Ferguson plc

Good morning, everyone, and welcome to Ferguson's first quarter 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 investor section of our corporate website and on our SEC violence webpage. A 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. Additional information on these matters is also included in our earnings announcement and in our Form 10K available on the SEC website. Any forward-looking statements represent the company's expectations only as of today. 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.

Thank you, Brian, and welcome, everyone, to Ferguson's first quarter results conference call. On the call today, I'll cover highlights of our Q1 performance, I'll also provide a more detailed view of our performance by end markets and by customer groups before turning the call over to Bill for the financials and our outlook for fiscal year 23. I'll then come back at the end to share some thoughts on how we're executing our strategy, particularly as it relates to acquisitions, and conclude with some closing remarks before Bill and I take your questions. First quarter saw our teams deliver another strong performance. We'd like to express sincere thanks to our associates for their remarkable efforts to serve our customers, helping to make their projects simple, successful, and sustainable. We've continued to leverage our consultative approach, our scale, our global supply chain, and our strong balance sheet to support our customers' projects. This drove 17% revenue growth as we appropriately managed and passed through price inflation. We were disciplined with costs to ensure strong profit delivery with adjusted operating profit increasing 13% and adjusted earnings per share increasing 18%. We've declared a quarterly dividend of 75 cents per share, implying a 9% increase when annualized over the prior year as we transition away from historical semiannual dividend distributions. Our balance sheet is strong. and we continue to execute our strategy of investing for organic growth, consolidating our fragmented markets through acquisitions and returning capital to shareholders. On the M&A front, we were pleased to welcome one acquisition during the quarter and two subsequent to quarter end. I'll touch on acquisitions in more detail later, but these bring annualized revenues of approximately $270 million. We're proud of these results, which came in as we expected, and we're confident in the strength of our business model as we go forward. Turning to our performance by end markets in the U.S., demand remained robust across our markets, with growth moderating slightly as we came up against increasingly challenging comparables. We'd continue to take share across both residential and non-residential end markets. Residential, which comprises just over half our U.S. revenue, saw solid growth. While new residential growth has started to slow, repair, maintenance, and improvement has been more resilient. Our residential revenue grew approximately 15%. The pace of non-residential growth eased from quarter four due to tough comparables, but grew by 20% over the prior year, with broad growth across commercial. civil and industrial end markets as we've discussed previously we will continue to focus on maintaining our balanced end market mix and while we expect growth rates will fluctuate over time we seek to maintain this healthy balance turning next to revenue growth across our largest customer groups in the u.s all customer groups saw growth in the quarter despite challenging comparables Residential trade grew by 15%, and building and remodel grew over 20%, with strong repair, maintenance, and improvement activity. HVAC, where the majority of our business serves the residential end market, grew by 18%, with a two-year stack of 41%, while residential digital commerce grew very modestly against a strong comparable, as we've seen a slowdown in the do-it-yourself consumer. Waterworks continued to deliver very strong revenue growth of 27%, driven by price inflation, on top of a prior year comparable of 50%. The commercial mechanical customer group continued to grow, and within other, our non-residential, industrial, fire and fabrication, and facility supply businesses saw strong growth. It's through these nine customer groups that we achieve broad and balanced end market exposure. In aggregate, this allows us to serve our customers' needs in a more holistic way and bring more value to the total project. Let me now hand over to Bill, who will take you through the financials in a little more detail.

Thank you, Kevin, and good morning or afternoon, everyone. Net sales were 16.6% above last year. with growth rates slowing through the quarter as expected. Organic growth was 12.7%, with price inflation stepping down from Q4 to Q1 to 15%, indicating a small volume decline in the quarter. Acquisitions contributed 2.7% to revenue, with a further 1.5% from an additional sales day, partially offset by a 0.3% adverse impact from foreign exchange rates. We were pleased to deliver gross margins of 30.5%, in line with Q4, but down 80 basis points over the prior year as expected. This was driven primarily by strong prior year comparables during a period of rapid commodity price inflation and supply chain constraints. Tightly controlled costs, partially offsetting the year-on-year gross margin decline, enabling us to deliver adjusted operating margins of 10.9%. Adjusted operating profit of $864 million was up $97 million, or 12.6% over the prior year. Adjusted diluted EPS grew by 18%, driven principally by the growth in adjusted operating profit, as well as the impact of our share buyback program. Our balance sheet remains strong at one time's net debt to adjusted EBITDA. Moving to our segment results, the U.S. business delivered another solid performance. Continued to take market share with net sales growth of 17.4%. Hispanic revenue growth of 13% was bolstered by a further 2.9% growth from acquisitions and 1.5% from an additional sales day. Delivered adjusted operating profit of $845 million. an increase of $93 million, or 12.4%, over the prior year, with operating cost leverage driving an 11.2% adjusted operating margin. Turning to our Canadian segment, the business performed well with organic revenue growth of 8.2%, as we lapped a 13.9% prior year comparable. One additional sales day added 1.5% to revenue growth, but adverse foreign exchange rates reduced revenue growth by 6.1%. Total revenue growth was 3.6%. Similar to the U.S., non-residential end markets performed better than residential in the quarter. Adjusted operating profit of $33 million was $1 million below last year, including a $2 million adverse impact from foreign exchange rates. Turning to cash flow, We take a disciplined approach to cash generation. It continues to be an important priority and quality of our business model. Adjusted EBITDA in the quarter was $912 million. As expected, our working capital investment of $357 million was lower than the prior year as we have begun to reduce inventory as supply chain constraints start to ease. Inventory was down approximately $100 million during the first quarter. We generated $501 million in operating cash flow, an increase of $510 million over the prior year. We continue to invest in organic growth through CapEx, principally invested in our market distribution centers, branch network, and technology programs. As a result, free cash flow was $408 million, an increase of $470 million over the prior year. Our balance sheet position is strong, with net debt to adjusted EBITDA of one times. We continue to 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. As I previously mentioned on the cash flow side, our organic investments were driven by a combination of working capital to support our growth and CapEx investments, which are broadly split between our market distribution center rollout, technology investments in both front-end customer-facing capabilities, as well as the modernization of our back-end systems, and investments in our branch network. Second, we continue to sustainably grow our ordinary dividend. Previously announced our intention to transition from a semiannual dividend to a quarterly dividend, and have today declared a $0.75 per share dividend. This implies an increase of 9% when annualized 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. Purchased three businesses since the start of the fiscal year, bringing in approximately $270 million of incremental annualized revenues. While the pace of deal activity in the market has slowed, we maintain a good pipeline of potential deals and we remain focused on executing our consolidation strategy. Finally, we remain committed to returning surplus capital to shareholders, principally through share buybacks, when we are under the low end of our target leverage range. During the quarter, we returned $366 million to shareholders through share buybacks, reducing our share count by approximately $3 million. This leaves approximately $600 million outstanding on the share repurchase program at the end of the quarter. Turning last to our view of fiscal 23 guidance, which remains unchanged. We expect to deliver low single-digit revenue growth for the year, driven by continued organic market share gains and the benefit of completed acquisitions on top of markets which we expect to decline in the low single digits. We expect growth rates to continue compressing as we move through the year. driven by increasingly difficult comparables, a reduction in inflation, and a deterioration in market volumes. After stepping up adjusted operating margins by 230 basis points over the last two years, we envision some normalization and have provided a range of between 9.3 to 9.9 percent. We expect interest expense to be between $170 to $190 million. Our adjusted effective tax rate should stay broadly consistent at approximately 25%, and CapEx is expected to come in between $350 to $400 million. So to summarize, the business is performing well, and we remain focused on executing our strategy. I believe the combination of our strong balance sheet and flexible business positions us well for the remainder of the fiscal year. Thank you, and I'll now pass you back to Kevin.