Ferguson plcFERGNYSE
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Operator: 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.
Brian Lantz: 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.
Kevin Murphy: 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 and 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 welcomed 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 continued 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 remained challenged. New residential housing starts and permit activity were down on the prior year, and repair, maintenance and improvement work also remained 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 pressured 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, Facilities Supply and Industrial Customer groups all saw growth during the year as we take share and leverage the benefits of our unique multi-customer 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.
Bill Brundage: 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, Facilities 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.
Kevin Murphy: 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. 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 trades 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-starved 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, it's about a nationwide builder sales force, best-in-class showroom experience and a strong connected digital experience to serve builders, remodelers, designers, architects and homeowners. These customers value our personalized consultative approach to design and product selection, 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.
Bill Brundage: 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%. And 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 1x 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 and 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 spend 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 -- our over market growth and 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.
Kevin Murphy: 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 that 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: [Operator Instructions] Our first question comes from Phil Ng from Jefferies.
Philip Ng: 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.
Kevin Murphy: 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.
Bill Brundage: 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 multi-customer group approach.
Philip Ng: 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 there's mix dynamics perhaps we're not really appreciating?
Bill Brundage: 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.
Operator: Our next question comes from Sam Reid from Wells Fargo.
Richard Reid: Brian, congrats on the forthcoming retirement. Just wanted to stick on the...
Bill Brundage: Thank you.
Richard Reid: 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.
Bill Brundage: 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.
Kevin Murphy: 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.
Richard Reid: 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?
Bill Brundage: 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.
Operator: Our next question is from Ryan Merkel from William Blair.
Ryan Merkel: 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.
Bill Brundage: 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.
Ryan Merkel: 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.
Bill Brundage: 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.
Kevin Murphy: 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.
Operator: Our next question is from Keith Hughes from Truist.
Keith Hughes: I guess 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?
Kevin Murphy: 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.
Keith Hughes: 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?
Kevin Murphy: 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 large capital projects, and we are performing well with that multi-customer 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 works side of our Waterworks business will be a strong tailwind for us as we go forward and set up well for the company.
Keith Hughes: And when you say diversified Waterworks, are you talking do you mean both fresh and wastewater or what exactly is entailed in that?
Kevin Murphy: 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.
Keith Hughes: 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?
Kevin Murphy: 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.
Operator: Our next question comes from Matthew Bouley from Barclays.
Matthew Bouley: 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 nonres 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?
Bill Brundage: 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 Waterworks space. So we feel pretty optimistic about another strong year out of our nonres customer groups.
Matthew Bouley: 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?
Bill Brundage: 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.
Kevin Murphy: 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.
Operator: Our next question comes from Mike Dahl from RBC Capital Markets.
Michael Dahl: 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.
Bill Brundage: 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.
Michael Dahl: 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?
Bill Brundage: 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.
Kevin Murphy: 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.
Operator: We will now take our final question from David Manthey from Baird.
David Manthey: 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?
Bill Brundage: 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.
David Manthey: 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?
Bill Brundage: 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.
David Manthey: Okay. Small changes around the edges, but a good strategic update. Thank you very much for doing this.
Operator: Thank you. I will now hand the call back to Kevin Murphy, CEO, for closing remarks.
Kevin Murphy: 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.
Operator: This concludes today's call. Thank you for joining us. You may now disconnect your lines.