Ferguson plc Q1 FY2026 earnings call

• Financial performance: Sales of $8.2 billion increased 5% y-o-y; gross margin 30.7% increased 60 basis points; operating profit $808 million grew 14%; diluted EPS $2.84 increased nearly 16%. Deployed $511 million, declared 7% dividend increase, acquired Moore Supply Company, and returned $372 million to shareholders. - End markets: Residential end markets challenged with weak housing starts, but Ferguson outperformed; nonresidential end markets performed better with share gains. - Customer groups: Waterworks grew 14%, Ferguson Home grew 1%, other groups had varied performance. - Acquisitions: Completed acquisition of Moore Supply Company, an HVAC equipment and supplies business in the Chicago Metro Area. - Capital allocation: Strong balance sheet with net debt to EBITDA of 1.1 times; invested in working capital and CapEx, returned capital to shareholders.

In The United States, net sales grew by 5.3%. Residential end markets, representing approximately half of US revenue, were challenged with weak housing starts and soft repair/maintenance work, but Ferguson's residential revenue was down 1% in the quarter. Nonresidential end markets performed better, with revenue up 12% driven by scale, expertise, multi-customer group approach, and value-added services. Across customer groups in the US, Waterworks revenues grew 14% due to strength in large capital projects, public works, etc. Ferguson Home grew 1% in a challenging market. Residential trade plumbing declined 4%, HVAC declined 6%, commercial mechanical grew 21%, and fire and fabrication, facility supply, and industrial customer groups saw growth. In Canada, net sales were 2.2% ahead of last year, but markets were subdued, especially residential, and operating profit was $16 million, $7 million below last year.

• Expected approximately 5% revenue growth for 2025. - Operating margin range of between 9.4% to 9.6% up from prior expectation of 9.2% to 9.6%. - Interest expense expected to be approximately $190 million for the year. - Estimated CapEx of approximately $350 million, upper end of previous guide. - Effective tax rate expected to land at approximately 26%.

• Market uncertainties including challenges in residential construction. - Industry transitions affecting HVAC with potential for lumpiness in large capital project revenue. - Foreign exchange rate impacts and market subdued conditions in Canada.

Q: Good morning, everyone. Thank you for taking the questions. Wanted to start on the data center and large capital projects. I'm wondering if at this point, given all the growth you've seen, you're able to quantify, perhaps what portion of the business, that is for you today, and maybe kinda where that can get to. But also, I'm curious if you can kind of know, give us a little bit of color on the timing of bidding and the momentum and if there's any risk of kind of lumpiness given how those projects work and how you ship to them or if we should kinda think that this is gonna be more of a, I don't know, smoother kinda outlook for that business. Thank you.

A: Yeah. Good morning, Matt. Thanks for the question. I'll start this is Bill. I'll start with that one. If you take a step back and look at overall large capital projects for us, we would estimate that that that is somewhere between mid to high single digits as a percentage of our total company revenue at this point. With data centers specifically being a bit over 50% of that a bit over half of that overall large capital project. Revenue. In terms of what we're seeing in the market, the pipeline does continue to grow. So we're seeing additional projects coming into planning. We're then seeing that continue to flow into additional bidding activity. And our open order volume on large capital projects does continue to grow. And you're seeing that, you saw it come through revenue this quarter. Principally in the commercial mechanical business, which was up 21% and then a portion of that waterworks business, which grew 14%. So we are continuing to see that activity grow. Certainly, the gestation period of these projects is much longer than maybe our traditional projects. And so, yes, there could be some lumpiness, in terms of of revenue rate as as we move into the future. But overall, we remain bullish that this is a continued growth area for us, and and will continue to be driving revenue as we as we exit '25 and step into '26. And, Matt, as Bill said, the lumpiness will likely be there in the gestation period for these projects. It's gonna be longer but that's part of the reason why we're reasonably pleased with our progress. As you look at our ability to deliver scale, a multi-customer group approach, a broad base of vendors that can bring product to the site on time and in full. The impact of modular construction on data center work, that's all serving us well in terms of what those share gains look like, especially against the backdrop where traditional nonres is in a pretty challenging spot.

Q: Want to follow-up on the last comment on 4Q. Just a little bit of a slowdown there to growth up 3%. Is there anything that stands out? Or is it just maybe just seasonally, it's just a bit softer at this at this point.

A: Yeah. It it it is that new res pressure continuing to play through, Ryan. If you go back, permits and starts, as everybody's well aware, had continued to weaken through the calendar year. Outside of our waterworks business, there's a little bit of a lag of those slower starts coming through the rest of our customer groups, to then then play through on revenue. I think we're just seeing that playing through on those weaker starts. And then, certainly, there's more HVAC pressure, which we talked about during our last quarterly conference call. Our HVAC business was down about 6% for our first quarter or for the quarter ended October. That growth got a little bit more challenging towards the end of the quarter as the market's in a pretty tough spot. So I think those two those are the two pressure points we would point to. Still, as you look through that, we're very bullish and optimistic on the HVAC market overall over the medium to long term. And and we would believe that residential at some point will will stabilize on on the new resi side.

Q: Yes. Thank you. Good morning, guys. Along the lines of the the pricing discussion here with price looking like it's going to represent a pretty positive factor year over year through the, the coming calendar year against what what appears to be pretty easy deflation affected comps last year. Should we continue to expect incremental margins to run ahead of that sort of targeted 11% to 13% rate given the contribution from positive pricing over the course of the next four quarters?

A: Maybe this is Seth. Back, Dave, we're very pleased with the operating margin in improvement that the business has delivered this calendar year. If you go back to calendar '24, we delivered a 9.1% operating margin. We've just given our updated guidance, which is nine four to nine six. So call that a nine five at the midpoint. So we're expecting a very solid progression on operating margins this year of somewhere in that 30 to 50 basis point range. Now I would remind you, we did have a bit of outsized gross margin gain during the during the middle part of this calendar year. Recall, we had a a quarter with 31% and then 31.7% gross margins, and we had flagged that there were some impact of the timing and extent of supplier price increases And then we expected that gross margin to to normalize and and you've seen that play through now in this last quarter. So we wouldn't expect that kind of outsized gain to next year. So probably actually a little bit of a headwind in the middle part of the of the calendar year versus versus the prior year, twenty-six to twenty-five. We'll set out our guidance for overall operating margins next year, and certainly, that will that will be dependent on what the market environment is like. Assuming that we have supportive market and we have decent growth, we would expect some modest progression on operating margins next year. But, again, we'll be back with you in February and give you a more clear view of what we expect at that point.

Q: Yes. Thank you. Good morning, guys. Along the lines of the the pricing discussion here with price looking like it's going to represent a pretty positive factor year over year through the, the coming calendar year against what what appears to be pretty easy deflation affected comps last year. Should we continue to expect incremental margins to run ahead of that sort of targeted 11% to 13% rate given the contribution from positive pricing over the course of the next four quarters?

A: Maybe this is Seth. Back, Dave, we're very pleased with the operating margin in improvement that the business has delivered this calendar year. If you go back to calendar '24, we delivered a 9.1% operating margin. We've just given our updated guidance, which is nine four to nine six. So call that a nine five at the midpoint. So we're expecting a very solid progression on operating margins this year of somewhere in that 30 to 50 basis point range. Now I would remind you, we did have a bit of outsized gross margin gain during the during the middle part of this calendar year. Recall, we had a a quarter with 31% and then 31.7% gross margins, and we had flagged that there were some impact of the timing and extent of supplier price increases And then we expected that gross margin to to normalize and and you've seen that play through now in this last quarter. So we wouldn't expect that kind of outsized gain to next year. So probably actually a little bit of a headwind in the middle part of the of the calendar year versus versus the prior year, twenty-six to twenty-five. We'll set out our guidance for overall operating margins next year, and certainly, that will that will be dependent on what the market environment is like. Assuming that we have supportive market and we have decent growth, we would expect some modest progression on operating margins next year. But, again, we'll be back with you in February and give you a more clear view of what we expect at that point.

Q: Hey, good morning. This is Julian on for Keith. Just in terms of HVAC, when do you think comps are going to start to ease from the pre shipments ahead of the standard change from last A: Yeah. I'd I'd say to again, to build on what Bill has already said, the market's in a tough spot right now. We saw it get a bit worse. As we went through the quarter and exited October. It's a variety of factors, though. You've got a bit of the a two l transition. As you had pull forward. You certainly have equipment price increase playing in now. As the majority of the sell through is in that new equipment standard. And then you've got a pressured consumer that is moving a bit to repair versus replace environment. And then you had some degree of play through on multifamily new construction that is now, you know, passed. And so we're pleased with the overall execution. When does that start to get back to a replace environment? When do we start to see a bit of residential life? That's that's tough to to pinpoint. For us, we're bullish on what that market looks like over time. And we're gonna continue to build out convenient locations across The United States. Continue to build out our OEM brand representation, We're gonna continue to focus on M&A expansion as we capitalize on what we think is a growing trend with that dual trade contractor.

Q: Thanks very much. Good morning. The I want to touch on some SG and A topics. Last fiscal year, you made investments in trainees, HVAC counter expansion, large project teams. Just to could I get an update on on how these investments have been trending what you're looking for maybe going out over the coming year, and, and impacts of these, of these investments to date. Thanks.

A: Yes. Scott, thanks for the question. First off, from a trainee perspective, our trainee program something that's been really foundational to the success of this company over decades now. And it's a it's an area that we invest in in good markets and in bad markets. So we continue to add trainees year in, year out to fuel our pipeline of talent. This year, we added roughly 250 to 300 trainees in our in our classes throughout the year, and we would expect to continue that that program and expand that program as we step into calendar '26. In terms of additional investments, Kevin just talked about our HVAC expansion plans and the build out of convenient locations. We have now completed roughly 650 counter conversions So that is both taking HVAC counters and adding plumbing products as well as taking plumbing counters and adding HVAC products. And it's not just the products. It's also the expertise of and our associates that we train to ensure that we have experts serving experts. We believe that is yielding real fruit. So despite a very challenging eight HVAC environment, we believe we are outperforming that HVAC market. And have done so for the last several quarters. And we will continue, as Kevin said, to fuel that growth to to ensure that we expand that HVAC footprint. And and and maybe lastly, we're continuing to invest in a a technology and a digital standpoint. And so we continue to invest in new technology tool, digital tools, principally in the areas of HVAC. And for the repair, replace plumbing contractor. We're very pleased with the progress that we've made with with many of those investments. If you take a step back from an overall SG and A perspective, we've been able to continue to invest in those types of areas to fuel future growth while we've managed the cost base. And we did take some cost actions earlier in this in this calendar year that we talked about a couple of quarters ago. Those cost actions have played through where we've received the benefits of that. And so while even though we're operating in still a a bit of a challenging top line market environment, we're delivering good quality SG and A leverage. While we're continuing to invest in the business for the future. So we feel good about where the cost base sits as we exit calendar '25 and enter calendar '26. And maybe to just build on what Bill was saying. Certainly, the trainee aspect is a long-term investment in the business and making sure that we have a pipeline of talented associates to grow this. Business over time. He spoke about the HVAC business, so I won't be repetitive there. But when you look at what investments we've made in waterworks diversification, and making sure that we have a broad book of business from residential to public works to water wastewater treatment plant to geosynthetics and soil stabilization that is serving us well. And, certainly, we're pleased with a plus 14% growth rate We're pleased with the large capital project space. We talked about a multi-customer group approach and engaging early on in the project. But we're also investing in value-added services like fabrication. Valve actuation and automation, and virtual design. And so that's serving us well, obviously, with plus 21 in the commercial mechanical business. We're pleased. And then lastly, when you talk about Ferguson Home, and bringing together what is a best-in-class digital platform, with a showroom experience and a consultative approach and a builder outside Salesforce that's driving growth with the connected consumer to that builder, designer, and remodeler. And so we think all of those investments are proving to be successful as we move through a it's a challenging environment.

Q: Thanks for the question, guys. Appreciate it. So you gave a bit of color on the calendar fourth quarter. I missed any gross margin commentary. Just wondering if there's any sense on how that's been trending year to date?

A: Yeah. I would I would think of it, Nigel, in a pretty similar range. To the quarter that we just reported. And as we had talked about coming out of the summer months that we had expected, to get back more into that normalized range of somewhere between 30-31%, So I think you can you can expect it in that in that range. As we exit the calendar year.

Q: Thanks for the question, guys. Appreciate it. So you gave a bit of color on the calendar fourth quarter. I missed any gross margin commentary. Just wondering if there's any sense on how that's been trending year to date?

A: Yeah. I would I would think of it, Nigel, in a pretty similar range. To the quarter that we just reported. And as we had talked about coming out of the summer months that we had expected, to get back more into that normalized range of somewhere between 30-31%, So I think you can you can expect it in that in that range. As we exit the calendar year.