Ferguson plc Q3 FY2025 earnings call

Key Points

• Sales totaled $7.6 billion, up 4.3% year-over-year, driven by organic growth of 5% and acquisition growth of 1%, offset by 1.7% from 1 fewer sales day and foreign exchange. Gross margin was 31%, up 50 basis points. Operating profit increased 6.1% to $715 million, with an operating margin of 9.4%. Diluted earnings per share were $2.50, up 7.8%.
• End Markets: Residential end market in the U.S. grew ~2% (driven by HVAC growth initiative), while nonresidential end markets grew ~7% (strong activity on large capital projects).
• Customer Groups: HVAC customer group up 10%; residential trade plumbing down 1% (faced headwinds in new construction); Ferguson Home merged residential building/remodel and digital commerce for omnichannel experience; Waterworks up 12%; Commercial/Mechanical up 10%; Industrial, Fire and Fabrication, Facility Supply down 1% (due to commodity deflation).
• Growth Initiatives: Focus on HVAC expansion, Waterworks diversification, large capital projects, and launch of Ferguson Home for seamless omnichannel experience.

In the United States, net sales grew 4.5% with an organic increase of 5% and a 1% contribution from acquisitions, partially offset by a 1.5% impact from 1 fewer sales day. Operating profit was $726 million, up $41 million from the prior year, delivering an operating margin of 10%. In Canada, net sales were 0.3% below last year, with organic growth of 3% and a 2.8% contribution from acquisitions, offset by a 4.4% adverse impact from foreign exchange rates and a 1.7% impact from 1 fewer sales day. Operating profit in Canada was $8 million in the quarter, $2 million above the prior year.

Forward-Looking

• Updated fiscal 2025 guidance: Expect low to mid-single-digit revenue growth (up from prior low single-digit). Operating margin range revised to 8.5% to 9.0% (up from 8.3% to 8.8%). Interest expense expected to be between $180 million to $200 million. Effective tax rate estimated at approximately 26%. CapEx estimate revised to between $300 million to $350 million.

Risks

• Uncertain external variables such as tariff changes, industry price increases, and deflation in certain commodity categories that could impact results.

Question and Answer

• **Q: Organic volume growth and sustainability?

A: Kevin Murphy attributes strong organic growth to nonresidential large capital projects and residential HVAC initiatives, stating sustainability as market trends play out over the medium term.**

• **Q: Gross margin and mix impact?

A: Bill Brundage notes minor mix impact, with actions taken in Q2 leading to improved gross margin in Q3, expecting margins above 30% in Q4.**

• **Q: Bidding activity in commercial and industrial?

A: Kevin Murphy says there is strong bidding activity in commercial and industrial, with open orders growing, but watches for potential project cancellations.**

• **Q: Tariffs and margin management?

A: Kevin and Bill discuss the industry moving to annual price increases, suppliers varying responses to tariffs, but express confidence in managing margins through value delivery.**

• **Q: Waterworks growth and residential bidding?

A: Kevin Murphy mentions Waterworks' diversification and pleased with public works growth, while being cautiously optimistic about residential new build bidding activity.**

• **Q: Fiscal guidance and fourth quarter?

A: Bill Brundage explains the upgrade in fiscal guidance is due to strong third quarter performance and a solid outlook for the fourth quarter.**

• **Q: HVAC branch conversions and outgrowth?

A: Kevin Murphy states majority of HVAC growth is organic, with counter conversions for dual trade contractors, and a balanced approach of organic expansion, acquisitions, and conversions.**

• **Q: Restructuring and OpEx?

A: Bill Brundage says restructuring reduced 800 positions, with expectations of SG&A leverage in the fourth quarter as the year concludes.**

• **Q: Fiscal guidance disaggregation?

A: Bill Brundage attributes the upgrade in fiscal guidance to the positive performance in the third quarter and a better setup for deflation moving forward.**

• **Q: HVAC refrigerant transition and inventories?

A: Kevin Murphy indicates the refrigerant transition is largely through A2L conversion, with little price inflation contributing to HVAC growth.**

• **Q: Pull forward buying and categories?

A: Kevin Murphy says pull forward buying had immaterial impact in Q3, with tariff activity in the quarter being largely insignificant.**

• **Q: Competitive dynamics and gross margin?

A: Kevin Murphy explains that product strategy and sales management efforts balance growth and gross margin by ensuring the right product for contractor applications.**

• **Q: Residential new build bidding and share gain?

A: Kevin Murphy expresses being pleasantly surprised by single-family new construction bidding activity, encouraged by the positive sign of activity across markets.**

• **Q: Ferguson Home reception and surprises?

A: Kevin Murphy is pleased with Ferguson Home's rollout, noting embrace of the omnichannel experience, with some bumps being worked out along the way.**

• **Q: Own brand and distribution centers?

A: Kevin Murphy discusses diversified sourcing for own brand to mitigate tariff risks, while Bill Brundage talks about distribution center openings and future investments in the supply chain network.