Ferguson Enterprises Inc. /DE/ Q4 FY2024 earnings call

Management Statement and Operational Highlights

• Fourth Quarter Performance: Delivered sales of $7.9 billion, an increase of 1.4% despite deflation of approximately 2%. Gross margins were resilient, and adjusted operating profit was $857 million, an increase of 5.3% over prior year, resulting in an adjusted operating margin of 10.8%. Adjusted diluted earnings per share grew 7.6% to $2.98.
• Full Year Performance: Team delivered resilient results in line with expectations despite challenging markets and deflation. Revenue was $29.6 billion broadly flat to last year. Gross margins were 30.5% improving 10 basis points over the prior year. Adjusted operating profit was $2.8 billion with a 9.5% adjusted operating margin. Adjusted diluted earnings per share was $9.69, a 1.5% reduction against prior year.
• End Markets: Balanced end market exposure with about half business in residential and half in non-residential. Residential end markets declined by approximately 7% but outperformed with organic revenue down 4%. Non-residential markets were down approximately 4% but flat for the year, strong in large capital projects.
• Supply Chain and Capabilities: Extensive network in North America, investing in automation, efficiency, and expansion. Focus on dual trade opportunities in plumbing and HVAC, expanding HVAC offering. Strong in non-residential large capital projects, addressing a $50 billion+ market by 2030 through multi-customer group approach.

Segment Performance

• Fourth Quarter 2024:
  • US net sales grew 1.3%, with an organic decline of 0.2% offset by a 1.5% contribution from acquisitions. Adjusted operating profit was $844 million, increasing 5% over the prior year, delivering an adjusted operating margin of 11.2%, 40 basis points ahead of last year.
  • 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. Adjusted operating profit was $22 million in the quarter, flat to last year.
• Full Year 2024:
  • Net sales were $29.6 billion, broadly flat to the prior year. Gross margins were 30.5%, improving 10 basis points over the prior year. Adjusted operating profit was $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 was strong with $1.9 billion of operating cash flow.

Guidance

• Fiscal 2025: Expect revenue growth in the low single-digit range. Adjusted operating margin projected to be between 9.0% to 9.5%. Interest expected to remain broadly consistent between $180 million to $200 million. CapEx expected to be between $400 million to $450 million. Assumes continued deflation and market challenges but sees medium-term opportunities in underbuilt housing, aging infrastructure, and non-residential large capital projects.

Risks

• Market Volatility: Continued macroeconomic pressure, deflation, and slower market recovery could impact performance.
• Commodity Pressures: Prolonged deflation in commodity-based products could affect gross margins and top-line growth.
• Regulatory Changes: Impact on non-residential projects and end markets due to changing regulations or legislation.

Question and Answer

• Q: Color on deflation and inflection point? A: Deflation driven by commodities, expected to ease as 2024 comparables roll over, but timing uncertain.
• Q: Gross margin benefit from inventory reserve and 2025 margin outlook? A: Inventory reserve adjustment helped Q4 gross margin. 2025 margin pressure from SG&A leverage due to deflation and market challenges.
• Q: Growth expectations for 2025, end markets, and year start? A: Resi down low-mid single-digit, non-resi flat-ish. Year started soft with organic growth still down.
• Q: Progress on own brands and tax rate in 2025? A: Own brands ~10% of revenue, growing across segments. Tax rate ~26% due to US domiciliation and rate changes.
• Q: Free cash flow, capital allocation, and M&A in 2025? A: Strong free cash flow, balanced capital allocation including M&A, pipeline healthy with focus on HVAC and capability deals.
• Q: Large capital projects addressable market and progress? A: Addressable market ~$50B by 2030, early innings with continued project pipeline.
• Q: Dual trade leadership and market position? A: Nationwide player with unique approach in plumbing and HVAC dual trade, leading in service for dual trade professionals.