business was, Dave, we were pleased with being, call it, down 1 in Q4 on a plus 9% prior year comparator. And if you look at the business overall, we continue to get after counter conversions to address the dual trade contractor and be the source of supply for them. We've done about 600 of them. We'll continue with, call it, 50-plus more as we go into early 2026.

You've seen us expand our geographic footprint and we will continue to open up new stores that are dedicated to serving that dual trade HVAC and plumbing contractor, and then you've seen it play out in the M&A side. There's clearly a move towards more repair versus replace in today's world. We have sold through the majority of our 410A, and that was in place as we went through the fourth quarter, which is why, as Bill indicated, low single digit is probably the inflation number you should be thinking about.

But that will clearly move as repair moves a bit more to repair moves to replace and as we start to see that H2L play into the system as the system of choice. But you've also got the balance between ductless and unitary systems buying through as well. Generally speaking, we're very pleased with the strategy. We're very pleased with the execution, and we'll continue to have that as a major source of growth for us on the residential side of our house as we go forward.

The next question goes to [ Sam Reid ] of Wells Fargo.

So you called out a little earlier some softness in resi remodel. And I just wanted to unpack that a bit more because you've got a really strong presence in remodel with higher income consumers. And that's historically insulated you from some of the category slowness. So are you starting to see demand crack from that higher income consumer? And then can you just give us a sense as to where remodel backlog sit today versus, say, 1 to 2 quarters ago?

In the remodel market is continued pressure. We're seeing continued pressure there. We've said that the higher end of the market will continue to perform better than the rest. We're pleased with a plus 3% growth rate in Ferguson Home, especially as we brought those 2 channels together. And if you look at our showroom business in particular, it is predominantly that remodel space today, and it's primarily that remodel project work for the higher end of the market. We've seen traffic continue to be healthy and so we'll look at that continuing to be the driver.

On the lower end of the market, we saw that pressure play through in residential trade and along with new construction pressure and PVC price deflation, that puts that business under a little bit more pressure in a down 2% position. But generally speaking, we're pleased with that higher end of the market with Ferguson Home.

That helps. And then just switching gears and drilling down a little bit more on Waterworks, I mean really strong results here, especially in the context of some peer REITs, can you just talk to more specifically what you're hearing from your large homebuilder customers? It sounds like there was a pullback that accelerated in August in demand for, let's call it, new residential subdivision projects.

But I just want to confirm that. And then can you just give us a rough sense as to where your resi Waterworks business sits from a geographic standpoint? Do you under-indexed, for instance, in markets like, say, Florida? Just love some additional context there.

Yes. I'll start with we don't under index in Florida. But if I take a step back and look at our business, clearly, we're really pleased with a plus 15% in the quarter, we're really pleased with a plus 20% on a 2-year stack inside that Waterworks business. It's a testament to what the group has built over time. and that diverse business mix that they have, residential, commercial, public works, municipal spend, water wastewater treatment plant, storm water management, geosynthetics and even moving closer to that engineering environment, as I referenced earlier, with pumps, valve packages, process equipment and controls. And so that continues to play well for us.

Perhaps the biggest impact that we've seen though is in that large capital project, nonresidential space as the water piece of that business is quite impactful. And then the multi-customer group approach on non-resis playing out. If I then shift to your residential portion of the question, we have a pretty broad-based business residentially across the U.S. We're very -- we have strength in the Southeast. We have strength in the South, but it's pretty broad-based.

If you look at what we're seeing, I'll take aside conversations with the large builder. We've clearly seen pressure on that new residential construction space as has the rest of the country. If you look at our bidding activity, we have not seen a significant fall off in residential bidding activity. But that said, we have no idea how that work will be released. Will it be released at all? And what does that look like in terms of sections or phases and how that plays out. But we do anticipate that in the near term, we'll see some continued pressure on that new residential waterworks insulation space.

The next question goes to Ryan Merkel of William Blair.

I wanted to follow up on the new residential construction market. So you mentioned that trends have weakened. Can you just give us a little bit more color? We've heard the Sunbelt in particular, has weakened recently and then lot development feels like that slowed quite a bit. So curious if you're seeing that. And then for the guide, are you assuming that it gets worse from sort of August to December for new resi?

Yes. Maybe, Ryan, I'll start with the guide. Again, we don't see anything falling off of a cliff. From where we sit today, we think that new resi will be a bit weaker as we move through the back half of the calendar year. And therefore, we think that our growth overall for the second half of the calendar year could be a bit below the first half. First half was clearly at 5%. So I'd read that to be sub-5%. But again, don't see that falling off dramatically. To Kevin's point, we're still seeing decent activity out there. And if I go back to kind of how we saw the residential markets playing through our fiscal year, we've been pretty consistent and kind of seen a bit more softening as we've come through, but expected those markets to be down low to mid-single digits. We now expect them to be down maybe a touch more in the second half of the year.

But Ryan, it's precisely why we are pleased with the balanced business mix that we have inside the organization and the growth areas that we've got with HVAC, Waterworks diversification, large capital and then that higher end of the remodel market of residential with Ferguson Home.

Got it. Okay. And then my second question, just back to the non-resi market, up 15%, so a really good number. But when I look at the details, industrial is up 5%. So could you comment on why that particular market might be a little bit slower than the others? You mentioned the onshoring theme, which is very real. Just curious if you expect the industrial market to stay softer than commercial and civil.

I'll give you a bit of color and then Bill can fill in. If you look at that plus 5% number. That's inclusive of our fire protection business, our industrial business and our facility supply business together. If I think about the fire business and the industrial business, they still were working through periods of commodity deflation.

And as Bill indicated, we haven't seen a massive ramp-up in steel pipe pricing across those markets. But we were very pleased with what those businesses have done in market share and especially in our industrial business and what they've done to work together with our water business and our commercial mechanical business on the valve packages and the valve actuation and automation pieces of large capital projects. We're pleased with that, and I wouldn't read too much into the plus 5% against the plus 21% of the commercial.

The next question goes to Mike Dahl of RBC Capital Markets.

Just to go back on HVAC for a minute. I wanted to dive a little bit deeper. Obviously, a lot of concern from some of the OEMs and invoicing some much sharper declines in the near term. So a similar question as you just answered on Waterworks. But when you think about what the guide embeds for the balance of the year, the OEMs seem to suggest that the near term is going to be quite pressured on HVAC volumes, but then potentially even better price mix than what you've articulated. Just give us a little more detail on how your guide embeds kind of that HVAC growth in the second half.

Mike, thank you for the question. If you look at the HVAC business, as we looked at the fourth quarter, as Bill indicated, we would see low single-digit price embedded. We clearly believe that, that will increase on the equipment side as 410A moves over to A2L. We also had that mix move from replace to repair, which had muted what that overall inflationary impact is. But if I also look at a down one number in the quarter, it really was the tale of, call it, 2 geographies, if you will, inside of our company. Very strong performance on the East Coast, the Mid-Atlantic up through the Northeast and the Midwest with some challenging weather environments and sell-through inside the Western United States and it really was bifurcated.

We know there's going to be pressure on new res construction. We know there's going to be pressure on affordability with the consumer as we go through the next several months. But we are pleased with what has been happening from a volume perspective, especially as we've got a lot to go after in the market and continue to expand. As I indicated, we're going to expand our counters. We're going to expand our locations, and we're going to continue to focus on that from an M&A perspective. So the market is going to be a bit challenging, but we're bullish on what that looks like over the medium term.

And Mike, that's effectively embedded in the guide, again, being -- not to be too repetitive, but the second half being down a bit from the first half would play through. And our expectation is that, that's driven by that new resi weakness and a bit of HVAC softness. And we've seen that in August. HVAC was down a touch in August, still low single digits. So again, I don't see that falling off a cliff from our revenue perspective. But we're coming up against some pretty tough comparables in HVAC, start to lap some double-digit comparables. So probably some softness in the near term on HVAC, all embedded in the guide with a touch softer revenue in the second half.

Okay. That's helpful. And then shifting gears just on the balance sheet and capital allocation. You've done a good job deploying a decent amount of capital. That said, your balance sheet is still being pretty conservatively managed around the low end of your target range. There's obviously a lot of differing views on where we are in the cycle right now. But from your standpoint, what would it take for you to deploy capital even more aggressively towards the midpoint or upper end of your leverage range? And is that more likely as you sit here today and look at your M&A pipeline? Is that more likely to come through increased focus on M&A or a step-up in buybacks?

Yes. I'll start with -- we try to be very consistent, and I think we've delivered consistency when it comes to capital allocation. We like having a strong balance sheet. It gives us that optionality to scale up and to go after growth investments. And so we intend to operate towards the low end of that leverage range of 1 to 2x net debt to EBITDA on an ongoing basis. In terms of scaling up, you would see us scale up where there were really good organic growth opportunities or maybe more so in the near term, where there would be more M&A opportunities.

There's nothing large in the pipeline right now, but we have that balance sheet flexibility to take advantage of those opportunities should they occur.

We'll take our last question from Anthony Pettinari of Citi.

Just following up on the last question on M&A. I think you indicated there's nothing large in the pipeline, but I wonder if you could talk more -- maybe more generally about what the pipeline looks like as we get closer to the end of the year. I guess, specifically, valuations, seller expectations, whether you're seeing any increased competition for assets in water and air, maybe from new parties? Just is there anything that's kind of changed about the landscape in the model?

Yes, Anthony, no real significant changes in the landscape. I mean it's been a pretty competitive environment in water and air for a number of quarters and years, quite honestly. But valuations still probably towards the upper end of our typical, call it, 7 to 7 to 10 enterprise value to EBITDA range. We have a good actionable pipeline. As I mentioned, yet nothing really large in that pipeline. But quite frankly, that's what the industry is. The industry lends itself to 10,000-plus small- to medium-sized competitors that are out there. And our focus has been on consolidating those markets over time. So our strategy is very consistent. Our pipeline is pretty healthy. And we think we have a good opportunity to continue to consolidate the industry.

Okay. That's very helpful. And then just following up on maybe some of the earlier questions on margin. You said you expect some level of inflation over the next few quarters. Does that anticipate any specific tariff-related price increases? Or are we pretty much kind of level set on tariffs essentially sort of being in prices right now?

Yes, Anthony, as Bill said earlier, we expected earlier in this year to get annual price increases, that's happened. We thought we would see some additional increases based on a variety of factors, that's happened. And it was offset by continued commodity deflation principally in PVC. And so at 2% inflation in the quarter, that's modest overall inflation.

We expect that to continue. But it's a pretty uncertain environment. As Bill indicated earlier, manufacturers reacted quickly to the reciprocals, then pulled back in large part and been slower to address those changes and taking a more wait-and-see approach. The good part for us as a business is that the cost of product pales in comparison to the cost of labor, and we wake up every day, making sure that we're driving construction productivity for that [ water and ] [indiscernible] specialized pro.

And so yes, we expect some degree of modest inflation, but we're going to compete every day in the market and make sure that we leverage scale, that we're sourcing product from 37,000 different suppliers and then we're getting the right price for the right project, and getting it at the right time to get that project done. So it will be modest inflation as we go forward, but still a lot of uncertainty in the marketplace right now.

I'll now pass back to Kevin Murphy, CEO, for closing remarks.

Thank you, operator, and thank you all for the time today. We appreciate it more than you know. And again, I just want to reiterate, thanks to our associates. We're incredibly pleased and proud of the execution of our strategy in both the quarter and the full year.

And although near-term markets remain challenging, particularly on the residential side of our balanced business mix, we're confident in our ability to outperform over time. So please reach out with any further questions, and we look forward to seeing you very soon. Thank you again.

That concludes the Ferguson Fourth Quarter and Year-end Results Conference Call. I'd like to thank you for your participation. You may now disconnect your lines.