Exchange: NYSE | Sector: Industrials | Industry: Industrial Distribution
Q2 2025
Published: Mar 11, 2025
Earnings Highlights
Revenue of $6.87B up 3% year-over-year
EPS of $1.38 decreased by 12.7% from previous year
Gross margin of 29.7%
Net income of 276.00M
""HVAC market is large, fragmented and highly attractive. We're taking a three-pronged approach to growth with a combination of dual trade counter product conversions, geographic expansion of our HVAC network and strategic acquisitions."" - Kevin Murphy
Ferguson plc (FERG) QQ2 2025 Results: Revenue Growth in HVAC and Waterworks Amid Commodity Deflation; Margin Recovery Path and Growth Initiatives
Executive Summary
Ferguson’s QQ2 2025 results reflect continued top-line momentum in a deflationary environment, with net sales of $6.872 billion, up 3% year over year. The quarter featured meaningful growth in HVAC (+17% in the U.S.) and Waterworks (+10%), underscored by the company’s multi-pronged growth strategy: accelerate dual-trade counter conversions, expand HVAC geography, and pursue selective acquisitions. While volume-driven revenue growth persisted for a fourth consecutive quarter, gross margin contracted to 29.7% primarily due to persistent commodity deflation and mix effects from HVAC and Waterworks growth. Adjusted operating profit declined by $71 million to $449 million, yielding an adjusted operating margin of 6.5%. The company continues to outgrow its markets, with capital deployment totaling about $500 million in the quarter and an increased share-repurchase authorization. Management projects a low single-digit sales increase for fiscal 2025 and targets an adjusted operating margin of 8.3%–8.8% for the year, supported by ongoing cost-management actions and efficiency initiatives. The guidance remains cautious on margin progression given deflation persistence, tariff-related pricing dynamics, and timing of acquisitions, but Ferguson expects improvement in the second half as price realization and mix stabilizes, with fundamental demand drivers in residential and non-residential end-markets still intact.
Key Performance Indicators
Revenue
6.87B
QoQ: -11.58% | YoY:2.98%
Gross Profit
2.04B
29.71% margin
QoQ: -12.74% | YoY:0.64%
Operating Income
410.00M
QoQ: -38.35% | YoY:-14.05%
Net Income
276.00M
QoQ: -41.28% | YoY:-14.29%
EPS
1.38
QoQ: -41.03% | YoY:-12.66%
Revenue Trend
Margin Analysis
Key Insights
Net sales: $6.872 billion in QQ2 2025, up 3% YoY; organic growth 2.1% plus 1.2% from acquisitions; total volume up 5% offset by ~2% commodity-led deflation.
Gross margin: 29.7% in QQ2 2025, down 70 bps YoY due to weak end-market demand, persistent deflation, and sales-mix impact from HVAC/Waterworks growth.
Operating profit: Adjusted operating profit $449 million, down $71 million YoY; adjusted operating margin 6.5% (vs. prior year).
Net income and earnings: Net income $276 million; net income margin 4.02%; adjusted diluted EPS $1.52, down 12.6% YoY; GAAP EPS $1.38.
Cash flow: Net cash provided by operating activities $340 million in the quarter; six-month operating cash flow $685 million; capex $158 million in H1; free cash flow $545 million in H1; cash and equivalents $764 million; net debt to adjusted EBITDA 1.2x.
Financial Highlights
Revenue and profitability:
- Net sales: $6.872 billion in QQ2 2025, up 3% YoY; organic growth 2.1% plus 1.2% from acquisitions; total volume up 5% offset by ~2% commodity-led deflation.
- Gross margin: 29.7% in QQ2 2025, down 70 bps YoY due to weak end-market demand, persistent deflation, and sales-mix impact from HVAC/Waterworks growth.
- Operating profit: Adjusted operating profit $449 million, down $71 million YoY; adjusted operating margin 6.5% (vs. prior year).
- Net income and earnings: Net income $276 million; net income margin 4.02%; adjusted diluted EPS $1.52, down 12.6% YoY; GAAP EPS $1.38.
- Cash flow: Net cash provided by operating activities $340 million in the quarter; six-month operating cash flow $685 million; capex $158 million in H1; free cash flow $545 million in H1; cash and equivalents $764 million; net debt to adjusted EBITDA 1.2x.
- Balance sheet and liquidity: Total assets $16.53B; total liabilities $11.041B; total stockholders’ equity $5.489B; long-term debt $5.205B; total debt $6.021B; cash and cash equivalents $764M; working capital investment +$200M in H1.
- Shareholder returns: Dividends declared $0.83 per share; share repurchases in H1 approximate $508M; total outstanding share repurchase program ~ $1.4B remaining.
- Guidance (FY2025): Low single-digit total sales growth; adjusted OPM 8.3%–8.8%; interest expense $180–$200M; adjusted tax rate ~26%; Capex guidance $325–$375M; continued deleveraging or strategic actions to improve efficiency and simplify structure.
Income Statement
Metric
Value
YoY Change
QoQ Change
Revenue
6.87B
2.98%
-11.58%
Gross Profit
2.04B
0.64%
-12.74%
Operating Income
410.00M
-14.05%
-38.35%
Net Income
276.00M
-14.29%
-41.28%
EPS
1.38
-12.66%
-41.03%
Key Financial Ratios
currentRatio
1.82
grossProfitMargin
29.7%
operatingProfitMargin
5.97%
netProfitMargin
4.02%
returnOnAssets
1.67%
returnOnEquity
5.03%
debtEquityRatio
1.1
operatingCashFlowPerShare
$1.7
freeCashFlowPerShare
$1.3
dividendPayoutRatio
60%
priceToBookRatio
6.59
priceEarningsRatio
32.75
Net Income vs. Revenue
Expense Breakdown
Management Commentary
Key management themes from the earnings call:
- Strategy and growth execution: Ferguson reaffirmed a three-pronged growth approach in HVAC: dual-trade counter conversions, geographic expansion, and acquisitions; Waterworks leadership emphasizes end-to-end project involvement and digital/training enhancements (e.g., AI-assisted maintenance and leak detection). The company targets over 650 dual-trade counters by fiscal 2026 and highlights Ferguson Home as a unifying omnichannel platform.
- Market dynamics and pricing: Management highlighted persistent commodity-led deflation (~2% in the quarter) and a fifth consecutive quarter of volume growth; they expect deflation to persist into the second half, with tariff-driven price increases providing some stabilization. Pricing realization across finished goods remains incremental as tariff impacts and converter dynamics play out.
- Margin and productivity: The margin decline was driven by deflation and mix, with two-thirds of margin impact from market/deflation and one-third from mix. Management emphasized ongoing cost-management actions and productivity improvements to offset deflation and fund growth investments.
- Capital allocation and acquisitions: Ferguson deployed roughly $500M in capital in QQ2 and authorized an additional $1B repurchase program, indicating strong cash generation and confidence in long-term cash flow. Acquisitions include Templeton/TEMSCO in Q2 and intent to acquire Pipe & Supply post-quarter-end."
"HVAC market is large, fragmented and highly attractive. We're taking a three-pronged approach to growth with a combination of dual trade counter product conversions, geographic expansion of our HVAC network and strategic acquisitions."
— Kevin Murphy
"Two thirds of the impact on gross margins was from the market and deflation with the remaining close to one third being driven by mix."
— Bill Brundage
Forward Guidance
Outlook and assessment:
- Revenue trajectory: Management maintains a low single-digit total sales growth assumption for FY2025, acknowledging ongoing commodity deflation and a slightly negative pricing dynamic in the year. Second-half gross margins are expected to improve modestly as deflation persists, but Tariff-driven price actions and end-market volatility may still weigh on upside.
- Margin profile: FY2025 adjusted OPM guidance of 8.3%–8.8% implies margin recovery from QQ2 levels (6.5% adjusted). The path depends on better price realization, a stabilized mix, and continued productivity gains. The company plans to accelerate non-customer facing cost reductions and simplify management layers to support profitability.
- Capital allocation: Capex guidance of $325–$375M suggests ongoing investment in growth platforms (HVAC counters, Waterworks capabilities) while maintaining capital discipline. Acquisitions are expected to contribute just under 1% to sales; timing of post-quarter deals (e.g., Pipe & Supply) will influence the pace of growth and margin mix.
- Key factors for monitoring: progression of deflation in PVC/steel input costs, tariff impacts and pass-through pricing, open-order activity in large capital projects (data centers, municipal), execution and integration risk of acquisitions, and the effectiveness of efficiency initiatives in the third and fourth quarters. Investors should watch the pace of HVAC counter-conversions, Waterworks project wins, and the incremental margin lift from productivity programs.
Competitive Position
Company
Gross Margin
Operating Margin
Return on Equity
P/E Ratio
FERG Focus
29.71%
5.97%
5.03%
32.75%
DXPE
30.90%
8.50%
4.34%
10.53%
AIT
30.60%
11.30%
5.20%
24.66%
GIC
35.20%
7.59%
7.51%
14.48%
MSM
41.00%
6.98%
2.90%
28.51%
Gross Profit Margin
Operating Profit Margin
Return on Equity
P/E Ratio Comparison
Investment Outlook
Overall, Ferguson enters the second half of fiscal 2025 with a clearer path to margin recovery through price realization, productivity gains, and strategic growth investments. The QQ2 2025 results demonstrate disciplined execution of HVAC and Waterworks growth initiatives that should support above-market revenue growth while the company navigates deflationary headwinds. The key driver of upside remains the stabilization of commodity prices and successful execution of Ferguson Home and counter-conversion programs which enhance cross-sell, service levels, and project-management capabilities. Investors should monitor: (1) the trajectory of deflation and tariff impacts on gross margin, (2) the pace and integration progress of Templeton/TEMSCO and Pipe & Supply acquisitions, (3) the effectiveness of cost-reduction initiatives in Q3/Q4, and (4) the rate of large capital project bookings in Waterworks and non-residential end-markets. If management delivers on the 8.3%–8.8% adjusted OPM target and maintains low single-digit revenue growth, Ferguson could begin to show margin expansion in the next year alongside sustainable top-line growth and healthy cash generation.
Key Investment Factors
Growth Potential
High growth potential anchored in: (1) HVAC market expansion through counter conversions, broader geographic coverage, and the Durastar private-label line; (2) Waterworks leadership across water/wastewater, meters, and municipal infrastructure with AI-enabled maintenance and leak-detection solutions; (3) sustained M&A activity to fill capacity and capability gaps, plus larger project collaborations (e.g., data centers, civil infrastructure). The company targets over 650 dual-trade counters by FY2026 and has initiated Ferguson Home to enhance omnichannel project-based workflows.
Profitability Risk
Key risks include persistent commodity-based deflation depressing gross margins, tariff and trade-policy volatility affecting input costs and pricing, regulatory or funding shifts affecting infrastructure projects (e.g., federal funding dynamics for water/wastewater), and execution risk from integration of acquisitions and scale-up of new counter-conversion programs. Cyclicality of construction markets and a potential slowdown in large capital projects could dampen revenue growth and margin recovery in the near term.
Financial Position
Balanced liquidity with net debt to EBITDA at ~1.2x, ample liquidity from cash (~$764M) and robust operating cash flow ($685M in H1). The company continues to generate substantial free cash flow ($545M H1) and has a sizable buyback program ($1.4B remaining). The leverage target range (1x–2x) provides flexibility to fund growth while maintaining financial discipline. The company’s price-to-book and other liquidity metrics suggest a conservative balance between growth investment and capital returns.
SWOT Analysis
Strengths
Scale and breadth: 1,679 branches and 11 distribution centers; diversified revenue base across HVAC, Waterworks, Commercial Mechanical, Industrial, and Fire & Fabrication.
Largest and diversified Waterworks business with exposure to municipal, public works, and metering technology; end-market breadth reduces dependence on any single segment.
Strategic growth platforms: HVAC counter-conversions with >500 completed and targeting >650 in FY2026; Ferguson Home omnichannel platform; BIM/content for large capital projects.
Strong cash generation and shareholder-friendly capital allocation with ~1.4B remaining on buyback program; disciplined capex.
Robust balance sheet with net debt to EBITDA of ~1.2x and solid operating cash flow.
Weaknesses
Margin compression driven by persistent commodity deflation and mix shift toward HVAC/Waterworks; QQ2 gross margin down 70 bps YoY.
Near-term margin volatility due to deflation, tariffs, and timing of price realization on finished goods.
Cyclical exposure to construction and large-scale infrastructure cycles; sensitivity to end-market softness.
Opportunities
Infrastructure-led demand in the U.S. and Canada; growth in water/wastewater treatment, metering technology, and large capital projects (data centers, utilities).
Expansion of dual-trade counters and private-label offerings (Durastar) to improve share and price realization.
Further bolt-on acquisitions to expand capabilities and geographic reach; potential upside from Ferguson Home omnichannel adoption.
Tariffs could stabilize input costs and support a more favorable pricing environment if pass-through is achieved.
Threats
Prolonged deflation in commodity inputs (PVC, steel) and price volatility; potential tariff escalations.
Regulatory or funding shifts affecting public infrastructure programs and federal appropriations.
Competitive intensity in industrial distribution and potential erosion of pricing power in a price-competitive market.