Good morning, everyone. My name is Seb, and I will be your conference operator for today. At this time, I would like to welcome you to Ferguson's third quarter results for the period ended September 30th, 2026. All lines have been placed on mute to prevent any interference with the presentation. At the end of the prepared remarks, there will be a question-and-answer session. To ask a question at that time, please press star and then one on your telephone keypad. To withdraw your question, please press star and then two. Thank you. I would now like to turn the call over to Pete Kennedy, Ferguson's Vice President of Investor Relations and Sustainability. You may begin the call.
Good morning, everyone, and welcome to Ferguson's quarterly earnings conference call and webcast. Hopefully, you have 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 webpage. 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-KT, available on the SEC's website. Also, any forward-looking statements represent the company's expectations only as of today, and we disclaim any obligation to update these statements. In addition, on today's call, we will also discuss certain non-GAAP financial measures.
Therefore, all references to operating profit, operating margin, diluted earnings per share, effective tax rate, and earnings before interest, taxes, depreciation, and amortization reflect certain non-GAAP adjustments. Please refer to our earnings presentation and announcements on our website for additional information regarding those non-GAAP measures, including reconciliations to their most directly comparable GAAP financial measures. With me on the call today are Kevin Murphy, our CEO, and Bill Brundage, our CFO. I will now turn the call over to Kevin.
Thanks, Pete, and good morning, everyone. Today, I will cover our quarterly performance highlights and our results by end market and by customer group. Bill will then review our financials and our updated guidance before I wrap up with a few final comments. We will then have time to take your questions at the end. Driven by the dedication of our expert associates, we delivered strong third quarter results with revenue 9.5% ahead of last year. We are pleased with our continued volume momentum and our operational execution. Gross margin was also strong at 30.9%, and we continued to balance disciplined cost management with investments for future growth. As a result, we delivered operating profit of $962 million, an increase of 9% over prior year, driving diluted earnings per share growth of nearly 8%. We remain focused on executing our capital priorities, deploying $2 billion during the quarter.
We invested $1.7 billion to complete three acquisitions, including the closing of FloWorks on August 31st. We invested $108 million in CapEx to promote further organic growth, and we paid $172 million in quarterly dividends. Our balance sheet remains strong with net debt to adjusted EBITDA at 1.7 times. While our markets remain mixed, our year-to-date performance and the addition of FloWorks enable us to raise our full-year guidance, which Bill will cover in more detail. Turning to our U.S. business, which grew 10.2% in the quarter. Non-residential sales increased by 15% on top of a 13% prior year comparable. Our associates continued to leverage our scale, multi-customer group approach, value-added solutions, and technical capabilities to drive market outperformance. Large capital project activity remained healthy with growth in open order volume and strong bidding activity, while the traditional non-residential market remains soft.
Despite a weak residential market backdrop, we outperformed, growing revenue by 6% in the quarter. We delivered strong HVAC growth, as well as growth in both residential trade plumbing and Ferguson Home, which we will discuss in a moment. Divergent markets across residential and non-residential reinforce the advantage of our balanced business, providing us the ability to capture unique market tailwinds while yielding a resilient business through cycles. Next, I will share the drivers behind our sales performance across our U.S. customer groups. Waterworks revenue grew 5% on top of a 15% prior year comparable. Our diversified exposure across large capital projects, public works, municipal, and water and wastewater treatment helped us offset ongoing weak new residential construction. Commercial mechanical had another outstanding quarter, growing 17% on top of 24% growth in the prior year.
This momentum was driven by our disciplined execution on large capital projects such as data centers, pharma, biotechnology, and general manufacturing. Our scale, product breadth, diversified supply chain, value-added solutions, and deep relationships with project stakeholders continue to drive market outperformance. Industrial grew 55% with 32% organic growth. This exceptional performance was led by our expert industrial team, now including FloWorks, and driven by demand across our balanced industrial portfolio. Life sciences, pharma, metals and mining, food and beverage, chemical processing, and power generation infrastructure that is critical for supporting large capital projects represent the high-growth areas driving our industrial sales growth. We continue to see healthy growth in our order backlog, led by both our commercial mechanical and industrial customer groups. We also delivered solid growth in our facilities supply customer group, where sales increased 6%, with growth in hospitality, multifamily, and senior living facilities.
Fire and fabrication declined 8% on a tough prior year comparable as we continue to execute our product strategy and work through a vendor transition. Within our residential customer groups, Ferguson Home grew 3%. Our business outperformed in a challenging market, with particular strength through our showroom channel, catering to the higher end of the market. Residential trade plumbing also grew by 3%, led by our ability to service the trade repair professional as new construction remains under pressure. HVAC delivered a robust 15% growth for the quarter, driven by solid organic growth combined with contributions from acquisitions. We continue to execute our HVAC growth strategy, driving market outperformance through investments in dual-trade capabilities, greenfield expansion, and acquisitions. The scale, breadth, and capabilities of our specialized customer groups, combined with our expert associates, continue to deliver unique value to the water and air professionals that we serve every day.
With that, I will hand the call over to Bill to take you through our financial performance in more detail.
Thank you, Kevin, and good morning, everyone. As Kevin noted, total sales for the quarter were $9 billion, an increase of 9.5% over the prior year, driven by organic growth of 7% and acquisition growth of 2.7%, partially offset by 0.2% from divestments in Canada. Our expert associates continue to deliver for our customers, which drove another quarter of volume growth. Price inflation edged back up from low single digits in the second quarter to low to mid-single digits in the third quarter, principally due to some modest improvement in commodity pricing. Our gross margin was also strong at 30.9%. This was down 40 basis points over the prior year, which was expected due to the timing and extent of supplier price increases in the prior period. We continue to drive productivity with 40 basis points of operating leverage, while at the same time investing for the future growth.
As a result, operating profit grew 8.9% to $962 million, delivering a 10.7% operating margin, which was flat on the prior year. Diluted earnings per share of $3.43 was 7.9% above last year, principally driven by operating profit growth. Net debt to adjusted EBITDA was 1.7 x, reflecting the deployment of capital into acquisitions, including the closing of FloWorks in the quarter. We remain well-positioned and within our target range of one to two times net debt to adjusted EBITDA, and intend to return to the lower end of that range over time. Turning to our segment results. In the U.S., net sales increased 10.2% to $8.6 billion, driven by organic growth of 7.4% and a 2.8% contribution from acquisitions. Operating profit of $952 million was 8.8%, or $77 million above the prior year, delivering an operating margin of 11%.
In Canada, market conditions remain challenging, particularly within residential. Against this backdrop, our teams delivered organic growth of 0.6%, which was fully offset by a 3.2% impact from non-core business divestments and a 1.9% headwind from foreign exchange rates, resulting in a net sales decrease of 4.5%. Operating profit of $23 million was $1 million ahead of last year. Moving on to our year-to-date performance. Net sales of $25.2 billion was 6% ahead of last year, driven by organic growth of 4.6% and acquisition growth of 1.5%, partially offset by 0.1% impact from divestments. Gross margin of 31% was 10 basis points lower than the prior year. We continue to drive productivity initiatives, generating operating cost leverage while we invest in the business. As a result, operating profit of $2.5 billion grew 6.5% over the prior year, with operating margin expanding 10 basis points to 10.1%.
This profit growth, combined with the year-to-date impact of our share repurchase program, drove a 7.2% increase in diluted earnings per share to $9.09. Turning next to our cash flow through the first nine months of the year. We generated $2.7 billion in adjusted EBITDA. Operating cash flow was $1.5 billion, down approximately $400 million on the prior year, as we invested in working capital, principally receivables driven by third-quarter sales growth, along with inventory to support growth in large capital projects and HVAC expansion. Cash tax increased as a result of higher profit, as well as certain timing benefits recognized in the prior year. We continued to invest in organic growth through CapEx, with $342 million invested in our supply chain expansion and optimization, branch network, technology, and value-added solutions. The result was free cash flow of approximately $1.1 billion.
We anticipate strong cash flow in the fourth quarter to close out another year of solid performance. Moving to capital allocation. We allocate capital across four clear priorities. We continue to invest organically in the business through working capital and CapEx to drive further above-market growth. We completed three acquisitions during the quarter and one subsequent to quarter end. This includes the closing of the FloWorks acquisition, which expands our industrial flow control platform. As we've previously shared, FloWorks adds technical depth in specialized valves, automation, and flow control solutions. We've increased our total addressable market from $340 billion to $400 billion. FloWorks enhances our growth strategy with recurring MRO-driven revenue. It also expands our exposure to a wide variety of highly technical industries, such as power generation, semiconductors, pharmaceuticals, chemicals, and refining, which adds significant cross-selling opportunities across our non-residential customer groups.
In addition to FloWorks, we also added Brax Company to our industrial platform, which further scales our pump and pump repair capabilities on the West Coast. We continue to accelerate our HVAC growth strategy with the addition of Rogers Supply Company, with 12 locations across Illinois and Indiana that support our dual-trade expansion. Subsequent to quarter end, we acquired Canyon Systems, which continues to diversify our Waterworks portfolio with process solution offerings for water and wastewater treatment across six Western states. Collectively, these deals will expand and enhance our capabilities across water and wastewater treatment, HVAC, and industrial valves and flow control. Together, the 11 acquisitions completed this year represent approximately $1.5 billion in aggregate annualized sales, and our overall acquisition pipeline remains healthy. Our board declared a quarterly dividend of $0.89 per share.
As previously discussed, we temporarily paused our share repurchase program in connection with the FloWorks acquisition. We expect to resume buybacks as leverage trends back toward the lower end of our one to two times net debt to adjusted EBITDA range. Next, I'll cover our updated full-year 2026 guidance. While we expect continued pressure across our residential markets, given our year-to-date performance and the inclusion of FloWorks, we are raising our net sales guidance to approximately 7% growth compared to our prior guidance of mid-single-digit growth. We are also raising the lower end of our operating margin range, which we now expect to be in the range of 9.6%-9.8%. We now expect interest expense to be approximately $235 million, up from roughly $200 million, reflecting higher debt balances associated with financing our recent acquisitions.
We expect CapEx to be approximately $425 million, and our adjusted effective tax rate remains unchanged at approximately 26%. As we head into the final quarter of the year, we believe our strong balance sheet, agile business model, balanced end market exposure, and continued strategic investments position us well to continue to outperform. Thank you, and I'll now pass back to Kevin.
Thank you, Bill. Let me once again thank our 36,000+ expert associates whose commitment to our customers drove another quarter of market outperformance, revenue, and profit growth. Our scale advantage business model and strong cash generation enable us to continue to invest in organic growth and high-quality acquisitions. We are well-positioned to leverage the long-term growth drivers of water infrastructure, large capital projects, climate and comfort, and aging and underbuilt housing. Our balanced business and our ability to deploy scale locally through our multi-customer group approach, world-class supply chain, value-added solutions, and expert associates drive productivity for the water and air specialized professionals as they build and maintain the infrastructure that keeps North America running. Thank you for your time today. Bill and I are now happy to take your questions. Operator, I'll hand the call back over to you.
Thank you. First question we have is from Sam Reid with Wells Fargo. Please go ahead.
Awesome. Thanks so much, guys. Exceptional performance this quarter. I wanted to drill down a little bit on the industrial segment. Just contextualize the organic acceleration in this segment this quarter, obviously ex the FloWorks acquisition. I wanted to perhaps disaggregate what's data center here versus non-data center. You called out several, let's call them non-data center type categories like life sciences and pharma. I just want to understand kind of the split here, what's data center driving versus some of these other categories, and how you're expecting to comp this into 2027. Thanks so much.
Yeah. Thank you, Sam. We are very pleased with 55% industrial growth. We are very pleased with 32% of that growth being organic. If we look at the organic side, we would call it roughly half large capital projects, half maintenance, repair, and operations. If we look at the large capital projects, clearly the industrial portion of our business helps our other customer groups, like commercial mechanical, in driving data center construction. But the real drivers of the industrial large capital project landscape in the quarter were power and power generation, what we see with refining, what we see with mining and minerals. So, the growth is really broad-based organically across that industrial segment.
I think we will see continued help from a technical perspective and from a product perspective as that industrial group becomes very entrenched with our commercial mechanical teams and our Waterworks teams as we expand in areas like water, wastewater infrastructure, and then that continued build-out from a data center construction perspective.
Sam, as we think about going forward, clearly the 32% growth, as Kevin just outlined, was an outstanding quarter. But our open orders and our backlog in the industrial business continues to build, and continues to accelerate. So while we would not sit here and sign up for 32% organic growth in every quarter, we are quite bullish on the future of our industrial business, particularly as we look into next year.
Very helpful. Let us maybe switch gears and touch on HVAC. Obviously strong growth here as well. Perhaps contextualize where you see the share gains is coming from, and then talk to where you are in terms of your HVAC desks hitting their full maturity. I suspect they are probably still in the process of reaching maturity, so just curious kind of where they are in that maturation cycle and how that could translate into growth into year-end and perhaps early into 2027.
Yeah, Sam, it will continue to be an escalation of maturity over time. This is a long-range growth vector for us, and if you look at 15% growth inside that HVAC business in a market that still remains challenged, we are very pleased. We are very pleased with it being part of our focus area. It really is solid execution on what we have talked about in the past being really a multi-pronged growth strategy around climate and comfort. That multi-pronged growth strategy is really structurally set up to capitalize on what we can get after with the dual-trade and multi-trade contractor across the entirety of the nation, and quite frankly, across the entirety of the U.S. and Canada. We have been investing in talent along the way.
That investment in talent is, yes, in existing talented associates that may be in the market, but also maybe more importantly, bringing newer associates up to speed from a technical capability perspective as we invest in training that allow them to really understand what it takes to serve that specialized air professional. We have also been doing geographic location expansion, and it is not just the counter build-out that we have talked about in the past, but it is also new geographic locations that will all be built to best serve a multi-trade, especially repair contractor in both plumbing and HVAC.
We have been building on some really solid equipment relationships, both unitary and ductless, across the entirety of the nation, and then complementing that with M&A, but only getting after complementing it with M&A where we have a share opportunity that we need to get after or where we have an opportunity that we need to build out what our OEM relationships are in that particular market.
Really appreciate it, guys. I will pass it on.
Thanks, Sam.
Thank you. Next question is from Phil Ng from Jefferies. Please go ahead.
Congrats on another strong quarter. With interest rates rising, certainly more headlines on the data center front. It does not sound like you have seen any choppiness in your order pattern or quoting, but any color there? Any delays in projects for large capital projects or light commercial? Your backlogs in general for some of these large capital projects, how far are they and how are these backlogs contracted as well?
Phil, thanks for the question. As we take a step back, as we have talked in the past, large capital projects clearly are a growth driver, and they are very exciting from a capability perspective for our company. But they represent, call it, mid to high single digits of our revenue. Then if you click down, roughly half of that is data center. But overall, if you look at our balanced business mix of, call it, 50/50 res/non-res, two-thirds/one-third repair/maintenance to new construction, that does provide us with pretty good durability and resilience. When you take that together with what we think was really solid execution in the quarter, it allows us to outperform not only in large capital projects, but also in areas like we just discussed with HVAC expansion and then Waterworks, and again, as we see some improvement, aging and underbuilt housing.
I think that you see that today with, call it, 6% growth in resi and 15% growth in non-resi. As you look at pauses and delays, it's still a bit early to tell how that's going to be playing out. It remains a bit early to see how that's playing out. We haven't seen a tremendous amount of pause. Our backlog remains strong and is growing. If you look at the nature of that large capital project, as I said initially, it really is data center, but also power generation, water infrastructure, pharma, semiconductor, mining, and then additional manufacturing and advanced manufacturing. So, we're pretty encouraged that that large capital construction open order volume and bidding activity continues to grow and provides us with a good multi-year tailwind.
In terms of the window that that gives us into the future, Phil, PO that we get in our open orders will vary in terms of some we're delivering in the next 30 days, some are six to nine months out. But in general, that non-res open order book gives us a view, call it six to nine months out. So we feel pretty good about the momentum, as Kevin Murphy just outlined, that sits in the business today and how we'll exit this year and enter next year. You also mentioned interest rates, though, and a bit on residential. Certainly, as we exit this year, the one area of the market where we've seen additional pressure building is on new residential construction. So we've seen, as you've seen, permits and starts continue to weaken. That's played through already through our Waterworks business.
It's put a bit more pressure on our Waterworks business. Then as we enter next year, we would expect that pressure from a new residential construction perspective to build a bit through the rest of our residential customer group. So, we're a bit more pessimistic on new residential right now, but very optimistic on the non-res large capital project side.
That's a really helpful color, guys. Then from inflation standpoint, freight inflation more broadly is rising. Margins were actually quite solid. So I guess, one, how are you managing these headwinds? Then as you kind of lap the inventory profit gains as we look out to 2027, are you in a spot where we should expect the typical gross margin expansion to go when we look out to 2027? Any color would be helpful. Thank you.
Yeah. We are quite pleased with how the teams have managed both the gross margin side of the P&L, but also the SG&A side of the P&L. There are some cost headwinds out there, as you highlighted. We have seen freight rates increase. We have certainly seen fuel costs increase. That affects a bit in our gross margin and then a bit in our SG&A. But the teams have done a really nice job of balancing charging for our value and executing our product strategy on the gross margin side of the world. Then on the SG&A side, offsetting things like freight, healthcare, et cetera, that are some real cost headwinds with our productivity initiatives. So we feel quite good about how the teams have executed this year.
While we expected gross margins to come in a little bit year-over-year, and we have seen that, we have been able to offset that with SG&A leverage. As we look into next year from a gross margin perspective, we have been pretty consistent, I think, that this is, we believe, the ongoing gross margin of this business is in the 30%-31% range, probably in the upper half, upper portion of that. Then as that settles out, as we get through some of the uniqueness that we have had over the last couple of years, we do believe we will grow those gross margins over time, particularly as we invest in the business, as we continue to build out additional value-added services and solutions. That gives us an ability to charge for those services and solutions and grow those gross margins over time.
Thank you. Next question is from Matthew Bouley with Barclays. Please go ahead.
Morning, everyone. Thank you for taking the questions. Another one on the large capital projects. I heard you mention that data center is half of that. Obviously, given all the sort of discourse today, it sounded like you are not seeing any delays yet. But my question is kind of around the intentions that you have around diversifying that large capital projects business. Seems like FloWorks, of course, would have been part of that. But where do you see that kind of mix of data center and non-data center, I guess, within large capital projects going over time based on your own investments and then, of course, based on what the markets, of course, are giving you across those categories? Thank you.
Yeah, Matt, thank you for the question, and good morning. As we said, large capital projects are roughly mid to high single digits of our revenue, and we said that data centers were roughly half. That is just because of the significant growth tailwind that data centers did provide. We have always looked at this business to have a good balanced approach, especially as we look at the Ferguson Non-Residential side of that business. You are right, the FloWorks acquisition offers us the opportunity to really accelerate what our highly technical capabilities are in things like valve automation, valve actuation, pumps and rotating equipment, the repair and service side of that business, and also the general selling skills that are associated with that.
Bolting that onto a pretty balanced mix, including taking our Waterworks business further into the future around water and wastewater treatment and infrastructure, together with our process solutions manufacturer's rep initiative, we are building out a pretty good capability set that will serve us well in that water infrastructure well past data center construction. The same thing plays out on the power generation side. We are going to continue to see both behind-the-meter and data center activity, but also general work inside the grid. We are seeing good MRO opportunities inside of power generation today, and that was a real driver of the organic growth inside the industrial business.
The story for us is always built on a balanced portfolio that is resilient, that allows us to take advantage of strong markets, and again, a market of $400 billion where we still have tremendous opportunity for growth, not only in the non-res space, but also in the residential sector.
Got it. No, that is really helpful color. Thank you for that, Kevin. Secondly, kind of more near term, zooming into our organic growth. It seemed like in the quarter that organic did accelerate, as you had alluded to, I guess, when you spoke in early August, correct me if I am wrong. But maybe just any more color in kind of the monthly cadence there and sort of what you have been seeing in organic growth quarter to date. Thank you.
Yeah, Matt, there's always a bit of bouncing around in intra-quarter, month- on- month. I would say overall, the quarter was relatively consistent with growth and nothing that I would draw any conclusions from. If we think about how we've entered the fourth quarter, October is a continuation of strong growth, which certainly supports our full-year forecast. When you look at that 7% overall growth rate on the guidance, that would imply somewhere in the high single digit to low double-digit range of total growth for Q4. So we're expecting another solid quarter of organic growth, complemented with acquisitions growth and inclusive of a full quarter of the FloWorks transaction.
Thanks, Bill. Good luck, guys.
Thanks. Thanks, Matt.
Next question is from Mike Dahl with RBC. Please go ahead.
Hi, this is Chris for Mike Dahl. Thanks for taking our questions. Maybe just back on the implied 4Q look for growth. Could you maybe break out how much you expect acquisitions contribute there specifically? On the organic side, any fleshing out you could provide on the price versus volume expectations?
Yeah. Again, there's certainly a range. I don't think we're going to. If I take a step back and say the approximately 7% guide for the full-year, there's a bit of a range around that. I don't think we're going to hit 7% on the head. Again, overall growth probably in that high single to low double-digit growth. Organic growth will probably be in a similar range as we saw in Q3. Could be a touch below, a touch above. We're expecting the full acquisition impact from FloWorks. If you think about FloWorks overall, it adds about 3% growth on the year. You can think that acquisition growth will tick up just a touch. In terms of price, look, we're sitting in that low to mid-single-digit range today. That also has bounced around a bit in the year.
We saw commodities move up a bit from Q2 into Q3, which moved that price inflation up into that low to mid-single-digit range. Difficult to call how that'll play through Q4, but I'd estimate that would be in a similar range to what we saw in Q3.
Understood. On that last point, is there a way you could help us think about the commodity versus non-commodity dynamics and on exit rate for this year on price relative to that low to mid-single digit? How much of that non-commodity tailwind could continue into 2027?
Yeah. Overall, finished goods are about 85% of our revenue, with commodities making up broadly 15%, that remaining 15%. If you look at the finished goods side of the world, that's been pretty consistent over the last couple of quarters in the low single-digit range, kind of on the high end of that low single-digit range of inflation. Commodities has moved from flattish in Q2 up into mid-single-digit inflation in Q3. As we exit the year and enter next year, we're probably expecting a similar range on the finished goods side of the world. It remains to be seen what types of price increases will be announced from our manufacturers as we step into the year. But we would plan on it today being kind of a normal year of annualized price increases.
We'll have a better view for that when we are with you in February, talking through our Q4 results. On the commodity piece, it's really hard to call where those commodity prices will move by definition. Today, we're sitting with copper that still has very strong inflation, steel that has pretty solid inflation, and then plastics as a basket are still in deflation. While that deflation has gotten a little less throughout the year, we're still probably mid-single-digit deflation on overall plastics. So, a little difficult to call where that commodity basket will move. But overall, from a planning assumption perspective, we exit this year kind of in that low to mid-single-digit range and anticipate a similar start at the beginning of 2027.
Understood. Appreciate all the color.
Thanks, Chris.
Thank you. The next question is from Anthony Pettinari with Citigroup. Please go ahead.
Hi. Good morning. You outperformed in the quarter in a very weak resi environment. I am just wondering if you can talk a little bit more about drivers of share gain at Ferguson Home and residential trade plumbing, and maybe just kind of what the competitive environment looks like right now in those categories.
It is a challenging residential market. As Bill indicated earlier, not only is it challenging on the new residential construction side, as we do not see any real catalyst for acceleration, but also when you look at existing home turnover still being challenged and what that means to the overall repair/remodel side of the world. What we have seen is our areas of focus have really been drivers of outperformance in the market. That HVAC and residential trade plumbing coming together and expanding our capabilities, and we have got a roughly $10 billion North American coast-to-coast business inside of plumbing and HVAC that serves that residential trade repair contractor. We have been very pleased from a share gain perspective there.
The trade plumbing side of the business has really benefited from its connection to the HVAC side of our business, maintaining purity of purpose for the technician, the air and water professional themselves, but also leveraging being together. When you look at the Ferguson Home side, especially our showroom channel inside of that Ferguson Home business, we have been very pleased. We have been very pleased with the obvious associate impact of the consultative approach that that showroom brings, together with our relationships with the builder, allowing us to take advantage of what is the most healthy part of that market, which is the higher end, the premium and luxury space inside of the remodel activity inside of residential.
And that's even as we see our product strategy start to drive more growth inside plumbing, inside lighting, and inside of the appurtenances inside the home, while we balance that with the appliance side of our business. We've been really pleased with what that execution has been inside of Ferguson Home.
Okay, that's very helpful. Then just on Waterworks, you mentioned the impact of new build and mortgage rates hitting 7% in October. I'm just wondering, when you look at your Waterworks business, is it possible to give sort of a rough percentage that's coming from resi versus commercial versus a municipal customer? I'm wondering, when you talk with your muni customers, is there kind of a view on what the public funding environment looks like for 2027?
Just under 25% of our business in the Waterworks business would be, call it that new residential construction. If I take a step back and you look at the business itself, 5% growth on a 15% growth comp, a 20% two year stack is a solid result. As Bill indicated earlier, that growth rate was a bit challenged from a residential perspective, particularly in the areas where we didn't have as much of an impact on large capital construction projects. But it's a really diverse model that that Waterworks business has, with large capital projects, water and wastewater treatment, geosynthetics, and stormwater stabilization, as well as light commercial and public works infrastructure. We haven't seen a dramatic change from an infrastructure funding perspective.
Again, there's still good share for us to go after, especially as we combine the capabilities and the relationships that we have across commercial mechanical, our industrial business, and even to a lesser extent, our fire business. So we're pretty pleased with that balance and the 20% two-year stack that we've got inside that business.
Okay, that's helpful. I'll turn it over.
Thank you. Next question comes from Connor Cerniglia from Bernstein. Please go ahead.
Thanks so much. I was hoping you could talk about gross margins. They held up relatively well, despite particularly strong large capital projects, which I would have thought would have been somewhat dilutive to the gross margin. Can you talk about what might have helped offset that mix pressure this quarter and how we should think about maintaining healthy gross margins going forward if non-resi growth remains as strong as it has this quarter?
Yeah, I mean, again, I'd go back to our belief that our ongoing gross margin range is in that 30%-31% range, probably in the upper half of that, kind of on a normalized basis, and we expect to grow that over time. If you look at the quarter, to your point, we were quite pleased with the 30.9% gross margin. We did expect that to step down from the 31.3% that we delivered last year, which had some unique price-cost timing items going through it. So we were pleased with the 30.9%. If I look at the large capital project business that we have today, we are very pleased with the value-added solutions that we are building out for those types of projects.
If you think about areas like fabrication, valve automation, those give us an ability to charge for that value and to generate pretty strong gross margins. While certain components of large capital projects can put pressure on the gross margin, if you think about truckloads and truckloads of steel pipe being shipped direct to job site, those components of those projects can put some pressure there. Overall, we were really pleased with the way the teams performed and generated solid gross margins. Across the business, our customer groups delivered solid gross margins in the quarter. We were pleased with Ferguson Home, as Kevin talked about. We have made some decisions there to really focus our product category offering, and we are seeing nice gross margin benefits coming through there as well.
When I take a step back, 30.9% gross margins, kind of at the top end of our expectations, and it was a solid quarter.
Yeah, to build on what Bill was highlighting, that fabrication side of the business on both plastics as well as on metals, that valve automation area, not only does that allow us to charge for the value we are providing, but we are adding labor productivity to one of the bigger challenges to building out large capital projects in the U.S., and that is that trade labor force. In addition to that, the groups are highly engaged in value engineering, what that project can look like in many reasons, and also surety of supply. As we look at what product categories and what brands can be utilized on these particular projects to make sure they can get the job done on time and on budget, those values are playing through inside the gross margin of the business.
Very helpful color. Can I switch back to the large capital projects pipeline? Are you seeing any change in project conversion rates or timing? This is, I guess, a very premature question, but since the election last week, have you seen any change in customer confidence or willingness to move forward with any of these larger projects?
As we said earlier, it remains to be seen how it plays out. It's early days. We're obviously keeping a watchful eye on it. We haven't seen any material pauses or cancellations. But again, it's early days. We think as the focus goes really state by state, and that focus is probably on moratorium and pause, not prohibition, we think that probably plays out in areas like the elimination of tax incentives. We think that there is obviously going to be some focus on power rate protection. Then we think that there's going to be obviously continued focus on making sure that water is a part of the discussion. That leads itself to closed-loop systems, which we're seeing in most of the projects set today. We do well in that closed-loop liquid cooling system.
We've seen that open order volume grow, that bidding activity grow, and haven't seen significant pauses or cancellations. But again, it's pretty early days.
Great. Very helpful. Thanks for your time, and I'll hand it back.
Thanks.
We have time for one more question. This comes from Collin Verron from Deutsche Bank. Please go ahead.
Good morning. Thank you for taking my questions. Now that the FloWorks acquisition is closed a few months ago, can you just provide an update on early integration milestones, how you're tracking in the early days relative to the $45 million in annualized cost and revenue synergies you originally laid out? And maybe provide some color around the early wins that you've seen and anything that's surprising you, the upside or downside?
Yeah. Remember, it is early days. We're only 60 days in, and the capabilities of the FloWorks team are incredibly special. It's early in bringing that together. We are very pleased with the customer reception to the combination of both Ferguson Industrial and FloWorks, but maybe Ferguson Non-Residential more broadly and FloWorks. We're pleased with the way the teams are working together to make sure we don't dilute, we enhance the special nature of the different operating companies inside of that FloWorks organization while combining them with great pipe, flange, and fitting operations and an emerging valve business inside of Ferguson Industrial, and then again, in those fabrication capabilities, both for metals and plastics. It's still early, but we're very encouraged by what that looks like as we go forward.
Great, helpful color. I just want to touch on capital allocation. You flagged that your leverage moved to 1.7 x, which is still within your range. You temporarily paused the share repurchases. I guess, any outline of the expected timeline for returning to buybacks, just given the strong free cash flow in the business? Does your leverage impact your near-term strategy around bolt-on M&A?
I'll take the second part of that question first. Sitting at 1.7 x with a highly cash-generative business, we still have plenty of capacity to go after bolt-on M&A, and the pipeline continues to remain pretty healthy. We're quite encouraged about our ability to continue to consolidate the industry. In terms of when we'll resume buybacks, that will really depend on the answer to my last question, which is, what is that M&A pipeline? Absent any significant M&A, we will delever pretty quickly. If you look over the last handful of years, we've been buying back roughly $900 million of our shares a year. With that being paused right now, it doesn't take us too long to get back towards the low end of the leverage range. I think we'd be sitting here sometime next year, back in the market, resuming share buybacks.
But again, that will depend on what M&A opportunities we have in front of us.
Great. I appreciate all the color, and good luck through the end of the year.
Thank you.
Thank you. As this now concludes the Q&A session, I will hand the floor back to Kevin for closing comments.
Thank you, operator. Much appreciated. I will end by again saying thank you to our fellow associates. They have worked tirelessly to deliver real value for the air and water specialized professional, and driving not only 15% non-residential growth, but also 6% residential growth in what is still a very challenging residential market. Our balanced business really positions us to continue to outperform as we drive growth inside of capital construction, climate and comfort, water infrastructure, and generally housing. We thank you for your time today, and we look forward to speaking with you again very soon. Thank you.
This concludes today's conference call. Thank you all very much for joining. You may now disconnect your lines.