[Management View]
Ferguson Enterprises reported a 4.3% increase in net sales to $7.6 billion for Q3 FY2025, driven by 5% organic growth and 1% from acquisitions, despite a 1.7% negative impact from fewer sales days and foreign exchange. The company achieved a 31% gross margin, up 130 basis points sequentially, and a 9.4% operating margin, expanding by 20 basis points. Key growth areas include HVAC and Waterworks, with sales growth of 10% and 12% respectively. Ferguson Home was launched as a unified omnichannel brand to enhance customer experience.

[Outlook]
Ferguson updated its fiscal 2025 guidance, now expecting low- to mid-single-digit revenue growth and an operating margin of 8.5%-9.0%. The company plans to continue investing in key growth areas such as HVAC, Waterworks diversification, and large capital projects. Capital expenditure guidance is set at $300 million–$350 million, with a focus on network and automation investments.

[Financial Performance]
Year-to-date, Ferguson's net sales grew 2.7%, with a 2.2% organic increase and a 1.1% contribution from acquisitions. Gross margin was 30.3%, down 10 basis points, while operating profit decreased by 4.9% compared to the prior year. Diluted earnings per share increased by 7.8% to $2.50 in Q3 FY2025.

[Q&A Highlights]
Question 1: How much of the 5% organic growth in the U.S. is due to internal initiatives versus market improvement, and how sustainable is this growth?
Answer: Kevin Murphy attributed the growth to scale benefits and a multi-customer group approach to large capital projects, particularly in the nonresidential market. The residential side saw focused efforts to expand HVAC capabilities, outperforming the market.

Question 2: Was there any mix impact on the 31% gross margin, and what is the outlook for gross margin in Q4?
Answer: Bill Brundage noted no significant mix impact, with actions taken in Q2 to adjust pricing strategies contributing to the strong Q3 gross margin. Gross margins are expected to remain above 30% in Q4, despite an uncertain environment.

Question 3: Can you provide more color on commercial and industrial bidding activity and its progression?
Answer: Kevin Murphy highlighted strong data center activity and growing open order volumes in commercial mechanical and large capital projects. The margin profile for these projects may be a headwind on gross margin, but operating margins should remain stable.

Question 4: How are you managing the own brand business amid changing tariff dynamics, and what are the plans for distribution centers?
Answer: Kevin Murphy explained that 90% of revenue comes from branded, predominantly domestic suppliers, with a diversified sourcing profile for own brand products. Bill Brundage mentioned ongoing investments in supply chain network optimization, with two new distribution centers opening within 12 months.

[Sentiment Analysis]
Analysts expressed positive sentiment, congratulating Ferguson on strong quarterly performance and effective management of volume and margin growth. Management conveyed confidence in their strategic initiatives and market positioning, despite acknowledging the dynamic and uncertain environment.

[Quarterly Comparison]
| Key Metrics | Q3 FY2025 | Q3 FY2024 | YoY Change |
|------------------------------|-----------|-----------|------------|
| Net Sales | $7.6B | $7.28B | +4.3% |
| Gross Margin | 31.0% | 30.5% | +50 bps |
| Operating Profit | $715M | $674M | +6.1% |
| Operating Margin | 9.4% | 9.2% | +20 bps |
| Diluted Earnings Per Share | $2.50 | $2.32 | +7.8% |

[Risks and Concerns]
Ferguson faces risks from deflation, which exceeded 1% year-to-date, and a 0.3% decline in net sales in Canada due to adverse currency impacts and fewer sales days. The company incurred a $68 million nonrecurring business restructuring charge, primarily related to severance costs, but expects $100 million in annualized cost savings.

[Final Takeaway]
Ferguson Enterprises demonstrated strong performance in Q3 FY2025, with significant growth in HVAC and Waterworks customer groups. The company effectively managed pricing strategies and cost controls, resulting in gross margin improvement and operating profit growth. Despite challenges in the residential market and deflationary pressures, Ferguson remains confident in its strategic initiatives and market positioning, with updated guidance reflecting expected revenue and margin growth. The company's focus on large capital projects and diversification efforts positions it well for future success.