FERG Q1 2025: Guides Op Margins at 9-9.5% Amid Cost Headwinds
- HVAC Expansion and Growth: The company’s HVAC segment grew by 10% (on a 4% comparable), and the expansion of HVAC counters from over 400 to a target of 500+ by year-end supports continued revenue and margin expansion.
- Investments to Enhance Gross Margins: Initiatives such as increasing the private label (own brand) share—currently around 10% of sales—along with advanced pricing analytics and value-added offerings are expected to improve gross margins over time, offsetting commodity deflation pressures.
- Robust M&A and Market Consolidation Pipeline: Maintaining an active and healthy acquisition pipeline in a fragmented market supports long-term revenue growth and market share gains through incremental revenue contributions.
- Margin compression risk: Despite 3% volume growth, the cost base grew by 5% due to wage inflation and ongoing investments. This differential may continue to pressure operating margins if revenue growth does not accelerate.
- Persistent commodity deflation: The company continues to experience about 2% overall price deflation in commodity-based products, with specific categories like steel pipe and PVC under pressure. This trend could further erode gross margins despite expectations of future pricing improvements.
- Upfront investment uncertainty: Significant asset investments—such as the expansion of HVAC counters (over 400 counters already, aiming for more) and large trainee programs—are being front-loaded. If market recovery or revenue growth lags, these heavy upfront costs may delay or dampen the expected margin benefits.
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Margin Pressure
Q: Why are margins compressed?
A: Management explained that despite solid gross margins, commodity deflation and a lower-margin mix have pressured overall margins, even with some resilience in the commodity business. -
Op Margin Guidance
Q: What is the op margin outlook?
A: They expect full-year operating margins to remain in the 9% to 9.5% range, with near-term pressure easing in the back half as volumes grow and pricing improves. -
SG&A Deleverage
Q: How will SG&A deleverage evolve?
A: Management noted that while SG&A costs grew about 5% against 3% volume growth in Q1, cost efficiency is being pursued through controlled headcount and productivity investments. -
OpEx Growth
Q: What growth rate for operating expenses?
A: Operating expenses are expected to see mid-single-digit growth, driven by upfront investments like training and HVAC expansion, with improvements anticipated as volume growth picks up. -
Pricing Trend
Q: What is the pricing outlook?
A: Finished goods pricing is projected to see low single-digit inflation, while commodity deflation—recorded at about 2%—begins to ease, with some categories like copper showing pricing strength. -
M&A Pipeline
Q: How is the M&A pipeline?
A: The pipeline remains robust with no major shifts in valuation expectations, and management expects acquisitions to add roughly 1% to 3% in incremental revenue over time. -
HVAC Expansion
Q: How is HVAC demand growing?
A: The HVAC side grew by 10% on a 4% comparable, with over 400 counters in place and plans to expand to over 500 by year-end, positioning the business for future growth. -
Organic Trends
Q: How did organic sales perform?
A: Organic sales have been stable, showing consistent performance with an overall 2% deflation observed over the last five quarters, including into November. -
International Sourcing
Q: How are international costs managed?
A: The company sources from over 37,000 suppliers in 30 countries, which helps mitigate China exposure and spreads cost risks effectively. -
Private Label Margin
Q: How does private label aid margins?
A: Private label products, making up nearly 10% of revenue, combined with pricing analytics and added value services, are expected to gradually enhance gross margins. -
Political Impact
Q: Will politics affect project bidding?
A: Despite political uncertainties, management remains bullish, noting strong bidding activity—especially in data centers and large capital projects—that is unlikely to be derailed by political changes. -
OpEx/Revenue Growth
Q: Will revenue growth pick up?
A: There’s an expectation for revenue and volume acceleration in the back half of the fiscal year, which should improve SG&A leverage, even as current investments drive mid-single-digit OpEx growth. -
Sales Day Reduction
Q: Impact of one less sales day?
A: The slight reduction due to a leap year effect (one fewer sales day in Q3) is minor and not expected to materially impact overall performance.
Research analysts covering Ferguson Enterprises Inc. /DE/.