Thank you. For our Q&A, if you would like to ask a question, please press star followed by one on your telephone keypad now. If you change your minds, please press star followed by two. When preparing to ask a question, please ensure your device is unmuted locally. First question comes from Matthew Bouley with Barclays. Your line is open. Please go ahead.

Morning, everyone. Thank you for taking the questions. Maybe start off on the large capital projects. Can see your commercial mechanical up 15% on that 20% prior year comp. Maybe just kind of dive into a little bit on what you're seeing with the open order volumes and backlog. I know last quarter you had signaled the, I guess, difficulty of going up against these comps going forward, but obviously you still saw that growth here. What are some of the specifics, and maybe just kind of unpack how the large capital projects business is included in your guide for the year. Thank you.

Yeah, thanks for the question, Matt. This is Bill. Maybe I'll start with that one. You're right. We were incredibly pleased with the growth rates, not only in commercial mechanical, but also in our industrial business, with commercial up 15% on 20%, and industrial up 18% on a 6% comparable. We are seeing strength driven across that large capital project space. As we've talked about before, if we take a step back, large capital projects represent somewhere in the mid-to high-single-digit percentage of our total overall Ferguson revenue, and we continue to trend up within that range. The backlogs, the open orders continue to build, both if you look at commercial mechanical and industrial and even waterworks, which had a bit of a lumpier quarter this quarter. You see those backlogs building and those backlogs continuing to be above what those growth rates were for the quarter. We continue to think and believe that the large capital project space will build into the future and will be a tailwind over the next couple of years. As we talked about, the gestation period of these projects is long. It's difficult to predict the timing of revenue in any one quarter, but the overall trend is still quite positive.

Matt, as Bill indicated, we're pleased with that growth rate across industrial, commercial, mechanical, and even waterworks. As you look at the overall bidding activity and activity levels, they continue to be strong, not just in the data center activity, which is obviously the strongest, but across power generation and water infrastructure. As we look at that, one of the key drivers of our performance has been early engagement in the process to make sure that we can take care of the supply chain needs in order to meet the timelines of these projects. As we look forward, labor availability as well as overall supply chain pressure further enhances that need to be early in that process to make sure that we can deliver on those project timelines.

Got it. Okay, perfect. Thank you for that color. Then, secondly, inflation, I guess the deceleration to low-single-digit from mid-single-digits. I guess if you can kind of pick apart what's going on there. I'm also curious, as we've seen kind of inflation pushing through the year into July and August, just how inflation is maybe tracking quarter-to-date and sort of everything going on there. Thank you.

Matt, as we set out at the beginning of the year, we thought that inflation overall was going to be somewhere in the low-single-digit range for the year. We thought that coming into the year, we were going to be above that, then as we started to lap the comparables from last year, after that Liberation Day time period, that inflation would start to compress. When we talked to you at the end of the first quarter, we were in the midst of some additional price increase announcements, particularly with geopolitical events that were going on at that time, we talked about certain price increase announcements that were coming through, resin price leading to, or oil price increase leading to resin leading to PVC price increases. We had flagged that we thought that inflation could be a touch above our original expectation, but still in that low-single-digit range for the year. We've got another quarter under our belt, on the branded side of products, finished goods side of the products category, we've seen exactly what we expected. We have started to roll over those prior year price increases, we've seen that inflation compress, that inflation on finished goods is now down to the low-single-digit range. On the commodity side, much like we flagged, some of those PVC price increases have struggled a bit to stick in the marketplace, and PVC is still very much in deflation. If you look in the quarter, PVC is still down about in the double-digit range for the quarter. As a basket, commodities were about flat in the quarter. You put that together, it did tick down from mid-single-digits to, I'd say, the upper portion of low-single-digits in the quarter. Difficult to predict where that goes from here, but again, I'd take a step back and say somewhere in that low-single-digit range for the full calendar year is probably our best view at this point.

All right. Thanks, Bill. Good luck, guys.

Thanks, Matt.

We now turn to John Lovallo with UBS. Your line is open. Please go ahead.

Good morning, guys. Thanks for taking my questions as well. The first one is, you raised the revenue outlook and increased the midpoint of the operating margin outlook for the full-year. Is this primarily a function of the stronger year-to-date results and maybe the completed M&A? How would you characterize your expectations for organic growth in the second half relative to the second quarter?

Yeah. Thanks, John. To your point, if we take a step back again, we are really not seeing a change in the market and our market expectations for the full-year. We came into the year expecting our markets would be broadly flat with more pressure on residential being down low-to mid-single-digits, and non-resi being up low-to mid-single-digits. Our view of the market really hasn't changed much. What has changed, to your point, is our performance for the first half has been a bit better than our expectations. Then as we look towards the second half, we are expecting the second half to have a touch higher growth rate. That's supported by not only our first half performance, our second quarter performance, but also the open orders that I talked about before during Matt's question. When we take a step back, we think revenue will be a bit stronger in the second half. We did raise, to your point, the low-end of our operating margin guide, and we feel that we'll deliver a pretty solid second half.

Okay, that's helpful. The second question, just on the gross margin seasonality. Typically, HVAC and Waterworks mix would drive some pressure on gross margin during the summer months, and I think last quarter, you guys expected a step down below 31% in the summer. Second quarter gross margin was pretty flat quarter-over-quarter. What drove the strength there, and how are you thinking about the gross margin dynamic as we move through the third quarter?

Yeah. John, as we've said in the past, we believe our gross margin currently sits somewhere in that 30%-31% range right now. We were very pleased to deliver at the top-end of that range this quarter. There was good execution by the teams. Executing on our pricing tools and technology, delivering on our product strategy, certainly driving strong own brand growth. All of that led to solid gross margins in the quarter. To your point, we did see a touch of expected seasonal underlying gross margin compression. There are always some puts and takes in the quarter, and I'd just go back to the fact that we were quite pleased with the overall execution. As we look out to the second half, certainly we are about to comp against our strongest gross margin from last year. In Q3 last year, we delivered a 31.3% gross margin. Again, we'd expect to be a bit down on that, but feel that our gross margins sit in a good spot, and we're well positioned again to deliver the operating margin guidance that we've laid out.

Great. Thank you, guys.

Thanks, John.

We now turn to Phil Ng with Jefferies. Your line is open. Please go ahead.

Hey, guys. Congrats on a strong quarter. Bill, I guess a question for you to kick things off. You mentioned perhaps the back half top-line growth to be a little stronger than the first half. What's driving that? Is that mostly in the non-res side? Is that resi? Resi did inflect. On the non-res side of things, I guess question for you, Kevin, it just feels like the end-markets are broadening out a bit outside of data centers. Any color in terms of some of the end-markets that really stand out where you're seeing a big inflection?

Yeah. Phil, we'd expect the non-res growth strength to continue. Again, going back to what we're seeing not only in commercial mechanical, but what we're also seeing in Waterworks and as we look at our open orders. We would expect the second half to deliver solid growth from non-res. As we set out at the beginning of the year, while resi is in a challenged spot, we did expect our resi performance to improve slightly as we moved throughout the year. We are seeing that. That's principally driven on the HVAC side of the world. If you look at our 11% growth in the quarter, on top of a prior year growth rate of 1%, we were quite pleased with that return to very strong growth in HVAC. As we look towards the second half, we would expect strong growth there, which will offset some of that very weak market conditions that we still see across the residential business.

To build on that, Phil, we're really pleased with the execution of the teams on the HVAC side of the business. We've talked in the past about that multi-pronged growth strategy that we have. We believe we're a great solution for the growing dual trade contractor that does plumbing and HVAC. We believe that we are a very good solution for the consolidator that is either expanding the trade professional network in a regional or nationwide network. We're focused on investing organically and expanding locations and counters, building equipment relationships, investing in talented associates. As you've seen, we've also complemented that with good M&A across the network, not the least of which is Dealers Supply and Carrier Great Lakes, as we talked about in the prepared remarks. We're pleased with that HVAC outperformance at 11% growth. If you go to your question around the non-residential side of the business, clearly it still is large capital construction projects that are driving the day. We haven't seen a tremendous amount of improvement in that traditional core non-res activity like office, warehouse, to a lesser extent, around education and even hospitality. We do see good, broad-based, large capital construction project growth. Data center construction activity continues to be the strength of that sector, but we're also seeing good growth, which are great projects for us, in areas like power generation, in areas like chemical, food and beverage, general manufacturing, mining and minerals, obviously water and wastewater treatment. That broadening is driving results, and it really does play well to the business model that we've built over time, and to having a good, strong multi-customer group approach from water through industrial pipe, valve, and fitting, commercial, mechanical, and fire suppression.

That's great color, Kevin. Pretty dynamic backdrop still on the inflation front. Lot of movement and noise around tariffs. Anything noteworthy callout that we should be mindful of? As we look out to pricing in the back half, part of the question I have is, we've seen some of your vendors, they've gotten tariff refunds back, and they've talked about reinvesting in the business. I don't know what that means for Ferguson. Is that a good thing from a pricing margin standpoint or something just to be mindful of? Thank you.

Phil, first off, from a pricing perspective, if you go back to my previous comments, we would expect pricing to be in that low-single-digit range for the year. I'd probably expect somewhere in that range for the back half. Again, admittedly, it's very difficult to call what's going to happen on those commodity prices, which again, just for a reminder, commodities are about 15% of our overall revenue. In terms of tariffs, as you know, the vast majority of our purchases, over 90% of what we buy, are from branded manufacturers. We have not received any tariff refunds from those branded suppliers, and are not expected to. As we look forward, we're the importer of record for a small portion of our own brand products. We have sought tariff refunds where appropriate there, we've received what I would call a modest amount, but nothing material as we look out at the full-year. As you recall, again, that 90%+ of our purchases that are from branded suppliers, there were very little, if any, that would've highlighted tariff as the reason for that increase. They were more broad-based, including a variety of different operational inputs.

Great color, guys. Really appreciate it.

Thanks, Phil.

We now turn to Sam Reid with Wells Fargo. Your line is open. Please go ahead.

Thanks so much, guys. Wanted to quickly touch on the inventory line item really quickly. I believe inventory days were up a little bit year-over-year. Just talk through any puts and takes on inventory. Was there any pre-buy activity or other more one-timers we should be mindful of?

Yes, Sam. We have invested in inventory, as we said in our opening comments, particularly in a couple of areas. If you look at our HVAC business to support our dual trade growth initiatives, to support our organic growth initiatives, as well as in large capital projects inventory. From an HVAC standpoint, we did lean into inventory a bit seasonally. I would expect that to come off and to normalize as we go through the back half of the season. I'd expect that inventory, it's a bit elevated right now, but I would expect that to normalize by the time we get to the end of the year. Our large capital projects inventory, that will continue to build. As you've seen in the revenue results, that is generating strong revenue growth. We have a great backlog, as we talked about earlier. Overall, when you take a step back, while there's a bit more inventory on large capital projects, the overall returns on capital are quite good there. I would expect us to be a little bit heavier on that large capital project inventory. Every day we're continuing to work that and monitor that.

Quite helpful. Maybe switching gears here, fantastic performance on the HVAC line. You've talked about your desk rollouts as being one of the sources of success here. Clearly, that's true. Are there opportunities to continue to roll out more HVAC desks and lean even deeper into your dual-pronged plumbing HVAC trade strategy? Would just love maybe some higher-level commentary here.

Yeah. I would think about our business as being focused on that dual trade plumbing and HVAC trade professional overall. I would consider our company to be very pure in our purpose in terms of how we address the unique needs of that plumbing contractor as well as that HVAC contractor. As we go forward, we'll look at the location landscape and make sure that we're building out convenient locations that are close to customers' jobs for both will call as well as delivery, and make sure that all of those locations that we're dotting the landscape with are effectively addressing the dual trade and the plumbing and HVAC contractor specifically. Although we've completed that 650 counter rollout, all of our locations as we go forward in that blended traditional plumbing and HVAC space will continue to grow to service that contractor base.

Really appreciate it. Thank you so much.

Thank you.

We now turn to Ryan Merkel with William Blair. Your line is open. Please go ahead.

Hey, everyone. Thanks for the question. I want to start on organic growth and the shape of the quarter. It looks like it might have exited a little stronger than it started. How should we think about the back half 3Q organic growth? Can it be similar to what you just put up in the second quarter? Any color there?

Yeah. Ryan, to your point, we saw a bit of growth strengthening during the quarter. When we look at our exit rate, if we look at the month of July, for example, that supports our expectation of a slightly stronger second half. July was a touch better than Q2. I would expect that revenue in the back half is stronger than the first half. I would expect that the Q3 growth rate is a bit stronger than the Q2 growth rate.

Got it. All right. Second topic is on FloWorks. You mentioned it's going to drive revenue synergies across a couple groups. Just expand on that a little bit, if you would.

Yeah. If you look at the FloWorks acquisition, I'll start off with saying it is a fantastic associate base and a very strong cultural fit to our organization. As we look to bring these companies together, the capabilities that FloWorks has is a great complement to the work that we're doing in the marketplace around pipe flange and fittings, as well as valve and valve automation. Additionally, the relationships that they bring in some key areas like power generation, chip manufacturing. As we look at the traditional multi-customer group approach that we take on large capital construction projects with waterworks, commercial, mechanical, and industrial, this further strengthens that in some really key areas and the build-out of North American infrastructure around data centers, chip production, power generation, water, and also pharma and biotechnology. You layer on a very strong MRO capability set that's going to help us with an ever-growing install base. As we look forward, we think we can capitalize on some good revenue synergies as these two companies complement each other.

That's great. Appreciate that. All right, I'll pass it on.

We now turn to David Manthey with Baird. Your line is open. Please go ahead.

Hi, good morning. This is Inara on for Dave this morning. Nice job on the quarter, given the still choppy backdrop. First, with the prior cost program now lapsed, how should we think about OpEx growth in the back half of 2026? Does the margin progression embedded in the guide mainly reflect normal seasonality, or should price costs and the productivity actions you've discussed support better operating leverage?

Yeah. Inara, thanks for the question. To your point, we did take a fair number of cost actions as we restructured the field operations of our business last year in that April timeframe. We had talked about the fact that our growth rate on SG&A would step up from Q1 to Q2 just a bit, and that's what we saw. We saw the SG&A step up to just over 4% growth rate in the second quarter. We did, however, still deliver 10 basis points of operating leverage in the quarter. As we think about the second half, I would expect similar growth rates. It might step up just a touch more as we continue to invest in the business. For example, we just brought in a trainee class of 200 associates in the summer, which is typical for us. We'll bring in some more trainees in September to fuel that pipeline of future talent, and to fuel our future growth. We're still expecting to generate overall operating leverage for the year. When I take a large step back to the beginning of the year, we thought this year was going to be one where we might have a touch of gross margin compression for the year after some outsized gross margin last year, offset by some SG&A leverage. We think the cost base is in a good spot. We're able to continue to invest for future growth, and we're expecting a bit of leverage as we move to the back half.

Great. Just as a quick follow-up. Yeah, contribution margin was around 7% in 2Q versus that sort of targeted 11%-14% rate. Should that improve in the back half? Is that more gross margin through mix and price cost or from that SG&A leverage you mentioned?

Yeah, that was really driven in the second quarter by the slight compression in gross margins, which again, gross margin was a bit outsized in both Q2 and Q3 last year. We expected a bit of operating margin compression in Q2 because of that gross margin year-over-year comparable. I think that could be similar as we go through Q3. Again, for the year, we would expect to deliver somewhere in that 9.5%-9.8% operating margin range and have a very strong year after last year, where operating margins stepped up from a 9.1%-9.6%. Another strong year, and good solid performance is our view for this year.

Great. Appreciate the color. I will pass it back.

We now turn to Keith Hughes with Truist. Your line is open. Please go ahead.

Thank you. Have you done any work in your residential business on HVAC and plumbing contractors? How many of your customer base actually do both trades and legitimate quantities?

As we've said, we think that roughly two-thirds of the market is, or just about two-thirds of the market is engaged in that dual trade area. When we look at the work going forward, we think that that grows and doesn't shrink in terms of what that percentage is.

When you say two-thirds, are you saying two-thirds do at least some of both, or they're really dual trade where they do a significant amount of work in both or can you measure it quite that close?

I'm sorry. It's about one-third of our overall customer base is doing dual trade today, and we expect that to grow over time. We don't get down to the granularity of each individual customer who will do HVAC and plumbing work. There are certain dual trade customers that are engaged with specific groups inside their company that we would tag as dual trade. That crossover does happen even at the local one to two truck plumber/HVAC technician work, which we don't capture as accurately as those that have some scale.

Okay. One other question on FloWorks. A lot of the products they sell, I think about you already selling, is it the customer relationships? Is that the real advantage of the acquisition?

It's really the customer relationships as well as the capabilities. When you look at their valve and automation capabilities, their rotating equipment and pump capabilities, overall flow control valve repair. They accelerate our ability to compete in this landscape quite quickly as we look at the build-out of, like I said, chemical, downstream oil and gas, general manufacturing, mining, and etc. We're pleased with both the capability set as well as the relationships, especially in areas like power generation.

Okay, great. Thank you.

Ladies and gentlemen, that's all the time we have for questions. I'll now hand back to Kevin Murphy for any final remarks.

Yeah, again, thank you for your time today and maybe end as we began, with a thank you to our associate base. They continue to have solid execution that drove results in our second quarter. Our business model and the ongoing investments that we're making in some key growth areas really continue to drive our performance. Not just on the non-residential space with large capital projects, but also in the residential side of the world with our HVAC and our expansion of that HVAC business across our plumbing footprint. The scale deployed locally business model that we represent together with a multi-customer group approach continues to pay dividends. We thank you for your time, and we look forward to talking to you very soon.

That concludes today's call. I'd like to thank you all for your participation. You may now disconnect your lines.