Q3 2023 Ferguson Plc Earnings Call

Good morning ladies and gentlemen, my name is Elliot and I'll be your conference operator today. At this time, I would like to welcome you to Ferguson's third course at conference call. All lines have been placed on mute to prevent any interference with the presentation. At the end of the group, prayer remarks, there'll be a question and answer session.

To ask a question at the time, please press star then the number one on your keyboard.

So, your question, please press style into. Thank you. Now, Alex from the call over to Mr. Brian Martin, focusing on the vice president of Investor Relations and Communications, maybe in your course course. Good morning, everyone, and welcome to Ferguson's third quarter earnings conference call and webcast. Hopefully you've had a chance to review the earnings announcement we issued this morning.

The announcement is available in the Investor section of our corporate website.

and on our SEC Fireways webpage. A recording of this call will be made available later today. I want to remind everyone that some of our statements today may be forward looking and are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected.

including the various risks and uncertainties discussed in the section entitled risk factors in our Form 10K available on the SEC's website.

Also, any forward-looking statements represent the company's expectations only as of today.

And we specifically displaying any obligation to update these statements.

In addition, on today's call, we will also discuss certain non- GAAP financial measures. Please refer to our earnings presentation announcement on our website for additional information regarding those non- GAAP measures .

including rected saleation to the most directly comparable gaps in natural measures.

With me on the call today, our Kevin Murphy, our CEO , and Bill Brandage, our CEO .

I will now turn the call over to Kevin.

Thank you, Brian , and welcome everyone to Ferguson's third quarter results conference call. On today's call, I'll cover highlights from our Q3 performance. I'll also provide a more detailed view of our performance by end market and by customer group before turning the call over to Bill for the financials and our updated outlook for fiscal year 2023.

I'll then come back at the end to give a brief update on some of the fundamental drivers of our residential and non-residential end markets before Bill and I take your questions.

year has continued as we expected. And our Associates, again, delivered solid results that were in line with our expectations following the significant step up in performance delivered in fiscal year 2022.

Our dedicated associates continue to go above and beyond to serve our customers and help make their projects more simple, successful, and sustainable.

As market conditions have become more challenging, our balanced business mix is serving us well.

We leverage our consultative approach, our scale, our global supply chain, and our strong balance sheet to help improve our customers' projects.

As expected, we saw modest revenue decline in the quarter, but were pleased with revenue stepping up by over 20% compared to the equivalent quarter in fiscal year 2021.

We remain disciplined on cost, delivering adjusted operating profit of $657 million and adjusted deluded earnings per share of $2.20. $26.00.

This represents significant growth from two years ago at 18% and 24% respectively.

Our balance sheet remains strong, and our cash generative model allows us to continue to execute our strategy of investing for organic growth.

sustainable growth of our dividend, consolidating our fragmented markets through acquisition.

and returning capital to shareholders.

We've declared a quarterly dividend of 75 cents per share, implying a 9% increase when annualized over the prior year, and have also increased the share repurchased program by an additional $500 million.

We're proud of these results, which came in as we expected, and our confidence in the strength of our business model as we go forward.

Turning to our performance by end-market in the United States.

Overall growth moderated as we laughed strong comparable and markets became more challenged.

As expected, residential markets were more significantly impacted by the slowdown in new residential construction.

and an area serving the project-minded consumer.

whereas repair maintenance and improvement markets.

particularly with our core trade professionals and in high-end remodel prove more resilient.

A residential revenues which comprise just over half of U.S. revenue slowed during the quarter to a 6% decline.

Overall non-residential end market, representing nearly half of US revenue, saw the pace of growth ease in the third quarter in line with our guidance.

It was good activity in industrial related end markets and our non-residential sales were 3% higher than prior year on top of tough comparables.

Despite a sequential slowdown in the business, we continue to outperform our markets, taking share across both residential and non-residential end markets.

As we've discussed previously, we will continue to focus on maintaining our balanced end-market mix, and while we expect growth rates will fluctuate over time.

We seek to maintain this healthy balance.

Turning now to revenue growth across our customer groups in the United States. Residential trade plumbing declined by 11% against a 21% prior year comparable growth due to declines in new residential construction activity.

Residential Building and Remodel grew 3% on top of 17% prior year comparables with continued resilience in higher end remodel projects.

Residential digital commerce declined by 15% due principally to softening consumer demand.

HVAC, where the majority of our business serves the residential end market, declines by 2% with a 2-year stack of 26% growth.

Waterworks revenues were flat on top of a prior year comparable of 42% growth.

The balanced business mix between residential and non-residential work within our Waterworks Group ensures good diversification and has allowed us to take advantage of more resilient public works and commercial demand.

The commercial mechanical customer group declined 2%.

Our industrial fire and fabrication and facility supply businesses delivered a combined 14% growth in the quarter against a 27% comparable driven by non-residential trends such as onshoreing.

Plant turnaround work and general increased industrial activity. It is through our growth platform of nine customer groups that we achieve broad and balanced end market exposure.

This allows us to serve our customers' needs in a more holistic way and bring more value to the total project.

Let me now hand over to Bill who will take you through the financials in a little bit more detail.

Thank you, Kevin, and good morning or afternoon, everyone.

HETS sales were 2% below last year, driven principally by the 1.9% impact of one fewer sales day and for an exchange.

Organic revenue declined 2.5% and was largely offset by acquisition growth of 2.4%.

As expected, price inflation stepped down from 10% in Q2 to 5% in Q3.

Roast margin of 30% was down 30 basis points against a strong prior year comparable.

The modest decline was driven principally by deflation in certain commodity categories.

We've proactively managed the cost base, keeping it flat on a sequential basis compared to Q2, as revenue increased into our seasonally stronger third quarter.

This enabled us to deliver an adjusted operating margin of 9.2%. Adjusted operating profit of $657 million was down $90 million or 12% compared to prior year's record third quarter. But remains well ahead of fiscal 2021 levels.

Adjusted diluted EPS compressed by 12% in line with the reduction in adjusted operating profit, but remains 24% above fiscal 2021.

During the quarter, we took additional steps to review and control our cost base.

We recorded a charge of $20 million related to the closure of 44 smaller, underperforming branches within our network of approximately 1700 branches.

We evaluated this decision based on market conditions to ensure we have the right branch portfolio and cost base going forward.

Also, we continue to make good progress overall with our IT modernization journey, investing in both front-end customer facing capabilities, and backend systems and tools to drive productivity.

We've delivered key benefits in areas such as omni-channel capabilities in Build with Ferguson and Buy Online pick-up and store capabilities.

upgraded modern fleet and delivery systems. Proof call center and customer contact technology.

warehouse automation and robotics and back office finance and HR systems.

A component of our investment targeted the modernization of certain branch transactional processes.

to enhance customer experience and associate productivity.

After piloting the solution at a handful of locations, we determined the results did not meet our customer service, speed, and efficiency requirements, and we chose not to proceed with the upgrade.

Accordingly, we recorded a non-cash software impairment charge with $107 million in the quarter.

We remain focused on building on what has been good overall momentum on our IT modernization journey. We will continue to invest in areas that enhance systems and processes to deliver an unmatched customer experience while improving associate productivity. And finally, our ballot sheet remains strong at 1.1 times net debt to adjust the

by 1.6%. Driven by one fewer sales day.

Organic revenue declined 2.5% offset by a 2.5% contribution from acquisitions.

We delivered a just-it operating profit of $664 million, down 9.8% over the prior year, delivering a 9.7% adjusted operating margin.

Turning to our Canadian segment, markets soften further with some sustained pressure from the adverse impact of foreign exchange rates, resulting in a challenging quarter.

Organic revenue declined 1.5% against a strong 11.3% comparable growth.

6.2% decline from the impact of forward exchange rates and a 1.8% decline from one fewer sales day.

Total revenue declined by 9.5%.

This is with the US non-residential end markets performed better than residential this quarter. Adjusted operating profit of $7 million was down $13 million below last year. While there is more work to be done in Canada, we will continue to invest in capabilities to improve the return profile of the business over the longer term.

Turning to the year-to-date results.

Netsales were 6.3% above last year, with organic growth of 4.2%.

Acquisitions contributed 2.6% to revenue, partially offset by 0.5% adverse impact from foreign exchange rates and sales days.

First margin was 30.2%, down 50 basis points as expected against a strong prior year comparable during a period of rapid commodity price inflation and acute supply chain disruption.

We have proactively managed both labor and non-labor operating expenses throughout the year, managing down overtime and temporary labor while allowing natural attrition without backfill to reduce the number of FTEs in the business.

In addition, as discussed last quarter, we implemented certain targeted headcount reductions. Collectively, these actions have reduced our full-time equivalent headcount by over 2000 during the year.

We will continue to evaluate our cost-based and resource allocation decisions as we move forward. Adjusted operating profit of $2.1 billion was flat compared to the prior year, delivering a 9.6% adjusted operating margin.

Adjusted deluded EPS grew by 2 percent, benefiting from our share repurchase program.

The business delivered strong cash flow during the first nine months of the year, generating $1.8 billion in operating cash flow.

which was $1.1 billion more than the prior year.

Year-to-date adjusted EBITDA was $2.2 billion, with working capital benefiting cash flow as we continue to reduce inventory as supply chain constraints ease.

Inventory, excluding acquisitions, was down $315 million in the first nine months of the fiscal year.

We continue to invest in organic growth through CAPEX, principally invested in our market distribution centers, branch network, and technology programs.

The increase over the prior years, principally attributable to timing of investments related to our multi-year Market Distribution Center rollout strategy.

As a result, free cash flow was $1.4 billion.

a significant increase of nearly $1 billion over the prior year.

Our balance sheet position is strong with net debt to adjust the EBITDA of 1.1 times.

We target a net leverage range of one to two times, and we intend to operate towards the low end of the range through cycle to ensure we have the capacity to take advantage of growth opportunities as well as to maintain a resilient balance sheet.

We allocate capital across four clear priorities.

First, we're investing in the business to drive a club market organic growth.

As previously mentioned, working capital had a positive impact on cash flow this year to date.

Our CAPEX investments were principally focused on our Market Distribution Center rollout.

Second, we continue to sustainably grow our ordinary dividend.

Our board declared a 75% per share quarterly dividend that implies an increase of 9% when annualized over the prior year, reflecting our confidence in the business and cash generation.

Third, we're consolidating our fragmented markets through bolt-on geographic and capability acquisitions.

We purchased five businesses since the start of the fiscal year, bringing in approximately $330 million of incremental annualized revenue, and have signed a definitive purchase agreement on SGTORIS.

15 location HVAC distributor in the Northeast, which is expected to close in the fourth quarter.

Our deal pipeline remains healthy and we will continue to execute our consolidation strategy. And finally, we are committed to returning surplus capital to shareholders when we are below the low end of our target leverage range.

We have returned $784 million to shareholders to be able to share repurchases year-to-date, reducing our share count by approximately $6.2 million. And we've extended the share repurchase program by an additional $500 million.

resulting in a remaining balance of approximately $700 million at the end of the quarter.

Turning to our view of fiscal 23 guidance.

The year continues to progress as expected.

Our revenue guidance remains unchanged and we have tightened the range on adjusted operating margin guidance with the midpoint of the range unchanged.

As we've set out at the beginning of the year, we expected to deliver low single-digit revenue growth, driven by continued organic market share gains, and the benefit of completed acquisitions on top of markets which we expected to climb in the low single digits for the year. After stepping up adjusted operating margins by 230 basis,

To trim to interest expense guidance to between 185 and $195 million.

Finally, our just-ed-effective tax rate guidance is approximately 25% and CAPEX have $400 to $450 million remain unchanged.

So to summarize, the business is performing well and in line with our expectations.

We remain focused on executing our strategy. I believe the combination of our strong balance sheet and flexible business model positions us well.

Thank you, and I'll pass you back to Kevin.

Now pass you back to Kevin. Thank you, Bill.

We continue to drive and market outperformance while further investing to build on our competitive advantages for the longer term. We will also continue to maintain a balanced business.

with broad exposure to both residential and non-residential, and a balance of repair maintenance and improvement and new construction.

both residential and non-residential and a balance of repair maintenance and improvement and new construction. This ensures we can leverage scale.

and attractive profit pools with a less cyclical, more durable business model.

Turning the fundamentals in the residential markets. While near-term residential demand is challenged, we continue to believe the market fundamentals remain attractive over the medium term.

The combination of an under-supply of homes with very low vacancy rates will be supportive of new residential construction.

Major housing stocks should be supportive of both new residential construction and repair maintenance and improvement markets with a combination of rebuilds and remodels. And our greater exposure to repair maintenance and improvement revenue streams reduces cyclicality.

Turning the non-residential end markets. Our view on the opportunities ahead with large-scale mega projects remains unchanged.

The data continues to point towards significant volumes of mega-project construction spend over the next five years.

As one Ferguson, we're able to leverage our capabilities.

Our products and our services across all of our businesses. We do this, we add value and have the ability to sell from the ground up solutions focusing on the entire project rather than just selling products.

We estimate our total addressable market for projects with over $400 million of construction value to be over $30 billion across our platform over the next five years. We continue to believe our scale and platform strongly position us to capture meaningful growth from these significant projects.

We believe these mega project trends supported by on-shoring activity, recent legislative acts and the aging infrastructure will provide a multi-year tailwind.

Additionally, our non-residential customers gravitate towards where the work is. For example, a contractor can typically move between segments like office, retail, education, healthcare or the construction of a new airport terminal. This means our customers have the ability to flex to where growth opportunities are. To close

Let me again thank our associates for their dedication to serving our customers. The year continues to track overall as we expected. The performance to date has been strong against challenging comps and we continue to build on our market leading positions and our key strengths while investing for future growth. Despite a more challenging macroeconomic environment, we are still in the middle of a pandemic.

We are well positioned with a balanced business mix between residential and non-residential.

new construction and repair maintenance and improvement. We have an agile business model and flexible cost space that allows us to adapt to changing market conditions.

Our scale and advantage growth platform allows us to leverage our competitive position across nine customer groups in order to capture opportunities from structural changes in our end markets.

And we're maintaining a strong balance sheet operating at the low end of our target leverage range while focusing on strong cast generation. This allows us to continue to invest for organic growth.

consolidate our fragmented markets through acquisitions and return capital to shareholders.

We're confident in our competitive position in markets that are attractive over the medium term.

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. If you would like to ask a question, please press star full of by one on the telephone D-pad. If you would like to withdraw your question, please press star full of by two.

When preparing to ask the question, they can show your device is unmuted locally.

First question comes from Matthew Booley with Barclays. Your line is open.

Morning everyone, thank you for taking the questions. Maybe just one to start on the near term. I think the Q4 revenue guide is assuming a bit of a deceleration to get to your full year guide. I think the two year stack comp is relatively similar sequentially. So just any questions?

start with that one. You are correct. If you look at our implied guidance for Q4, it's implying a mid-single digit, roughly mid-single digit revenue decline. We would expect that to be comprised of mid-to-high single digit organic decline with price inflation continuing to compress.

Volume will be likely fairly similar to where it was in Q3, but price inflation continuing to step down as we move through the quarter, and really just continuing that sequential trend we've seen all year with price inflation compressing. In terms of what we've seen in May, May was pretty much right in line with that down.

mid to high single digits with inflation dropping down into the low single digits. So we'd expect that to kind of continue to play out through Q4 to finish up the year. We Jerry Poland,

Perfect. Okay. Thank you for that, Bill. Second one, higher level on the mega projects, you know, really helpful color there. You gave your estimates of the 30 billion addressable market. I'm curious, you know, number one, how did you arrive at that estimate? And then number two, um,

you know how do we think about Ferguson's market share of that should we be thinking sort of looking at your current market share of your non-residential customer groups and applying that or how do we think about your ability to capture that thirty billion market thanks guys

Thank you, Matt. And as we went through last quarter, we really worked to try and tighten up what our addressable market could be in areas like industrial, commercial, mechanical, fire and fabrication, fireworks and so forth.

And so we started to tighten that up and in fact expanded the number of projects that we would include in that area because of some of the industrial activity that was happening, particularly with the on-shoring and the movement from a sustainability perspective in terms of what that technology and that manufacturing start to look like. So we think we've got a pretty decent idea as to what that can represent in our product categories.

and with our customer base. And then as we discussed during the last quarter, the thing that we're really excited about beyond the revenue and profit pools that are associated with what we think is a generational shift in terms of non-residential construction activity, what's really exciting from our perspective is...

as we start to engage with general contractors and owners around what product specifications can look like to make sure that we deliver that project on time and as required. And then use that as a poll strategy with our trade customers across everything from water to fire to commercial mechanical.

in terms of what the capabilities are of the overall Ferguson platform. So we think we can over achieve from a share perspective our traditional market shares in these types of projects.

Got it. All right. Well, thanks Kevin. Thanks Bill. Good luck guys.

Got it. All right. Well, thanks, Kevin. Thanks, Bill. Good luck, guys. Thanks, Matt.

We now turn to Phil Ng with Jefferies. Your line is open. Hey guys, solid quarter in a choppy environment. So Kevin, I mean, you're certainly excited about the opportunity on some of these mega projects. I'm just curious, is that enough to offset potentially softer trends in like commercial? Certainly that lags.

more than anything else. As we look at the non-residential space, there is going to be pressure on knock on commercial activity as we've discussed before, certainly in areas like office and even natural build-out from a retail perspective.

There's also the chance for additional product deflation in terms of commodity product categories like cast iron or steel. But it really is a timing issue because the gestation period, just the way that these projects progress because of their size and complexity.

that we may see a lot. In fact, we saw a bit of a lot in our commercial mechanical business during the quarter and that is not indicative of what the non-residential bidding activity and order activity is just a mere lot in terms of what that timing looks like. So we do believe that will provide a natural tailwind. We do believe it will be over the next five plus years.

may see a low. In fact, we saw a bit of a low in our commercial mechanical business during the quarter and that is not indicative of what the non-residential bidding activity and order activity is just a mere low in terms of what that timing looks like. So we do believe that will provide a natural tailwind. We do believe it will be over the next five plus years. The timing may be suspect.

Gotcha. Dupas. Directly that telephone. And when you think about your resume business, once again, it's quite balanced. The home builders that I actually talked up order patterns picking out this year, are you trying to see that come through? And on the flip side, R&R, I think, with existing home sales down a bit, certainly more questions among investors. Your business is actually hung in there pretty well. It's been pretty resilient.

Can you now walk us through how you think about the cross-core interesting and resin?

Yeah, the residential new construction pressure that we saw was principally in our residential trade plumbing business and in particular with that residential new construction plumbing contractor. And as we started to get through the quarter and into our fiscal fourth quarter.

bidding activity has actually been somewhat of a bright spot and if you think about it one point four million stars historically is a reasonably good place for us to kind of find a steady state and begin to grow from uh... so that was where the bulk of the pressure was we're actually as i said in

seeing a bit of supportive activity in our water works business for subdivision bidding activity. That said, the RMI side, which is the bulk of what that residential exposure is, did perform well and in fact performed better on the higher end remodel side, which is where our showroom business sits with 3% growth on top of a 17% prior year cop.

And we continue to see good activity with that small to medium sized local builder remodeler and what they're not on consumer related activity looks like. So that balance of just call it just under 20% of our business being new res and that 36%

being residential RMI is supportive of what we think the market looks like.

Gotcha. Kevin, can you remind us that bidding activity called out on the inflection side, how long does it take to actually ripple through from a buying standpoint for you guys?

Yeah, it would take a bit of time as we would see that bidding activity on the water side still have a lag before the construction activity and then it wouldn't appear in the residential trade side of our business for likely six months or so. And so as we start to look into next year, it's really a question of quarters as you start to look at what improvement.

could look like on the residential side of the world. Okay, appreciate the call. Thank you. We now turn to Catherine Thompson with Thompson Research Group. Your line is open.

Hey, good morning everyone. This is actually Brian Barros on for Catherine. Thank you for taking my questions. Speaking with the kind of similar theme of last question on the state of residential, you know, obviously down seems like a stabilizing fitting activity looking a little bit stronger than expected at the beginning of the year. So can you just continue to talk about where we sit today and kind of what we're expecting going forward from here? Is stable kind of this new normal or are we looking at...

a little bit. We're turned to growth sometimes. You briefly touched on the last question, but a little bit more would be helpful. Yeah, Brian . Thank you. And as we walked into our third quarter, we had very strong comps that we were coming up against.

We knew that residential new construction was going to be a pressure point. We also knew that there could be some pressure from a revenue perspective with commodity based product deflation. And we saw that play out in the residential side of our world, particularly in areas like residential plumbing PVC products, which causes a bit of a headwind. That comparable headwind that we have continues into Q4 and even into Q1. And so from that perspective,

That frames our expectation. But again, 1.4 million starts is a reasonably good historic number. We know in this country we need 1.5 million starts to get back to equilibrium. We know we're underbuilt, arguably 2 to 4 million units. And so we're starting to see some degree of spark in terms of what that looks like in new residential construction activity. Got it. Thank you.??? Gladground.

to invest both from an M&A as well as an organic perspective. We're really going to look to build out our dual trade plumbing and HVAC capabilities across the nation to make sure that we're the best solution for that dual trade plumbing and HVAC repair replace contractor.

We think that skill set plays well as that contractor continues to grow and sustainable solutions like heat pump water heating technology start to really take hold in the marketplace.

And then on the non-res side...

If you just look at the inflation reduction act, if you look at the infrastructure provision, chips and science, general on-suring of manufacturing activity, following supply chain, disruption, there's just a tremendous amount happening with that non-residential mega-projects.

We intend to take advantage of that again, utilizing multiple customer groups to provide a solution for the owner and the general contractor, while at the same time being the best solution.

for that individual contractor who may be doing the site utility work, or the fire protection work, or the commercial mechanical or industrial pipe valve and fitting.

So we think it's a good time to begin to leverage.

Those capabilities across customer groups and non-res. Thank you, Bethel.

across customer groups and non-res. Thank you. Pass it along. Thanks Brian .

We now turn to Patrick Bauman with JP Morgan. The line is open. Hi, good morning, Kevin. Good morning, Bill. Thanks for taking my questions. I had a couple on each fact and then one on the chart is on each fact. I'm just wondering if you could give any color.

on how May's looked, or quarter date versus kind of the third quarter decline of 2%. And then on the acquisition there, any detail on the size of the revenue and the OEM partners. I haven't had a chance to kind of look through the website yet, so any additional color, and that would be helpful. And then on the impairments...

You know, just curious impact in terms of ongoing business. I assume there's some cost savings from the branch closure, but maybe some loss sales as well. And on the IT impairment charge, it just seemed pretty sizable. So maybe some detail on, I guess, loss productivity benefits perhaps, or just any additional color you give on that specific item would be helpful. Thanks. Patrick, good morning, and thank you.

with our residential trade plumbing business inside that New England marketplace to provide a real powerful solution for customers. In terms of what we're seeing in the market, as we look at the landscape, the western US was a little bit softer from an HVAC perspective, and so that had an effect on what the overall revenue base was in the third quarter.

with our residential trade plumbing business to provide a great solution and the activity level that we've got from an M&A perspective.

Yeah, Patrick, on the charges, from a branch closure perspective, think of these as mostly smaller branches. So there will be a minimal impact from a loss revenue perspective, but it's clearly taking the opportunity as we review the entirety of the cost base to ensure we have the right branch portfolio and the right cost structure moving forward. In terms of payback, again, a $20 million charge probably.

you know, roughly with a small amount of lost sales offset by cost savings, you're looking at probably a two to three year payback period on those actions. And then from an IT perspective, I'll just go back to where we've been investing over the last several years. You know, we've invested roughly a quarter to a third of our capex on an annual basis.

journey. This component was focused on those branch transactional pieces and as we said we piloted it in a handful of locations and quite frankly it didn't meet our customer service needs and expectations. We are a very complex customer service project driven business and the last thing we're going to do is jeopardize that customer service ethos.

made the decision to take the charge and move on and feel very good about our IT journey as we look forward. Thanks for the time, appreciate it. Thanks, Patrick. Our next question comes from John LaVallo with UBS. Your line is open.

Good morning guys, thank you for taking my questions as well here. Maybe the first one, just to confirm here, given what you're currently seeing in the market right now, I mean, should we be thinking about the fourth quarter revenue down sort of mid-single digits, which would sort of imply, you know, through the 10 growth for the year, and you know, maybe what could...

changes on the upside and downside.

Yeah, that's right. If you look at our guide, the midpoint of that would imply total revenue growth down in that mid-single digit range as we step through the years. As I said earlier, or as we stepped through the quarter rather, as I said earlier, we anticipate that being mid to high single digit organic decline with price inflation, compressing as a component of that.

So the volume decline stays in similar range to where it was in Q3. And then we'll pick up a couple points for acquisitions to bring us back to that mid-single digit decline in Q4.

Okay, that's helpful. And then maybe just on the fourth quarter, implied margin, it seems that at the high end and the low end, it would imply a pretty notable change in your current margin trend. What do you sort of think of the drivers of that high end and low end? Yeah, I mean, I think if you focus first on the midpoint of the...

of commodity prices, which we've talked about, commodities have continued to compress in total, although not all moving in the same direction at the same time. But we've seen that commodity deflation or inflation move to about flat in Q3. If there's continued pressure there, that could put a little bit more downward pressure.

towards the lower end of that range. On the flip side of that, if we continue to add commodity stabilization, that could float us up to the midpoint or more towards the high point of the range. And then certainly the trading environment, while we don't expect to see a dramatic change in volumes over the next, call it, two, two and a half months as we round out the quarter.

any changes there could have an impact on the delivery. Thank you guys.

Thanks, Sam. We now turn to Mike Dahl with RBC Council Markets. Your line is open.

It's actually Chris Claudon from Mike. Thanks for taking our questions. Just going back to the cost cutting actions you've implemented so far this year, it looks like the headcount reductions have been paused since February and now this announcement of the 44 underperforming branches. Where are we today in terms of your cost cutting journey and when should we expect?

That's a combination of overtime and temp labor in addition to natural attrition and then some of the targeted actions which we took in Q2 and in Q3. So we think we're in a good place from a headcount perspective, certainly as we play through our stronger seasonal months in the summer season. So we don't have any additional plans right now from a headcount action perspective.

Certainly we'll keep that under close watches as we always do as we evaluate the market environment going forward. And then as we talked about earlier the branch closures taking that opportunity to ensure that we have the right cost structure from an infrastructure standpoint as we move forward. So at this point we feel good about the actions that we've taken. We'll continue to keep them under advisement.

but have no additional plans for significant reductions as we move through the fourth quarter and into the next fiscal year. I appreciate that. And then just a follow-up on the on the pricing outlook. You guys said May moderated to upload single digits.

Can you just flush out what drove that? Was there any changes to pricing power in the marketplaces that largely just a comp dynamic? And then when you think about pricing into next year with deflation expecting to still be a drag, how are you thinking in terms of being able to offset that with pricing to keep price flat up essentially? Yeah, if we think about how pricing has moved through the quarters, it's really been right in line.

as we said, more flat. Moving forward, we'd expect those finished good inflation to return to more normalized levels for our industry, which would be in the low single-digit range. And then the variable being what happens with commodities as we move forward. We could see, as a basket, a touch of deflation as we move through Q4 and into Q1.

But obviously that's a very difficult thing for us to predict. Today the commodity pressure that's manifested itself has been in the area of principally residential trade plumbing PVC and steel from a commercial perspective. We think that the markets will remain relatively supportive as you look at the Waterworks PVC market and then as steel becomes.

a bit more supported by non-residential mega projects as we move forward. So, it's been, as expected, a mixed bag in terms of what's happened with deflation pressures inside the commodity-based products.

Understood, appreciate all the call. The next question comes from McLaren Hayes with Zellman on the photo. Yes, your line is open.

Thanks. Hey, good morning, guys. On the pricing thing, I guess to build on that, besides the roll off of prior year increases, are you seeing any mix impacts or any trade down? CDC set up a whole Jurassic Park or some alien Our mandate is to get right another march down

We aren't seeing any trade down from a mixed impact perspective inside of our business given the balance of our business res non res new construction RMI. You will see a natural movement from a gross margin perspective as non residential customer groups would have a slightly lower gross margin but also a slightly lower cost to serve and so as non res.

has a bit of a tailwind and growth. You may see a little bit of downward tip from a gross margin, but an operating margin should be unchanged. Got it, thanks. And was also hoping that you could give us an update on own grants, you know, how the strategy is trending your date. If there's any growth there, now that commodity.

You know, inflation isn't as much of a headwind to your own brand's percentage of your overall revenue. Yeah, we've been very pleased with the growth of own brand. It is just under 10% overall overall revenue and you're right as commodity start to tick down there 14% of what we do today. They've historically been roughly 10% of what we do. It's a part of our product strategy together with our brand inventors.

with our exclusive products from our branded vendors, but we've been very pleased in areas like DuraStar on the HVAC side and the expansion of that product in both unitary as well as ductless product. We've been very pleased with the rollout of residential trade plumbing products, particularly in the commodity sector. So it's got good growth and good adoption in the marketplace, and we think that will play out as we go through the next several quarters.

exclusive products from our branded vendors. But we've been very pleased in areas like Durastar on the HVAC side and the expansion of that product in both unitary as well as ductless product. We've been very pleased with the rollout of residential trade plumbing products, particularly in the commodity sector. So it's got good growth and good adoption in the marketplace. We think that will play out as we go through the next several quarters. Thank you.

We now turn to Keith Hughes with Truist. Your line is open. Thank you. Question on the digital commerce. If you talk about trends there, and that's one of the closest products you have to a consumer. How did that turn into the quarter? How did it turn into May? Keith, you're exactly right. That residential digital commerce business.

saw pressure. It's a balance between the project-minded consumer and the light decorative pro with the pro holding up much better than the project-minded consumer which was the principal driver of the decline. And so if we look at where that pressure exists in the residential market, it really is in.

was it down that 15% most of the quarter in the back.

It wasn't a step down. It was fairly consistent. Okay, and final question on you talked about deflation in the quarter and potentially move forward. Can you kind of quantify how much commodity deflation you saw in the period? Well in total again Keith it was about flat.

year on year perspective. So as a basket it was about flat. Yeah. It's like, like, spread around cast iron on the plumbing side and slight inflation on the ductile iron side from a water worst perspective. And I assume particularly on TDCs, that's going to turn just, you know, places that they are. That's going to turn negative as we had into the nuked fiscal years. That's correct.

Yeah, there's a good chance of that just given the rollover and where pricing sits today.

There is a good chance of that given the rollover and where pricing sits today.

Thank you. Thank you. Our final question comes from Queen's Richardson with that your line is open. Hey good morning guys. I wanted to build on the earlier question on the digital business and just thinking more broadly Kevin you made comments about the higher end remodel holding up better.

Is that the right way to think about the relative exposure to higher end versus consumers, the showroom and digital business, just trying to think of...

Kind of relative exposure there and how to quantify that for you guys That's right Glenn in the residential building and remodel customer group Which has that showroom business being a principal driver inside of that group does tend to skew towards the higher end both in new construction as well as in

fairly sizable remodel activity. The traffic in our showroom continues to be very supportive. Project and project growth continues to be supportive as well as price. When you look at the digital commerce side, again, that is a balance between the light decorative pro and a project-minded consumer. That consumer piece has been a bit more challenging.

Now the part that energizes us around residential digital commerce is not only that good balance that exists in that mix, but also utilizing those capabilities and the build with Ferguson team to help to bring that digital experience together with our showroom.

To make a better omni channel experience for our connected customer in that showroom And and so that's been very supportive as we've gone through the past year Okay, thank you and then secondly just a question on HVAC wondering if you can discuss you know the state of your inventory

I'll take the last part first and then move backwards. The DuraStar rollout continues to be a very positive thing for us, both unitary as well as in ductless. We continue to be mindful about how we roll that product out from a supply perspective, but also to make sure that we've got the right plan in place geographically as we take that site.

Again, as we discussed, that offers good choice for our customers and we have a multi-brand product offering made for us again from one of our OEMs. As we think about the overall market and the DOE changes, we have little to no inventory that is trapped as that DOE change has gone on. So quite frankly, our teams did a great job of positioning inventory into the right place. We do have good inventories to take care of our customers as we move into the summer cooling season. And then from a supply chain perspective, pretty much normalized across the board some areas of individual product categories that still have some supply chain pressures, but generally speaking, we think supply is good and ready for a good cooling season as we get into the summer months.

we discussed that offers good choice for our customers and we have a multi-brand product offering made for us again from one of our OEMs. As we think about the overall market and the DOE changes, we have little to no inventory that is trapped as that DOE change has gone on. So quite frankly our teams did a great job of positioning inventory into the right place. We do have good inventories to take care of our customers as we move into the summer cooling season and then from a supply chain perspective pretty much normalized across the board some areas of individual product categories that still have some supply chain pressures but generally speaking we think supply is good and ready for a good cooling season as we get into the summer months. Thank you very much.

Thank you, Glenn. This concludes our Q&A. I'll now hand back to Kevin Murphy, CEO , for any closing remarks. Thank you. Thank you very much. And let me close again by saying thank you for your time today. Very much appreciated. We don't take it for granted. And then, and away we began, which is a strong thank you to our associates who continue to deliver for our customers' complex projects and make them more simple, successful, and sustainable. The year does continue to unfold as we expected, and our balanced business mix serves us well. Res, non-res, RMI, new construction.

Our markets remain attractive over the medium term. An under-built housing supply is supportive of new residential construction over the medium term, and good remodel activity, which favors the balanced nature of our business, and then from a non-res perspective, taking advantage of the opportunities of really an unprecedented growth in mega projects over 400 million across that non-res space. So we continue to work to provide those sustainable solutions to our customers, especially in the area of dual trade, residential plumbing.

and HVAC contractors. So again, thank you for your time. Have a great remainder of your day. Ladies and gentlemen, today's call is now concluded. We'd like to thank your participation. You may now connect your lines.