Yahoo Finance Ferguson plc (NYSE:FERG) Q3 2024 Earnings Call Transcript
Ferguson plc (NYSE:FERG) Q3 2024 Earnings Call Transcript June 4, 2024
Ferguson plc reports earnings inline with expectations. Reported EPS is $2.32 EPS, expectations were $2.32.
Operator: Good morning, ladies and gentlemen. My name is Harry and I will be your conference operator today. At this time, I would like to welcome you to Ferguson's Third Quarter Conference Call. All lines have been placed on mute to prevent any interference with the presentation. At the end of the prepared remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. I would now like to turn the call over to Mr. Brian Lantz, Ferguson's VP of Investor Relations and Communications. You may begin your conference call.
Brian Lantz: Good morning, everyone, and welcome to Ferguson's Third Quarter Earnings Conference Call and Webcast. Hopefully, you've had a chance to review the earnings announcement we issued this morning. The announcement is available in the Investors section of our corporate website and on our SEC filings webpage. Recording of this call will be made available later today. I want to remind everyone that some of our statements today may be forward-looking and are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected, including the various risks and uncertainties discussed in our Form 10-K available on the SEC's website. Also any forward-looking statements represent the company's expectations only as of today and we disclaim any obligation to update these statements.
In addition, on today's call, we will also discuss certain non-GAAP financial measures. Please refer to our earnings presentation and announcement on our website for additional information regarding those non-GAAP measures, including reconciliations to the most directly comparable GAAP financial measures. With me on the call today are Kevin Murphy, our CEO; and Bill Brundage, our CFO. I will now turn the call over to Kevin.
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Kevin Murphy: Thank you, Brian, and welcome, everyone, to Ferguson's third quarter results conference call. On today's call, I'll cover highlights of our third quarter performance. I'll also provide a more detailed view of our performance by end market and customer groups before turning the call over to Bill for the financials. I'll then come back at the end and give some closing comments before Bill and I take your questions. Our associates have remained focused on delivering relentless customer service for the complex project needs of our specialist professional customers, executing well as we have returned to volume growth in the quarter. In the quarter, we saw revenue growth of 2.4% despite continued deflation of approximately 2%.
We delivered resilient gross margins and appropriately managed cost to the volume environment, generating adjusted operating profit of $674 million, an increase of 2.6%. Adjusted diluted earnings per share of $2.32 was up 5.5% against the prior year. As a result of our confidence in the business, we're pleased to declare a 5% increase to our quarterly ordinary dividend and extend the share repurchase program by an additional $1 billion. Looking forward, we remain well positioned to leverage multiyear tailwinds in both residential and nonresidential end markets. Turning to our performance by end markets in the United States. Net sales grew by 2.2% as all end markets saw sequential improvement. Residential end markets, which comprised just over half of US revenue, remain muted, but showed a slight sequential improvement from the second quarter.
Overall, residential revenue grew by approximately 1% in the third quarter. Nonresidential markets were slightly more resilient. Commercial and civil infrastructure revenues saw mid-single-digit growth, while Industrial sales were slightly down against strong comparables. Overall, net sales in nonresidential were up 4% during the quarter. We've continued to see good levels of nonresidential bidding activity in large capital projects. While we expect growth rates will fluctuate over time, our intentional balanced end market exposure positions us well. Moving to our customer groups in the United States. Residential trade plumbing grew by 1% as we begin to lap easier comparables and new residential markets begin to stabilize. While leading indicators such as new residential permits and starts have been somewhat mixed, we expect further improvement in future quarters.
HVAC grew by 4% as we continue to build on the strengths of our residential trade plumbing and HVAC customer groups in service of the growing dual trade contractor. Residential Building and Remodel revenues grew by 1% with the high end portion of the market showing relative resilience as the overall repair, maintenance and improvement market remains pressured. Residential Digital Commerce declined by 12% as consumer demand continued to be weak. Waterworks revenues were up 7%. Bidding activity has remained healthy across our broadly diversified business mix, including residential, commercial, public works, municipal, meters and metering technology, water and wastewater treatment plants, soil stabilization and urban green infrastructure. The Commercial Mechanical customer group grew 8% as we continue to see our customers pivot towards work such as data centers and large capital projects.
Our Industrial, Fire and Fabrication and Facilities Supply businesses delivered a combined net sales growth of 2% against a strong 14% growth comparable. Our breadth of customer groups positions us to maximize the value we bring to the total project while also maintaining a broad and balanced end market exposure. Now let me pass to Bill to cover the financial results in more detail.
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Bill Brundage: Thank you, Kevin, and good morning, everyone. Third quarter net sales were 2.4% ahead of last year. Organic revenue declined 0.9% comprised of volume growth of approximately 1%, offset by deflation of approximately 2%. Acquisition revenue was 1.7% and one additional sales day added a 1.6% contribution. Overall price deflation of 2% remained similar to the first half driven by continued weakness in certain commodity categories, while finished goods pricing has remained broadly flat. Gross margin of 30.5% was up 50 basis points over the prior year driven by strong pricing execution from our associates. We are appropriately managing the cost base against volume growth. We continue to focus on productivity initiatives while we invest in core capabilities for future growth.
Adjusted operating profit of $674 million was up $17 million or 2.6% higher than prior year. Adjusted diluted earnings per share grew by 5.5% with the increase due to the higher adjusted operating profit and the impact of our continued share repurchase program. And our balance sheet remains strong at one times net debt to adjusted EBITDA. Moving to our segment results. Net sales in the US grew 2.2% with an organic decline of 0.9%, offset by a 1.5% contribution from acquisitions and 1.6% from one additional sales day. Adjusted operating profit of $685 million increased 3.2% over the prior year, delivering an adjusted operating margin of 9.8%, improving 10 basis points over prior year. In Canada, net sales were 6.7% ahead of last year with an organic decline of 0.6%, offset by a 5.1% contribution from acquisitions and 2.2% from the combined impact of one additional sales day and the impact of foreign exchange rates.
Markets have been similar to that of the United States. Adjusted operating profit was $6 million in the quarter. Turning to our year-to-date results. The year is progressing largely as expected. Net sales were 0.9% below last year with an organic decline of 3.2%, partially offset by an acquisition contribution of 1.9% and an additional 0.4% from the extra sales day. Gross margin was 30.4%, up 20 basis points as our associates have been disciplined in managing prices for a period of commodity price deflation. We have managed labor and nonlabor operating expenses through the year, balancing the near-term market demand environment against the return to volume growth in the third quarter. Adjusted operating profit of $1.967 billion was down 6.5% compared to the prior year, delivering a 9.1% adjusted operating margin.
And adjusted diluted earnings per share of $6.72 was down 5%. Next, the business continues to generate strong cash flows. After the unwind of inventory positions in the prior year, we have returned to more normal historical seasonal working capital trends. We saw a net inflow of $20 million in the first nine months of the year. Interest and tax outflows were slightly lower than last year due to the timing of tax payments, resulting in strong year-to-date operating cash flows of $1.5 billion. And we continue to invest in organic growth through CapEx, investing $263 million year-to-date, down on the prior year due to timing of certain investments. As a result, we generated free cash flow of approximately $1.3 billion. Moving to capital allocation.
Our balance sheet position is strong, with net debt to adjusted EBITDA of one times. We target a net leverage range of one to two times. And we intend to operate towards the low end of that range through cycle to ensure we have the capacity to take advantage of growth opportunities as well as to maintain a resilient balance sheet. We allocate capital across four clear priorities. First, we're investing in the business to drive above-market organic growth. Previously mentioned, year-to-date, we have invested $263 million into CapEx, principally focused on our market distribution centers, branch network and technology programs. Second, we continue to sustainably grow our ordinary dividend. Our Board declared a $0.79 per share quarterly dividend, a 5% increase over the prior year, reflecting our confidence in the business and cash generation.
Third, we're consolidating our fragmented markets through bolt-on geographic and capability acquisitions. We are pleased to welcome associates from Southwest Geo-Solutions, AVCO Supply, GAR Engineering, Safe Step Tubs of Minnesota and Yorkwest during the third quarter and subsequent weeks. We have now completed eight deals this year, bringing in approximately $350 million of annualized revenue. Our deal pipeline remains healthy, allowing us to continue executing our consolidation strategy. And finally, we are committed to returning surplus capital to shareholders, and we are below the low end of our target leverage range. We returned $421 million to shareholders via share repurchases in the fiscal year-to-date, reducing our share count by approximately 2.3 million.
And we are pleased to announce a $1 billion extension to our share repurchase program today. Now let's turn our attention to the sequential revenue performance of the business, which is trending in line with our expectations. Organic revenue has strengthened on a sequential basis with volume growth turning positive in Q3. We believe this trend will continue against easing comparables as we conclude our fiscal year. Now turning to our updated view of fiscal 2024 guidance. We continue to believe revenue will be broadly flat for the year albeit with slightly stronger volumes as we now expect modest deflation to continue through the end of fiscal year. Given that drag of deflation and with only one quarter remaining, we are narrowing the outlook for adjusted operating margin by trimming the top end of the range.
We now expect to deliver between 9.2% to 9.6% adjusted operating margin for the year. As a result of our strong cash flow and net debt position, we have lowered our interest expense guidance to between $175 million to $185 million. Our adjusted effective tax rate is unchanged and expected to be approximately 25% this year. And we have lowered our expected CapEx investment by $50 million due to timing factors of capital outflows, now expecting it to land between $350 million to $400 million for the year. So to summarize, the year has progressed largely as expected, and we remain focused on execution. We believe the combination of our strong balance sheet, flexible business model and balanced end market exposure positions us well. Thank you, and I'll now pass you back to Kevin.
Kevin Murphy: Thank you, Bill. Let me again thank our associates for their continued dedication to serving our customers, helping them make their complex projects more simple, successful and sustainable. We're pleased with our execution in the quarter, and the year is progressing largely as expected. Our updated fiscal year '24 guidance reflects continued volume growth and resilient gross margin despite the impact of continuing mild deflation expected for the remainder of the fiscal year. As we look forward, we are well positioned with a balanced business mix between residential and nonresidential, between new construction and repair maintenance and improvement. We have an agile business model and flexible cost base that allows us to adapt to changing market conditions.
Our cash generative model allows us to continue to invest for organic growth, consolidate our fragmented markets through acquisitions and return capital to shareholders. We intend to do this while maintaining a strong balance sheet, operating at the low end of our target leverage range. We have consistently executed on these priorities. And this has supported a long-term track record of outperformance and disciplined cash deployment. Our scale and breadth allows us to leverage our competitive position across our customer groups in order to benefit from emerging multiyear tailwinds in our end markets. We remain confident in the strength of our markets over the medium and longer term and expect to capitalize on growth opportunities. Thank you for your time today.
Bill and I are now happy to take your questions. Operator, I'll hand the call back over to you.
Operator: Thank you. [Operator Instructions] And our first question today is from the line of Phil Ng of Jefferies. Phil, please go ahead. Your line is open.
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