Ferguson Enterprises Inc. /DE/ Q1 FY2025 earnings call

• First quarter net sales were $7.8 billion, 0.8% ahead of last year, driven by organic revenue decline of 0.3% offset by acquisition growth of 1.1%. Volumetric volume increased by ~3%, with organic volume up ~2%. • Gross margin was 30.1%, down 10 basis points. Adjusted operating profit was $706 million, with an adjusted operating margin of 9.1%. Adjusted diluted EPS was $2.45, down 7.5% from prior year. • Focus on end markets: U.S. residential flat, non-residential slightly resilient. Customer groups: HVAC up 10%, residential trade plumbing up 1%, waterworks up 3%, industrial down 6%. • Investments in organic growth: $77 million capex in first quarter, including HVAC expansion, supply chain optimization, and digital tools. • Dividend raised 5% to $0.83 per share. Completed acquisitions of Fresno Pipe & Supply and Templeton. • Committed to returning surplus capital to shareholders and consolidating fragmented markets through acquisitions.

In the United States, net sales grew by 0.5% with an organic decline of 0.4% offset by a 0.9% contribution from acquisitions. Adjusted operating profit was $697 million, down $69 million from the prior year, with an adjusted operating margin of 9.5%. In Canada, net sales were 6.3% ahead of last year, driven by organic growth of 1.3% and a 5.6% contribution from acquisitions, partially offset by a 0.6% adverse impact from foreign exchange rates. Adjusted operating profit in Canada was $23 million, flat to the prior year. U.S. residential end markets, comprising approximately half of U.S. revenue, were flat in the first quarter, while non-residential markets were slightly more resilient but still down year-over-year. HVAC customer group grew by 10%, residential trade plumbing grew by 1%, and waterworks revenues were up 3%, while industrial fire and fabrication saw a 6% net sales decline.

• Net sales expected to grow in the low single digit range, inclusive of slight pricing decline due to commodity deflation. • Adjusted operating margin range 9% to 9.5%. • Interest expense expected between $180 million to $200 million. • Adjusted effective tax rate approximately 26%. • Capex investment expected between $400 million to $450 million. • Market outperformance of approximately 300 to 400 basis points, with ~1% contribution from completed acquisitions, partially offset by one fewer sales day in the third quarter.

• Market headwinds and commodity price deflation continuing to impact margins. • Potential impact of political changes on end markets, such as uncertainty around large capital projects and manufacturing activity. • Continued pressure from commodity deflation affecting gross margins, with finished goods pricing environment being spotty and difficult to predict.

Q: There was a good bit of SG&A deleverage in the quarter. Talk about that and what it would look like for the remainder of the fiscal year.

A: Bill Brundage said SG&A deleverage is due to volume growth and continued investment in areas like trainee classes, HVAC counter expansion, and large project teams. Kevin Murphy added they'll continue investing to capitalize on market growth.

Q: One other question on margins - price is down for several quarters, and gross margin flipped from modest improvements to down 10 basis points. Anything specific in this quarter causing more compression?

A: Bill Brundage said continued commodity deflation and business mix pressure from faster-growing businesses with lower gross margins are contributing. Kevin Murphy noted teams are managing the commodity business well despite deflation.

Q: Curious if you saw bidding activity step up post election and impact of Trump presidency on end markets.

A: Kevin Murphy said large capital projects, especially data centers, continue to show good bidding activity. He expects data center activity to continue regardless of administration changes, with EV and on-shoring activity having a more nuanced impact.

Q: How organic sales trended through the quarter and into November on both a volume and pricing basis?

A: Kevin Murphy said overall deflation has been consistent for the last five quarters, with 2% deflation consistent through Q1 and into November.

Q: Talk about M&A pipeline and valuation expectations.

A: Kevin Murphy said the pipeline is healthy with ample runway for acquisitions in the fragmented industry. Valuation expectations haven't changed much, and they expect to continue consolidating markets with incremental revenue from acquisitions.

Q: How organic sales trended and pricing on commodity side, and finished goods inflation assumption.

A: Bill Brundage said finished goods were broadly flat in Q1, expecting more price increase activity in the back half. Commodity deflation is still present but somewhat sequentially stable, with some categories returning to inflation.

Q: On gross margin performance, things in control to help margins.

A: Bill Brundage said own brand (private label) is a lever, and they're investing in pricing analytics and value-added services. Kevin Murphy emphasized adding productivity to contractor bases through product strategy and supply chain cost reductions.

Q: HVAC expansion plans in a down residential environment and when resi comes back.

A: Kevin Murphy said HVAC grew 10% in the quarter, with over 400 counters built out for HVAC, aiming for over 500 by year-end and 650 in 24 months. Growth includes greenfield locations and M&A, with improvement in the economy expected to boost the opportunity, currently skewing towards repair.