Earnings Call Transcript - FERG Q1 2022

Operator, Operator

Good morning, ladies and gentlemen, my name is Wong, and I will be your conference operator today. At this time, I'd like to welcome you to the Ferguson plc First Quarter Results 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'd now like to turn the call over to Mr. Brian Lantz, Ferguson's VP of Investor Relations and Communications. You may now begin your conference.

Brian Lantz, VP of Investor Relations and Communications

Good morning, everyone and welcome to Ferguson's first quarter earnings conference call and webcast. Hopefully, you've had a chance to review the earnings announcement we issued this morning. This is available in the Investors and Media 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. Additional information is included under the legal disclaimer in our earnings announcement this morning. In addition, we will be discussing certain non-GAAP financial measures. Please refer to the earnings announcement on our website for additional information, including a reconciliation to the most directly comparable financial measures calculated in accordance with GAAP. 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, CEO

Good morning, everyone, and welcome to Ferguson's first quarter results conference call. On today's call, I'll give you some highlights from our Q1 results and an update on our end markets before I turn the call over to Bill for the financials. I'll come back at the end to set our outlook for the rest of the fiscal year before Bill and I take your questions. We begin by saying the Group delivered exceptional performance in the first quarter, driven in part by strong market share gains. This success is due largely to our associates, who we would like to express our sincere thanks to as they continue to make our customers' projects simpler and more successful. We continue to leverage our global supply chain and strong balance sheet to support our local customers through a period of supply chain disruption. Reliably delivering in a period of industry supply chain pressures remains a gravitational pull for our customers to our business and has helped us to continue to capture these outsized market share gains. Technology remains a key strength, allowing us to make our customers as productive as possible, while at the same time, enhancing our own productivity. For our end markets, residential, which comprises just over half our U.S. revenue remained robust in the first quarter. Both new construction and RMI saw strong demand and our residential revenues grew by approximately twenty-four percent in the first quarter. Non-residential end markets grew faster than residential as we lapped negative comparables in the prior year. With an acceleration of activity in areas such as education, healthcare, and hospitality. Our non-residential revenue grew by approximately thirty-one percent and near-term economic indicators appear to be in pretty good shape. Inflation trends stepped up further in the quarter, driven both by finished goods and commodities. Our pricing discipline and particularly strong gross margins contributed to profit growing significantly faster than revenue, delivering strong operating leverage in the quarter. On the acquisition front, we acquired four high-quality businesses, bringing in approximately one hundred twenty-five million dollars in annualized revenue. And we're pleased to welcome these associates to Ferguson as these local relationships help us drive further growth in the future. We initiated our new one billion share buyback program, completing approximately one hundred million dollars in the first month of execution. And finally, we remain on track to hold our second vote on listing in the spring of twenty twenty-two, as we look to move our primary listing to the New York Stock Exchange. So again, we are proud of our strong results in the first quarter and are confident in the ongoing strength of our business model. Now let me pass you over to Bill, who will take you through the financial numbers in more detail.

Bill Brundage, CFO

Thank you, Kevin, and good morning, or afternoon everyone. As I start today, I wanted to remind you that we adopted U.S. GAAP effective August first, and therefore, the first quarter results we will cover today are presented on that basis. Now turning to the results. As expected, we've seen a continuation of trends from the fourth quarter with strong market share gains contributing to revenue growth of twenty-six point six percent. Organic growth of twenty-four point five percent was at similar levels to Q4 of last fiscal year. And as Kevin mentioned, price inflation stepped up in the first quarter into the low teens. Gross margins were one seventy basis points ahead of last year, reflecting the value we deliver to our customers, the strength of our business model and our ability to manage price inflation. Operating costs continue to be well controlled as we focused on productivity and efficiencies, while investing in our talented associates, supply chain capabilities, and technology program. As such, adjusted operating profit grew by two hundred eighty-three million dollars, up fifty-eight point five percent, and adjusted diluted EPS grew by sixty-four point five percent. Moving to our segment results, the U.S. business mirrors the Group results with a strong performance. Total revenues grew twenty-seven point one percent with organic growth of twenty-five point two percent and a further one point nine percent from acquisitions. Price inflation stepped up further in the first quarter into the low teens. We expanded gross margins, tightly controlled costs and generated strong operating leverage. Headcount and variable costs grew to appropriately support volume growth and consequently, adjusted operating profit came in at seven hundred fifty-two million dollars, two hundred eighty million dollars ahead of last year with adjusted operating margins expanding two forty basis points to eleven point seven percent. We provided a breakout of the revenue growth across our largest customer groups in the U.S. We saw strength in both the residential and non-residential end markets and our growth was fairly well balanced. Residential trade and building and remodel grew well with strong demand coming from both new construction and remodeling project works. Residential digital commerce continues to benefit from elevated demand from the project-minded consumer and the light decorative pro. HVAC, where the majority of our business serves the residential end market grew by twenty-three percent in the first quarter. Waterworks continue to outperform with revenue growth accelerating to fifty percent, driven by an increase in inflation and a balance of strong public works demand, good residential growth, and growth in non-residential end markets. The commercial mechanical and other non-residential customer groups saw good growth in the quarter. These businesses have lapped negative prior year comparatives. We continue to see growth in areas such as education, healthcare, and hospitality. The Canadian business performed well in Q1 with revenue growth of nineteen point six percent. Organic revenue grew by thirteen point nine percent, with a further five point seven percent tailwind coming from the positive impact of foreign exchange rates. Residential end markets, which account for over half of our Canadian business performed well in the period with another particularly strong performance from our HVAC business. We saw continued growth in civil infrastructure markets and returned to growth in our industrial markets. A good gross margin performance and tight cost control led to an eleven million dollar increase in adjusted operating profit with adjusted operating margin stepping up one seventy basis points to eight point eight percent. As we focus solely on North American markets, we continue to see success as we leverage the considerable expertise, knowledge, and know-how from our U.S. associates to enhance operations and customer experience across Canada. Finally, the balance sheet remains in great shape. Our capital allocation priorities and leverage targets have not changed and we continue to prioritize moving back into our stated leverage range of between one to two times. We are continuing to invest in the organic growth of the business and look to sustainably grow the ordinary dividend. Acquisitions are an important part of our growth strategy. We've completed four acquisitions to date in the fiscal year, and we currently see a healthy future pipeline of bolt-on acquisitions. We remain committed to returning surplus capital to shareholders and continue to execute the one billion dollar share buyback program, having completed just over two hundred million dollars to date. So let me wrap up, we're pleased with the start we have made to fiscal twenty twenty-two. Strong earnings while continuing to invest in the business and a strong balance sheet put us in a great position going into the balance of the year. Thank you. Now, let me hand you back to Kevin for an update on the outlook and his closing remarks.

Kevin Murphy, CEO

Thank you, Bill. Since the start of the second quarter, we continued to generate revenue growth similar to that of the first quarter. That being said, we do continue to expect a tapering of growth rates as we enter the second half. The recent tailwinds we've seen from inflation on our gross margins are likely to moderate, but the timing and the extent of this remain unclear. Given the momentum in the business and the strength of our business model, our full-year expectations have now increased. So to summarize, for the first quarter, the business is performing extremely well. We're leveraging our core strengths in the face of global supply chain challenges to deliver outsized market share gains. We believe we are well-positioned for growth and remain focused on executing our strategy over the rest of the fiscal year and beyond. 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.

Operator, Operator

Thank you. And our first question comes from Will Jones from Redburn. Please Will, your line is now open.

Will Jones, Analyst

Thank you. Good morning. I have a couple of questions. First, can we break down the gross margin increase of seventy basis points this quarter? I’m particularly interested in understanding how much of this was due to inventory holding gains versus other factors like customer service and product mix. Secondly, can you share your thoughts on your market share performance this quarter? I realize it’s a short period, but how much do you think this is influenced by supply chain constraints, and how do you plan to retain those customers once the supply chains stabilize, possibly in calendar 2022? Additionally, regarding market share, I noticed that Waterworks performed exceptionally well, achieving fifty percent. Is there anything specific we should note about that market share gain? Thank you.

Bill Brundage, CFO

Yes, good morning, Will. This is Bill. I'll take the first part of that question and thank you for that question. If you think about our Q1 gross margins of thirty-one point three percent, they were really a continuation of what we saw in Q4, which is right about the same level thirty-one point four percent, really driven by the continued step-up in inflation, as we said in our release, in our prepared comments, inflation moved from about eight percent in Q4, up into the low-teens. The majority of that further increase was driven by finished goods inflation. And that enabled us to continue to put up a very strong gross margin in the first quarter. So again, very much as that inflation continues to move up, we're able to translate that, manage that price inflation and leverage the strengths of our supply chain to produce those outsized gross margins. We would expect that as inflation tapers at some point in the future, that those margins will moderate at some point, but it is difficult to say when that's going to happen and to what extent that will be. But certainly the majority of that was driven by our ability to manage price in the first quarter.

Kevin Murphy, CEO

Yes, Will, and if we tackle down your question to market share, as we think about market share in the quarter, it's difficult for us to tease out exactly what that market share gain looks like, but I would think of it as broadly similar to what we experienced as we exited the fiscal year last year. And so that market out-performance is slightly above that two hundred basis points to three hundred basis points that we normally target. And as we said at the end of our fiscal year, really that's driven in large part by that supply chain chaos that's happening and our ability to service customers. And like we said at the close of the fiscal year, hanging on to new customers and the durability of those new relationships, we believe is in fact durable and the reason for that is these customers have been targets of ours for a period of time. And given the opportunity to service that customer to make their project better, we think is a bit of a durable proposition. You're going to win some, you're going to lose some, but we think we win more than we lose over the long haul. In terms of the Waterworks outperformance, we're really pleased with the balance of that performance, that balance across municipal, public works, residential new construction, commercial, and when you look across that performance, you've got a balance of inflation, especially in the commodity side of the business, things like PVC on the piping material side with also good volume growth. And we think that's about call it, half and half in terms of the growth inside of the quarter. So really pleased with what that brings, because if you look at the totality of the project, that's the opening gambit, if you will, for our company as we look to then take advantage of opportunities with the finished side of that building above underground construction, especially in residential and commercial settings.

Will Jones, Analyst

Right. Thank you.

Operator, Operator

Thank you. And our next question comes from Elodie Rall from J.P. Morgan. Please Elodie, your line is now open.

Elodie Rall, Analyst

Hi, thank you. Good morning, gentlemen. I have two questions about your end markets. First, can you provide insights on your Waterworks business, which performed really well in Q1? How do you see the potential benefits from the recent U.S. infrastructure plan? Secondly, could you share your updated perspective on the new housing market in the U.S. considering the rising interest rates? Thank you.

Kevin Murphy, CEO

Thanks, Elodie. I'll take the beginning of that and then if Bill wants to add in. In terms of that end market residential and infrastructure and commercial, when we think about Waterworks, the infrastructure bill will certainly be a tailwind. And it will likely play out over time as we think about what those projects are going to start to look like. And then as we discussed previously, there is a bit of pressure on trade labor. And so putting those projects into action will take a bit of time in our view. But it certainly will be a tailwind for us. I reflect back to that residential commercial side inside of Waterworks because of the broad-based nature of that performance. And the residential new construction market across the U.S., in particular, appears to continue to be quite strong. We've seen good bidding activity inside of that Waterworks business. We haven't seen any substantial reduction in lot count for subdivisions or postponement of new subdivision construction, which again points well towards our residential trade business, our building remodel business, and in the rest of the construction process inside of Ferguson. In terms of the new housing market, external indicators look to be good, permit activity at one point six five starts at about one point five two look to be good. And so that new construction growth appears to be strong, as we move into the next calendar year.

Elodie Rall, Analyst

Great. Thanks for that.

Operator, Operator

Thank you. Our next question comes from Keith Hughes from Truist. Please Keith, your line is now open.

Keith Hughes, Analyst

Thank you. Question on inflation, can you give any sort of feel on the inflation levels you saw in your commodity products versus how much you saw more of the value add of HVAC, finished plumbing and things of that nature?

Kevin Murphy, CEO

Yes, good morning, Keith. Thanks for the question. Commodities really trended in a very similar level from an inflation standpoint to what they did in Q4. So think of that in the fifty percent inflation range year-over-year, so very similar, some puts and takes in there between the different commodity categories, but overall, very similar level. As you know, commodities represent today what used to be about ten percent to twelve percent of our business today, it's more like thirteen percent to fourteen percent just given the fact of that price increase. But where we've really seen the step up and we talked about this a bit on the Q4 call is we're now seeing the commodity and the input costs playing through to finished goods. And so we saw that finished goods inflation step up into the high-single digits in Q1. And so it's really the combination of that and the acceleration on the finished goods side that drove that further uptick in inflation from Q4 to Q1.

Keith Hughes, Analyst

Okay, thank you. And I guess one other question, maybe the lion's share repurchase you talked about the progress on one billion dollar plan. Could you just give us an idea where you are in share count right now given all the repurchase activity?

Kevin Murphy, CEO

Yes, we're just under two hundred and twenty-one million dollars shares today, Keith. And to date we've purchased about two hundred and twenty-five million dollars to date on that billion dollar share buyback program.

Keith Hughes, Analyst

Okay. I have a broader question to wrap things up. As you mentioned, inflation is likely to decrease. Do you have any historical examples of previous periods when inflation subsided and how much of that you managed to retain? Is there any general rule of thumb to consider, particularly regarding finished goods and value-added products? Do you have any relevant historical instances?

Kevin Murphy, CEO

We are currently experiencing a period of unusually high inflation, and we lack significant historical data to guide us. Last year, we achieved gross margins of thirty point six percent, and we anticipate these will rise to the mid thirty-one percent range, but we expect some moderation in that regard. Our main focus remains on improving overall operating margins. We were pleased to increase our operating margin from around eight percent to approximately nine point two percent last fiscal year, establishing a new base for future growth. We believe there is potential for our operating margin to continue increasing over time. While we expect a slight decrease in gross margins, it is challenging to predict where they will ultimately stabilize.

Keith Hughes, Analyst

Okay, great. Thank you very much.

Operator, Operator

Thank you. Our next question comes from Gregor Kuglitsch from UBS. Please Gregor, your line is now open.

Gregor Kuglitsch, Analyst

Hi, good morning. I have a couple of questions. Firstly, you mentioned that you have raised your expectations; could you share your current outlook and the key components needed to achieve that? My second question is about the fill rates into the distribution center and branches that you previously discussed. Can you provide an update on the supply chain challenges and whether they are easing? Lastly, I noted that you expressed your intention to seek a vote for re-listing in the spring. Can you provide any specific updates or steps taken since your last communication in September? Thank you.

Bill Brundage, CFO

Yes, sure, thanks Gregor. If I go back to your question on expectations first, we started the fiscal year in strong fashion and really pleased with the growth almost twenty-four percent, twenty-five percent organic growth in Q1. And really pleased with the operating leverage that we produced. And as we said, we've started from a growth perspective, even though it's early, we've started Q2 at a very similar growth range. So I play that through and we would expect to have a very strong first half set of results. As you turn to the second half, as we've talked about in the past, the organic comparables get much tougher; they moved from roughly three percent in the first half to twenty-two percent in the second half. And there are some uncertainty as we've already talked about a bit today from an inflation standpoint in terms of how that will play through to gross margins. So we would expect a tapering still of growth. But sitting here today, two months after we last spoke to the market, given the start to the year given the momentum, we have we're incrementally more positive for the full-year outlook at this point.

Kevin Murphy, CEO

Yes, thank you, Gregor and building onto the fill rate and supply chain area, as we discussed previously, we were using our balance sheet to invest in inventory, using our supply chain to make sure that we took what were pressured fill rates at the time, call it, in that thirty percent area on time and in full into our DC, and turning that into high nineties fill rate and in stock for our customers at the branch level. That hasn't changed materially in terms of what that on time and in full looks like into our DC. And it hasn't changed materially in terms of our fill rate and in stocks at the branch level. What has changed is we have seen as we exited the quarter some improvement and some firming up of the ground under our feet in that supply chain area, especially in certain product categories, certain SKUs, but it has been intermittent. And so, the way we've been looking at this is, we have certain areas of our product catalog that are coming in at normalized fill rates and normalized time horizons. And the way we measure that is we look at the entirety of a purchase order to one of our suppliers, and how quickly we can get to, say, seventy-five percent of that purchase order being filled into our DCs. And that time horizon to get that fill has improved by roughly twenty-six percent as we exited the quarter. So we're starting to see some of that improvement. Now that's going to play out with a little bit of challenge inside of our network, because you've got to make sure that you can take care of the project for the customer in its totality. And so, we're going to use that scaled relationship with the supplier. We're going to use our location base and our supply chain to make sure that we can aggregate that product and make sure that we can bring it to the customer on time and in full. So, it's improving, but there is still some inconsistencies that are going to lead to a bit of challenges as we go forward into the new calendar year.

Gregor Kuglitsch, Analyst

Thank you.

Kevin Murphy, CEO

There is nothing new to discuss regarding vote number two. We previously mentioned that we would plan to bring that vote in the spring. When we initially voted for the additional listing of shares in New York, we indicated that we would revisit that vote within a year of the additional listing's establishment. We believe we are still largely on track with that timeline.

Gregor Kuglitsch, Analyst

Thank you.

Operator, Operator

Thank you. Our next question comes from Kathryn Thompson from Thompson Research. Please Kathryn, your line is now open.

Kathryn Thompson, Analyst

Hi, thank you for taking my questions today. Just a follow-up on supply chain and narrowing it a little bit, could you give an update on the build-out of the DC supply chain and tech improvements? And particularly given in light of continued challenges with supply chain, how is this contributing to gaining market share, in other words, with next day delivery targets that you put out, and also any changes in terms of purchasing from key suppliers, in other words, doing some advanced purchasing to ensure that you have in inventory for finished goods. Thank you.

Kevin Murphy, CEO

Sure, Kathryn, I'll address your questions about the MDC. We launched our first new format MDC in the latter half of last fiscal year in Denver, and we currently have Phoenix under construction, which is expected to open in the spring. We're also progressing on our next location in Dallas, followed by Houston. Our MDC build-out is aligned with our strategy and plan. We've received positive initial feedback from Denver regarding product availability and service offerings, which shows potential for market share growth. Although it's still early in the process, we are optimistic about the efficiency and what this could bring to the market.

Bill Brundage, CFO

Yes, Kathryn, thank you. And in terms of changes in purchasing behavior, we haven't really stepped up any changes in purchasing behavior or forward buys to any discernible degree. This has been a very unique environment, as everyone knows. And we've been working together with our suppliers to make sure that we can be their best path to market and have the best fill rates for our customers and move product around our network to make sure that we can fill any gaps that exist in any local market for that particular supplier. In terms of how we think about the go forward purchasing behavior though, one of the key things on our mind is even in normalized markets, we want to help the manufacturer to make their manufacturing activity a bit more predictable. We want to make sure that we are doing everything we can to smooth that out. In unpredictable environments, we want to also be helpful in that environment. And so, when we look at right now, a tendency for end customers and our trade professional to want to place orders earlier to get ahead of any supply chain disruption, we want to make sure that we're getting the right required dates, so that we can make sure that we have inventory on hand for their job when they need it and avoid an excessive pull forward of demand. That's important for us as we go forward.

Kathryn Thompson, Analyst

Okay. A follow-up on the raised expectation certainly too, and I appreciate your earlier comments on that. But we want to dig a little bit deeper, in the past and really understanding which bucket has improved? Previously you had outlined a path for high single-digit to low double-digit growth of GDP growing to two percent to three percent, industry growth of one hundred basis points and Ferguson growing above the market by two hundred basis points to three hundred basis points. And then one hundred basis points to two hundred basis points of M&A to growth. When you look at those disparate buckets, what is driving the raised expectations? And then, is this from conservative estimates, are there end markets or regions that are outperforming that are raising some of those buckets for expectations?

Bill Brundage, CFO

Yes, Kathryn, I think right now we're in a period where market growth is quite strong. And as we've talked about both in the last fiscal year call as well as this morning, our market share gains are a bit outsized versus that traditional two hundred basis points to three hundred basis points. So we are closer to four hundred basis points to five hundred basis points at the end of last year. And as Kevin outlined today, while we can't pinpoint it in Q1, we're probably in a similar range. So it's really the combination of market strength, but then our ability to generate those outsized market gains, again driven by the strength of our associates, our supply chain, and our technology platform.

Kevin Murphy, CEO

Yes, we're not seeing any major geographic disparities in terms of where that growth is coming from as you can imagine, we're seeing good growth in the Southeast in Texas in the Mid-South area, but generally speaking that growth is strong across the nation and through Canada as well.

Kathryn Thompson, Analyst

In that four hundred to five hundred basis point range that you mentioned, which seems to reflect a continuation of the trend, what are the main two or three factors that you believe are contributing to that significant growth? Thank you.

Kevin Murphy, CEO

Yes, and Kathryn, not to be evasive here, it really has been broad-based as we talked about earlier in the Q&A session of this call, the Waterworks performance at fifty percent growth has been very strong, aided in large part by some commodity inflation in that business, but really across the board from residential trade plumbing through our building remodel business, our digital commerce business with that light decorative pro and project-minded consumer through HVAC and into that non-res space as well within industrial, commercial mechanical. So it has been a very solid broad-based performance inside the business. And when you look at the share gains in those individual customer groups, it really is a testament to what they're working on together for the construction of the project as a whole in both residential and non-residential.

Kathryn Thompson, Analyst

Great. Thank you so much.

Operator, Operator

Thank you. Our next question comes from Ami Galla from Citigroup. Please Ami, your line is now open.

Ami Galla, Analyst

Yes, thank you guys. Just a couple of questions from me, if I could have one follow-up on the sort of gross margin question. Can you talk a bit about where do we think the sustainable gross margins in this business should trend towards even considering in the context of own brand mix that is there in the business? And the second question was really on inflation on the overhead base, if you could give us the moving parts or color around those elements?

Kevin Murphy, CEO

Yes, sure, Ami. Thanks for the question. In terms of that gross margin again, it's a bit out-sized right now at thirty one point three percent. And it's difficult to pinpoint exactly where that will settle. But if you go back to the full-year results from last year, where we are in the mid thirty percent range, so thirty point six percent, we think that's probably a more reasonable range. And then we do believe that we will continue to incrementally grow both gross margins and more importantly operating margins over time. Some of that driven by the own brand portfolio and strategy that we have in addition to our overarching product strategy and the strengths that we bring from a global sourcing and supply chain and purchasing power perspective. So we do believe that gross margins will come off a bit as inflation normalizes, and then we'll continue to incrementally grow those over time as we have done consistently over the last decade or so.

Ami Galla, Analyst

My second question is about the overhead costs. Can you discuss the inflationary trends you've observed at the overhead cost levels?

Kevin Murphy, CEO

Yes, sure. Apologies. We have seen wage inflation step up a bit. And if you think about for our cost base wages and labor costs are about two-thirds of our cost base, just over sixty percent. Generally, those would run kind of three percent to four percent kind of normalized wage increases year-in year-out. We're seeing that at a higher level, largely driven by drivers and warehouse associates where there is more pressure from an overarching market perspective for that type of talent and that type of labor costs. So we've seen that increase, we would expect those pressures to continue as we step into calendar twenty twenty-two. But overall, we feel good about our ability to manage those wage increases and that inflation from a cost perspective, driven by the growth we're seeing on the top-line productivity and continued focus there. So it's been well managed, but we are seeing more pressure from a cost perspective.

Ami Galla, Analyst

Thank you.

Operator, Operator

Thank you. Our next question comes from Arnaud Lehmann from Bank of America. Please Arnaud, your line is now open.

Arnaud Lehmann, Analyst

Thank you very much. Good morning, Kevin. Good morning, Bill. My first question is on M&A, especially in the context of your balance sheet, which is I guess in very, very strong shape, and your net debt to EBITDA below where you want it to be. Appreciate the priorities organic growth. But do you see a strong pipeline, we heard about some potential changes in capital gains, taxes in the U.S. I don't believe that going ahead. But could you accelerate some activity going forward? That's my first question. And my second question is just a technical one and sorry, if it's silly, but I still see twenty-five million dollars income from discontinued operations. I am assuming this has nothing to do with the U.K., so is there something else here that, which you're selling? Thank you.

Bill Brundage, CFO

Yes, Arnaud, thank you for the question. Our M&A pipeline is quite strong at the moment. We've completed four deals so far this fiscal year and have several more bolt-on and capability acquisitions in the works. Over the last twelve months, we have noticed an increase in activity following the initial concerns and lockdowns from COVID. This uptick can be attributed to a few factors: first, the market is generally favorable right now, leading to good performance in businesses; second, many of our acquisitions and those of our competitors involve small to medium-sized family-owned businesses, which have navigated the challenges of COVID and are now looking ahead to understand the future competitive landscape. This has prompted more of these businesses to consider selling. Additionally, discussions around potential changes to capital gains rates have likely contributed to this trend. We anticipate a robust pipeline will continue for at least the remainder of this fiscal year.

Kevin Murphy, CEO

We are very satisfied with the pipeline, which is well balanced with geographic bolt-on acquisitions and high-quality companies that we can integrate into Ferguson. Our markets are quite fragmented, and as we aim to consolidate them, we’ve identified strong opportunities with excellent associates and local relationships that can enhance our supply chain technology, global sourcing, and functional expertise. Additionally, our capability acquisitions and business expansion efforts, like in Geosynthetics for our Waterworks division and in our own brand, are noteworthy. In the first four deals of fiscal 2022, we began integrating solid own brand companies that do not have manufacturing assets but possess high-quality brands that we can market through our physical and digital channels to accelerate growth. This balance is quite strong at the moment.

Bill Brundage, CFO

And then last, on your question on the twenty-five million dollars, that related to the disposal of a property from a former discontinued operation, it was actually property from the Nordic business, not the U.K., but you should very much consider that a one-time event.

Arnaud Lehmann, Analyst

Very clear. Thank you very much.

Operator, Operator

Thank you. And we have time for one more question on today's conference call. And the last question comes from Dominic Edridge from Deutsche Bank. Please Dominic, your line is now open.

Dominic Edridge, Analyst

Thank you very much. I'd like to revisit the discussion about gross margins and perhaps look at it from a different angle. Could you elaborate on how your gross profit per unit compares to historical data? Is there any impact from inventory gains this quarter that might level off in the upcoming quarters? I recall you mentioning earlier that Waterworks was about fifty-fifty in terms of volume and price; is that correct? My second question pertains to demand. With the ongoing price increases, what changes in customer behavior have you observed? Are people delaying projects due to these price hikes, or are we still in a situation where customers are fairly responsive to pricing at this moment? Thank you very much.

Kevin Murphy, CEO

Yes, regarding gross margins, we have managed to increase gross profit per unit across various product lines despite higher inflation. This has allowed us to enhance our flow-through and gross margins, partly due to our effectiveness in selling through inventory. As inflation has continued to rise, we've experienced an improvement in gross margin benefits. While we anticipate this trend to eventually stabilize, predicting the exact level it will stabilize at is challenging. You accurately noted that about half of the fifty percent growth in Waterworks revenue is driven by inflation, with the remainder coming from increased volume.

Bill Brundage, CFO

In terms of demand and what we're seeing in the market from the customer base, we have been concerned that price inflation, especially as it entered the finished goods side, would cause some degree of concern for postponing projects. As you look at the balance of new construction and RMI that we have inside the business, we have not seen any discernible behavior of postponing projects. We have seen a touch inside of the public works infrastructure space, but as we all know, that's going to have some additional demand created from the infrastructure bill. But on the residential and non-residential portions of our business, specifically commercial, we actually haven't seen any postponement of construction activity due to price; that demand continues to be quite strong. And in fact, as we discussed during Kathryn's question, we're trying to make sure that we understand exact needs and delivery requirements so that we don't have a dramatic pull forward of demand to get product on-site early. So we see a pretty consistent play of demand.

Dominic Edridge, Analyst

That's very clear. Thank you very much.

Operator, Operator

Thank you. I will now hand over to Kevin Murphy for any final remarks.

Kevin Murphy, CEO

Yes, thank you operator. And thank you all for your time today, very much appreciate it. Maybe just a quick close as we began. We're pleased with the growth and improvement for our organization in Q1. As you've heard through our Q&A, our markets remain supportive both residential, non-residential, new construction, and RMI. We're pleased with the continued investments that we're making in high quality associates coming into our industry and into our company and high quality associates coming in through acquisition. The investments we're making in supply chain for best breadth and depth in the local marketplace for same-day, next day delivery and the investments we're making from a technology perspective to make our customers more productive as well as our associates. And most of all, we are thankful to those associates who continue to deliver for our customers, they continue to deliver on the promise to make that customer's project more simple and successful and to ensure their ongoing trust in our company as their supplier of choice. So thank you again. And we look forward to speaking with everyone again very soon. Thanks for your time.

Operator, Operator

This concludes today's call. Thank you so much for joining. You may now disconnect your lines.