Ferguson plc misses on earnings expectations. Reported EPS is $1.74 EPS, expectations were $1.85. Ferguson plc isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Hello, and welcome to Ferguson's Second Quarter Results Conference Call. My name is Adam, and I'll be coordinating your call today. I'd now like to turn the call over to Brian Lantz, Vice President of Investor Relations and Communications. The floor is yours. Please go ahead.
Brian Lantz: Good morning, everyone, and welcome to Ferguson's second quarter earnings conference call and webcast. Hopefully, you've had a chance to review the earnings announcement we issued this morning. The announcement is available in the Investors section of our corporate website and on our SEC filings web page. Recording of this call will be made available later today. I want to remind everyone that some of our statements today may be forward looking and are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected. Including the various risks and uncertainties discussed in our Form 10-K available on the SEC's website. Also, any forward-looking statements represent the company's expectations only as of today, and we disclaim any obligation to update these statements.
In addition, on today's call, we will also discuss certain non-GAAP financial measures. Please refer to our earnings presentation and announcement on our website for additional information regarding those non-GAAP measures, including reconciliations to the most directly comparable GAAP financial measures. With me on the call today are Kevin Murphy, our CEO, and Bill Brundage, our CFO. I will now turn the call over to Kevin.
Kevin Murphy: Thank you, Brian, and welcome, everyone to Ferguson's second quarter results conference call. On the call today, I'll cover highlights from our second quarter performance, I'll also provide a more detailed view of our performance by end market and by customer group before turning the call over to Bill for the financials then come back at the end and give some closing comments before Bill and I take your questions. Our associates have continued to execute well, going above and beyond to serve our customers, helping to make their projects more simple, successful and sustainable. In the quarter, we saw a modest revenue decline of 2.2%, largely driven by 2% deflation in a challenging market. We delivered solid gross margins and appropriately managed costs while preparing for our seasonally stronger second-half.
Adjusted operating profit came in at $520 million, with adjusted diluted earnings per share of $1.74 down 8.9% against last year. Over the three years since fiscal 2021, this represents sales growth of 35%. Adjusted operating profit growth of nearly 50% and adjusted diluted earnings per share growth of nearly 60% for the second quarter. Looking forward, open orders and sales per day trends support our expectation of improvement through the balance of the fiscal year against easing comparables. Our views on fiscal 2024 guidance are unchanged. Bill will walk you through this in more detail shortly. Turning to our performance by end markets in the United States. Net sales were down 2.2% as end markets remain challenged. Trends in new residential housing starts and permit activity improved slightly in the quarter, while repair, maintenance and improvement work remains soft.
Our residential revenues, which comprised just over half of U.S. revenue, declined 4% during the second quarter, representing a sequential improvement from Q1. Non-residential markets show comparative resilience Commercial and civil infrastructure activity held flat in the quarter against strong comparables with industrial down 6% against an outstanding 24% comparable. Overall, Net sales in nonresidential declined by 1% during the quarter, the good levels of nonresidential bidding activity and expect improvement through the second half. While we expect growth rates will fluctuate over time, our intentional balanced end market exposure positions us well. Moving to our customer groups in the United States. Residential trade plumbing declined by 2%, an improvement from double-digit declines over the three quarters as we begin to lap easier comparables and new residential markets begin to stabilize.
Any indicators such as new residential permits and starts have recently seen modest improvement, and we expect further improvement in future quarters. HVAC growth continued. Rising 1% against a 10% prior year comparable. We will continue to build on the strength of our residential trade plumbing and HVAC customer groups in service of the growing dual trade contractor. Residential Building and remodel revenues declined 4%, similar levels to the first quarter with continued pressure on repair, maintenance and improvement. Residential digital commerce declined by 13% with consumer demand remaining weaker. Waterworks revenues were flat. Hitting activity is healthy across our broadly diversified business mix, including residential, commercial, public works, municipal, meters and metering technology and wastewater treatment plant.
Soil stabilization and urban green infrastructure. The commercial mechanical customer group grew 1% as we continue to see our customers pivot towards work such as data centers and major capital projects. Our industrial, Fire and Fabrication and facility supply businesses delivered a combined net sales decline of 3% against a strong 17% growth comparable. Our breadth of customer group allows us to bring value to the total project while also maintaining a broad and balanced end market exposure. Now let me pass to Bill to cover the financial results in a bit more detail.
Bill Brundage: Thank you, Kevin. And good morning, everyone. Second quarter net sales were 2.2% below last year. Manic revenue declined 3.7%, partially offset by acquisition revenue of 1.5%. Pricing environment was similar to the first quarter with approximately 2% deflation driven by weakness in certain commodity categories as we lap strong comparables, while finished goods pricing has remained slightly positive. Gross margin of 30.4% was up 20 basis points over the prior year, driven by strong pricing and product strategy execution from our associates. We are appropriately managing the cost base with SG&A stepping down more than $40 million from Q1. We're balancing targeted cost control actions and productivity initiatives with continued investment in core capabilities for future growth.
A busy warehouse stocked with a variety of industrial plumbing parts.
Adjusted operating profit of $520 million was down $62 million or 10.7% lower compared to prior year. Adjusted diluted earnings per share of $1.74 was 8.9% lower than prior year, with the reduction due to lower adjusted operating profit, partially offset by the impact of our share repurchase program. Our balance sheet remains strong at 1.1 times net debt to adjusted EBITDA. Moving to our segment results. Net sales in the U.S. declined by 2.2% with an organic decline of 3.7%, partially offset by 1.5% contribution from acquisitions. Adjusted operating profit was $525 million, delivering an adjusted operating margin of 8.2%. Canada net sales were down 3.7%, with an organic decline of 3.3% and a 0.4% adverse impact from foreign exchange rates. Markets have remained challenging, and we saw similar trends to that of the U.S. Adjusted operating profit came in at $9 million.
Turning to our first half results. The year is progressing as expected. As we set out at the beginning of the year, we expected to operate against a challenging market backdrop, particularly in the first half of our fiscal year against strong revenue and adjusted operating margin comparables. Net sales were 2.5% below last year, with an organic decline of 4.4%, partially offset by an acquisition contribution of 1.9%. Gross margin was 30.3%, down 10 basis points as our associates have been disciplined in managing prices through a period of commodity price deflation. We have managed labor and nonlabor expenses throughout the year, balancing the near-term market demand environment against expected growth in upcoming quarters. Adjusted operating profit of $1.3 billion was down 10.6% compared to the prior year, delivering a 9.0% adjusted operating margin.
Adjusted diluted EPS of $4.40 was down 9.7%. I believe the business is well positioned as we head into the second half with improving market demand and the cost base in good shape. Next, the business continues to generate strong cash flows. Inventory positions normalized as we exited last fiscal year and we have returned to our normal historical seasonal working capital trends with a modest outflow in the first half of the year. Interest and tax outflows were slightly lower than last year, due to the timing of tax payments, resulting in strong first half operating cash flow of $863 million. We continue to invest in organic growth through CapEx, investing $192 million in the first half. As a result, we generated free cash flow of approximately $700 million.
Moving to capital allocation. Our balance sheet position is strong, with net debt to adjusted EBITDA of 1.1 times. Target a net leverage range of 1 times to 2 times, and we intend to operate towards the low end of that range through cycle to ensure we have the capacity to take advantage of growth opportunities as well as to maintain a resilient balance sheet. Allocate capital across four clear priorities. First, we're investing in the business to drive above-market organic growth. Previously mentioned, we invested $113 million in working capital and $192 million in the CapEx during the first half, principally focused on our market distribution centers, branch network and technology programs. Second, we continue to sustainably grow our ordinary dividend.
Board declared a $0.79 per share quarterly dividend, a 5% increase over the prior year, reflecting our confidence in the business and cash generation. Third, we're consolidating our fragmented markets through bolt-on geographic and capability acquisitions. We are pleased to welcome associates from secure vision, grow supply and hard way appliances during the first half. Our deal pipeline remains healthy, allowing us to continue to execute our consolidation strategy. Finally, we are committed to returning surplus capital to shareholders when we are below the low end of our target leverage range. returned $250 million to shareholders via share repurchases during the first-half, reducing our share count by approximately $1.5 million and ended the period with $285 million outstanding under the current share repurchase program.
Now let's turn our attention to the remainder of the fiscal year. As Kevin outlined earlier, current open orders and sales per day trends support our expectation of improvement through the balance of the fiscal year against easing comparables. I believe we are well positioned for our upcoming seasonally stronger second half. As a result, our view of fiscal 2024 guidance remains unchanged. We believe revenue will be broadly flat for the year. Here, we assume end markets declined in the mid-single-digit range. We expect to outperform these markets by approximately 300 to 400 basis points. Sales from completed acquisitions which we expect to generate just over $600 million in revenue and the benefit of one additional sales day landing in the third quarter.
Overall, while we saw modest deflation in the first half, we are assuming a broadly neutral pricing environment for the full year as a whole. Continue to provide a range for adjusted operating margin between 9.2% to 9.8%. I expect interest expense of approximately $190 million to $210 million. Our adjusted effective tax rate is expected to be approximately 25% this year and we expect to invest between $400 million to $450 million in CapEx, similar levels to last fiscal year. So to summarize, we had solid execution in the first half and our views on fiscal 2024 guidance are unchanged. And remain focused on execution and believe the combination of our strong balance sheet, flexible business model and balanced end market exposure positions us well.
Thank you, and I'll now pass back to Kevin.
Kevin Murphy: Thank you, Bill. Let me again thank our associates for their unwavering dedication to serving our customers, helping to make their projects more simple, successful and sustainable. We are pleased with our execution in the first half. Business is well positioned as we anticipate firming demand. And as Bill set out, our fiscal 2024 guidance is unchanged. As we look forward, we are well positioned with a balanced business mix between residential and nonresidential, new construction and repair, maintenance and improvement. We have an agile business model and flexible cost base that allows us to adapt to changing market conditions. Our cash-generative model allows us to continue to invest for organic growth, consolidate our fragmented markets through acquisitions and return capital to shareholders and to do this while maintaining a strong balance sheet, operating at the low end of our target leverage range.
We have consistently executed on these priorities and supported a long-term track record of outperformance and disciplined deployment of capital. Scale and breadth allows us to leverage our competitive position across our customer groups in order to benefit from emerging multiyear tailwinds in our end markets. Remain confident in the strength of our markets over the medium and longer term and expect to capitalize on these growth opportunities. Thank you for your time today. Bill and I are now happy to take your questions. Operator, I'll hand the call back over to you.
