Half Year 2021 Ferguson PLC Earnings Call
<unk> of Investor Relations and Communications you May begin your conference call and.
Good morning, Good afternoon, everyone and welcome to focus in the first half earnings conference call and webcast.
Hopefully you've had a chance to review the press release, we issued this morning. This is available and the Investor Relations section of our corporate website.
Transcripts of this call and the slides will also be available later today as one of the recording of the call.
I want to remind everyone that some of our statements today, both in our prepared remarks were and the answer to questions may be forward looking including within the meaning of the United States Private Securities Litigation Reform Act.
And are subject to certain risks and uncertainties that could cause actual results to differ materially including those noted on slide two and then all of recent form 20-F filing with the SEC.
Other than in accordance with our legal and regulatory obligations. We undertake no obligation to publicly update or revise any forward looking statements.
With me on the call today are Kevin Murphy, our CEO and Bill Brundage, our CFO and I will now turn the call over to Kevin for his prepared remarks.
Thank you Mark and thanks to everyone joining us on the call today.
And I hope that you and your loved ones are all staying safe.
We could not be prouder of what Ferguson and our 30000 associates of achieved and the first half given all of the continuing challenges of the pandemic.
We continue to serve our customers while at the same time protect the health and wellbeing of our associates.
We generated good growth and achieved strong operational delivery and the first half.
We also continue to invest and our business and.
And execute our growth strategy at pace.
So turning to today's agenda, I'll kick things off and give you some highlights and the.
And Bill will give you an overview of the numbers and then I'll come back and give you a quick update on our strategy and some of the areas of the team is focusing on the.
And Bill and I will be happy to answer all of your questions.
Turning to the highlights and <unk>.
Today's presentation all of the metrics stated of for continuing operations the UK.
The business, which was sold and half one is now characterized as a discontinued operation.
We are very proud the Ferguson achieved another period of strong operational delivery and the first half of fiscal 2021.
Revenue of $10 3 billion.
It was for 2% ahead of last year and three 4% ahead on an organic basis.
Gross margins remain a key focus and we've been pleased with their resilience through the pandemic.
There has been of short term shift and business and sales channel but.
But which worth mentioning this hasnt impacted our trading margins.
We continue to tightly control our operating expenses to ensure that the profit growth, we achieve outpaces revenue growth.
I am pleased to say, we delivered another period of strong leverage and underlying trading profit and the first half was 12, 2% ahead at $837 million with headline EPS nearly 15% ahead benefiting from the strong profit growth, we achieved and the first half.
We also delivered another strong cash performance and this remains one of the key hallmarks of Ferguson.
And the business continues to be underpinned by a strong balance sheet, which enables us to continue to invest and the business and and growth.
In addition funding of sustainable ordinary dividend through the cycle is an important part of our capital priorities and the board is recommending and increased interim dividend of 72 nine per share.
Ferguson the successful because of our associates and our baseline commitment is to create a safe and healthy work environment for all.
We will always embed safety is of core value driver and everything we do.
We're pleased that our recordable injuries continue to improve with our group total injury rate and our lost time rate showing strong improvements.
We're making progress and our journey to become first and safety and throughout the pandemic, keeping our associates and our customers safe has been at the forefront of everything we do.
And in such a challenging year, we were really pleased to have also achieved a three percentage point increase and our associate engagement scores and this year survey, which we completed in February.
Yes.
We're also pleased with the continued momentum on the corporate actions, we set out last year.
We delivered what we promised and we're pleased with the execution here.
Most importantly as markets have recovered we are progressively been able to put our strong balance sheet back to work in terms of restarting investment and the bolt on M&A program resuming.
Ordinary dividend payments and returning surplus capital to shareholders.
The first M&A.
And we're really pleased with the for bolt on deals, we completed and the first half which represented an investment of $224 million.
Acquisitions are a core part of our growth strategy and in recent weeks, we completed amrok, a leading brand of decorative cabinet hardware and Clarksville lighting and appliance showroom business based in Tennessee.
Having restored of ordinary dividend payments, we now feel that the group's prospects and continued strong financial position means we can also resume returning surplus capital.
And we're announcing today, we will buy back up to $400 million of the company's shares.
In January we announced the completion of the disposal of Wolseley U K.
Which achieves our aim of focusing our business on North America.
We will return substantially all of the proceeds from the transaction alongside the interim dividend payment in May.
So if you take our interim dividend of <unk>.
Share buyback and special dividend payments together Ferguson is committed to returning just under $1 billion to shareholders in the coming months.
Our additional U S listing on the New York Stock Exchange went live last week.
This was a very proud moment for all Ferguson associates, and we expect that over time. The U S listing will facilitate increased interest and the business from domestic U S investors.
And since the start of the calendar year, we have been steadily increasing our engagement with the significant pool of capital.
We grew faster than the markets, we serve and the first half and continued to gain share with our outperformance estimated at about 3%.
With the core markets of remained about flat and the first half with residential continuing to grow.
New residential strongest the Rmi, where we generate the majority of our revenue is also growing well.
Nonresidential markets remained much more challenging with commercial markets down about mid single digits and civils down low single digits.
Industrial remains the weakest market. Although there are the early signs that this market appears to be bottoming out.
We track data points from numerous economic industry and research sources as well as serving our own customers and measuring our order books.
And the second half, we anticipate that market to overall will return to growth driven.
Driven by the continued strength of residential markets, which represent just over half of our business.
We're also seeing and increasing tailwind from inflation, which started and commodities, but is now flowing through into finished goods due to rising input manufacturing and transportation costs.
Now, let me pass you over to Bill who will walk you through the numbers.
Thank you, Kevin and good morning, or afternoon, everyone as Kevin mentioned the numbers on the accompanying slides are for the continuing operations of the group comprised of the U S, Canada and central costs.
We had a strong first six months with continued momentum from Q1 into Q2.
As expected, we've seen broadly flat U S and markets during the first half and we're pleased with the performance of our business against this backdrop.
Total revenue growth was four 2% organic revenue growth was up three 4% and acquisitions added a further one 5% with the balance offset by one fewer trading day.
Gross margins were down 20 basis points due to a combination of business and channel mix, but I am very pleased with the continued cost control and operating leverage resulting in underlying trading profit of $837 million up $91 million or 12, 2%.
Headline EPS increased by 14, 5%, principally due to the increase and trading profit.
The balance sheet is in great shape, and we were at <unk> six times Levered at the half year as Kevin mentioned, we are returning the proceeds from the UK disposal of approximately $400 million and have initiated a new $400 million share buyback. If you take both of these items into consideration the pro forma leverage position.
And is one times.
The U S business delivered another strong operational performance. Despite challenging conditions, we continued to outgrow flat markets with organic revenue growth of three 3% and total growth of four 1%.
Price inflation was broadly flat overall, but strengthened through the period.
Gross margins were slightly lower due to a combination of business and channel mix.
We control cost well and dredging and generated strong operating leverage.
Head count grew modestly to support volume growth and we continue to invest and the organic growth of the business and the areas of digital technology and supply chain.
We continued to benefit from a combination of the restructuring actions announced last year as well as ongoing savings during the pandemic and areas such as travel customer engagement and health care.
Consequently underlying trading profit came in at $823 million $83 million ahead of last year with underlying trading margin of eight 5%.
We've provided a breakout of revenue growth across our largest customer groups and the U S.
As Kevin outlined we saw strength and the residential end market and our customer groups, serving that and market performed well.
Residential trade and showroom grew well and we continue to see particularly strong trends and E business due to strong residential demand from the project minded consumer and the light decorative pro and.
And <unk>, where the majority of our business serves the residential end market, we delivered double digit growth.
Commercial mechanical continued to be restricted by more challenging non residential markets.
We continue to see our commercial customers pivoting towards areas, such as data and distribution centers as work and office hospitality and retail has slowed.
Waterworks continued to outperform the market with revenues up slightly.
And the other bucket is comprised of fire and fabrication facility supply and industrial which has remained weak.
The Canadian business delivered a strong operating result generated revenue growth of five 2% and the first half.
<unk> and markets, which account for nearly 60% of our Canadian business performed well and the period with a particularly strong performance from our HVAC business.
We also saw growth and civil infrastructure markets, but industrial markets remained challenging.
Similar to the U S gross margins were lower than last year, but good cost control and benefits of restructuring led to a $7 million increase and underlying trading profit and an improvement and trading margin to 6%.
As we focus solely on North American markets, we are leveraging the considerable expertise knowledge and knowhow from our U S associates to enhance operations and customer experience across Canada.
Finance charges were as expected with the increased principally due to a higher level of average gross debt and the prior half year.
The effective tax rate was also as expected and in line with our technical guidance.
Exceptional charges for continuing operations for small and the first half with modest cost associated with the U S listing partially offset by adjustments to previously accrued business restructuring expenses.
Exceptional charges on discontinued operations were $188 million, principally as a result of exiting the UK.
And there was a $63 million of impairment, resulting from a small loss on the book value of assets as well as transaction costs.
There was a further $135 million of net cumulative currency translation adjustments arising from exiting the UK operating company offset in part by winding down a dormant former UK group financing company.
These currency translation adjustments have built up over many years as a result of movements and GBP to U S dollar exchange rates.
And it's important to note that they are noncash items.
I've set out the cash flows on a pre <unk> 16 basis, which more closely mirrors. The U S. GAAP standards, but there is a reconciliation to the statutory numbers and the appendix.
We take a disciplined approach to cash generation it's.
It's an important priority and quality of our business model.
Cash flow from operations was $559 million after a seasonal working capital outflow of $361 million.
It's worth highlighting the due to recent supply chain pressures and low vendor fill rates, we continue to invest and inventory ensuring that we of the best levels of availability for our customers.
As I said on the previous slide interest and tax came in as expected and the first half.
Capex was a touch lower than last year, but we continue to invest and the organic growth of our business.
Particularly on our digital front, and overall technology journey and World class supply chain.
We returned $460 million of shareholders in the form of dividends and the first half which included both the deferred interim dividend from 2020 as well as the final dividend.
We invested $224 million and bolt on acquisitions of core part of our growth strategy.
And finally, the disposal of cash principally relates to the sale of the UK business and as discussed we are returning to shareholders through a special dividend.
Our balance sheet and access to liquidity has been and continues to be a source of strength as we have guided the business through the ongoing challenges of the pandemic. We finished the period with the net debt to adjusted EBITDA ratio of <unk> six times and as previously noted this rises to one times on a pro forma basis.
And you consider the special dividend and the share buyback.
Lease liabilities recognized under <unk> 16 were $1 1 billion.
A little lower than last year. After we exited the UK business at the end of January.
The net pension position moved to a deficit to a lower due to lower discount rates on plan liabilities, but remains modest compared to the gross asset value of approximately $2 2 billion.
Turning to capital allocation.
We remain committed to our capital allocation priorities.
While we have operated prudently during the pandemic as markets have recovered we are progressively reinstated our capital priorities and we continue to target of net debt to adjusted EBITDA range of one to two times.
Investment inorganic growth principally through working capital and Capex remains our first priority.
We remain committed to growing our dividend sustainably through the cycle.
We will then invest and selective bolt on acquisition opportunities and return surplus capital to shareholders over time, when we are below our leverage range.
Moving on the technical guidance most of our guidance remains unchanged from six months ago.
We have one fewer trading day this year worth of approximately $15 million of trading profit.
We lost one and the first quarter, we will gain one and the third quarter and lose one and the fourth quarter.
I have included the revenue impact of completed acquisitions on the fiscal 'twenty, one full year figures.
Guidance has been increased to account for the Amrok and Clarksville acquisitions.
The interest and tax guidance remains unchanged cash.
Opex guidance is a touch lower than previously guided and part due to exiting the UK operations.
As you think about performance for the rest of this fiscal year, we expect to see the continued benefit of the business restructuring charges, we took last year.
In addition to those restructuring actions as we discussed at last year and as well as in Q1, when the lockdown impacted our business from April we took a number of decisive short term actions on the cost base, including placing 2500 associates on temporary layoffs.
Those temporary layoffs or done and those associates are and are now back at work.
Our associates represent the intellectual capital of our business and as we move forward, we will continue to invest and head count as well.
As in our digital front and technology initiatives and supply chain and order to capture future market growth.
We also expect as the world returns to a more normal operating environment that will start to see some cost come back into the business and certain cost categories, such as travel and customer engagement.
And we are facing inflationary cost pressures and areas such as supply chain and transportation.
Despite these cost headwinds our business is well positioned and we remain committed to driving long term productivity and operating leverage through our business model.
I also wanted to take the opportunity today to announce and alignment with our strategy and and another step on our journey to North America. The group will change the U S. GAAP reporting as of August one of this year and order to aid comparability with the U S peers.
We will host an investor session on the topic prior to the end of the fiscal year to communicate the impact of the financials and provide reconciliations from <unk> to U S. GAAP.
So let me wrap up I am pleased with the first half results that the team delivered good earnings and good cash generation provided us the ability to continue to execute against our capital priorities.
Our balance sheet is strong and we are well positioned going into the second half.
Let me now hand, you back to Kevin.
Thanks Bill.
Let's move on to the business update and how we are executing our strategy.
Our strategic framework is our road map for developing our business. We will continue to drive all of our resources and knowledge to make sure that through a consultative approach our customers projects are more successful because of they dealt with Ferguson.
We will be our customers' trusted adviser, giving them unrivaled choice of products sourcing the leading brands and all our categories, including our growing portfolio of high quality owned brands offering of true omni channel experience, so that doing business with us is as frictionless as possible.
Distribution remains a core competency and we bring the deepest and widest inventory in our product categories with a world class supply chain.
That is our core and we are continuing to invest here.
Personal relationships are critical.
Believed this is not enough. We will also build capabilities that drive the best digitally enabled customer relationships.
We will use technology to make our business more productive and equip our associates with the tools that drive productivity, while saving time for the customer and all the while never being afraid to experiment or to innovate.
And the next few slides, let me give you a sense of some of the key areas. We are driving as we continue to execute the strategy.
The next slide is an example of sales execution that cut across our vertical customer groups.
To be truly successful, we must create value for the ultimate owner and general contractor on a project.
A great example of how we're working to meet the needs of a large and complex project is our approach to a new $6 billion residential and commercial project and the Western U S, which is currently and the planning stages.
Here, we're harnessing the power of our scale and breadth of our business to meet the diverse needs of the developer through a single unified consultative approach.
And to give you some idea of the scale. The first phase of the project will involve building five resort hotels over 500 residential units resort amenities, including extensive commercial and retail facilities.
And the essential temporary infrastructure, including a 50 unit temporary workforce hotel and supporting infrastructure, including roads and utilities.
We're being written into the specifications with the general contractor and the sub contractors.
The end customer will benefit from a single approach to procurement across multiple customer groups.
Our approach includes design support.
Building code compliance lead level of environmental goals as well as providing readily available inventory across all of the trades at a remote site location.
All of this will be delivered through dedicated resources, including associates.
The temporary branch and lay down space close to the site and done together with the trade professional.
This highlights the power of Ferguson's diversity, and our objective to be of part of our end customers decision, making process sooner evolving from order taker to.
The trusted advisor and always be project, driven rather than simply quoting lists.
Moving on to supply chain, which in today's environment is even more important than ever.
We bridge the gap between approximately 37000 and suppliers utilizing scale and our distribution to sort of over 1 million customers.
Our customers require access to a wide variety of products, they expect high fill rates and speed of delivery.
<unk> and supply chain is built around these needs.
We are not complacent about the need to continue to invest and a world class procurement logistics and supply chain.
It's the heart of our business and we continuously evaluate our distribution network to optimize it for efficient speed based on our proximity to every major U S market.
We will have the most effective and efficient same day next day Omnichannel supply chain and the U S by placing our product closer to the customer being in stock for shipping same day, while further developing the capability for $24 seven and access to our inventory by our customers.
Today, we have $6 5 million square feet, and <unk> and more than 35 million square feet and our branch network as the foundation for our overall omni channel strategy supported by developing best in class technology and tools.
We've also established import centers on each coast to ensure efficient replenishment of globally source products across the country.
The strategy also includes progressively developing our market distribution centers and the major msas as the most efficient means of final mile distribution.
Our network of already sees pipe yards import centers Mdc's and branches allows us to put the product closer to the customer increasing the speed of delivery and providing greater operating efficiency.
A good example of how we are progressive we optimizing the network is our newest facility located in Denver of one $5 billion residential and commercial market with over 70 branches.
Our new 450000 square foot MDC and Denver provides a more cost effective fulfillment solution within Ferguson as distribution Center network.
It allowed us to consolidate for existing sites, providing next day replenishment to our branch network and same day delivery to customers across the region.
It does this by eliminating double handling.
Enabling us to make deliveries directly from the MDC the customers in the Denver Metro market and scale with far fewer support staff.
Operations are safer for our associates with greater automation and robotics technology to reduce mainly manual handling and deliver speed.
Overtime, we will progressively expand this improved MDC model within other major MSA and our rate of about 2% to three per year, which is included within our planned capex requirements.
Moving onto the digital and technology.
We must have a build on the best relationships and the industry.
Our customers want flexibility and a seamless interaction from order to fast delivery and returns.
Now more than ever we're focusing on technology solutions and pairing digital capabilities with our existing associate customer relationships.
Pro pickup is a fast collect service, providing digital enhancements to online order placement order status and delivery.
And for customers ordering online and through their mobile device or over the phone.
The service puts the customer and control by giving them multiple delivery and pickup options that best fits their changing needs.
Once placed orders are typically picked up and one to three hours at the branch selected by the customer who then receive real time alerting of the order progress.
During COVID-19, we introduced curbside pickup at our counters to protect our customers and our associates.
For that reason pro pick up also now includes the text to customer service. So that when a customer's order is ready he or she can Texas when they arrived and will bring their order out to their vehicle.
We're also now piloting secure lockers for stock at our major sites, which enables both contactless pickup, but also $24 seven access the product, which can be really useful for our customers doing off hours repairs.
So in summary sat here today, our businesses and very good shape.
We're extremely proud of how our associates of continue to rise to the challenge and we're staying focused on protecting their well being as well as our customers.
We are pleased with the operational delivery given the ongoing challenges of our markets and we will continue to focus on the rapid execution of our strategy.
That means investing and the strong foundation of a world class supply chain.
Delivering a consultative approach to our customers of.
Balanced product strategy and investing in digital and technology.
Thank you for your attention now Bill and I will be very happy to take any questions or comments you have.
Later, I will hand, the call back over to you.
Yeah.
Thank you.
Reminder, if you'd like to ask a question. Please press star one on your telephone keypad now okay. Thanks, and I'll ask a question. Please ensure your hudson's fully plugged in and non muted locally.
Our first question today comes from will Jones of Redburn. Your line is now open.
Thank you.
Good morning, and good afternoon.
A couple for me if I could please the first was.
And just exploring the step up and the like for like sales growth and so far and Q3 could you just I guess seems a bit more color on that and particularly the extent to which it's being driven by price and do.
The volume of space within the mix and then would your working assumption be that that number could actually.
And today for the last four months of the year for Michael just given that you start to lap some of the Covid comps.
And then the second question was just around gross margin just if you could give us of steel for.
Any mix issues positively or negatively and we looked at the second half of I guess, the things like maybe counters and share re et cetera, right, but then you've got commodity inflation coming through just how you see that.
And balancing out mix wise and just more generally I guess on gross margins is there anything you would you would call out around the competitive dynamics and any of the business lines the changed and the first half of the year outside of type of mix effect. Thank you.
Thank you will this is Kevin and maybe I'll give a start to the questions and and then hand over to bill.
In terms of the step up in Q3 and like for like and what that trend looks like I think it is built on several things number one we're seeing.
Again ongoing good progress and the residential markets, both new construction and Rmi on the new construction side led by single family, New construction, but quite frankly multifamily is still performing well and then the rmi side as housing.
Housing stock turns over and as you have people that have spent a tremendous amount of time in their home as an office as of Jim as the school and.
More generally we are.
Seeing good signs from that perspective, so that residential market is driving but the commercial market, although down call. It mid single digits and and if you look at what put in place is supposed to be for 2021 of down eight and.
And we're seeing actually our contractors gravitate towards where those areas and those pockets of strength are and our companies doing the same thing bill highlighted in his portion around distribution centers and thats been a very solid growth area for us across multiple customer verticals as that distribution center activity has been.
It has been solid so we see that supporting we also see inflation coming through on the commodity side, which is really where it started and have one we saw about 7% inflation and commodities commodities being about 10% of our business and it really has started to flow into the finished goods side of the.
<unk>.
Based on what's happening with our manufacturers trying to make sure they maintain a safe work environment, but at the same time.
Take up for some product shortages that are out there and make sure that we can get it through the supply chain you got some transportation shortages and the like.
And that are that are making things a bit more challenging from a product availability side, and we're seeing that flow through and price inflation as input costs manufacturing and transportation rise and so we do think that will provide a tailwind.
It will have us working very diligently to make sure that we drive price and the market appropriately and of great communication with our contractors as they talk with their owners and developers.
So we see both of those things benefiting.
What our sales environment is in Q3 and that supported by our open order volumes on.
On the gross margin side.
Yes, we had about 20 basis points down in half one and I think that's generally a good positive in terms of the resiliency and our support for gross margin that was caused by a business mix and sales channel mix, which we start to see changing a bit on the sales channel mix, we are starting to see.
<unk> activity inside of our counters and our showrooms increase as we entered Q3 that pace continues to growth as.
You start to see some of unlocking from of pandemic perspective, and you see more open environment is across the country to homeowners, allowing trade professionals to come in and do repair remodel work. So we do believe that will be positive it will be positive on growth it will be positive from a margin perspective.
The other thing that were seeing that were we.
We believe we'll be supported from a gross margin perspective.
Is that of supply chain pressures are out there our associates are guiding customers to those products that we keep and stock that we have ample supply chain capabilities for and net are also part of our product strategy, which is the best growth Avenue for gross margin for us. So we're pretty positive on both of those fronts and look bill if you of any.
Good.
Does that answer the question well alright. Thank you.
Okay. Thank you will.
Our next question comes from Keith Hughes of tourists Keith. Please go ahead.
Okay.
Thank you and just kind of building on the last question.
Talk about some pockets of.
Of commercial.
Do that or if you could talk a little bit about the industrial business, a little bit more and seeing the biggest declines of the first half of that is.
Is that now bottoming out and are there any signs with the potential of transportation Bill and the U S infrastructure.
The second half of the year.
Yes, Thank you Keith.
From an industrial perspective.
It's worth reminding it's about 6% of our overall business mix sat here today, we do see that bottoming out and starting to improve from a comparable perspective, we really started to we start to come up against some very favorable comps and March April may.
For our business from an industrial perspective, and so we do see that returning to a more positive environment.
And that said, we still see some challenges in the manufacturing environment for pipe valve and fitting and doing.
Some shutdown work just because of manufacturers are behind schedule in terms of production and so thats going to continue to ebb and flow and then we have a decent piece of exposure and our integrated business on the aircraft engine side of the world and that's still going to have some time before that gets back to growth, but generally speaking.
And we're bullish around what industrial can be and the second half given those comparables on the infrastructure side of the world ex mostly.
In our waterworks business on the civil side, and and today that waterworks business is seeing good market residential and commercially and then we'll wait and see what happens from a civil perspective, we've got a growing storm water geo synthetic soil stabilization business that we think can be can be helpful. And addition to <unk>.
General water and sewer on that infrastructure side.
Okay and second question.
Around margins with the inflation for Rod and we've seen and the market coming.
Do you anticipate and the second half.
The period of time would your margin be compressed the.
Half of those prices through all of it.
And that not be an issue and this round of inflation.
Keith what I'll say is that our teams it's top of mind every morning, when they wake up and come to work how do we make sure that we have good communication with our contractor and with our contractors customer on what price is going to happen what product availability looks like and how do we make sure that increase.
As are our pass through the supply chain appropriately.
I can say, it's been historically of core competency of our company through hard work.
But it's day to day, and and we managed through that and take a great deal of pride and effort and doing so it's a tough environment out there right now as you look at say just <unk>.
Going back to one of the initial areas of supply chain pressure on the appliance side of the business. When we are securing a piece of business, where the builder or even with the consumer we are having to place orders very early and the project just to make sure that we get product in our warehouses and have it available for the customer when they need it and making.
Sure that that communication line.
Is very tight is hugely important so I don't anticipate short term margin disruption, but it's a point of effort as we go through the day to day.
Okay. Thank you.
Our next question comes from L. D rule of Jpmorgan. Your line is now open.
Hi, Thank you good morning, good afternoon, and my first question would be on the USA, Inc.
And you mentioned that you are hoping for key and increasing.
Domestic index and my question is of your next city of anything yet.
And back to base and how much would you say now U S based Betsy.
And.
And would you see the KOB two suites two of primary use cash in the for one yeah. That's my first question and my second question is regarding the acquisition that you've made in H one of call of $224 million and could you confirm that the EBITDA multiple that you stated.
Got it wrong the seven.
And times between Louisville and.
And and how much would you expect debt either on the top and if I may.
And and putting a third quick one just is it sort of op margin expectation for 2021, and given what you've said on topline and correcting Crazy would you <unk>.
And the lease to them to consensus estimates for the margin, which is I believe of on the 91%.
And but yes, hi.
Yeah, Thanks for that.
Thank you Ellie I'll take maybe the first question and let bill jump in.
From the U S listing perspective.
And obviously, we're pretty pleased as I said and the statement.
And with being able to achieve the additional listing on the New York stock Exchange on March eight a lot of hard work by the teams getting us ready for that for.
For that step and so if I look back over the past year. When we first started this journey.
We said, we're going to take this and this two step process.
We consulted with shareholders in great detail and.
And we're really encouraged the shareholder said, we want to hear from the board what they believe is and the best interest of the company and that was very encouraging and then to have our board. We came out and indicated that we felt like the best long term listing structure was in the U S for the company, but then we take a two step process, so achieving that that listing on margin.
<unk> was a big step we still got a lot of work to do and.
And that of that revolves around Sarbanes Oxley, we still got of migrate some job and work from.
And the UK over to the U S and our Ferguson group services operations, we're transitioning to U S. GAAP as indicated so theres still a lot of work to do and yes. If you go back to the original statement last year, We said, we could get the vote on the primary around about a year from standing up that additional listing sat here today.
That seems appropriate, but what I would say is we still got a lot of work to do and how we approach that debt additional listing and the things I talked about as well as managing the business operationally through what is still a very challenging market of dynamic market that we're on.
Operating and so that's about where we are from a listing perspective and maybe bill take.
The acquisition and margin expansion, yes, maybe just to round that first question out of LNG I think you asked on the percentage split on investors. If you look on our website, we actually out of study done in October for about 33% of our <unk>.
Shareholders are U S based today, and we have not seen that move appreciably over the last several months.
On your question on acquisitions, yes, the for deals that we've completed this fiscal year.
Very much and kind of in line with that historical.
Multiple from a 7% and 10 perspective keep in mind, we do always have in year. One once we acquire those acquisitions, we always have some one off year, one integration costs that come along with that.
And I feel very good about those for deals that we've completed.
And then in terms of the expectations from a top line perspective, as Kevin outlined and.
And as we've talked about already.
And the Q&A from our currently running at high single digits.
We were flagging from a cost perspective is that we are first and foremost really pleased with the restructuring actions that we took last year and how that's played through to the first half from an operating leverage perspective.
If you look at that first half we've had about 80 basis points of operating leverage on sales.
As you flip the calendar and you look out towards Q4, just a reminder, in terms of some of those temporary actions that we took last year as we were in that environment.
Taking those temporary actions such as that the 2500 associates that we had on temporary lay off.
As we talked about last year, we actually had a bit of a better revenue performance last year, and Q4 and that led to a bit of and outsized drop through and trading margin in Q4. So on balance we feel really good about the cost base, we feel really good about how we're balancing.
Cost discipline with investments to take advantage of those topline market opportunities that Kevin talked about and we feel that we're well positioned for a good second half.
Okay. Thanks very much.
Our next question is from James Rose from Barclays changed your line is now open.
Good morning.
Two please first is on you've touched on some of the supply chain pressures you've seen so far and she is the scarcity.
Could you just talk a bit more of of how you. How are you dealing with that and what impact it could have on growth and cost.
The thing you can still still carry on into the high single digits and above with some of the availability issues in the market.
And then secondly, and freight costs.
Is this the.
Distribution and flagged it as well, but the is this a short term sort of cookie.
Related to inflation.
And then more structural.
How are you.
Are you able to pass on true.
True.
Okay over the past that one of them.
Okay.
Great. Thank you James I'll start off with that from a supply chain perspective, just to give you a sense of what we're dealing with because it is broad based across a wide variety of the products that we handle and product categories. We handle so just give a sense from a DC inbound perspective historically.
Brickley DC inbound shipments were about 75% fill rate on time and for <unk>.
Today, we're sitting at about 48%, but what's really helpful for the strength of our company and scale of our company is that we're turning those 48% fill rates around into of 94, 3% fill rate from D. C. The branch customer.
And so really pleased with the ability to turn that around we are appropriately using the strength of the balance sheet to invest and inventory.
And to make sure that we've got the best product breadth and depth for our customer our associates are selling and guiding customers to those products that we believe we can handle from a supply chain perspective, and deliver on time and and full to their job site.
So I think that we'll see customer attraction to that strength and it will serve us well can I speak about what's going to happen as we go it's a very dynamic environment out there right now and on things like PVC, PVC pipe and what that availability looks like.
It's a pressure point right now.
That said from an inflation perspective.
I can't really comment on whether it's structural of you don't want me commenting on monetary policy of fiscal policy for that matter, but what I do see what we see is price increase coming into the system at a fairly rapid rate. It started with commodities and it's moved into our finished goods inventory could be 10.
Perry phenomenon, but we believe we've got support of residential end markets that together with that inflation tailwind.
Managed appropriately we will serve us well as we go into our Q3 and Q4.
And James maybe on your second question and specifically on freight costs.
We are we are.
Certainly seeing some very high spot freight rates out there and the marketplace everything from call. It ocean freight rates that are spot rates up 50% to 75% to <unk>.
<unk> and truckload rates that are up 20% to 30% to put that in context about 6% of our cost base is distribution and freight.
If you think about though we are very well positioned with good long term contracts and good long term relationships with our suppliers with our transportation suppliers that is in addition to that we do run our own private fleet for final mile distribution. So we have 3500.
Small and heavy duty trucks on the road each and every day. So we can manage that cost base a little bit more.
Distinctly within our own P&L, so we are managing well through the transportation.
Price inflation.
But it's certainly something that we're keeping a watchful eye on.
That's great. Thanks for the color.
Thank you Chad.
Our next question is from David Manthey of Pet David Your line is now open. Please go ahead.
Hi, good morning, Thank you.
And I was hoping to get your thoughts on the Ferguson's mode relative to online only competitors and.
Kevin.
Success of build Dot com.
And what does it tell you about the future and how that will look for you.
Yes, David Thank you great question.
As we think about online we do believe that.
The best digitally enabled customer relationship is extremely important and we do believe in and Omnichannel future.
And so when we look at our pure play more pure play E business.
Growth, we're pretty bullish you obviously, the COVID-19 environment from a DIY perspective, and with that light decorative pro has been a good growth area for the economy.
<unk> seen that our E business growth rates up 40% in the half and quite frankly, our build with Ferguson.
The 50 plus percent and so good growth good customer service, we have brought that build with Ferguson and together with our showroom to.
To give a best in class Omnichannel experience for that.
DIY light decorative pro and net customer who wants to act in an omnichannel fashion. So we're pleased with the progress that we've made but that journey is very much.
Okay.
And.
Okay.
Okay.
Okay.
Yes.
Thanks, Kevin and I appreciate it.
Next question.
Our next question is from Kathryn Thompson of Thompson Research Catherine. Please go ahead.
Hi, Thank you for taking the question Paul just for.
All of that the high single digits.
Right.
Current quarter.
And looking at slide 11.
That's very helpful.
Sure.
And there continues.
And so.
Hi.
Ladies and gentlemen.
Great.
The commercial.
Not really.
Yes.
Construction.
Okay.
Thank you Catherine you were breaking up a bit but I think I got the gist of the question. If we look down through the customer verticals, and where we're seeing pockets of strength and maybe some challenges.
From a residential trade perspective.
We feel good about the growth that we've had and as we entered Q3.
And have played through Q3 some of that strength that we've seen has come from that residential trade sector. I think I highlighted earlier that we're starting to see counter activity.
Hiccup and grow and accelerate.
We're seeing customers being allowed into homes more.
Across the country to do remodel work.
And we go and so that DIY debt was so very strong is now starting to see greater balance with that trade professional on the builder side, we're seeing showroom traffic for our attached consumer.
Really start to increase we've done well to increase our staffing levels and our associate count both from a customer service Rep perspective, but also showroom consultants because in many markets. We're seeing our consultation appointments start to lengthen and the need to address that is very acute and.
Again.
David's question earlier, bringing together build dot com as build with Ferguson together with the showroom has started to make our customer more productive.
And really help the productivity of our showroom consultants and then and <unk>.
Shrink of the time necessary for that consultation process. So we're really pleased with what our E business.
Showroom builder and residential trade markets are doing against that residential strength that we're seeing out in the market on the commercial side I spoke to a bit of distribution center activity. That's been a source of strength for quite some time. It really is across all of our businesses fire and fabrication and sprinkler pipe of Buildout with hedge.
And devices, what we're seeing with underground construction and general commercial activity and as we think about land pressures one of the areas that has been very positive on the distribution center side is what we've been able to do with retention detention for storm water management and the underground applications that are associated with the very.
Good engineering.
Oriented solutions that our company is able to deliver and it's been it's been very helpful for us on the commercial side.
That's really part of the waterworks business vertical.
Katherine go ahead.
And I guess, the one follow up on commercial.
Our primary research is showing.
And it's still the very early stages granted that as we prepare for it.
The World Youre seeing.
More structural things that are happy with it and I will hand washing stations and schools to revamping HVAC systems.
To what extent are you seeing any of the early signs of the more fundamental changes and the post COVID-19 world impact of your commercial business.
And I think your word early is is right on and we're seeing great growth on a small base for indoor air quality.
The very acutely on light commercial we're starting to see of grow more rapidly one of the nice parts about this multi customer vertical.
And the diverse base of.
Revenue that we have is our HVA teams are coming together with our facility supply teams and our plumbing organization to work with schools, both K through 12, but also.
The university level and.
And start to address things like touchless, faucets and dryers, what we're seeing with humidity control ventilation and overall HVAC system upgrades I think that will serve us well as some of the stimulus money starts to make its way through into the educational system.
And we're also seeing some.
Some degree of ramp up its very early but some degree of ramp up.
And University of housing.
And what that renovation market looks like and University housing, it's very early days, but we're starting to see some signs of that and we're pretty bullish on that as we go forward.
Yeah, I would suspect that on the schooling you should see of ramp up because given the three priorities with the by the stimulus plan one of those and.
Schools.
And the interest you have that tracks the free.
Question is really.
Very helpful I'm talking about of inflationary pressures.
And supply chain and really two part.
Are you seeing any residual impacts and the Texas freeze we've heard it from the current Thats really more related to the supply chain and be at chemical plants, having for instance of heart.
Later.
The challenge of getting certain products that go into finished product and the.
Then the other follow up on inflation and general historically, because you sell of higher value add products. Historically, you have been able to add on pricing beyond inflation, just the confirmation of that thank you very much.
Thank you and when you talk about the storm and the central part of the United States, particularly in Texas. It had a short term negative impact as the storm was actually playing out but then immediately following the freeze.
Ill jump up a very.
Strong jump up that really stress the system in terms of our trade professionals and their need for product area.
Everything from what was happening with leaks and pipe burst all the way through water heater failures and the need to replace water heaters.
And the like and so.
Our teams have been working nonstop to make sure that they take care of their customers and that Texas market.
Across the landscape from and industrial perspective, Yes, we did see resin plant.
And have some short term disruption that's played its way through and both allocation of resin to fight manufacturers and then the corresponding allocation onto the wholesale and retail channels.
And we're managing that the <unk>.
Strength of our supply chain and our inventory.
The position puts us in a good place with our contractors, but the need is to pass on price increase as we go through that the other bright side too.
Our ability to help the industrial sector as we saw a.
Good ramp up and industrial spend in the.
The Texas marketplace, both on maintenance and repairs.
As a result of the storm, but also some catalyst for some capital spend as well so that Texas market is is driving pretty good growth right now.
Great. Thank you very much.
Our next question comes from Sue has any of Herman and I'll say from Goldman Sachs Sydney Sydney. Please go ahead.
Alright. Thank you for taking my questions just two for me please.
And looking to Q3 and Q4 of Mike. Thank you one other any trading the implications that could be aware of and the second one is on the medium.
EBIT margin.
It's just the more growth from the online channel digitally at a brisk recommendation chips.
One of the dynamics of this would be of bad all implications for gross margin EBIT margin for example, and how does that play out in terms of looking items.
Good day, the EBIT margin improvement and maybe it is coming from taking the gross margin offset by second or.
Okay.
Thank you.
Yes. Good morning. Thanks for the question from of trading day perspective, we lost one and our first quarter, we will pick up the trading day in Q3.
And we will lose one and then in Q4.
And sue.
On the margin story, especially as we move towards that digitally enabled customer relationship that omnichannel approach, we do not see that as having a detrimental effect on EBIT margins.
From a gross margin perspective and.
Our pricing is aligned together with our showroom and we need to be competitive to the marketplace and a very transparent pricing world.
And then we've got to make sure that we address cost to serve.
For that customer as they're doing business and in Omnichannel fashion. So long term, we still believe that we can enhance gross margins.
10 basis points of year based on.
And the value, we provide and implementing that product strategy and then we believe that we can drive operating leverage based on that gross margin expansion and productivity such the profit grow faster than sales.
As we go so we do not see that as a negative or a drag as we move to and Omnichannel world.
Thank you.
Thank you Sue.
Our final question today comes from Emily Biddulph of Credit Suisse. Emily Your line is now open.
And good morning, guys and I hate you well.
Thanks for taking my questions and.
Just wanted to come back on the supply chain issues and you were talking about the the fill rates.
Thank you.
And I, just wondered what he and what you're sort.
The thing of competitors and whether you think this is the sort of big enough pressure on the smaller competitors that we might be able to think about outperforming the market by more and the second half of the year and then you will see easily or sort of is this just the challenge for everyone and thank you.
Sort of you Shouldnt expect to see and numbers too much thanks very much.
We're seeing supply chain pressures across a more broad based product.
Product set than what we've seen and in a while.
We do believe that the strength of our company is attractive to our customers more so today than even in a more normalized environment.
And when you look at the strength of the balance sheet, and our ability to invest and inventory and get product quickly from different parts of the country to satisfy customer needs. We do believe that customers are going to gravitate towards strength in this type of environment. We're seeing that play out we're seeing it play out in terms of the.
The interaction that we're having with customers on bidding activity and making sure that they understand.
How price is going to flow through the system and how they need to order product and quite frankly as you look at our location base.
Again, we're managing working capital well growing inventory, but also offsetting that with good management of accounts receivable and payables.
And so even as we're growing inventory the biggest concern that we have right. Now is just making sure that we have ample supply chain space inside of our location base. So that we can operate in a safe environment.
And while making sure that we've got product accessible for the customer so long answer to a short question, we see customers gravitating towards that strength, we think it will serve us well as we go through.
But there are pressure points on certain product categories that have an opportunity to play out as we go through the next couple of quarters.
Okay. Thank you.
Thank you.
This concludes today's question and answer session. So I'll hand back to the management team for any closing remarks.
Yes, Thank you very much and and thank you for your time today very much appreciate it and we're really pleased as we've indicated with the delivery from the company. We are couldnt be more thankful for our associates across the.
The organization and their ability to balance personal and professional challenges to really deliver for our customers and.
And as we go through.
The next two quarters and and we find our way of fighting through the the.
The remnants of the pandemic, keeping our associates and our customers safe, while making sure we fulfill our essential role and the supply chain is of the utmost importance. So thank you very much for your time today and look forward to seeing you soon.
Ladies and gentlemen. This concludes today's call. Thank you very much for joining you may now disconnect your lines.
Yeah.
Okay.
Okay.
[music].
Okay.
[music].
And.
Yes.
[music].