Ferguson plc

Good morning all and thank you for joining us for Ferguson's first call to conference call. My name is Carly and I'll be coordinating your call today. If you'd like to register a question during the call you can do so by pressing star followed by one on your telephone keypad and to remove yourself from the line of questioning will be star followed by two. And I'd like to hand over to your host Brian Lance, Ferguson's VP of Investor Relations and Communications. You may now begin the conference.

Good morning, everyone, and welcome to Ferguson's first 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 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 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 first quarter results conference call. On today's call, I'll cover highlights from our first quarter performance. I'll also provide a more detailed view of our performance by end market and by customer group before turning the call over to Bill for the financials. I'll then come back at the end to give some closing comments before Bill and I take your questions. Again in the first quarter, our associates have remained focused on execution and on customer service. We continue to outperform broader markets with sales of $7.8 billion, nearly 1% ahead of last year, despite market headwinds and deflation of approximately 2%. Gross margins were resilient, and we continue to manage operating costs, focusing on servicing volumetric growth and continued investment in our business. We delivered adjusted operating profit of $706 million, representing a 9.1% adjusted operating margin. Adjusted diluted earnings per share of $2.45 was down 7.5% on the prior year. This year has largely started out as expected, with volume growth offset by continued price deflation in commodity-based products. Our balanced business mix and our ability to deploy scale locally gives us confidence in our continued outperformance as our markets return to growth. Turning to our performance by end market in the United States. Net sales grew by 0.5%. Residential end markets, which comprise approximately half of U.S. revenue, saw similar activity levels to the fourth quarter. Both new residential construction and repair, maintenance, and improvement markets have been down compared to the prior year, and we've continued to outperform with overall residential revenue flat in the first quarter. Non-residential markets were slightly more resilient, but also remained down year over year, with activity levels similar to the fourth quarter. We continued to take share with total revenue growth of approximately 1%. Sales in civil infrastructure and industrial were stronger with commercial flat. We continued to see solid shipments, open order volumes, and bidding activity on large capital projects, and our intentional balanced market exposure continues to position us well. Moving now to revenue performance across our customer groups in the United States. Residential trade plumbing grew by 1%, sequentially consistent with both the third and fourth quarters, despite headwinds in both new and repair maintenance and improvement construction, as well as continued price deflation. HVAC grew by 10% as we continue to invest in distinct growth initiatives, including servicing the dual trade contractor. Residential building and remodel revenues were down 1%, similar to the past couple of quarters. The higher-end remodel market continues to hold up better than the broader remodel market. Residential digital commerce declined by 8% as consumer demand remained weak. Waterworks revenues were up 3% with activity in public works, general municipal, and meters and metering technology offsetting weakness in residential. Our diversification efforts into geosynthetics and soil stabilization continue to position us well for growth. The commercial mechanical customer group grew by 1% on top of a strong 6% prior year comparable, driven by large capital projects such as data centers, partially offset with weaker activity in traditional non-residential projects. Our industrial fire and fabrication and facility supply customer groups delivered a combined net sales decline of 6%, heavily impacted by commodity deflation and steel pipe against a flat comparable. we remain committed to a broad and balanced end market exposure, driving productivity for our specialized professional customers and maximizing value to the total project. Now let me pass you over to Bill to cover the financial results in more detail. Thank you, Kevin, and good morning, everyone. Net sales of $7.8 billion were 0.8% ahead of last year, driven by an organic revenue decline of 0.3%, offset by acquisition growth of 1.1%. On a volumetric basis, total volume increased by approximately 3%, with organic volume up approximately 2%. Continued weakness in certain commodity-related categories drove modest overall price deflation of around 2%. Gross margin was 30.1%, a decrease of 10 basis points over last year. Operating cost growth was driven by volumetric growth inflation, and continued investment in organic growth capabilities, including our annual trainee class, HVAC expansion efforts, large capital project teams, and investments in digital tools. Adjusted operating profit of $706 million was down $67 million, delivering a 9.1% adjusted operating margin. Adjusted diluted EPS of $2.45 was 7.5% 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 by 0.5% with an organic decline of 0.4% offset by a 0.9% contribution from acquisitions. Adjusted operating profit of $697 million decreased $69 million over the prior year, delivering an adjusted operating margin of 9.5%. In Canada, net sales were 6.3% ahead of last year, with organic growth of 1.3% and a 5.6% contribution from acquisitions, partially offset by a 0.6% 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 of $23 million in the quarter was flat to last year. Moving to our cash performance, working capital investments of $376 million during the first quarter were a touch higher than historical seasonal trends due to timing and investments in HVAC to support our growth initiatives, as well as the transition to new efficiency standards. As a result, operating cash flow was $345 million in the quarter. We have continued to invest in organic growth through CapEx, investing $77 million, resulting in free cash flow of $274 million in the first quarter. Turning to capital allocation. As previously noted, we invested $77 million of CapEx into the business in the first quarter to build on our competitive advantages and drive above-market organic growth. We're investing in areas such as counter conversions to sell both HVAC and plumbing material to a growing segment of dual trade professionals. We're also investing to optimize our supply chain network for a combination of automation, efficiency, and expansion. And we continue to invest in digital tools and technology. We raised our dividend 5% over the prior year to 83 cents per share for this quarter, reflecting our confidence in the business and cash generation. We continue to consolidate our fragmented markets through bolt-on geographic and capability acquisitions. We are pleased to announce two completed acquisitions, Fresno Pipe & Supply and Templeton. And finally, we are committed to returning surplus capital to shareholders when we are below the low end of our target leverage range of one to two times net debt to adjusted EBITDA. We returned $256 million to shareholders via share repurchases this quarter. reducing our share count by approximately 1.3 million. And we ended the quarter with approximately $600 million outstanding under the current share repurchase program. Moving on to our fiscal 2025 guidance. As Kevin said, the year has started largely as we expected, and as a result, our guidance is unchanged. We expect next sales to grow in the low single-digit range based on our markets being down low single digits, inclusive of pricing being slightly down for the year, driven by ongoing deflation in commodity-based products. We expect continued market outperformance of approximately 300 to 400 basis points and just under a 1% contribution from already completed acquisitions, which is partially offset by one fewer sales day in the third quarter. We expect an adjusted operating margin range between 9 to 9.5%. Interest expense will be between $180 to $200 million, Our adjusted effective tax rate will be approximately 26%, and we expect to invest between 400 to $450 million in CapEx. We believe that our strong balance sheet, agile business model, balanced end market exposure, and continued investment positions as well for the future. Thank you, and I'll now pass back to Kevin. Thank you, Bill. As we conclude our remarks, let me first reiterate how proud we are of our associates who have displayed disciplined execution in an environment characterized by market headwinds and commodity price deflation. Our focus remains steadfast on the principles that underpin our strategy for sustained growth and market leadership. As a result, our fiscal year has started largely as we expected. Our strong balance sheet enables us to invest in organic growth, consolidate fragmented markets through acquisitions, and return capital to our shareholders. We will continue to operate at the lower end of our target leverage range maintain the flexibility to capitalize on strategic opportunities as they arise. Our commitment to delivering productivity for our customers remains unwavering. By enhancing our value-added solutions and our digital tools, we're creating efficiencies, reducing costs, and enhancing quality to provide real benefits for our customers. This is especially important in the current challenging macroeconomic environment, given the pressures on the trade labor force. We expect to continue to outperform our markets as we leverage multi-year structural tailwinds. Our size, scale, and strategy, we believe we are well positioned to take advantage of opportunities in the underbuilt and aging U.S. housing market, non-residential large capital projects, and the growing demand for plumbing and HVAC specialized professionals. 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.