Full Year 2021 Ferguson PLC Earnings Call
Okay.
Good morning, Ladies and gentlemen, my name is will and I'll be your conference operator today.
This time I would like to welcome you to the folks in P. O see full year results earnings conference call.
Over the long it's been placed on mute to prevent any interference with the presentation.
The end of the prepared remarks, there will be a question and answer session to ask a question. Please press star followed by one on your telephone keypad to withdraw your question. Please press star followed by two.
I would now like to turn this call over to Brian Lee.
Since V P of Investor Relations and Communications you May now again that Youll conference call.
Good morning, everyone and welcome to <unk> full year earnings conference call and webcast hopefully you've had a chance to review the earnings announcement, we issued this morning.
This is available in the Investor and media section of our corporate website and on our SEC filings web page.
A recording of this call will be made available later today.
I want to remind everyone that some of our statements today may be forward looking and are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected in forward looking statements.
Additional information is included under the legal disclaimer in our earnings announcement this morning.
With me on the call today are Kevin Murphy, our CEO.
And Bill <unk> our CFO.
I will now turn the call over to Kevin.
Thank you, Brian and thank you to everyone joining us on the call today.
Let me begin by saying, we could not be more proud of what our 31000 associates have achieved through the challenges of fiscal year 2021.
We continue to serve our customers, while protecting the health and wellbeing of our associates.
We generated strong growth, particularly in the second half amid industry wide supply shortages and inflation.
We continued to invest in talented associates.
Our global supply chain.
<unk> breadth and depth and digital solutions, while growing our dividend investing in high quality acquisitions, and returning capital to shareholders.
Now turning to today's agenda, I'll kick things off with the high level results and some key accomplishments build.
Bill will provide you with an overview of the numbers then I'll come back and give you a quick overview of how we're leveraging our strengths in the market.
And finally build out will be happy to answer all of your questions.
Ferguson is successful because of our associates and our baseline commitment is to create a safe and healthy work environment for all we.
We will continue to embed safety is a core value driver in everything that 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.
Our teams delivered exceptional sales and profit growth in fiscal 2021.
Revenue of $30.0 billion was 14% ahead of last year and 13% ahead from an organic basis.
This accelerated market outperformance was driven by our ability to deliver on our customers' projects amid unprecedented industry wide supply chain pressure.
We remain very focused on continuing to ensure high levels of availability for our customers as uncertainty around the medium term impact of supply chain pressures and rising price inflation continues.
Gross margins grew 60 basis points, driven primarily by our ability to service our customers while managing this price inflation.
We tightly controlled our operating expenses and increase productivity to ensure that the profit growth we achieved outpaced our revenue growth.
As a result, we delivered underlying trading profit growth of 32% for the full year headline EPS growth of 35%.
Our business continues to drive solid cash flow and be underpinned by a strong balance sheet, which enables us to continue to invest in growth.
We also returned over $5.0 billion to shareholders through an ordinary dividend share buyback and special dividend.
Rolling the ordinary dividends sustainably through the cycle is an important part of our capital priorities and the board has recommended to increase the total ordinary dividend by 15%.
Beyond our financial results were also very proud of a number of key accomplishments during the past year that position us for the future.
We further accelerated market share gains in a period of challenged industry product availability by using our scale and our balance sheet to invest in the right levels of inventory for our customers.
Our associates worked diligently to manage price inflation during a period of significant uncertainty.
On the acquisition front, we acquired seven high quality businesses, bringing in approximately $360 million in annualized revenue driven by talented associates and local relationships that will help us further drive growth in the future.
Given our continued performance and strong balance sheet, we are initiating a $1 billion share buyback program.
Having completed the sale of the UK business earlier in the year. We are now solely focused on our attractive North American end markets with a favorable balance of residential and nonresidential.
<unk> and new construction.
Structure.
All of this provides the more consistent demand over time.
We made good progress on a methodical to step journey to migrate our primary listing to the United States matching our exclusive focus on North American end markets.
We initiated an additional listing on the New York stock Exchange in March following a very supportive shareholder vote of 99, 5% in favor.
We are on track to hold our second vote in the spring of 2022 to complete the move of our primary listing to the New York stock Exchange.
So again, we are proud of our results and accomplishments in fiscal 2021 and we enter fiscal 2022, even more confident in the strength of the company and in our business model.
Turning to our end markets.
Residential end market growth accelerated in the second half an experienced double digit growth for the full year.
New residential housing starts and permits continue to show strength in the fourth quarter and residential Rmi markets. Also continued strong growth as we've seen an acceleration of growth in projects delivered by the trade compression.
Nonresidential end markets returned to growth for the 12 months.
As we told you in May there were bright spots in the commercial market in areas like data centers and distribution.
But we're also now experiencing increased activity in areas, such as health care and education.
Industrial activity levels are improving and our contractor customers have benefited from easier access to undertake repair and maintenance work inside manufacturing facilities.
And then civil infrastructure, we saw strong public works demand with a reasonable anticipation future infrastructure work funding down the track.
Overall demand from these end markets was strong in the second half of our fiscal year, and we outperformed our end markets by more than anticipated in fiscal 2021.
This strength has continued into the first two months of the fiscal 2022, driven by the exceptional work of our associates, while leveraging the strength and scale of our supply chain.
Now let me pass you over to Bill who will take you through our financial numbers in more detail.
Thank you, Kevin and good morning, or afternoon, everyone I'm pleased to present, the group's full year results, which demonstrates strong progress achieved during the year the.
The numbers on the accompanying slides are for the continuing operations of the group comprised of the U S, Canada and central costs.
Total revenues in the year were up 14, 3% and we expanded gross margins by 60 basis points with further expansion in the second half driven by our ability to service our customers, while managing price inflation.
Costs were well controlled while we continue to invest in the business, resulting in good operating leverage for the year of 60 basis points.
Underlying trading profit of nearly $3.0 billion increased 31, 8% just over $500 million with underlying trading margins progressing a 120 basis points to nine 2%, which is a record for our business.
Headline earnings per share increased by 35, 5% principally due to the strength of trading profit growth during the year.
Taking into account the group's prospects and financial position. We are pleased to propose a final dividend of $166 five.
This brings the total full year dividend to $239 four.
An increase of 15%, reflecting our confidence in the business.
The balance sheet remains strong with leverage of <unk> six times, and we have announced today, our intention to commence a new $1 billion share buyback over the next 12 months.
The U S business mirrors, the group results with a strong performance.
Total revenues grew 13, 9% with organic growth of 12, 8%.
Price inflation averaged approximately 3% during the year picking up from flat in the first half to mid single digits in the second half.
Gross margins were ahead of last year, reflecting the value we deliver to our customers the strength of our business model and our ability to manage inflation.
We tightly controlled costs and generated strong operating leverage.
Head count and variable costs grew to appropriately support volume growth and we continue to invest in the organic growth of the business in the areas of digital technology and supply chain.
Consequently underlying trading profit came in at $75.0 million $486 million ahead of last year with underlying trading margins, expanding 130 basis points to nine 7%.
We provided a breakout of revenue growth across our largest customer groups in the U S. As Kevin outlined we saw strength in the residential end market and our customer groups, serving that end market performed well.
Residential trade in residential building in remodel grew well and we continue to see particularly strong trends in residential digital commerce up 38% for the year due to strong demand from the project minded consumer and light decorative pro.
H B a C where the majority of our business serves the residential end market grew 22% in the year and 27% in the fourth quarter.
Waterworks continued to outperform the market with full year growth of 17% and revenue growth accelerating to 39% in Q4, driven by a balance of strong public works demand good residential growth and green shoots and commercial end markets.
The commercial mechanical customer group was restricted by more challenging nonresidential markets in the first half, but saw robust growth in the second half.
We continue to see our commercial customers pivoting towards growth areas, such as data and distribution centers education and healthcare has worked in office and retail continue to lag.
The other bucket comprises fire and fabrication facilities supply and industrial each of which returned to growth in the second half, but as a group remained slightly down for the full year driven by the industrial contraction earlier in the year.
The Canadian business delivered a strong operating result, generating revenue growth of 21, 3% of which 15, 8% was organic.
Residential end markets, which account for over half of our Canadian business performed well in the period with a particularly strong performance from our HVAC business.
We also saw growth in civil infrastructure markets, but industrial markets remained challenging.
Similar to the U S. Gross margins were ahead of last year and tight cost control led to a $33 million increase in underlying trading profit.
As we focus solely on North American markets, we continue to leverage the considerable expertise knowledge and knowhow from our U S associates to enhance operations and customer experience across Canada.
As we look at the performance in the fourth quarter total revenues grew by 24% with organic growth of 23, 6% and supportive markets inflation.
Inflation in the quarter averaged approximately 8% with upward movement on both commodities and finished goods.
Gross margins were significantly ahead of last year, driven by tightening supply chain constraints accelerating price inflation and channel mix improvements.
Mindful that the inflation driven benefit in our gross margins to potentially moderate or reverse in future.
Head count and variable costs grew appropriately to support volume growth, resulting in underlying trading profit of $702 million, an increase of $189 million. Despite one fewer trading day.
We were pleased with the progress of underlying trading margins, which were up 100 basis points to 10, 7%.
As you look at our quarterly sequential performance you can see the significant step up in revenue growth in the second half.
We delivered good trading margin expansion in each quarter of fiscal 'twenty, one which accelerated further in the second half R.
Our over market growth expanded gross margins and good operating leverage resulted in 120 basis points of margin improvement for the full year to nine 2%.
It's important to contextualize this year's progress as we think about the performance of the business next year and Kevin will set out our thoughts on the outlook shortly.
Finance charges were as expected and broadly in line with the prior year. The effective tax rate of 24, 4% was slightly lower than the prior year and our guided range driven by lower levels of non tax deductible expenses.
Exceptional charges for continuing operations were small with cost associated with the U S listing partially offset by adjustments to previously accrued business restructuring expenses.
I've set out the cash flows on a pre IDE or S 16 basis, which more closely mirrors. The U S. GAAP standards, but theres a reconciliation to the eye for our statutory numbers in the appendix.
Cash flow from operations was $752.0 million after a working capital outflow of $576 million driven by continued investments in inventory to ensure we have the best levels of availability for our customers during a time of supply chain pressures and low vendor fill rates.
The increase in interest and tax was principally driven by the increase in profit.
Capex was a touch lower due to timing of projects, but we continue to invest in organic growth of our business, particularly in technology and supply chain.
We returned over $5.0 billion to shareholders, which included both the deferred interim and final dividends from 2020.
2021 interim dividend as well as the special dividend related to the UK disposal and the recently completed $400 million share buyback program.
Acquisitions remain a core part of our growth strategy, and we invested $335 million completing seven deals in the year.
And finally, the disposal cash principally relates to the sale of the UK business, which as noted was returned to shareholders via a special dividend paid in may of this year.
That means we finished the period with a strong balance sheet and a net debt to adjusted EBITDA ratio of <unk> six times. This rises to one times on a pro forma basis. If you consider the new $1 billion share buyback program.
And as a reminder, we typically see our leverage seasonally increased during the first half of our fiscal year.
Lease liabilities recognized under Ifr 16 were $2.0 billion.
A little lower than last year. After we exited the U K business at the end of January.
The net pension position returned to a small asset due principally to changes in actuarial assumptions.
And an additional one off contribution of $40 million made following the disposal of Wolseley U K.
Our balance sheet is strong and we have great liquidity.
Moving on to technical guidance. We've included the revenue impact of completed acquisitions on the fiscal 'twenty two full year figures. This includes the three deals we closed in the fourth quarter.
We have the same number of trading days in the year ahead as in fiscal 'twenty, one, albeit gaining one day in Q2 and losing one day in Q3.
The interest charge is expected to be broadly in line with last year with the $100 million as a U S. GAAP number so it excludes lease related finance charges that we previously included under Ifr RFS.
We expect the effective tax rate to be in a similar range to fiscal 'twenty one next year.
And Capex guidance is expected to be approximately $300 million to $350 million.
As previously highlighted we adopted U S. GAAP reporting as of August 1st of this year. This is a logical step in our journey as we focus our operations on our attractive North American markets.
The main rationale for this change is to better facilitate comparability with U S peers, both on an accounting basis, but also through more closely align kpis.
We set out our preliminary view of the U S. GAAP differences during our Investor session in July and we've now updated the full set of reconciliations through fiscal 'twenty, one year, and which we will publish separately on our website today.
After taking on shareholder feedback and considering the impact of the transition further we will continue to add back the impact of acquisition related intangible amortization to our primary profit and EPS metrics, which will more closely align them with our past practice.
As such we will report adjusted operating profit and adjusted EPS, which as you can see in the chart above more closely mirrors, our historic underlying trading profit in headline EPS metrics.
Acquisitions remain a core part of our growth strategy, and we believe being more consistent with past practice as appropriate as we continue our transition to the U S.
We will also continue to publish adjusted EBITDA, which adds back both noncash amortization and depreciation.
And finally, we remain committed to our capital allocation priorities, while we operate prudently during the pandemic, we continue to target a net debt to adjusted EBITDA range of one to two times.
Investment in organic growth, principally through working capital and capital investments remains the first capital priority.
We remain committed to growing our dividend sustainably through the cycle and are pleased to step this up 15% this year.
We will then invest in selective bolt on and capability acquisition opportunities and finally return surplus capital to shareholders over time, when we are below our leverage range.
So let me wrap up I'm pleased with the results that the team delivered strong top line growth gross margin expansion and operating leverage resulted in strong earnings growth.
This combined with solid cash generation provided us with the ability to continue to execute against our capital priorities.
Our balance sheet is strong and we are well positioned as we enter the new fiscal year.
Let me now turn it back to Kevin.
Thanks Bill.
Before we close I'll touch briefly on our core areas of investments that allow us to make our customers and their projects more successful.
I left off a moment ago speaking about our end markets.
Ferguson, our purpose is to take our customers complex construction projects and make them more simple and successful.
And over the past decade, we have very intentionally positioned our business to serve an attractive balance of residential and nonresidential end markets.
Just as important across those end markets, where approximately 60% Rmi.
40% new construction.
We really liked this mixed the favorable demand balance that it brings.
I'd like to focus the next few minutes highlighting the strengths that enable us to consistently outperform in these end markets.
There are four distinct competitive advantages that cut across our company and together enable us to serve our customer groups better than anyone else.
They ultimately make our business truly unique and differentiated in the minds of our customers our suppliers and our associates.
Our objective is always to make our customers and their projects more successful while expanding our role in the value chain.
Everything starts with our associates, who are truly the intellectual capital of the business.
For over 65 years, we've invested in recruiting training and developing the best associates to drive above market growth that in turn fuels future opportunities for them.
And the service business like ours, everything starts with training and development within an inclusive environment for all of our associates.
And while personal relationships are critical going forward this will not be enough.
And as a result, we're also building the best digitally enabled customer relationships we.
We're already using technology to make both our customers and our business more productive.
We're consistently investing to equip our associates with the tools that drive productivity, while saving time for and submitting the relationship with the customer.
We bring to bear our scale global supply chain to maintain the most effective and efficient same day next day omnichannel availability.
We place our products closer to the customer being in stock. We're shipping the same day, while further developing the capability for 24, seven customer access to our inventory.
This year, our supply chain has been a fundamental strength for our business as we've been able to maintain high levels of product availability.
We employ a focused product strategy, providing a robust offering that includes both branded and own brand offering giving customers unrivaled choice for their projects.
We seek to ensure through a consultative approach that we provide our customers with the best product solution.
We source product from over 30 countries. In addition to the U S and we drive sales through specification to the trade professional and to the end user.
We strategically expand the product assortment to grow the bundle, providing a comprehensive range of products.
The result is that we're more relevant for not only the trade professional but also the ultimate end user an owner.
And the next few slides will provide some highlights on two of these strengths product strategy and supply chain.
First looking at product strategy.
While we do not seek to own manufacturing assets, we are going to get as close to the point of manufacturing as we can.
We're going to continue to expand our diverse global sourcing organization to make sure that we're driving design product development and owned brand execution.
Our product strategy includes both branded and own brand offerings and with over 1 million products across our non customer groups are extensive range can meet every customer's needs.
Owned brands are important to us as they offer.
Quality products with excellent availability and industry leading support.
A good example of this is Dora store.
In November of 2020, we launched a new line of own brand products in the HVAC equipment category.
They're a star offers a broad range of residential unitary and ductless HVAC equipment.
The initial neurostar offering included air conditioning heat pumps gas furnaces air handlers and coils.
Executing a phase targeted launch strategy and growing geographically into new markets over the next several years.
This brand together with knowledgeable HVA see associates offers us a considerable growth opportunity to expand our HVAC business in combination with the strength of our residential plumbing group, giving our customers even greater choice for their HVAC needs.
Creating and launching to restore enables us to sell in any market across our different customer groups and through any channel.
This is a large and attractive market of around $50 billion in which we generated over $2 billion of revenue in 2021.
Turning to our supply chain.
We delivered global scale locally.
We bridge the gap between just over 34000 suppliers to serve over 1 million customers.
Our customers require access to a wide variety of products, while expecting exceptionally high fill rates and speed of delivery.
Ferguson supply chain is built around these needs.
We will have the most effective and efficient same day omnichannel supply chain in North America by placing our products closer to the customer and being in stock and further developing the capability for $24 seven customer access to our inventory.
Today in the U S. We have six 5 million square feet inside of 10 distribution centers and more than 35 million square feet in our branch network. This is the foundation of our overall omni channel strategy.
We've established import centers on each coast to ensure efficient replenishment globally sourced products across the country.
This strategy also includes progressively developing our market distribution centers or M. D. CS in major metro areas is the most efficient means of final mile distribution.
Our network of regional distribution centers type yards import centers Mdc's in branches allows us to put the product closer to the customer increasing availability speed of delivery and providing greater operating efficiency.
I've mentioned Denver at the half year results, which is the first of our future state MDC site, which came online towards the end of our fiscal year.
The facility utilizes an automated inventory picking and replenishment system, completing 60% of all product fixed today.
The system holds 49000 bins, and 26000 products and utilizes energy efficient robots to run these products across our modular grid optimizing space time energy and productivity.
Using regenerative power each robot uses about 100 watts of electricity a 10th of what is used by an average toaster, which significantly lower energy cost.
The robot picks product day, and night saving on traditional warehouse labor lighting and heating, while also improving health and safety by decreasing material handling by 50%.
Overtime, we will progressively expand this improved MDC model within major msas at a rate of about 2% to three per year, which is included within our planned capex requirements.
So in summary, our business is in very good shape.
We're extremely proud of how our associates delivered for our customers, we remain focused first and foremost.
On the health and wellbeing of our associates and our customers.
We're very pleased with the operational delivery, particularly in light of the ongoing supply chain challenges.
In addition, our strong cash flow and our balance sheet continue to help us drive incremental growth and value.
For fiscal year 2022.
We started the new financial year with strong momentum with organic revenue growth at similar levels to the fourth quarter of fiscal 'twenty one.
We expect a year of good growth overall, but we anticipate a tapering of revenue growth in the second half on tougher prior year comparator and we're mindful that the recent tailwind from inflation on gross margins could moderate.
For the full year ahead, we expect operational improvements to broadly offset headwinds from inflation in the cost base.
Given the strong momentum in the business and the agility of our business model, we are well positioned to have a good year of growth.
Looking longer term our teams are executing well to deliver results and build on our strengths that will enable us to outperform in attractive end markets.
We remain focused on better serving our customers and capturing market opportunities through our continued investment in talented associates.
Global supply chain product breadth and depth and digital solutions.
We look very forward to telling you more about this in our virtual Investor day on December nine.
Thank you.
Now I'll turn the call back over to the operator and answer questions you may have operator.
Ladies and gentlemen, if you would like to ask a question. Please press star followed by one on your telephone keypad now.
Okay.
Our first question comes from Leds Route from J P. Morgan. Your line is open. Please go ahead.
Oh, hi, Thanks for taking my questions. Good morning to you and so my first question would be on the evolution of your salary being base.
I know I have asked that question in the past that.
Can you confirm that you've seen.
Clean and I was wondering if you can add some.
Jennifer Deason in that geography.
And of your Investor base in Arlington.
And my second question would be on and the working capital variation that we've seen because we've seen a large outflow.
Investment in inventory and.
Supply chain constraints I guess that's it.
How should we think about it and do you expect that trend to continue in 'twenty two to normalized previous he has levels.
Thanks.
Yeah.
Yeah. Good morning, <unk>. This is bill thanks for the questions first off on the shareholding base, we have not seen a significant move in the geographic split of the shareholding base since the additional lifting.
Was was live in March.
So that's been relatively consistent.
To this point.
And then from a working capital perspective as noted yes, we have invested about an incremental $825 million year over year in inventory to offset those supply chain constraints and limited product availability that we're seeing.
As we look forward.
We don't see anything in the very short term I E for the rest of this calendar year that would indicate that those supply chain pressures are going to alleviate.
So I would anticipate us running with additional investment in inventory.
Through at least the end of the calendar year likely into next next calendar year and we'll just continue to take a very disciplined approach around working capital as we always have and I would expect that to alleviate in us to bring that working capital down once we see those supply chain constraints start to ease.
Yeah Ali this is Kevin.
To build on what Bill was saying, we think about the inventory levels that we're keeping in our branch network. Most specifically it really is taking up for those supply chain challenges. So I think at the third quarter, we talked a bit about what our inbound vendor fill rate was for our top 20 D C vendors and.
It still sits below 30% on time and in full and our branch in stock rates are still hovering in the mid Ninety's, So providing good day to day availability for our customers, but maybe as importantly, as we take our role in the supply chain really seriously the sporadic nature of the.
[laughter] nature of inbound flow rate, we have to keep the right product for the project as a whole until such time as the project is ready for full delivery.
I mean, if you think about.
A typical residential construction project just in our residential trade business. It can have upwards of 200 different line items on a single family home and so making sure that we have the right product at the right time and are storing it for a customer is a huge part of our value proposition in the supply chain.
Yeah.
Great. Thanks very much.
Thank you Olivier.
Our next question comes from Keith Hughes from Truest. Your line is open. Please go ahead.
Thank you.
On the statement in the outlook a portion of the release you.
Talk about the headwinds from inflation on the cost base moving forward offsetting that with operational improvements.
Seem to have done incredibly well so far in terms of passing through inflation of the customer base and the results do you think that's going to get more difficult or what exactly are you referring to there.
Yeah, Keith Good morning. This is bill I'll start and then Kevin Kevin can jump in too.
To your point, we've been very pleased with our ability to manage price inflation, particularly over the last couple of quarters in the second half of the fiscal year and you've seen that reflected in the step up in gross margins.
Just thinking about it from a year over year perspective, we grew gross margins by 110 basis points in Q3 over the prior year.
And then that stepped up to 160 basis points in Q4, So really pleased with the work of our teams in the field and I think that demonstrates again the product availability that we have and the strength of our supply chain.
We'd see those.
We've seen inflation increase as we mentioned growing to 8% in Q4, we see those characteristics holding true as we enter into this fiscal year and so I think theres, a pretty supportive pricing environment, particularly in the first half of this fiscal year as we turn to the second half of the fiscal year. The comparable is get tougher both from.
On a revenue perspective inclusive of inflation and other gross margin comparable to get tougher. So I do think you'll see a bit.
I would say.
I have a different kind of have wanted to have to.
But again, we think.
From an overarching perspective, I'm pleased with gross margins and how they have stepped up really pleased with how that drop through to the bottom line with 120 basis point expansion in trading margin again, which is a record for our business at nine 2%.
And we're going to work diligently.
To maintain that trading margin from a full year perspective, as we move forward.
Keith when you think about the operational cost side of the business.
Just like many of our competitors and even our customers are feeling the pinch from a labor perspective, and what rising wages look like there certainly will be some pressures that little largely be offset as we think about productivity, but also in a rising price that bill referenced from an inflation perspective, typically and predominantly what we're seeing.
Is pressure on call it the less than one year driver and warehouse associates.
Culture of Ferguson is extremely strong and so when an associate it comes on board and is with us for more than a year. There is a great likelihood that that is a career orientation.
We look forward, but that's less than one year and the competitive environment for that type of associates out there and it will have some degree of cost pressure as we think about wage growth in our in our business.
Okay. So this is this is not about the ability to pass through prices is about some of the operational issues laborer everyone Azad.
This industry is doing right now it sounds like it's yeah, I think we think about it in two different areas Casey operational cost base as it relates to labor and productivity savings that we will have as we move forward offsetting that and then as we think about commodity inflation easing.
That can mean to gross margin, our overall, but our ability to pass through price in the near term on inflation still remains very much intact. As we talked in Q3, it's not easy to a lot of hard work. It has a productivity drain on our associates as we look to renegotiate and worked through with.
Our customer and our customers customer, but we have no doubts in our ability to continue to do that.
Okay, and then final question.
You talked about some of the fill rates in the 90 something percent by interest is pretty high considering some of the shortages were sitting across building products do you feel like you've missed any meaningful revenue in the quarter.
Shortages or were you able to get at least most of what the demand was.
We have seen some project delay in terms of shipment waiting on some.
Inventory to come into the system, we do not feel like we missed out on revenue due to supply chain shortages in our relative ability to get product for the customer in fact quite the opposite we've seen enhanced share gains because of that product availability and our associate base and our supply chain.
As we look into the near term, though what we're seeing is.
Customers and our customers' customer, placing orders and getting after a product.
Ordering cycles earlier.
To make sure that they have access to product when the project is ready to go.
Okay. Thank you very much.
Thank you Keith.
Our next question comes from James Rose from Barclays. Your line is open. Please go ahead.
Good morning.
Two please the first is on.
On the supply chain when do you think the manufacturer fill rates and general availability levels could get back to normal.
And second question is on when you look at branches on a like for like basis, just in the second half.
<unk> round about 15% volume growth year on year end.
We run pretty efficiently.
Still confident that you would go headroom prefer the like for like growth in the branches without having to add incremental investment.
Yeah. So James Thank you for the questions on the supply chain normalization.
We keep as you might imagine are very very close eye to when we're seeing that fill rate improve when we're seeing completion of P OS coming into our distribution network.
A more fully and we haven't seen any easing of that supply chain pressure right. Now we believe that continues likely through the calendar year and perhaps into the first calendar quarter of next year.
But we keep a pretty close eye on it and again, making sure that we have that inventory closest to the customer inside that branch network for fill rates has served us incredibly well.
In the past several quarters.
And James maybe to address your question on headroom and volume growth in the branch network, Yes to your point if you exclude inflation volumes were up roughly 15% in Q4, I think what that's demonstrating is the strength of our overarching supply chain and our distribution center as well as our M. D C.
Market distribution center and ship hub.
Supply chain environment. So as you know, we are investing and trying to put product closer to the customers.
And we are opening M. D C. 's as Kevin noted, we just opened our Denver M. D. C. So you'll see us continue to invest in those types of facilities, but overall, we expect to have plenty of capacity to take care of market driven volume growth.
In the marketplace.
Okay. Thanks very much.
Our next question comes from will Jones from Redburn. Your line is open. Please go ahead.
Thank you three if I could please the first just going back to gross margins. When you think about that step up from the first half to the second.
Would you be willing to put any numbers around how much of that.
<unk> was what you might call inflation gain I suppose this is underlying improvement or mix and then on the issue of mix when we think through to FY 'twenty two.
Channel mix business mix is there anything that you'd point us to think around in terms of positive or negative so how that might shape up.
In the year ahead.
Secondly, just coming back to.
There has not been cost.
Like all businesses you had some coaching related savings in the last kind of 18 months around travel utilities health care, which you flagged before.
I suspect not but is there any quantification around that bucket.
We are thinking will come back in July 22, if indeed, you are thinking about and then the last one was just revisiting the points you made on private label could you give us the latest on the share.
Brand within the business and I think in the policy you talked about potentially growing twice.
Twice the rate of the underlying market so is that still build.
Feasible and just big picture all the manufacturers, okay with us.
Making the transition.
Okay.
Yes, Thanks will.
On gross margins to your point, yes, a good step up both in Q3 as I said 110 basis points over the prior year and in Q4, expanding 160 basis points I'd say, the majority of that driven by inflation and our ability to manage that inflation.
And we saw that as inflation stepped up from Q3 to Q4 gross margin stepped up further from Q3 to Q4.
Channel mix did come into play, particularly in Q4, if you think about what was happening last year. During Q4, when we were going through the Covid Lockdown periods, we had our counters closed to walk in traffic for a period of time as well as our showrooms as those channels are now fully opened.
Both buy online pickup in store, but also to in store traffic, we've seen that channel mix improvement as those are higher margin channels improve year over year I would see that continuing as we step into into this fiscal year.
But we absolutely recognize a 31, 4% gross margin in Q4.
It does have the benefit of inflation there.
I think that continues there is good pricing dynamics, we see supply chain constraints continuing as we go into the first half of this fiscal year.
But as we get to the second half there could be a tempering of that given the comparable next year and.
Then from an overhead perspective, yes, we have flagged in the past we had some savings on health care in areas like travel and entertainment.
As that as those come back we do believe that we have efficiency and productivity gains to largely offset those.
In addition to the wage inflation headwinds that Kevin talked about so there will be some step back in those costs, but we feel that we're well positioned to manage that as we go into fiscal 'twenty, two and maybe to build a little bit well on what what bill was saying from a an inflation perspective not only.
Or are we able to pass through inflation, but as we think about the availability of product. We look at gross margin is the best reflection of the value that we provide in the marketplace and because of that we were not only able to gain share and excess of what we historically have but also able to grow gross margins.
As we were picking up work from customers, who perhaps normally didn't look at us as their first source of supply because of what that capability was that's hugely important to us because it also starts to cement further relationships for a more long term.
Relationship with our company in terms of the channel side, we continue to see showrooms and counters growing faster than the core of our business, which is also beneficial to gross margin as we go forward, but we believe getting back to that call. It 10 basis points a year is important for us.
If we shift gears to the private label side of the question remained roughly flat at about 9% of our overall revenue base.
We continue to look at growth in that area via two means.
One is product development, and where are those opportunities for us to grow inside of brands that we have or the development of new brands inside of our customer groups. We highlighted Dora start today that was won but we also grow by.
<unk> and we acquired a fantastic company called Amrok.
The cabinet hardware business. This past year, which also allows us not just to grow that business more generally, but also specifically through our counter and through our showrooms as well as through our different customer groups and channels. So that's that's a dual track growth strategy for us on the private label side on the supplier.
Our relationship we still feel very good I mean, obviously still 91% plus of our revenue was driven with those branded relationships and even as we look at private label development.
Often times, that's done in conjunction with our OEM suppliers, who are making the product for us and allowing us to take it to market under our own brand so that relationship remains solid.
Great. Thanks, a lot.
Our next question comes from Kathryn Thompson from Thompson Thompson Research Group. Your line is open. Please go ahead.
Hi, Thank you for taking my questions today tagging on to the really manufactured product or private label initiatives and I'm glad you brought up about the cabinet side, because it was something to take a little bit more term.
I totally get your spanning the offering.
Understanding the value of that but.
What are the major drivers in choosing which categories to focus.
When I look at other distributors like a pool court for instance that have.
<unk> gone a little bit more into the private label side, It's that's a.
Very specific type strategy, but do you can tighten in to help us better understand really.
Core fundamentals for the categories to focus.
That'd be helpful. Thank you.
Yeah, Catherine I mean, if you take it. Thank you for the question first of all if you take it at the essence of what Ferguson is we really.
Live to make a complex new construction and Rmi project more simple and successful for the customer and for our customer's customer and we do it from the very beginning of the project to the very end.
And the design work all the way through to the first shovel, turning dirt and installing pipe to the last appliance install as we're closing up a project and so as we think about what categories to get into it is what product categories are going to make us more relevant for the sheriff.
Wallet for the particular customer group that we're focusing on and cabinets.
Is one of the larger areas inside of a kitchen remodel, which is a core part of what we do inside of our customer base.
And then we also look at what makes us more relevant on the project as a whole and that's how we decide around expansion in customer groups. What is that next most relevant thing on a project for an owner or a general contractor.
That also has margin attributes that allow us to add value in the supply chain and get paid for that value and so that's how we think about both expansion and product categories, but also in what customer groups, we need to go after in the overall project.
And for these using the Colorado acquisition as an example.
Sure.
Such as cabinets are you.
Given the changes in the supply chain, given the changes and post Covid World is there a propensity to focus on more domestic manufacturers are you thinking.
And the U S.
Yes, so the Colorado actually acquisition, you're talking about his kitchen showcase and that was not an owned brand acquisition. It was a cabinet acquisition principally in the residential new construction sector.
Private label acquisition that I was talking about was Amrok, which is in the hardware side of the business that does a tremendous amount through online activity and our showroom.
Should that kitchen showcase acquisition as well as the acquisition, we made in Florida in.
In the cabinet business, not a known brand.
Acquisition.
Okay.
As far as private label is your bogey still in kind of the mid teens to upper teens in terms of mix.
Yes, so we don't we don't put it and target on it we work to grow it at about two times the rate of Ferguson's core growth rate again going back to an earlier question needing to make sure that those branded supplier relationships that we wholesale very dear in half for over 65 years that it's.
Done in a methodical way.
And so that still remains how we're focused we didn't accomplish that this year, but over the long haul we think about two X. The furbishing growth rate is the right place for us to be.
Okay.
As we look at the on going debate for a U S infrastructure build the traditional side.
What if any changes do you have in terms of what the potential impact could be for you.
You bet, your waterworks detention or elsewhere and.
But.
Any other color or any other update in terms of.
What that May mean for FERC.
If we take a step back and look at what we see right now in terms of demand the market is still pretty healthy the indicators from our residential and nonresidential perspective look good we're very confident in the medium term in terms of what these end markets represent not the least of which is residential when you think about the under <unk>.
<unk> of housing units as well as what Rmi might mean, given a post COVID-19 world on residential there is pressure out there clearly from a supply chain perspective, but also from a labor perspective, if I take that against an infrastructure Bill.
Assuming that everything goes well and gets passed we will look to see what is in there and what the details are around the plant it will benefit us from our waterworks business, which is growing quite solidly right now at 39% in the fourth quarter.
Cross public works through residential and commercial we think there's good opportunities for us inside of that.
There's indications that it'll be about 111 billion on the water side.
With good focus on what lead service lines look like that's a great place for us.
They'll also be good road work, presumably which will have erosion control soil stabilization storm water management attached to it but it could also be in the areas of schoolwork.
Airports.
Good commercial projects that take the whole of Ferguson and provide us with good tailwind. So we're looking forward to it but we also need to see what the detail is and what the timelines look like.
Okay, great. Thank you so much.
Thank you.
Our next.
<unk> come from <unk> <unk> from BNP Paribas. Your line is open. Please go ahead.
Good morning, Thank you for taking my questions.
The first one was just on the incremental margin obviously, it's been a much better underlying environment here, but I think the last time you spoke about sort of your expectation that 2022, we're obviously already sort of insinuating that the incremental margins will start to come back down from sort of the double digit.
You've achieved in 2021.
As we look into H, two probably of next year I know, it's quite far away.
How should we think about sort of the ongoing level of incremental margin for the group do you expect some normalization or can you still continue to to hit the 10% plus range.
And then my second question is.
Understand you need more time and details and granularity into the the infra plan.
But equally it seems that you are quite aware of the sort of a bow.
That will go into certain categories. When you think about the overall project what is the total size of the market that directly concern to you.
You mentioned, the 111 million water, but is there any other thing in there that we can think as this will be incremental demand flows for Ferguson in next few years. Thank you very much.
Yeah <unk> good morning, good afternoon, and thanks for the question I'll start on question one in terms of incremental margin and if I just take a step back to your point in a typical year, what we try to achieve is growing our gross margin by 10 basis points year end year out and getting more productivity out of the cost base to drive.
To drive trading profits faster than sales and to generate incremental trading margin.
As we've said in the past also in periods of higher sales growth, we're able to leverage that a bit more and drop more to the bottom line and you've seen that this year.
From a labor and cost productivity side. In addition to the expanded gross margins, which we've talked about so really pleased with 120 basis point step up in trading margins for the year.
As we go into next year, I think again fiscal 'twenty, one was a bit of a story of two halves I think youll see fiscal 'twenty two being very similar.
In terms of strong momentum heading into half one and then those tougher comparable is coming into play in half two we expect for the full year as we've said that our operational improvements can broadly offset any impact of cost inflation.
And certainly for the full year.
After stepping trading margins up by 120 basis points. It would be a great result for us to hold onto that 120 basis point improvement for next year.
And we're going to work very diligently to maintain that but I wouldn't expect large incremental flow through for the full year on sales growth next year, given the step up this past year.
And Dave on the on.
On the infrastructure side I can't effectively give you translation of what a trillion dollar bill if passed would flow through in terms of tailwind to our business. What I will say is generally speaking we feel good about the markets, both residential and nonresidential and what their growth characteristics are our customers and our business will.
Move to where those green shoots are.
And so as this plays out and hopefully gets passed it will provide a tailwind for us what even a water project might represent in terms of product revenue growth really depends on what type of product project. It is a water treatment plant versus a pipeline on airport versus school rep.
Trop fit so it really does depend so apologies that I can't give you a more.
Synced answer on that.
Thank you. Thank you very much and have a nice week.
Thank you. Thank you.
Our next question comes from Greg cartilage from UBS. Your line is open. Please go ahead.
Hi, Good morning, Thanks for taking my question. So I've got a few please so the first one is on the way our house efficiency I was quite interested in your comments around 10, but sorry, I missed you were sort of implying you're going to change a lot of your warehouses over a distributor distribution centers over to that sort of new.
Modus operandi with robots and stuff. So could you just tell us perhaps at a high level.
Whats the efficiency say with a 10 year old warehouse to this and kind of whats the efficiency in part or how quickly will you. We knew the fleet basically to get to sort of newest technology.
Sort of related to that so you kind of flagged your margins. This year will be 9.2 is why they were like 9% to last year, you're expecting to sort of be stable.
Is this sort of overall picture that you think that is the right margin level for the group I appreciate last year with like a massive step up and now you're kind of saying well you hold it or do you think that medium term.
Perhaps there is more room to improve.
Just I guess, the example would be for instance warehouse efficiency.
Reasons, why that wouldn't be the case or not and then finally just quickly sorry, just to be clear on the U S. GAAP instead of Kpis that you're talking to.
I'm looking at the presentation, it looks a little bit different to what you reported am I right in understanding you're essentially moving back to pre amortization number on both the earnings and operating profit also under U S. GAAP sort of is your kpis that you're going to talk to.
And then sorry, one final question.
Regarding the release thing I. Appreciate you. Your intention is attending the way. This actually works will you sort of do a soft Paul with your.
With your shareholders and see if you've got the numbers and then go for it because I guess the risk is if you don't have the numbers.
It's perhaps problem to then come back to it later, so I want to understand what you're thinking in terms of actually press. The go button. Thank you.
Gregor I'll take the this is Kevin I'll take the first question around the MDC overview, if I can.
At the highest level, what we're trying to do because we're trying to get best breadth and depth of product closer to the customer and market.
What we do there from an operational efficiency perspective is we save double touches from our regional distribution center, we save transportation costs in terms of replenishment to the local market and we'd give best breadth and depth fill rate for our customers.
Denver is a good example of it they're averaging call it between $350 to 750000 square feet, we're gonna rollout likely two to three a year, it's inside of our existing Capex budget.
And we're going to go to the major msas across the U S for local delivery local pickup and branch replenishment, it's a V.
Very strong productivity savings for us will also implement some of the.
Robotic picking technology that we talked about that not only saves labor, but also is very environmentally friendly and efficient. So that's the plan overall and why we're going about it I'll, let bill take the second two yes.
Yes, Greg Thanks for the question from an overarching margin perspective, I think the thing that we're most pleased about with this business. It's a long term sustainable growth and trading margin and we don't put a ceiling on that so while we've had a significant step up in and truly an exceptional year rising.
Rising to nine 2%, we don't believe that's the ceiling longer term.
We do believe over time, we can continue to grow that and get more efficient.
And again, we won't we won't put a cap on what that is but recognizing that we've stepped up a significant portion in a single year.
I think we're mindful that holding onto that.
And diligently working to deliver that in fiscal 'twenty, two would be would be a great result.
In terms of your interpretation on U S. GAAP, yes, youre exactly correct.
We are planning on continuing to use a profit metric both on the profit side and the EPS side, it's very similar to our past practice just felt that after taking out some shareholder feedback remaining consistent.
Provided an easier transition for us and our shareholders as we migrate to the U S.
And the last question.
On on re listing and shareholder.
Shareholder feedback one of the things that we're really proud of is the methodical way that we have gone about this process as a company and shareholders across the board during the initial phases of consultation said they wanted to hear from the board what was in the best interest of the company.
Thought that was fantastic because the board was unable to look at us focusing on our North American markets and what's the most appropriate thing for the organization and we did do extensive consultation with shareholders prior to that initial vote, which passed with strong confidence at over 99%. We continue to have good dialogue on it.
System basis, with our shareholders and understand.
Where they are in the process, we hope that the methodical way we've gone about this would number one allow shareholders and have shareholders continue to hold us as an investment, but certainly offer time for those who can't.
To appropriately address that situation, we're going to retain the standard listing in London, and so again, we will talk with shareholders all the way through as we move towards the spring of 2022 for vote number two.
Okay, great. Thank you sorry, one follow up on the M D C.
Can you just tell us maybe a quick maybe you will touch on this in the CMT or how many you've got to give us some context and whether this is just sort of a new thing or whether you're converting somebody I am a little bit confused in terms of the different numbers of Dcs you've called it the variance.
Mdc's Rd season, then I think you've got shipyards pipe yard. So if you could just summarize what the position if there would be great. Thank you.
Yeah, Greg I'll give a little color on that and then yes, you can expect us to give.
More details as we get into the CMT, but if you think about it overall, we've got 10 national regional distribution centers. The M. D. C that we're opening the first one was Denver reopening Phoenix later this year in Houston is underway. So you should expect us to get up to a rolling pace of about two to three per year and then as Kevin.
As mentioned, we are retrofitting some of our existing larger facilities.
With better warehouse layout and design and robotics. So all of that is embedded in our ongoing capex cost and capex guidance, but that will be continued investment over the next several years.
Okay brilliant thank you.
Thank you for your questions I will now hand back to Kevin for closing remarks.
Thank you operator, and thank you all for your time today on the call I guess just in closing, we'll close with where we began we are incredibly thankful for our associates and what they delivered in fiscal 'twenty wandering a really challenging year and our top priority will always be.
Maintaining their health and well being and that of our customers and our communities. We're really proud of what the group was able to do from a revenue growth perspective at 14, 3% ahead of last year and that ramp up during a stronger demand in the second half as importantly from a gross margin perspective 60 basis.
Points ahead of prior year, and the ability through hard work and product availability to pass through that price inflation and have a good gross margin result, maintaining strong cost control so that leverage both on the cost base as well as from a gross margin perspective led to that trading profit outperformance. So.
We're really pleased we're focused on what the near term can bring us we're optimistic about what that near term is with our Q1 entry at about the same growth rate as our Q4 exit rate will maintain a strong and keen focus on what is happening with supply chain pressures, but most importantly, our ability to.
Take a complex construction project and make it more simple and successful for our customer and our <unk>.
Customers customer so thank you for your time today look forward to talking again very soon.
Ladies and gentlemen that concludes today's call. Thank you very much for joining you may now disconnect your lines.
Yeah.