NEWPORT NEWS—Despite supply chain issues and labor shortages throughout the United States and the world, Ferguson posted strong first quarter results. “Our associates have continued to drive strong market share gains while navigating industry supply chain pressures, delivering particularly strong profit growth,” said Kevin Murphy, Group Chief Executive. “We are pleased with earnings growth that significantly outpaced revenue growth to generate strong operating leverage, demonstrating the agility of our business model. Our balance sheet remains strong as we continue to invest in inventory availability to service our customers and return capital to shareholders through the ongoing share buyback program.
“Since the start of the second quarter, Ferguson has generated revenue growth similar to that of Q1 2022. We continue to expect a tapering of growth in the second half on tougher prior year comparatives and we remain mindful that the recent tailwinds from inflation on gross margins will likely moderate, although the timing and extent remain uncertain. Given the strong momentum in the business and the agility of our business model, our full year expectations have increased.”
Summary of financial results
First quarter net sales of $6,803 million were 26.6 percent ahead of last year, 24.5 percent higher on an organic basis with 1.8 percent from acquisitions and a further 0.3 percent from the impact of foreign exchange. Inflation in the first quarter was in the low teens.
Gross margins of 31.3 percent were 170 basis points ahead of last year driven primarily by Ferguson’s ability to service customers while managing price inflation, enabled by the hard work of sales associates and the strength of our supply chain. Operating expenses continued to be well controlled as they focused on productivity and efficiencies while investing in talented associates, supply chain capabilities, and technology programs.
Reported operating profit was $739 million (adjusted operating profit: $767 million), 64.2 percent ahead of last year (adjusted operating profit growth: 58.5 percent) as strong revenue, gross margin expansion, and good cost control led to strong operating leverage.
Earnings per share on a diluted basis was $2.40 (adjusted earnings per share—diluted: $2.50), an increase of 71.4 percent (adjusted earnings per share—diluted growth: 64.5 percent) with the increase due to the strength of the profit performance in the period and the lower share count arising from share buyback programs.
The US business grew net sales by 27.1 percent which comprised 25.2 percent organic growth and a further 1.9 percent from acquisitions. Price inflation was in the low teens during the quarter.
Residential end markets, which comprise just over half of Ferguson’s US revenue, remained robust in the first quarter. New residential housing starts and permits continued to grow in the quarter, as did residential repair, maintenance, and improvement (“RMI”) which performed strongly. Overall, Ferguson’s residential revenue grew by approximately 24 percent in the first quarter.
Non-residential end markets saw strong growth as increased demand lapped weaker comparators. Non-residential revenue grew by approximately 31 percent in the first quarter with leading non-residential economic indicators strengthening in recent months.
Adjusted operating profit was strong at $752 million, $280 million ahead of last year, driven by excellent revenue growth, expansion in gross margins and strong operating leverage.
Ferguson also completed two acquisitions during the quarter—Sunstate Meter & Supply, a waterworks meter distributor serving the Florida municipal market, and Meyer Appliance, a high-end appliance showroom serving consumers, builders, and designers in the San Francisco Bay Area. Subsequent to the quarter end, Ferguson acquired Safe Step California, an independent dealer licensed to sell and install Safe Step products in California and Nevada, and RP Lighting & Fans, an own-brand distributor based in Albuquerque, New Mexico.
Net sales grew by 19.6 percent with inflation of high single digits. Organic revenue grew by 13.9 percent with a further 5.7 percent of growth due to the impact of foreign exchange rates. Residential end markets saw good growth and non-residential markets returned to growth. Adjusted operating profit of $34 million grew by 47.8 percent, significantly outpacing revenue growth as a result of good operating leverage.
Financial position and corporate updates
Net debt on October 31, 2021 was $1,442 million and during the quarter Ferguson completed $97 million of the $1 billion share buyback announced on September 28, 2021. Since the end of the quarter, they have purchased a further $126 million of the buyback program through December 3, 2021.
Following shareholder approval at the Annual General Meeting, the final dividend of 166.5 cents per share, amounting to approximately $368 million, will be paid to shareholders on December 10, 2021.
The shareholder vote on U.S. primary listing remains on track for Spring 2022.
There have been no other significant changes to the financial position of the Company.
Since the start of the second quarter, Ferguson has generated revenue growth similar to that of Q1 2022. They continue to expect a tapering of growth in the second half on tougher prior year comparatives and we remain mindful that the recent tailwinds from inflation on gross margins will likely moderate, although the timing and extent remain uncertain. Given the strong momentum in the business and the agility of their business model, full year expectations have increased.