Ferguson Chugs Along, Accelerates HVAC Growth

Last week Ferguson announced its FY25 Q2 earnings with their analyst call. Ferguson continues to diversify into multiple markets beyond plumbing, including HVACR, lighting, waterworks, facilities supply, fire and fabrication, industrial and mechanical.  They see opportunities to increase sales, and their market share, in these large markets, and continue to invest for growth.

Digging Into Ferguson’s FY25 Q2 

Note, words in italics are additional comments

• Sales, for the quarter, of $6.9 billion, up 3.0%, offset by continued “deflation” of about 2% (organic growth)
  • Breaking it down
    • Organically the business grew 2.1%
    • Acquisitions added 1.2%
    • Currency exchange was a -0.3%
    • Volume increased by approximately 5% with organic volume up approximately 4%.
  • Six-month sales were $14.64 billion, up 1.8%
  • Overall gross margin is 29.75%, down 70 basis points.  Ferguson stock took a hit from the margin miss.
    • For the six months ended January 1, 2025, their margin was 29.9%, down 40 basis points.
    • Ferguson cited market weakness and ongoing deflation accounted for 2/3 of the margin decline and mix effect (more growth in HVAC and Waterworks) impacting about 1/3 of the margin decline. (So, is lower margin for more revenue good? While the stock market may not respect this, margin dollars pay bills for independent distributors, so the diversification model could be something to emulate.)
  • Adjusted operating margin of 6.5% as gross margins were lower (continued subdued end markets and persistent commodity price deflation driving adjusted operating margin lower during the seasonally lightest quarter for the company.)
  • Ferguson made an acquisition of a commercial/mechanical distributor in the Northeast US, Independent Pipe & Supply Corporation.  Closed on the acquisition of Templeton and its affiliate, TEMSCO, which serves the water and wastewater industries in the southeast.
  • Overall market
    • Non-residential end markets, just under half of US revenue, remained slightly more resilient than residential end markets with continued activity on large capital projects.
    • Ferguson believes they continue to take share with non-residential revenue growth of approximately +4% in the second quarter.  Residential revenue grew +2%
    • Sales grew modestly in both commercial (+3%) and industrial (+1%) end markets with particular strength in civil/infrastructure end markets (+9%).

HVAC

• • • HVAC customer group featured strongest growth at +17% due to continued 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?).  Also, strong growth driven by counter expansion, geographic organic expansion and acquisitions.
    • Resi building and remodel up slightly +1%.

Resi digital commerce was down -7%, consumer demand pressured.

Other Markets

• • • Waterworks up 10%, growth focus to address aging infrastructure.
    • Commercial / Mechanical up 2%, driven by data centers, partially offset by weaker activity in traditional non-res projects.
    • Other businesses, (industrial, fire, fabrication and facility supply) down -6%, primarily due to commodity steel pipe deflation.
  • Ferguson continues to invest in digital (i.e., BIM models), branch expansion and refurbishment and supply chain optimization initiatives to increase speed and efficiency to better serve customers, enhance automation and drive efficiencies.
  • Also investing in productivity for contractor base (fabrication, valve and automation) and engaging in more up-front funnel work with general contractors/owners/engineers to ensure Ferguson brings value.
  • Discussed potential impact of tariffs (expected)

HVAC Growth Plans

• “Within HVAC, our markets are large, fragmented and highly attractive. We’re taking a three-pronged approach to growth with a combination of dual trade counter product conversions, geographic expansion of our HVAC network and strategic acquisitions. We’re meeting the needs of the rapidly growing dual trade professional, by completing over 500 counter conversions that now better serve both plumbing and HVAC professionals.
• We’re ahead of our pace to complete our goal of over 650 dual trade counters in fiscal 2026. We deploy a multi-equipment brand strategy, partnering with a number of branded suppliers, to ensure our customers have access to the product choice that they require. Additionally, our private label HVAC line Durastar has shown solid growth ….”

Thoughts – Ferguson is going to invest in expanding branches, HVAC inventory to support current plumbing locations, making acquisitions, and pursuing the commercial market. This quarter, growth in the private label offering, Durastar, was called out specifically.  HVAC distributors should expect 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 / incentive program. (Our advertiser, ITA Group, will be launching a white paper on customer loyalty shortly. To reserve a copy, email us. We also recommend reaching out to them.)

The margin weakness is probably a short-term soft patch, Ferguson continues to have an attractive business model, including market outperformance, solid execution, strong free cash flow generation, large cash returns to shareholders and a very attractive valuation. 

Analyst Q&A

• For FY 2025, Ferguson reiterates expectation of low single-digit growth, and this is inclusive of acquisitions as well as across their market segments.
• Ferguson provided a breakdown of the market-by-market opportunity and estimates of Ferguson’s position in each market:

• Ferguson stated that they see the HVAC business moving more to repair. They expect parts and supply growth to outpace unitary equipment growth.
• Strong growth on the HVAC side “is (due to) execution of the strategy. M&A, geographic organic expansion and then counter expansion for the dual trade professional. ….”
• Much of the deflation is from “PVC resin or hot rolled coil on the steel side.” (commodity-based products are approximately 15% of revenue).  “Steel has been one of the biggest pressure points that we’ve had and that’s impacted the Commercial Mechanical business and the Fire & Fabrication business in particular.”
• Goal is for Ferguson to be 30+ percent gross margin.

Ferguson Take Aways for HVAC Distributors and Manufacturers

• Manufacturers – Ferguson will continue to 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? The challenge is that the market is not growing significantly so you are trading dollars among distributors. Who to support or let the market decide?
• Distributors
  • Ferguson is coming to your market, and they want to pursue your dual trade customers. How should you best 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.
  • While Ferguson is in a position to continue acquiring, they have slowed and will probably be more selective until margins improve.  They do have the resources to make 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?

If we can help you craft the business or marketing strategy, give us a call.

Kevin Coleman is a member of Channel Marketing Group’s Executive-in-Residence Program. Prior to working with Channel Marketing Group, Kevin was Director of Market Intelligence for Signify (formerly Philips Lighting.) He works with Channel Marketing Group clients on market research, competitive intelligence, and customer insight initiatives. He can be contacted via contacting Channel Marketing Group.