Ferguson plc

Good morning, ladies and gentlemen. My name's Lydia and I'll be your conference operator today. At this time, I'd like to welcome you to Ferguson's second 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'll 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. Thank you. I'd now like to turn the call over to Mr. Brian Lanz. Ferguson's Vice President of Investor Relations and Human Communications. You may begin your conference call.

Good morning, everyone, and welcome to Ferguson's second 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 second quarter results conference call. On the call today, I'll cover highlights of our second quarter performance, I'll also provide a more detailed view of our performance by end market, customer groups, and growth initiatives before turning the call over to Bill for the financials. I'll then come back at the end and give some closing comments before Bill and I take your questions. During the second quarter, our associates executed well for our customers, delivering continued volume growth driven by market outperformance. Sequential step-up in our volume growth rate generated sales of $6.9 billion. An increase of 3% over prior year, despite continued commodity-led deflation of approximately 2%. We delivered adjusted operating profit of $449 million as we managed through the sixth consecutive quarter of overall deflation in what was a subdued market. We continue to execute our capital priorities, deploying approximately $500 million in capital during the quarter. And the $1 billion increase to our share repurchase authorization reflects our confidence in our business. We remain confident in both our residential and non-residential end markets over the medium term, and we continue to balance investment in our customer-facing associates, our capabilities, and our value-added solutions. That said, we are taking near-term actions to increase speed and efficiency to better serve our customers and to better position the organization for future profitable growth. Turning to our performance by end market in the United States. Net sales grew by 3% despite continued deflation driven by commodity products across both residential and non-residential end markets. The residential end market, which comprises approximately half of U.S. revenue, remains subdued across both new construction and repair maintenance and improvement. Our teams grew revenues in our residential end market by approximately 2% in the quarter. The non-residential market was slightly more resilient with continued activity on large capital projects where we saw healthy levels of shipments, bidding activity, and open order volumes. We continue to take share with our total non-residential revenue growth of approximately 4%. Sales grew modestly in both commercial and industrial with particular strength in civil infrastructure. Our intentional balanced market exposure, new versus repair, maintenance, and improvement, And residential versus non-residential continues to position us well, both in the current environment and well into the future. Moving now to revenue performance across our customer groups in the United States. We are pleased with the continued sales growth in our HVAC customer group, an increase of 17% in the quarter, building on growth from the prior year as we continue to strategically invest in distinct growth initiatives, which I'll cover in a bit more detail later. Residential trade plumbing revenues were flat, broadly consistent with recent quarters. Business faced continued headwinds in new construction and ongoing price deflation, while repair, maintenance, and improvement is performing slightly better. We saw similar trends in residential building and remodel and residential digital commerce, where the higher end project is holding up better than the broader remodel market. We'll discuss later how these groups are coming together to create a unique experience in the market. Waterworks revenues were up 10% with robust activity in public works, general municipal, and meters and metering technology, offsetting weaknesses in residential. Additionally, our diversification efforts continue to drive incremental growth, positioning us well for the long term. Commercial mechanical customer group grew 2%, driven by large capital projects such as data centers, partially offset by weaker activity in traditional non-res projects. We're optimistic as we enter the third quarter as our open order book continues to grow. Our industrial, fire and fabrication, and facility supply customer groups delivered a combined net sales decline of 6%, heavily impacted by commodity deflation in steel pipe, particularly in our fire and fabrication business. We remain committed to driving productivity for our specialized professional customers and maximizing value to the total project across each of our customer groups. Despite near-term market headwinds, we're very pleased with the results of our investments in key growth areas. Within HVAC, our markets are large, fragmented, and highly attractive. We're taking a three-pronged approach to growth with a combination of dual-trade counter product conversions, geographic expansion of our HVAC network, and strategic acquisitions. We're meeting the needs of the rapidly growing dual-trade professional by completing over 500 counter conversions that now better serve both plumbing, and HVAC professionals. We're ahead of our pace to complete our goal of over 650 dual trade counters in fiscal 2026. We deploy a multi-equipment brand strategy, partnering with a number of branded suppliers to ensure our customers have access to the product choice that they require. Additionally, our private label HVAC line Durastar has shown solid growth and is building momentum as a high quality equipment line that's accessible across the United States for our customers. Our waterworks business is both our largest and most diversified customer group. We're involved from the design stage through project management. Our diverse business provides solutions for water, wastewater, and stormwater management, as well as erosion control, urban green infrastructure, treatment plant construction, and metering technology. We've expanded our capabilities to offer more holistic solutions for our customers. Day in and day out, we're solving problems to support the nation's aging infrastructure. With the use of artificial intelligence, we advise our customers in areas such as preventative maintenance and leak detection. Our knowledgeable Waterworks associates leverage the scale of our business and our supply chain to provide outstanding service and deliver comprehensive solutions for our customers. Waterworks is also a unique and critical piece of our focus on large capital projects, an area where tailwinds have emerged in an otherwise muted non-residential end market. Our multi customer group approach on large capital projects drives collaboration and expertise across our waterworks commercial mechanical industrial and fire and fabrication customer groups to solve complex project requirements. The sophistication and size of these projects, particularly data centers demand extensive expertise proficiency and the ability to scale. By engaging early in the project lifecycle. We partner with owners, architects, engineers, and general contractors. We influence and address project challenges effectively, leading to successful outcomes. Finally, the recent launch of Ferguson Home represents another area of growth as a unified brand that fully integrates our showroom and digital channels, offering customers a seamless project-based experience. This best-in-class omni-channel approach is the next step for the evolution of our digital footprint. while leveraging the expert consultative approach within our showrooms. For our customers, this results in a more consistent and connected experience that simplifies and enhances residential projects, bringing additional value to our residential building and remodel and residential digital commerce customer groups. We're pleased with the progress of these key growth areas and will continue to invest in them to drive long-term growth and returns. And I'll pass you over to Bill, who will discuss the financial results in more detail. Thank you, Kevin, and good morning, everyone. Net sales of $6.9 billion were 3% ahead of last year. Organic revenue increased 2.1%, with an additional 1.2% increase from acquisitions. Total volume increased by 5%, offset by continued commodity-led price deflation of approximately 2%. This represents our fourth consecutive quarter of volume growth. Gross margin was 29.7%, a decrease of 70 basis points over last year, impacted by weak end market demand and persistent deflation, along with the sales mix impact of outsized growth in HVAC and waterworks. Operating costs grew largely in line with our 5% sales volume growth. The 60 basis point decline in operating leverage was largely driven by the impact of price deflation on sales, along with the impact from continued selective investments in core capabilities for future growth. As a result, adjusted operating profit of $449 million was down $71 million on the prior year, delivering a 6.5% adjusted operating margin. Adjusted diluted earnings per share of $1.52 was 12.6% 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 3% with an organic increase of 2% and a 1% contribution from acquisitions. Adjusted operating profit of $455 million decreased $70 million over the prior year, delivering an adjusted operating margin of 6.9%. In Canada, Net sales were 3.2% ahead of last year, with organic growth of 3.1% and a 5.4% contribution from acquisitions, partially offset by a 5.3% 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 was $11 million in the quarter, $2 million above the prior year. Turning to our first half results, the year has been challenged by persistent commodity-led deflation and subdued end markets. Despite this, we have consistently outperformed our markets. Net sales were 1.8% ahead of last year, with organic sales up 0.8% and an acquisition contribution of 1.2% offset by 0.2% from the adverse impact of foreign exchange rates. Gross margin was 29.9%. down 40 basis points. Adjusted operating profit of $1.2 billion was down 10.7% compared to the prior year, delivering a 7.9% adjusted operating margin. An adjusted diluted earnings per share of $3.98 was down 9.5%. Next are cash flow performance. Adjusted EBITDA of $1.26 billion was down approximately $130 million on the prior year. Working capital investments of $200 million were above the prior year by $87 million, driven by investments in HVAC to support our growth initiatives, as well as the transition to new equipment efficiency standards, along with an increase in receivables driven by sales growth. Interest and tax were down approximately $40 million in the prior year. As a result, operating cash flow was $685 million. We have continued to invest in organic growth through CapEx, investing $158 million, slightly down on the prior year as projects are taking longer to complete, resulting in free cash flow of $545 million in the first half. Turning to capital allocation, as previously mentioned, we invested $158 million into CapEx during the first half to drive further above-market organic growth. Our board declared an 83 cent per share quarterly dividend, This is consistent with the first quarter and represents a 5% increase over the prior year, reflecting our confidence in the business and cash generation. We continue to consolidate our fragmented markets through bolt-on geographic and capability acquisitions. We announced one completed acquisition during the second quarter, Templeton and its affiliate Tempsco. In addition, subsequent to quarter end, we signed a definitive purchase agreement to acquire independent pipe and supply. a leading commercial mechanical business in the Northeast. 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 $508 million to shareholders via share repurchases during the first half, compared to $250 million in the first half of the prior year, reducing our share count by approximately 2.6 million. And today, we've announced an increase to our share repurchase program by an additional $1 billion, reflecting our confidence in the business. As a result, we have approximately $1.4 billion outstanding under the share repurchase program. Next, I'll cover our revised outlook for fiscal 2025. We are pleased with our continued market outperformance, but challenging end markets and persistent commodity-led deflation have resulted in adjusted operating margins coming in below our expectations in the first half. While we continue to expect improvement in the second half, we believe our markets will remain somewhat subdued and are therefore updating our full year outlook. Our fiscal 2025 guidance is as follows. We maintain our view of total sales growth in the low single digit range. With the continued assumption of 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 in 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 8.3 to 8.8%. Interest expense will be between $180 to $200 million. Our adjusted effective tax rate will be approximately 26%. And we've revised our CapEx estimate to be between $325 to $375 million to reflect the extended project delivery timeline and pace of expected capital deployment. Also, as Kevin mentioned earlier, we are currently taking actions to increase speed and efficiency to better serve our customers and deliver value. While we have been disciplined in managing costs in relation to volume growth, there's additional opportunity to reduce complexity, simplify management structures, and drive greater speed and accountability within the organization. These actions we are taking will better position the organization for profitable growth. Thank you, Bill. As we conclude our remarks, let me reiterate our thanks to our associates whose continued execution has driven further share gains despite a backdrop of market headwinds and commodity-led price deflation. With leading positions in large, highly fragmented markets, we expect to continue to outperform our markets as we leverage our size, scale, and strategy. We're operating in a unique time where we must continue to drive disciplined cost management. We're taking actions to better position the organization for future profitable growth. We differentiate ourselves on service levels focusing on value-added solutions, a suite of digital tools backed by the strength of our knowledgeable associates and a supply chain that delivers the best breadth and depth to our customers where and when they need it. In residential markets, we continue to see strong long-term fundamentals with an aging and underbuilt housing stock in addition to our structural growth opportunity in HVAC. On the non-residential side, our diverse exposure coupled with multi-year tailwinds from large capital projects are expected to drive continued growth. We're well positioned for this growth, as we engage in a more holistic involvement earlier in the design phase to leverage our scale, our value added solutions, and our digital capabilities. We believe our markets remain attractive over the medium term, and we continue to balance investment in our core customer facing associates and our capabilities, focusing on the principles that underpin our strategy for sustained growth and market leadership. Thank you for your time today. Bill and I are now happy to take your questions. I'll hand the call back over to you. Thank you.