Q2 2024 Ferguson plc Earnings Call
Hello, and welcome to <unk> second quarter results Conference call. My name is that there'll be coordinating Yoko each day.
Operator: Hello, and welcome to Ferguson's second quarter results. My name is Adam, and I'll be coordinating your call today. I'd now like to turn the call over to Brian Lantz, Vice President of Investor Relations and Communications. The floor is yours, please go ahead.
Now, let's turn the call over to Brian Lantz, Vice President of Investor Relations and communications.
Please go ahead.
Brian C. Lantz: Good morning, everyone, and welcome to Ferguson's Second Quarter Earnings Conference Forum Webinar. 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 filings website. A recording of this call will be made available later today.
Good morning, everyone and welcome to <unk> second 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 investors section of our corporate website and on our SEC filings webpage.
According to this call will be made available later today.
Brian C. Lantz: 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 our Form 10-K, available on the SEC's website. Also, any forward-looking statements represent the company's expectation only as of today, and we disclaim 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 and announcement on our website for additional information regarding those non-GAAP measures, including reconciliations to the most directly comparable GAAP financial measures. With me on the call today are Kevin Murphy, our CEO, and Bill Brundage, our CFO. I will now turn the call over to Kevin.
I wanted 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 our Form 10-K available on the Sec's website.
Any forward looking statements represent the companys expectations only as of today and we disclaim 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 and announcement on our website for additional information regarding those non-GAAP measures, including reconciliations to the most directly comparable GAAP financial measures.
With me on the call today are Kevin Murphy, our CEO and Bill Burke, our CFO I will now turn the call over to Kevin.
Kevin Murphy: Thank you, Brian, and welcome everyone to Ferguson's second quarter results conference call. On the call today, I'll cover highlights from our second quarter 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. Then I'll come back at the end and give some closing comments before Bill and I take your questions.
Thank you, Brian and welcome everyone to <unk> second quarter results Conference call.
On the call today I will cover highlights from our second quarter performance I will 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 then come back at the end and give some closing comments before bill and I will take your questions.
Our associates have continued to execute well going above and beyond to serve our customers helping to make their projects more simple successful and sustainable.
Kevin Murphy: Our associates have continued to execute well, going above and beyond to serve our customers, helping to make their projects more simple, successful, and sustainable. In the quarter, we saw a modest revenue decline of 2.2%, largely driven by 2% deflation in a challenging market, delivered solid gross margins and appropriately managed costs while preparing for our seasonally stronger second half. Adjusted operating profit came in at $520 million, with adjusted diluted earnings per share of $1.74, down 8.9% against last year.
In the quarter, we saw a modest revenue decline of two 2% largely driven by 2% deflation in a challenging market.
We delivered solid gross margins and appropriately managed costs, while preparing for our seasonally stronger second half.
Adjusted operating profit came in at $520 million.
With adjusted diluted earnings per share of $1 74.
Down eight 9% against last year.
Over the three years since fiscal 2021 this represents sales growth of 35%.
Kevin Murphy: Over the three years since fiscal 2021, this represents sales growth of 35%, just at operating profit growth of nearly 50%, and adjusted diluted earnings per share growth of nearly 60% for the second quarter. Looking forward, open orders and sales per day trends support our expectation of improvement through the balance of the fiscal year against easing comparables. Our views on fiscal 2024 guidance are unchanged.
Adjusted operating profit growth of nearly 50%.
And adjusted diluted earnings per share growth of nearly 60% for the second quarter.
Looking forward open.
Open orders and sales per day trends support our expectation of improvement through the balance of the fiscal year against easing comparable.
Our views on fiscal 2024 guidance are unchanged.
Kevin Murphy: Bill, we'll walk you through this in more detail shortly. Turning to our performance by end markets in the United States, net sales were down 2.2%, and markets remain challenged.
Bill will walk you through this in more detail shortly.
Turning to our performance by end markets in the United States.
Net sales were down two 2% and markets remain challenged.
Kevin Murphy: Trends in new residential housing starts and permit activity improved slightly in the quarter, while repair, maintenance, and improvement work remained soft. Our residential revenues, which comprise just over half of U.S. revenue, declined 4% during the second quarter, representing a sequential improvement from Q1. Non-residential markets showed comparative resilience. Commercial and civil infrastructure activity held flat in the quarter against strong comparables, with industrial down 6% against an outstanding 24% comparable. Overall, net sales in non-residential declined by 1% during the quarter.
Trends in new residential housing starts and permit activity improved slightly in the quarter, while repair maintenance and improvement work remained soft.
Our residential revenues, which comprised just over half of U S revenue declined 4% during the second quarter, representing a sequential improvement from Q1.
Nonresidential market comparative Brazilians.
Commercial and civil infrastructure activity held flat in the quarter against strong comparable.
With industrial down 6% against an outstanding 24% comparable.
Overall.
Net sales in nonresidential declined by 1% during the quarter.
Kevin Murphy: We see good levels of non-residential bidding activity and expect improvement through the second half. We expect growth rates to fluctuate over time, but our intentional balanced end market exposure positions us well. Moving to our customer groups in the United States, residential trade plumbing declined by 2%, an improvement from double-digit declines over the last three quarters as we begin to lap easier comparables and new residential markets begin to stabilize.
Good levels of nonresidential bidding activity and expect improvement through the second half.
While we expect growth rates will fluctuate overtime, our intentional balanced end market exposure positions us well.
Moving to our customer groups in the United States.
Residential trade plumbing declined by 2% an improvement from double digit declines over the last three quarters as we begin to lap easier comparables and new residential markets begin to stabilize.
Kevin Murphy: Leading indicators such as new residential permits and starts have recently seen modest improvement, and we expect further improvement in future quarters. HVAC growth continues, rising 1% against a 10% prior year comparable. We will continue to build on the strengths of our residential trade plumbing and HVAC customer groups in service of the growing dual trade contract. Residential building and remodel revenues declined 4%, similar levels to the first quarter, with continued pressure on repair, maintenance, and improvement. Presidential digital commerce declined by 13% with consumer demand remaining weak, and Waterworks revenues were flat.
Leading indicators such as new residential permits and starts have recently seen modest improvement and we expect further improvement in future quarters.
Hvac's growth continued.
Using 1% against a 10% prior year comparable.
We will continue to build on the strengths of our residential trade plumbing and HVAC customer groups in service of the growing dual trade contractor.
Residential building in remodel revenues declined 4% similar levels to the first quarter with continued pressure on repair maintenance and improvement.
Residential digital commerce declined by 13% with consumer demand remaining weaker.
Waterworks revenues were flat.
Kevin Murphy: Hitting activity is healthy across our broadly diversified business mix, including residential, commercial, public works, municipal, meters and metering technology, and wastewater treatment plant, soil stabilization, and urban green infrastructure. The commercial mechanical customer group grew 1% as we continued to see our customers pivot toward work such as data centers and major capital projects. Our industrial, fire, and fabrication, and facility supply businesses delivered a combined net sales decline of 3% against a strong 17% growth comparable.
Hitting activity is healthy across our broadly diversified business mix, including residential commercial public works municipal meters and metering technology and wastewater treatment plant soil stabilization and urban green infrastructure.
The commercial mechanical customer group grew 1% as we continued to see our customers pivot towards work such as data centers and major capital projects.
Our industrial fire in fabrication and facility supply businesses delivered a combined net sales declined 3% against a strong 17% growth comparable.
Our breadth of customer groups allows us to bring value to the total project, while also maintaining a broad and balanced end market exposure.
Kevin Murphy: Our breadth of customer groups allows us to bring value to the total project while also maintaining a broad and balanced end market exposure. Now, let me pass the buck to cover the financial results in a bit more detail. Thank you, Kevin. And good morning, everyone.
Now, let me pass to bill to cover the financial results in a bit more detail.
Thank you, Kevin and good morning, everyone.
William Brundage: Second quarter net sales were 2.2% below last year. Organic revenue declined 3.7%, partially offset by acquisition revenue of 1.5%. The pricing environment was similar to the first quarter, with approximately 2% deflation, driven by weakness in certain commodity categories as we lapped strong comparables, while finished goods pricing remained slightly positive. Post-margin of 30.4% was up 20 basis points over the prior year, driven by strong pricing and product strategy execution from our associates. We are appropriately managing the cost base, with SG&A stepping down more than $40 million from Q1. We're balancing targeted cost control actions and productivity initiatives. Continued investment and core capabilities for future growth, adjusted operating profit of $520 million, down $62 million or 10.7% lower compared to the prior year, adjusted diluted earnings per share of $1.74 is 8.9% lower than the prior year, with the reduction due to lower adjusted operating profit partially offset by the impact of our share repurchase program. Our balance sheet remains strong at 1.1 times net debt to adjusted EBIT. Moving to our segment results, pet sales in the U.S. declined by 2.2%.
Second quarter net sales were two 2% below last year.
<unk> revenue declined three 7%, partially offset by acquisition revenue of one 5%.
Pricing environment was similar to the first quarter with approximately 2% deflation driven by weakness in certain commodity categories. As we lapped strong comparable while finished goods pricing has remained slightly positive.
Gross margin of 34% was up 20 basis points over the prior year, driven by strong pricing and product strategy execution from our associates.
We are appropriately managing our cost base with SG&A stepping down more than $40 million from Q1.
We're balancing targeted cost control actions and productivity initiatives with continued investment in core capabilities for future growth.
Adjusted operating profit of $520 million was down $62 million or 10, 7% lower compared to prior year.
Adjusted diluted earnings per share of $1 74.
It was eight 9% lower than prior year with the reduction due to lower adjusted operating profit, partially offset by the impact of our share repurchase program.
Our balance sheet remains strong at one one times net debt to adjusted EBITDA.
Moving to our segment results.
Net sales in the U S declined by two 2% within.
William Brundage: An organic decline of 3.7%, partially offset by 1.5% contribution from acquisitions. Adjusted operating profit was $525 million, delivering an adjusted operating margin of 8.2%. In Canada, net sales were down 3.7%, an organic decline of 3.3%, and a 0.4% adverse impact from foreign exchange rates.
As an organic decline of three 7%, partially offset by one 5% contribution from acquisitions.
Adjusted operating profit was $525 million delivering an adjusted operating margin of eight 2%.
Canada net sales were down three 7% with an organic decline of three 3% and a <unk>, 4% adverse impact from foreign exchange rates.
William Brundage: Markets have remained challenging, and we saw similar trends to that of the US. Adjusted operating profit came in at $9 million. Turning to our first half results, the year is progressing as expected. As we set out at the beginning of the year, we expected to operate against a challenging market backdrop, particularly in the first half of our fiscal year, against strong revenue and adjusted operating margin comparables. Net sales were 2.5% below last year, with an organic decline of 4.4%, partially offset by an acquisition contribution of $1.9 billion.
Markets have remained challenging and we saw similar trends to that of the U S.
Adjusted operating profit came in at $9 million.
Turning to our first half results of the year is progressing as expected as we set out at the beginning of the year, we expect it to operate against a challenging market backdrop, particularly in the first half of our fiscal year against strong revenue and adjusted operating margin comparable.
Net sales were $2, 5% below last year with an organic decline of four 4%, partially offset by an acquisition contribution of one 9%.
William Brundage: Gross margin was 30.3%, down 10 basis points as our associates have been disciplined in managing prices through a period of commodity price deflation. We have managed labor and non-labor expenses throughout the year, balancing the near-term market demand environment against expected growth in upcoming quarters. Adjusted operating profit of $1.3 billion, down 10.6% compared to the prior year, delivering a 9.0% adjusted operating profit; adjusted diluted EPS of $4.40 was down 9.7%.
Gross margin was 33% down 10 basis points as our associates have been disciplined in managing prices through a period of commodity price deflation.
We have managed labor and non labor expenses throughout the year balancing the near term market demand environment against expected growth in upcoming quarters.
Adjusted operating profit of $1 3 billion.
It was down 10, 6% compared to the prior year delivering a 9.0% adjusted operating margin.
Adjusted diluted EPS of $4 40 was down nine 7%.
William Brundage: I believe the business is well positioned as we head into the second half with improving market demand and the cost base in good shape. Additionally, the business continues to generate strong cash flow. Inventory positions normalized as we exited last fiscal year, and we have returned to our normal historical seasonal working capital trends with a modest outflow in the first half of the year. Interest and tax outflows were slightly lower than last year due to the timing of tax payments, resulting in a strong first half operating cash flow of $863 million. We continue to invest in organic growth through capital, investing $192 million in the first half. As a result, we generated free cash flow of approximately $700 million.
Leave the business is well positioned as we head into the second half with improving market demand and the cost base in good shape.
Next the business continues to generate strong cash flows.
Inventory positions normalized as we exited last fiscal year, and we have returned to our normal historical seasonal working capital trends with a modest outflow in the first half of the year interest in tax outflows were slightly lower than last year due to the timing of tax payments, resulting in strong first half operating cash flow of $863 million.
We continue to invest in organic growth through Capex.
Investing $192 million in the first half.
As a result, we generated free cash flow of approximately $700 million.
Moving to capital allocation, our balance sheet position is strong with net debt to adjusted EBITDA of one one times.
William Brundage: Moving to capital allocation, our balance sheet position is strong with net debt to adjusted EBITDA of 1.1 times, and we target a net leverage range of one to two times. And we intend to operate towards the low end of that range through the cycle to ensure we have the capacity to take advantage of growth opportunities, as well as to maintain a resilient balance and allocate capital across four clear priorities. First, we're investing in the business to drive above-market organic growth. As previously mentioned, we invested $113 million in working capital.
Targeted net leverage range of one to two times and we intend to operate towards the low end of that range through cycle to ensure we have the capacity to take advantage of growth opportunities as well as to maintain a resilient balance sheet.
Allocate capital across four clear priorities.
First we're investing in the business to drive above market organic growth.
As previously mentioned, we invested $113 million in working capital.
William Brundage: $192 million in CapEx during the first half, principally focused on our market distribution centers, branch network, and technology. Second, we continue to sustainably grow our ordinary dividends. The Board declared a $0.79 per share quarterly dividend.
$192 million and our Capex during the first half principally focused on our market distribution centers branch network and technology programs.
Second we continued to sustainably grow our ordinary dividend.
Board declared a <unk> 79 per share quarterly dividend, a 5% increase over the prior year, reflecting our confidence in the business and cash generation.
William Brundage: 5% increase 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 acquisition. We are pleased to welcome associates from Secure Vision, Growth Supply, and Hardway Appliances during the first half. Additionally, our deal pipeline remains healthy, allowing us to continue to execute our consolidation strategy. Finally, we are committed to returning surplus capital to shareholders when we are below the low end of our target leverage range, returning $250 million to shareholders via share repurchases during the first half, and using our share count by approximately 1.5 million, ended the period with $285 million outstanding under the current share repurchase program.
Third we're consolidating our fragmented markets through bolt on geographic and capability acquisitions.
We're pleased to welcome associates from secure vision growth supply and hardware appliances during the first half.
Deal pipeline remains healthy, allowing us to continue to execute our consolidation strategy.
Finally, we are committed to returning surplus capital to shareholders. When we are below the low end of our target leverage range.
Returned $250 million to shareholders via share repurchases during the first half, reducing our share count by approximately $1 5 million.
Ended the period with $285 million outstanding under the current share repurchase program.
Now, let's turn our attention to the remainder of the fiscal year.
William Brundage: Now let's turn our attention to the remainder of the fiscal year. As Kevin outlined earlier, current open orders and sales per day trends support our expectation of improvement through the balance of the fiscal year against easing comparables. I believe we are well positioned for our upcoming seasonally stronger second half. As a result, our view of fiscal 2024 guidance remains unchanged.
As Kevin outlined earlier current open orders and sales per day trends support our expectation of improvement through the balance of the fiscal year against easing comparable.
I believe we are well positioned for our upcoming seasonally stronger second half.
As a result, our view of fiscal 2024 guidance remains unchanged.
William Brundage: I believe revenue will be broadly flat for the year. Here we assume end markets decline in the mid-single-digit range, to outperform these markets by approximately three to four hundred basis points, hail from Completed Acquisitions, which we expect to generate just over $600 million in revenue, and the benefit of one additional sales day landing in the third quarter. Overall, while we saw modest deflation in the first half, we are assuming a broadly neutral pricing environment for the full year as a whole, continue to provide a range for adjusted operating margin between 9.2 to 9.8 percent, and expect interest expense of approximately $190 to $210 million. Our adjusted effective tax rate is expected to be approximately 25% this year, and we expect to invest between $400 to $450 million in CapEx, similar levels to last year. So to summarize, we had solid execution in the first half, and our views on fiscal 2024 guidance are unchanged. We remain focused on execution, and believe the combination of our strong balance sheet, flexible business model, and balanced end market exposure positions us well. Thank you, and I'll now pass back to Kevin.
I believe revenue will be broadly flat for the year.
Year, we assume end markets declined in the mid single digit range.
Back to outperform these markets by approximately 3% to 400 basis points.
Hey, al from completed acquisitions, which we expect to generate just over $600 million in revenue and the benefit of one additional sales day landing in the third quarter.
Overall, while we saw modest deflation in the first half we are assuming a broadly neutral pricing environment for the full year as a whole.
We need to provide a range for adjusted operating margin between nine two to nine 8%.
Net interest expense of approximately $190 million to $210 million.
Our adjusted effective tax rate is expected to be approximately 25%. This year and we expect to invest between $400 million to $450 million in capex similar levels to last fiscal year.
So to summarize we had solid execution in the first half and our views on fiscal 2024 guidance are unchanged.
We remain focused on execution and believe the combination of our strong balance sheet flexible business model and balanced end market exposure positions us well.
Thank you and I'll now pass back together.
Kevin Murphy: Thank you, Bill. Let me again thank our associates for their unwavering dedication to serving our customers, helping to make their projects more simple, successful, and sustainable. We are pleased with our execution in the first half. Business is well positioned as we anticipate firming demand. This bill sets out our fiscal 2024 guidance, which is unchanged.
Thank you Bill.
Let me again, thank our associates for their unwavering dedication to serving our customers helping to make their projects more simple successful and sustainable.
We are pleased with our execution in the first half.
Business is well positioned as we anticipate firming demand and as bill set out our fiscal 2024 guidance is unchanged.
We look forward, we are well positioned with our balanced business mix between residential and nonresidential.
Kevin Murphy: We look forward; we are well positioned with a balanced business mix between residential and non-residential. New Construction and Repair, Maintenance, and Improvement. Agile business model and flexible cost base that allows us to adapt to changing market conditions. Our cash generative model allows us to continue to invest in organic growth and solidify our fragmented markets through acquisition.
New construction and repair and maintenance and improvement.
We have an agile business model and flexible cost base that allows us to adapt to changing market conditions.
Our cash generative model allows us to continue to invest for organic growth.
Consolidate our fragmented markets through acquisitions and return capital to shareholders.
Kevin Murphy: Return Capital to Shareholders, and do this while maintaining a strong balance sheet, operating at the low end of our target leverage, consistently executing on these priorities, and reporting a long-term track record of outperformance. Disciplined deployment of capital, scale, and breadth allows us to leverage our competitive position across our customer groups in order to benefit from emerging multi-year tailwinds in our end market, remain confident in the strength of our markets over the medium and longer term, and expect to capitalize on these growth opportunities. Thank you for your time today.
And to do this while maintaining a strong balance sheet operating at the low end of our target leverage range.
We have consistently executed on these priorities.
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Disciplined deployment of capital.
Scale and breadth allows us to leverage our competitive position across our customer groups in order to benefit from emerging multiyear tailwind in our end markets.
We remain confident in the strength of our markets over the medium and longer term and expect to capitalize on these growth 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.
Operator: 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 one on your telephone keypad now. If you change your mind, please press star followed by. Please ensure your device is unmuted locally.
Thank you for our Q&A, if you'd like to ask a question. Please press star one on your telephone keypad now if you change your mind. Please press star followed by two <unk>.
To ask a question. Please proceed with devices and muted locally.
Our first question comes from Matthew Bouley from Barclays. Matthew Your line is open. Please go ahead.
Matthew Adrien Bouley: Our first question comes from Matthew Bouley from Barclays. Matthew, your line is open, please go ahead. Hey, morning, everyone.
Hey, good morning, everyone. Thank you for taking the questions.
Kevin Murphy: Thank you for taking the questions. You all mentioned current open orders and sales per day, supporting second half improvement. I guess what exactly are you seeing around orders and daily sales? And maybe you can kind of help us with the cadence of growth through fiscal Q2. How did January trend with weather and all that kind of stuff? What are you seeing quarter to date? Thank you. Good morning, Matt. Yeah, thank you for the question. This is Kevin.
You All mentioned current open orders and sales per day supporting second half improvement I guess, what exactly are you seeing around orders daily sales and maybe help if you can kind of help us with the cadence of growth through fiscal Q2, how did January trend with weather and all that kind of what are you seeing quarter to date.
Thank you.
Good morning, Matt and thank you for the question. This is Kevin I'll take the beginning portion maybe then bill can sprinkle in some.
Kevin Murphy: I'll take the beginning portion, and maybe then Bill can sprinkle in some detail around what we're experiencing. As we said previously, the second quarter is always our seasonally weakest quarter from a revenue perspective. And if you look at how we progressed through the second quarter, the top line was a bit more pressured than we would have expected, really, given what was an extended holiday season for the trade professional and some January weather impact that was a bit more challenging than, say, years past. But, generally speaking, the year is progressing as we expected, and that second quarter progressed largely as we expected. If we look forward, the bidding activity that we've got out there from our waterworks group all the way up through residential trade plumbing and the like, and the open order volume that we have sales per day trends against what are some easing comparables really do support what we think is going to be improvement throughout the balance of the year. Yeah, Matt, we've seen that improvement start to play out in the early part of the second quarter.
Detailed around what were experiencing as we said previously the second quarter is always our seasonally weakest quarter from a revenue perspective, and if you look at how we progress through the second quarter. The top line was a bit more pressure.
Then what we would've expected really given what was an extended holiday season for the trade professional and some January weather impact that was a bit more.
<unk>, then say years past, but generally speaking the year is progressing as we expected and that second quarter progressed largely.
Largely as we expected if we look forward the bidding activity that we've got out there from our Waterworks group all the way up through residential trade plumbing and the like.
And the open order volume that we have sales per day trends against what are some easing comparable really do support what we think is going to be improvement throughout the balance of the year.
Yes, Matt we've seen that improvement start to play through in the early part of the second quarter. So in February organic growth was about flat, which with when you add in the acquisition impact that would lead to slightly positive total growth for the months. So again supporting our confidence level that that growth is improving.
William Brundage: So in February, organic growth was about flat, which when you add in the acquisition impact, would lead to slightly positive total growth for the month. So again, supporting our confidence level that growth is improving and will improve as we move through the second quarter. Perfect. Thanks for that, guys. Very helpful.
And will improve as we move through the second half.
Perfect. Thanks for that guys very helpful.
William Brundage: Second one, the deflation of 2% in the quarter sounded like that was all commodity. I think you said finished goods were slightly positive. And so to get to your full year guide of broadly neutral inflation, are you starting to see any kind of incremental finished goods inflation and price increases to support that? Or is it really just kind of the year over year comps as you get to the second half?
Second one.
The deflation of 2% in the quarter. It sounded like that was all commodity I think you said finished goods was slightly positive and so.
To get to your full year guide of broadly neutral inflation are you starting to see any kind of incremental finished goods inflation and price increases to support that or is it really just kind of the year over year comps as you get to the second half kind of what takes inflation positive in the second half to get to your guidance. Thank you.
William Brundage: What takes inflation positive in the second half to get to your guide? Thank you. Yeah, so back to your point about 2% deflation, both in Q1 and Q2. Largely driven by commodity deflation, commodities were down, call it low to mid-teens in the quarter. And those finished goods, as we expected, are still slightly positive in terms of year over year inflation. I think a couple things as we roll through the second half will lead us to believe that that deflation will improve. First and foremost, we are continuing to roll over, not just easing revenue comparables but easing inflation comparables. And in fact, we'll start to roll over our first months of commodity deflation as we step out of the third quarter and into the fourth quarter.
Yeah, so that to your point about 2% deflation both in Q1 and Q2.
Largely driven by commodity deflation commodities were down call it low to mid teens in the quarter and Theres finished goods as we expected our still.
Slightly positive in terms of year over year inflation.
I think a couple of things as we roll through the second half leads us to believe that that deflation will improve first and foremost we are continuing to rollover not just easing revenue comparable but easing inflation comparable and in fact, we will start to rollover, our first months of commodity deflation as we step.
Out of the third quarter and into the fourth quarter, we've seen some stability broadly in those commodity prices over the first half of the year.
William Brundage: We've seen some stability broadly in commodity prices over the first half of the year. So assuming that that stability continues, commodity deflation should lessen as we move throughout the second half. And again, we would expect finished goods inflation to be in that more traditional low single-digit range. So that leads us to believe that we'll have improving deflation moving back towards inflation in the second half. Of course, predicting commodities is difficult.
So assuming that that stability continues that commodity deflation should lessen as we move throughout the second half and again, we would expect finished goods inflation to be in that more traditional low single digit range. So that leads us to believe that we will have improving deflation moving back towards inflation.
In the second half of course predicting commodities is difficult. So as we're guiding broadly neutral pricing for the full year. There is some range of possible outcomes around that around that full year guide and that as we've discussed in the past the commodity based product basket that we have.
William Brundage: So as we're guiding broadly neutral pricing for the full year, there's some range of possible outcomes around that full year. Yeah, Matt, as we've discussed in the past, the commodity-based product basket that we have is going to and has moved at different rates and has had some, you know, puts as well inside of that. And so as we're sitting here today, we've seen some signs of stabilization; we've seen some resin price increases playing through in the marketplace. And then we've seen some stabilization from a steel pipe perspective.
Is going to end has moved at different rates and has had some.
Puts us well inside of that and so as we're sat here today, we've seen some signs of stabilization we have seen some resin price increases playing through inside the marketplace.
And then we've seen some stabilization from a steel pipe perspective, so we feel.
Kevin Murphy: So we feel more confident about that. And as it relates to finished goods, we've talked traditionally about the annual spring price increase season. And although it hasn't been as ubiquitous as the past, we have seen major product categories announcing price increases that give us some degree of confidence as we go into that second half.
More confident about that and as it relates to finished goods. We've talked traditionally about the annual spring price increase season, and although it hasnt been as ubiquitous as in the past we have seen major product categories announcing price increases I think give us some degree of confidence as we go into that second half.
Kevin Murphy: Thanks, Kevin, thanks, Bill. Good luck, guys. Thanks, Patrick. The next question is from John Lovallo from UBS. John, your line is open, please go ahead. Good morning, guys. And thank you for taking my questions as well. The first one is, you guys do have a pretty agile cost structure. I think it's highly variable, around 80 to 90%.
Great. Thanks, Kevin Thanks, Bill Good luck guys.
Thanks, Matt Thanks, Matt.
The next question is from John Lovallo from UBS. Your line is please go ahead.
Hey, good morning, guys and thank you for taking my questions as well. The first one is you guys do have a pretty agile cost structure I think it's highly variable around 80% to 90% Incrementals are generally kind of 10 to 13 ish percent now recognizing pricing was a bit of a headwind in the quarter why were decremental margins.
William Brundage: Incrementals are generally kind of 10 to 13 ish percent. Now, recognizing pricing was a bit of a headwind in the quarter. Why were the decremental margins so high at close to 40%? Yeah, John, thanks for the question. If you think about the second quarter, again, in our seasonally lightest quarter, and as Kevin mentioned, there's a bit more pressure on the top line. So that has a bit of an outsized impact on the bottom line operating leverage when you get a bit more pressure from a top line perspective. The fixed cost nature of our business, even though we have a good variable cost structure in that seasonally lighter quarter, plays down a little bit more from a decremental perspective. But as we take a step back and think about the overall cost structure, we are pleased that the cost did step down from Q1 into Q2. As we think about labor costs, which is certainly our largest component of our cost base, we manage very closely full-time equivalents and headcount as the primary input to that labor cost.
Hi, you had close to 40%.
Yes, John Thanks for the question as you think about the second quarter again in our seasonally lightest quarter and as Kevin mentioned, there is a bit more pressure on the topline.
So that has a bit of an outsized impact.
On the bottom line operating leverage when you get when you get a bit more pressure from a top line perspective, the fixed cost nature of our business.
Even though we have a good variable cost structure in that seasonally lighter quarter.
Place down a little bit more from a decremental perspective, but as we take a step back and think about the overall cost structure.
Pleased that the cost did step down from Q1 into Q2, as we think about labor cost, which is certainly our largest component of our cost base.
Managed very closely full time equivalents and head count as the primary input to that that labor cost if I look at where full time equivalents or as we exited Q2 were down slightly still year over year on volumes that were effectively flat for the quarter. So the teams are doing a really nice job.
William Brundage: If I look at where full-time equivalents are as we exited Q2, we're down slightly still year over year on volumes that were effectively flat for the quarter. So the teams are doing a really nice job managing those input costs. And we've really positioned that cost base for what we expect to play through in the second half and into next fiscal year, which is an improving growth environment. So, given the fact that, you know, our associate base is the intellectual capacity and capability of the organization, we want to make sure we have the right associate base to take care of that future growth.
<unk> those input costs, and we've really positioned that cost base for what we expect to play through in the second half and into next fiscal year, which is an improving growth environment.
Given the fact that.
Our associate base as the intellectual capacity and capability of the organization, we want to make sure. We have the right associate base to take care of that future growth. So feel good about where the cost base is yes, it put a little bit more opex pressure in Q2, but as we look forward. We believe we are in the right place and John just to reiterate a little bit of luck.
Kevin Murphy: So, we feel good about where the cost base is. Yes, it put a little bit more op-ex pressure on in Q2, but as we look forward, we believe we're in the right place. And, John, just to reiterate a little bit of what Bill said, we do feel good about where the cost base is as we prepare for what we believe to be an improvement through the balance of the year. If you think about what the volume outlook looks like inside of our residential trade plumbing business, which has been a pressured part of the business, both new construction as well as repair, maintenance, and improvement, they've done a great job of going out and taking They've grown in volume, www.youtube.com or the link in the video description, while at the same time holding gross margin. And so keeping those teams engaged and prepared for what we think is an improving outlook in the second half is quite important. So we're pretty positive about what the team has done in terms of. That's helpful.
Bill said, we do feel good about where the cost bases as we prepare for what we believe to be an improvement through the balance of the year. If you think about what the volume.
Outlook looks like.
Inside of our residential trade plumbing business, which has been a pressured part of the business, both new construction as well as repair maintenance and improvement they've done a great job of going out and taking market share they've grown in volume and pounds for PVC pipe, even though the pricing environment has been down in the mid 20.
Percent range, while at the same time holding gross margin so keeping those teams engaged and prepared for what we think is an improving outlook in the second half is quite important so we're pretty.
Positive about what the team has done in terms of expense management.
That's helpful. Thank you and then on the industrial segment in particular down 6% year over year understanding the comp was tough at around 24% I'm. Just curious I mean, the first quarter faced a similar comp and it was actually up I think 3% year over year in the quarter. So was there anything particular in the quarter outside of the tough comp.
Kevin Murphy: And then, you know, on the industrial segment, in particular, down 6% year over year, understanding the comp was tough at around 24%. Just curious, I mean, the first quarter faced a similar comp and was actually up, I think, you know, 3% year over year in the quarter. So was there anything, you know, particular in the quarter, you know, outside of the tough comp that challenged industrial? Yeah, John, there's nothing that we would point to right now. You've got some timing issues that are out there.
The challenge for industrial.
Yes, John there is nothing.
We would point to right now you've got some timing issues that are out there talked about.
Kevin Murphy: I talked about a little bit of an extended holiday season. I also talked about a little bit of weather. We typically don't like to talk about weather, but it did have an outsized impact on branch closures. But if I look at what's building behind that industrial environment, the backlog is solid, especially in that major capital projects area. We've talked historically about that mega project trend. When you look at together, our industrial, our waterworks, commercial, fire, and fabrication, and HVAC business coming together, that's where we're seeing a good tailwind from an open order perspective and are positive about what's coming in the second quarter. Great, thank you guys. Thank you. The next question comes from Philip Ng of Jeffreys. Philip, your line is open, please go ahead. Hey Kevin,
A little bit of an extended holiday season, I've talked about a little bit of weather, we typically don't like to talk about weather, but it did have an outsized impact with branch closures, but if I look at what's building behind that industrial environment. The backlog is solid, especially in that major capital projects area, we've talked historically about that mega.
<unk> trend when you look at together, our industrial our waterworks commercial fire and fabrication and HVAC business coming together, that's where we're seeing a good tailwind from an open order perspective and are positive about what's coming in the second half.
Great. Thank you guys.
Thank you.
The next question comes from Philip <unk> from Jefferies. Philip Your line is open. Please go ahead.
Hey, Kevin.
Kevin Murphy: You know, looking at your non-res business, certainly some puts and takes on the heavy side, clearly you're upbeat about that. A light commercial could be a little softer, but just kind of help us unpack in the back half. Do you expect growth and the bidding activity you're seeing in some of these megaprojects to kind of ripple through in the second half? And conversely, have you seen the light commercial bottom out?
Looking at your non res business, certainly some puts and takes on the heavy side clearly you are upbeat about that.
Like commercial can be a little softer, but just kind of help us unpack in the back half do you expect growth and the bidding activity youre seeing in some of these mega projects do you expect that to kind of ripple through in the second half and Conversely have you seen like commercial bottom out here.
Kevin Murphy: Yeah, well, thank you for the question. And we do see growth in the second half. Again, we do see open-order volumes picking up across that non-residential space, from waterworks through commercial, through industrial, and through fire. But when you look at what's out there, we've said that those major capital projects, specifically those like onshoring and reshoring, sustainability trends, fiscal stimulus, you know, aided, they're going to take a bit longer. We're seeing that play out.
Yes, Hello, Thank you for the question and we do.
C growth in the second half.
Again, we do see open order volumes picking up across that nonresidential space from waterworks through commercial through industrial and through fire.
When you look at what's out there we've said that those major capital projects, specifically, those like onshoring and reassuring sustainability trends fiscal stimulus aided theyre going to take a bit longer we're seeing that play out I mean, much like we saw with the infrastructure Act and how that plays through our waterworks business. It's just take.
Kevin Murphy: I mean, much like we saw with the Infrastructure Act and how that plays through our waterworks business, it's just taking more time, both in terms of release, as well as in, you know, project delays that we may see during the normal course of construction. But there are also some tailwinds that we're really starting to capitalise on that are in the current market. If you think about AI and what its data center impact is, those are very good projects for us across multiple customer groups.
<unk> more time.
In terms of release as well as in project delays that we may see during the normal course of construction there.
There are also some tailwind that we're really starting to capitalize that in the current market. If you think about AI and what the data center impact is.
<unk> are very good projects for us across multiple customer groups and we're seeing it play out very similarly to the way in which we're seeing mega projects play out and that is across customer group collaboration with the owner of the general contractor to make sure that Ferguson as a valuable partner on the job for the <unk>.
Kevin Murphy: And we're seeing it play out very similarly to the way in which we're seeing megaprojects play out. And that is through customer group collaboration with the owner, and the general contractor to make sure that Ferguson is a valuable partner on the job. For the contractor as well as the owner. And so we're bullish on what that looks like in the second half, and that's starting to pay off today. Kevin, you beat me to the punch.
Tractor as well as the owner and so.
We're bullish on what that looks like in the second half and that's starting to play in today.
Kevin You beat me to the Punch I was going to ask you what percentage of your business on data centers.
Kevin Murphy: I was gonna ask you, what percentage of your business in data centers is your non-res business just because it's very much in vogue with that AI dynamic, but any color on the data center portion of your business for non-res? Yeah, for me, the color is that it's very much like that megaproject or major capital project landscape. Number one, they're good profit pools that are growing, and it's a unique time in the construction environment for our country. But maybe more importantly, it offers us that unique opportunity to come together as multiple customer groups for the owner, the general contractor, as well as for the contractor that's actually doing the installation. And so coming together on water, commercial, industrial, fire, and HVAC is proving valuable. We're seeing that play out. In fact, we've made some good investments in how we can approach that part of the construction environment uniquely as compared to where we used to just bid that work as individual customer groups really coming together and offering a total package. Okay, I appreciate all the great color.
Does your non res business just because it is very much in vogue for what that AI dynamic, but any color on the.
The data center portion of your business for non res.
Yes for me the color is that it's very much liked that Mega project for a major capital project landscape number one theyre. Good profit pools that are growing and it's a unique time in the construction environment.
For our country, but maybe more importantly, it offers us that unique opportunity to come together as multiple customer groups for the owner of the general contractor.
As well as for the contractors Thats actually doing the installs and so coming together on water commercial industrial fire Hvac's is proving valuable we're seeing that play out and in fact, we've made some good investments and how we can approach that part of the construction environment uniquely as to where we used.
Just did that work as individual customer groups really coming together and offering a total package.
Okay I appreciate all the great color. Thank you.
Kevin Murphy: Thank you. The next question comes from David Manthey from Baird. David, your line is open. Please go ahead.
The next question comes from David Manthey from Baird. David Your line is open. Please go ahead.
Kevin Murphy: Good morning, everyone. First question for Kevin, maybe. On slide five, when you look at your U.S. end markets in the second quarter, they're mostly flattish, year-over-year, give or take. After this quarter, which of these end markets leaves you more encouraged for the second half of the year, and on which ones are you more cautious following recent results? Thanks, Dave.
Okay.
Thank you and good morning, everyone.
First question for Kevin.
Slide five when you look at your U S end markets.
In the second quarter, mostly flattish year over year give or take.
After this quarter.
Which of these end markets, we view more encourage.
Second half of the year.
On which was even more cautious following recent results.
Yeah. Thanks, Dave for the question if I start at the residential side.
Kevin Murphy: As we're sitting here today, we're looking at an RMI, or Repair, Maintenance, and Improvement, residential market that is a touch softer than what we would have expected at the beginning of the year. Lyra is calling for a down market call in that mid to high single-digit area for the calendar year. But the residential new construction market, we see as a bit more positive, especially on the single-family side of the world. We think that multifamily, although it's been supportive for the business as we've delivered product to the market. It now starts to get a bit more challenging because there's been a lot of product that has entered the market from a multifamily perspective. However, what single family starts and permit activities give us a more bullish tone. On the non-res side, as I talked earlier in the call, the major capital project work and the data center work gives us some really good outlook for the second half. And so I'd say there's some balance.
As we're sat here today, we're looking at an rmi or repair maintenance and improvement residential market that is a touch softer than what we would've expected at the beginning of the year later is calling for a down market call. It in that mid to high single digit area for the calendar year.
But the residential new construction market, we see is a bit more positive, especially in the single family side of the world. We think that multifamily, although it's been supportive for the business as we've delivered product to the market.
It now starts to get a bit more challenged because there's been a lot of product that has entered the market from a multifamily perspective, let's.
Single family starts and permit activities.
Give us some more bullish on.
On the non res side as I talked earlier on the call.
The major capital project work and the data center work gives.
Gives us some really good outlook for the second half and so I'd.
I'd say theres some balanced optimism as we go into the second half there is balanced in terms of how we're lapping comparable from prior year and so it plays to that.
Kevin Murphy: Optimism As we go into the second half, there's balance in terms of how we're lapping comparables from the prior year. And so it plays to that, again, balanced business. On one note on that multi-family side, we are seeing good activity levels in high-rise multifamily, especially down in your neck of the woods, down in Florida. And so we're bullish on that multifamily high-rise work, but maybe a bit more pressured on the core multifamily. Yeah, thanks for that detail. Quick one for Bill.
<unk> balanced business mix.
One note on that multifamily side.
We are seeing.
Good activity levels and high rise multifamily, especially down.
And youre not because it was done at Florida, and so we're bullish on that multifamily high rise work, but but maybe a bit more pressured on the core multifamily side.
Okay. Thanks for that detail a quick one for bill mathematically if.
William Brundage: Mathematically, if we think about the new M&A deals that you've announced in the roll-off of prior acquisitions, what percentage contribution to growth should we expect in the third and fourth quarters? Yeah, Dave. If you look at the first half, we delivered, you know, just under just under 2%, just under $300 million worth of acquisition contribution. And given the deals we've recently announced, we'd expect a similar dollar amount in the second half. So somewhere just south of that, that 2% range, roughly $600 million in full year revenue contribution. Rx.
If we think about the new M&A deals that you've announced in the roll off of prior acquisitions, what percentage contribution to growth should we expect in the third and fourth quarters.
Yes, David if you look at the first half we delivered just under just under 2% just under $300 million worth of acquisition contribution and given the deals. We have recently announced we would expect a similar dollar amount in the second half so somewhere just south of that 2%.
<unk> roughly $600 million of full year revenue contribution would be our expectation at this point.
William Brundage: Got it. Thanks, guys. Thank you, Ted. The next question comes from Ryan Merkel on behalf of William Blair. Ryan, your line is open, please go ahead. Hey, good morning.
Got it thanks guys.
Thanks, Dave.
The next question comes from Ryan Merkel from William Blair Bryan. Your line is open. Please go ahead.
Hey, good morning. Thank you I wanted to ask on gross margins really solid result, this quarter.
William Brundage: Thank you. I wanted to ask about gross margins, a really solid result this quarter. Can you remind us of gross margin seasonality as we think about modeling 3Q and any reason not to use normal seasonality? Yeah, right.
Can you remind us of gross margin seasonality as we think about modeling <unk> any reason not to use normal seasonality.
Yes, Ryan seasonality.
William Brundage: I mean, seasonality, you know, really doesn't play a large factor and doesn't have a large impact on gross margin swings. I mean, sometimes as we approach the larger seasonal months in the summer calendar, we'll get a touch of pressure there just given the HVAC growth in our business and the waterworks growth in our business in those seasonal months, which tends to have slightly lower gross margins, again similar operating margins, but in general, in that low 30 to 35% range is kind of our expectation and where we've delivered over the last several quarters. And just to follow up there, if inflation turns positive, is that a helper to your gross margins as we think about the second half? We don't expect inflation to move at a pace that would have a big impact on gross margins.
Really doesn't play a large factor it doesn't have a large impact on gross margin swings.
It's sometimes in as we approach the larger seasonal.
Months in the summer calendar will get a actually a touch of pressure there just given the the HVAC growth in our business and the waterworks growth in our business in those seasonal months, which tends to have slightly lower gross margins against similar operating margins, but in general in that low 30% to 35% range is kind of our expectation and where we've.
Where we've delivered over the last several quarters.
And just a follow up there you know inflation turns positive is that a help her to your gross margins as we think about the second half.
We don't we don't expect inflation to move at a pace that would have a big impact on gross margins certainly as we lap those comparable and as we've talked about.
William Brundage: Certainly, as we lap those comparables and as we've talked about, we still expect low single-digit inflation on finished goods. That would be helpful from a revenue perspective, but I wouldn't expect a large gross margin impact without some significant short-term moves in commodity prices, which we don't expect sitting here today, but again, that's a little bit difficult to predict and call. Ryan, what we are pleased with is, as we've been going through this period of commodity-based product deflation, to hold and achieve the kind of gross margin levels that we have is very encouraging, especially as, as I've indicated earlier, we've taken market share and actually grown volume inside of some of those commodity-based products, held on, and produced good gross margins, even in a falling price environment.
We still expect low single digit inflation on finished goods that would be helpful. From a revenue perspective, but I wouldn't expect a large gross margin impact without some significant short term moves in commodity prices, which we don't expect sitting here today.
But again, thats, a little bit difficult to predict and call. Brian. What we are pleased with is as we've been going through this period of commodity based product deflation.
And to achieve the kind of gross margin levels that we have is very encouraging, especially as as I've indicated earlier, we've taken market share and actually grown volume inside of some of those commodity based products held in produce good gross margins even in a falling price environment as we look forward to what we should experience this year.
William Brundage: As we look forward to what we should experience this year, we start to get back to a more normalized pricing environment, where you see annual price increases playing through on finished goods. And this year may be a bit more choppy than years past, but generally speaking, that's where we get back to utilizing our product strategy and charging for the value that we provide to get long-term sustainable gross margin expansion and call it that 10 basis points to 20 basis points environment. I got it.
We start to get back to again, a more normalized pricing environment, where you see annual price increases playing through on finished goods.
And this year may be a bit more choppy than years past, but generally speaking, that's where we get back to utilizing our product strategy and charging for the value that we provide to get long term sustainable gross margin expansion and call. It that 10 basis points to 20 basis points environment.
Got it.
William Brundage: And just for my follow-up question, anything to think about for March and April when we think about last year in terms of modeling? I know there was some weather last March. Just curious if the comparisons get a little bit easier, and if there's anything to think about.
It's helpful and just my follow up anything to think about for March and April when we think about last year in terms of modeling I know there was some weather last March just curious if the comparisons get a little bit easier than it does anything to think about.
Yes, it's difficult to predict what the weather impact would be Ryan, but certainly the comparable continue to ease as we step through Q3 into Q4, we had our first negative organic growth or organic decline of about two 4% last year Q3, and then that went down about five.
William Brundage: Yeah, it's difficult to predict what the weather impact will be, Ryan, but certainly the comparables continue to ease as we step through Q3 into Q4. You know, we had our first negative organic growth, or organic decline of about 2.4% last year in Q3. And then that went down to about 5% organic decline in Q4. So the comparables do continue to ease a bit as we march through, kind of, month by month through the end of the year. Perfect, thank you. Thanks, Ryan. The next question comes from Mike Dahl from RBC Capital Markets. Mike, your line is open. Please go ahead.
<unk> organic decline in Q4, so the comparable is due continue to ease a bit as we march through kind of month by month through the end of the fiscal year.
Perfect. Thank you.
Thanks, Brian.
The next question comes from Mike Dahl from RBC capital markets. Mike. Your line is open. Please go ahead.
Good morning, Thanks for taking my questions.
William Brundage: Morning, thanks for taking my questions. First question: just looking at kind of category performance for digital has been, Even as we've gotten against easier comps, I think double digits also, you know, comping off a double digit decline, and you're now down to about 8% of sales from 10%. You know, obviously, that applies, at least partially, with your comments around RMI. But just wondering if you can give a little more color there and give us an update on how you're planning to invest in and expand the digital effort here. Thanks, Mike, for the question. Good morning.
First question, just looking at kind of category performance digital has been.
Even as we've got I guess easier comps I think double digits also.
Yes, comping off of a double digit.
Decline and Youre now down to about 8% of sales from 10%.
Obviously that.
At least partially with your comments around Rmi, but just wondering if you could give a little more color there give us an update on.
Yes, you are.
How you are planning to invest and expand.
Good spot here.
Thanks, Mike for the question. Good morning, when you look at that digital piece. It was the most affected in terms of a pull forward of demand during that Covid lockdown period, and Youre right. The Rmi side of the world is a bit more challenged on the residential portion of the business and so the customers that that is really going after.
Kevin Murphy: When you look at that digital piece, it was the most affected in terms of a pull-forward of demand during that COVID lockdown period. And you're right, the RMI side of the world is a bit more challenged in the residential portion of the business. And so the customers that this is really going after and targeting are that light decorative pro and that project-minded consumer. And so they're probably the most pressured when we look at that residential space.
And targeting is that light decorative pro and that project minded consumer and so there is probably the most pressured when we look at that residential space. If you think about consumer balance sheets, and again, where they are spending their money on experiences versus say some light renovation on the home that's where we're seeing the pressure if I look at where we're going to take.
Kevin Murphy: You know, if you think about consumer balance sheets and again, where they are spending their money on experiences versus, say, some light renovation on the home, that's where we're seeing the pressure. If I look at where we're going to take this business going forward, where we get really energized is how we pair what we think are really unique assets together for an omnichannel experience. Because if you look at the digital business, especially built with Ferguson, that's a unique digital experience for that project-minded consumer and that light decorative pro, and the tools that are there from a technology perspective, are starting to really enable that building and remodel business through the showroom, bringing together a best in class experience for bricks and mortar with a consultative experience in person, together with a best in class experience digitally and a great project tool Thanks, Kevin. That's helpful. And then, shifting gears.
This business going forward, where we get really energized is how we pare. What we think are really unique assets together for an omnichannel experience because if you look at the digital business, especially build with Ferguson. That's a unique digital experience for that project minded consumer and that likely record a pro and the tools that are there from a technology.
<unk> perspective are starting to really enable that building and remodel business through the showroom, bringing together our best in class experience for bricks and mortar with a consultative experience in person together with a best in class experience digitally and a great project tool. So as we look forward that's really.
Where youre going to see those businesses come together and where we should see that growth.
Thanks, Kevin that's helpful.
And then shifting gears.
Kevin Murphy: Back on to kind of capital allocation and M&A, it seems like there's been a significant uptick in broader M&A activity across virtually everything, distribution, manufacturing, a lot of things housing related, industrial related. You know, can you talk about, obviously, you closed on three acquisitions, but just the pipeline you're seeing, kind of composition, has that changed at all as you've gone through the past? and any kind of medium to larger size thing, shaking moose, or would you still expect a kind of similar cadence as we've seen?
Back onto kind of capital allocation M&A, it looks like Theres been a significant uptake in broader M&A activity.
Across virtually everything in distribution manufacturing.
A lot of things housing related industrial related.
Can you talk to.
Obviously, you closed three acquisitions, but just the pipeline youre seeing kind of composition of that.
So at all as you've gone through the past.
Two months.
Any kind of medium to larger size.
Taking a boost or so.
So.
Or would you still expect kind of similar cadence that we've seen.
Yes, Mike I would say.
William Brundage: Yeah, Mike, I would say no, no significant change. We're pleased with the four deals we've now completed year to date. In fact, we closed on our York West deal that we announced previously signing on. We closed on that late yesterday. So, we're so pleased to have those four deals this year.
No no significant change.
Pleased with the four deals we've now completed.
Year to date in fact, we closed on our York West deal that we announced previously signing on we closed on that late yesterday. So pleased to have those four deals this year.
William Brundage: The pipeline is pretty healthy right now, still full of those size deals that you would expect, just given the nature of our industry. So, as we've talked about a lot in the past, you know, 10,000 plus small to medium-sized competitors out there that make a good, robust, thank you for all your support, very large pipeline, just given the nature of what our industry is. And that pipeline is still solid.
The pipeline is pretty healthy right now.
Full of those.
Size deals that you would expect just given the nature of our industry. So as we've talked about a lot in the past 10000, plus small to medium sized competitors out there that make a good robust and healthy pipeline for us for what we believe will be years to come so I would expect a similar cadence.
Nothing.
Very large in the pipeline just given the nature of what our industry is.
That pipeline is still solid we still focus on both geographic bolt on and capability M&A, you see us focusing on <unk>.
Kevin Murphy: We still focus on both geographic bolt-ons and capability M&A. You see us focusing on new capabilities inside of our waterworks business, especially in areas like meters and metering technology, stormwater management, soil stabilization, and urban green infrastructure. And then you also see us focusing on expanding our HVAC capabilities so that we can best serve that dual-trade HVAC and residential plumbing repair trade professional. We see that market growing. We see that contractor base growing, and we'd like to be uniquely positioned to take care of that customer as we go forward. And M&A is a big part of that landscape as we look to fill out our HVAC capabilities across the United States. Thank you. The next question comes from Catherine Thompson from Thompson Research Group. Catherine, your line is open, please go ahead.
New capabilities inside of our waterworks business, especially in areas like meters and metering technology storm water management soil stabilization and urban Green infrastructure and then you'll also see us focusing on expanding our HVAC capabilities.
So that we can best serve that dual trade HVA.
And residential plumbing repair trade professional we see that market growing we see that contractor base growing and we'd like to be uniquely positioned to take care of that customer as we go forward M&A is a big part of that landscape as we look to fill out our HVAC capabilities across the United States.
Thank you.
The next question comes from Kathryn Thompson from Thompson Research Group Catherine Your line is open. Please go ahead.
Hi, Thanks, just a clarification from earlier in the Q&A could you remind us what percentage of cost at all of our commodity products.
Kathryn Ingram Thompson: Hi, thanks. Just a clarification from earlier in the Q&A. Could you remind us what percentage of cost goods sold are commodity products? And how has this balance changed today versus, say, three to four years ago?
How has this balance changed today.
Today versus say.
Four years ago.
Yes, Kathryn today commodities are roughly just under 14% of our revenue if you went back.
William Brundage: Yeah, Catherine, today commodities are roughly just under 14% of our revenue. If you went back before the pandemic, we were more like 10 11% of revenue with rapid commodity inflation that increased as a percentage of our sales to up over 16 percent at one point, so we've started to normalize back kind of midway back closer to where we were pre-pandemic, and given where commodity prices are today, I probably expect a similar range in terms of total percentage of revenue as we step through this. And that'll all depend, Catherine, on how we progress through the next, call it, four or five quarters as we start to see good non-residential activity continue to play out.
Pre pandemic, we were we were more like 10%, 11% of revenue with rapid commodity inflation.
That increase as a percentage of our sales to up over 16% at one point. So we've started to normalize back kind of midway back closer to where we were pre pandemic.
And given where commodity prices are today, probably expect a similar.
Similar range in terms of total percentage of revenue as we step through the second half and that will all depend Katherine on how we progress through the next call it four or five quarters as we start to see good nonresidential activity continue to play through that will play through beginning with our waterworks business roll into.
Kevin Murphy: That'll play out, beginning with our waterworks business, rolling into, you know, heavy steel pipe usage inside of our commercial mechanical business, some heavy steel pipe usage inside of our industrial business, as well as iron fabrication. So you may see that volume begin to increase, even though price deflation is already largely set in through the group. And we find that there are some building product categories with other companies that are better able to pass through pricing on commercial projects than on residential. How does that play out for you in terms of pricing power, particularly taking into account larger-scale projects that are a greater relative mix versus historic levels? Catherine, I wouldn't say that our ability to pass through pricing is very different between residential and non-residential in our business mix. Certainly, you have different pressure points that happen on long gestation period projects.
Heavy steel pipe usage inside of our commercial mechanical business. Some heavy steel pipe usage inside of our industrial business as well as fire and fabrication. So you may see that volume begin to increase even though price deflation has already largely set in through through the group.
And we find that there is some building product categories.
Other.
Is that where you're able to get better able to pass through pricing on commercial projects.
On on residential.
How does that play through for you in terms of pricing power.
Particularly taking into account.
Larger scale projects.
A greater relative next person.
Historic level.
Catherine I wouldn't say that our ability to pass through pricing is very different between residential and nonresidential inside of our business mix.
Certainly you have different pressure points that happen for long gestation period projects.
Kevin Murphy: But we generally do that in conjunction with the contractor and the manufacturer as we're going through those projects. So there isn't a whole lot of difference as we go through them. And as we said, we don't expect to have massive price inflation or abnormal price inflation as we move into the second half. We do see finished goods having some positive movements from a pricing perspective and stabilization on the commodity side of the world. Okay, and finally, last week, the largest annual residential construction and market trade show, the International Builders Show, wrapped up. What, if any, trends can you share with us that could give just some additional broader color into that important residential end market for you? So if you think at the highest level, as we've talked, Catherine, and by the way, that just ended, so I haven't gotten a complete download in terms of what the epiphanies were coming out of the show from our associates.
But we generally play that through in conjunction with the contractor and the manufacturer as were going through those projects. So there isn't a whole lot of different as we go through there and as we've said, we don't expect to have massive price inflation or abnormal price inflation as we move into the second half we do see finished.
Good having some positive movements from a pricing perspective and stabilization on the commodity side of the world.
Okay.
Finally last week.
The largest annual residential.
Construction end market at the international Builders' show wrapped up.
Any trends can you share with us that could get just some additional broader color.
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That important residential end market for you.
So if you think at the highest level as we've talked Catherine and by the way.
And so I haven't gotten a complete download in terms of what the <unk> were coming out of the show.
From our associates, but at the highest level for us in terms of market again, we think that we're going to see good movement from single family residential start perspective, as we're under built inside of this country and existing home turnover is still pressure, we think that multifamily starts to tail off at on the remodel side of the world We.
Kevin Murphy: But at the highest level for us in terms of markets, again, we think that we're going to see good movement from a single-family residential construction perspective as we're underbuilt inside of this country, and existing home turnover is still pressured. We think that multifamily starts to tail off. And on the remodel side of the world, we still believe that the high-end remodel side of the world is going to be a bit more resilient than, say, your core RMI portion of the business. And we're seeing that play out.
Still believe that the high end remodel side of the world is going to be a bit more resilient than say your core rmi portion of the business. We're seeing that play out if you look at the real core customer for our showroom business that local high end builder remodel or what we've seen is if they.
Kevin Murphy: If you look at the real core customer for our showroom business, that local high-end builder and remodeler, what we've seen is if they're doing, call it, six to 12 projects annually, and they're high-end projects, we're seeing them flip from new residential construction to more high-end total remodels, but their book of business is still pretty solid, and they feel pretty good about the marketplace. So, generally, from a In terms of trends that are happening inside the product set, I'll defer to a bit later in the year as to what the takeaways were from KBiz. I've, Okay, great. Thanks very much.
We're doing call it six months to 12 projects annually and in their high end projects, we're seeing them flip from new residential construction to more high end total remodels, but their book of business is still pretty solid and they feel pretty good about the marketplace. So generally from a market perspective, that's what we're seeing in terms of <unk>.
<unk> that are happening inside the product set all of the FERC to a bit later in the year as to as to what the takeaways were from Cape is either.
Okay, great. Thanks very much.
Hi, Catherine.
Patrick Michael Baumann: Our final question today comes from Patrick Baumann from J.P. Morgan. Patrick, your line is open, please go ahead. Oh, hi, good morning.
And our final question today comes from Patrick Baumann from JP Morgan Patrick Your line is open. Please go ahead.
Hi, good morning, Thanks for taking my questions.
Patrick Michael Baumann: Thanks for taking my questions. Just wanted to jump back to gross margins. You mentioned, I think, in the commentary that pricing and product strategy are drivers of expansion in the quarter. Can you just flesh out what you mean by that? Because on pricing, you know, you're seeing deflation.
Just wanted to jump back to gross margins you mentioned I think in the.
Commentary.
That pricing and product strategy or drivers of expansion in the quarter can you just flesh out what you mean by that because im pricing youre seeing deflation. So are you getting some price cost benefit I think you said Mike.
Patrick Michael Baumann: So are you getting some price cost benefit? I think you said, like, discipline from your associates from a price perspective. And then on product strategy, is this an own brand contribution? Is this something else, you know, from a services perspective? Yeah, thank you, Patrick.
Discipline from your associates from a price perspective, and then on product strategy is this own brand contribution as this.
Or something else.
I'm a services perspective.
Yes. Thank you Patrik again, if we think about the pricing side of the world. One of the things that is most important from a customer service and a customer engagement perspective is consistent pricing across our network and across time, and so making sure that we have good solid matrix utilization as well as <unk>.
Kevin Murphy: And if we think about the pricing side of the world, one of the things that is most important from a customer service and a customer engagement perspective is consistent pricing across our network and across time. And so making sure that we have good, solid matrix utilization, as well as doing the right thing from a special pricing perspective. As you know, we're a value-added and service-driven company. And so, in some cases, upwards of 20% of our revenue can be non-stock specials.
Doing the right thing from a specials pricing as you know we are a value added service driven company and so in some cases upwards of 20% of our revenue can be non stop specials, and so making sure that we're pricing appropriately for the project.
Kevin Murphy: And so making sure that we're pricing appropriately for the project has an impact on our gross margin and that gross margin expansion. Additionally, from a product strategy perspective, we think that's probably our best avenue for overall gross margin. And yes, own brand is probably the highest expression of what that product strategy looks like because you have a product that's unique to Ferguson and one in which we are promoters of the brand and have a higher overall gross margin profile. But it's not just own brand.
It has an impact on our gross margin and that gross margin expansion.
Additionally from a product strategy perspective, we think that's probably our best Avenue for overall gross margin and yes owned brand is probably the highest.
<unk> of what that product strategy looks like because you have a product that's unique to Ferguson and one in which we are promoters of the brand and have a higher overall gross margin profile, but it's not just one brand. It's also the partner vendors that we have that we can grow faster than market for them that we can offer.
Kevin Murphy: It's also the partner vendors that we have, that we can grow faster than the market for them, that we can offer unique cost savings, and we can drive value for them and have a higher overall gross margin profile. So it's really our sales associates both inside and out, driving the right product for the job and the application for the customer. And then, secondarily, those that have the highest gross margin profile for Ferguson as a company.
Unique cost savings and we can drive value for them and have a higher overall gross margin profile. So it's really our sales associates, both inside and out.
Driving the right product for the job and the application for the customer and then secondarily those that had the highest gross margin profile for Ferguson as a company and Thats. The way, we look at expanding gross margin over time.
Kevin Murphy: And that's the way we look at expanding gross margin over time. Makes sense, helpful. And then on the commodity product pricing side. You mentioned some increase in resin, which is a good sign for PVC pipe, I suppose. I'm wondering if you could comment on any differences you're seeing in the smaller diameter plastic water pipe for the resi trade versus like the bigger diameter stuff for the waterworks business. You said, you said something about like a 20% decline overall, I think. I wonder if you could give any color on the differences between, you know, the types of PVC pipe. And if you look at the commodity-based basket of products that we have, again, it's PVC pipe, steel pipe, cast iron, ductile iron, copper tube, and so inside of that basket, we've said that they're going to move at different paces and potentially move quite differently. PVC is one of those materials.
Makes sense helpful.
And then on.
And my follow up is on the commodity product pricing side, you mentioned some increase in resin is a good sign for PVC pipe I suppose I'm wondering if you could comment on any differences youre seeing.
In the smaller diameter like plastic water pipe for resi trade versus like the bigger diameter stuff for the Waterworks business. You said, you said something about like a 20% decline overall I think.
Wonder if you could give any color on differences between.
The types of PVC pipe.
And if you look at the commodity based basket of products that we have again it PVC pipe steel pipe cast iron ductile iron copper tube and so inside of that basket. We have said that they're going to move at different paces and potentially move quite differently. PVC is one of those we have seen a bit more movement.
Kevin Murphy: We've seen a bit more movement on the small diameter and plumbing PVC pipe than we have on the large diameter and waterworks PVC pipe. However, we have seen more stability. That said, resin price increases are going to affect both sides of that. And so although we've seen a bit more pricing pressure or deflation in plumbing, we do see that moving in a different direction as we're sitting here today. So it really has had different movements across, call it the first two quarters, especially helpful. And then if I could fit one more in here, I know I'm the last question.
On the small diameter and plumbing PVC pipe than we have on large diameter and waterworks PVC pipe, we've seen more stability.
That said resin price increases are going to affect both sides of that and so although we've seen a bit more pricing pressure or deflation in plumbing, we do see that moving in a different direction as we're sat here today.
It really has had different movements across call. It the first two quarters, especially this year.
Helpful. And then if I could fit one more in here I know on the last question. So I'm just going to get one more in.
Patrick Michael Baumann: So I'm just going to fit one more in. And if I get on your MDC rollout, any update on how that's going relative to your expectations, like what are kind of the plans for this year from an MDC perspective and any kind of financial metrics you could share with us? You know how it's impacting the business. Yeah, Pat, we're pretty pleased with our rollout to date. To date, we have three MDCs that are open, Denver, Phoenix, and Houston, with Houston being our most recent one that we've opened. And as we look at this year, from a calendar year perspective, we'll open our first MDC in Canada, in Toronto. We'll have Nashville come online later this calendar year. And then, as we roll into the next calendar year, Dallas and Washington.
On the your MDC rollout any update kind of on an.
How how thats going relative to your expectations like what are the plans for this year for MDC perspective, and any kind of financial metrics you could share with us on.
How it's impacting the business.
Yes, Pat we're pretty pleased with our rollout to date to date, we have three mdc's that are open Denver, Phoenix, and Houston Houston being our most recent MDC that we've opened and as we look at this year from a calendar year perspective will open.
First MDC in Canada in Toronto.
We will have Nashville come online later this calendar year.
Then as we roll into next calendar year, Dallas, and Washington D. C. So the rollout strategy of call. It two to three per year over the next several years is very much on track.
William Brundage: So the rollout strategy of calling it two to three per year over the next several years is very much on track. Early reads on productivity levels are quite good and positive. As you know, we've got a lot of investment in automation within those warehouses. And just from a pure labor standpoint, we're getting 20 to 30% productivity out of those components of the warehouses. So good productivity, but maybe more importantly from a strategic standpoint. You know, what we're bringing is the best same-day availability of inventory into these major metropolitan markets. And that's really improving customer service scores and product availability, fill rates, and stocks in those markets. We think this is a real core component of our continued organic growth strategy over the next several years.
Early reads on productivity levels are quite good and positive as you know we've got a lot of investment in automation.
Within those warehouses.
And just from a pure labor standpoint, we're getting 20% to 30% productivity.
Those components of the warehouses, so good productivity, but maybe more importantly from a strategic standpoint.
What we're bringing is best same day availability of inventory into these major metropolitan markets.
And thats really improving customer service scores and product availability fill rates and in stocks in those markets. We think this is a real core component of our continued organic growth strategy over the next several years. So very pleased with the rollout to date and we'll continue to March down that path.
William Brundage: So very pleased with the rollout to date, and we'll continue to march down. Great. Thanks a lot for the update.
Great. Thanks, a lot for the update best of luck.
Kevin Murphy: Best of luck to you. Thank you. This concludes today's Q&A session. I'll now hand over to Kevin Murphy for closing remarks. Thank you, operator. And thank you all for your time with us today. We appreciate it more than you know. And again, I'll end where we started. And that's a thank you to our associates there. Tyler's efforts to really make our customers' projects better because we were on the job with them. As I take a step back, we are pleased with how the year is progressing. It's generally going as we expected. And as we look forward to the second half, our seasonally stronger second half, we look forward to continued improvement as we lap some even comparables. So again, thank you very much for your time. We look forward to seeing and talking with you soon. That concludes the Ferguson second quarter results conference call. I'd like to thank you for your participation. You may now disconnect your lines.
Thanks Pat.
This concludes today's Q&A session I will now hand over to.
Kevin Murphy for closing remarks.
Thank you operator, and thank you all for your time with US today, we appreciate it more than you know.
And again I'll end, where we started and thats. It. Thank you to our associates their tyler's efforts to really make our customers' projects better.
Because we were on the job with them.
As I take a step back we are pleased with how the year's progressing it's generally progressing as we expected and as we look forward to the second half our seasonally stronger second half. We look forward to continued improvement as we lap some easing comparable so again. Thank you very much for your time, and we look forward to seeing and talking with.
Soon.
That concludes the <unk> second quarter results conference call I'd like to thank you for your participation you may now disconnect your lines.
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