Good morning, ladies and gentlemen. My name is Lydia, and I'll be your conference operator today. At this time, I'd like to welcome you to Ferguson's Second Quarter Conference Call. All lines have been placed on mute to prevent any interference with the presentation. At the end of the prepared remarks, there'll be a question-and-answer session. [Operator Instructions]. Thank you. I'd now like to turn the call over to Mr. Brian Lantz, Ferguson's Vice President of Investor Relations and Communications. You may begin your conference call.

Good morning everyone and welcome to Ferguson's second quarter earnings conference call and webcast. Hopefully you’ve 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-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 also discuss certain non-GAAP financial measures. Please refer to our earnings presentation and announcement on our website for additional information regarding those non-GAAP measures, including reconciliations to the 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.

Thank you, Brian and welcome, everyone to Ferguson's second quarter results conference call. On the today's call, I’ll cover highlights from our second quarter performance. I'll also provide a more detailed view of our performance by end market, customer groups and growth initiatives, before turning the call over to Bill for the financials. I'll then come back at the end and give some closing comments before; Bill and I take your questions. During the second quarter, our associates executed well for our customers, delivering continued volume growth driven by market outperformance. Sequential step-up in our volume growth rate generated sales of $6.9 billion, an increase of 3% over prior year, despite continued commodity-led deflation of approximately 2%. We delivered adjusted operating profit of $449 million, as we managed through the 6th consecutive quarter of overall deflation in what was a subdued market. We continue to execute our capital priorities, deploying approximately $500 million in capital during the quarter and the $1 billion increase to our share repurchase authorization reflects our confidence in our business. We remain confident in both our residential and non-residential end markets over the medium-term, and we continue to balance investment in our customer-facing associates, our capabilities and our value-added solutions. That said, we are taking near-term actions to increase speed and efficiency to better serve our customers and to better position the organization for future profitable growth. Turning to our performance by end market in the United States. Net sales grew by 3% despite continued deflation, driven by commodity products across both residential and non-residential end markets. The residential end market, which comprises approximately half of U.S. revenue, remains subdued across both new construction and repair maintenance improvement. Our teams grew revenues in our residential end market, by approximately 2% in the quarter. The non-residential market…

Thank you, Kevin, and good morning, everyone. Net sales of $6.9 billion were 3% ahead of last year. Organic revenue increased 2.1% with an additional 1.2% increase from acquisitions. Total volume increased by 5%, offset by continued commodity-led price deflation of approximately 2%. This represents our fourth consecutive quarter of volume growth. Gross margin was 29.7%, a decrease of 70 basis points over last year, impacted by weak end market demand and persistent deflation, along with the sales mix impact of outsized growth in HVAC and Waterworks. Operating costs grew largely in line with our 5% sales volume growth. The 60-basis point decline in operating leverage was largely driven by the impact of price deflation on sales, along with the impact from continued selective investments in core capabilities for future growth. As a result, adjusted operating profit of $449 million was down $71 million on the prior year, delivering a 6.5% adjusted operating margin. Adjusted diluted earnings per share of $1.52 was 12.6% lower than last year, driven by lower adjusted operating profit, partially offset by the impact of share repurchases. And our balance sheet remains strong at 1.2 times net debt to adjusted EBITDA. Moving to our segment results. Net sales in the U.S. grew three %, with an organic increase of 2% and a 1% contribution from acquisitions. Adjusted operating profit of $455 million, decreased $70 million over the prior year, delivering an adjusted operating margin of 6.9%. In Canada, net sales were 3.2% ahead of last year, with organic growth of 3.1% and a 5.4% contribution from acquisitions, partially offset by a 5.3% adverse impact from foreign exchange rates. Markets have been broadly similar to that of the United States with non-residential activity remaining more resilient than residential. Adjusted operating profit was $11 million in the quarter,…

Thank you, Bill. As we conclude our remarks, let me reiterate our thanks to our associates, whose continued execution has driven further share gains despite a backdrop of market headwinds and commodity led price deflation. With leading positions in large, highly-fragmented markets, we expect to continue to outperform our markets, as we leverage our size, scale and strategy. We're operating in a unique time, where we must continue to drive disciplined cost management. We're taking actions to better position the organization for future profitable growth. We differentiate ourselves on service levels focusing on value added solutions, a suite of digital tools, backed by the strength of our knowledgeable associates and a supply chain that delivers the best breadth and depth to our customers where and when they need it. In residential markets, we continue to see strong long-term fundamentals with an aging and under-built housing stock in addition to our structural growth opportunity in HVAC. On the non-residential side, our diverse exposure coupled with multi-year tailwinds from large capital projects are expected to drive continued growth. We're well-positioned for this growth, as we engage in a more holistic involvement earlier in the design phase to leverage our scale, our value-added solutions and our digital capabilities. We believe our markets remain attractive over the medium-term and we continue to balance investment in our core customer-facing associates and our capabilities, focusing on the principles that underpin our strategy for sustained growth and market leadership. 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. [Operator Instructions]. Our first question today comes from Matthew Bouley with Barclays. Please go ahead. Your line is open.

Good morning, everyone. Thank you for taking the questions. Wanted to ask, first around the growth investments, in OpEx and a lot of these areas you've been speaking about for a while, kind of the large capital projects and the HVAC counter conversions, and now it sounds like you've got a few more growth initiatives, beyond that as well, as you guys, sort of invest for growth despite a bit of a choppy end market backdrop here. So, basically, where are we in the cycle of these growth investments? I'm curious if you can maybe quantify any of the kind of year-over-year OpEx in the second half and then maybe balance that with some of the areas that where you're looking to reduce costs, that I heard you mentioned as well? Thank you.

Yes. Matt, this is Kevin. I'll start and then pass it over to Bill. When you look at the investments that we're making, you're right to call out both HVAC and large capital projects and I probably spread that into Waterworks as well as the rest of our traditional business. If you take HVAC and we've talked about this in the past, we want to make sure that we're building out counter locations across the entirety of The United States that can take care of not only specialized HVAC contractors with a great product offering and experience set, but also the dual tray contractor that does HVAC and plumbing. And so, we're well on our way to that conversion. And so, the investments in both people, product and expansion have been across 500 counters and we're probably on track to north of 650, as we look towards the next fiscal year. We've also been growing organically, because as you know, we want to make sure that we have great HVAC capabilities across all markets in the nation. And so, we've actually expanded over 20 new markets from an HVAC perspective, again complementing that traditional plumbing business and complementing the dual trade contractor that's growing in the market. So that's been a good source of that investment. And then, the third prong obviously being from an M&A perspective. On the large capital project side, it really has been taking the complexity and the scale of these projects and making sure that, we're there to add productivity to the contractor base in areas like fabrication, valve and automation, what we're doing with digital product content for BIM models. We're also engaged in more up funnel work together with the general contractor, the owner, the engineer to make sure that, across multiple customer groups we're bringing value to the job as a whole. Then you look at the Waterworks side and both from an M&A perspective as well as what we're doing organically is bringing more capabilities to water and wastewater treatment plant and infrastructure, so that we can be more valuable to the project as a whole, more product sets, more execution, more up funnel engagement. I think you're seeing that play out. We're pleased with that from a growth perspective not only in the core Waterworks business but across the Civil Infrastructure space. So, it really is across multiple customer groups and balancing that with driving the volumetric exposure that we have inside the business. And we're pleased with what that has been. But additionally, when you look at a business across time, there are areas that we can address from spans and layers perspective, make sure that we're more streamlined, we're more accountable, we're driving focus for our customers.

Yes, Matt maybe just to build on to that a bit from a quantification standpoint. As we mentioned in the prepared remarks, if you look at the cost growth that we had in the second quarter, cost growth was about 5.5%. The vast majority of that was driven by that 5% volume growth. And the teams to Kevin's point are doing a really nice job managing that volume. In fact, if you look at our full-time equivalent headcount, it's about flat year-over-year versus that volumetric growth of 5%. So, we're driving good underlying productivity in the core business. As you think about that 60-basis point deleverage and you think about a 2% top-line impact from deflation, worth about $130 million of sales from a pricing perspective is the 2% equivalent. That's driving roughly 40 of that 60 basis points of deleverage in the quarter. So, the remainder is the fact that, we're driving underlying productivity offset by some cost inflation and those investments. So, with a really an underlying 20 basis point step-up in OpEx deleverage, or OpEx cost as a percentage of sales in the quarter. We're quite pleased with how that was managed in a tough environment. When you look forward to Kevin's point, we are taking some actions and we're right in the midst of those actions really focused on non-customer-facing roles, layers and structure. That work is well underway. We plan to execute most of that work in the third quarter and into the fourth quarter. And while I won't give an exact number, our intention is to slow the rate of cost growth, as we move through the second half, again still against that backdrop of a challenging market.

Excellent. Perfect. Thank you for that comprehensive answer. Secondly, I wanted to ask about the two customer groups, HVAC up 17% and Waterworks up 10%. And I'm sure the growth investments you've been making is part of the answer to this question. But I guess, firstly, any way to quantify how much M&A is in those, kind of roughly versus organic? And then, we'd just love to hear further elaboration on what drove the acceleration in both of those customer groups, maybe from a market perspective beyond your growth investments and kind of, if you're expecting those to remain above the company average in terms of your second half guide? Thank you.

Yes, Matt. The vast majority of the growth in both of those customer groups is organic. You can probably pencil in a couple of points of acquisition growth. So again with 17% and 10% respectively growth from those customer groups, the vast majority is organic. And I'll take it in reverse, Matt, and talk Water and then HVAC. From a Waterworks perspective, the group has heard me talk over and over again, couldn't be more pleased with the balanced business mix that our Waterworks business operates in and drives. And so, if you look across residential, commercial, municipal, public works, that balance is serving us quite well. And we called out civil infrastructure, as being a big part of the growth in this past quarter. If you look at our meter and automation group, our geosynthetics, our municipal sales, our water and wastewater treatment, that's all up double-digits on a pretty sizable number. And so, the investments that we're making to be great in that area are serving us well in the current period. And then I go back to on the HVAC side, it really is execution of the strategy. M&A, geographic organic expansion and then counter expansion for the dual trade professional. And so, yes, maybe, there's a little bit of pull forward of product in residential new construction, as you see the equipment conversion or there may be a bit of, small bit of inventory build. That's not the real drivers of what you're seeing out in the marketplace. It really is execution of what that multi-year strategy is.

Our next question comes from Philip Ng with Jefferies. Please go ahead.

I have a question on gross margins. Certainly, a little softer in the quarter and you've lowered your full year guide for EBIT margins. So, I guess perhaps, where is some of the downward surprise you're seeing? Is that more less price -- more pricing headwinds on the commodity side and/or limited pricing on your finished goods? Just looking out to the back half this year, I just want to get any update on how price increases are shaping up, whether it's finished good or commodity side? And especially in the backdrop where tariffs are being implemented, how does that kind of impact your ability to push price in good or bad?

Yes, Phil, thanks for the question. If you look at that 70-basis point decline from prior year second quarter, it really is a confluence of a few factors. Firstly, we are still operating in an overall market that's down year-on-year with compressed volumes. We have persistent deflation, and I would point to that driving the majority of the decline year-over-year. If you think about the fact that, we're now in our 6th quarter of deflation and that's lasted a bit longer than we expected at the beginning of the fiscal year, and is lasting a bit longer as we turn to the second half. So, deflation is a big component of that really all on the commodity side, not on the branded product side. And then, last but certainly not least, we just got done talking about a bit more explanation on the expanded growth in HVAC and Waterworks. And so, there's some mix pressure there from a gross margin perspective, that's driving the remainder of that gross margin pressure year-on-year.

Any color on the pricing side in the back half? And then, certainly there's tariffs right being implemented on metal and stuff like that. Is that a good guy on your commodity side? And then, any price increase on the finished goods side that you're seeing out there?

Yes. Phil, as Bill indicated, the persistent deflation really is driven by commodity input-based deflation. And so, you think about PVC resin or hot rolled coil on the steel side, that's really driving what that deflation looks like and that's the biggest cause of what we're seeing from an overall margin perspective. If you look at how the market is affecting, we compete in the market every day, and we're very pleased with the market outperformance from a revenue perspective. And our teams are constantly and consistently working to make sure that, we balance share gains, long-term customer relationships, price and margin and what we're doing with our vendor community around getting the right cost of goods sold position for the value that we add in the marketplace. And that happens in every market, every day across every customer group on every project. And so, we're pleased with the way that's progressing and we're making sure that we manage that over time. When you look at the tariff impact, that certainly will have some degree of a stabilizing effect on what that deflation looks like. And if you think about the steel market and what we're seeing in price increases that have already been announced in the steel pipe side of the business. So, we think that, that can be a stabilizing effect, but there's a great deal of uncertainty and it's a pretty dynamic process, as we look forward.

Okay. That's helpful. And just pivoting on demand trends, any color on fiscal 3Q intra quarter trends? Certainly, feels like the consumer has weakened a bit in February. All the commentary around your commercial, especially your mega projects infrastructure side of things sounds pretty encouraging. Admittedly, there has been choppiness from what we're hearing on tariffs and new policies of DOGE and on that front. Are you seeing any choppiness on the heavy commercial side as well?

Yes. First off, Phil, from a February perspective, February top-line was largely in line with the second quarter. So, you can think of that as somewhere around that 3% overall growth rate. So pretty consistent, as we stepped out of Q2 into Q3. With that said, February is a 20-day billing month that's always got some weather impact. So, I wouldn't read too much from a trend perspective. If you look at -- if you take a step back and you think about the guidance we set out for the full year, we've said we expect to deliver low single-digits growth for the full year. We're sitting just under 2% growth in the first half. I'd tell you that, we still think the markets overall will be down in the low single-digits range like we set out at the beginning of the year, but probably a bit more pressure towards the lower end of that low single-digits, than we thought at the beginning of the year. Just to your point, as the markets have just been a bit more muted and as we just talked about deflation is lasting a bit longer. So that really sets us up for an expectation that the second half will still be in somewhere from a growth perspective in that low single-digit range pretty consistent with the first half.

Our next question comes from Quinn Fredrickson with Baird. Your line is open.

Yes. Hi, thanks. Good morning, guys. Can you give us any details on what individual commodities are doing in terms of large diameter versus small diameter PVC, copper tubing, steel pipe, et cetera, and maybe how those are trending here quarter-to-date?

Yes, sure. If you think about, if we start with copper tube and we mentioned this in the last quarter call, copper had been in a bit of the inflation through the first quarter and that continued into the second quarter and we would expect that to continue. That was really exiting the first quarter. That was really the only commodity category that was in inflationary territory. As we just talked about, steel has been one of the biggest pressure points that we've had and that's impacted the Commercial Mechanical business and the Fire & Fabrication business in particular. That's still in deflation today. As Kevin just alluded to, we've seen some announcements of price increases largely on the backs of tariff announcements. So, we would expect that deflation to lessen, as we move through the second half. But it remains to be seen, what happens with those tariffs. We could have a change in that, while we're on this call quite frankly. And then, PVC as you outlined is still probably the biggest commodity deflation category for us, a bit more deflation still on the plumbing side than on the waterworks side, but both are still facing some pressure and we expect that pressure to continue in the second half, which is driving some of that expectation of deflation lasting a touch longer.

Okay. Thank you for that. And then secondarily, just the back half operating margin sequential improvement, that's embedded in the guide. Would that be consistent with just normal seasonal upticks, or does maybe some of the lessening commodity deflation and some of the cost actions that you've mentioned, support better than seasonally normal? Thanks.

Yes, I think the majority is seasonal, but if you look at the first half operating margin that we delivered of 7.9% and the full year guide of 8.3% to 8.8% implies a second half that's going to be somewhere in the mid-8% to mid-9% operating margin range. Seasonally, we generally take a step-up to your point in the second half, but also, we're actioning every day, as Kevin mentioned earlier to ensure that we're charging for our value from a gross margin perspective. And while gross margins were pressured in the second quarter, that pressure was particularly early in the second quarter in November and December. We've been encouraged by the movement and the progress that we've made in January and exiting February. And then, to your point on the cost side, while the cost growth has been about 5% for the first half and we expect that cost growth to continue particularly in the third quarter, as we do take some of these actions, again our intention is to slow that rate of cost growth in relation to sales as we exit the year. Of course, some of that will be driven by the volume environment that we find ourselves in the second half.

Our next question comes from John Lovallo with UBS. Please go ahead.

Good morning guys. Thank you for taking my questions as well. The first one is, are you seeing any DOGE impacts in any of the water infrastructure, construction or institutional markets? And do any of the metering deployments of the big projects depend on federal funding?

Yes. John, thanks for the question. No, we're not seeing any near-term impact from a DOGE perspective. There is some conversation around what the federal funding structure might look like. Today, when you look at the civil infrastructure growth that we experienced, the Waterworks growth in general, it's not coming from a flood of federal dollars. It is coming from, the focus that we've got on helping our aging infrastructure around public line work, water and wastewater treatment plant construction, meters and metering technology and general infrastructure repair maintenance and improvement. It's difficult right now to understand what the federal funding picture is going to look like, but we're bullish on what the needs of that overall infrastructure investment has to be, especially in light of what we're seeing around the country. And so, we will invest in that both organically and inorganically to make sure that, we are part of that solution.

Understood. And then, is there any way to help us kind of think about or quantify the mix impact to gross margin from the higher HVAC and waterworks sales? I guess in addition to that, are you seeing any customers kind of trade down?

Yes, John broadly I'd say two thirds of the impact on gross margins was from the market and deflation with the remaining close to one third being driven by mix. Again, that's going to vary quarter in quarter out depending on the mix of that business.

And from a trade down perspective, I wouldn't attribute much of that to trade down. We talked about HVAC. Just like we saw in 2008, 2009, we're seeing a bit of focus on the repair versus the replace. That probably will continue, especially as we go through the refrigerant changes in, call it, the back half of our Q3 and the front half of our Q4. That's to be expected, but we aren't seeing a very large amount of trade down, because of consumer balance sheet.

Thank you, guys.

Thanks, John.

The next question comes from Sam Reid with Wells Fargo. Please go ahead.

Awesome. Thanks so much. So, I wanted to drill down a bit on Waterworks. You're obviously executing quite well in this category, but you also alluded to some weakness on the resi side. Wanted to understand, was that weakness a little bit more pronounced sequentially? Are you starting to see the large builders pull back on community count growth in response perhaps to lower demand? Just want to unpack that comment in greater detail.

Yes, Sam. It really is around just what the growth in the market looks like. We haven't seen a pronounced turndown. We haven't seen any real change in builder activity. In fact, if we're looking forward, the bidding activity that we're seeing on the residential side of our Waterworks business has been encouraging. Now that's just bidding activity and so we need to make sure that, that, a, plays out in actual projects being released and that when those projects are released that all phases and sections are going to be released. So, it's a bit too early to tell, but it isn't a pronounced movement downward. It really is a bit of a mix shift in what our Waterworks business has experienced from a growth perspective in Public Works versus Residential. And again, I'll go back to we're really pleased with the balanced business mix that exists in that Water business, because it's not dependent on one particular sector inside the market.

That helps. And then maybe switching gears here. I wanted to dig a little deeper on finished goods pricing, perhaps following up a bit from Phil's question. When I talk through realization on list price increases versus what you're actually seeing in the market, are there any categories, where you're getting something close to the list price increase, any categories, where you're notably not getting or not seeing pricing flow through, in line with those list price increases? Thanks so much.

Yes. Thank you. And when you think about the finished goods side, we're still fairly early in the year in terms of what those annual price increases look like. And we're still a little bit early in tariff realization, because you've got multiple things playing out at the same time in a pretty dynamic environment. And so, if I were to take a step back and look at us not only from an annual price increase perspective, but also in the tariff environment. We've got the broadest supplier base in the industry. It gives us the ability to navigate solutions for our customer that match price and value. We've got people and systems in place that we can react pretty quickly to what is a dynamic environment right now. We always take the opportunity to proactively communicate with our customers and our customers' customer, to make sure that we're understanding what that price move looks. That's hard work, as we go through especially when you think about tariff and annual price increase, because you've got to address projects that are already in-flight line-by-line, project-by-project. Generally speaking, we will pass through that price. There are going to be some pressure points, but generally speaking that's what we do. And so, it's a bit early to tell how that is going to stick and it's a bit early to tell what tariff is going to play with annual, but we're encouraged by that being a stabilizing effect, as we think about what deflation has meant to the first half of our fiscal year.

The next question comes from Mike Dahl with RBC. Please go ahead.

Good morning. Thanks for taking my questions. Kevin, I want to go back to the gross margins again. Interesting comment in terms of the sequential dynamics kind of being worse in November, December and then a little bit better coming through Jan, Feb. And it kind of your comments kind of married your prior ones, which talked about balancing share and getting paid for your product. Can you just talk about, did you reach a point where you thought that balance had gotten out of whack in November, December? I mean, you certainly gained share from a top-line standpoint. But did you feel like you were giving up too much to do that? And now you're rebalancing a little bit, as you kind of think about that trade off in the back half of the year, or how else would you characterize the competitive dynamics right now?

Yes. You're right, we did experience November and December a bit more challenged and we're encouraged by what January and February look like. As Bill said, it really was a mix of three different areas. You've got sales mix with HVAC and water. You got persistent deflation that's playing out. And then, you got some challenging markets. And the group is out there especially when we think about the commodity side of the world, and the input commodity deflating and making sure that, we're right for our vendor partners, making sure that, we're right for our customers that we have long-term relationships with, and making sure that we're marrying that value with price and margin. And we're working that every day and we're working at every customer and across customer groups. And so, we need to make sure that, we're addressing that in real time. I feel good about where we went through January, and where we are in February. And quite frankly the quarter particularly November and December was a pretty unique time in the market with all those things coming together. And so, I feel good about where we're going. And as we look forward, we intend this business to be a 30 plus percent gross margin business, based on the value that we provide assuming business mix stays reasonably similar, because we're going to continue to add value-added services that we charge for and make sure that we're adding productivity to our contractor customer. I think generally speaking as we're moving into the third quarter, we feel good about where we're headed.

That's helpful. Thanks. And then secondly, I know a lot of questions have already been asked about the pricing dynamics. But, just, I guess, to be more specific, in your prior guide, I think you contemplated that second half would get back to flat to slightly positive. Now you're saying deflation lingers a little bit longer, but you do have some of these kinds of tariff-based increases out there. Can just help us dial in, what the pricing cadence should look like in the second half of the year? Is it still down each of 3Q and 4Q, order of magnitude? Anything you can give us quantify would be great.

Yes, Mike. Clearly a little bit difficult to predict the future, given the commodity impact there. But if I take a step back, the first half down about 2%, and pretty consistent Q1 to Q2. We still expect overall pricing levels to improve, as we move through the second half. I would still expect overall deflation in Q3. And as you get out to Q4, I think it remains to be seen as Kevin said, what the true tariff impact, what the true branded price increase announcements are that will come through largely through Q3 and into Q4. So, do we get back to flat? Probably close to that would be our best read. I don't think you'll see very positive pricing in the second half of this fiscal year, as we continue to work through this environment.

The next question comes from Keith Hughes with Truist. Your line is open.

Thank you. You talked earlier in the call you've been facing deflation for six or more quarters now. But the gross margin impact of that was far greater this quarter, than what we've seen over that period of time. Specifically, what happened in the reported quarter that caused it to have such a such a notable impact when it hasn't before?

Yes, Keith. I mean, I think we've tried to cover the unique factors that came together. The other piece, I'd point out, it's clearly our seasonally lightest quarter. So, while we're disappointed in the gross margin coming in where it did, the volumes being weak, competitive market, deflation lasting longer and then that mix, which I alluded to driving a portion of that, really all came together in the quarter. As we exited the quarter and into the third quarter, as Kevin talked about, we think we're on a better trajectory. But look, there are lots of factors that will impact that margin. It's never going to be a flat line in any quarter-to-quarter. So, to Kevin's point, our intention, our belief is over the medium to long-term, this is a 30 plus percent gross margin business.

Yes, Keith, and we're going to continue to balance a bunch of different factors, making sure that we're the best path to market for our supplier community, making sure that we maintain long-term customer relationships, making sure that we gain share at the balanced and appropriate level, and then making sure that we've got a right price, margin, mix. And so, I think we're on the right track as we get through January, February and into Q3.

Okay. And just one question on products. The fire business was off in the quarter. Was most of that steel pipe deflation? And can you talk about units, I guess, is my question?

You got it. We feel good about the volumes in that fire business, but it is very heavily-weighted towards steel pipe and that has been a very challenged commodity-based input product. And so, that really drove what the operating environment was for our fire business. We're still adding a ton of value on the fabrication side of the world and making sure that, our projects are better, because Ferguson was involved. But that steel pipe is a tough headwind to battle through.

We'll take our final question from Will Jones at Redburn. Please go ahead.

Thank you. Just a couple, if I can please. I'm sorry to come back on the gross margin, but specifically the impact from deflation when you mentioned that. Are you actually highlighting that, there are inventory losses, so to speak, in the quarter and therefore that's a temporary effect that may reverse or are there other mechanics where deflation can affect the gross margin? And then second was just again on business mix. I think in the past you've said that, the businesses at the operating margin level are fairly similar. Is that the case? And if HVAC and Waterworks continue to outgrow the rest of the business, I think likely, do we think should we be seeing an offset in SG&A recovery over the fullness of time? Thanks.

Yes. I'll take it first from the back question and then turn it over to Bill. Yes, we have said that, the operating margins are fairly consistent across all of our different customer groups even, as gross margins vary. And the gross margin was impacted by the growth of water and HVAC. And traditionally that would flow through to operating margins that are consistent with the higher gross margin portions of the business. But as we said, we are also taking some very intentional investments in both HVAC and water, as we look into not only the second quarter, but as we go forward. And so, there is some impact for those investments, as we look to the future.

And on the gross margin side, Will, I wouldn't think about inventory losses on deflation. I would think about that deflation just putting a bit more pressure on the bidding and the quoting work, that we're doing every day, as we're out there battling for orders in what's a very challenging volumetric market. So, we also think that, we're likely near to the end than the beginning now six quarters into deflation, but it's a challenging point in time, that we're managing through right now.

Thank you. And since I'm the last one, maybe sneak in one more. I think it was about three years ago that, we had the Investor Day, and you gave your financial framework for sales and margin and other items. Just when you reflect on that over the medium-term, you're still happy that, that's the right way to think about the trend lines for both top-line and margin?

Yes. We're in a very unique time right now, Will. When you look at the deflationary environment that we've talked about, but also when you look at the market environment. Embedded inside that growth algorithm was our markets outperforming GDP, us from a growth perspective outperforming our markets, call it 300 basis points to 400 basis points and then driving not only gross margin expansion, as markets are more normal, but also productivity leading to operating margin expansion. We still believe in that. We've got to get back to a more normalized market environment, inclusive of price, and we intend to get back to that growth algorithm.

Thank you, very much.

Thank you.

Thank you. This concludes today's Q&A session. So, I'll now hand over to Kevin Murphy for any closing remarks.

Thank you, Lydia. Just want to again say, thank you for your time today. Very much appreciated. And a thank you to our associate base, who have been battling through a challenging market. We are pleased with the organic outperformance in the market. We're encouraged by the balanced business mix that we have, and our ability to take advantage of what we think are some very strong structural tailwinds and the investments that we're making are going to serve us well over the near-term, as well as the medium and long. So, thank you again for your time. We'll talk to you soon. Thanks.

This concludes the Ferguson second quarter results conference call. Thank you for your participation. You may now disconnect your line.