Ferguson Reports First Quarter Results
December 17, 2022
First Quarter Highlights
– Sales growth of 16.6% with 12.7% organic growth on top of strong prior year comparables
– Solid gross margin delivery of 30.5%
– Cost base well controlled, delivering operating margin of 10.5% (10.9% on an adjusted basis)
– Diluted earnings per share growth of 18.3% (18.0% on an adjusted basis)
– Declared quarterly dividend of $0.75, implying an increase of 9% when annualized over the prior year
– Completed one acquisition during the quarter and two post-quarter end with aggregate annualized revenues of approximately $270 million
– Share repurchases of $366 million during the quarter
– Balance sheet remains strong with net debt to adjusted EBITDA of 1.0x
FY2023 Guidance (unchanged)
• Net sales growth of low single digits driven by market outperformance and completed acquisitions
• Adjusted operating margin of 9.3% to 9.9%
• Interest expense of $170 – $190 million
• Adjusted effective tax rate of approximately 25%
• Capital expenditures of $350 – $400 million
Kevin Murphy, Ferguson CEO, said, “Our associates continued to deliver a strong performance in the first quarter, demonstrating the core strengths of Ferguson. Their focus on taking care of our customers’ complex projects drove strong growth and continued market share gains. At the same time, we appropriately managed costs to position the business for macro economic headwinds. Strong cash generation in the quarter and a strong balance sheet enabled us to continue to invest for organic growth, consolidate our fragmented markets through acquisitions and return capital to shareholders.
“We remain well positioned with balanced exposure to both residential and non-residential end markets and an agile business model. Our financial guidance continues to reflect market outperformance, both organically and from acquisitions, and we remain confident in the fundamental strength of our end markets over the longer term.”
Net sales of $7,931 million were 16.6% ahead of last year, with growth rates slowing through the period as expected. Organic revenue growth was 12.7% with a further 2.7% contribution from acquisitions and 1.5% from an additional sales day, partially offset by a 0.3% adverse impact from foreign exchange rates. Inflation in the first quarter was approximately 15%.
Gross margins of 30.5% were 80 basis points lower than last year driven primarily by strong prior year comparables, during a period of rapid commodity price inflation and acute supply chain disruption. Operating expenses continued to be well controlled, improving 40 basis points as a percentage of sales which partially offset the gross margin decline, limiting operating margin compression to 40 basis points on a reported and adjusted basis. We remain focused on productivity and efficiencies while investing in our talented associates, supply chain capabilities and digital tools.
Reported operating profit was $831 million, 12.4% ahead of last year. Adjusted operating profit of $864 million, increased 12.6% compared to last year.
Reported diluted earnings per share was $2.84 (Q1 FY2022: $2.40), an increase of 18.3%, and adjusted diluted earnings per share of $2.95 increased 18.0% with the increase due to the strength of the operating profit performance in the quarter and the lower share count from share repurchases.
USA – First Quarter
The US business grew net sales by 17.4%, driven by 13.0% organic growth with a further 2.9% from acquisitions and 1.5% from an additional sales day.
Residential end markets, which comprise just over half of US revenue, held up well during the quarter. New residential housing start and permit activity has eased but RMI work has remained more resilient. Overall, residential revenue grew by approximately 15% in the first quarter.
Non-residential end markets, representing just under half of US revenue, experienced continued robust growth. Non- residential revenue grew by approximately 20% in the first quarter.
Adjusted operating profit of $845 million was 12.4% or $93 million ahead of last year.
We completed one acquisition during the quarter that comprised several locations of Monark Premium Appliance, a distributor of high end appliances serving builders, designers, developers and homeowners. Subsequent to the quarter end we acquired Airefco, a leading regional HVAC distributor serving customers in the Pacific Northwest across 11 locations and Guarino Distributing Company, an HVAC distributor operating in Louisiana and Mississippi. In aggregate these three businesses generate annualized revenues of approximately $270 million.
Canada – First Quarter
Net sales grew by 3.6%, with organic revenue growth of 8.2% and a further 1.5% from an additional sales day, offset by 6.1% due to the adverse impact of foreign exchange rates. Similar to the US segment, non-residential markets have been more resilient than residential markets. Adjusted operating profit of $33 million compressed by $1 million, including a $2 million adverse impact from foreign exchange rates.
Net debt at October 31, 2022 was $3.2 billion and during the quarter we completed share repurchases of $366 million, leaving approximately $0.6 billion remaining under our current share repurchase program.
We have declared a quarterly dividend of $0.75, having transitioned from a semi-annual distribution schedule. This implies a 9% increase, as compared to a quarter of the prior year’s total dividend, and will be paid on February 3, 2023 to shareholders on the register as of December 16, 2022.
We increased liquidity by $800 million during the quarter through a series of financing transactions that included a new $500 million syndicated three-year term loan credit facility, maturing in October 2025.
There have been no other significant changes to the financial position of the Company.