Q3 2024 Ferguson plc Earnings Call
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Harry: Good morning, Ladies and gentlemen, my name is Harry and I will be your conference operator today at this time I would like to welcome you to focus since third quarter conference call. All lines have been placed on mute to prevent any interference with the presentation at the end of the prepared remarks, there will be a question and answer session to ask a question at that time. Please press Star then the number.
Speaker Change: One on your keypad tubing.
Speaker Change: To withdraw your question Please press star and the number two.
Speaker Change: Thank you I would now like to turn the call over to Mr. Brian Lynch <unk> VP of Investor Relations and Communications you May begin your conference call.
Operator: Good morning, everyone, and welcome to Ferguson's third quarter earnings conference call and 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. 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 110k, available on the SEC's website.
Speaker Change: Good morning, everyone and welcome to <unk> third quarter earnings conference call and webcast.
Operator: 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. Thanks.
Speaker Change: Hopefully you've had a chance to review the earnings announcement, we issued this morning.
Speaker Change: The announcement is available in the investors section of our corporate website and on our SEC filings webpage.
Speaker Change: This call will be made available later today.
Speaker Change: Want to remind everyone that some of our statements today may be forward looking and are subject to certain risks and uncertainties that could cause actual results to differ materially from those projects.
Speaker Change: Including the various risks and uncertainties discussed in our Form 10-K available on the Sec's website.
Speaker Change: Also any forward looking statements represent the companys expectations only as of today and we disclaim any obligation to update these statements.
Speaker Change: In addition on today's call. We will also discuss certain non-GAAP financial measures.
Speaker Change: 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.
Speaker Change: With me on the call today are Kevin Murphy, our CEO and Bill Brown our CFO.
Speaker Change: I'll now turn the call over to Kevin.
Kevin Murphy: Thank you, Brian, and welcome everyone to Ferguson's third-quarter results conference call. On today's call, I'll cover highlights of our third-quarter performance and provide a more detailed view of our performance by end market and customer group before turning the call over to Bill for the financials. I'll then come back at the end and give some closing comments before Bill and I take your questions.
Kevin: Thank you, Brian and welcome everyone to <unk> third quarter results conference call.
On today's call I'll cover highlights of our third quarter performance I will also provide a more detailed view of our performance by end market and customer groups before turning the call over to bill for the financials.
Brian C. Lantz: I'll then come back at the end give some closing comments before bill and I take your questions.
Kevin Murphy: Our associates have remained focused on delivering relentless customer service for the complex project needs of our specialist professional customers, executing well as we have returned to volume growth in the quarter. In the quarter, we saw revenue growth of 2.4% despite continued deflation of approximately 2%. We delivered resilient gross margins and appropriately managed costs to the volume environment, generating adjusted operating profit of $674 million, an increase of 2.6%.
Brian C. Lantz: Our associates have remained focused on delivering relentless customer service with a complex project needs of our specialist professional customers executing well as we have returned to volume growth in the quarter.
Speaker Change: In the quarter, we saw revenue growth of two 4%. Despite continued deflation of approximately 2%.
Speaker Change: We delivered resilient gross margins and appropriately managed costs to the volume environment generating adjusted operating profit of $674 million.
Speaker Change: An increase of two 6%.
Kevin Murphy: Adjusted diluted earnings per share of $2.32 was up 5.5% against the prior year. As a result of our confidence in the business, we're pleased to declare a 5% increase in our quarterly ordinary dividend and extend the share repurchase program by an additional $1 billion. Looking forward, we remain well positioned to leverage multi-year tailwinds in both residential and non-residential end markets. Now, we turn to our performance by end markets in the United States. Net sales grew by 2.2% as all end markets saw sequential improvement.
Speaker Change: Adjusted diluted earnings per share of $2 32.
Speaker Change: It was up five 5% against the prior year.
Speaker Change: As a result of our confidence in the business. We're pleased to declare a 5% increase to our quarterly ordinary dividend and extend the share repurchase program by an additional $1 billion.
Speaker Change: Looking forward, we remain well positioned to leverage multiyear tailwind in both residential and nonresidential end markets.
Speaker Change: Turning to our performance by end markets in the United States.
Speaker Change: Net sales grew by two 2% as all end markets saw sequential improvement.
Kevin Murphy: Residential end markets, which comprise just over half of U.S. revenue, remain muted, but showed a slight sequential improvement from the second quarter. Overall, residential revenue grew by approximately 1% in the third quarter. Non-residential markets were slightly more resilient.
Speaker Change: Residential end markets, which comprise just over half of U S revenue remained muted, but showed a slight sequential improvement from the second quarter.
Speaker Change: Overall residential revenue grew by approximately 1% in the third quarter.
Speaker Change: Nonresidential markets were slightly more resilient.
Kevin Murphy: Commercial and civil infrastructure revenues saw mid-single-digit growth, while industrial sales were slightly down against strong comparables. Overall, net sales in non-residential were up 4% during the quarter, and we continue to see good levels of non-residential bidding activity in large capital projects. While we expect growth rates to fluctuate over time, our intentional balanced end market exposure positions us well. Moving to our customer groups in the United States, Residential trade plumbing grew by 1% as we began to lap easier comparables and new residential markets began to stabilize, while leading indicators such as new residential permits and starts have been somewhat mixed.
Speaker Change: Marshall and civil infrastructure revenues saw mid single digit growth, while industrial sales were slightly down against strong comparables.
Speaker Change: Overall net sales in nonresidential were up 4% during the quarter.
We've continued to see good levels of nonresidential bidding activity in large capital projects.
Speaker Change: While we expect growth rates will fluctuate over time, our intentional balanced end market exposure positions us well.
Speaker Change: Moving to our customer groups in the United States.
Speaker Change: Residential trade plumbing grew by 1% as we begin to lap easier comparables and new residential markets begin to stabilize.
Speaker Change: While leading indicators such as new residential permits and starts have been somewhat mixed.
Kevin Murphy: We expect further improvement in future quarters. HVAC grew by 4% as we 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 grew by 1%, with the high-end portion of the market showing relative resilience, as the overall repair, maintenance, and improvement market remains pressured. However, residential digital commerce declined by 12% as consumer demand continued to be weak.
Speaker Change: We expect further improvement in future quarters.
Speaker Change: Hvac's grew by 4% as we continue to build on the strengths of our residential trade plumbing and HVAC customer groups and service of the growing dual trade contractor.
Speaker Change: Residential building in remodel revenues grew by 1% with the high end portion of the market showing relative resilience as the overall repair maintenance and improvement market remains pressured.
Speaker Change: Residential digital commerce declined by 12% as consumer demand continued to be weak.
Kevin Murphy: Waterworks revenues were up 7%. Bidding activity has remained healthy across our broadly diversified business mix, including residential, commercial, public works, municipal, meters and metering technology, water and wastewater treatment plants, soil stabilization, and urban green infrastructure. The commercial mechanical customer group grew 8% as we continued to see our customers pivot towards work such as data centers and large capital projects. Our industrial, fire, and fabrication, and facility supply businesses delivered a combined net sales growth of 2% against a strong 14% growth comparable.
Speaker Change: Waterworks revenues were up 7%.
Speaker Change: Bidding activity has remained healthy across our broadly diversified business mix, including residential commercial public works municipal meters and metering technology water and wastewater treatment plants soil stabilization and urban green infrastructure.
Speaker Change: The commercial mechanical customer group grew 8% as we continued to see our customers pivot towards work such as data centers and large capital projects.
Speaker Change: Our industrial <unk>.
Speaker Change: Higher in fabrication and facility supply businesses delivered a combined net sales growth of 2%.
Speaker Change: Against a strong 14% growth comparable.
Kevin Murphy: Our breadth of customer groups positions us to maximize the value we bring to the total project while also maintaining a broad and balanced end market exposure. Now, let me pass the balance to cover the financial results in more detail. Thank you, Kevin, and good morning, everyone.
Speaker Change: Our breadth of customer groups positions us to maximize the value we bring to the total project, while also maintaining a broad and balanced end market exposure.
Speaker Change: Now, let me pass to Bill to cover the financial results in more detail.
William Brundage: Third quarter net sales were 2.4% ahead of last year. Organic revenue declined 0.9%, comprised of volume growth of approximately 1%, offset by deflation of approximately 2%. Acquisition revenue was 1.7%, and one additional sales day added a 1.6% contribution. Overall price deflation of 2% remains similar to the first half, driven by continued weakness in certain commodity categories, while finished goods pricing has remained broadly flat.
William Jones: Thank you, Kevin and good morning, everyone.
William Jones: Third quarter net sales were two 4% ahead of last year.
William Jones: Organic revenue declined <unk>, 9% comprised of volume growth of approximately 1% offset by deflation of approximately 2%.
William Jones: Acquisition revenue was one 7%.
William Jones: One additional sales day added a one 6% contribution.
Overall price deflation of 2% remained similar to the first half driven by continued weakness in certain commodity categories.
Speaker Change: Finished goods pricing has remained broadly flat.
William Brundage: Gross margin of 30.5% was up 50 basis points over the prior year, driven by strong pricing execution from our associates. We are appropriately managing the cost base against volume growth. We continue to focus on productivity initiatives while we invest in core capabilities for future growth. Adjusted operating profit of $674 million was up $17 million, or 2.6% higher than the prior year.
Speaker Change: Gross margin of 35% was up 50 basis points over the prior year driven by strong pricing execution from our associates.
Speaker Change: We are appropriately managing the cost base against volume growth.
Speaker Change: We continue to focus on productivity initiatives, while we invest in core capabilities for future growth.
Speaker Change: Adjusted operating profit of $674 million was up $17 million or two 6% higher than prior year.
William Brundage: Adjusted diluted earnings per share grew by 5.5%, with the increase due to the higher adjusted operating profit and the impact of our continued share repurchase program. And our balance sheet remains strong at one times net debt to adjusted EBITDA. Moving to our segment results, net sales in the U.S. grew 2.2%, with an organic decline of 0.9%, offset by a 1.5% contribution from acquisitions and 1.6% from one additional sales day. Adjusted operating profit of $685 million increased 3.2% over the prior year.
Speaker Change: Adjusted diluted earnings per share grew by five 5% with the increase due to the higher adjusted operating profit and the impact of our continued share repurchase program.
Speaker Change: And our balance sheet remained strong at one times net debt to adjusted EBITDA.
Speaker Change: Moving to our segment results net sales in the U S grew two 2% with an organic decline of <unk>, 9% offset by one 5% contribution from acquisitions and one 6% from one additional sales day.
Speaker Change: Adjusted operating profit of $685 million increased three 2% over the prior year.
William Brundage: Delivering an adjusted operating margin of 9.8%, improving 10 basis points over prior years. In Canada, net sales were 6.7% ahead of last year, with an organic decline of 0.6%, offset by a 5.1% contribution from acquisitions and 2.2% from the combined impact of one additional sales day and the impact of foreign exchange rates. Markets have been similar to that of the United States. Adjusted operating profit was $6 million in the quarter. Turning to our year-to-date results, the year is progressing largely as expected. Net sales were 0.9% below last year, with an organic decline of 3.2%, partially offset by an acquisition contribution of 1.9% and an additional 0.4% from the extra sales debt.
Delivering an adjusted operating margin of nine 8%, improving 10 basis points over prior year.
Speaker Change: In Canada net sales were six 7% ahead of last year with an organic decline of <unk>, 6% offset by a five 1% contribution from acquisitions and two 2% from the combined impact of one additional sales day and the impact of foreign exchange rates.
Speaker Change: Markets have been similar to that of the United States.
Speaker Change: <unk> operating profit was $6 million in the quarter.
Turning to our year to date results the year is progressing largely as expected.
Speaker Change: Net sales were <unk>, 9% below last year with an organic decline of three 2%, partially offset by an acquisition contribution of one 9% and an additional <unk>, 4% from the extra sales day.
William Brundage: Gross margin was 30.4%, up 20 basis points as our associates have been disciplined in managing prices for a period of commodity price deflation. We have managed labor and non-labor operating expenses through the year, balancing the near-term market demand environment against the return to volume growth in the third quarter. Adjusted operating profit of $1,967,000,000 was down 6.5% compared to the prior year, delivering a 9.1% adjusted operating profit. Adjusted diluted earnings per share of $6.72 was down 5%.
Speaker Change: Gross margin was 34% up 20 basis points as our associates have been disciplined in managing prices for a period of commodity price deflation.
Speaker Change: We have managed labor and non labor operating expenses through the year balancing the near term market demand environment against the return to volume growth in the third quarter.
Speaker Change: Adjusted operating profit of $1 $967 million was down six 5% compared to the prior year delivering a nine 1% adjusted operating margin.
Speaker Change: And adjusted diluted earnings per share of $6 72 was down 5%.
William Brundage: Next, the business continues to generate strong cash flows. After the unwinding of inventory positions in the prior year, we have returned to more normal historical seasonal working capital trends. We saw a net inflow of $20 million in the first nine months of the year.
Next the business continues to generate strong cash flows after the unwind of inventory positions in the prior year, we have returned to more normal historical seasonal working capital trends.
Speaker Change: We saw a net inflow of $20 million in the first nine months of the year.
William Brundage: Interest and tax outflows were slightly lower than last year due to the timing of tax payments, resulting in strong year-to-date operating cash flows of $1.5 billion. And we continue to invest in organic growth through CapEx, investing $263 million year-to-date, down on the prior year due to the timing of certain investments. As a result, we generated free cash flow of approximately $1.3 billion. Moving to capital allocation, our balance sheet position is strong, with net debt to adjusted EBITDA of one times.
Speaker Change: Interest and tax outflows were slightly lower than last year due to the timing of tax payments, resulting in strong year to date operating cash flows of $1 5 billion.
Speaker Change: And we continue to invest in organic growth through capex investing $263 million year to date down on the prior year due to timing of certain investments.
Speaker Change: As a result, we generated free cash flow of approximately $1 3 billion.
Speaker Change: Moving to capital allocation, our balance sheet position is strong with net debt to adjusted EBITDA of one times.
William Brundage: 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 sheet. We allocate capital across four clear priorities.
Speaker Change: 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.
Speaker Change: We allocate capital across four clear priorities.
William Brundage: First, we're investing in the business to drive above market organic growth. As previously mentioned, year-to-date, we have invested $263 million in CapEx, principally focused on our market distribution centers, branch network, and technology programs. Second, we continued to sustainably grow our ordinary dividend. Our board declared a $0.79 per share quarterly dividend, a 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 acquisitions. We are pleased to welcome associates from Southwest GeoSolutions, AFCO Supply, GAR Engineering, Safe Step Tubs of Minnesota, and York West during the third quarter and subsequent weeks.
Speaker Change: First we're investing in the business to drive above market organic growth.
Speaker Change: Previously mentioned year to date, we've invested $263 million into Capex prints.
Speaker Change: Principally focused on our market distribution centers branch network and technology programs.
Speaker Change: Second we continued to sustainably grow our ordinary dividend.
Speaker Change: 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.
Speaker Change: Third we're consolidating our fragmented markets through bolt on geographic and capability acquisition.
Speaker Change: We are pleased to welcome associates from southwest Geo solutions <unk> supply.
Speaker Change: Our engineering.
Speaker Change: <unk> step tubs of Minnesota, and York West during the third quarter and subsequent weeks.
William Brundage: We have now completed eight deals this year, bringing in approximately $350 million of annualized revenue. Our deal pipeline remains healthy, allowing us to continue executing our consolidation strategy. And finally, we're committed to returning surplus capital to shareholders when we are below the low end of our target leverage range. We returned $421 million to shareholders via share repurchases in the fiscal year to date, reducing our share count by approximately $2.3 million.
Speaker Change: We have now completed eight deals this year, bringing in approximately $350 million of annualized revenue.
Speaker Change: Our deal pipeline remains healthy, allowing us to continue executing our consolidation strategy.
Speaker Change: And finally, we are committed to returning surplus capital to shareholders. When we are below the low end of our target leverage range.
Speaker Change: We returned $421 million to shareholders via share repurchases in the fiscal year to date, reducing our share count by approximately $2 3 million.
William Brundage: And we are pleased to announce a $1 billion extension to our share repurchase program today. Now, let's turn our attention to the sequential revenue performance of the business, which is trending in line with our expectations. Organic revenue has strengthened on a sequential basis, with volume growth turning positive in Q3. We believe this trend will continue against easing comparables as we conclude our fiscal year. Now, turning to our updated view of fiscal 2024 guidance, we continue to believe revenue will be broadly flat for the year, albeit with slightly stronger volumes, as we now expect modest deflation to continue through the end of the fiscal year.
Speaker Change: And we are pleased to announce a $1 billion extension to our share repurchase program today.
Speaker Change: Now, let's turn our attention to the sequential revenue performance of the business, which is trending in line with our expectations.
Speaker Change: Organic revenue has strengthened on a sequential basis with volume growth turning positive in Q3.
Speaker Change: I believe this trend will continue against easing comparable as we conclude our fiscal year.
Speaker Change: Now turning to our updated view of fiscal 2020 for guidance. We continue to believe revenue will be broadly flat for the year, albeit with slightly stronger volumes as we now expect modest deflation to continue through the end of the fiscal year.
William Brundage: Given the drag of deflation and with only one quarter remaining, we are narrowing the outlook for adjusted operating margin by trimming the top end of the range. We now expect to deliver between 9.2% and 9.6% adjusted operating margin for the year. As a result of our strong cash flow and net debt position, we have lowered our interest expense guidance to between $175 million and $185 million. Our adjusted effective tax rate is unchanged and expected to be approximately 25% this year.
Speaker Change: Given that drag of deflation and with only one quarter remaining we are narrowing the outlook for adjusted operating margin by trimming the top end of the range.
Speaker Change: We now expect to deliver between nine 2% to nine 6% adjusted operating margin for the year.
As a result of our strong cash flow and net debt position, we have lowered our interest expense guidance to between 175 $185 million.
Speaker Change: Our adjusted effective tax rate is unchanged and expected to be approximately 25% this year.
William Brundage: And we have lowered our expected CapEx investment by $50 million due to timing factors of capital outflows, now expecting it to land between $350 to $400 million for the year. So to summarize, the year has progressed largely as expected, and we remain focused on execution. We 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 you back to Kevin.
Speaker Change: And we have lowered our expected capex investment by $50 million due to timing factors of capital outflows now expecting it to land between $350 million to $400 million for the year.
Speaker Change: So to summarize the year has progressed largely as expected and we remain focused on execution.
Speaker Change: I believe the combination of our strong balance sheet flexible business model and balanced end market exposure positions us well.
Speaker Change: Thank you and I'll now pass you back to Kevin.
Kevin Murphy: Thank you, Bill. Let me again thank our associates for their continued dedication to serving our customers, helping to make their complex projects more simple, successful, and sustainable. We're pleased with our execution in the quarter, and the year is progressing largely as expected. Our updated fiscal year 24 guidance reflects continued volume growth and resilient gross margin despite the impact of continuing mild deflation expected for the remainder of the fiscal year.
Speaker Change: Bill let.
Kevin Murphy: Let me again, thank our associates for their continued dedication to serving our customers helping to make their complex projects more simple.
Speaker Change: <unk> and sustainable.
Kevin Murphy: We're pleased with our execution in the quarter and the year is progressing largely as expected.
Our updated fiscal year 'twenty four guidance reflects continued volume growth and resilient gross margin. Despite the impact of continuing mild deflation expected for the remainder of the fiscal year.
Kevin Murphy: As we look forward, we are well positioned with a balanced business mix between residential and non-residential, between new construction and repair, maintenance, and improvement. We have an agile business model and a 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, consolidate our fragmented markets through acquisitions, and return capital to shareholders. We intend to do this while maintaining a strong balance sheet and operating at the low end of our target leverage range.
Kevin Murphy: As we look forward, we are well positioned with our balanced business mix between residential and nonresidential.
Kevin Murphy: New construction and repair maintenance and improvement.
Speaker Change: We have an agile business model and flexible cost base that allows us to adapt to changing market conditions.
Speaker Change: Our cash generative model allows us to continue to invest for organic growth.
Speaker Change: Consolidate our fragmented markets through acquisitions and return capital to shareholders.
Speaker Change: We intend to do this while maintaining a strong balance sheet operating at the low end of our target leverage range.
Kevin Murphy: We have consistently executed on these priorities, and this has supported a long-term track record of outperformance and disciplined cash deployment. Our scale and breadth allow us to leverage our competitive position across our customer groups in order to benefit from emerging multi-year tailwinds in our end market. We remain confident in the strength of our markets over the medium and longer term and expect to capitalize on growth opportunities.
Speaker Change: We have consistently executed on these priorities and this has supported our long term track record of outperformance and disciplined cash deployment.
Speaker Change: Our 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.
Speaker Change: We remain confident in the strength of our markets over the medium and longer term and expect to capitalize on growth opportunities.
Operator: Thank you for your time today. Phil and I are now happy to take your questions. Operator, I'll hand the call back over to you.
Speaker Change: 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: Thank you for Q&A. If you would like to ask a question, please press * on your telephone keypad now. Sorry, press star followed by one on your telephone keypad now. If you change your mind, please press star followed by two. And when preparing to ask your question, please ensure that your phone is unmuted. As a reminder, that's star one for any questions now. And our first question today is from the line of Phil Ng of Jefferies. Phil, please go ahead. Your line is open.
Speaker Change: Thank you for Q&A, if you'd like to ask a question. Please press star on your telephone keypad now sorry Star followed by one on your telephone keypad now if you change your mind. Please press star followed by two.
Speaker Change: When preparing to ask your question. Please ensure that your phone is on mute locally.
Speaker Change: As a reminder, that star one for any questions now and our first question today is from the line of filling of Jefferies. Please go ahead. Your line is open.
Philip H. Ng: Hey guys, volumes are certainly tracking a little better than you expected coming into the year, notably in your waterworks and commercial mechanical business. Are you starting to see some of that uptick in bidding activity called out for the last few quarters on the heavy commercial industrial activity start to come through? Now on the flip side, RISD was a little more muted in this hire for longer interest rate environment? I'm just curious, when you unpack all these price grants, what do you think about the fourth quarter and, certainly, looking out to 2025?
Speaker Change: Hey, guys volume is certainly tracking a little better than you expected coming into the year, notably in your waterworks and commercial and mechanical business.
Speaker Change: Are you seeing are you starting to see some of that uptick in bidding activity you called out for the last few quarters on the heavy commercial industrial activity start to come through now.
On the flip side <unk> was a little more muted, but it is higher for longer interest rate environment.
Speaker Change: I'm just curious when you unpack all these crosscurrents, how do you think about fourth quarter.
Speaker Change: Certainly looking out to 2025.
Speaker Change: Good morning, and thank you for the question, maybe I'll take the beginning of that talking a bit about the markets and then bill can follow in.
Kevin Murphy: Good morning, Phil, and thank you for the question. Maybe I'll start the beginning of that by talking a bit about the markets, and then Bill can follow in. I appreciate the comments around WaterWorks and commercial mechanical volume, and certainly we're starting to see some activity play out on those large capital projects that we believe are going to be the strength that offsets those things like office, distribution, warehouse, and traditional knock-on commercial. And so we saw that growth inside of WaterWorks, commercial mechanical, even inside of industrial pipe, valve, and fitting. And then, despite the tail or the headwind of depletion inside of our fire and fabrication.
Speaker Change: Appreciate the comments around the water worsening commercial mechanical volume and certainly we're starting to see some activity play through on those large capital projects that we believe we're going to be the strength that offset those things like office distribution warehouse and traditional knock on commercial and so we saw that growth.
Speaker Change: Inside of Waterworks commercial mechanical even inside of industrial pipe valve and fitting and then display the Tam.
The headwind of deflation inside of our fire and fabrication business.
Kevin Murphy: And you've heard us say this before, we were very pleased with the way that our groups are working together, closer to the source of funds, with the general contractor, with the owner, and construction manager, to make sure that we've got a credible source of supply on some pretty tight timelines, making sure that we're helping to guide what that product selection looks like, and it's playing through in our revenue, and we're still seeing supportive bidding And if you look at that group, that non-residential activity actually has more deflation that impacts that business than even residential. If you turn to the residential channel, yeah, certainly it's still muted.
You've heard US say this before we were very pleased with the way that our groups are working together.
Speaker Change: Closer to the source of funds with the general contractor with the owner and construction manager to make sure that we've got credible source of supply on some pretty tight timeline, making sure that we're helping to guide what that product selection looks like it's playing through in our revenue and were still seeing supported bidding activity.
Speaker Change: And if you look at that group that non res activity actually has more deflation that impacts that business then even residential if you turn to the residential yes, certainly it's still muted clearly we've got affordability concerns around single family new construction in particular, but the lack of <unk>.
Kevin Murphy: You know, clearly, we've got affordability concerns around single-family new construction in particular, but the lack of existing home inventory for sale means demand is still somewhat supportive. And we're pretty pleased with our performance and our overmarket performance and share gains in that space. If you look at our residential trade plumbing business, which really is the point of the spear on that side of the world, their volume growth leaves us quite pleased.
<unk> home inventory per sale means demand is still somewhat supportive.
Speaker Change: We're pretty pleased with our performance in our over market performance and share gains in that space.
Speaker Change: Look at our residential trade plumbing business, which really is the point of the spear.
Speaker Change: That side of the world.
<unk> volume growth.
Kevin Murphy: And as we look forward, the conversations we're having with our contractor base about that activity leave us in a pretty good place as we're moving forward into that fourth quarter. Phil, this is Bill, maybe to touch on your guidance question for the fourth quarter.
Speaker Change: I was quite pleased and as we look forward.
Speaker Change: Conversations, we're having with our contractor base about that activity leaves us in a pretty good place as we're moving forward into that fourth quarter and Phil. This is bill maybe to touch on your guidance question on the fourth quarter taken a step back when we came into the year to Kevin's point, we expected non res to hold up a bit better than resin.
William Brundage: Taking a step back, when we came into the year, to Kevin's point, we expected non-resi to hold up a bit better than residential. As you know, we expected both sides of our markets to be down and our overall markets to be down mid-single digits, with residential a little bit more pressured, and non-resi a little bit better. And that's what I think we will see playing out throughout the year. You know, non-res has held up a bit better, and we would expect, particularly given the performance in Q3, we would expect that to continue into Q4.
Speaker Change: <unk> as you know we expected both.
Speaker Change: Both sides of our markets to be down and our overall market to be down mid single digits with Randy a little bit more pressured non raising a little bit better and Thats, where I think we see playing out throughout the year.
Speaker Change: Non res is held up a bit better and we would expect particularly given the performance in Q3, we would expect that to continue into Q4, our overall guidance.
William Brundage: Our overall guidance of broadly flat on the top line hasn't changed since we set that guidance out at the beginning of the year, and that clearly implies that we'll have some level of modest growth on the top line overall.
Speaker Change: <unk> flat on the top line that Hasnt changed since we since we set that guidance out at the beginning of the year.
Speaker Change: And that clearly implies that we will have some level of modest growth on the top line overall in Q4.
William Brundage: Okay, that's great color. And I guess, Bill, now you're expecting some modest inflation for the full year. Have you seen prices stabilize, particularly on your more commodity side of things? Is down 2% a good way to think about the fourth quarter?
Speaker Change: Okay, that's great color.
Speaker Change: And I guess bill now you're expecting some modest inflation for the full year have you seen prices stabilize particularly on your more commodity side of things is down 2% a good way to think about the fourth quarter and.
And how has like finished good prices behave.
Bill: Seen some inflation for the actual commodities like copper and zinc prices rise noticeably in recent months are you seeing any inflation and does that have a lag effect what does that all mean for U S.
Speaker Change: We kind of look out the next six to nine months in terms of your margins and your top line.
William Brundage: And how have finished goods prices behaved? We've seen some inflation for the actual commodities like copper and zinc prices rise noticeably in recent months. Are you seeing any inflation? And does that have a lag effect? What does that all mean for you as we kind of look at the next six to nine months in terms of your margins and your top line?
William Brundage: Yeah, sure. I mean, first off, as you know, predicting commodity prices is pretty difficult. But we were expecting, as we moved through the year, for the deflationary pressures to lessen, particularly as we start to exit this year, as we start to roll over some of those deflationary comparables from the prior year. On commodities, we are seeing some stability in prices, but it's important to note that they're still, year over year, still down. You mentioned copper.
Yes, sure I mean first off as you know predicting commodity prices is pretty difficult but.
Speaker Change: And we were expecting as we moved through the year for the deflationary pressures to lessen, particularly as we start exiting this year as.
Speaker Change: As we start to rollover some of those deflationary comparable from the prior year on commodities, we are seeing some stability in prices.
Speaker Change: But it's important to note that there is still year over year still down.
William Brundage: If you look at copper tube for us, prices have been moving in an upward direction more recently, but still down year over year, so there's still some deflationary year-on-year pressure even in copper. Carbon steel has been one that's moved more sequentially sideways, and so that deflationary pressure is starting to lessen from a year-over-year perspective. And then we still have some pressure on the plastic pipe side of the world
Speaker Change: You mentioned copper if you look at copper tube for us prices have been moving in an upward direction more recently, but still down year over year. So theres still some deflationary year on year pressure, even in copper to carbon steel has been one that's moved more sequentially sideways and so that deflationary pressure is starting.
Speaker Change: To lessen from a year over year perspective, and then we still have some pressure on the plastic pipe side of the world. So.
Speaker Change: Theres still some year on year pressure, we do expect that to lessen as we move into the future.
William Brundage: So there's still some year-on-year pressure, but we do expect that to lessen as we move into the future, but we still expect, or we expect now, that modest level of deflation to continue a bit longer than we initially expected at the beginning of the year and perhaps into the start of our fiscal year. On the finished goods side, finished goods pricing has held up better, as expected. We're about flat year over year in total finished goods.
Speaker Change: But we still expect now or we expect now that modest level of deflation to continue a bit longer than we initially expected at the beginning of the year and perhaps into the start of our fiscal year on the finished goods side finished goods pricing has held up better as expected.
Speaker Change: About flat year over year and total finished goods.
William Brundage: What we've seen, and I think what we flagged, is that some of the typical annual price increases that we would normally see in our industry have just been a bit spottier than normal. So, still some expected return to inflation. It's just taking a bit longer on the finished goods side of the world than we may have expected at the outset.
Speaker Change: What we've seen and I think what we flagged is that some of the typical annual price increases that we would normally see in our industry have just been a bit spotty here than normal.
Speaker Change: So still some expected return to inflation, it's just taking a bit longer on the finished goods side of the world than than what we may have expected at the outset of the fiscal year.
William Brundage: And Bill, any categories that stand out that are a little spottier on the finished goods side from a pricing standpoint?
Speaker Change: And bill any categories that stand out Thats, a little spot here on the finished goods side from a pricing standpoint.
Speaker Change: Well, if you look at where we've seen some.
William Brundage: Well, if you look at where we've seen some, some of the more recent increases, take HVAC units, where we've seen it maybe a bit spottier has been in areas like appliances, maybe in the faucet category. So it's just a bit more of a mixed bag than we would typically.
Speaker Change: Some of the more recent increases take HVAC units.
Speaker Change: Where we've seen it maybe a bit spotty here has been on areas like appliances, maybe on the faucet category. So it's just a bit more of a mixed bag than we would typically see.
Philip H. Ng: Okay, I appreciate all the great color guys. Thank you.
Speaker Change: Okay I appreciate all the great color guys. Thank you.
Phil: Thank you Phil.
John Lovallo: Our next question today is from the line of John Lovallo of UBS. John, please go ahead. Your line is open.
John: Our next question today is from the line of Jonathan <unk> of UBS. John. Please go ahead. Your line is open.
John Lovallo: Good morning, guys. Thank you for taking the time to answer my questions.
John: Hey, good morning, guys. Thank you for taking my questions. The first one is can you sort of walk through the moving pieces of your revenue outlook I mean, how much of a headwind versus the prior outlook is the updated view on pricing is that fully offset by organic volume or is there some incremental M&A.
John: Part of this as well and if so could you help us break out those two components. Please.
Yes, I would tell you John that the majority of the broadly flat guidance, it's been a touch more deflation offset by organic volume.
William Brundage: The first one is, can you sort of walk through the moving pieces of your revenue outlook? I mean, how much of a headwind versus the prior outlook is the updated view on price? And is that fully offset by organic volume? Or is there some incremental M&A, you know, that's part of this as well? And if so, can you help us break out those two components, please?
William Brundage: Yeah, I would tell you, John, that the majority of the broadly flat guidance has been a touch more deflation offset by organic volume. We have done a handful of deals; we announced four deals last week. And if you look in total, while that's going to be a nice tail as we enter into next fiscal year, that doesn't change the overall guide from an acquisitions perspective very materially for the rest of the year.
Have done a handful of deals we announced four deals last week.
Speaker Change: And if you look in total well that's going to be a nice tail as we enter into next fiscal year that doesn't change.
Speaker Change: The overall guide from an acquisitions perspective.
Speaker Change: Very materially for the rest of the year. If you take a step back for the full year acquisition revenue will probably be somewhere in the $600 million range. So that hasnt changed significantly. So it's more been a slight increase in volumes offset by that that.
William Brundage: If you take a step back for the full year, acquisition revenue will probably be somewhere in the $600 million range, so that hasn't changed significantly. It's more been a slight increase in volumes offset by that modest deflation lasting a bit longer than we expect.
Speaker Change: Modest deflation lasting a bit longer than we expected.
William Brundage: And then, you know, can you just help us think about the drivers of risk across the operating margin, you know, outlook range. It seems like, you know, the top end was taken off the table. What sort of drove you to do that? Was all the deflate solely attributable to deflation?
Speaker Change: Understood and then can you just help us think about the drivers of risk across the operating margin.
Speaker Change: <unk> outlook range. It seems like the top end was taken off the table what sort of drove you to do that was that all of the fleet.
William Brundage: And, you know, what would sort of get you to the bottom end of the range? Now, why not take that bottom end of the range off the table as well? Yeah, in terms of trimming
Speaker Change: So the.
Speaker Change: Attributable to the deflation and what sort of gets you to the bottom end of the range why not take that bottom end of the range off the table as well.
William Brundage: Yeah, in terms of trimming the top end of the range again, what hasn't changed is the revenue guide. What has changed is that deflation lasting a bit longer puts a touch more pressure on the SG&A side of the world.
Yes in terms of trimming the top end of the range again, what Hasnt changed is the revenue guide.
Speaker Change: What has changed is that deflation lasting a bit longer but to touch more pressure on the SG&A side of the world. So I mean, if you look at 2% deflation in the quarter.
William Brundage: So I mean, if you look at 2% deflation in the quarter, that's worth about $145 million on the top line. We clearly have to have the input costs and the headcount and the associate count to take care of that volume. And so that puts a bit of pressure on that OPEX leverage, then recognizing that we're sitting at a 9.1% operating margin through three quarters. You know, our midpoint of our guide is at 9.4, but the wide end of the range, 9.2 to 9.6, implies that we'll deliver somewhere between a 9.5 and an upper 10% operating margin for Q4 versus 10.4% last year in Q4.
Speaker Change: That's worth about $145 million on the top line.
Speaker Change: We clearly have to have the input costs and the head count and the associate count to take care of that volume.
Speaker Change: And so that puts a bit of pressure on that opex leverage.
Speaker Change: Then recognizing that we're sitting at a nine 1% operating margin through three quarters.
Speaker Change: Our midpoint of our guide at <unk>, four but the wide end of the range of 90 to 96 implies it will deliver somewhere between nine and a half to an upper 10% operating margin for Q4 versus 10, 4% last year in Q4.
William Brundage: So we think that's a pretty reasonable bookend approach to take as we look at the fourth quarter. And in terms of the bottom end of the range, why not take that off the table? Quite honestly, what could cause us to come closer to that bottom end of the range would be additional deflationary pressure in Q4, which, as we think we have a pretty good window into what that will be, again, it's always a little bit difficult to predict how that will come through over the next quarter.
Speaker Change: So we think that's a pretty reasonable.
Speaker Change: Bookend approach to take as we look at.
Speaker Change: We look at the fourth quarter in terms of the bottom end of the range why not take that off the table quite honestly, what could cause us to come closer to that bottom end of the range would be additional deflationary pressure in Q4, which as we think we have a pretty good window into what that will be again, it's always a little bit difficult to predict how that will come through over the next quarter.
Speaker Change: Understood. Thank you guys.
Speaker Change: Thank you John.
William Brundage: Our next question today is from the line of Sam Reid of Wells Fargo. Please go ahead; your line is open.
Speaker Change: Our next question today is from the line of Sam Reid of Wells Fargo.
Speaker Change: Please go ahead your line is open.
Sam Reid: No, thanks so much guys for taking my question. I wanted to maybe unpack the quarter in a bit more detail. You've already provided some color here, but maybe just one more question around this. If I recall, February was kind of trending more flattish from an organic basis. So maybe just talk through how trends might have looked through the remainder of the quarter, especially since you were lapping easier comps in those months.
Sam Reid: No. Thanks, so much guys for taking my question I wanted to maybe unpack the quarter in a bit more detail you've already provided some color here, but maybe just one more question around that.
Sam Reid: February with kind of trending more flattish from an organic basis. So maybe just talk through how trends might have looked through the remainder of the quarter, especially since you are lapping easier comps in those months.
William Brundage: Yeah, Sam. I'll answer that one. February was about flat from an organic perspective. I think it's important February is a seasonally slow month, and I think we tried to call that out in the second quarter. The trend really didn't change significantly through March and April. Clearly, if February was flat, March and April were down slightly from an organic perspective, but pretty close to the overall organic decline that we delivered for the quarter.
Sam Reid: Yes, Sam.
Sam Reid: I'll answer that one February was about flat from an organic perspective.
It's important.
Speaker Change: Sure, it's a seasonally slow months.
Speaker Change: And I think we tried to call that out in the second quarter.
Speaker Change: The trend really Didnt change significantly through March and April clearly February was flat March and April were down slightly from an organic perspective.
Speaker Change: But pretty close to the overall.
Speaker Change: Organic decline that we delivered for the quarter, so a slight organic decline again that deflationary pressure.
William Brundage: So a slight organic decline. Again, that deflationary pressure continued a bit longer through the quarter and is now expected to continue a bit longer, as we've already outlined. But there was no significant movement month-to-month in the quarter that would be worth noting.
Speaker Change: Continued a bit longer through the quarter and now expect it to continue a bit longer as we've already outlined.
Speaker Change: But but no significant movement.
Speaker Change: Its a month in the quarter that would be worth noting.
Sam Reid: That's helpful. Maybe we can pivot down the P&L and talk a little bit about SG&A. It's something that a lot of investors, I think, are looking at, you know, with respect to your name, and maybe just think about kind of absolute SG&A levels this quarter. You know, kind of, would you say you're well calibrated into, you know, kind of some of these seasonally stronger quarters that are coming up? And maybe how should we be thinking about SG&A into FQ4 and perhaps into FQ1? Thanks.
Speaker Change: That's helpful. Maybe put pivot down the P&L and talk a little bit about SG&A, it's something that a lot of investors I think are looking at with respect to your name and maybe just think about kind of absolute SG&A level. This quarter kind of would you say, you're well calibrated into kind of some of these.
Speaker Change: Stronger quarters that are coming up and maybe how should we be thinking about SG&A in Q.
Speaker Change: Q4, and perhaps into Q1 thanks.
William Brundage: Sure. Yeah, we're really pleased with how our teams have managed the business through what has been a challenging time with that top-line deflationary pressure. If you look at the overall SG&A cost, Q2 to Q3, SG&A was up about 3%, and that's with revenue sequentially moving up about 9%. So, the teams have done a great job.
Speaker Change: Sure, Yes, we're really pleased with how our teams have managed the business through what has been a challenging time with that topline deflationary pressure.
Speaker Change: If you look at the overall SG&A cost.
Speaker Change: Q2 to Q3, SG&A was up about 3% and that's with revenue sequentially moving up about 9%. So.
William Brundage: We've held full-time equivalents from a headcount perspective about flat to last year on an organic basis, and that is in the face of increasing volumes. So, we've generated some volumetric productivity in the business through the quarter. You asked me if we have the right level, and we think we do have the right level to step out of Q3 and into Q4. So we don't have any planned cost actions at this point because we think we have the right cost base to take care of an improving market and volumes that will continue to step up as we go through our seasonally strong months.
Speaker Change: The teams have done a great job, we've held fulltime equivalents from a head count perspective about flat to last year on an organic basis and that is in the face of increasing volumes. So we've generated some volumetric productivity in the business.
Speaker Change: Through the quarter.
William Brundage: But we should continue to improve a bit on that operating cost leverage as we move out of this fiscal year and into next fiscal year. If I go back to Q2 and look at just pure SG&A leverage, we were down about 90 basis points on the prior year in Q2, down about 50 basis points in Q3, and again, I'd expect that gap to continue to work its way flat as we get back to growth.
Speaker Change: You asked about do we have the right level and we think we do have the right level to step out of Q3 and into Q4. So we don't have any planned cost actions at this point because we think we have the right cost base to take care of an improving market and volumes that will continue to step up as we get through our seasonally strong months.
Speaker Change: But we should continue to improve a bit on that operating cost leverage as we move.
Speaker Change: Out of this fiscal year and into next fiscal year.
Speaker Change: If I go back to Q2.
Speaker Change: And look at just pure SG&A leverage we were down about 90 basis points on the prior year in Q2.
Speaker Change: Down about 50 basis points in Q3, and again I would expect that gap to continue to work its way.
Speaker Change: Flat.
Speaker Change: We get back to back to growth.
Sam Reid: That's helpful. Thanks so much. I'll pass it on.
That's helpful. Thanks, So much I'll pass it on.
Operator: Our next question today is from the line of Dave Manthey of Baird. Dave, your line is now open; please go ahead.
Speaker Change: Our next question today is from the line of Dave Manthey of Baird. Your line is now open. Please go ahead.
Quinn Thomas Fredrickson: Hi, good morning, guys. It's Quinn Fredrickson on for Dave. Thanks for taking the question. I know that you're not providing fiscal 25 guidance, obviously, at this stage, but just wondering, you know, even conceptually or qualitatively, which of your end markets or customer groups are you starting to feel better about, and conversely, are there any that you're starting to maybe see a little bit more pressure on?
Hi, Good morning, guys, It's Quinn fredrickson on for Dave Thanks for taking the question.
Speaker Change: No that you're not providing fiscal 'twenty five guidance, obviously at this stage, but just wondering.
Speaker Change #100: Actually you are qualitatively.
Speaker Change #101: Which of your end market or customer groups as youre kind of looking out into next fiscal year.
Speaker Change #101: Starting to feel better about and Conversely are there any that you're starting to maybe see a little bit more pressure on.
Kevin Murphy: Yeah, thank you, Quinn. Good morning.
Speaker Change #102: Yes, Thank you Colin and good morning.
Colin: We're really pleased actually with both sides of the house when you look at residential and nonresidential the performance in the quarter and as we start to look forward.
Kevin Murphy: We're really pleased with both sides of the house when you look at residential and non-residential, the performance in the quarter and as we start to look forward. As we highlighted earlier, the fact that there is demand out there, but existing home turnover is not happening at the levels we've seen historically. And so single-family new construction becomes that outlet. And so we're energized by our ability to take share on that side of the world as we move into the fourth quarter and into Q1 of the following fiscal year.
Colin: We highlighted earlier the fact that there is demand out there existing home turnover is not happening at the levels, we've seen historically and so single family new construction becomes that outlet and so we're energized by our ability to take share on that side of the world as we move into.
Colin: Fourth quarter and to Q1 of the following fiscal year. Additionally, on the repair maintenance and improvements out of the residential markets. The dual trade contractor the residential trade repair professional and the focus and the investment that we're putting there for that residential trade pro that does both plumbing as well as <unk> and the.
Kevin Murphy: Additionally, on the repair, maintenance, and improvement side of the residential markets, the dual trade contractor, the residential trade repair professional, and the focus and the investment that we're making there for that residential trade pro that does both plumbing, as well as HVAC. And the expansion that we're seeing inside of our HVAC business provides us with some pretty energizing activity. And then, if you look at the non-residential side of the house, it really is a unique time in our country's history, and it continues to be supported by things like infrastructure investments, data centers, chips, manufacturing, healthcare, and life sciences that are filling the void right now of high-rise and distribution and warehouse activity.
Colin: Expansion that we're seeing inside of our HVAC business provides us with.
Colin: Some pretty energizing activity and.
Colin: And then if you look at the nonresidential side of the house. It really is a unique time in our country's history and it continues to be supported with things like infrastructure investment data centers chips manufacturing healthcare life Sciences.
Our filling the void right now.
Speaker Change #104: High rise and with distribution and warehouse activity.
Kevin Murphy: And we think that only continues to ramp up as we go into 2025 and beyond, and that's got a multi-year tailwind. So if you look at those three areas, we're fairly energized by what they can be in medium-term markets.
Speaker Change #104: We think that continues and only continues to ramp up as we go into 'twenty five.
Speaker Change #104: And beyond and Thats got a multiyear tailwind. So if you look at those three areas.
Quinn Thomas Fredrickson: All right, thank you. That's helpful.
Speaker Change #105: We're fairly energized by what it can be in medium term markets.
William Brundage: And then, second question on gross margin. Here in the third quarter, I'm wondering if you could help unpack for us what I think you mentioned, Bill, maybe just on the pricing side of things, really good execution. But was there anything unusual in terms of rebates or anything like that? It just seemed like, you know, seasonally, it was very strong.
Speaker Change #107: Alright. Thank you that's helpful.
Speaker Change #106: And then second question on gross margin.
Speaker Change #108: Here in the third quarter I'm wondering if you could.
William Brundage: And then, you know, secondly, on the execution side of things, can you help unpack, you know, what you're doing to drive that? Are there certain tools that you're providing to associates, or just any color there? Thanks. Yeah, sure. Nothing.
Speaker Change #109: Help unpack for us that I think you mentioned bill maybe just on the pricing side of things really good execution.
Speaker Change #110: Was there anything unusual in terms of rebates or anything like that it just seemed like.
Speaker Change #110: Seasonally it was very strong and then secondly on.
Speaker Change #110: The execution side of things can you help unpack.
Speaker Change #111: What are you doing to drive that are there certain tools that you're providing your associates or just any color there.
William Brundage: Yeah, sure. Nothing in terms of a one-off or unusual really in the quarter. But look, there are a number of initiatives that we have been driving throughout the business to try to execute stronger gross margins over time. Certainly, there are a number of tools that we've rolled out from a pricing analytics perspective in terms of setting a relevant price. There are absolutely pricing tools that we put in the hands of our associates to derive a price for a job or a price for a special on a quote.
Speaker Change #112: Yes, sure nothing in terms of a one off or unusual really in the quarter, but look there are a number of initiatives that we have been driving throughout the business.
Speaker Change #113: To try to execute stronger gross margins over time, certainly there are a number of tools that we've rolled out from our pricing analytics perspective in terms of setting a relevant price there.
Speaker Change #113: There are absolutely pricing tools that we put in the hands of our associates.
Speaker Change #114: To derive a price for a job or a price for a special on a quote.
William Brundage: In terms of the overall approach, we continue to drive our product strategy, which is selling the products that work best for an individual project but that also give us the best gross margin. So there's a lot of focus on that throughout the organization, and our teams are doing a nice job executing that. And then certainly, we've got our own brand initiative, which is core to that product strategy, and we've had some nice improvements on our own brand. So there are a number of them.
Speaker Change #114: In terms of overall approach and we continue to drive our product strategy, which is selling the products that are most appropriate for an individual project, but that also give us the best gross margin. So there's a lot of focus on that throughout the organization and our teams are doing a nice job executing that and then certainly we've got.
Speaker Change #114: Our own brand initiative, which is core to that product strategy.
Speaker Change #114: We've had some nice.
Speaker Change #114: Improvement on our brands. So there are a number of.
Kevin Murphy: As regards our improved gross margins, you know, as we look forward, we'd expect continued strong gross margins. Typically, in Q4, there's a bit of seasonal pressure as our, our, our, lower gross margin businesses like HVAC and waterworks tend to take a larger share of the total revenue, but overall, we're quite pleased with the gross margin delivery in the year to date. Yeah, Quinn, and maybe to build a little bit on what Bill was saying, we think that gross margin is the best reflection of the value that we provide in the marketplace.
Speaker Change #114: Aspects to our improved gross margins.
Speaker Change #114: As we look forward, we would expect continued strong gross margins typically in Q4, there is a bit of seasonal pressure as our lower gross margin businesses like HVAC and waterworks tend to take a larger share of the total revenue.
Speaker Change #114: But overall quite pleased with the gross margin delivery in the year to date.
And maybe to build a little bit on what bill was saying, we think that gross margins. The best reflection of the value that we provide in the marketplace and if you look at the need for trade professionals in our country.
Kevin Murphy: And if you look at the need for trade professionals in our country and their time being incredibly valuable, anything that we can do to add construction productivity to the mix, we think it's reflected in our gross margin. And some of that, a lot of that has to do with product selection, to Bill's point about product strategy and also making sure that we are serving their needs on time and in full with the best breadth and depth for their unique needs in the marketplace. And so we think that gross margin is a good reflection of what we're doing, and we'll continue to improve that as we go forward.
Speaker Change #115: And their time being incredibly valuable anything that we can do to add construction productivity to the mix. We think it's reflected in our gross margin and some of that a lot of that has to do with product selection.
Speaker Change #115: Those point around product strategy and also making sure that we are serving their needs on time and in full with the best breadth and depth for their unique needs in the marketplace and so we think that gross margin is a good reflection of what we're doing and we'll continue to drive that as we go out.
Bob: Thank you Bob.
Brent: Thanks Brent.
Operator: Our next question today is from the line of Keith Hughes of Truist. Please go ahead; your line is open.
Speaker Change #119: Our next question today is from the line of Keith Hughes of Truest. Please go ahead. Your line is open.
Keith Brian Hughes: Thank you. Just to delve into the deflation a little more, could you talk about what individual products are continuing to see deflation and what sectors that it's affecting?
Keith Brian Hughes: Thank you.
Keith Brian Hughes: The element of the deflation a little more could you talk about what the individual products.
Speaker Change #120: The CD promotion.
Speaker Change #120: What sectors.
Speaker Change #120: Okay.
William Brundage: Yeah, sure. Again, Keith, it's all driven on the commodity side of the world. And for us, again, just a level set. When we talk about commodity products, things like plastic pipe, copper tube, steel pipe, carbon steel, etc., it's slightly under 15% of our total revenue.
Speaker Change #120: Yes, sure again, it's Keith it's all driven on the commodity side of the world and for US again, just to level set when we talk about commodity products things like plastic pipe copper tube steel pipe carbon steel et cetera, So it's slightly under 15% of our total revenue.
William Brundage: While not all those commodities are moving in the same direction, most are in some form of year-over-year deflation. Again, just to go back to a couple of things that I highlighted before, copper tube, we've started to see that move up, but it's still down, up sequentially, but it's still down year over year. If that trend continues, we would expect, over the next couple of quarters, copper tube to turn back to inflation, but again, difficult for us to predict how that moves. Carbon steel, steel, and stainless steel have been a bit more sequentially flat, so that'll take a bit longer to move out of deflation.
Speaker Change #120: Well all of those commodities are moving in the same direction.
Speaker Change #120: Most are in some form of year over year deflation again, just to get back to a couple of things that I highlighted before copper tube, we started to see that move up but it's still up sequentially, but it's still down year over year.
Speaker Change #120: If that trend continues we would expect over the next couple of quarters copper tube to turn back to inflation, but again difficult for us to predict how that moves carbon steel steel stainless steel has been a bit more sequentially flat.
Speaker Change #120: Take a bit longer to move out of deflation and then in the plastic side of the world, while we have some different pressures.
William Brundage: And then on the plastic side of the world, while we have some different pressures that we've talked about in the past between plumbing plastic pipe and waterworks plastic pipe, there's still some pressure there overall. But, in general, it's the commodity basket that's still in that deflationary territory, which is driving the total 2% deflation. And I think that's the most important call out is that this is input cost-driven commodity deflation that drove that 2% number in the court.
Speaker Change #120: We've talked about in the past between plumbing plastic pipe and waterworks plastic pipe there is still some pressure there overall.
Speaker Change #120: But in general it's the commodity basket.
Speaker Change #120: Still and that deflationary territory, which is driving the total 2% deflation in the top line and I think thats. The most important call out is that this is input cost led commodity deflation.
Speaker Change #120: Drove that 2% number in the quarter.
Keith Brian Hughes: Okay, one final question on this. The water plastic pipe, the large diameter pipe, has remained particularly high after a substantial run. Are you seeing any signs of real deflation there that's coming back down to historical prices?
Speaker Change #120: Okay and one final question on this.
Speaker Change #120: <unk>.
Speaker Change #121: Water plastic pipe large diameter pipe has remained particularly for <unk>.
Speaker Change #121: Potential run.
Speaker Change #122: Are you seeing any signs of real deflation.
Speaker Change #123: Going back down to historical prices.
William Brundage: It has performed better than plastic pipe inside of the more residential plumbing side of the business. You know, a variety of different reasons as to why that could be the case, whether that is overall demand being supportive, the vertical nature of the PVC pipe manufacturers, those things all play into account, but they still have pressure in terms of deflation year on year inside the quarter in waterworks.
Speaker Change #124: It has performed better than the plastic pipe inside of the more residential plumbing side of the business.
Speaker Change #124: A variety of different reasons as to how that could be the case, whether that is overall demand being supportive.
Speaker Change #124: The vertical nature of the PVC pipe manufacturers those things all play into account, but they still have pressure in terms of deflation year on year inside the quarter and waterworks.
Speaker Change #125: Okay and final question.
Keith Brian Hughes: And final question, the residential trade numbers were very encouraging, the positive 1%. I think you made a comment there on volume; was the volume a little better than the revenue numbers? Yes, it was. And we are in
Speaker Change #126: So Craig numbers were very encouraging positive, 1% I think you made a comment there on volume.
You have a little better than <unk>.
Speaker Change #127: Revenue number you mentioned.
Kevin Murphy: Yes, it was. And we are encouraged by the volume. Our teams are out there doing good work and driving over market performance, even in the face of what you just referred to as plastic pipe deflation inside of a large portion of that market. So they've done a nice job of going out and gaining share both in residential trade repair, as well as in new construction in that market.
Speaker Change #128: Yes, It was and we are encouraged by the volume our teams are out there doing good work and driving over market performance.
Even in the face of what you just attributed to call. It plastic pipe deflation inside of a large portion of that market. So.
Speaker Change #128: They've done a nice job of going out and gain share both in residential trade repair as well as in new construction in that market.
Speaker Change #130: Okay, great. Thank you.
Speaker Change #129: Thank you.
Operator: Our next question today is from the line of Mike Dahl of RBC Capital Markets. Mike, please go ahead; your line is now open.
Speaker Change #129: Our next question today is from the line of Mike Dahl of RBC capital markets. Please go ahead. Your line is now open.
Michael Glaser Dahl: This is Chris Claudon from Mike. Just going back to the pricing conversation and your comments around spottiness on the finished goods side, can you just flesh out a little more the dynamic that's causing that? Is it competitive pressures in the market? Is it your customers pushing back?
Speaker Change #129: Hey, Chris Kalata on for Mike.
Speaker Change #131: Just going back to the pricing conversation.
Speaker Change #132: And your comments around spotting. This on the finished good side can you just maybe.
Speaker Change #132: A flush out little more the dynamic that's causing that is it is a competitive pressures in the market your customers pushing back.
Speaker Change #133: And then I think last quarter, your expectation was overall pricing including commodity to be.
Speaker Change #135: Positive <unk> now that's three.
Christopher Frank Kalata: And then I think last quarter your expectation was overall pricing, including commodity, to be positive in 4Q. Now you're expecting it to be negative through the end of this year. So are you expecting total pricing to be positive in 1Q25 or just some color there on when do you expect an eventual positive price inflection?
Speaker Change #134: Would you expect it to be.
Speaker Change #134: Through the end of this year so are you expecting.
Speaker Change #134: <unk> pricing to be positive.
Speaker Change #136: <unk> 25, or just some color there on when do you expect eventual positive price inflection.
William Brundage: Yeah, Chris, as we indicated, the deflation in the quarter was driven by input cost commodity deflation. In terms of that flat finished goods number, we're, you know, reasonably pleased with that.
Chris Kalata: Yeah, Chris as we indicated the deflation in the quarter was driven by input costs commodity deflation in terms of that flat finished goods number.
Chris Kalata: We're reasonably pleased with that it's not competitive pressure, that's driving that down it's the spotty nature of increases.
Speaker Change #138: On the annual price increase cycle that our finished goods manufacturers are going through and so if you look at where that 2% is again that is strictly driven by the.
William Brundage: It's not competitive pressure that's driving that down; it's the spotty nature of increases on the annual price increase cycle that our finished goods manufacturers are going through. And so if you look at where that 2% is, again, that is strictly driven by the input cost commodity deflation that we're experiencing. Yeah, in terms of what we expected versus what has changed now, to Kevin's point, it's finished goods a bit spottier. So maybe not as much inflation in the second part of our fiscal year as we might have expected.
Speaker Change #138: Input costs commodity deflation that we're experiencing.
Speaker Change #139: And in terms of what we expected versus what has changed now to Kevin's point it's finished.
Speaker Change #138: Finished goods.
Speaker Change #140: Bit spotty here, so maybe not as much inflation in the second part of our fiscal year as we might have expected and then that commodity deflation lapping a bit longer the combination of that is driven us to say, we now expect deflation overall price deflation for our full fiscal year to be down around 2%.
William Brundage: And then that commodity deflation lasting a bit longer. The combination of that has driven us to say we now expect deflation, overall price deflation for our full fiscal year to be down around 2%, and John R. We are expecting a similar level in Q4. Again, it is hard to call when that turns and how long that lasts. We do expect that deflation to lessen as we step into the future, not the least of which is that we are going to roll over those deflationary comparables. But it is likely, perhaps to last into the start of our fiscal year. It is hard to call exactly when that is going to happen.
Speaker Change #140: A similar level in Q4.
Speaker Change #140: Again hard to call.
Speaker Change #140: When that turns how long that last we do expect that deflation to lessen as we step into the future.
Speaker Change #141: The least of which again is we're going to roll over those deflationary comparables.
Speaker Change #141: But it's likely perhaps to last into the start of our fiscal year hard to call exactly when that and flex.
Christopher Frank Kalata: And then maybe just shifting to some of the tailwinds. You called out megaprojects in the past, and I was curious what you're seeing today in terms of that tailwind and the kind of quantification you provide on expectations of growth exiting this year into next. Thanks.
Speaker Change #142: Understood and then.
Speaker Change #142: Maybe just shifting to.
Some of the tailwind as you called out on Mega projects in the past.
Speaker Change #143: I just was curious what youre seeing today in terms of that tailwind.
Speaker Change #144: Any kind of quantification you can provide on an expectation of growth exiting this year into next.
Kevin Murphy: Yeah, as we said, we continue to have good, strong bidding activity. Our groups continue to work well together, both with the GC as well as the project owners, and then the individual specialist pros that are on that job, from infrastructure, through fire and fabrication, through commercial mechanical, and industrial pipe, valve, and fitting.
Speaker Change #145: As we said we continue to have good strong bidding activity or groups continue to work well together, both with the GEC as well as the project owners and then the individuals' specialist pros that are on that job from infrastructure through fire and fabrication through <unk>.
Commercial mechanical and industrial pipe valve and fittings, and it's evident that it's impacting the quarter, you'll see commercial mechanical up eight you see our waterworks business up seven our total non res up four despite having.
Speaker Change #146: More deflation than the entirety of our book of business as we look forward as we said that starts to ramp up and these projects take longer.
Christopher Frank Kalata: And that's evident that it's impacting the quarter. You see commercial mechanical up eight, you see our waterworks business up seven, and our total non-res up four. Despite having more deflation than the entirety of our book of business. As we look forward, as we said, that starts to ramp up, and these projects take longer. They have fits and starts as you're going through the construction process, and we see that probably peaking as we start to move 25, 26. So it's got a longer tailwind, but right now, suffice it to say, it's filling the void of that high-rise office distribution center warehouse knock-on commercial activity.
Speaker Change #146: They have fits and starts as youre going through the construction process and we see that probably peaking as we start to move 20 526, So it's got a longer tailwind.
Speaker Change #146: Right now.
Speaker Change #146: Suffice it to say, it's filling the void of that high rise office distribution center warehouse knock on commercial activity as we've said.
Operator: Got it. I appreciate the call.
Got it appreciate the color.
Speaker Change #147: Thank you.
William Jones: Thank you, and we will now take our last question from the line of Will Jones of Redburn Atlantic. Will, your line is open, please go ahead.
Speaker Change #148: Thank you and we will now take our last question from the line of will Jones from Redburn Atlantic will your line is open. Please go ahead.
William Brundage: Can I just come back on volume, please, when you talk about continued improvement through the rest of the year. Is the implication there that you might do better in Q4 than the plus one in Q3, like for like? And then secondly, maybe if you could just update us on the DC kind of rollout; I think Toronto opened in the spring. Could you remind us what's coming later this year, and perhaps as we look to 25, and just marry that up with the CapEx trim for the year that you pulled down by 50 million? Presumably, that's not about the DCs themselves. Thanks.
William Jones: Thanks, Good morning.
William Jones: Could I just come back on volume. Please when you talked about continued improvement through the rest of the year.
Speaker Change #150: Is the implication that you might do better in Q4 than the plus one.
Speaker Change #150: Q3 like for like.
Speaker Change #151: And then secondly, maybe.
Speaker Change #152: Just update around around the D C kind of rollout I think Toronto opened in the spring.
Speaker Change #152: Could you remind us what's coming later this year and perhaps as we look to 2005 and just marry that up with the capex trim for the year.
Speaker Change #153: He pulled out about 50 billion, presumably that's.
Speaker Change #152: About the.
Speaker Change #152: The D C themselves.
William Brundage: Yeah, well, if you look at the broadly flat guide, that would imply for Q4, we're going to have somewhere around two to 3% growth at the midpoint. Certainly, there's a range of just positive to slightly more than that midpoint on a broadly flat full-year guide. But that would imply, with about 2% deflation, that volume does continue to get a bit better as we step through the fourth quarter.
Speaker Change #154: Yes, well if you look at the broadly flat guide that would imply for Q4, we're going to have somewhere around 2% to 3% growth at the midpoint certainly theres a range of just positive to slightly more than that mid point on a broadly flat full year guide.
Speaker Change #155: But that would imply that with about 2% deflation.
Speaker Change #155: That volume does continue to get a bit better as we step through the fourth quarter. So that is our expectation.
William Jones: So that is our In terms of the MDC rollout, to your point, we did just open the Toronto MDC in the last few months, so we've got four that are now open. We have three more that are in the construction phase. That would be Nashville, Dallas, and then Washington, D.C. And then, in addition to that, we are adding automation that we've developed and launched in those MDCs. We're also adding some of that automation to some of our existing and newer large-format buildings, areas like our Front Royal Distribution Center and then a large-format building in Fort Myers down in Florida.
Speaker Change #156: Terms of the MDC rollout to your point, we did just open the Toronto MDC.
Speaker Change #157: Within the last few months. So we've got four that are now open we have three more that are in the construction phase that would be Nashville, Dallas and Washington DC.
Speaker Change #157: And then in addition to that we are adding automation.
Speaker Change #157: We've that we've developed and launched and Theres Mdc's, we're adding some of that automation to some of our existing and newer large format buildings areas like our front Royal distribution Center and then a large format building in Fort Myers and down in Florida. So we're continuing with the execution plan.
William Brundage: So, we're continuing with the execution plan that we laid out for MDCs. So, from a CapEx perspective, there's no change in strategy here. It is simply the timing of those real estate investments and when that cash is going to flow out the door. But no change in strategy.
Speaker Change #158: We laid out on Mdc's, so from a capex perspective, there's no change in strategy here. It is simply timing of those real estate investments.
Speaker Change #158: When that cash is going to flow out the door, but no change in strategy.
Speaker Change #158: Thank you.
Operator: Thank you. This concludes today's Q&A session. I'll now hand the microphone back over to Kevin Murphy for some closing remarks.
Speaker Change #158: Thank you. This concludes today's Q&A session I will now hand back over to Kevin Murphy for some closing remarks.
Kevin Murphy: Thank you, operator. And thank you again for your time on the call today.
Kevin Murphy: Thank you operator, and thank you again for your time on the call today.
Kevin Murphy: We again want to express our sincere thanks to our associates. They continue to add value to our customers. They continue to work to make their projects more simple, successful, and sustainable. As we look at the year in total, it continues to play out largely as we've expected. We're pleased to achieve revenue growth of 2.4% driven by volume improvement in the quarter. We're also pleased with the delivery of a 9.2% adjusted operating margin in the quarter and growing EPS by 5.5%.
Kevin Murphy: We again want to express our sincere thanks to our associates. They continue to add value to our customers. They continue to work to make their projects more simple successful and sustainable as we look at the year in total it continues to play out largely as we've expected. We're pleased to achieve revenue growth of two four.
Kevin Murphy: <unk> percent driven by volume improvement in the quarter, but we're also pleased with the delivery of a nine 2% adjusted operating margin in the quarter and growing EPS by five 5%. So again. Thank you very much for your time, we appreciate it greatly and we'll talk to you very soon thank you.
Operator: So again, thank you very much for your time. We appreciate it greatly. We'll talk to you very soon. Thank you.
Kevin Murphy: Okay.
Operator: That concludes the Ferguson Third Quarter Results Conference Call. I'd like to thank you for your participation. You may now disconnect your lines.
Speaker Change #159: That concludes the Ferguson third quarter results conference call I'd like to thank you for your participation you may now disconnect your lines.
Speaker Change #159: Yeah.
Speaker Change #159: Yes.
Speaker Change #159: Okay.
Speaker Change #159: Yes.
Speaker Change #159: Okay.
Speaker Change #159: Yeah.
Speaker Change #159: Okay.
Speaker Change #159: Okay.
Speaker Change #159: Yes.
Speaker Change #159: Thanks.
Speaker Change #159: Yeah.
Okay.
Speaker Change #159: Okay.
Speaker Change #159: Yes.