Good morning, ladies and gentlemen. My name is Elliot, and I'll be your conference operator today. At this time, I would like to welcome you to Ferguson's Third Quarter Conference Call. All lines have been placed on mute to prevent any interference with the presentation. At the end of the prepared remarks, there will be a question-and-answer session. Thank you. I would now like to turn the call over to Mr. Brian Lantz, Ferguson's Vice President of Investor Relations and Communications.

Good morning, everyone, and welcome to Ferguson's third 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 webpage. A 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 the section entitled Risk Factors 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 specifically 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 their 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.

Thank you, Brian, and welcome everyone to Ferguson's third quarter results conference call. On today's call, I'll cover highlights from our Q3 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 and our updated outlook for fiscal year 2023. I'll then come back at the end to give a brief update on some of the fundamental drivers of our residential and non-residential end markets before Bill and I take your questions. The year has continued as we expected and our associates again delivered solid results that were in line with our expectations following the significant step up in performance delivered in fiscal year 2022. Our dedicated associates continue to go above and beyond to serve our customers and help make their projects simpler, successful, and sustainable. As market conditions have become more challenging, our balanced business mix is serving us well. We leveraged our consultative approach, our scale, our global supply chain, and our strong balance sheet to help improve our customers' projects. As expected, we saw a modest revenue decline in the quarter, but we're pleased with revenue stepping up by over 20% compared to the equivalent quarter in fiscal year 2021. We remain disciplined on cost delivering adjusted operating profit of $657 million and adjusted diluted earnings per share of $2.20. This represents significant growth from two years ago at 18% and 24%, respectively. Our balance sheet remains strong and our cash-generative model allows us to continue to execute our strategy of investing for organic growth, sustainable growth of our dividend, consolidating our fragmented markets through acquisition, and returning capital to shareholders. We've declared a quarterly dividend of $0.75 per share implying a 9% increase when annualized over the prior year and have also increased the share repurchase program by an additional $500 million. We're proud of these results, which came in as we expected and are confident in the strength of our business model as we go forward. Turning to our performance by end market in the United States. Overall growth moderated as we lap strong comparables and markets became more challenged. As expected, residential markets were more significantly impacted by the slowdown in new residential construction and an area serving the project-minded consumer. Whereas repair, maintenance, and improvement markets, particularly with our core trade professionals and in high-end remodel proved more resilient. Our residential revenues, which comprise just over half of U.S. revenue, slowed during the quarter to a 6% decline. Overall non-residential end markets representing nearly half of U.S. revenue saw the pace of growth ease in the third quarter, in line with our guidance. There was good activity in industrial-related end markets and our non-residential sales were 3% higher than the prior year on top of tough comparables. Despite a sequential slowdown in the business, we continue to outperform our markets taking share across both residential and non-residential end markets. As we've discussed previously, we will continue to focus on maintaining our balanced end market mix and while we expect growth rates will fluctuate over time, we seek to maintain this healthy balance. Turning now to revenue growth across our customer groups in the United States. Residential trade plumbing declined by 11% against a 21% prior year comparable growth, due to declines in new residential construction activity. Residential building and remodel grew 3% on top of a 17% prior year comparables with continued resilience in higher-end remodel projects. Residential Digital Commerce declined by 15% due principally to softening consumer demand. HVAC, where the majority of our business serves the residential end market, declined by 2% with a two-year stack of 26% growth. Waterworks revenues were flat on top of a prior year comparable of 42% growth. The balanced business mix between residential and non-residential work within our Waterworks group ensures good diversification and has allowed us to take advantage of more resilient public works and commercial demand. The commercial mechanical customer group declined 2%. Our industrial fire and fabrication and facility supply businesses delivered a combined 14% growth in the quarter against a 27% comparable, driven by non-residential trends such as onshoring, plant turnaround work, and general increased industrial activity. It is through our growth platform of nine customer groups that we achieved broad and balanced end market exposure. This allows us to serve our customers' needs in a more holistic way and bring more value to the total project. Let me now hand over to Bill, who will take you through the financials in a little bit more detail.

Thank you, Kevin, and good morning or afternoon, everyone. Net sales were 2% below last year, driven principally by the 1.9% impact of one fewer sales day and foreign exchange. Organic revenue declined 2.5% and was largely offset by acquisition growth of 2.4%. As expected, price inflation stepped down from 10% in Q2 to 5% in Q3. Gross margin of 30% was down 30 basis points against a strong prior year comparable. The modest decline was driven principally by deflation in certain commodity categories. We proactively managed the cost base, keeping it flat on a sequential basis compared to Q2, as revenue increased into our seasonally stronger third quarter. This enabled us to deliver an adjusted operating margin of 9.2%. Adjusted operating profit of $657 million was down $90 million or 12% compared to the prior year's record third quarter, but remains well ahead of fiscal 2021 levels. Adjusted diluted EPS compressed by 12%, in line with the reduction in adjusted operating profit, but remains 24% above fiscal 2021. During the quarter, we took additional steps to review and control our cost base. We recorded a charge of $30 million related to the closure of 44 smaller underperforming branches within our network of approximately 1,700 branches. We evaluated this decision based on market conditions to ensure we have the right branch portfolio and cost base going forward. Also, we continue to make good progress overall with our IT modernization journey, investing in both front-end customer-facing capabilities and back-end systems and tools to drive productivity. We've delivered key benefits in areas such as omni-channel capabilities and build with Ferguson and buy online, pickup in store capabilities, upgraded modern fleet and delivery systems, proof call center and customer contact technology, warehouse automation and robotics and back-office finance and HR systems. A component of our investment targeted the modernization of certain branch transactional processes to enhance customer experience and associate productivity. After piloting the solution at a handful of locations, we determined the results did not meet our customer service, speed, and efficiency requirements, and we chose not to proceed with the upgrade. Accordingly, we recorded a non-cash software impairment charge of $107 million in the quarter. We remain focused on building on what has been good overall momentum on our IT modernization journey, and we will continue to invest in areas that enhance systems and processes to deliver an unmatched customer experience while improving associate productivity. And finally, our balance sheet remains strong at 1.1 times net debt to adjusted EBITDA and we intend to maintain our leverage towards the low end of our stated 1 times to 2 times guidance range. Moving to our segment results. The U.S. business delivered another solid performance against strong comparables. Net sales declined by 1.6%, driven by one fewer sales day. Organic revenue declined 2.5%, offset by a 2.5% contribution from acquisitions. We delivered adjusted operating profit of $664 million, down 9.8% over the prior year, delivering a 9.7% adjusted operating margin. Turning to our Canadian segment, markets softened further with some sustained pressure from the adverse impact of foreign exchange rates resulting in a challenging quarter. Organic revenue declined 1.5% against a strong 11.3% comparable growth. A 6.2% decline from the impact of foreign exchange rates and a 1.8% decline from one fewer sales day. Total revenue declined by 9.5%. Consistent with the U.S., non-residential end markets performed better than residential this quarter. Adjusted operating profit of $7 million was down $13 million below last year. While there is more work to be done in Canada, we will continue to invest in capabilities to improve the return profile of the business over the longer term. Turning to the year-to-date results. Net sales were 6.3% above last year with organic growth of 4.2%. Acquisitions contributed 2.6% to revenue, partially offset by a 0.5% adverse impact from foreign exchange rates and sales days. Gross margin was 30.2%, down 50 basis points as expected against a strong prior year comparable during a period of rapid commodity price inflation and acute supply chain disruption. We have proactively managed both labor and non-labor operating expenses throughout the year, managing down overtime and temporary labor while allowing natural attrition without backfills to reduce the number of FTEs in the business. In addition, as discussed last quarter, we implemented certain targeted headcount reductions. Selectively, these actions have reduced our full-time equivalent headcount by over 2,000 during the year. We will continue to evaluate our cost base and resource allocation decisions as we move forward. Adjusted operating profit of $2.1 billion was flat compared to the prior year, delivering a 9.6% adjusted operating margin. Adjusted diluted EPS grew by 2%, benefiting from our share repurchase program. The business delivered strong cash flow during the first nine months of the year generating $1.8 billion in operating cash flow, which was $1.1 billion more than the prior year. Year-to-date adjusted EBITDA was $2.2 billion with working capital benefiting cash flow as we continue to reduce inventory as supply chain constraints ease. Inventory, excluding acquisitions, was down $315 million in the first nine months of the fiscal year. We continue to invest in organic growth through CapEx principally invested in our market distribution centers, branch network, and technology programs. The increase over the prior year is principally attributable to timing of investments related to our multi-year market distribution center rollout strategy. As a result, free cash flow was $1.4 billion, a significant increase of nearly $1 billion over the prior year. Our balance sheet position is strong with net debt to adjusted EBITDA of 1.1 times. We target a net leverage range of 1 times to 2 times. And we intend to operate towards the low end of the range through cycle to ensure we have the capacity to take advantage of growth opportunities as well as to maintain a resilient balance sheet. We allocate capital across four clear priorities. First, we're investing in the business to drive above-market organic growth. As previously mentioned, working capital has had a positive impact on cash flow this year to date. Our CapEx investments were principally focused on our market distribution center rollout. Second, we continued to sustainably grow our ordinary dividend. Our board declared a $0.75 per share quarterly dividend that implies a 9% increase when annualized 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 purchased five businesses since the start of the fiscal year, bringing in approximately $330 million of incremental annualized revenue and have signed a definitive purchase agreement on S.G. Torrice, a 15 location HVAC distributor in the Northeast, which is expected to close in the fourth quarter. Our deal pipeline remains healthy and we will continue to execute our consolidation strategy. And finally, we are committed to returning surplus capital to shareholders when we are below the low end of our target leverage range. We have returned $784 million to shareholders via share repurchases year to date, reducing our share count by approximately 6.2 million, and we've extended the share repurchase program by an additional $500 million, resulting in a remaining balance of approximately $700 million at the end of the quarter. Turning to our view of fiscal 2023 guidance. The year continues to progress as expected. Our revenue guidance remains unchanged and we have tightened the range on adjusted operating margin guidance, with the midpoint of the range unchanged. As we've set out at the beginning of the year, we expected to deliver low single digit revenue growth, driven by continued organic market share gains and the benefit of completed acquisitions on top of markets, which we expect to decline in the low single digits for the year. After stepping up adjusted operating margins by 230 basis points over the last two years, we continue to expect some normalization. We've tightened the top and bottom end of our adjusted operating margin range to between 9.4% to 9.8%, with the midpoint unchanged from previous guidance. We've trimmed interest expense guidance to between $185 million and $195 million. Finally, our adjusted effective tax rate guidance of approximately 25% and CapEx of $400 million to $450 million remain unchanged. So to summarize, the business is performing well and in line with our expectations. We remain focused on executing our strategy. I believe the combination of our strong balance sheet and flexible business model positions us well.

Thank you, Bill. We continue to drive end market outperformance while further investing to build on our competitive advantages for the longer term. We will also continue to maintain a balanced business with broad exposure to both residential and non-residential and a balance of repair, maintenance, and improvement and new construction. This ensures we can leverage scale in attractive profit pools with a less cyclical, more durable business model. Turning to fundamentals in the residential markets. While near-term residential demand is challenged, we continue to believe the market fundamentals remain attractive over the medium term. The combination of an undersupply of homes with very low vacancy rates will be supportive of new residential construction. Aging housing stocks should be supportive of both new residential construction and repair, maintenance, and improvement markets with a combination of rebuilds and remodels. Our greater exposure to repair, maintenance, and improvement revenue streams reduces cyclicality. Turning to non-residential end markets. Our view on the opportunities ahead with large-scale mega projects remains unchanged. The data continues to point towards significant volumes of megaproject construction spend over the next five years. As one Ferguson, we're able to leverage our capabilities, our products, and our services across all of our businesses. We do this, we add value and have the ability to sell from the ground up solutions focusing on the entire project rather than just selling products. We estimate our total addressable market for projects with over $400 million of construction value to be over $30 billion across our platform over the next five years. We continue to believe our scale and platform strongly position us to capture meaningful growth from these significant projects. We believe these megaproject trends supported by onshoring activity, recent legislative acts, and the aging infrastructure will provide a multiyear tailwind. Additionally, our non-residential customers gravitate towards where the work is. For example, a contractor can typically move between segments like office, retail, education, healthcare, or the construction of a new airport terminal. This means our customers have the ability to flex to where growth opportunities are. To close, let me again thank our associates for their dedication to serving our customers. The year continues to track overall as we expected. The performance to date has been strong against challenging comps and we continue to build on our market-leading position and our key strengths while investing for future growth. Despite a more challenging macroeconomic environment, we are well positioned with a balanced business mix between residential and non-residential, 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 scale and advantage growth platform allows us to leverage our competitive position across nine customer groups in order to capture opportunities from structural changes in our end markets. And we're maintaining a strong balance sheet operating at the low end of our target leverage range while focusing on strong cash generation. This allows us to continue to invest for organic growth, consolidate our fragmented markets through acquisitions, and return capital to shareholders. We're confident in our competitive position in markets that are attractive over the medium term. 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.

Thank you. First question comes from Matthew Bouley with Barclays. Your line is open.

Good morning, everyone. Thank you for taking the questions. Maybe just one to start on the near term. I think the Q4 revenue guide is assuming a bit of a deceleration to get to your full year guide. I think the two-year stack comp is relatively similar sequentially. So just any color on what's kind of underlying that deceleration, price volume into Q4? And maybe any color around what you've been seeing quarter to date, please? Thank you.

Yes. Good morning, Matt. It's Bill. I will start with that one. You are correct. If you look at our implied guidance for Q4, it's implying a mid-single digit revenue decline. We would expect that to consist of a mid to high single digit organic decline with price inflation continuing to compress. So volume will likely remain fairly similar to where it was in Q3, but price inflation will continue to step down as we progress through the quarter, maintaining the sequential trend we've observed all year with price inflation compressing. In terms of what we've seen in May, it was largely consistent with that mid to high single digit decline, with inflation dropping into the low single digits. We expect this trend to continue through Q4 as we finish up the year.

Perfect. Okay. Thank you for that, Bill. Second one, higher level on the mega project. Really helpful color there. You gave your estimates of the $30 billion addressable market. I'm curious, number one, how did you arrive at that estimate? And then number two, how do we think about Ferguson's market share of that? Should we be thinking sort of looking at your current market share of your non-residential customer groups and applying that? Or how do we think about your ability to capture that $30 billion market? Thanks, guys.

Thank you, Matt. And as we went through last quarter, we really worked to try and tighten up what our addressable market could be in areas like industrial, commercial mechanical, fire and fabrication, waterworks and so forth. And so, we started to tighten that up and in fact expanded the number of projects that we would include in that area because of some of the industrial activity that was happening, particularly with the onshoring and the movement from a sustainability perspective in terms of that technology and that manufacturing start to look like. So we think we've got a pretty decent idea as to what that can represent in our product categories and with our customer base. And then, as we discussed during the last quarter, the thing that we're really excited about beyond the revenue and profit pools that are associated with what we think is a generational shift in terms of non-residential construction activity. What's really exciting from our perspective is, as we start to engage with general contractors and owners around what product specifications can look like to make sure that we deliver that project on time and as required. And then use that as a pull strategy with our trade customers across everything from water to fire to commercial mechanical and industrial PVF. And at the same time, utilize the supply chain network and branch network that can provide the best product on-site and on time. So we think that the complexity of these large projects really serves us well in terms of what the capabilities are of the overall platform. So we think we can overachieve from a share perspective our traditional market shares in these types of projects.

Got it. All right. Well, thanks, Kevin. Thanks, Bill. Good luck, guys.

We now turn to Philip Ng with Jefferies. Your line is open.

Hey, guys. Solid quarter in a choppy environment. So Kevin, I mean, you're certainly excited about the opportunity on some of these mega projects. I'm just curious, is that enough to offset potentially softer trends in like commercial, certainly that lags resi typically and we've seen tighter lending conditions. So just want to help us think through how these two end markets on the commercial side progresses as we kind of look out to 2024?

Yes. Thanks, Phil. From our perspective, really it's a timing issue more than anything else. As we look at the non-residential space, there is going to be pressure on knock-on commercial activity as we've discussed before, certainly in areas like office and even natural build out from a retail perspective. There's also the chance for additional product deflation in terms of commodity product categories like cast iron or steel. But it really is a timing issue because the gestation period just the way that these projects progress because of their size and complexity that we may see a low. In fact, we saw a bit of a low in our commercial mechanical business during the quarter. And that is not indicative of what the non-residential bidding activity and order activity is, just a mere low in terms of what that timing looks like. So we do believe that will provide a natural tailwind. We do believe it will be over the next five plus years. The timing may be suspect.

Got you. Okay. Directionally that's helpful. And when you think about your resi business, once again, it's quite balanced. The homebuilders have actually talked up order patterns picking up this year, are you starting to see that come through? And on the flipside, R&R, I think with existing home sales down a bit, certainly more questions among investors. Your business actually hung in there pretty well. It's been pretty resilient. Can you kind of walk us through how you're thinking about the insights you're seeing in resi?

Yes. The residential new construction pressure that we saw was principally in our residential trade plumbing business and in particular, with that residential new construction plumbing contractor and as we started to get through the quarter and into our fiscal fourth quarter, bidding activity has actually been somewhat of a bright spot. And if you think about it, 1.4 million starts, historically, is a reasonably good place for us to kind of find a steady state and begin to grow from. So that was where the bulk of the pressure was. We're actually, as I said, seeing a bit of supportive activity in our Waterworks business for subdivision bidding activity. That said, the RMI side, which is the bulk of what that residential exposure is, did perform well and in fact, performed better on the higher-end remodel side, which is where our showroom business sits with 3% growth on top of a 17% prior year comp. And we continue to see good activity with that small to medium-sized local builder remodeler and what their knock-on consumer-related activity looks like. So that balance of just under 20% of our business being new residential and that 36% being residential RMI is supportive of what we think the market looks like.

Got you. Kevin, can you remind us that bidding activity called out on the inflection side, how long does it take to actually ripple through from a volume standpoint for you guys?

Yes. So it would take a bit of time as we would see that bidding activity on the water side still have a lag before the construction activity and then it wouldn't appear in the residential trade side of our business for likely six months or so. And so as we start to look into next year, it's really a question of quarters as you start to look at what improvement could look like on the residential side of the world.

Hi. Good morning, everyone. This is actually Brian Biros on for Kathryn. Thank you for taking my questions. Sticking with the kind of similar theme of last question on the state of residential, obviously, down, it seems like it's stabilizing, bidding activity looking a little bit stronger than expected at the beginning of the year. So can you just continue to talk about where we sit today and kind of what we're expecting going forward from here is stable kind of this new normal? Or are we looking at a little bit of return to growth sometime soon? I think you briefly touched on it on the last question, but a little bit more would be helpful.

Yes, Brian. Thank you. And as we walked into our third quarter, we had very strong comps that we were coming up against. We knew that residential new construction was going to be a pressure point. We also knew that there could be some pressure from a revenue perspective with commodity-based product deflation. And we saw that play out in the residential side of our world, particularly in areas like residential plumbing PVC products, which caused a bit of a headwind. That comparable headwind that we have continues into Q4 and even into Q1. And so from that perspective, that frames our expectation. But again, 1.4 million starts is a reasonably good historic number. We know in this country we need 1.5 million starts to get back to equilibrium. We know we're underbuilt, arguably 2 million to 4 million units, and so we're starting to see some degree of spark in terms of what that looks like in new residential construction activity.

Got it. Thank you. Can you just also provide an update on how Ferguson wins with all the federal spending initiatives that are out there? You got IIJA, the Inflation Reduction Act. Maybe just what are you seeing now on the ground today? What are you currently benefiting from and what is still to come? Thank you.

Brian, I'll take that question really in two parts. Firstly, on the residential side. As we look strategically to a tailwind that can exist structurally inside that market, we do see sustainable product growth, particularly in the areas of HVAC and water heating, having some tailwind, especially when you look at the Inflation Reduction Act. As we look to invest, both from an M&A as well as an organic perspective, we're really going to look to build out our dual trade plumbing and HVAC capabilities across the nation to make sure that we're the best solution for that dual trade plumbing and HVAC repair replace contractor, we think that skill set plays well as that contractor continues to grow and sustainable solutions like heat pump water heating technology start to really take hold in the marketplace. And then on the non-residential side, if you just look at the Inflation Reduction Act, if you look at the infrastructure provision, chips and science, general onshoring of manufacturing activity following supply chain disruption. There's just a tremendous amount happening with that non-residential mega projects. We intend to take advantage of that, again, utilizing multiple customer groups to provide a solution for the owner and the general contractor, while at the same time, being the best solution for that individual contractor, who may be doing the site utility work or the fire protection work or the commercial mechanical or industrial pipe valve and fitting. So we think it's a good time to begin to leverage those capabilities across customer groups and non-res.

Thank you.

Hi. Good morning, Kevin. Good morning, Bill. Thanks for taking my questions. I had a couple on HVAC and then one on the charges. On HVAC, just wondering if you could give any color on how May's looked or quarter-to-date versus kind of the third quarter decline of 2%? And then on the acquisition there, any detail on the size of the revenue and the OEM partners. I haven't had a chance to kind of look through the website yet. So any additional color on that would be helpful. And then on the impairments, just curious impact in terms of ongoing business. I assume there's some cost savings from the branch closure, but maybe small sales as well. And on the IT impairment charge, it just seemed pretty sizable. So maybe some detail on, I guess, loss productivity benefits perhaps? Or just any additional color you can give on that specific item would be helpful. Thanks.

Patrick, good morning and thank you. On the HVAC side of the business, if I take a step back, it's clearly an area of investment for us, again, both from an M&A perspective as well as from an organic growth perspective. Really pleased to sign with S.G. Torrice, a $100-plus million HVAC acquisition in New England, and bring them together with our residential trade plumbing business inside that New England marketplace to provide a real powerful solution for our customers. In terms of what we're seeing in the market, as we look at the landscape. The Western U.S. was a little bit softer from an HVAC perspective. And so that had an effect on what the overall revenue base was in the third quarter. And then candidly, we're not here to be weather people. But when you look at what the cooling days looked like in the quarter, not necessarily as supportive. But generally speaking, we're very pleased with what the build-out looks like in our HVAC business, the combination with our residential trade plumbing business to provide a great solution and the activity level that we've got from an M&A perspective.

Yes. And Patrick, on the charges, from a branch closure perspective, think of these as mostly smaller branches. So there will be a minimal impact from a loss revenue perspective. But it's clearly taking the opportunity as we review the entirety of the cost base to ensure we have the right branch portfolio and the right cost structure moving forward. In terms of payback, again, a $20 million charge, probably roughly with a small amount of lost sales offset by cost savings, you're looking at probably a two to three-year payback period on those actions. And then from an IT perspective, I'll just go back to where we've been investing over the last several years. We've invested roughly a quarter to a third of our CapEx on an annual basis over the last four to five years in IT in a number of different areas as part of our multi-year modernization journey. And quite pleased, as we said in our prepared remarks, quite pleased with a lot of the significant delivery and successes that we've had over that journey. This component was focused on those branch transactional pieces. And as we said, we piloted it in a handful of locations. And quite frankly, it didn't meet our customer service needs and expectations. We are a very complex customer service project-driven business. And the last thing we're going to do is jeopardize that customer service ethos. So made the decision to take the charge and move on and feel very good about our IT journey as we look forward.

Thanks for the time. Appreciate it.

Our next question comes from John Lovallo with UBS. Your line is open.

Yes. Good morning, guys. Thank you for taking my question as well here. Maybe the first one, just to confirm here, given what you're currently seeing in the market right now, I mean, should we be thinking about the fourth quarter revenue down sort of mid-single digits, which would sort of imply 3% growth through the year? And maybe what could change on the upside and downside?

Yes, that's right. If you look at our guide, the midpoint of that would imply total revenue growth down in that mid-single-digit range. As we step through the year, as I said or as we step through the quarter rather, as I said earlier. We anticipate that being mid- to high single-digit organic decline with price inflation compressing as a component of that. So the volume decline stays in a similar range to where it was in Q3. And then we'll pick up a couple of points for acquisitions to bring us back to that mid-single-digit decline in Q4.

Okay. That's helpful. And then maybe just on the fourth quarter implied margin. It seems that at the high end and the low end, it would imply a pretty notable change in your current margin trend. What do you sort of think of the drivers of that high end and low end?

Yes. I mean I think if you focus first on the midpoint of the range, the midpoint being 9.6% for the full year. And us having delivered 9.6% through three quarters. So the midpoint is really right in line with where we've delivered for the year-to-date. In terms of what could flex that up or down, certainly, the impact of commodity prices, which we've talked about, commodities have continued to compress in total, although not all moving in the same direction at the same time. But we've seen that commodity deflation or inflation move to about flat in Q3. If there's continued pressure there, that could put a little bit more downward pressure towards the lower end of that range. On the flip side of that, if we continue to have commodity stabilization, that could float us up to the midpoint or more towards the high point of the range. And then certainly, the trading environment, while we don't expect to see a dramatic change in volumes over the next, call it, two, two and a half months as we round out the quarter. Any changes there could have an impact on the delivery.

Got it. Thank you, guys.

We now turn to Mike Dahl with RBC Capital Markets. Your line is open.

Hi. It's actually Chris on for Mike. Thanks for taking our questions. Just going back to the cost-cutting actions you've implemented so far this year. It looks like headcount reductions have been paused since February and now this announcement of the 44 underperforming branches. Just where are we today in terms of your cost-cutting journey? And when should we expect that to be largely completed?

Yes. We feel very good about the actions that we've taken to date. If you think about it just from a headcount perspective, which we commented on, the total organic headcount is actually down by about 2,500 FTEs year-to-date. And that's a combination of overtime and temp labor in addition to natural attrition and then some of the targeted actions, which we took in Q2 and in Q3. So we think we're in a good place from a headcount perspective, certainly, as we play through our stronger seasonal months in the summer season. So we don't have any additional plans right now from a headcount action perspective. Certainly, we'll keep that under close watch as we always do as we evaluate the market environment going forward. And then as we talked about earlier, the branch closures taking that opportunity to ensure that we have the right cost structure from an infrastructure standpoint as we move forward. So at this point, we feel good about the actions that we've taken. We'll continue to keep them under advisement, but have no additional plans for significant reductions as we move through the fourth quarter and into next fiscal year.

Got it. Appreciate that. And then just a follow-up on the pricing outlook that you guys said may moderate to up low single digits. Could you just flesh out what drove that? Was there any changes to pricing power in the marketplace? Or is that largely just a comp dynamic? And then when you think about pricing into next year with deflation expecting to still be a drag, how are you thinking in terms of being able to offset that with pricing to keep price flat to up essentially?

Yes. When we consider the pricing changes over the quarters, they have aligned well with our expectations set at the year's start, reflecting a natural decrease from the significant price increases experienced in previous years. We have seen a reduction from 15% in Q1 to 10% in Q2 and down to 5% in Q3. In Q3, the increase in finished goods was in the mid- to high single-digit range, while commodities remained relatively stable. Looking ahead, we anticipate that finished goods inflation will return to more typical levels for our industry, which means low single digits. The variable factor will be the behavior of commodities in the future. We may experience slight deflation as we progress through Q4 and into Q1, but predicting that trend is challenging.

And today, the commodity pressure that's manifested itself has been in the area of principally residential trade plumbing PVC and steel from a commercial perspective, we think that the markets will remain relatively supportive as you look at the Waterworks PVC market. And then as steel becomes a bit more supported by non-residential mega projects as we move forward. So it's been, as expected, a mixed bag in terms of what's happened with deflation pressures inside the commodity-based products.

Understood. Appreciate all the color.

Our next question comes from McClaran Hayes with Zelman & Associates. Your line is open.

Thanks. Hi, good morning, guys. On the pricing thing, I guess, to build on that, besides the roll-off of prior year increases, are you seeing any mix impacts or any trade down?

We aren't seeing any trade down. From a mix impact perspective inside of our business, given the balance of our business, residential, non-residential new construction RMI, you will see a natural movement from a gross margin perspective as non-residential customer groups would have a slightly lower gross margin but also a slightly lower cost to serve. And so as non-residential has a bit of a tailwind in growth, you may see a little bit of downward tip from a gross margin, but operating margin should be unchanged.

Got it. Thanks. And I was also hoping that you could give us an update on own brands, how the strategy is trending year-to-date, if there's any growth there now that commodity inflation isn't as much of a headwind to your own brands percentage of your overall revenue.

Yes. We've been very pleased with the growth of own brand. It is just under 10% of our overall revenue. And you're right, as commodities start to tick down, they're 14% of what we do today, they've historically been roughly 10% of what we do. It's a part of our product strategy, together with our branded vendors with our exclusive products from our branded vendors. But we've been very pleased in areas like DuraStar on the HVAC side and the expansion of that product in both unitary as well as ductless product. We've been very pleased with the rollout of residential trade plumbing products, particularly in the commodity sector. So it's got good growth and good adoption in the marketplace, and we think that will play out as we go through the next several quarters.

Thank you.

We now turn to Keith Hughes with Truist. Your line is open.

Thank you. I have a question regarding digital commerce. As you discuss the trends in this area, which is one of your closest products to consumers, how did that trend evolve during the quarter and in May?

Keith, you're exactly right. That residential digital commerce business saw pressure. It's a balance between the project-minded consumer and the decorative pro, with the pro holding up much better than the project-minded consumer, which was the principal driver of the decline. And so, if we look at where that pressure exists in the residential market, it really is in residential new construction on the trade plumbing side and then the project-minded consumer on the residential digital commerce side of the business.

And did that change as the quarter went on that particular DIY? Is that change as the quarter went along? Or was it down to 15% most of the quarter end of May?

It wasn't a step down. It was fairly consistent, Keith.

Okay. And for my final question, you mentioned deflation during the quarter and possibly moving forward. Can you quantify the amount of commodity deflation you experienced during that period?

Well, in total, again, Keith, it was about flat as a basket. With, again, to Kevin's point, we saw carbon steel and plastic pipe and fittings on the plumbing side of the business moving into slight deflationary territory, offset by copper, steel, and waterworks plastic pipe still being up from a year-on-year perspective. So as a basket, it was about flat. Slight pressure on cast iron on the plumbing side and slight inflation on the ductile iron side from orders perspective.

And I assume, particularly on PVC, that if prices stay where they are, it will turn negative as we head into the new fiscal year. Is that correct?

Yes, there's a good chance of that just given the rollover of where pricing sits today.

Okay. Thank you.

Thanks, Keith.

Our final question comes from Glenn Richardson with Baird. Your line is open.

Hi, good morning, guys. Wanted to build on the earlier question on the digital business and just thinking more broadly, Kevin, you made comments about the higher-end remodel holding up better. Is that the right way to think about the relative exposure to higher-end versus consumers, the showroom and digital business? Just trying to think of kind of relative exposure there, and how to quantify that for you guys?

That's right, Glenn, in the residential building and remodel customer group, which has that showroom business being a principal driver inside of that group does tend to skew towards the higher end, both in new construction as well as in fairly sizable remodel activity. The traffic in our showroom continues to be very supportive, project and project growth continues to be supportive as well as price. When you look at the digital commerce side, again, that is a balance between the decorative pro and a project-minded consumer. That consumer piece has been a bit more challenging. Now the part that energizes us around residential digital commerce is not only that good balance that exists in that mix, but also utilizing those capabilities and the build with Ferguson team to help to bring that digital experience together with our showroom to make a better omnichannel experience for our connected customer in that showroom. And so, that's been very supportive as we've gone through the past year.

Okay. Thank you. And then secondly, just a question on HVAC. I wondering if you can discuss the state of your inventory in that business, especially this being the first full quarter following the DOE change, just any inventory mismatch or strand inventory? Or did that go fairly smoothly? And then you talked about it a little bit before, but if we could get an update specifically on the DuraStar rollout, that would be helpful. Thanks.

Yes. I'll take the last part first and then work backwards. The DuraStar rollout continues to be a very positive thing for us, both unitary as well as in ductless. We continue to be mindful about how we roll that product out from a supply perspective, but also to make sure that we've got the right plan in place geographically as we take that. Again, as we discussed, that offers good choice for our customers, and we have a multi-brand product offering made for us again from one of our OEMs. As we think about the overall market and the DOE changes, we have little to no inventory that is trapped as that DOE change has gone on. So quite frankly, our teams did a great job of positioning inventory into the right place. We do have good inventories to take care of our customers as we move into the summer cooling season. And then from a supply chain perspective, pretty much normalized across the board, some areas of individual product categories that still have some supply chain pressures, but generally speaking, we think supply is good and ready for a good cooling season as we get into the summer months.

Okay. Thank you very much.

This concludes our Q&A. I'll now hand back to Kevin Murphy, CEO, for any closing remarks.

Thank you very much for your time today. We greatly appreciate it and do not take it for granted. I want to express our gratitude to our associates who have continued to support our customers' complex projects, making them simpler, more successful, and sustainable. The year is progressing as we anticipated, and our diverse business mix in residential, non-residential, RMI, and new construction serves us well. Our markets remain appealing in the medium term, with an underbuilt housing supply supporting new residential construction and favorable remodeling activity that benefits our balanced business. From a non-residential standpoint, we are capitalizing on the significant growth in mega projects exceeding $400 million in this sector. We are committed to providing sustainable solutions to our customers, particularly in dual trade, residential plumbing, and HVAC contracting. Once again, thank you for your time. Enjoy the rest of your day.

Ladies and gentlemen, today's call has now concluded. We'd like to thank you for your participation. You may now disconnect your lines.