Ferguson CEO talks earnings, housing boom, and commodities inflation

Ferguson CEO Kevin Murphy joins Yahoo Finance Live to discuss the company's earnings, growth, the housing boom, and inflation.

Video transcript

BRIAN SOZZI: Building supply giant Ferguson is our better than expected quarterly earnings, in part reflecting ongoing strength in the US housing market. Let's dive into the company's business and outlook now with Ferguson CEO, Kevin Murphy. Kevin, welcome on. Good to see you here this morning. So 50% of your US business is tied to that US residential housing market. What are you seeing in this market here in front of what could be a series of rate hikes from the Federal Reserve?

KEVIN MURPHY: Yeah, good morning, Brian. Thank you for having me on. You're right. Just over 50% of our business is in residential, a little less than 50% in non-res. If you think about our residential business, call it 60% new construction, 40% RMI. And on that new construction side, certainly, we're mindful of what's happening from a rate perspective, what's happening in terms of price appreciation.

But the demand curve that we're seeing is still very strong. When you look at permit activity that's out there, still strong at 1.9 million. We're still underbuilt from a housing perspective. We see the millennial generation really unlocking what home buying looks like. And as hybrid work happens, that commuting distance extends. Our waterworks business, our underground construction business gives us a good, early indicator as to what new residential looks like. So we're still bullish about what that new res sector can bring.

BRIAN SOZZI: Kevin, I made a note on your earnings release where you noted that you're seeing high teens inflation. Now where are you seeing some of the largest components of inflation? And what is that doing to the cost of remodeling a home?

KEVIN MURPHY: Yeah, so we saw high teens inflation in the second quarter of our fiscal year coming off of low teens in the first quarter. We really saw inflation early in the commodity side of our business. Commodities represent about 10% of what we do year in and year out. And we started seeing commodities move in the fall of 2020, and it ramped up through finished goods inflation in the most recent quarter.

And that price inflation really is ubiquitous across all of our product categories-- res, non-res, new construction RMI, underground infrastructure, all the way up through residential plumbing, appliances, lighting, HVAC, and fire protection. So it's across the entire book. That said, that price inflation is being passed on in higher price for home purchases, and demand is still very strong.

JARED BLIKRE: And Kevin, you mentioned, I believe-- I hope I get this right-- that you have a kind of leading indicator, [INAUDIBLE] leading indicator window into the residential side. I'm wondering if that also applies to the non-residential side, where we see things develop a little bit more slowly. Any trends in there that you're seeing in commercial real estate?

KEVIN MURPHY: Yeah, we do. We're fortunate in that we have a very comprehensive set of customer groups in everything from underground infrastructure all the way up through the rough side of construction, through the finished side. And so we see early on what's happening in both res and non-res. And then you look at even from a residential perspective, as we see that subdivision buildout, there's a natural knock-on for commercial buildout that follows residential construction.

And so we're also pretty confident in the non-residential side of our markets. We see health in areas like distribution centers, big box warehouse construction, as e-commerce gets closer to the customer, as you look at health care, hospitality, even, and again, that knock-on commercial buildout for residential. What's really exciting, though, is we're starting to see some large non-residential projects start to take root.

And if you look at the onshoring of manufacturing activity, exciting things for our country like semiconductor and what's happening in Ohio and Arizona, what's happening with electric vehicle production in Georgia and Illinois, and then technology investments that we're seeing in data centers across the US, non-res is really starting to pick up steam for us.

BRIAN SOZZI: And I'm going to use the best example I could here. I was at my local Home Depot-- Home Depot and Lowe's a week ago. And I was just surprised to see some of the product shortages in basic components now-- screws, pipes. It was really mind blowing to me. Are there just certain products you can't get right now because of various shortages?

KEVIN MURPHY: Yeah, so right, just like I talked about inflation being ubiquitous across all of our product categories, it really has been a supply chain shortage issue across the entirety of the product categories. And we're recently starting to see some improvement in that, but really, it has shown the strengths of Ferguson. If you look at one of our core strengths, it is having a global supply chain with over 1,600 locations across North America, where we can get best-in-class breadth and depth of product availability.

And so we really use this time to leverage that global supply chain, leverage the strength of our balance sheet. We put an additional billion dollars worth of inventory in place to make sure that we could take care of our customers' needs on time and in full. And then the last component, which I can't oversell, is our associates' involvement. Our associates helped to guide a customer, typically a trade professional, in terms of what is the best solution for their particular project.

In this case, it is, what product can be supplied on time to make their job complete? And so those three things working together-- supply chain, inventory investment, and associate consultation-- really had helped to create a gravitational pull to our company for our customers and cemented relationships for the long haul.

BRIAN SOZZI: Kevin, real quick before I let you go, US listing still on track for May?

KEVIN MURPHY: Yeah, so it's an exciting time for Ferguson. We were a premium listing in London. And through a methodical process, over the course of a couple of years, in conjunction with our share register, it was really exciting to see 95 plus percent support from our share register to demote the premium listing in London and move our primary listing to the New York Stock Exchange. Like you said, May 12 goes effective. So a big time for Ferguson and a big step towards aligning our operations, our sales and profit, our management team with our listing structure.

BRIAN SOZZI: Looking forward to staying in touch. Ferguson CEO Kevin Murphy, we'll talk to you soon.