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    FERG
    Earnings call· Jan 2025(Q3 FY25)

    Ferguson Enterprises Inc. /DE/ Q3 FY25 earnings call FERG

    Jun 3, 2025 Source

    Executive summary

    Ferguson Q3 FY25 — Strong Organic Growth and Margin Expansion

    Ferguson delivered strong Q3 FY25 results, driven by robust organic growth and significant gross margin expansion, benefiting from strategic actions and moderating deflation. The company continues to invest in key growth areas like HVAC and Waterworks, leveraging multi-year tailwinds despite a dynamic and uncertain environment. Management remains confident in its ability to outperform the market and drive profitable growth.

    Highlights

    5

    • Sales increased 4.3% over prior year to $7.6 billion, driven by 5% organic growth.

    • Gross margin strengthened to 31%, up 50 basis points year-over-year, due to value capture actions and moderating deflation.

    • Operating profit increased 6.1% with operating margin expanding 20 basis points to 9.4%.

    • Diluted EPS increased 7.8% to $2.50.

    • Waterworks revenue grew 12%, and Commercial/Mechanical revenue grew 10%.

    Concerns

    4

    • Residential end market, comprising approximately half of U.S. revenue, remains subdued, with residential trade plumbing revenues declining 1%.

    • Commodity deflation continued, particularly in Fire and Fabrication business, leading to a combined net sales decline of 1% for Industrial, Fire and Fabrication, and Facility Supply customer groups.

    • Incurred a nonrecurring business restructuring charge of $68 million, principally related to severance costs.

    • Deflation was over 1% year-to-date, and YTD operating profit was down 4.9% to $1.9 billion, with YTD diluted EPS down 3.6% to $6.48.

    Guidance & targets

    6
    CategoryTargetConfidence
    Full-year 2025 revenue growth
    low to mid-single-digit
    high materiality
    High
    Full-year 2025 operating margin
    8.5% to 9.0%
    high materiality
    High
    Full-year 2025 interest expense
    between $180 million to $200 million
    medium materiality
    High
    Full-year 2025 effective tax rate
    approximately 26%
    medium materiality
    High
    Full-year 2025 CapEx
    between $300 million to $350 million
    medium materiality
    High
    Annualized cost savings from restructuring
    $100 million
    medium materiality
    High

    Segment performance

    2
    SegmentRevenueYoYQoQMargin
    United States
    Net sales grew 4.5% with an organic increase of 5% and a 1% contribution from acquisitions, partially offset by a 1.5% impact from 1 fewer sales day. Operating profit increased $41 million over prior year, delivering an operating margin of 10%.
    Organic increase: 5%Acquisition contribution: 1%Impact from 1 fewer sales day: -1.5%Operating profit: $726 million
    		—4.5%—10%
    Canada
    Net sales were 0.3% below last year, with organic growth of 3% and a 2.8% contribution from acquisitions, offset by a 4.4% adverse impact from foreign exchange rates and a 1.7% impact from 1 fewer sales day. Residential activity has continued to be soft with nonresidential activity remaining more resilient. Operating profit was $8 million in the quarter, $2 million above the prior year.
    Organic growth: 3%Acquisition contribution: 2.8%Adverse impact from foreign exchange rates: -4.4%Impact from 1 fewer sales day: -1.7%
    		—-0.3%—$8 million

    Operational metrics

    43
    Net sales
    $7.6 billionup 4.3% YoY
    Q3 FY25

    Driven by organic growth of 5% and acquisition growth of 1%, despite 1 fewer sales day and foreign exchange, which had a combined 1.7% negative impact.

    Organic revenue growth
    5%
    Q3 FY25

    Contributed to overall sales increase.

    Acquisition revenue growth
    1%
    Q3 FY25

    Contributed to overall sales increase.

    Sales impact from fewer sales days and FX
    1.7%
    Q3 FY25

    Combined negative impact on sales.

    Gross margin
    31%up 50 bps YoY
    Q3 FY25

    Driven by actions to better capture value and moderating deflation.

    Operating profit
    $715 millionup 6.1% YoY
    Q3 FY25
    Operating margin
    9.4%expanded 20 bps YoY
    Q3 FY25
    Diluted earnings per share
    $2.50up 7.8% YoY
    Q3 FY25
    Net debt to EBITDA
    1.2x
    Q3 FY25

    Balance sheet remains strong.

    Capital deployed
    $690 million
    Q3 FY25

    Includes acquisitions and shareholder returns.

    Capital returned to shareholders
    $417 million
    Q3 FY25

    Through share repurchases and dividends.

    HVAC revenue growth
    10%
    Q3 FY25

    Reflects focus and investments to expand HVAC capabilities, vast majority organic.

    Residential trade plumbing revenue growth
    -1%
    Q3 FY25

    Broadly consistent with recent quarters, facing headwinds in new construction and price deflation.

    Nonresidential revenue growth
    7%
    Q3 FY25

    Stronger growth than residential, driven by increased activity on large capital projects.

    Waterworks revenue growth
    12%
    Q3 FY25

    Driven by public works, municipal activity, and diversification efforts.

    Commercial/Mechanical revenue growth
    10%
    Q3 FY25

    Strong activity on large capital projects.

    Industrial, Fire and Fabrication, Facility Supply combined net sales growth
    -1%
    Q3 FY25

    Due to continued commodity deflation, particularly in Fire and Fabrication.

    Counter conversions for dual trade contractors
    550
    Q3 FY25 YTD

    Completed to serve dual trade contractors, part of HVAC growth strategy.

    Nonrecurring business restructuring charge
    $68 million
    Q3 FY25

    Principally related to severance costs, to streamline operations.

    Annualized cost savings from restructuring
    $100 million
    Annual

    Expected from streamlining operations and reducing complexity.

    Net sales growth
    2.7%ahead of last year
    YTD Q3 FY25

    In a period challenged by commodity-led deflation and subdued end markets.

    Organic growth
    2.2%
    YTD Q3 FY25

    Contributed to YTD net sales.

    Acquisition contribution to sales
    1.1%
    YTD Q3 FY25

    Contributed to YTD net sales.

    YTD sales impact from fewer sales days and FX
    0.6%
    YTD Q3 FY25

    Adverse impact on YTD net sales.

    Deflation
    over 1%
    YTD Q3 FY25

    Commodity-led deflation.

    Gross margin
    30.3%down 10 bps YoY
    YTD Q3 FY25
    Operating profit
    $1.9 billiondown 4.9% YoY
    YTD Q3 FY25
    Operating margin
    8.4%
    YTD Q3 FY25
    Diluted earnings per share
    $6.48down 3.6% YoY
    YTD Q3 FY25
    EBITDA
    $2 billiondown approximately $80 million YoY
    YTD Q3 FY25
    Working capital investments
    $100 millionabove prior year
    YTD Q3 FY25

    Driven by investments in inventory and increase in receivables.

    Interest and tax
    down approximately $110 millionYoY
    YTD Q3 FY25

    Driven by timing.

    Capital expenditures
    $235 millionslightly down YoY
    YTD Q3 FY25

    Invested for organic growth.

    Quarterly dividend per share
    $0.83up 5% YoY
    Q3 FY25

    Consistent with Q2, reflects confidence in business and cash generation.

    Share repurchases
    $759 millionvs $421 million in prior year
    YTD Q3 FY25

    Returned to shareholders.

    Share count reduction
    4.1 million
    YTD FY25

    Reduced through share repurchases.

    Remaining share repurchase authorization
    $1.1 billion
    As of Q3 FY25

    Outstanding under the share repurchase program.

    Implied full-year operating profit range (prior guidance)
    $2.5 billion to $2.7 billion
    FY25

    Based on prior guidance of low single-digit growth and 8.3%-8.8% operating margin.

    Revenue share from branded suppliers
    90%
    Q3 FY25

    Branded suppliers are principally domestic in the U.S.

    Revenue share from own brand business
    10%
    Q3 FY25

    Sourced from over 31 different countries.

    Positions reduced through restructuring
    800
    Q3 FY25

    To simplify structure, eliminate layers, and drive decision-making.

    Market distribution centers open
    5
    As of Q3 FY25

    Part of network optimization efforts.

    Market distribution centers in process
    2
    Next 12 months

    One in Dallas, one outside Washington, D.C.

    Industry KPIs

    1
    MetricValueDetails
    Digital vending managed inventory penetration230locations

    Deals & partnerships

    3
    Independent Pipe and SupplyLeading commercial mechanical business

    Acquired during Q3 FY25, located in the Northeast.

    Light InnovationsResidential building and remodel showroom

    Acquired during Q3 FY25, located in Arkansas.

    National FireMarket-leading Fire and Fabrication business

    Acquired during Q3 FY25, operating across Eastern and Western Canada.

    Risks & headwinds

    4
    Dynamic and uncertain market environmentcurrent environment

    inherently uncertain time with... many uncertain external variables

    Mitigation: Balancing investment in strategic opportunities, leveraging multiyear tailwinds, and focusing on specialized professional customers.

    Subdued residential end marketQ3 FY25

    comprises approximately half of U.S. revenue, residential trade plumbing revenues declined 1%

    Mitigation: Driving growth through HVAC initiatives and focusing on higher-end projects with Ferguson Home.

    Commodity deflationQ3 FY25

    continued weakness in certain commodity categories, deflation was over 1% year-to-date, mid-single-digit deflation in commodity basket for Q3

    Mitigation: Actions to better capture value, managing price matrix, and product strategy to drive efficiencies. Expects price to move into mild inflation in Q4.

    Tariff announcements and price increasesvery near term

    many uncertain external variables, wide variety of responses from vendors

    Mitigation: Pricing strategy focuses on value, not solely price; working with customers on bidding activity to ensure right product, availability, and price. Diversifying own brand sourcing.

    What to watch in Q4 FY25

    5

    Gross margin trajectory

    Q4 FY25
    Current31%
    TargetRemain above 30%

    Why it matters

    Gross margin expansion was a key positive this quarter, driven by strategic actions and moderating deflation. Sustaining this level is critical for profitability.

    We would anticipate gross margins will remain above 30% as we step through Q4.

    Q&A highlights

    6

    How much of the 5% organic growth is due to internal initiatives vs. market improvement, and is it sustainable?

    Kevin Murphy attributed the growth to the multi-customer group approach for large capital projects (non-res strength) and focused HVAC expansion (res strength), allowing them to outperform the market. He noted the non-res market is expected to peak in 2026-2027.

    “I think if you look back at what we've been trying to accomplish, especially in the nonresidential side of the world, it is bringing scale benefits and a multi-customer group approach to large capital projects.”

    asked by John Lovallo · answered by Kevin Murphy

    2 min read5 chapters

    Detailed Narrative

    01

    Strategic Growth Initiatives Driving Outperformance

    Ferguson's multi-year investments in HVAC, Waterworks diversification, large capital projects, and the newly launched Ferguson Home brand are yielding strong returns. HVAC revenue grew 10% in Q3, primarily organically, through counter conversions for dual trade contractors and geographic expansion. Waterworks revenue increased 12%, driven by diversification into public works, wastewater, and storm water management, alongside its impact on large capital projects.

    02

    Gross Margin Expansion and Cost Management

    The company achieved a 31% gross margin, a 50 basis point increase year-over-year, attributed to specific actions to capture value and moderating deflation. This, combined with tight management of operating costs and early benefits from streamlining the business, led to a 6.1% increase in operating profit and 20 basis points of operating margin expansion.

    03

    Restructuring for Efficiency and Accountability

    Ferguson incurred a $68 million nonrecurring restructuring charge, primarily for severance, as part of actions to streamline operations and enhance speed. These changes, which included reducing approximately 800 positions, are expected to deliver $100 million in annualized cost savings by simplifying management structures and driving decision-making closer to customers.

    04

    Dynamic End Market Performance

    While the residential end market remains subdued with a 2% revenue growth (driven by HVAC) and a 1% decline in residential trade plumbing, nonresidential end markets showed stronger growth at 7%. This nonresidential strength was fueled by increased activity on large capital projects, particularly in civil infrastructure (low double-digit growth) and commercial/industrial (mid- to high single-digit growth).

    05

    Capital Allocation and Balance Sheet Strength

    The company deployed approximately $690 million during the quarter, including $100 million in working capital and $235 million in CapEx. It completed 3 acquisitions and returned $417 million to shareholders through share repurchases and dividends. The balance sheet remains strong with a net debt to EBITDA of 1.2x, and $1.1 billion remains under the share repurchase program.

    AI-generated summary of the company’s earnings call. Not investment advice.