Ferguson plc

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 fourth 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 will be a question and answer session. To ask a question at that time, please press star and then the number one on your telephone keypad. To withdraw your question, please press star and then the number two. I'd now like to turn the call over to Mr. Brian Lance. Ferguson's VP of Investor Relations and Communications. You may begin your conference call.

Good morning, everyone, and welcome to Ferguson's fourth 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 investor section of our corporate website and on our SEC Filings webpage. Recording 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 expectation 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 fourth quarter results conference call. On today's call, I'll cover highlights of both our fourth quarter and our full year performance. our performance against our markets in fiscal 24, and our track record of growth and improvement over the longer term. I'll then turn the call over to Bill for financials before I come back to expand on how we're deploying our scale locally. We'll then have time to take your questions at the end. Starting with the fourth quarter, once again, our expert associates executed well, going above and beyond to take care of the complex project needs of our specialist professional customers. we delivered sales of $7.9 billion, an increase of 1.4% despite deflation of approximately 2%. Gross margins were resilient and costs were managed well. We delivered adjusted operating profit of $857 million, an increase of 5.3% over prior year and resulting in an adjusted operating margin of 10.8%. Adjusted diluted earnings per share grew 7.6% to $2.98. We are pleased with these results and our confidence that our balanced business mix and ability to fully scale locally position us well going forward. Turning to our full year performance, our team delivered resilient results in line with our expectations while faced with challenging markets and deflation. Revenue of $29.6 billion was broadly flat to last year, Our teams delivered gross margins of 30.5%, improving 10 basis points over the prior year. We proactively managed our operating expenses, delivering adjusted operating profit of $2.8 billion, representing a 9.5% adjusted operating margin. Adjusted diluted earnings per share came in at $9.69, a 1.5% reduction against prior year. Cash generation continued to be strong, With $1.9 billion of operating cash flow, this cash delivery enabled us to continue investing in our business and executing against our capital allocation priorities. We returned $1.4 billion to shareholders via dividends and share repurchases during the year, while also welcoming associates from 10 acquisitions, continuing our strategy of consolidating our fragmented markets. and we continued to deliver strong overall return on capital of approximately 31% for the year. Despite market headwinds and deflation, we outperformed our markets, we returned to volume growth, we expanded gross margins, and we delivered solid operating margin performance. Next, our performance against the broader end markets for the year. Our balanced end market exposure continues to serve us well, with about half our business and residential and half in non-residential. We've continued to take share across both end markets. We believe our residential end markets declined by approximately 7% due to a combination of weak new construction and softer repair maintenance and improvement markets. We outperformed with organic revenue down 4%. Non-residential markets were slightly more resilient than residential, but were down approximately 4%. We were pleased with the performance of our non-residential customer groups, particularly across large capital projects, where our multi-customer group approach is unique in the market. Our non-residential revenue was flat for the year. Taking a step back, over the longer term, our business model has generated consistent above-market organic growth, which is the foundation of everything we do. We've complimented that organic growth with a history of growth through acquisitions as we consolidate our fragmented markets through geographic bolt-on and capability deals. And the implementation of our strategy combined with disciplined execution has driven improvement in operating margins over time. If we look at more recent performance, over the past five years, we've grown revenue by nearly 50% and improved our operating margins by 150 basis points, growing our adjusted operating profit by 78% and our adjusted diluted earnings per share by 92%. We believe we're well positioned to continue this long-term track record of growth and improvement as we look to the future. Now let me hand over to Bill to go through the financials. Thank you, Kevin, and good morning, everyone. Let me start with some additional detail on the fourth quarter results. Net sales were 1.4% ahead of last year. driven by a 0.2% organic decline and a further 0.1% decline from the adverse impacts of foreign exchange rates, offset by a 1.7% contribution from acquisitions. As expected, price deflation continued at approximately 2%, resulting in organic volume growth of nearly 2% in the quarter. Gross margin was 31%, an increase of 40 basis points over last year. driven by the value we provide to our customers, as well as a decrease to our inventory reserves. We are particularly pleased with this performance as our teams continue to provide services and solutions that add value to our customers' projects. The cost base has been well managed, enabling us to deliver a 10.8% adjusted operating margin. Adjusted operating profit of $857 million was up $43 million, or 5.3% ahead of prior year. Adjusted diluted earnings per share of $2.98 was 7.6% ahead of last year, driven by the increase in adjusted operating profit and the impact of share repurchases. And our balance sheet remains strong at 1.1 times net debt to adjusted EBITDA. Turning to our fourth quarter performance by end markets in the U.S., net sales grew by 1.3%. Residential end markets, which comprise approximately half of U.S. revenue, remained muted due to softness in both new residential construction and RMI. Overall, residential revenue was flat in the fourth quarter. Non-residential markets were slightly more resilient, and we continued to perform well. Our revenue grew by 3% in the quarter with growth across commercial, civil infrastructure, and industrial. We've continued to see good levels of non-residential bidding activity on large capital projects. While we expect growth rates to fluctuate over time, our intentional balanced end market exposure positions us well. Moving to our customer groups in the U.S., residential trade plumbing grew by 1%, sequentially consistent with the third quarter, with repair and replace outperforming new construction. HVAC grew by 9% as we continue to build on the strengths of our residential trade plumbing and HVAC customer groups in service of the growing dual trade contractor. Residential building and remodel revenues were flat. Pressure amongst local and regional builders has been somewhat offset by resilience from larger national builders. On remodel, the higher end portion of the market continues to hold up better than the broader remodel market. Residential digital commerce declined by 12%, consistent with the third quarter as consumer demand continues to be weak. Waterworks revenues were up 5% with strength in public works, municipal, and commercial offsetting softness in residential. Our focused diversification efforts continue to drive growth in areas such as geosynthetics and meters and technology. The commercial mechanical customer group grew 6% driven in part by large capital projects such as data centers. Our industrial, fire and fabrication, and facility supply businesses delivered a combined net sales decline of 5%, heavily impacted by commodity steel pipe deflation, against a 6% growth comparable. Our breadth of customer groups positions us to maximize the value we bring to the total project, while also intentionally maintaining a broad and balanced end market exposure. Moving to our segment results, net sales in the U.S. grew 1.3% with an organic decline of 0.2% offset by a 1.5% contribution from acquisitions. Adjusted operating profit of $844 million increased 5% over the prior year, delivering an adjusted operating margin of 11.2%, 40 basis points ahead of last year. In Canada, net sales were 2% ahead of last year. with an organic decline of 1.2% and a 2.4% adverse impact from foreign exchange rates, offset by a 5.6% contribution from acquisitions. Markets have been broadly similar to that of the United States. Adjusted operating profit was $22 million in the quarter, flat to last year. Turning to the full year results, net sales were 0.3% below last year, with an organic decline of 2.4%, and a 0.1% adverse impact from foreign exchange rates. Offsetting this was a 1.8% contribution from acquisitions and a 0.4% uplift from one additional sales day. Deflation was approximately 2% for the year, driven by certain commodity categories. Gross margin was 30.5%, 10 basis points ahead of prior year as we continue to execute our strategy and provide value-added solutions to our customers. During the year, we were proactive in managing both labor and non-labor operating expenses to respond to the prevailing volumetric environment. As a result, adjusted operating profit of $2.8 billion with a 9.5% adjusted operating margin was in line with expectations we set out at the beginning of the fiscal year. An adjusted diluted earnings per share was $9.69, slightly down by 1.5% for the year. We are pleased with this performance given the market headwinds and deflation we experienced during the year. Moving to our cash flow performance. After the normalization of inventory last year, which generated outsized cash flow, we returned to a more typical year of strong cash generation with operating cash flow of $1.9 billion. Interest and tax came in as we expected, and we have continued to invest in organic growth through CapEx. investing $372 million in the year. As a result, free cash flow was $1.5 billion for fiscal year 24. Our balance sheet position is strong, with net debt to adjusted EBITDA of 1.1 times. We target a net leverage range of one to two times, and we intend to operate towards the low end of that range through cycle to ensure we have the capacity to take advantage of growth opportunities, as well as to maintain a resilient balance sheet. We allocate capital across four clear priorities. First, we invested $372 million into CapEx in the business to build on our competitive advantages and drive above market organic growth. We're investing to optimize our supply chain network through a combination of automation, efficiency, and expansion. And we continue to invest in digital tools and technology, as well as our extensive branch network. Second, We continued to sustainably grow our ordinary dividend. Our board declared a 79 cent per share quarterly dividend, bringing our full year dividend declared to $3.16, representing a 5% increase over our fiscal 23 declared dividends, reflecting our confidence in the business and cash generation. Third, we're consolidating our fragmented markets through bolt-on geographic and capability acquisitions. As Kevin outlined, we are pleased to have welcomed associates from 10 high-quality businesses this year. We invested $260 million, bringing in approximately $400 million of incremental annualized revenue. Our deal pipeline remains healthy, and we will continue to execute our consolidation strategy. And finally, we are committed to returning surplus capital to shareholders when we are below the low end of our target leverage range. We returned $634 million to shareholders via share repurchases this year, reducing our share count by approximately 3.3 million. And we ended the year with approximately $900 million outstanding under the current share repurchase program. Now let's turn our attention to the sequential revenue performance of the business, which is trending in line with our expectations. We've seen gradual improvement in organic growth trends despite market softness and ongoing deflation. Organic volume returned to growth in Q3 and Q4. While two-year comparables will ease as we progress through fiscal 25, we anticipate continued near-term market challenges and headwinds from deflation, particularly in the early part of the year. Which leads me next to our full-year guidance. Given various uncertainties of the market backdrop, there are a broad range of potential outcomes for the year ahead. Taking this into account, we believe revenue will grow in the low single-digit range for the year, reflecting an ongoing challenging near-term market environment. Our assumptions are based on our end markets declining in the low single-digit range, inclusive of pricing being down slightly for the year, driven by continued commodity deflation, particularly as we enter the year. We assume continued market outperformance, of approximately three to 400 basis points, a tail from already completed acquisitions, which we expect to generate approximately $250 million in revenue, offset in part by one fewer sales day in the third quarter. We have provided a range for adjusted operating margin between 9.0 to 9.5%. We expect interest to remain broadly consistent between 180 to $200 million. And as previously noted, our adjusted effective tax rate will be approximately 26%. And we expect to invest between $400 to $450 million in CapEx. After a year of strong execution, delivering resilient results, we continue to invest in the business to support our ongoing market outperformance. We believe the combination of our strong balance sheet, flexible business model, and balanced end market exposure positions us well as we move into fiscal 25. Thank you, and I'll now pass back to Kevin. Thanks, Bill. I now wanted to take some time to expand on a few key areas that Bill mentioned as he discussed our performance that we believe differentiate us in the market. First, our scale and global supply chain set us apart. Quite simply, we're driving the best breadth and depth of inventory where and when our customers need it. We aim to connect the entire supply chain from the point of manufacturing to the point of install. We deliver scale locally through our vast network of facilities and our fleet of vehicles for final mile delivery. This extensive network places us within 60 miles of 95% of our customers in North America. Building on this competitive advantage, we are further optimizing our network through a combination of automation, efficiency, and expansion. We continue to invest in our distribution facilities and implementing technology solutions. The combination of our supply chain capabilities, and our expert associates allow us to deliver the best local service in the industry. Next, we continue to focus on the significant dual trade opportunities in plumbing and HVAC. Our ability to bring together market leading capabilities in both plumbing and HVAC provide us with a competitive advantage for serving these professionals and capturing growth from this market for years to come. we estimate that the combined HVAC and residential trade plumbing markets to be approximately $100 billion, of which we estimate nearly $30 billion of the market is serviced by more than 65,000 dual trade plumbing and HVAC professionals. And this segment of the market is growing. We are expanding our HVAC offering to match the density of our plumbing presence, executing this expansion through a combination of dual trade branch conversions, geographic branch expansion, and acquisitions. We're further building our capabilities to provide a single point of service to those professionals while further differentiating our services as we simplify processes, harmonize pricing, and coordinate pickups and deliveries. Turning to non-residential markets and our view of the opportunities ahead with large capital projects. data continues to point towards the structural tailwinds from large construction projects over the next several years, supported by data centers, onshoring activity, legislative acts, and the aging infrastructure. When we leverage our core strengths, products and services across our customer groups, we add value and have the ability to sell from the ground up solutions, focusing on the entire project, not just selling products. We estimate our total addressable market for these projects to be in the region of $50 billion through fiscal 2030. In the short term, this type of activity has helped to offset traditional non-residential weakness as we continue to see solid bidding activity, which gives us confidence in this multi-year structural tailwind. We believe our scale and multi-customer group approach strongly positions us to capture meaningful growth from these significant and complex projects over the medium term. To close, let me again thank our associates for their dedication to serving our specialist professional customers. We are pleased with our team's execution in the quarter and for the year as a whole. Despite market headwinds and deflation during the year, we continue to consolidate our markets We returned to volume growth, we expanded gross margins, and we delivered solid operating margin performance. Our fiscal 25 guidance reflects modest full-year growth in an ongoing challenging near-term market environment. Our cash generative model allows us to continue to invest for organic growth, consolidate our fragmented markets through acquisitions, and return capital to shareholders. We intend to do this while maintaining a strong balance sheet operating at the low end of our target leverage range. We will continue to invest in scale and capabilities to take advantage of multi-year structural tailwinds, such as underbuilt U.S. housing, non-residential large capital projects, and our opportunity with the dual trade plumbing and HVAC contractor. 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.