Ferguson plc Reports Third Quarter Results
Third quarter highlights
- Sales decline of 2.0%, as expected, with one fewer sales day (1.6% impact), on top of a 23.1% prior year growth comparable.
- Gross margin of 30.0%.
- Operating margin of 7.0% (9.2% on an adjusted basis) in the quarter, with fiscal year to date operating margin of 8.6% (9.6% on an adjusted basis).
- Diluted earnings per share of $1.63 ($2.20 on an adjusted basis).
- Strong net cash provided by operating activities of $1.8 billion on a fiscal year to date basis.
- Declared quarterly dividend of $0.75, implying an annualized increase of 9% over the prior year.
- Subsequent to quarter end, signed a definitive purchase agreement to acquire a 15 location Northeast HVAC business, which we expect to complete in the fourth quarter subject to regulatory approval.
- Share repurchases of $220 million during the quarter, and increased the program by a further $500 million.
- Balance sheet remains strong with net debt to adjusted EBITDA of 1.1x.
Kevin Murphy, Ferguson CEO, commented “The year is progressing as expected and our associates again delivered solid results, leveraging our scale and core strengths to help our customers navigate their complex projects. Our balanced business is serving us well in challenging markets. During the quarter we continued to take targeted actions to manage the cost base and working capital to deliver strong cash flows.
“Our financial guidance continues to reflect market outperformance, both organically and from acquisitions. Our markets remain attractive over the medium term and our scale and advantaged platform position us to capitalize on structural tailwinds. Our strong balance sheet and cash generative model allow us to continue to invest for organic growth, consolidate our fragmented markets through acquisitions and return capital to shareholders.”
Summary of financial results
Net sales of $7.1 billion were 2.0% below last year primarily driven by the 1.9% adverse impact from one fewer sales day and the impact of foreign exchange. Organic revenue declined 2.5% and was largely offset by acquisition growth of 2.4%. The Company’s decrease in net sales was mainly driven by declines in residential, partially offset by growth in non-residential sales compared to the prior year period. As expected, price inflation stepped down from approximately 10% in the second quarter to approximately 5% in the third quarter.
Gross margin of 30.0% was 30 basis points lower than last year, impacted by certain commodity categories. Operating expenses were diligently managed, with costs sequentially flat to the second quarter, and we remain focused on productivity and efficiencies while investing in core capabilities for future growth.
Reported operating profit was $497 million (7.0% operating margin), 30.2% lower than last year, in part due to branch closure and software impairment charges. Adjusted operating profit of $657 million (9.2% adjusted operating margin) was 12.0% lower than last year.
Reported diluted earnings per share was $1.63 (Q3 2022: $2.50), a decrease of 34.8%, and adjusted diluted earnings per share of $2.20 decreased 12.0% with the reduction due to lower adjusted operating profit and higher interest expense, partially offset by the impact of share repurchases.
Branch closure and software impairment charges
During the quarter we continued to take additional steps to review and control our cost base. As a result, we recorded a charge of $20 million related to the closure of 44 smaller, underperforming branches.
In addition, we have been upgrading portions of our IT systems to enhance our customer experience and associate productivity. One of the solutions developed targeted certain branch transactional processes and was piloted at select locations. We determined during the third quarter that this solution did not meet our customer service, speed and efficiency goals and we chose not to proceed with this component. As a result, we recorded a non-cash impairment charge of $107 million.
USA – third quarter
Net sales in the US business declined 1.6%, driven by a 1.6% adverse impact from one fewer selling day. Organic revenue was down 2.5%, offset by 2.5% from acquisitions.
Residential end markets, which comprise just over half of US revenue, slowed further during the quarter as expected. New residential housing start and permit activity was relatively stable on a sequential basis but is significantly below prior year levels, while repairs, maintenance and improvement (“RMI”) work remained more resilient. Overall, residential revenue declined by approximately 6% in the third quarter.
Non-residential end markets, representing just under half of US revenue, continued to moderate with non-residential revenues growing by approximately 3% in the third quarter. Industrial and non-residential waterworks projects saw strength in the quarter and, as expected, we are beginning to see increased levels of megaproject related bid activity.
Adjusted operating profit of $664 million was 9.8% or $72 million behind last year.
Canada – third quarter
Net sales compressed by 9.5%, with organic revenue decline of 1.5%, a 1.8% adverse impact from one fewer sales day, and a further 6.2% due to the adverse impact of foreign exchange rates. Similar to the US segment, non-residential end markets have been more resilient than residential end markets. Adjusted operating profit of $7 million declined by $13 million compared to last year.
Net debt at April 30, 2023 was $3.3 billion and during the quarter we completed share repurchases of $0.2 billion.
Taking into account the Company’s strong financial position, we have extended the share repurchase program by an additional $0.5 billion, resulting in a remaining balance of approximately $0.7 billion.
We have declared a quarterly dividend of $0.75, having transitioned from a semi-annual distribution schedule earlier in the fiscal year. This implies a 9% increase, as compared to a quarter of the prior year’s total dividend, and will be paid on August 4, 2023 to shareholders on the register as of June 16, 2023.
Subsequent to quarter end we signed a definitive purchase agreement to acquire S. G. Torrice, an HVAC business with 15 locations in the Northeast, which we expect to complete in the fourth quarter subject to regulatory approval.
There have been no other significant changes to the financial position of the Company.
For the full third quarter results, click here.
Ferguson plc (NYSE: FERG; LSE: FERG) is a leading value-added distributor in North America providing expertise, solutions and products from infrastructure, plumbing and appliances to HVAC, fire, fabrication and more. We exist to make our customers’ complex projects simple, successful and sustainable. Ferguson is headquartered in the U.K., with its operations and associates solely focused on North America and managed from Newport News, Virginia. For more information, please visit www.corporate.ferguson.com or follow us on LinkedIn www.linkedin.com/company/ferguson-enterprises.
John Pappas – Director of Financial Communications – (484) 790-2727
Source: Ferguson plc