Ferguson Enterprises Inc Q2 2025 Earnings Call Transcript

The following is excerpted from the question-and-answer section of the transcript.

Question: Matthew Bouley - Barclays Bank - Analyst : I wanted to ask first around the growth investments in OpEx and a lot of these areas you've been speaking about for a while, kind of the large capital projects and the HVAC counter conversions and now it sounds like you've got a few more growth initiatives beyond that as well. As you guys sort of invest for growth despite a bit of a choppy end market backdrop here, so basically, where are we in the cycle of these growth investments? I'm curious if you can maybe quantify any of the kind of year-over-year OpEx in the second half? And then maybe balance that with some of the areas that -- where you're looking to reduce costs that I heard you mention as well.

Question: Matthew Bouley - Barclays Bank - Analyst : Excellent. Perfect. Comprehensive answer. Secondly, I wanted to ask about the two customer groups, HVAC up 17% and Waterworks up 10% and I'm sure the growth investments you've been making is part of the answer to this question. But I guess, firstly any way to quantify how much M&A is in those kind of roughly versus organic? And then I would just love to hear further elaboration on what drove the acceleration in both of those customer groups, maybe from a market perspective beyond your growth investments and kind of if you're expecting those to remain above the company average in terms of your second half guide?

Question: Philip Ng - Jefferies LLC - Analyst : I had a question on gross margins. Certainly, a little softer in the quarter, and you've lowered your full year guide for EBIT margins. So I guess, perhaps where is some of the downward surprise you're seeing? Is that more less price -- more pricing headwinds on the commodity side and/or limited pricing on your finished goods? Just looking out to the back half of this year. I just want to get any update on how price increases are shaping up, whether it's finished goods or commodity side. And especially in the backdrop where tariffs are being implemented, how does that kind of impact your ability to push price good or bad?

Question: Philip Ng - Jefferies LLC - Analyst : Any color on the pricing side in the back half? And then certainly, there's tariffs, right, being implemented on metal and stuff like that? Is that a good guy on your commodity side? And then any price increase on the finished goods side that you're seeing out there?

Question: Philip Ng - Jefferies LLC - Analyst : Okay. That's helpful. And just pivoting on demand trends, any color on fiscal 3Q intra-quarter trends, certainly feels like the consumer has weakened a bit in February, all the commentary around your commercial, especially your mega projects, infrastructure side of things, sounds pretty encouraging, admittedly there's been choppiness from what we're hearing on in tariffs and new policies with DOGE on that front. Are you seeing any choppiness on the heavy commercial side as well?

Question: Quinn Fredrickson - Robert W. Baird & Co. Incorporated - Analyst : Can you give us any details on what individual commodities are doing in terms of large diameter versus small diameter PVC copper tubing, steel

Question: Quinn Fredrickson - Robert W. Baird & Co. Incorporated - Analyst : Okay. And then secondarily, just the back half operating margin, sequential improvement that's embedded in the guide, would that be consistent with just normal seasonal upticks? Or does maybe some of the lessening commodity deflation and some of the cost actions that you've mentioned support better than seasonally normal?

Question: John Lovallo - UBS Investment Bank - Analyst : The first one is, are you seeing any DOGE -- are you guys seeing any DOGE impacts in any of the water infrastructure construction or institutional markets? And do any of the metering deployments of the big projects depend on federal funding?

Question: John Lovallo - UBS Investment Bank - Analyst : Understood. And then is there any way to help us kind of think about or quantify the mix impact to gross margin from the higher HVAC and Waterworks sales. I guess in addition to that, are you seeing any customers kind of trade down? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. MARCH 11, 2025 / 12:30PM, FERG.N - Q2 2025 Ferguson Enterprises Inc Earnings Call

Question: Sam Reid - Wells Fargo Securities - Analyst : Awesome. I wanted to drill down a bit on Waterworks. You're obviously executing quite well in this category. But you also alluded to some weakness on the resi side. I wanted to understand was that weakness a little bit more pronounced sequentially, are you starting to see the large builders pull back on community count growth in response, perhaps to lower demand? Just want to unpack that comment in greater detail.

Question: Sam Reid - Wells Fargo Securities - Analyst : That helps. And then maybe switching gears here. I wanted to dig a little deeper on finished goods pricing, perhaps following up a bit from Phil's question. When I talk through realization on list price increases versus what you're actually seeing in the market. Are there any categories where you're getting something close to the list price increase, any categories where you're notably not getting or not seeing pricing flow through in line with those list price increases. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. MARCH 11, 2025 / 12:30PM, FERG.N - Q2 2025 Ferguson Enterprises Inc Earnings Call

Question: Michael Dahl - RBC Capital Markets - Analyst : Kevin, I wanted to go back to the gross margins again, interesting comment in terms of the sequential dynamics kind of being worse in November, December and then a little bit better coming through Jan, Feb, and your comments kind of married your prior ones, which talked about balancing share and getting paid for your product. Can you just talk about, did you reach a point where you thought that balance had gotten out of whack in November, December? I mean you certainly gained share from a top line standpoint. But did you -- do you feel like you were giving up too much to do that and now you're rebalancing a little bit as you kind of think about that trade-off in the back half of the year? Or how else would you characterize the competitive dynamics right now?

Question: Michael Dahl - RBC Capital Markets - Analyst : That's helpful. And then secondly, I know a lot of questions have already been asked about the pricing dynamics, but just, I guess, to be more specific in your prior guide, I think you contemplated that second half would get back to flat to slightly positive. Now you're saying deflation lingers a little bit longer, but you do have some of these kind of tariff-based increases out there. Can just help us dial in what the pricing cadence should look like in the second half of the year? Is it still down each of 3Q and 4Q order of magnitude? Anything you can give us to quantify would be great.

Question: Keith Hughes - Truist Securities, Inc. - Analyst : You talked earlier on the call, you've been facing deflation for six or more quarters now. But the gross margin impact of that was far greater this quarter than what we've seen over that period of time. Specifically what happened in the reported quarter that caused it to have such a notable impact when it hasn't before.

Question: Keith Hughes - Truist Securities, Inc. - Analyst : Okay. And just one question on products. The Fire business was off in the quarter, was most of that steel pipe deflation, and you talk about units, I guess, is my question.

Question: William Jones - Redburn (Europe) Limited - Analyst : Just a couple if I can, please. -- to come back on the gross margin, but specifically the impact from deflation when you mentioned that. Are you actually highlighting that there are inventory losses, so to speak, in the quarter. And therefore, that's a temporary effect that may reverse? Or are there other mechanics where deflation can affect the gross margin. And then second one, just again on business mix. I think in the past, you said that the businesses at the operating margin level are all fairly similar. Is that the case? And if HVAC and Waterworks continue to outgrow the rest of the business, I think likely. Do we think you should we be seeing an offset in SG&A recovery over the fullness of time?

Question: William Jones - Redburn (Europe) Limited - Analyst : And since I'm the last one, maybe sneak in one more, I think it was about three years ago that we had the Investor Day and you gave your financial framework for sales and margin and other items. Just when you reflect on that over the medium term, you're still happy that's the right way to think about the trend lines for both top line and margin?