Q3 2021 Ferguson PLC Trading Statement Call
Good day and welcome to the Ferguson Plc Conference call. Today's conference is being recorded and at this time I'd like to turn the conference over to the Vice President of Investor Relations and Communications Brian. Please go ahead Sir.
Thank you Catherine and good morning, everyone and welcome to Perk up since Q3 earnings conference call and webcast.
Hopefully you've had a chance to review the press release, we issued this morning.
The release is available and the investors section of our website.
And a recording of this call will be made available later today.
I want to remind everyone that some of our statements today.
Both in our prepared remarks are and the question and answer session, maybe forward looking and.
<unk> 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 under the legal disclaimer and our Q3 earnings announcement. This morning, as well as under principal risks and uncertainties and are happier earnings release.
Leafs and.
And risk factors and our form 20-F.
Other than in accordance with our legal and regulatory obligations, we undertake no obligation to undertake or update or revise any forward looking statements.
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 for his prepared remarks, Kevin.
Thank you good morning, and good afternoon, and welcome to this third quarter results conference call and you've got built brundage and I presenting this morning, but I'd also like to welcome Brian Lantz, Our recently appointed Vice President of IR and communications and the <unk>.
Process of handing over from Mark Baron who will leave US later in the year as we continue to migrate our corporate functions to the U S.
We brought forward the Q3 update earlier than planned to ensure we provide you with a rapid assessment of how we're driving our business model to support our customers at a time of strong demand.
These recent developments without a material impact on our financial outlook.
So on today's call, we'll give you a sense of how we traded through the third quarter.
How we're seeing our end markets and what we've been seeing on the ground and our various businesses since our last update in mid March.
I'll first give you some color on trading and markets and Bill will take you through the Q3 trading performance and of course, we'll then be happy to answer your questions.
Our revenue growth rate accelerated sequentially through the third quarter as the U S economy started to reopen more fully.
This acceleration was built upon many of the themes we were talking to you about and March during our half year results.
It's also played into the key strengths of the Ferguson and business model as we've been able to serve our customers.
Residential markets, which represent just over half our U S revenue were strong and the first half and accelerated further in the third quarter and both Rmi and new construction.
New residential housing starts and permits continue to grow well and the third quarter and residential are in line markets improved as the U S economy continue to reopen and trade professionals returned to consumer project.
There's been growth and trade remodeling projects, such as major kitchen, and Bath renovations. This is benefited Ferguson straight professional customer base and they're seeing strong demand.
Turning to the nonresidential as we told you back in March there were bright spots and the commercial market and areas like data centers and distribution centers, but we're also now seeing increased activity and hospitality and education.
We also told you we expected industrial to start to bottom out and the third quarter from a prior year revenue comparative standpoint.
Activity levels, while still negative for the quarter are improving and our customers have benefited from easier access to undertake repair and maintenance work and manufacturing facilities.
Civil projects has largely continued in flight with some anticipation of future infrastructure funding further down the track.
Sales inflation was a significant factor in Q3.
And it built through the early part of the calendar year, and we saw it first and commodities, which is about 10% of our sales and it's now accelerated rapidly into finished goods.
We estimate the total inflation and the U S. In the third quarter was about 5% across our business up from about flat in the first half.
We are very pleased with the hard work of our associates to positively drive price and the market, which enhanced our revenue growth rate and also our gross margins.
We've also been using our advantaged business model and other areas to serve our customers, including the strength of our balance sheet and the scale of our supply chain to maintain unmatched product availability for our customers at a time of great scarcity.
Manufacturing supply chains are struggling to balance increased demand with.
With staffing and transportation pressures.
We think this is led to a gravitational pull of customers to Ferguson as we've continued to gain share.
Of course. These recent developments have also created some uncertainty for our customers not least around the medium term impact of limited product availability and rising price inflation.
We remain very focused on continuing to ensure high levels of availability for our customers and we will continue to drive the benefits of our scale our business model.
However, we're mindful of the ongoing risk of both project cancellation and pull forward of demand should project costs continue to rise or scarcity becomes more of a medium term issue.
We arent seeing that today, but it is something we're watching very carefully over the coming weeks and months.
Turning to the outlook you all seen from our announcement this morning that our financial outlook for the business has changed materially.
Revenue picked up strongly through the quarter continuing into early May and we're pleased with the momentum and our business.
Given the better than expected Q3 results.
We're revising our outlook for fiscal year 2021 upwards as we expect to continue to outperform strong end markets in Q4.
Based on our latest view of the operating environment, we expect to generate group trading profit in fiscal 'twenty, 1, including the impact of Ifr F 16, and the range of 2 billion to $2 $1 billion.
Given the much stronger revenue tailwind. This is materially ahead of the guidance that we provided in March which has led to today's brought forward announcement.
Ladies and gentlemen, and I hope. This gives you some insight into what we're seeing and how we're driving the business to benefit from the strengthening demand environment.
Let me now hand, you over to Bill who will take you through the Q3 numbers.
Thanks, Kevin and good morning, ladies and gentlemen, let me start with the trading performance in Q3.
Overall group revenue of $5.916 billion grew by 24, 5%.
Revenue accelerated through the quarter, driven by improving end markets weaker competitors and April and acute inflation.
<unk> increased sequentially and average 5% and the quarter.
Group gross margins of 39% or 110 basis points ahead of last year, principally driven by the pass through of higher sales inflation enabled by our sales associates and the strength of our supply chain combined with channel mix improvements.
We're conscious of the inflation driven margin benefit could moderate or reverse in coming quarters, but the timing and extent of this risk is uncertain.
We continue to carefully manage the cost base in order to simultaneously take advantage of market growth opportunities, while also improving productivity and profitability.
In order to flex the labor cost base through this unique period, we continue to make localized decisions to adjust our levels of permanent temporary and overtime resource to suit the prevailing conditions.
We also remain committed to investing and digital capabilities and our supply chain to better serve our customers.
We are mindful of the inflationary pressures on our cost base and areas such as transportation and wages, but we believe we can manage through that through those appropriately.
So overall, we're really pleased with the group's performance with underlying trading profit coming in at $560 million and.
And 9 5% trading margin and $227 million ahead of last year.
Turning to the U S Q3 revenue growth was 23, 3% with acquisitions and 1 additional trading day contributing 1 6% each to the quarter.
And we've seen strong positive growth and our residential trade and residential chevron and customer groups with increased customer traffic across both counter and showroom networks.
<unk> revenues grew 40% and E business grow at over 50% as a result of exceptionally strong residential demand from the project minded consumer and a light decorative pro.
The commercial mechanical customer group continued to be mixed but returned to growth and the quarter and waterworks delivered robust growth and the quarter as a number of projects commenced.
The industrial revenue declines slowed in the quarter and we are seeing signs of improvement.
Gross margins and the U S were strong driven by the same dynamics discussed and the group numbers and the cost base was well managed.
Therefore, we generated underlying trading profit and the U S of $560 million $217 million ahead of last year.
And Canada total revenue growth was just over 50%.
Of which 35% was organic.
Residential demand was particularly strong and we have seen exceptional growth across Quebec, and the greater Toronto area.
Gross margins were stable and the quarter and the cost basis and good shape.
And sequentially, we generated a $12 million underlying trading profit.
With regards to cash and liquidity the group remains and our strong financial position with net debt excluding leases at April 30th of zero point $9 billion and the ratio a ratio of net debt to the last 12 months adjusted EBITDA of <unk> 4 times.
During the quarter, we completed $140 million of the $400 million share buyback announced on March 16th.
Additionally, on May 11th we paid $567 million of ordinary and special dividends to shareholders.
Consider the $260 million outstanding on the buyback program and adjust for the post period and dividend payment. The pro forma leverage is approximately 0.8 times.
That let me hand, you back to Kevin.
Thank you Bill.
So in summary sat here today, our business is in very good shape.
We're extremely proud of how our associates have continued to rise to the challenge and we're staying focused on protecting their well being as well as our customers.
During these challenging times, and we're incredibly thankful and proud of what they continue to accomplish.
We're pleased with the operational delivery and we will continue to focus on execution.
We are well positioned to manage through the near term, though we're mindful of the ongoing effect of inflation on sales and gross margins and its potential adverse impact on operating costs.
Looking ahead, we are confident and our strategy and we remain committed to investing and our talented associates world class supply chain and digital capabilities to better serve our customers.
So thank you, ladies and gentlemen, bill and I will be happy to take any of your questions.
Thank you if you'd like to ask a question. Please signal by pressing star 1 on your telephone keypad.
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And that is still wanted to ask a question will force just from Raymond from Nokia.
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Hello.
We will now take the first question from James <unk> at Barclays. Please go ahead.
And that ammonia.
I've got 2 please the first 1 is on the gross margin uplift you saw and a third quarter.
I'm going to presume that most of the uplift came from you setting inventory you've already got a higher prices relative to what you've acquired and inventory earlier.
Earlier in the year and firstly is that right and secondly is that is that temporary effect. So do you expect gross margins.
Margins to return to more normal levels in the fourth quarter and I appreciate your thoughts on that and.
Then secondly, when it comes to when you set your guidance and sort of moving parts for the fourth quarter and there is still quite low.
There's still quite a wide range implicit within that and it looks like fourth quarter organic could still be would still be very strong.
To the extent, where even the upper and Youll guidance still looks a bit conservative perhaps and so I. Appreciate your thoughts on from moving part for when you set that guidance. Thanks.
Yeah, Good morning, James.
Maybe I'll start and and Kevin can fill in on both those questions. So first off on the gross margin lift yes, there is absolutely a benefit there coming through from price inflation and the rapid.
And kind of sequential improvement that we saw there in the quarter. So there'll be a bit of that that is to your point, maybe some sell through of older average cost inventory, but we're quite proud with the performance of our associates and being able to take that price up.
And really it's become as much a issue of product availability trumping price in the marketplace and so the strength of our supply chain and our inventory availability has really helped to play through.
And that through that strength.
We are mindful that that may moderate over time and it could reverse in the future if if if pricing comes off.
But we're quite confident.
And the near term.
The strength of those gross margins.
Maybe get to your question on guidance, Yes. The reality is there still a number of uncertainties out there.
As we play through the fourth quarter.
And not the Liza, which is that inflation how it plays through both from a top line perspective, but also through the <unk>.
Gross margins and.
And so we've.
Play through those various dynamics and and really honed in on a trading profit dollar range.
Recognizing that there are there are various dynamics at play there.
James Thank you just Kevin and on the gross margin question. If I go back yes, there is a certain impact on the existing inventory, but we're really pleased with the stewardship of price that our associates have driven as we talked at the half 1 results in flight projects are the most concerning we obviously take price to the market for.
Point of purchase decisions immediately, but having to renegotiate and worked together with the owners of projects on in flight projects is extremely important it has a bit of a productivity drain, but really pleased with that hard yardage that our associates were able to drive and will continue to drive as we look forward.
Yeah.
Great. Thanks very much.
And you find that your question has been and you.
You may remove yourself from the queue by pressing star Kate We will now take the next question from Bill James with them.
Please go ahead.
Thank you and good day.
Good morning.
Couple from me as well please.
First 1 was just coming back.
The issue and supply chain and I think the Q2 stage you gave some some good figures around manufacturer fill rates, how they decline how your growth before but still.
Setting that perhaps you could just update us on.
And to play and just any more anecdotes about how you're managing that that supply chain situation and given how tight.
The market is currently.
And then the second question was really around the people side of the business I just want to how youre thinking about your hiring needs a bit when you would vote and <unk> growth clearly debates and organic headcount reduction. This time last year I think some came back on and the first half.
Should we think about that head count number moving back to pre COVID-19 levels, just given activity or at the button and do you think type rework because I'd be telling them that side of things can can fill the gap. Thank you.
Well. Thank you yeah I'll hit on some of the of what we're seeing from a supply chain perspective, I'll start by saying, we're really proud of what the category management sourcing and supply chain Associate base is doing together with incredible vendor partners.
To make sure that we utilize the scale of our business to ensure best fill rates and the industry and that has an impact and knock on impact on price as bill indicated earlier from a fill rate perspective, we've seen a continued degradation of inbound fill rates into our DC network across our vendor partners. When we were together and have 1 we were.
Talking about fill rates moving from 75% to 48 across that D. C and about we're now down below 40 to about 37% inbound fill rates as continued demand and stress on the transportation and manufacturing sectors play out we're turning that 37, though still into.
90% outbound D C. The branch DC to customer fill rates and our branch in stocks.
To date have remained at 95%. So we're very pleased with our ability to utilize that scale and then as we talked about and have won our associates' ability to drive and a consultative way to those products to satisfy demand that we can fill and that also are in line with our product strategy.
Over the long haul.
Is that and ongoing concern of course it is our manufacturer partners across all aspects are struggling with what that demand looks like.
We're really pleased with that interaction on the people side.
We are absolutely in a bit of a stressed position right. Now is is most of the economy. As you think about the labor side of the World are bill highlighted wage and what we're seeing in terms of demand from.
Driver and warehouse, that's certainly the case that we have strong demand in this country for truck drivers and warehouse and customer service Representatives. So we have to make sure that we continue to be the employer of choice as we're out there trying to build up the right intellectual property to grow this business.
And this and serve our customers.
Yeah, well, maybe just to add on a little bit there we are to Kevin's point absolutely adding.
Head count and resource back into the system and take advantage of those growth opportunities.
We added about 700 people in the quarter.
As we've seen growth rates accelerate so you should expect us to continue to invest on that people side of the business as those market opportunities play out.
Great. Thanks, a lot.
We will now take the next question from low to you all at.
J P. Morgan. Please go ahead.
Hi, good morning, and maybe and 1 question, Chris on and the trends that you have seen in May and.
In parts of Canada that Q3 are we highly yoga and the growth in the month of May and have you seen any peptide and.
The Q3 trend.
That's my first question and second maybe you can give us an update on the USA in process and is it on track at our primary D.
Sooner or rather than the 1 year and 10.
And I get that you had and I think I asked the question last time and you had and.
<unk> you have to be fed to a kidney from October with.
You broke up at the end there, but I think I got the adjusted the question.
First of all from a trends and May standpoint, as we said the Q3 revenue accelerated through the quarter.
And we saw organic strength continue although we're only 2 weeks into trading from our May perspective, but we still see the same market dynamics at play both in terms of demand residential and commercial bright spots, but also and supply chain pressure and the need to have gray.
Fill rates for your customers in order to take advantage of that strength.
And the U S listing side.
Not too much has changed from that perspective, as we said at the half year results. We felt like and we had said early on and the process that we felt like we could bring a second vote within 12 months of standing up the additional listing and the U S. We still think that's appropriate, especially given a.
And not just the workload attached to that transition or that set up for that vote, but also given the economic circumstances that we're working through and the challenges from a day to day perspective, and making sure that we're the best path to market for our vendors and provide the best service for our customers So that time horizon still place.
<unk>.
We will now take the next question.
From Kathryn Thompson of Thompson Research Group. Please go ahead.
Good morning, and thank you for taking my questions today.
On your guidance for.
For the full year, obviously, it's it's you're giving and implied guidance for Q4 and the trading profit looks to be $5 50 to 750.
Versus last year's <unk> 30, just wanted to make sure that that's the correct way to think about it no you gave the trading profit.
Guidance, but.
And just be helpful for the top line is it fair to assume you're getting at least double digit top line, but I think given easy comps and given current trends.
Yes, Catherine I'll take that 1 so if you take the $2 billion to $2 1 billion trading profit range that include Diouf Rs and.
And you back out the year to date billion $4 54 that implies a Q4 trading profit of $5 46 to $6 46.
I think pretty close to the numbers you just you just suggested.
And there is a clearly a range on both revenue and gross margins and how those dynamics play through to that bottom line, but we would expect double digit growth and.
In Q4.
Okay.
Given the inflationary environment.
Are you able to wood and offset cost.
And with pricing actions.
Yeah. So we would we would expect.
Certainly we are seeing some pressures from a cost standpoint on transportation cost as well as wages and Kevin alluded to some of that particularly on the driver and warehouse side of the equation.
We would typically say and a normal period overarching wage inflation for our company is about 3% year and year out we would expect that and are seeing that pressured and would expect that to move up probably less of an impact in Q4, but more of an impact as we turn to next year.
<unk> and those wage pressures.
Pressures to increase yes, Catherine and both historically and and the current environment. We believe that our cost inflation should be handled by price inflation and the market appropriately driven and we continue to work together with our loyal customers, making sure that we take proper stewardship and driving <unk>.
Through the supply chain against some pretty strong demand and right now we're seeing that price increase and net price inflation be accepted through the marketplace as demand for and projects continues to be very strong and that's not just on the residential new or residential rmi side of the world. That's also and the non res portion of our.
And as we see commercial distribution center activity being extremely robust right now from waterworks and underground infrastructure, all the way up through mechanical fire suppression and the like.
And making sure that we can get product on time to get those projects stood up and a timely fashion has become more important than ever before.
Okay.
And just getting to just the fundamentals are you had in your prepared commentary on the strategy and non res, but and you've always said that Youre Waterworks group is a good leading indicator for your Bezzy could you give a little bit more color on terms of what youre seeing with trends and waterworks, both sequentially and year over year from amendment.
From standpoint.
And then also a little bit more color in terms of what youre seeing that commercial and market.
Other than what you had outlined in the prepared commentary. Thank you.
Yes Catherine.
Outerwear business is a good leading indicator is there the first on projects are in most cases and.
And we're seeing good broad based growth across that waterworks sector public works infrastructure or civils.
Commercial.
And residential work as well as municipal spend as budgets aren't as stretched as what we thought they were going to be.
On the residential side, we have not seen project cancellations broadly across.
The U S.
And new residential subdivision single family growth and.
So we're encouraged by that.
We've also seen strong commercial demand and and we've talked about this both at the half year as well as today, the distribution and big box warehouse space has been very strong and it continues to play very strongly for our waterworks business, which is a good leading indicator for our commercial mechanical and fire and fabrication.
Businesses are the public works side, we had anticipated that that may be under a bit of pressure again from stretched budgets at the municipal level, but were seeing projects stay in flight and continue on and then as we talked about we will see what happens from an infrastructure spending bill.
As we get further on into the year. So long story short a good broad based a piece of encouraging news from our waterworks business.
Okay, and if I could sneak 1 more and how does Ferguson, Gwen and against the backdrop and the potential U S infrastructure Bill.
Yeah, and and Kathryn is as we've said historically it really depends on the type of infrastructure spend that makes it through the bill.
It is in the roads and transportation areas, we certainly benefit from sort of stabilization from underground infrastructure as that road project works. If it's in airports, if it's in transportation related physical facilities or education or low income housing.
That really benefits a more broad based ferguson and business portfolio from underground water and sewer infrastructure, all the way up through commercial and even residential so it really depends on what makes it through into a into ultimate legislation.
Okay. Thank you very much.
Thank you we'll now take the next question from Keith Hughes Suntrust. Please go ahead.
Yeah. Thank you.
And I guess as we you've given us.
Trading profit for the fourth quarter and Ross.
And I guess on margins.
Peers, you're going to have margin gains and the fourth quarter, maybe not as robust.
What we saw and the reported period.
Is that interpretation correct and is that the influence of inflation, a little bit of a drag of pushing that pricing through to your to your customers.
Yeah, Keith good morning, and thanks for the question.
And there's a range of outcomes inclusive of.
A range of outcomes on trading margin and the fourth quarter. The reality is there's still a bit of uncertainty on how that inflation will react and play through over the next several months and that and that will have an impact on on that Q4 trading margin outcome.
But we're pretty confident and a range that we've put out there from a trading profit dollar perspective.
And kind of year over year.
We've talked a lot and the last several quarters about that Q4 trading margin that we put up last year that was driven by very different dynamics at that time.
Increasing revenue at a time, where we had taken out cost from a temporary cost action standpoint during the lockdown. So we have very different dynamics at play this year that will drive a range of outcomes, but pretty confident and the trading profit dollar number that we've provided as guidance yeah Keith.
To that uncertainty it really is a day to day week to week view as to how inflation and how product availability is playing through its more dynamic than we've ever seen as commodity increases and record commodity prices start to flow through into finished goods and then are further exacerbated by transportation.
Asian pressures and manufacturing.
Strength and so we're really focused on making sure our procurement and category management specialists and our business groups.
Are dealing with our partner vendors to make sure we use the balance sheet appropriately to get product closer to customers and maintain fill rates and maintaining fill rates is hugely important for us and <unk>.
Confident in our People's ability to pass through that price increase, but really that product availability issue is first and foremost and we're confident and where that sits today.
Okay.
If you look at.
And the last time, you talked what what sectors or what would be the leading sector and this cut and then higher than your expectations.
Arizona.
Certainly the robust growth and E business has continued to see that strength and over 50%, but quite honestly the residential side of the business has improved from when we were sitting here call. It 2 months ago and mid March So we've seen that continued.
Building of strength on the residential side of the business. Yeah, We're pleased and Keith with the balance that we've been able to achieve and res and non res and again about 56% of our business being and that residential with a good split of Rmi and new construction and and that non res piece that includes commercial industrial and civil and and that balances.
Serving us well and we've seen great growth and that residential space H B a C. At over 40% growth is really strong portion of that.
<unk> story, but then even again and the commercial markets as we see.
Both waterworks as well as commercial and mechanical driving good growth and the pockets of strength as we set our customers will gravitate towards those growth areas, even as things like office and retail may be pressured in the overall commercial markets.
Okay and final question on Canada and dismissed the number you said that you gave you the revenue growth Tobruk and Canada could you just repeat that.
Sure Yes. The total total revenue for Canada was $317 million, which is.
Growth of about 52%, 35% of that was organic.
Thank you very much.
Yeah, Keith a similar story and Canada as we really are focused on making sure. We have great connections between our U S and Canadian operations are driving good functional expertise across all of North America, and and then making sure that we're taking advantage of that strong residential market single family New construction mulch.
The family, New construction and HV AC.
And I'll take the next question from Greg ex with Glitch at UBS. Please go ahead.
Yeah.
Hi, Good morning, guys. Thanks for the call a couple of questions maybe 3 actually so sorry.
Sorry to labor the point on the on the growth just to be clear.
Because it's a bit challenging for us because the monthly comps and so and change but.
Just to understand correctly, you are saying your may trend and kind of exit rate or whatever you want to call. It is above that 20 odd percent growth is that what.
And you're saying just to be clear on that notwithstanding the comps kind of getting a little bit.
I guess more normal I think in May.
That's first and then the second question is on back to the released and what do you actually.
Looking out for so what's the trigger for you to say, Hey, I'm going to hold this vote now is at the register changing and deep conversation Michelle there is what do you actually.
I guess, what should we be thinking about really that actually happening.
The criteria I guess.
And then finally, if you care to comment anything.
Relevant relating to M&A is there.
Anything to say pipeline wise as the deals and the pipe are you.
<unk> is a valuation issue or maybe not I don't know it'd just be interesting to see what youre seeing from that side. Thank you.
Gregor at their at the risk of Jumbo and the question and I'll take number 2 first and then I'll, let bill jump in on May comps, and and where we sit with M&A. There is no trigger that we're looking for we're not looking for a shift and the register it really gets back to that workload that we're talking about in terms of making sure that we methodically prepare the company and aerie.
As like U S GAAP, Sarbanes Oxley and all the things that we're needing to do moving the functional expertise over to the U S and all the things that we had talked about leading up to that decision and then also making sure that we stay focused on delivering results and the business. It is not a new.
Normal environment, right, now and making sure that we're serving our customers is the first thing on our mind. So really there's no trigger that were looking for but we believe that we can achieve that 12 month time horizon, maybe bill can take 1 and 3 year Gregor from from your question on growth to your point the comps month to month.
And are a little unique is to say the least from last year April was down 10, 8% last year and the U S. So and so the exit rate to the entry rate is a little bit misleading, but we've continued to see.
Continued growth and strength as we've as we've exited the quarter in total with 20% organic growth into the first couple of weeks of May I would I would caution you. It's a couple of weeks of May.
And then last year, we saw sequential improvement in that growth rate may to June to July so the comps get a little bit tougher, albeit still negative for the quarter last year and we've seen continued growth against that.
From an M&A perspective really no change we have a we have a healthy pipeline of potential deals as we as we've talked about in the past the timing of those deals is always a bit uncertain and to some extent out of our control as we're trying to bring.
In many cases family businesses to a closing table and and timing will vary but you should expect a normal pipeline of bolt on and capability M&A from us as we move forward as we think forward, we think activity will continue to be solid and and perhaps increase.
Especially as you look at decently healthy markets as you look at digital becoming table Stakes for future customer service propositions as you look at product availability concerns are stressing the system and then quite frankly as people contemplate what tax legislation might come out and the impact of that on.
Their succession and and sale proceeds of the business.
Thank you and that was really clear thanks.
We will now take the next question from analysts that Maryland, and Morgan Stanley. Please go ahead.
And thank you and good morning, just 2 left from me and.
Let me just follow up on the wage inflation point.
And then historically, you've been very good and managing that and.
And obviously employee and Jive N and have engaged employee engagement and helps with that and but.
But I'm just wondering if you what extent you're concerned about all the recent headlines that we've seen on this topic and particularly a number of very large bill.
And color and players raising wages and offering incentives and so on and a lot of us.
Other businesses, calling out issues with with recruitment and.
All of that is 700 and I'll say people that you added in the course that did you have to do anything above and the ordinary in order to get them back in the door and.
Have you had to take on.
And number the normalcy of temp workers.
Just to see I'm, just wondering about that because I'm guessing the productivity. If there is would be lower than some of your permanent employees and.
And then also secondly.
In terms of where the leverage is and the balance sheet.
And in recent months, we've said <unk> been happy to be at the low end of your leverage range, given where we are and the world given how much stronger.
Things have been few lately I'm, just wondering if thats still the case and.
And why the and.
And following the payment of the dividend and so on and that started the buyback and.
How your capital deployment and.
How youre thinking about that in the rest of day yet.
Thank you analysts and I'll take the first on wage inflation, we are absolutely seeing wage inflation, we believe wage inflation will continue in the current environment. It starts at that driver warehouse level. It plays into customer service Representatives, our training program with young people coming off of college campuses.
Is and and the like.
We have in relation to the news we have historically.
Valued our associates and make sure that we bring and best Associates, We've had a 15 dollar and our minimum.
Wage already in place. So so that's not an effect for us, we believe and good balance across variable as well as salary or hourly wage and compensation. So that our associates are rewarded as the shareholder is rewarded and as our business succeeds and that goes across not just our salaried workforce, but also.
Our hourly workforce and so from an incentive perspective, that's part of our culture that needs to be an ongoing piece and.
In addition, as we think about temporary labor versus new hires it is a balance its a balance that's handled at the business unit level inside of local markets, where we flex overtime.
We flex temporary labor and.
And full time equivalents.
We're bringing on and the most important thing is making sure that we have the proper contact and service level for our customers, which is why making sure. We are best associates and our hiring full time equivalents in line with volume metric growth inside of our business is most important.
Yeah, and Alex on the leverage question, Yes, we're very very pleased with the strength of our balance sheet sitting at 4 4 times 8 if you factor and the payment of the dividends as well as the and progress share buyback program, where we're using our balance sheet today.
And to invest and the organic growth of the business, particularly around inventory as we've talked about the supply chain disruptions and product availability concerns.
We've added another $100 million plus of inventory and the quarter, which brings us to over $500 million of incremental investment from the beginning of the fiscal year.
So from a range perspective, we do intend to operate and are 1 to 2 times range. We're.
We're clearly right and the middle of the share buyback program, which we would anticipate wrapping up as we round out this fiscal year and then we'll come back to you with the year and balance sheet and update you on plans further from that standpoint.
That's great guys. Thank you very much.
Well now take the next question from Emily Biddulph Credit Suisse. Please go ahead.
And good.
Good morning, guys and thanks for taking my questions I've got 2 please.
The first 1 and it was just on Europe performance says, it's a market. Obviously, usually you say, it's you think it's sort of 2% to 3% and give them what you'd said about sort of supplier fill rates do you think you'll run and get something that's materially higher than that and the maintenance and I realize it might be difficult to quantify it and this market, but if he could do that would be great and D. C sort of de risked it that kind of things.
And the other way at some point or do you sort of think by attracting customers, who are able to sort of keep the share of wallet for longer even instead of suppliers so rates start to improve over time.
And then secondly, I appreciate sort of it feels like it's a long way away at the moment, but if we think about sort of 2020 T. If we're sort of still thinking about it as being sort of more moderate but still positive volume market and still in an inflationary environment, given what you sort of set about gross margin and and all say youll sort of ability to put through price to offset.
Operating cost inflation, what would you be completely uncomfortable with us sort of thinking that we get positive operating leverage and earnings and improvement in trading margins for next year I assume you don't want us to go away and sort of make a normal kind of double digit drop through assumption, that's sort of where would you kind of encourage us to sort of think about it at this stage. Thank you.
Yes. Thank you Emily I'll take the first 1 and and you're right. It is difficult to gauge that outperformance. We traditionally call out 2 to 300 basis points of outperformance. We do think there's a gravitational pull to strength in times like this and we believe that we are growing faster relative to market.
And then we historically do overtime.
From a data perspective, hey, we've seen any elongation of starts with permits.
Well being at about 1.8 starts at about 1.7, so that new residential pieces is good we think that the trade professional as part of the repair remodel side of residential is stronger the latest hearing numbers on the pro show 15% growth.
In terms of that target. So we still think we're outperforming that in terms of the ongoing share gains. We do believe that times like this create enhanced loyalty and relationship and.
And as you know, we're very focused on making sure that that human relationship that we have to serve our customers and our consultative way to make their project better because they dealt with our company.
Is beginning to get supported by the best digital relationship and continuing to invest and that and so when we think about share gains over the long haul it's about having the best people and relationships with the best digital relationships.
A world class supply chain and sourcing organization that provides best fill rates and then making sure that we're driving that product strategy, both from margin as well as to make sure that we enhance that best fill rates. So we think that continues over the long haul.
Yeah, and then in terms of your question on FY 'twenty 2.
Look I think I think you are right. If you look over the last really 2 years.
And last fiscal year, and then building into this fiscal year, we have had a significant step up and trading margin.
And part of that driven by the inflation that we've seen and the last quarter part of that driven by the productivity and the drop through that we've generated prior to inflation. So as we look forward into fiscal 'twenty, 2 clearly a lot of uncertainties out there, particularly around how inflation is going to unfold and we will certainly be and are better positioned.
And as we round out this fiscal year to give more views on next year.
After Q4.
But I think we're in a period of unprecedented inflation.
And I do think there is some risk of that moderating and even.
Reversing from a trading margin standpoint, so I would have a little bit of caution and would not model through your your example of that double digit drop through on the growth next year, given how quickly we've increased trading margins over the last 18 months.
Yes.
That's perfect. Thanks, guys.
Thank you.
That concludes today's question and answer session. Mr. Kevin Murphy I'd now like to turn the call over Chief and your additional question remark.
Yes. Thank you all for taking the time with us today.
With again, we believe that we are well positioned through the near term we are very thankful for what our associates have done to drive this operational accomplishment, especially in light of challenging circumstances with regards to supply chain with regards to customer communication and the ability to serve.
Customers and the marketplace as well as personal challenges as we more open and this economy.
From COVID-19, we think we're well positioned as we go forward to continue to drive positive stewardship on price inflation and manage this supply chain and.
And we're confident and our strategy as we go forward really continuing to invest and talented associates world class supply chain and digital capabilities to best serve our customers and some attractive residential and nonresidential markets. So thank you for your time today very much appreciate the support.
That concludes today's call. Thank you for your participation you may now disconnect.
Okay.