Ferguson plc (NYSE: FERG), a leading value-added distributor in North America, has demonstrated its ability to navigate a complex operating environment, delivering resilient financial results in its latest quarter. With annual net income of $1.89 billion and annual revenue of $29.73 billion, the company has maintained its strong financial footing, generating annual operating cash flow and free cash flow of $2.08 billion each.

In the third quarter of fiscal 2024, Ferguson reported net sales of $7.3 billion, a 2.4% increase compared to the same period in the prior year. This growth was driven by higher sales volume, incremental revenue from acquisitions, and the benefit of one additional sales day, partially offset by price deflation of approximately 2%. Gross profit in the quarter increased by 4.3% to $2.23 billion, with gross margin expanding by 50 basis points to 30.5%, reflecting the company's strong pricing execution.

Adjusted operating profit for the quarter was $674 million, up 2.6% year-over-year, with the United States segment delivering a 3.2% increase in adjusted operating profit to $685 million. The Canada segment reported adjusted operating profit of $6 million in the quarter. Ferguson's disciplined cost management, coupled with its flexible business model, enabled the company to navigate the ongoing deflationary environment, which impacted certain commodity categories.

Financials

For the nine-month period ended April 30, 2024, Ferguson's net sales were $21.69 billion, a 0.9% decrease compared to the same period in the prior year. This decline was primarily driven by price deflation of approximately 2%, partially offset by incremental sales from acquisitions and the benefit of one additional sales day. Gross profit for the nine-month period was $6.59 billion, a 0.5% decrease, with gross margin expanding by 20 basis points to 30.4%.

Adjusted operating profit for the nine-month period was $1.97 billion, a 6.5% decrease compared to the prior year, reflecting the impact of lower sales and the ongoing inflationary pressures on labor and non-labor operating expenses. Adjusted diluted earnings per share for the nine-month period was $6.72, down 5% year-over-year.

Liquidity

The company's balance sheet remains strong, with net debt to adjusted EBITDA of 1.0x as of April 30, 2024. Ferguson continues to allocate capital across four clear priorities: investing in the business to drive organic growth, sustainably growing its ordinary dividend, consolidating its fragmented markets through bolt-on acquisitions, and returning surplus capital to shareholders through share repurchases.

Recent Developments

In the third quarter, Ferguson welcomed associates from five acquired businesses, including Southwest Geo-Solutions, AVCO Supply, GAR Engineering, Safe Step Tubs of Minnesota, and Yorkwest. These acquisitions, which collectively contributed approximately $350 million in annualized revenue, are part of the company's ongoing strategy to consolidate its fragmented markets.

Outlook

Looking ahead, Ferguson has provided updated guidance for fiscal 2024. The company now expects revenue to be broadly flat for the year, with slightly stronger volumes as modest deflation is expected to continue through the end of the fiscal year. Ferguson has narrowed its adjusted operating margin guidance to a range of 9.2% to 9.6%, down from the previous range of 9.2% to 9.8%, primarily due to the impact of the ongoing deflationary environment.

The company's geographic performance was mixed in the third quarter. In the United States, net sales grew by 2.2%, with residential end markets showing a slight sequential improvement and non-residential markets, such as Commercial and Civil/Infrastructure, seeing mid-single-digit growth. The Canada segment reported a 6.7% increase in net sales, driven by incremental sales from an acquisition, the combined impact of one additional sales day and foreign exchange rates, and price inflation of approximately 1%.

Ferguson's balanced end market exposure, with a mix of residential and non-residential customers, has positioned the company well to navigate the evolving market conditions. The company's intentional focus on serving the needs of its specialist professional customers, combined with its agile business model and flexible cost base, has enabled it to adapt to changing market dynamics.

As the company looks ahead, it remains confident in the strength of its markets over the medium and longer term, with emerging tailwinds in areas such as infrastructure investment, data centers, manufacturing, and healthcare. Ferguson's scale, breadth, and competitive position across its customer groups position it to capitalize on these growth opportunities.

Conclusion

In conclusion, Ferguson has demonstrated its resilience in the face of a challenging operating environment, delivering solid financial results in the third quarter and nine-month period. The company's balanced business mix, disciplined cost management, and strategic capital allocation have enabled it to navigate the current market conditions effectively. With a strong balance sheet and a clear focus on driving organic growth, consolidating its fragmented markets, and returning capital to shareholders, Ferguson is well-positioned to continue creating value for its stakeholders.