Ferguson plc

Hello, everyone, and welcome to Ferguson's third quarter results conference call. My name is Lydia, and I'll be coordinating your call today. I'd now like to turn the call over to Brian Lance, Vice President of Investor Relations and Communications. The floor is yours. Please go ahead.

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. 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, 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. Therefore, all references to operating profit, operating margin, diluted earnings per share, effective tax rate, and earnings before interest, taxes, depreciation, and amortization reflect certain non-GAAP adjustments. Please refer to our earnings presentation and announcement on our website for additional information regarding those non-GAAP measures, including reconciliations to their 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 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, customer group, and our growth initiatives 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 continue to take care of our customers, outperform the market, and drove strong growth in the third quarter. Sales of $7.6 billion increased 4.3% over prior year. driven by organic growth of 5% and acquisition growth of 1%, despite one fewer sales day and foreign exchange, which had a combined 1.7% negative impact. We delivered a 31% gross margin, which strengthened sequentially by 130 basis points. This was driven by our actions to better capture the value we deliver to customers while maintaining market share gains, as well as the impact from moderating deflation. Strong volume growth, Gross margin improvement, moderating deflation, and the early benefits of streamlining our business drove profitable growth. Operating profit increased 6.1%, and operating margin expanded 20 basis points to 9.4%. Diluted earnings per share increased 7.8% over the prior year to $2.50. We continued to execute our capital priorities, deploying approximately $690 million during the quarter, including completing three acquisitions and returning $417 million to shareholders through share repurchases and dividends. Our balance sheet remained strong, with net debt to EBITDA of 1.2 times. While we're in a dynamic and uncertain environment, we remain confident in our markets over the medium term. We continue to balance investment and key strategic opportunities, leveraging multi-year tailwinds in both residential and non-residential end markets as we look to support the complex project needs of our specialized professional customers. Turning to our performance by end markets in the United States. Net sales grew 4.5% as we drove volume growth with moderating headwinds from deflation. The residential end market, which comprises approximately half of U.S. revenue, remains subdued. Our teams grew revenue in our residential end market by approximately 2% in the quarter, primarily driven by our HVAC growth initiative. Non-residential end markets representing just under half of U.S. revenue saw stronger growth than residential end markets with increased activity on large capital projects. We continued to grow share with non-residential revenue growth of approximately 7%. We delivered mid to high single digit growth across commercial and industrial end markets with low double-digit growth in civil infrastructure. Our intentional balanced end market exposure and focus on key growth initiatives continue to position us well in both the current environment and well into the future. Moving now to revenue performance across our customer groups in the United States. Our HVAC customer group continues to deliver strong growth with an increase of 10% in the quarter. I'll expand on our HVAC growth investments in a moment. Residential trade plumbing revenues declined 1%, broadly consistent with recent quarters. The business faced continued headwinds in new construction and ongoing price deflation, while repair, maintenance, and improvement is performing better. We've recently merged residential building and remodel and residential digital commerce customer groups into a unified brand called Ferguson Home. Ferguson Home provides a seamless omni-channel experience for our customers. Our focus on the higher end project is driving growth despite the overall softness and broader remodel activity. Strong waterworks growth of 12% in the quarter was driven by activity in public works, municipal, and our broader diversification efforts. Both waterworks and commercial mechanical continue to see strong activity on large capital projects. Commercial mechanical revenue grew 10% and our open order levels continue to grow. Our industrial, fire and fabrication, and facility supply customer groups delivered a combined net sales decline of 1%, as commodity deflation continued, particularly in our fire and fabrication business. Collaboration across multiple customer groups and our unique position in the market continue to be an advantage. Despite near-term headwinds, we continue to be pleased with the results of our four key growth areas. The third quarter performance shows ongoing returns from these multi-year investments. HVAC revenue, up 10% in the third quarter, reflects our focus and investments to expand our HVAC capabilities both organically and through acquisitions. Our multi-pronged approach, which includes leveraging the synergy between our residential trade plumbing and HVAC customer groups, continues to drive market outperformance. We've completed more than 550 counter conversions to serve our dual trade contractors. Our HVAC presence continues to grow geographically through both organic expansion and acquisitions. We're addressing the needs of the market by partnering with a variety of HVAC equipment vendors to offer our customers a range of choices, including our own Durastar brand. Waterworks revenue grew 12% in the quarter. We're committed to diversifying our waterworks business to create a best-in-class capability set that addresses the nation's infrastructure needs. We provide solutions for water, wastewater, and stormwater management, as well as erosion control, urban green infrastructure, treatment plant construction, meters, and metering technology. Our unique approach to large capital projects, bringing together the capabilities of underground waterworks infrastructure, commercial and industrial pipe valve and fitting, and fire protection, create a compelling solution for large capital projects and has been a driving force behind non-residential growth of 7% in the quarter. We believe our early alignment with owners, engineers, and general contractors on these projects, combined with our deep contractor relationships, our scale, and our ability to offer a suite of value-added solutions uniquely positions us for success in these projects. The February launch of Ferguson Home represents another compelling example of the value our multi-customer group approach brings to the market. We spent years developing best-in-class experience for our showroom and our digital platform for new construction, light remodel, and decorative markets. Ferguson Home is the unified brand of residential building and remodel and residential digital commerce, fully integrating our showroom and digital channels to offer our customers a seamless project-based experience. Our scale delivered locally with the cohesiveness of our customer groups is a true competitive advantage. We continue to invest in key growth areas that capitalize on multi-year tailwinds and drive out performance. I'll now pass you to Bill, who discussed the financial results in more detail. Thank you, Kevin, and good morning, everyone. Net sales of $7.6 billion were 4.3% ahead of last year. Organic revenue increased 5%, with an additional 1% from acquisitions, partially offset by 1.7% from one fewer sales day and the adverse impact of foreign exchange. During the quarter, we saw deflation moderate, with the pricing environment broadly flat. We saw improvement in finished goods pricing, offset by continued weakness in certain commodity categories. While we have seen some instances of pull-forward buying activity from customers in the quarter, this is difficult to quantify, and we do not believe this has had a material impact on the overall performance. Gross margin of 31% increased 50 basis points over last year, driven by specific actions taken to better capture the value we deliver to customers while also maintaining market share gains, as well as the positive impact of moderating deflation. We tightly managed operating costs with the growth being driven by higher volumes, cost inflation, and continued selective investments in core capabilities for future growth. As a result, operating profit of $715 million was up 6.1% on the prior year, delivering a 9.4% operating margin with 20 basis points of expansion over the prior year. Diluted earnings per share of $2.50 was 7.8% ahead of last year, driven by operating profit growth and the impact of share repurchases. And our balance sheet remains strong at 1.2 times net debt to EBITDA. As we discussed in the second quarter, we took targeted actions to streamline operations, enhance speed and efficiency to better serve our customers and drive further profitable growth. Consequently, we incurred a non-recurring business restructuring charge of $68 million, principally related to severance costs. These actions reduce complexity in the organization and will speed up decision-making. We expect the changes to deliver approximately $100 million of annualized cost savings. Moving to our segment results, net sales in the U.S. grew 4.5%, with an organic increase of 5%, and a 1% contribution from acquisitions, partially offset by a 1.5% impact from one fewer sales day. Operating profit of $726 million increased $41 million over the prior year, delivering an operating margin of 10%. In Canada, net sales were 0.3% below last year, with organic growth of 3% and a 2.8% contribution from acquisitions, offset by a 4.4% adverse impact from foreign exchange rates and a 1.7% impact from one fewer sales day. Residential activity has continued to be soft, with non-residential activity remaining more resilient. Operating profit was $8 million in the quarter, $2 million above the prior year. Turning to our year-to-date results, our associates delivered volume growth in a period challenged by commodity-led deflation in subdued end markets. Net sales were 2.7% ahead of last year, with organic growth of 2.2% and an acquisition contribution of 1.1%, partially offset by 0.6% from the adverse impact of one fewer sales day and foreign exchange rates. Deflation was over 1% year-to-date. Gross margin was 30.3%, down 10 basis points. Operating profit of $1.9 billion was down 4.9% compared to the prior year, delivering an 8.4% operating margin. And diluted earnings per share of $6.48 was down 3.6%. Next, our cash flow performance. EBITDA of $2 billion was down approximately $80 million on prior year. Working capital investments of approximately $100 million were above the prior year, driven by investments in inventory, along with an increase in receivables driven by sales growth. Interest in tax were down approximately $110 million on the prior year, driven by timing. As a result, operating cash flow was $1.4 billion. We have continued to invest in organic growth through CapEx, investing $235 million, slightly down in the prior year, resulting in free cash flow of $1.15 billion. Turning to capital allocation, as previously mentioned, we invested $100 million in working capital and $235 million into CapEx to drive further above market organic growth. Our board declared an 83 cent per share quarterly dividend. This is consistent with the second quarter and represents a 5% increase over the prior year, reflecting our confidence in the business and cash generation. We continue to consolidate our fragmented markets through bolt-on geographic and capability acquisitions. We completed three acquisitions during the third quarter, including Independent Pipe and Supply, a leading commercial mechanical business in the Northeast, Light Innovations, a residential building and remodel showroom in Arkansas, and National Fire, a market-leading fire and fabrication business operating across eastern and western Canada. We've now completed five acquisitions year-to-date, and the pipeline remains healthy. And finally, we are committed to returning surplus capital to shareholders when we are below the low end of our target leverage range of one to two times net debt to EBITDA. We have returned $759 million to shareholders via share repurchases year to date, compared to $421 million in the equivalent prior year period. This year, we have reduced our share count by approximately 4.1 million, and now have approximately $1.1 billion outstanding under the share repurchase program. Next, I'll cover our updated guidance for fiscal 2025. We are pleased with our continued market outperformance and solid growth in the quarter. Our markets remain dynamic and uncertain, but given the strong performance in the quarter, we are updating our full year guidance. We now expect low to mid single digit revenue growth, up from our prior expectation of low single digit growth. and we expect an operating margin range of 8.5 to 9.0%, up from our prior expectation of 8.3 to 8.8%. Interest expense is unchanged at between $180 to $200 million. Our effective tax rate is expected to be approximately 26%, and we've updated our CapEx estimate to between $300 million to $350 million to reflect the pace of expected capital deployment. We believe we are well-positioned as we head into the last quarter of our fiscal year. Thank you, and I'll now pass you back to Kevin. Thank you, Bill. Let me thank our associates who continue to take care of our customers, outperform the market, and are driving strong results. Our ability to serve and support the complex needs of our specialized professional customers continues to allow us to gain market share in a challenging environment. As announced last quarter, we implemented measures to better balance market share gains and capture the value we deliver to our customers. Additionally, we took actions to streamline our business and enhance speed and accountability by reducing complexity and simplifying management structures. We're pleased that these efforts, coupled with deflation moderating a quarter ahead of our expectations, have resulted in operating profit growth and operating margin expansion. We continue to invest in our key growth areas, including HVAC, waterworks diversification, large capital projects, and the recently launched Ferguson Home. Our third quarter performance shows continued returns from these multi-year investments. We believe our markets remain attractive over the medium term, and we continue to invest in our customer-facing associates and our capabilities to drive growth. We're efficiently delivering scale locally to enable our associates to provide exceptional service to our expert customers on their projects. 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.