Ferguson Q4 Earnings Report … Preparing for Increased HVAC Focus

Last week Ferguson shared their FY Q4 earnings and held their analyst call. While not “focused” on the HVACR market, Ferguson is growing in this space and sees opportunity to increase their influence and, more importantly, gain share in the market … and they have the war chest available to make the investments and “buy-in.”

From the Ferguson earnings call (words in italics are additional comments)

• Sales, for the quarter, of $7.9 billion, up 1.4% with “deflation” of about 2% (pricing declines)
  • Breaking it down
    • Organically the business was down .2%
    • Acquisitions added 1.7%
    • Currency exchange was a -.1%
  • YTD sales are $29.6 billion, which is flat vs LY
  • Overall gross margin is 30.5%, up 10 basis points vs LY
    • For the quarter it was 31%
  • Adjusted operating margin of 10.8% as gross margins were “resilient” (the quarterly operating margin exceeded YTD, which is 9.5%. This could be recognition of one-time events or compensation related, or perhaps some cost-cutting that is now benefiting the company.)
  • Cash generation is $1.9 billion with $1.4 billion returned to shareholders via dividends. (This means $500M available for “business investment”!)
  • The company made 10 acquisitions
  • Overall market
    • Ferguson believes that the overall residential end-markets, which represents about half of its business, declined 7% due to weak new construction and weak maintenance / improvement markets. Ferguson’s organic growth “outperformed” the market, only being down 4%.
    • The non-resi group is flat for the year but up 3% for the quarter in the commercial, civil infrastructure and industrial segments.
    • HVAC
      • HVAC grew 9% due to successes in serving the dual trade contractor (plumbing and HVAC) – (could this mean that HVAC distributors should analyze their customer base, determine dual trades, and consider acquisitions of plumbing distributors? Potentially electrical distributors? Or, since it can be challenging to acquire a residentially oriented electrical distributor, perhaps a lighting showroom that has a good contractor base and then expand the business?)
    • Resi building and remodel was flat.
    • Higher end portion of the market holding up better.
    • Resi digital commerce was down 12% as consumer demand wanes.
    • Waterworks up 5%
    • Commercial / Mechanical up 6%, driven by data centers.
    • Other businesses, which involve industrial, fire, fabrication and facility supply were down 5%, primarily due to commodity steel pipe deflation.
  • The company continues to invest in digital, branch renovation and its supply chain initiatives to enhance automation and drive efficiencies.
  • Seeking more acquisitions.
    • The 10 acquisitions generated approximately $400 million and cost $260 million (so, about 60-65% of sales is the average acquisition price across the types of acquisitions that they made.)

HVAC Growth Plans

• “Our ability to bring together market leading capabilities in both plumbing and HVAC provides us with a competitive advantage for serving these professionals and capturing growth from this market for years to come. We estimate that the combined HVAC and residential trade plumbing markets to be approximately $100 billion, of which, we estimate nearly $30 billion of the market is serviced by more than 65,000 dual trade plumbing and HVAC professionals.”
• “We’re expanding our HVAC offering to match the density of our plumbing presence, executing this expansion through a combination of dual trade branch conversions, geographic branch expansion and acquisitions.”

Thought – Ferguson is going to invest in expanding branches, HVAC inventory to support current plumbing locations, making acquisitions, and pursuing the commercial market. While it is unknown, but assumed, that they will further enhance their private label offering, HVAC distributors should be assured that their current suppliers will, unfortunately, embrace Ferguson, seeing them as a “growth” opportunity for most, if not all, of the suppliers. The question becomes, how to combat them? Further, they are a marketing engine. One area of opportunity is out-thinking them on a customer loyalty / inventive program, as mentioned in this article.

Analyst Q&A

• For FY 2025, Ferguson is expecting low single-digit growth, and this is inclusive of acquisitions as well as across their market segments.
• Resi is projected to be down lot to mid-single digit and non-reis to be flat.
  • The new resi-side of Ferguson’s business represents 18% of sales and resi RMI (remodel, maintenance, improvement) is 32% (rest of the 50%)
  • Non-resi is expected to be “flat-ish” with Ferguson benefiting from large capital projects (which then means the small and mid-sized elements of the market, as well as MRO, would be down.)
• Ferguson sees the HVAC business moving more to repair. They expect parts and supply growth to outpace unitary equipment growth.
  • Expects HVAC acquisitions to be more on the resi side of the business.
• Looking for acquisition deals, to support non-resi, that benefit BDC, virtual design, fabrication, valve and automation, things that can help us across multiple customer groups (potentially could look at software deals such as when WESCO acquired Storeroom Logix and entroCIM.)
• 15% of revenues are commodity-based products such as polyethylene, PVC, cast iron, ductile iron, steel, copper, tube, pipe, and fittings.
• Ferguson private label is a little less than 10% and faster growing on the resi side of the business, (which is more “brand agnostic”, especially for “inside the walls.”)

HVAC Take Aways

• If you are a manufacturer of parts and supplies, Ferguson will be a growth opportunity as they expand their offering within their plumbing locations. This has implications for your rebate / preferred distributor program. It also will represent interesting dynamics for your manufacturer reps … support existing customers or support Ferguson?
• Distributors
  • Ferguson is coming to your market, and they want to pursue your dual trade customers. Now is the time to consider strategies to secure these customers’ loyalty. Ferguson will be able to do things with pricing, rebates, incentives, cross-marketing, and more. How will you compete against them? Do you know what percentage of your customers this represents? The dollars that they represent? Do your salespeople know the questions to ask?
    • Just because they don’t have a unitary line doesn’t mean they can’t win business. They will take the higher margin business, leave you with the low margin business, and eventually pursue a unitary line.
  • Ferguson is in the acquisition mindset. Knowing they spent $260 million last year on acquisitions, you can suspect that they plan to spend another $250-300 million in 2025 … and could spend more for the right deal. So, who is next? From the report, you can presume their targets are residentially-oriented companies with a “preferred” unitary line or a strong parts and supply business.
    • And if you’re thinking “long-term”, should you be seeking an acquisition to help you appeal to a dual-trade contractor?

Just some food for thought. Your thoughts?

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