Q3 2022 Ferguson PLC Earnings Call
Hello, and welcome to focus on Q3 results Conference call. My name is Elliot and I will be coordinating the call today.
If you'd like to register a question during the presentation you may do so by pressing star followed by one on your telephone keypad.
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I would now like to turn the call over to Brian Lynch, Vice President of Investor Relations and Communications Floor's Yours. Please go ahead.
Good morning, everyone and welcome to Ferguson's third quarter earnings conference call and webcast hopefully you've had a chance to review the earnings announcement, we issued this morning.
This is available in the investors section of our corporate website and in our SEC filings webpage.
A recording of this call will be made available later today.
I want to remind everyone that some of our statements today may be forward looking and are subject to certain risks and uncertainties that could cause actual results to differ materially from those projects.
Additional information is included under the legal disclaimer in our earnings announcement.
In addition on today's call.
We will also discuss certain non-GAAP financial measures.
Please refer to the appendix of our earnings presentation and the earnings announcement on our website for additional information regarding those non-GAAP measures, including a reconciliation to their most directly comparable GAAP financial measures.
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 welcome everyone to Ferguson's third quarter results conference call.
On today's call I'll cover several of the highlights of our Q3 results.
I'll provide a brief update on capital deployment, including some highlights on our recent acquisition activity and our journey to a primary listing on the New York stock exchange.
And I'll also provide a view of our end markets before turning the call over to bill for the financials.
I'll then come back again to set our outlook for the remainder of the fiscal year before Bill and I take your questions.
Our teams delivered another exceptional performance in the third quarter.
We'd like to express sincere thanks to our associates for their remarkable efforts to serve our customers helping to make their projects simple successful at this.
Stable.
We continue to leverage our consultative approach our scale, our global supply chain and our strong balance sheet to support our customers' projects.
This drove 23% revenue growth on top of tough prior year comparable.
Our pricing discipline and technology enabled productivity gains enabled us to drive strong operating leverage with adjusted operating profit up 34%.
This operating profit performance, coupled with the execution of our share buyback program drove adjusted diluted earnings per share growth of over 40%.
We're proud of these results and are confident in the strength of our business model as we go forward.
Our balance sheet is strong and we continue to execute our strategy of investing for organic growth.
<unk> are fragmented markets through acquisitions, and returning capital to shareholders.
This strong performance allows us to deliver on our capital priorities.
We welcomed associates from four bolt on acquisitions during the quarter and we intend to touch on M&A and a little more detail shortly.
We are well underway with our $2 billion share buyback program and are continuing to repurchase shares at pace.
From a corporate perspective, we were pleased to transition our primary listing to the New York stock Exchange on May 12, aligning our listing structure with the geographic location of our operations and our associates.
We were also pleased to publish our first Standalone ESG report last week, highlighting our dedication to minimize the environmental impact of our operations and fostering a culture that is safe inclusive and engaging for our associates.
This report showcases how our people our expertise and our position within the value chain create positive impacts for our customers suppliers and local communities as we help build a better world.
Turning last to our end market demand has remained strong across our markets and we continue to outgrow these markets.
Residential which comprises just over half our U S revenue remained robust.
Both new construction and Rmi demand remains supportive and our residential revenue grew by approximately 20% in the quarter.
Nonresidential end markets remained strong and grew faster than our residential markets are.
Our non residential revenue grew by approximately 29% with a significant contribution from our Waterworks group.
As we've discussed previously we remain committed to our balance of residential and nonresidential end market exposure with a heavier mix of Rmi related work.
While we are mindful of broader macroeconomic headwinds this balanced mix, our agile business model and our strong balance sheet position us well for the future.
Turning back to acquisitions, we continue to see attractive growth opportunities through selective bolt on geographic and capability acquisitions.
During the quarter, we welcomed lighting, plus and founders kitchen, and bath into a residential building in remodel customer group.
Additionally, Adirondack and.
Supply broadened our industrial offering in upstate New York and the Southern U S respectively.
We continue to maintain a healthy pipeline completing three additional deals since the end of the quarter.
Aaron and company expands our residential plumbing and HVAC offering in New Jersey.
This acquisition is yet another step in expanding our value for the dual trade HVAC and plumbing professional.
We're also pleased to have signed a definitive purchase agreement to acquire <unk> lighting and owned brand lighting and fan business.
With a strong product portfolio, our customers will benefit from a broader range of choice as they undertake their projects.
We anticipate closing this acquisition in the fourth quarter subject to regulatory approval.
All in these businesses generate annualized revenues of approximately $450 million.
As we continue to consolidate our large growing and fragmented markets, while bringing in local relationships that fuel future organic growth.
Now let me pass you over to Bill who will take you through our financial numbers in a bit more detail.
Thank you, Kevin and good morning, or afternoon, everyone. We've seen a continuation of trends from the second quarter with market share gains contributing to revenue growth of 23, 1%.
Price inflation moved up a touch from the high teens in Q2 to approximately 20% with volumes remaining positive on tough prior year Comparables.
As we previously guided the strong comparable and changes in business mix led to some year on year gross margin compression, resulting in gross margins of 33%.
Tightly controlled costs driving strong operating leverage and improved overall adjusted operating margin by 90 basis points to 10, 3%, while investing in our talented associates supply chain capabilities and technology program.
Adjusted operating profit of $747 million was up $188 million or 33, 6% over the prior year.
Diluted adjusted EPS grew by 44% principally driven by the growth in operating profit and to a lesser extent the impact of our share buyback programs.
Our balance sheet remains strong with net debt to adjusted EBITDA of <unk> eight times.
Moving to our segment results the U S business mirrors, the overall results with a strong performance.
Markets were supportive and we continue to take share with sales growth of 23, 9% and organic growth of 23, 7% we.
We had a further one 8% of revenue growth from acquisitions offset by one 6% from one fewer sales day.
Head count and variable costs grew to appropriately support revenue growth and we delivered adjusted operating profit of $736 million in the quarter, an increase of $176 million.
Were 31, 4% over the prior year with adjusted operating margins, expanding 60 basis points to 10, 6%.
We've provided a breakout of revenue growth across our largest customer groups in the U S.
Kevin outlined we saw strength across both the residential and nonresidential end markets with all customer groups performing well.
Residential trade in HVA C, where the majority of our business serves the residential end market grew over 20% with strong demand in both new construction and Rmi.
Residential digital Commerce, which serves the project minded consumer and light decorative pro continued to grow well on top of a 51% prior year comparable.
Waterworks continued to see strong revenue growth on top of a prior year comparable of 26%.
This quarter's growth was driven predominantly by inflation supported by strong public works demand good residential growth and growth in nonresidential end markets.
Commercial mechanical and other nonresidential customer groups saw good growth in the quarter with supportive markets.
The Canadian business performed well with organic revenue growth of 11, 3% in Q3, as we lapped a 35% prior year comparable.
This was offset by one fewer sales day and the adverse impact of foreign exchange rates, resulting in total revenue growth of eight 8%.
Residential end markets performed well with good growth across our customer groups.
Nonresidential also grew well with particularly strong growth in our waterworks customer group.
Adjusted operating profit growth of 66, 7% significantly outpaced revenue growth as we tightly controlled operating costs generating strong operating leverage.
As we look at the year to date performance revenues are up 26, 9% 25, 2% on an organic basis with a 40 basis point improvement in gross margins.
Adjusted operating profit growth significantly outpaced sales up 59% with operating margins expanding 160 basis points to 10, 2%.
Adjusted diluted EPS grew by nearly 58%.
And as Kevin mentioned earlier, we are pleased with the strength of our performance and are confident in the resilience of our business.
Turning to cash flow, we take a disciplined approach to cash generation. It continues to be an important priority and quality of our business model.
Adjusted EBITDA year to date was $2 3 billion.
As we've discussed over the last several quarters, we continue to invest in working capital.
With inventory to ensure we have the best levels of availability for our customers. During this time of supply chain challenges as well as receivables driven by sales growth.
This investment has supported our exceptional growth and generated strong overall returns on capital.
<unk> increased over the prior year due to higher profit and timing of payments and we continue to invest in organic growth through capex, principally invested in our supply chain and technology programs.
Consequently, we generated $681 million in operating cash flow and $489 million of free cash flow.
Our balance sheet position is strong with net debt to adjusted EBITDA of <unk> eight times, which we've stepped up from <unk> four times a year ago.
We continue to target a leverage range of one to two times and we intend to operate towards the low end of that range to ensure we have the capacity to take advantage of growth opportunities.
We allocate capital across four clear priorities.
First we're investing in the business to drive above market organic growth principally through working capital and Capex.
We are sustainably growing our ordinary dividend and previously raised the interim dividend by 15%, which was paid after the quarter end in may.
Acquisitions are an important part of our growth strategy and we completed 10 in the first nine months testing.
Testing $287 million and we've closed a further three post quarter end and we have a healthy future pipeline.
And finally, we remain committed to returning surplus capital to shareholders. If we are below our target leverage range.
We've made good progress on our $2 billion buyback program returning in excess of $900 million through Q3, and having now completed nearly $1 3 billion of the program through last Friday.
We continue to execute the buyback at a good pace.
So let me wrap up we're pleased with the business performance, we've delivered strong results, while continuing to invest in the business.
Disciplined approach, we've taken on the cost base and our strong balance sheet position us well as we close out fiscal year 'twenty, two and head into fiscal year 'twenty three.
Thank you now let me hand, you back to Kevin for an update on the outlook and his closing remarks.
Thank you Bill.
As we go forward near term market demand remains supportive.
And we have increased our full year expectations for adjusted operating profit to between $2 85, and $2 95 billion.
While we are mindful of broader macroeconomic headwinds, our balanced business mix agile business model and strong balance sheet position us well for the future.
So to summarize the business is performing well, we're continuing to leverage our core strengths delivering market share gains.
We believe we are well positioned for growth and remain focused on executing our strategy and we're excited about our value creation opportunities.
Thank you for your time today.
Bill and I are now happy to take your questions operator, I'll hand, the call back over to you.
Thank you for our Q&A, if you would like to ask a question. Please press star followed by one on your telephone keypad now.
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Our first question today comes from David Manthey from Baird. Your line is open. Please go ahead.
Thank you good morning, guys.
Good morning.
First.
On the full year operating income guidance raised to $2 85 to $2 95 billion and could you remind us what was your prior outlook and then.
How much of the increase there is due to one better than expected third quarter results too.
Continuation of higher inflation three.
An expectation of better unit growth and then for acquisitions and if you can talk about those qualitatively is fine also.
Yes, good morning, Dave It's Bill I'll start with that question.
We have not set out specific DAU operating profit dollar guidance. Prior to this if you look at what the market consensus was at just under $2 7 billion about $2 billion $665 million.
So the midpoint of our range of $2 9 billion is just over $200 million increase.
In terms of the components it really is a combination.
The first two items that Jim mentioned, so Q3 was ahead of our expectations largely driven by the top line inflation ticked up from the high teens to around 20%.
We talked about coming out of Q2, given the fact that the comparable had stepped up significantly in Q3 and Q4 last year, we're expecting that those growth rates could be slightly lower than what we ultimately ended up delivering which was that 23% growth in Q3.
And then we were able to maintain our operating cost discipline and drop that through to the bottom line. So I would tell you roughly half of the profit.
<unk> was from Q3 and the other half roughly is from our outlook on Q4, we're carrying in that momentum from Q3 into Q4 as Kevin outlined near term demand signals for us across both residential and nonresidential still remains strong and that gave us the confidence to increase.
That outlook.
You look at that $2 85 billion to $2 95 billion that would imply a fourth quarter profit somewhere in the range of $750 million to $850 million.
Very little of that and the last point is just very little of that was driven by acquisitions acquisitions.
Acquisitions will be a nice tail for us into next fiscal year from a revenue perspective, but not a significant impact on this year's profit outlook.
And Dave as we indicated residential remains supportive both rmi and new construction as we're sat here today and that balance with nonresidential and there's good strength coming through from the nonresidential perspective.
In areas like knock on commercial activity after residential build out and also some really large project work that's happening across a variety of different industries that is supportive of both unit growth as well as ongoing inflation.
As we indicated previously seeing that.
Growth of inflation inside of finished goods continuing following commodities and thats played into the quarter and into the future.
That's very helpful. Thanks, a lot guys.
Thank you David.
Our next question comes from Kathryn Thompson from Thompson Research Group. Your line is open. Please go ahead.
Hi, Thank you for taking my question.
Just tagging on.
Just two quick questions.
Circling back on inflation.
We talked a bit about.
Shifting from just some times just in case.
Your model is a distributor should benefit and kind of a post COVID-19 world.
That said, we are starting to see on the fringes certain models that are coming up with too much inventory.
Great. Thanks, Don really two part for you.
Of the lion's share growth top line continues to be pricing.
Inflation, how much of that is contributed from <unk>.
Advantageous buying and how long do you see that going and what are your thoughts Bob.
Inventory and managing.
Given choppy.
Essentially company great. Thank you.
Yes, so Catherine Thank you for the question in terms of just in time to just in case and what it looks like from an inventory perspective, as we indicated in past quarters.
This supply chain chaos area has really allowed us to advance what our share gains our versus our historical 300 to 400 basis points and that gravitational pull the strength and having inventory when your customers need it and where they need it was hugely important that continues to serve us well.
As we are growing at the top end of that call. It 300 to 400 basis points worth of market outperformance that said supply chain pressure start to ease, which we're seeing and we're not seeing it across the board, but it is continuing to improve in spotty areas product by product category by category.
Laurie.
It's really incumbent upon us and what we're working on today is making sure that we're communicating extremely well with our customers.
And with our customers customer the owner of the general contractor, the GC and making sure that we understand what is product availability. So that we minimize that pull forward of ordering activity to get back to a much more consistent ordering pattern.
Surf projects, that's happening today, the majority of our inventory growth that you've seen early on during supply chain pressures was to take care of vendor fill rates that had been compressed we had talked about sub 30% on time in full of our top 20 DC vendors in bound.
And that has now improved to well north of 50.
So that inventory that we're keeping is making sure that we have completed projects for our customers where and when they need it in fact, our inventory growth for committed inventory of project base is.
As far in excess of what overall inventory growth is.
So from a pricing perspective, yes, thats driving the topline from a share gain perspective inventory availability and project is helping us, but we really are starting to drive back to a much more normalized ordering pattern.
Hey, Katherine maybe just to tack on there from a pricing perspective to your question and to Kevin's point.
The price inflation in the current quarter of around 20% means that we delivered low single digit volume growth, but I think it is important to look back at what we did last year in Q3, which was roughly 21% organic growth. The vast majority of that was volume about 5% was price. So if you look at it on a two year.
<unk> call it 44% total growth roughly 25% of that being price over that two year period. So it's still good two year stack volume growth recognizing that we had a large volume increase last year.
Alright, Thank you very much.
Thanks Catherine.
Our next question comes from Keith Hughes from <unk>. Your line is open. Please go ahead.
Thank you you had talked about what the unit growth in the quarter was low single digits can you talk about how that vary between residential.
Yes in terms of that growth Keith it was relatively consistent the inflation dynamics were slightly different.
Ramsey and non resi with non resi, having higher inflation. If you look at total <unk> growth in the quarter roughly 20% total non resi growth roughly 29. The difference between those two was largely higher inflation. So I'd say volume growth was relatively consistent between the two or across the two.
Yes.
And just one other question too on inflation.
Do you have a view of when what we know today when do you peak.
Question will not come.
Physical year.
Guests will be though.
Yes, it's obviously, a really difficult question to answer but one of the things that we think about and look at it is just simply the base effect or the.
The comparable on inflation that we are coming up against so if you look back to last year Q3 was about 5% inflation that then stepped up to 8% in Q4.
<unk> like low teens in Q1, and then high teens in Q2 and now around 20%. So as we move over the next several quarters.
We would expect inflation will start to compress just simply because of the comparable.
Clearly theres a lot of dynamics that could impact that but that's that's how we would think it would progressing over the next several quarters.
Okay. Thank you.
Thanks Keith.
Our next question comes from Matthew Bouley from Barclays. Your line is open. Please go ahead.
Hey, Good morning. This is Ashley Kim on for Matt today.
Just my first question with pricing kind of accelerated to three Q can you just talk about if youre seeing any signs of pricing fatigue.
And if so maybe can you call out any specific customers or end markets that maybe particularly challenged.
Ashley Thank you and in terms of pricing fatigue, obviously, that's something we keep a very keen eye on we haven't seen any real demand destruction, Rajiv non res new construction or up to this point.
We still see good solid.
Early waterworks growth inside of residential subdivisions for example.
But we keep a mindful eye on that there is certainly is fatigue and the ability to pass through that price increase.
Is incredibly challenging but it is hard work and heavy lifting that we do from a sales team perspective, with our customer and our customers' customers. So to date, we haven't seen demand destruction, but we keep a very keen eye towards that.
Thanks, and then just a quick follow up do you have good amount of visibility into into customer backlogs and is there anything any size it might show that that way.
Kind of a strong volume decline in the near term.
Yes.
Our visibility to backlog is somewhat limited call. It through the end of our fiscal year and into the first quarter of our next fiscal year, we have seen a growth in our overall open order volume fairly substantial growth again that is partly good solid demand and partly a pulling forward of ordering activity too.
Ensure that customers have the availability of their product for their project, where and when they need it.
<unk>.
Talking with customers through bidding activity and again, we see good solid bidding activity that continues in both residential and nonresidential activity.
From our waterworks business throughout residential trade plumbing finished plumbing and the like so there is still is good bidding activity that goes on we're certainly eyes wide open and mindful about what rates and price and consumer sentiment can mean in the overall macro but as we're sat here today that market.
<unk> and that demand curve still looks reasonably strong.
Okay. Thanks for that I'll leave it there.
Thank you.
We announcements who will Jones from Redburn. Your line is open. Please go ahead.
Thank you.
Three if I could please the first just a couple of actually around your customer groups HVA.
I think the two.
The highest growth in the quarter do you think that trial.
We will continue for the next few quarters and if so are.
Are you happy with the gross margin.
And the last quarter told around the current levels given the impact on mix.
Second I think it was around residential digital commerce.
I think you grew at 9%.
When would you expect that that's been a little lower actually given its retail focus.
Is this an area that you think you were out before begin as well.
Or was that more about the buckets.
One was just if you could put any numbers on it what youre doing around head count. Please thank you.
Yeah, So I'll take the beginning of that well. Thanks for the question in terms of the customer groups of HVAC in Waterworks, we were really pleased with the performance of both of those groups. As you know there are good solid focus areas for us in terms of what that growth looks like hvac's growing at 28% on top of a 40% comparable from prior year is.
Good solid broad based growth in that repair replace and new construction component of HVA C. We continue to look to grow that both organically in terms of same store opening up new locations as we partner with equipment manufacturers and also looked at our focused acquisition strategy to make sure that we have good broad exposure.
<unk> across the whole of the country and as we've talked about in the past, we think that we will be serving the market quite well, having a strong residential trade plumbing business combined with our strong HVAC business, particularly for that very large component of the market that is the dual trade HVAC and plumbing professional.
So we're pleased with that continued trend we're pleased with the gross margin production of that group.
On the waterworks side again strong growth that absolutely has been supportive across res and non res good subdivision in multifamily activity, but also good.
Distribution center activity and build out in the non res sector public works activity meters, and metering technology water and wastewater treatment plants and we've yet to see the impact of what the infrastructure package can do to a tailwind for that Waterworks group. We're mindful of what that can mean from a gross margin perspective in <unk>.
In terms of business mix, but the performance has been quite strong on the residential digital commerce piece, that's a 9% growth rate on top of a 51% prior year comparable so a tough comparable what we've seen there is we're competing quite well and still performing extremely strong.
On the top line as we see the project minded consumer take a bit.
Less impact in that business versus the light decorative pro when you look at lira numbers on what remodel activity is going to look like the do it for me portion of the market still see double digit growth coming in the future 12 quarters, we have seen that inside of our business, where the professional and the do it for me.
Activity is continuing to perform quite well I will give it to bill for that yes, well Im head count we do continue to invest in our associate base.
We're taking on.
And going after the additional revenue growth and volume growth, we've added about 3000 associates.
Into the business since the start of the fiscal year, so roughly about a 10% increase.
In our associate base.
Thank you and Thats, including acquisition is that something that would be including acquisition. Yes. Just over 500 of those are from acquisition and the year to date.
Great. Thank you.
Sure.
Our next question comes from Greg <unk> from UBS. Your line is open. Please go ahead.
Hi, Good morning, a few questions can you just give us some color on what kind of run rate, you're seeing kind of quarter.
Quarter to date since since April since the quarter end, I guess, but it's sort of been consistent.
Second question coming back to inflation, if you could just sort of help us out on the commodity element.
Some of the commodities are starting to roll I guess that'll take a little bit of time, but.
Just give us some color on the exposure there and how you see that feeding through I guess over time.
I guess the third question is on M&A. So can you just remind us as we sit here today, what you think the carryover into next year I think you just hit $450 million annualized with some deals before so just <unk>.
And what's the carryover on revenue.
And maybe can you elaborate what you spent on that 400 million piece.
That happened post the quarter.
And then maybe to wrap it all opposite of a big picture question I mean, obviously, you've just seen your earnings I'm looking at your trading profit.
And then I'll, let's call. It 1617 this year maybe.
Two nine.
I mean very high level, how much of that gain do you think is sustainable. Thank you.
Thanks, Craig I'll try to hit those you may have to remind me of a couple of those tidbits as we go but first off from a <unk>.
Entry rate perspective, we started Q4 with I would say broadly similar growth rates to our Q3.
Exit rate so the 23% that we delivered in Q3, the comparable does step up a bit throughout the quarter. So we think that could be.
Could develop.
As we move through Q4.
But still as we've said very good near term demand and really that revenue growth outlook has given us the confidence to take up our.
Our operating profit range in terms of inflation in commodities as we've talked about in the past commodities were.
10% of our revenue pre pandemic given the inflation that we've seen in those commodities that has grown to over 15% of our revenue today.
To your point, we have seen commodity prices largely trading sideways.
It will vary by category, depending on whether youre talking copper or steel or plastic, but as we've seen that trade sideways sequentially over the last several months most of this calendar year, we've seen the inflation impact year over year come down so where we were talking about in Q4 Q1 and Q2.
Commodity inflation in the 50% range, that's now down probably into the low to mid 30% range.
And we would think that that would continue to compress again as we go up against tougher comparable as we move over the next several quarters.
In terms of M&A.
Probably the irony of the numbers, but our outlook for this year for completed M&A impact is about $400 million on FY 'twenty two's results.
The annualized revenue for the Q3 acquisitions, we did plus.
The ones that we announced that we will close in Q4 is about $450 million of annualized revenue and the carryover into 'twenty. Three is also about $450 million of annualized revenue.
So hopefully that answers your question there and then last on operating profit.
We've been really pleased with the step up not only in operating profit over the last two years, but also in operating margins. We grew this the operating margins from about 8%.
292% last year and now our year to date being at 10, 2%. So we've had a pretty significant step up in operating margins from an operating profit dollar perspective.
We haven't yet set out our outlook on FY 'twenty three.
But we do intend to hold onto that operating profit as we move into next fiscal year, we will be in a much better position as we wrap up Q4 and release our year end results to give you our outlook on fiscal 2003, when we come back in September .
Thank you.
Our next question comes from Arnaud Lehmann from Bank of America. Your line is open. Please go ahead.
Thank you very much.
Just on my side, one question I guess on the gross margin.
You mentioned that we werent expecting some sort of normalization.
Same time, we were not necessarily expecting as much inflation to continue to come through.
In your introduction you mentioned some mix effects impacting the gross margins. So do you mind coming back on that and maybe give us some how to keep the low thirties right.
Out into the next fiscal year. Thank you very much.
Yeah sure in terms of the mixed impact year over year, we quantify that in the 10 to 20 basis point range at Q2 that was more like 20 to 30 basis points and that's really driven by the growth in waterworks and the growth in nonresidential.
Both tend to have slightly lower gross margins are very similar operating margins.
About a 10 to 20 basis point impact year over year as you look at Q3.
In terms of the go forward gross margin.
Clearly there are a lot of dynamics that impact gross margins, including inflation and pricing, including business mix, but we've said in the past that we think somewhere between that 30% to 31% is a good normalized gross margin for us to operate from and we do intend to and believe that we can continue to grow that over time.
Given our product strategy, given our own brand initiatives and given how we manage the business. So we're quite pleased with the delivery of 33% in Q3 and.
And are expecting a good gross margin in our fourth quarter to wrap up our fiscal year.
Okay.
Thank you so much.
Thank you Arnaud.
Our next question comes from Sue Hasani Varanasi from Goldman Sachs. Your line is open. Please go ahead.
Hi, Thank you for taking my question just one from me. Please just to follow up on the outlook.
Given what you see on the top line trends in Q4, 30% plus levels.
Modulation going into the first quarter and given how you've actually beaten estimates on market in the third quarter to date can you talk about what your margin expectations for Q4. Please.
So that's a little bit of caution over that so is that anything that we should be worried about in terms of inflation cost that could squeeze margins year over year. Thank you.
Yes, nothing that I would be wary about we've got a bit of a range both from a revenue perspective as well as from an operating margin perspective.
Again, given the fact that the comparable is do step up in Q4, so if I had to put a number on it we're expecting the revenue range to be somewhere in the mid high teens to low twenties.
And then a solid operating margin to complement that.
That would that would kind of book and your range or higher range, rather of that 250 to $209 50.
Thank you.
Our next question comes from Merrill Lynch Alba from Morgan Stanley . Your line is open. Please go ahead.
Hi, Once me with a couple of parts just on your capital allocation policy, how GV youll Skype for buybacks going forward sort of above and beyond the cheapening in target you already have in place and then the second part being how do you view kind of completing deals in this environment, which some would describe as maybe close to that.
Talk about the cycle.
How does this impact your thoughts on strategy and then the multiples you're willing to pay for some of these companies just off the back of the strong M&A you've been doing recently, especially post the quarter end.
Yes, thanks, Madeline in terms of the buybacks as Kevin outlined as we've talked about in our prepared remarks, we're pleased with the pace that we're executing on our $2 billion buyback program completed about $900 million in the first three quarters and again, we stepped that up and completing just under $1 3 billion.
Through through today as we sit here today.
That gives us about $700 million left on our $2 billion authorization, we'd expect that to run through the end of this fiscal year and then we'll come back with year end results and give you an update but we very much intend to live under our capital priorities and our stated policy, which remains if we're below that leverage range of one to two <unk>.
We will continue to return to shareholders.
To return cash to shareholders.
In terms of deals and M&A.
Talked about in the past over the past several quarters that we've had a healthy pipeline. We remain very disciplined as we're looking at not only multiples that we're paying.
From a valuation perspective, but also the fact that many businesses have had a good run over the last 12 months to 18 months in terms of operating profit performance. So we're taking a disciplined approach I would tell you that from a multiple perspective.
We remain towards the top end of that range that we've typically guided to in terms of M&A multiples in that seven to 10 range probably closer to the top end of that range collectively.
But we're very disciplined as we look at the operating profit that those companies have generated and we still see a pretty good pipeline as we move out of fiscal 'twenty, two and into fiscal 'twenty. Three so we're very comfortable with the guidance that we've set out in the past that we can continue to consolidate our fragmented markets and add somewhere in the range.
A 1% to 3% revenue growth annually through acquisition and the pipeline that we have today continues to be very complimentary for strategically what we want to do both in geographic bolt ons as well as in capability bolt ons you saw Aaron <unk> company in New Jersey, which again gets after that dual trade hvac's and plum.
Contractor and providing great value.
In the marketplace for them and then maker as it relates to our own brand programs, which we will take across our digital and bricks and mortar channels to really help our offering to.
That project minded consumer decorative pro Ferguson facility supply customer, we continue to see many of those acquisitions as well as Geo synthetics inside of our waterworks business, which is clearly some of the areas that we wanted to go after from an M&A perspective.
Great. Thank you.
Thank you.
This.
Today's Q&A session I'll now hand over to Kevin Murphy for closing remarks.
Yes. Thank you everyone for your time. This morning. This afternoon again just to reiterate we're really pleased with the overall performance of the business and we want to extend a sincere. Thank you to our associates, who are working extremely hard to make sure that we deliver on our customers' project, making them more simple successful and.
Sustainable we delivered strong results and while we continue to invest in the business, especially from an organic perspective to make sure that our technology agenda, our world class supply chain continues to deliver for our customers and the ongoing share gains.
With a disciplined approach to how we're managing the cost base of the business.
Will allow us and position us well as we close out our fiscal year 'twenty, two and move into fiscal year 'twenty. Three. Thank you very much for your time and support and hope to talk to you very soon thank you.
That concludes the folks in Q3 results. Thank you for your participation you may now disconnect your lines.
Okay.
Thanks.
Yes.
Okay.
Okay.
Okay.
Sure.
For the year.
Okay.
Sure.