Ferguson Enterprises Inc. /DE/ Q3 FY2024 earnings call

• Revenue grew 2.4% despite ~2% deflation, with adjusted operating profit of $674 million, an increase of 2.6%, and adjusted diluted earnings per share of $2.32, up 5.5%. Declared a 5% increase to the quarterly ordinary dividend and extended the share repurchase program by $1 billion.
• End markets in the US: Net sales grew 2.2% with all end markets improving sequentially. Residential end markets, comprising over half of US revenue, grew ~1% in Q3; nonresidential markets were more resilient with net sales up 4%, including mid-single-digit growth in commercial and civil infrastructure and slight decline in Industrial against strong comparables.
• Customer groups in the US: Residential trade plumbing grew 1%, HVAC grew 4%, Residential Building and Remodel grew 1%, Residential Digital Commerce declined 12%, Waterworks grew 7%, Commercial Mechanical grew 8%, and Industrial, Fire and Fabrication and Facilities Supply combined had net sales growth of 2% against strong comparables.
• Capital allocation: Investing in the business for organic growth, sustaining the ordinary dividend, consolidating markets via acquisitions, and returning surplus capital to shareholders. Year-to-date CapEx was $263 million, Board declared a $0.79 per share quarterly dividend, completed 8 acquisitions in the year bringing in ~$350 million of annualized revenue, and returned $421 million to shareholders via share repurchases.

In the United States, net sales 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 was $685 million, an increase of 3.2% over the prior year, delivering an adjusted operating margin of 9.8%. 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 foreign exchange rates. Adjusted operating profit in Canada was $6 million in the quarter. Year-to-date, 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 day. Gross margin was 30.4%, up 20 basis points. Adjusted operating profit was $1.967 billion, down 6.5% compared to the prior year, with an adjusted operating margin of 9.1%. Adjusted diluted earnings per share was $6.72, down 5%.

Fiscal 2024 guidance: Broadly flat revenue with modest deflation continuing through the end of the fiscal year. Adjusted operating margin expected to be between 9.2% to 9.6%. Interest expense guidance lowered to between $175 million to $185 million. CapEx expected to land between $350 million to $400 million due to timing factors of capital outflows.

• Commodity price deflation that has been impacting gross margins and could continue to do so. Uncertainty in predicting commodity price trends which can affect margin expectations. Potential for additional deflationary pressure in the fourth quarter that could impact the lower end of the adjusted operating margin outlook.

Q: Delve into deflation, which products and sectors are seeing it?

A: Driven by commodity side, including plastic pipe, copper tube, steel pipe, carbon steel, with most in year-over-year deflation, though some like copper tube are moving up sequentially but still down year-over-year.

Q: Residential trade numbers were encouraging, was volume better than revenue?

A: Yes, volume was better, with teams gaining share in residential trade repair and new construction despite plastic pipe deflation impacts.

Q: Flesh out finished goods pricing spottiness dynamic?

A: Spotty nature due to annual price increase cycle of finished goods manufacturers, not competitive pressure, with deflation strictly driven by input cost commodity deflation.

Q: What's seen in mega projects tailwind and growth exiting this year into next?

A: Good bidding activity, projects taking longer with fits and starts, ramping up as we move into 2025 and beyond, filling the void of certain commercial activity.

Q: Continued improvement through rest of year, implication for Q4? CapEx and MDC rollout?

A: Implies Q4 volume continues to get better with broadly flat full year guide. MDC rollout includes opened Toronto MDC, 3 under construction (Nashville, Dallas, Washington, DC), and adding automation to existing and new large format buildings, with no change in CapEx strategy, just timing of real estate investments.