Ferguson plc

Hello everyone and welcome to the Ferguson fourth quarter and year end results presentation. My name is Nadia and I'll be coordinating the call today. If you would like to ask a question at the end of the presentation, please press star, fill it by one on your telephone keypad. I will now hand over to your host, Brian Lance, Vice President of Investor Relations and Communications to begin. Brian, please go ahead.

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. A 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 expectations 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. Therefore, all references to operating profit, operating margin, diluted earnings per share, effective tax rate, and earnings before interest, taxes, depreciation, and amortization reflect certain non-GAAP adjustments. Please refer to our earnings presentation and announcement on our website for additional information regarding those non-GAAP measures, including reconciliations to their 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 to Ferguson's fourth quarter results conference call. On today's call, we'll cover highlights of our fourth quarter and full year performance and our market performance for fiscal year 25, including additional details on our customer groups and growth focus areas. Then we'll turn the call over to Bill to review financials, the change in our fiscal year, and our new calendar year financial outlook before I wrap up with a few final comments. We'll have time to take your questions at the end. In the fourth quarter, once again, our expert associates drove market outperformance and strong growth as they continued to serve our customers in a challenging market environment. Sales of $8.5 billion increased 6.9% over prior year, driven by organic growth of 5.8% and acquisition growth of 1.1%. Gross margin of 31.7% increased 70 basis points over the prior year. We remained disciplined on cost, and generated $972 million of operating profit, which grew 13.4% over last year. Diluted earnings per share increased 16.8% over prior year to $3.48. We continue to execute our capital priorities, deploying $483 million this quarter. Our investments in key growth areas, HVAC expansion, waterworks diversification, Large capital projects in Ferguson Home yielded solid results. We also announced four acquisitions in the quarter and one subsequent to the quarter, which focused primarily on HVAC and waterworks diversification. We'll provide more details on these growth areas and the recent acquisitions later on the call. We're pleased to return $354 million to shareholders through share repurchases and dividends, and our balance sheet remains strong with net debt to EBITDA of 1.1 times. While we continue to operate in an uncertain environment, we remain confident in our markets over the medium term, leveraging multi-year tailwinds in both residential and non-residential markets as we invest to support the complex project needs of the water and air specialized professional. Turning to our performance by U.S. end market in the fourth quarter. Net sales increased 7.1%, driven by our strong growth in non-residential markets. The residential end market, which makes up about half our U.S. revenue, has remained subdued due to weakened new construction starts and permit activity, as well as soft demand in repair, maintenance, and improvement. Residential revenue was flat in the quarter. Non-residential end markets, representing the other half of U.S. revenue, showed continued resilience with increased activity on large capital projects, We continue to grow share with non-residential revenue growth of approximately 15%. We delivered 17% and 13% growth across commercial and civil infrastructure end markets respectively, while industrial grew 5%. Our intentional balanced end market exposure and focus on key growth initiatives continue to position us well, both in the current environment and into the future. Moving to our U.S. performance by customer group for the quarter, HVAC revenue was slightly down due to softer market conditions impacted by the industry's transition to new efficiency standards and weak new residential construction activity. Despite these conditions, we were pleased with market outperformance during the quarter, particularly given the strong prior year comparable. Residential trade plumbing revenues decreased 2%. The business continues to face headwinds in new construction and ongoing PVC price deflation, while repair, maintenance, and improvement is performing better. As we previously shared, we've merged our residential building and remodel and our residential digital commerce customer groups into a unified brand called Ferguson Homes. This customer group accounts for approximately 19% of US sales and focuses on the higher end project market, which delivered Ferguson home revenue growth of 3% in the fourth quarter. Both Waterworks and Commercial Mechanical continued to drive strong activity on large capital projects. Commercial Mechanical revenue grew 21% and Waterworks revenues increased 15%, both on top of prior year growth comparables. Our industrial, fire and fabrication, and facility supply customer groups delivered a combined net sales growth of 5%. Our multi-customer group approach uniquely positions us to solve complex project requirements and drive market outperformance. Turning to our full-year performance, our teams delivered solid results while faced with challenging markets and periods of deflation. Revenue of $30.8 billion was 3.8% ahead of last year. The actions we took to streamline our business and manage costs more diligently resulted in operating profit of $2.84 billion, up 0.6%, and representing a 9.2% operating margin for the year. Diluted earnings per share came in at $9.94, a 2.6% increase over last year. Cash generation was strong, with $1.9 billion of operating cash flow, which allowed us to continue investing in our growth areas and executing our capital allocation priorities. We returned $1.4 billion to shareholders via dividends and share repurchases during the year, while also welcoming associates from nine acquisitions, continuing our strategy of consolidating our fragmented markets. and we continued to deliver strong overall returns on capital of approximately 29.4% for the year. Despite the challenging environment, we outperformed our markets, delivered solid volume growth, and drove profit expansion in fiscal 25. Next, our performance against the broader end markets for the year. Our residential end markets declined approximately 3% due to a combination of weak new construction and softer RMI markets. We outperformed with organic revenue up 1%. Non-residential markets were approximately flat as large capital project activity offset the weaker traditional non-res activity like warehouse and office space. As we discussed in the past, we believe our scale, our size, and our multi-customer group approach uniquely position us to provide value on large capital projects. we delivered 6% organic growth in the year, outperforming our typical 300 to 400 basis point market outperformance. And our balanced end market exposure continues to serve us well, and we've continued to take share across both end markets. Now let me highlight our four key growth areas that continue to show ongoing returns from our multi-year investments. Our HVAC revenue increased 8% for the year, driven primarily by organic growth and approximately 1% from acquisitions. By leveraging the synergy between our residential trade plumbing and HVAC customer groups, we continue to outperform the market. Dual trade counter conversions, geographic expansion of our HVAC network, and strategic acquisitions make up the multi-pronged approach of our HVAC Everywhere strategy. We've completed over 600 counter conversions, nearing our goal of 650, which we expect to achieve in early 2026. Our dual trade counters are uniquely positioned to serve approximately 65,000 dual trade contractors, which continue to make up a growing share of the HVAC and plumbing markets. Our recent acquisitions of manufactured duct and supply company out of Atlanta In the fourth quarter and more supply out of Chicago, which was subsequent to year end, further strengthen our HVAC strategy by expanding our footprint and continuing to support this dual trade professional. For Waterworks, our revenue grew 10% in fiscal year 25, driven by our diversification efforts as we expanded our capabilities to deliver a more integrated solution and address the nation's aging infrastructure. We've expanded our role as a strategic partner by collaborating with engineers and construction professionals during initial project stages and broadened our product offerings to include process equipment solutions. Specifically, our recent acquisitions of Templeton and Ritchie Environmental strengthen our expertise in water and wastewater treatment plant design. This adds to the existing breadth of solutions we already provide for water, wastewater, and green storm water management, as well as erosion control, treatment plant construction, and metering technology. Our unique approach to large capital projects and the rise in number of projects helped drive 7% total non-residential growth for the year. We're pleased to be a trusted partner in managing these complex projects that require expertise, scale, operational agility, and value-added solutions. By bringing together the capabilities of underground waterworks infrastructure, commercial and industrial PVF, and fire protection, create a compelling solution, particularly for data centers, large manufacturing operations, life science, and healthcare facilities. Onshoring and reshoring initiatives aimed at growing domestic production are further driving activity of large capital projects. We believe our early alignment with owners, engineers, and general contractors, combined with our deep contractor relationships, our scale, and our ability to offer a suite of value-added solutions, will continue to position us for success with these projects. Ferguson Home began its rollout in February and is a key milestone in delivering a seamless customer experience across all touchpoints, including online and in-person. It represents another compelling example of the value our multi-customer group approach brings to the market. In addition to enhancing the experience for residential customers, Ferguson Home is supported by a network of dedicated outside sales and showroom consultants who serve our specialized professional customers. These associates bring deep product expertise and personalized service to builders, designers, and other trade professionals, helping meet their unique project needs with precision and care. Bringing together residential building and remodel and residential digital commerce reinforces Ferguson's role as a trusted partner for the professional. We're pleased with the ongoing success of these growth areas, and we'll continue investing in them to leverage the unique advantages we can bring to the market that drive out performance. I'll now pass the bill. We'll discuss the financial results in more detail. Thank you, Kevin, and good morning, everyone. Let me start by covering our fourth quarter financial results in a bit more detail. Net sales of $8.5 billion were 6.9% ahead of last year. Organic revenue increased 5.8% with an additional 1.1% coming from acquisitions. During the quarter, we saw a return to mild inflation with pricing contributing approximately 2%. We saw improvement in finished goods pricing while commodity-related categories were down low single digits. Gross margin of 31.7% increased 70 basis points over last year, driven by our associate's strong execution and the timing and extent of supplier price increases. We tightly managed operating expenses, benefiting from the streamlining actions we took earlier in the year while we continued to invest in core capabilities for future growth. As a result, operating profit of $972 million was up 13.4% on the prior year, delivering an 11.4% operating margin with 60 basis points of expansion over prior year. Diluted earnings per share of $3.48 was 16.8% above last year, driven by operating profit growth and the impact of share repurchases. And our balance sheet remains strong at 1.1 times net debt to EBITDA. Moving to our segment results, net sales in the US grew 7.1%, with an organic increase of 6.1% and a 1% contribution from acquisitions. Operating profit of $962 million increased $118 million over the prior year, delivering an operating margin of 11.9%. In Canada, net sales were 4.8% above last year, with organic growth of 0.3%, and a 4.9% contribution from acquisitions, partially offset by a 0.4% adverse impact from foreign exchange rates. Residential activity has continued to be softer than non-residential, where the market has remained more resilient. Operating profit of $24 million in the quarter was $2 million above the prior year. Turning to our full year results, our associates delivered growth amid a challenging market backdrop. Net sales were 3.8% above last year, with organic growth of 3.2% and an acquisition contribution of 1%, partially offset by a 0.4% adverse impact of one fewer sales day. Pricing for the year was slightly down as a result of deflation in certain commodity-related categories, particularly early in the year. Gross margin of 30.7% was up 20 basis points. Operating profit of $2.8 billion grew 0.6% over the prior year, delivering a 9.2% operating margin. And diluted earnings per share of $9.94 was up 2.6% on the prior year. Next are cash flow performance. EBITDA of approximately $3.1 billion was up $44 million on the prior year. Working capital investments of approximately $300 million and interest in tax of approximately $800 million were generally in line with the prior year. As a result, operating cash flow was $1.9 billion, up $35 million on the prior year. We invested $305 million in CapEx and generated $51 million in proceeds from asset sales, resulting in free cash flow of $1.654 billion, an increase of $132 million over the prior year. Turning to capital allocation, as previously mentioned, we invested approximately $300 million in working capital and another $300 million in CapEx to drive further above market organic growth. Our board declared an 83 cents per share quarterly dividend. This is consistent with the third 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. As Kevin mentioned, we completed four acquisitions during the fourth quarter, including HPS Specialties, a manufacturer's representative of HVAC, plumbing and hydronic supplies serving commercial mechanical and industrial engineering professionals in the Northeast and Mid-Atlantic regions. Ritchey Environmental Solutions, a process equipment manufacturer's representative serving the water and wastewater treatment market in Virginia. Manufacturer Duct and Supply Company, an HVAC supplies and parts distributor covering the Atlanta and southeast markets. And Water Resources, Inc., an exclusive distributor of Neptune Technology Group products and water meters in the greater Chicago metro area. In total, we completed nine acquisitions in the fiscal year. Subsequent to year end, we purchased Moore Supply, an HVAC distributor based in Chicago that serves HVAC and dual trade professionals. As we look forward, our acquisition pipeline remains healthy. 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 EBITDA. We returned $948 million to shareholders via share repurchases this year. compared to $634 million in the equivalent prior year period. This year, we have reduced our share count by approximately 5 million and still have approximately $1 billion outstanding under the current share repurchase program. Now, let me address the change of our fiscal year end from July 31st to December 31st. This move shifts year end activities from our seasonally busiest time of the year to our slowest. allowing our associates to remain focused on our customers during their peak season. A five-month transition period will span from August 1 through December 31, 2025. During this time, we will release earnings on December 9, covering the three-month period of August 1 through October 31. We plan to announce our five-month transition period results in late February, and our new fiscal year will begin on January 1, 2026. As a result of this change, we are providing guidance for the 2025 calendar year. But before I move to the guidance, we have presented our first half performance on a calendar year basis for background. For the six months ended June 30th, sales of $15.6 billion grew 5% over the prior year. Operating profit of $1.5 billion increased 8%, resulting in an operating margin of 9.6%, an improvement of 30 basis points from 9.3% in the prior year. Further historical financial information for calendar quarters with relevant reconciliations can be found in an appendix at the end of this slide deck. Now, turning to our guidance for the 2025 calendar year, where we have provided the relevant comparative results from calendar 2024. We expect mid-single-digit revenue growth in calendar 2025. and we expect an operating margin range of 9.2 to 9.6 percent, an improvement of between 10 and 50 basis points over the prior year. Interest expense is expected to be between $180 to $200 million. Our effective tax rate is expected to be approximately 26 percent, and we estimate CapEx will be between $300 to $350 million. Despite the market uncertainty, We are leveraging the strength of our supply chain, tailored value-added solutions, innovative digital tools, and the expertise of our associates, enabling us to capitalize on multi-year tailwinds and drive out performance. Thank you, and I'll now pass you back to Kevin. Thank you, Bill. And let me again thank our expert associates who delivered strong results to finish this challenging year by continuing to take care of our customers and execute our strategy. Our ability to offer a scaled, multi-customer group approach on a project is unique and important to our key growth areas, including HVAC expansion, waterworks diversification, large capital projects, and Ferguson Home. Our performance continues to deliver results from these multi-year investments as we help meet our customers' needs. While we continue to operate in an uncertain environment, we believe our markets remain attractive over the medium term, and we continue to invest in our expert associates and our value-added capabilities to drive growth. We're committed to supporting the project needs of our water and air specialized professional customers by delivering scale locally and providing exceptional customer service. 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.