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    FERG
    Earnings call· Oct 2024(Q2 FY25)

    Ferguson Enterprises Inc. /DE/ FERG

    Mar 11, 2025 Source

    Executive summary

    Ferguson Q2 FY25 — Strong Volume Growth and Strategic Investments Amidst Deflation

    Ferguson delivered strong volume growth and market outperformance in Q2 FY25, driven by strategic investments in HVAC and Waterworks, despite persistent commodity-led deflation and subdued end markets. The company is taking near-term actions to enhance efficiency and streamline operations, while maintaining a balanced market exposure and confidence in medium-term residential and nonresidential fundamentals.

    Highlights

    5

    • Net sales grew 3% to $6.9 billion despite approximately 2% commodity-led deflation.

    • Organic revenue increased 2.1%, driven by a 5% increase in total volume.

    • HVAC customer group sales surged 17%, building on prior year growth.

    • Waterworks revenues increased 10%, with robust activity in public works and municipal sectors.

    • The company increased its share repurchase authorization by an additional $1 billion, reflecting confidence in the business.

    Concerns

    5

    • Adjusted operating profit decreased $71 million year-over-year to $449 million.

    • Adjusted diluted earnings per share fell 12.6% to $1.52.

    • Gross margin declined 70 basis points to 29.7%, impacted by weak demand, persistent deflation, and sales mix.

    • Operating costs grew 5.5%, largely in line with volume growth, but contributed to a 60 basis point decline in operating leverage.

    • Persistent commodity-led deflation, now in its sixth consecutive quarter, continued to pressure pricing.

    Guidance & targets

    7
    CategoryTargetConfidence
    Full-year FY25 Total Sales Growth
    low single-digit range
    high materiality
    High
    Full-year FY25 Market Performance
    down low single digits
    medium materiality
    Medium
    Full-year FY25 Acquisition Contribution to Sales Growth
    just under a 1%
    medium materiality
    High
    Full-year FY25 Adjusted Operating Margin
    8.3% to 8.8%
    high materiality
    Medium
    Full-year FY25 Interest Expense
    $180 million to $200 million
    medium materiality
    High
    Full-year FY25 Adjusted Effective Tax Rate
    approximately 26%
    medium materiality
    High
    Full-year FY25 Capital Expenditures
    $325 million to $375 million
    medium materiality
    Medium

    Segment performance

    2
    SegmentRevenueYoYQoQMargin
    United States
    Net sales grew 3%, with residential end markets remaining subdued but nonresidential showing resilience, particularly in large capital projects. Strong growth in HVAC and Waterworks, offset by declines in Fire and Fabrication due to commodity deflation.
    Adjusted Operating Margin: 6.9%Organic Growth: 2%Acquisition Contribution: 1%Residential End Market Revenue Growth: ~2%Nonresidential End Market Revenue Growth: ~4%HVAC Customer Group Sales Growth: 17%Residential Trade Plumbing Revenue Growth: flatWaterworks Revenue Growth: 10%Commercial Mechanical Customer Group Growth: 2%Industrial Fire and Fabrication and Facility Supply Sales Decline: 6%
    		—3%—$455 million
    Canada
    Net sales were 3.2% ahead of last year, with organic growth of 3.1% and significant acquisition contribution, partially offset by adverse foreign exchange rates. Markets were broadly similar to the United States, with nonresidential activity more resilient.
    Organic Growth: 3.1%Acquisition Contribution: 5.4%Adverse FX Impact: 5.3%
    		—3.2%—$11 million

    Operational metrics

    41
    Adjusted Operating Profit
    $449 milliondown $71 million
    Q2 FY25

    Impacted by weak end market demand, persistent deflation, and sales mix.

    Adjusted Diluted EPS
    $1.5212.6% lower
    Q2 FY25

    Driven by lower adjusted operating profit, partially offset by share repurchases.

    Gross Margin
    29.7%decrease of 70 basis points
    Q2 FY25

    Impacted by weak end market demand, persistent deflation, and sales mix impact of outsized growth in HVAC and Waterworks.

    Total Volume Growth
    5%
    Q2 FY25

    Fourth consecutive quarter of volume growth.

    Commodity-led Deflation Impact on Sales
    approximately 2%
    Q2 FY25

    Offsetting total volume growth; sixth consecutive quarter of overall deflation.

    Operating Costs Growth
    5.5%
    Q2 FY25

    Grew largely in line with 5% sales volume growth.

    Operating Leverage Decline
    60 basis point
    Q2 FY25

    Largely driven by the impact of price deflation on sales, along with continued selective investments.

    Net Debt to Adjusted EBITDA
    1.2x
    Q2 FY25

    Balance sheet remains strong, at the low end of the target leverage range of 1x to 2x.

    Adjusted EBITDA
    $1.26 billiondown approximately $130 million
    H1 FY25

    First half performance.

    Working Capital Investments
    $200 millionabove prior year by $87 million
    H1 FY25

    Driven by investments in HVAC to support growth initiatives and transition to new equipment efficiency standards, along with an increase in receivables.

    Capital Expenditures
    $158 millionslightly down on the prior year
    H1 FY25

    Invested to drive organic growth, projects taking longer to complete.

    Quarterly Dividend
    $0.835% increase over the prior year
    Q2 FY25

    Consistent with Q1, reflecting confidence in the business and cash generation.

    Share Repurchases
    $508 millioncompared to $250 million in H1 prior year
    H1 FY25

    Returned to shareholders when below the low end of target leverage range.

    Remaining Share Repurchase Authorization
    $1.4 billion
    as of 2025-03-11

    Reflects confidence in the business, increased by an additional $1 billion.

    Organic Revenue Growth
    2.1%
    Q2 FY25

    Driven by volume growth and market outperformance.

    Acquisition Contribution to Revenue Growth
    1.2%
    Q2 FY25

    Contribution from completed acquisitions.

    US Residential End Market Revenue Growth
    approximately 2%
    Q2 FY25

    Market remains subdued across new construction and RMI.

    US Nonresidential End Market Revenue Growth
    approximately 4%
    Q2 FY25

    Slightly more resilient with continued activity on large capital projects.

    US HVAC Customer Group Sales Growth
    17%
    Q2 FY25

    Building on growth from the prior year due to strategic investments.

    US Residential Trade Plumbing Revenue Growth
    flat
    Q2 FY25

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

    US Waterworks Revenue Growth
    10%
    Q2 FY25

    Robust activity in public works, general municipal, and meters offsetting residential weakness.

    US Commercial Mechanical Customer Group Growth
    2%
    Q2 FY25

    Driven by large capital projects like data centers, partially offset by weaker traditional non-res.

    US Industrial Fire and Fabrication and Facility Supply Sales Decline
    6%
    Q2 FY25

    Heavily impacted by commodity deflation in steel pipe.

    Canada Organic Growth
    3.1%
    Q2 FY25

    Part of 3.2% total sales growth.

    Canada Acquisition Contribution
    5.4%
    Q2 FY25

    Part of 3.2% total sales growth.

    Canada Adverse Foreign Exchange Impact
    5.3%
    Q2 FY25

    Offsetting sales growth.

    Canada Adjusted Operating Profit
    $11 million$2 million above prior year
    Q2 FY25

    Improved performance.

    H1 Net Sales Growth
    1.8%
    H1 FY25

    Challenged by persistent commodity-led deflation and subdued end markets.

    H1 Organic Sales Growth
    0.8%
    H1 FY25

    First half performance.

    H1 Acquisition Contribution
    1.2%
    H1 FY25

    First half performance.

    H1 Adverse Foreign Exchange Impact
    0.2%
    H1 FY25

    First half performance.

    H1 Gross Margin
    29.9%down 40 basis points
    H1 FY25

    First half performance.

    H1 Adjusted Operating Profit
    $1.2 billiondown 10.7%
    H1 FY25

    First half performance.

    H1 Adjusted Operating Margin
    7.9%
    H1 FY25

    First half performance.

    H1 Adjusted Diluted EPS
    $3.98down 9.5%
    H1 FY25

    First half performance.

    Full-time Equivalent Headcount
    about flat
    year-over-year

    Versus 5% volumetric growth, indicating underlying productivity.

    Operating Cost Growth
    about 5%
    H1 FY25

    First half performance.

    Operating Cost Growth
    about 5.5%
    Q2 FY25

    The vast majority driven by 5% volume growth.

    Dual Trade Counters Completed
    over 500
    as of Q2 FY25

    Part of HVAC growth strategy, ahead of pace for FY26 goal.

    HVAC New Markets Expanded
    over 20
    as of Q2 FY25

    Part of HVAC growth strategy, complementing traditional plumbing business.

    Pricing Cadence
    still expect overall deflation in Q3, Q4 probably close to flat, not very positive pricing
    H2 FY25

    Reflects continued commodity impact and uncertainty around tariff effects.

    Product announcements

    1
    ProductTypeDetails
    Ferguson Homelaunch

    Deals & partnerships

    2
    Templeton and TEMSCOConsolidating fragmented markets through bolt-on geographic and capability acquisitions.

    One completed acquisition during the second quarter.

    Independent Pipe & SupplyAcquisition of a leading commercial mechanical business in the Northeast.

    Signed a definitive purchase agreement subsequent to quarter end.

    Risks & headwinds

    4
    Persistent Commodity-led DeflationQ2 FY25 and expected to continue into H2 FY25

    approximately 2% impact on sales; sixth consecutive quarter of overall deflation

    Mitigation: Managing pricing, balancing share gains with long-term customer relationships, seeking stabilization from tariffs on steel.

    Subdued End MarketsQ2 FY25 and expected to remain subdued in H2 FY25

    Residential end market subdued (2% growth); nonresidential market slightly more resilient (4% growth) but traditional projects weaker; overall market down year-on-year

    Mitigation: Balanced market exposure (new vs. repair, residential vs. nonresidential), strategic investments in growth areas (HVAC, Waterworks, large capital projects), driving market outperformance.

    Gross Margin Pressure from Sales MixQ2 FY25

    Contributed to 70 basis point decrease in gross margin

    Mitigation: Continued investment in higher-growth areas, focus on value-added services, long-term target of 30%+ gross margin.

    Uncertainty in Tariff ImpactOngoing, particularly in H2 FY25

    Dynamic process, potential for changes in steel market

    Mitigation: Broadest supplier base, quick reaction capabilities, proactive communication with customers and vendors to navigate price moves.

    What to watch in Q3 FY25

    5

    Gross Margin Trajectory

    Q3 FY25
    Current29.7% (Q2 FY25)
    TargetImprovement from Q2 levels

    Why it matters

    Gross margin was pressured in Q2, and its recovery is critical for overall profitability and long-term targets.

    We've been encouraged by the movement and the progress that we've made in January and exiting February.

    Q&A highlights

    5

    Can you quantify the impact of growth investments (HVAC, large capital projects) on OpEx in H2, and how this balances with planned cost reductions?

    Management detailed investments in HVAC (counter conversions, geographic expansion, M&A) and large capital projects (fabrication, digital content, up-funnel engagement). CFO noted Q2 cost growth of 5.5% was mostly volume-driven, with underlying productivity offsetting some cost inflation and investments. The 60 bps operating deleverage was largely due to deflation. Actions are underway to streamline non-customer-facing roles, aiming to slow cost growth in H2.

    “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.”

    asked by Matthew Bouley · answered by Bill Brundage

    2 min read6 chapters

    Detailed Narrative

    01

    Market Outperformance and Volume Growth

    Despite a subdued market environment and persistent commodity-led deflation of approximately 2%, Ferguson achieved a 5% increase in total volume, driving 2.1% organic revenue growth. This outperformance was consistent across both residential (2% growth) and nonresidential (4% growth) end markets, demonstrating the effectiveness of the company's balanced market exposure and strategic initiatives.

    02

    Strategic Investments in HVAC Expansion

    Ferguson continues to strategically invest in its HVAC business, which saw a 17% increase in sales. Key initiatives include completing over 500 counter conversions to serve dual trade professionals, with a goal of over 650 by FY26, expanding into over 20 new HVAC markets, and leveraging a multi-equipment brand strategy including its private label Durastar. These investments aim to capture growth in a large and fragmented market.

    03

    Waterworks Diversification and Infrastructure Focus

    The Waterworks business grew 10%, driven by robust activity in public works, general municipal, and metering technology, offsetting residential weakness. Ferguson is expanding its capabilities to offer holistic solutions for aging infrastructure, including water, wastewater, stormwater management, and treatment plant construction. The use of AI for preventative maintenance and leak detection further enhances its value proposition in this critical sector.

    04

    Large Capital Projects and Cross-Group Collaboration

    Ferguson is actively engaged in large capital projects, particularly data centers, which demand extensive expertise and scale. A multi-customer group approach involving Waterworks, Commercial Mechanical, Industrial, and Fire & Fabrication groups ensures comprehensive solutions. By engaging early in the project lifecycle with owners, architects, engineers, and contractors, Ferguson aims to influence and address challenges effectively, leading to successful outcomes.

    05

    Launch of Ferguson Home for Omnichannel Experience

    The recent launch of Ferguson Home unifies the company's showroom and digital channels, offering customers a seamless, project-based experience. This omnichannel approach leverages expert consultative services in showrooms with digital capabilities, enhancing residential projects and adding value to residential building, remodel, and digital commerce customer groups.

    06

    Cost Management and Efficiency Actions

    To better position the organization for future profitable growth, Ferguson is undertaking actions to increase speed and efficiency. These include reducing complexity, simplifying management structures, and driving greater accountability. While cost growth was managed in line with volume in Q2, the company intends to slow the rate of cost growth in the second half of the fiscal year, focusing on non-customer-facing roles.

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