Earnings Call Transcript
Ferguson Enterprises Inc. /DE/ (FERG)
Earnings Call Transcript - FERG Q2 2024
Operator, Operator
Hello, and welcome to Ferguson's Second Quarter Results Conference Call. My name is Adam, and I'll be coordinating your call today. I'd now like to turn the call over to Brian Lantz, Vice President of Investor Relations and Communications. The floor is yours. Please go ahead.
Brian Lantz, Vice President, Investor Relations and Communications
Good morning, everyone, and welcome to Ferguson's second quarter earnings conference call and webcast. Hopefully, you've had a chance to review the earnings announcement we issued this morning. The announcement is available in the Investors section of our corporate website and on our SEC filings webpage. Recording of this call will be made available later today. I want to remind everyone that some of our statements today may be forward looking and are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected, including the various risks and uncertainties discussed in our Form 10-K available on the SEC's website. Also, any forward-looking statements represent the company's expectations only as of today, and we disclaim any obligation to update these statements. In addition, on today's call, we will also discuss certain non-GAAP financial measures. Please refer to our earnings presentation and announcement on our website for additional information regarding those non-GAAP measures, including reconciliations to the most directly comparable GAAP financial measures. With me on the call today are Kevin Murphy, our CEO, and Bill Brundage, our CFO. I will now turn the call over to Kevin.
Kevin Murphy, CEO
Thank you, Brian, and welcome, everyone to Ferguson's second quarter results conference call. On the call today, I'll cover highlights from our second quarter performance, I'll also provide a more detailed view of our performance by end market and by customer group before turning the call over to Bill for the financials, then come back at the end and give some closing comments before Bill and I take your questions. Our associates have continued to execute well, going above and beyond to serve our customers, helping to make their projects simpler, successful, and sustainable. In the quarter, we saw a modest revenue decline of 2.2%, largely driven by a 2% deflation in a challenging market. We delivered solid gross margins and appropriately managed costs while preparing for our seasonally stronger second half. Adjusted operating profit came in at $520 million, with adjusted diluted earnings per share of $1.74 down 8.9% against last year. Over the three years since fiscal 2021, this represents sales growth of 35%. Adjusted operating profit growth of nearly 50% and adjusted diluted earnings per share growth of nearly 60% for the second quarter. Looking forward, open orders and sales per day trends support our expectation of improvement through the balance of the fiscal year against easing comparables. Our views on fiscal 2024 guidance are unchanged. Bill will walk you through this in more detail shortly. Turning to our performance by end markets in the United States. Net sales were down 2.2% as end markets remain challenged. Trends in new residential housing starts and permit activity improved slightly in the quarter, while repair, maintenance, and improvement work remain soft. Our residential revenues, which comprised just over half of U.S. revenue, declined 4% during the second quarter, representing a sequential improvement from Q1. Non-residential markets show comparative resilience. Commercial and civil infrastructure activity held flat in the quarter against strong comparables, with industrial down 6% against an outstanding 24% comparable. Overall, net sales in non-residential declined by 1% during the quarter, with good levels of non-residential bidding activity and expect improvement through the second half. While we expect growth rates will fluctuate over time, our intentional balanced end market exposure positions us well. Moving to our customer groups in the United States. Residential trade plumbing declined by 2%, an improvement from double-digit declines over the past three quarters as we begin to lap easier comparables and new residential markets begin to stabilize. Any indicators such as new residential permits and starts have recently seen modest improvement, and we expect further improvement in future quarters. HVAC growth continued rising 1% against a 10% prior year comparable. We will continue to build on the strength of our residential trade plumbing and HVAC customer groups in service of the growing dual trade contractor. Residential building and remodel revenues declined 4%, similar levels to the first quarter with continued pressure on repair, maintenance, and improvement. Residential digital commerce declined by 13%, with consumer demand remaining weaker. Waterworks revenues were flat. Hitting activity is healthy across our broadly diversified business mix, including residential, commercial, public works, municipal, meters, metering technology, and wastewater treatment plants. Soil stabilization and urban green infrastructure. The commercial mechanical customer group grew 1% as we continue to see our customers pivot towards work such as data centers and major capital projects. Our industrial, fire and fabrication, and facility supply businesses delivered a combined net sales decline of 3% against a strong 17% growth comparable. Our breadth of customer groups allows us to bring value to the total project while also maintaining a broad and balanced end market exposure. Now let me pass to Bill to cover the financial results in a bit more detail.
Bill Brundage, CFO
Thank you, Kevin. And good morning, everyone. Second quarter net sales were 2.2% below last year. Manic revenue declined 3.7%, partially offset by acquisition revenue of 1.5%. The pricing environment was similar to the first quarter, with approximately 2% deflation driven by weakness in certain commodity categories as we lap strong comparables, while finished goods pricing has remained slightly positive. Gross margin of 30.4% was up 20 basis points over the prior year, driven by strong pricing and product strategy execution from our associates. We are appropriately managing the cost base with SG&A stepping down more than $40 million from Q1. We're balancing targeted cost control actions and productivity initiatives with continued investment in core capabilities for future growth. Adjusted operating profit of $520 million was down $62 million or 10.7% lower compared to the prior year. Adjusted diluted earnings per share of $1.74 was 8.9% lower than the prior year, with the reduction due to lower adjusted operating profit, partially offset by the impact of our share repurchase program. Our balance sheet remains strong at 1.1 times net debt to adjusted EBITDA. Moving to our segment results. Net sales in the U.S. declined by 2.2%, with an organic decline of 3.7%, partially offset by a 1.5% contribution from acquisitions. Adjusted operating profit was $525 million, delivering an adjusted operating margin of 8.2%. Canada net sales were down 3.7%, with an organic decline of 3.3% and a 0.4% adverse impact from foreign exchange rates. Markets have remained challenging, and we saw similar trends to that of the U.S. Adjusted operating profit came in at $9 million. Turning to our first half results, the year is progressing as expected. As we set out at the beginning of the year, we expected to operate against a challenging market backdrop, particularly in the first half of our fiscal year against strong revenue and adjusted operating margin comparables. Net sales were 2.5% below last year, with an organic decline of 4.4%, partially offset by an acquisition contribution of 1.9%. Gross margin was 30.3%, down 10 basis points, as our associates have been disciplined in managing prices through a period of commodity price deflation. We have managed labor and non-labor expenses throughout the year, balancing the near-term market demand environment against expected growth in upcoming quarters. Adjusted operating profit of $1.3 billion was down 10.6% compared to the prior year, delivering a 9.0% adjusted operating margin. Adjusted diluted EPS of $4.40 was down 9.7%. I believe the business is well positioned as we head into the second half with improving market demand and the cost base in good shape. Next, the business continues to generate strong cash flows. Inventory positions normalized as we exited last fiscal year, and we have returned to our normal historical seasonal working capital trends with a modest outflow in the first half of the year. Interest and tax outflows were slightly lower than last year due to the timing of tax payments, resulting in strong first half operating cash flow of $863 million. We continue to invest in organic growth through CapEx, investing $192 million in the first half. As a result, we generated free cash flow of approximately $700 million. Moving to capital allocation, our balance sheet position is strong, with net debt to adjusted EBITDA of 1.1 times. We target a net leverage range of 1 times to 2 times, and we intend to operate towards the low end of that range through the 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. Previously mentioned, we invested $113 million in working capital and $192 million in CapEx during the first half, principally focused on our market distribution centers, branch network, and technology programs. Second, we continue to sustainably grow our ordinary dividend. The board declared a $0.79 per share quarterly dividend, a 5% increase over the prior year, reflecting our confidence in the business and cash generation. Third, we're consolidating our fragmented markets through bolt-on geographic and capability acquisitions. We are pleased to welcome associates from secure vision, grow supply, and hard way appliances during the first half. Our deal pipeline remains healthy, allowing us to continue to execute our consolidation strategy. Finally, we are committed to returning surplus capital to shareholders when we are below the low end of our target leverage range. We returned $250 million to shareholders via share repurchases during the first half, reducing our share count by approximately $1.5 million and ended the period with $285 million outstanding under the current share repurchase program. Now let's turn our attention to the remainder of the fiscal year. As Kevin outlined earlier, current open orders and sales per day trends support our expectation of improvement through the balance of the fiscal year against easing comparables. I believe we are well positioned for our upcoming seasonally stronger second half. As a result, our view of fiscal 2024 guidance remains unchanged. We believe revenue will be broadly flat for the year, assuming end markets declined in the mid-single-digit range. We expect to outperform these markets by approximately 300 to 400 basis points. Sales from completed acquisitions, which we expect to generate just over $600 million in revenue, and the benefit of one additional sales day landing in the third quarter. Overall, while we saw modest deflation in the first half, we are assuming a broadly neutral pricing environment for the full year as a whole. We continue to provide a range for adjusted operating margin between 9.2% to 9.8%. I expect interest expense of approximately $190 million to $210 million. Our adjusted effective tax rate is expected to be approximately 25% this year, and we expect to invest between $400 million to $450 million in CapEx, similar levels to last fiscal year. So to summarize, we had solid execution in the first half, and our views on fiscal 2024 guidance are unchanged. We remain focused on execution and believe the combination of our strong balance sheet, flexible business model, and balanced end market exposure positions us well.
Kevin Murphy, CEO
Thank you, Bill. Let me again thank our associates for their unwavering dedication to serving our customers, helping to make their projects simpler, successful, and sustainable. We are pleased with our execution in the first half. The business is well positioned as we anticipate firming demand. And as Bill set out, our fiscal 2024 guidance is unchanged. As we look forward, we are well positioned with a balanced business mix between residential and 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 cash-generative model allows us to continue to invest for organic growth, consolidate our fragmented markets through acquisitions, and return capital to shareholders while maintaining a strong balance sheet operating at the low end of our target leverage range. We have consistently executed on these priorities and supported a long-term track record of outperformance and disciplined deployment of capital. Scale and breadth allow us to leverage our competitive position across our customer groups in order to benefit from emerging multi-year tailwinds in our end markets. We remain confident in the strength of our markets over the medium and longer term and expect to capitalize on these growth opportunities. Thank you for your time today. Bill and I are now happy to take your questions. Operator, I'll hand the call back over to you.
Operator, Operator
Thank you. Our first question comes from Matthew Bouley from Barclays. Matthew, your line is open. Please go ahead.
Matthew Bouley, Analyst
Hey, morning everyone. Thank you for taking the questions. You all mentioned current open orders and sales per day supporting second-half improvement. I guess what exactly are you seeing around orders and daily sales, and maybe help if you can kind of help us with the cadence of growth through fiscal Q2? How did January trend with weather and all that? And kind of what are you seeing quarter-to-date? Thank you.
Kevin Murphy, CEO
Good morning, Matt. Yes, thank you for the question. This is Kevin. I'll take the first portion, and maybe then Bill can sprinkle in some detail around what we're experiencing. As we said previously, the second quarter is always our seasonally weakest quarter from a revenue perspective. Looking at how we progressed through the second quarter, the top line was a bit more pressured than what we would have expected, really given what was an extended holiday season for the trade professionals and some January weather impacts that were a bit more challenging than, say, years past. But generally speaking, the year is progressing as we expected, and that second quarter progressed largely as we expected. If we look forward, the bidding activity that we've got out there from our Waterworks group all the way up through residential trade plumbing and the like, and the open order volume that we have, sales per day trends against what are some easing comparables really do support what we think is going to be improvement throughout the balance of the year.
Bill Brundage, CFO
Yes, Matt, we've seen that improvement start to play through in the early part of the second quarter. So in February, organic growth was about flat, which when you add in the acquisition impact that would lead to slightly positive total growth for the month. So again, supporting our confidence level that growth is improving and will improve as we move through the second half.
Matthew Bouley, Analyst
Perfect. Very helpful. Second one, the deflation of 2% in the quarter, it sounded like that was all commodity. I think you said finished goods was slightly positive. And so to get to your full year guide of broadly neutral inflation, are you starting to see any kind of incremental finished goods inflation and price increases to support that, or is it really just kind of the year-over-year comps as you get to the second half? What takes inflation positive in the second half to get to your guide?
Bill Brundage, CFO
Yes. So back to your point, about 2% deflation in both Q1 and Q2, largely driven by commodity deflation. Commodities were down, call it, low to mid-teens in the quarter. Those finished goods, as we expected, are still slightly positive in terms of year-over-year inflation. Think a couple of things as we roll through the second half that leads us to believe that, that deflation will improve. First and foremost, we are continuing to roll over, not just easing revenue comparables, but easing inflation comparables. In fact, we'll start to roll over our first month of commodity deflation as we step out of the third quarter and into the fourth quarter. We've seen some stability broadly in those commodity prices over the first half of the year. So assuming that, that stability continues, that commodity deflation should lessen as we move throughout the second half. Again, we would expect finished goods inflation to be in that more traditional low single-digit range. So that leads us to believe that we'll have improving deflation moving back towards inflation in the second half. But of course, predicting commodities is difficult. So as we're guiding broadly neutral pricing for the full year, there's some range of possible outcomes around that full year guide.
Kevin Murphy, CEO
Yes. Matt, as we've discussed in the past, the commodity-based product basket that we have is going to and has moved at different rates and has had some variances inside of that. As we're sat here today, we've seen some signs of stabilization. We've seen some resin price increases playing through inside the marketplace, and we've seen some stabilization from a steel pipe perspective. We feel more confident about that. Regarding finished goods, we've discussed traditionally about the annual spring price increase season. Although it hasn't been as ubiquitous as in the past, we have seen major product categories announcing price increases that give us some degree of confidence as we go into that second half.
Matthew Bouley, Analyst
Great, thanks Kevin, thanks Bill, good luck guys.
Kevin Murphy, CEO
Thanks, Matt.
Operator, Operator
The next question is from John Lovallo from UBS. John, your line is open, please go ahead.
John Lovallo, Analyst
Good morning guys, and thank you for taking my questions as well. The first one is you guys do have a pretty agile cost structure. I think it's highly variable around 80% to 90% incrementals are generally kind of 10% to 13-ish percent. Now recognizing pricing was a bit of a headwind in the quarter. Why were decremental margins so high, close to 40%?
Bill Brundage, CFO
Yes, John, thanks for the question. As you think about the second quarter, again, in our seasonally lightest quarter and as Kevin mentioned, there's a bit more pressure on the top line. So that has a bit of an outsized impact on bottom line operating leverage when you get a bit more pressure from a top line perspective. The fixed cost nature of our business, even though we have a good variable cost structure in that seasonally light quarter plays down a little bit more from a decremental perspective. But as we step back and think about our overall cost structure, we are pleased that the cost did step down from Q1 into Q2 as we think about labor costs, which is certainly our largest component of our cost base. We manage very closely full-time equivalents and headcount as the primary input to that labor cost. If I look at where full-time equivalents are as we exited Q2, we're down slightly still year-over-year on volumes that were effectively flat for the quarter. So the teams are doing a really nice job managing those input costs, and we've really positioned that cost base for what we expect to play through in the second half and into next fiscal year, which is an improving growth environment. Given the fact that our associate base is the intellectual capacity and capability of the organization, we want to ensure we have the right associate base to take care of that future growth. So, we feel good about where the cost base is. Yes, it put a little bit more OpEx pressure in Q2. But as we look forward, we believe we're in the right place.
Kevin Murphy, CEO
And John, just to reiterate a little bit of what Bill said, we do feel good about where the cost base is as we prepare for what we believe to be an improvement through the balance of the year. If you think about what the volume outlook looks like inside of our residential trade plumbing business, which has been a pressured part of the business, both new construction as well as repair, maintenance, and improvement. They've done a great job of going out and taking market share. They've grown in volume and pounds for PVC pipe even though the pricing environment has been down in the mid-20% range while at the same time holding gross margin. So keeping those teams engaged and prepared for what we think is an improving outlook in the second half is quite important. So we're pretty positive about what the team has done in terms of expense management.
John Lovallo, Analyst
That's helpful. Thank you. And then on the industrial segment, in particular, down 6% year-over-year, understanding the comp was tough at around 24%. Just curious, I mean, the first quarter faced a similar comp it was actually up, I think, 3% year-over-year in the quarter. So was there anything particular in the quarter outside of the tough comps that challenged industrial?
Kevin Murphy, CEO
Yes, John, there's nothing that we would point to right now. You've got some timing issues that are out there. I talked about a little bit of an extended holiday season. I talked about a little bit of weather. We typically don't like to talk about weather, but it did have an outsized impact with branch closures. But if I look at what's building behind that industrial environment, the backlog is solid, especially in that major capital projects area. We've talked historically about that mega project trend. When you look at our industrial, our Waterworks, commercial, fire and fabrication, and HVAC business coming together, that's where we're seeing a good tailwind from an open order perspective and are positive about what's coming in the second half.
John Lovallo, Analyst
Great. Thank you guys.
Kevin Murphy, CEO
Thank you.
Operator, Operator
The next question comes from Philip Ng from Jefferies. Philip, your line is open. Please go ahead.
Philip Ng, Analyst
Hey Kevin, looking at your non-res business, certainly some puts and takes on the heavy side. Clearly, you're upbeat about that. Like commercial could be a little softer, but just kind of help us unpack in the back half. Do you expect growth and the bidding activity you're seeing in some of these mega projects? Do you expect that to kind of ripple through in the second half? And conversely, have you seen light commercial bottom out here?
Kevin Murphy, CEO
Yes, Phil, thank you for the question. We do see growth in the second half. Again, we see open order volumes picking up across that non-residential space from Waterworks through commercial through industrial and through fire. When you look at what's out there, we've said that those major capital projects specifically, those like onshoring and reshoring sustainability trends, fiscal stimulus aided, they're going to take a bit longer. We're seeing that play out. Much like we saw with the Infrastructure Act and how that plays through our Waterworks business, it's just taking more time both in terms of release as well as in project delays that we may see during the normal course of construction. There are also some tailwinds that we're starting to capitalize on that are in the current market. If you think about AI and what the data center impact is, those are very good projects for us across multiple customer groups. We're seeing it play out and in fact, we've made some good investments in how we can approach that part of the construction environment uniquely as to where we used to just bid that work as individual customer groups, really coming together and offering a total package.
Philip Ng, Analyst
Kevin, you beat me to the punch, I was going to ask you what percentage of your business on data centers is your non-res business just because it's very much involved with that AI dynamic. But any color on the data center portion of your business for non-res?
Kevin Murphy, CEO
Yes. For me, the color is that it's very much like that mega project or a major capital project landscape. Number one, they are good profit pools that are growing, and it's a unique time in the construction environment for our country. But maybe more importantly, it offers us that unique opportunity to come together and multiple customer groups for the owner, the general contractor, as well as for the contractor that's actually doing the install. So coming together on water, commercial, industrial fire, HVAC is proving valuable. We're seeing that play out and in fact, we've made some good investments in how we can approach that part of the construction environment uniquely as to where we used to just bid that work as individual customer groups, really coming together and offering a total package.
Philip Ng, Analyst
Appreciate all the great color, thank you.
Operator, Operator
The next question comes from David Manthey from Baird. David, your line is open. Please go ahead.
David Manthey, Analyst
Thank you. Good morning, everyone. First question for Kevin maybe. On slide five, when you look at your U.S. end markets in the second quarter, they're mostly flattish year-over-year, give or take. After this quarter, which of these end markets leave you more encouraged for the second half of the year, and on which ones are you more cautious following recent results?
Kevin Murphy, CEO
Thanks, Dave, for the question. If I start at the residential side, as we're sitting here today, we're looking at an RMI or repair, maintenance, and improvement residential market that is a touch softer than what we would have expected at the beginning of the year. We're calling for a down market in that mid- to high-single-digit area for the calendar year. But the residential new construction market, we see as a bit more positive, especially in the single-family side of the world. We think that multifamily, although it's been supportive for the business as we've delivered product to the market, now starts to get a bit more challenged because there's been a lot of product that has entered the market from a multifamily perspective. But single-family starts and permit activities give us a more bullish tone. On the non-res side, as I talked earlier in the call, the major capital project work and the data center work give us some really good outlook for the second half. There's a balanced optimism as we go into the second half. There's a balance in how we're lapping comparables from the prior year, and so it plays to that again, balanced business mix. On one note on that multifamily side, we are seeing good activity levels in high-rise multifamily, especially down in Florida. So we're bullish on that multifamily high-rise work, but maybe a bit more pressured on the core multifamily side.
David Manthey, Analyst
Yes. Thanks for that detail. A quick one for Bill, mathematically if we think about the new M&A deals that you've announced and the roll-off of prior acquisitions, what percentage contribution to growth should we expect in the third and fourth quarters?
Bill Brundage, CFO
Yes, Dave, if you look at the first half, we delivered just under 2%, just under $300 million worth of acquisition contribution. Given the deals we've recently announced, we'd expect a similar dollar amount in the second half, so somewhere just south of that range, roughly $600 million of full-year revenue contribution would be our expectation at this point.
David Manthey, Analyst
Got it. Thanks, guys.
Bill Brundage, CFO
Thanks, Dave.
Operator, Operator
The next question comes from Ryan Merkel from William Blair. Ryan, your line is open. Please go ahead.
Ryan Merkel, Analyst
Hey, good morning. Thank you. I wanted to ask on gross margins, really solid result this quarter. Can you remind us of the gross margin seasonality as we think about modeling Q3? And any reason not to use normal seasonality?
Bill Brundage, CFO
Yes, Ryan. I mean, seasonality really doesn't play a large factor. It doesn't have a large impact on gross margin swings. Sometimes as we approach the larger seasonal months in the summer calendar, we'll get a touch of pressure there just given the HVAC growth in our business and the Waterworks growth in our business in those seasonal months, which tends to have slightly lower gross margins, again, similar operating margins. But in general, in that low 30% to 35% range is kind of our expectation and where we've delivered over the last several quarters.
Ryan Merkel, Analyst
And just a follow-up there, if inflation turns positive. Is that a help or to your gross margins as we think about the second half?
Bill Brundage, CFO
We don't expect inflation to move at a pace that would have a big impact on gross margins. Certainly, as we lap those comparables, we still expect low single-digit inflation on finished goods. That would be helpful from a revenue perspective, but I wouldn't expect a large gross margin impact without some significant short-term moves in commodity prices, which we don't expect sitting here today. But again, that's a little bit difficult to predict and call.
Kevin Murphy, CEO
Ryan, what we are pleased with is, as we've been going through this period of commodity-based product deflation, the ability to achieve the kind of gross margin levels that we have is very encouraging, especially as we've taken market share and actually grown volume inside of some of those commodity-based products while holding produced good gross margins even in a falling price environment. As we look forward to what we should experience this year, we start to get back to, again, a more normalized pricing environment, where we see annual price increases playing through on finished goods. This year may be a bit more choppy than years past, but generally speaking, that's where we get back to utilizing our product strategy and charging for the value that we provide to get long-term sustainable gross margin expansion, we can call it, that 10 basis points to 20 basis point environment.
Ryan Merkel, Analyst
Got it. That's helpful. And just for my follow-up. Anything to think about for March and April when we think about last year in terms of modeling? I know there was some weather last March. Just curious if the comparisons get a little bit easier and if there's anything to think about?
Bill Brundage, CFO
Yes. It's difficult to predict what the weather impact would be, Ryan. But certainly, the comparables continue to ease as we step through Q3 into Q4. We had our first negative organic growth, organic decline of about 2.4% last year, Q3, and then that went down to about 5% organic decline in Q4. So the comparables do continue to ease a bit as we march through kind of month by month through the end of the fiscal year.
Ryan Merkel, Analyst
Perfect. Thank you.
Bill Brundage, CFO
Thanks, Ryan.
Operator, Operator
The next question comes from Mike Dahl from RBC Capital Markets. Mike, your line is open. Please go ahead.
Mike Dahl, Analyst
Good morning. Thanks for taking my questions. First question, just looking at kind of category performance. Digital has been soft even as we've gotten against easier comps, I think, double digits off of comping off a double-digit decline, and you're now down to about 8% of sales from 10%. Obviously, that at least partially ties with your comments around RMI, but just wondering if you can give a little more color there and give us an update on how you're planning to invest and expand the digital effort here?
Kevin Murphy, CEO
Thanks, Mike, for the question. When you look at that digital piece, it was the most affected in terms of a pull forward of demand during that COVID lockdown period. You're right, the RMI side of the world is a bit more challenged on the residential portion of the business. The customers that we're really targeting are that light decorative pro and that project-minded consumer. So there's probably the most pressure when we look at that residential space. If I look at where we're going to take this business going forward, we get really energized about how we pair what we think are really unique assets together for an omnichannel experience. Because if you look at the digital business, especially built with Ferguson, that's a unique digital experience for that project-minded consumer and that like record to Pro. The tools that are there from a technology perspective are starting to really enable that building and remodel business through the showroom, bringing together a best-in-class experience for bricks and mortar with a consultative experience in person, together with a best-in-class experience digitally and a great project tool. As we look forward, that's really where you're going to see those businesses come together and where we should see that growth.
Bill Brundage, CFO
Yes, Mike, I would say no significant change. Pleased with the four deals we've now completed year-to-date. In fact, we closed on our York West deal that we announced previously signing on. We closed on that late yesterday. So pleased to have those four deals this year. The pipeline is pretty healthy right now. Still full of those size deals that you would expect, given the nature of our industry. As we've talked about in the past, there are about 10,000 small-to-medium-sized competitors out there, creating a robust and healthy pipeline for us for what we believe will be years to come. I'd expect a similar cadence, nothing very large in the pipeline, just given the nature of what our industry is. And that pipeline is still solid. We still focus on both geographic bolt-on and capability M&A. You see us concentrating on new capabilities inside of our Waterworks business, especially in areas like meters and metering technology, stormwater management, soil stabilization, and urban green infrastructure. You also see us focus on expanding our HVAC capabilities so that we can best serve that dual trade HVAC and residential plumbing repair trade professional. We see that market growing and that contractor base expanding, and we'd like to be uniquely positioned to take care of that customer as we go forward. M&A is a big part of that landscape as we look to fill out our HVAC capabilities across the United States.
Mike Dahl, Analyst
Thank you.
Operator, Operator
The next question comes from Kathryn Thompson from Thompson Research Group. Katherine, your line is open. Please go ahead.
Kathryn Thompson, Analyst
Hi, thanks. Just a clarification from earlier in the Q&A. Could you remind us what percentage of cost of goods sold or commodity products and how has this balance changed today versus, say, three to four years ago?
Bill Brundage, CFO
Yes, Kathryn, today, commodities are roughly just under 14% of our revenue. If you went back pre-pandemic, we were more like 10% to 11% of revenue with rapid commodity inflation that increased as a percentage of our sales to over 16% at one point. We've started to normalize back, kind of midway back closer to where we were pre-pandemic. Given where commodity prices are today, we probably expect a similar range in terms of the total percentage of revenue as we step through the second half.
Kevin Murphy, CEO
That will all depend, Kathryn, on how we progress through the next, call it, four to five quarters as we start to see good non-residential activity continue to play through. That will play through beginning with our Waterworks business, rolling into heavy steel pipe usage inside of our commercial mechanical business, some heavy steel usage inside of our industrial business as well as iron fabrication. You may see that volume begin to increase even though price deflation is already largely set in through the group.
Kathryn Thompson, Analyst
We observe that certain building product categories from other companies allow for better pricing pass-through on commercial projects compared to residential ones. How does this influence your pricing power, especially considering the larger scale projects that are becoming a more significant part of your business compared to historical trends?
Kevin Murphy, CEO
Kathryn, I would say our ability to pass through pricing is quite similar between residential and non-residential segments of our business. There are different pressures that arise for long-term projects, but we typically navigate that in collaboration with the contractor and the manufacturer throughout those projects. Therefore, there isn't a significant difference as we proceed. As we've mentioned, we do not anticipate experiencing significant inflation or unusual price inflation moving forward, although we do observe some positive pricing movements for finished goods and stabilization in commodity prices.
Kathryn Thompson, Analyst
Okay. And finally, last week, the largest annual residential construction and end market trade international builder show wrapped up. What, if any trends can you share with us that could give just some additional broader color into that important residential end market for you?
Kevin Murphy, CEO
So if you think at the highest level, as we've talked, Kathryn, that just ended, so I haven't received a complete download in terms of what the epiphanies were coming out of the show from our associates. But at the highest level for us in terms of market, again, we think that we're going to see good movement from a single-family residential start perspective as we're underbuilt inside of this country, and existing home turnover is still pressured. We think the multifamily starts to tail off. On the remodel side of the world, we still believe that the high-end remodel side of the world is going to be a bit more resilient than, say, your core MI portion of the business. We're seeing that play out. If you look at the real core customer for our showroom business, that local high-end builder remodeler, what we've seen is if they're doing, call it, six to twelve projects annually and their high-end projects, we're seeing them flip from new residential construction to more high-end total remodels, but their book of business is still solid, and they feel pretty good about the marketplace. So generally, from a market perspective, that's what we're seeing. In terms of trends that are happening inside the product set, I'll defer to a bit later in the year as to what the takeaways were from KBIS.
Kathryn Thompson, Analyst
Okay, great. Thanks very much.
Kevin Murphy, CEO
Thanks, Kathryn.
Operator, Operator
Our final question today comes from Patrick Baumann from JPMorgan. Patrick, your line is open. Please go ahead.
Patrick Baumann, Analyst
Well, hi. Good morning. Thanks for taking my questions. I just wanted to jump back to gross margins. You mentioned, I think, in the commentary that pricing and product strategy are drivers of expansion in the quarter. Can you just flesh out what you mean by that? Because on pricing, you're seeing deflation. So are you getting some price cost benefit? I think you said like discipline from your associates from a price perspective. And then on product strategy, is this own brand contribution? Is this something else from a services perspective?
Kevin Murphy, CEO
Yes. Thank you, Patrick. If we think about the pricing side of the world, one of the things that are most important from a customer service and engagement perspective is consistent pricing across our network and across time. Ensuring that we have a solid matrix utilization as well as doing the right pricing for specialists. As you know, we're a value-added and service-driven company. So in some cases, upwards of 20% of our revenue can be non-stock specials. Making sure that we're pricing appropriately for the project has an impact on our gross margin and that gross margin expansion. Additionally, from a product strategy perspective, we think that's probably our best avenue for overall gross margin. Yes, own brand is probably the highest expression of what that product strategy looks like because you have a product that's unique to Ferguson, and one in which we promote the brand and have a higher overall gross margin profile. But it's not just one brand. It's also the partner vendors that we have that we can grow faster than the market for them, offering unique cost savings and driving value for them, resulting in a higher overall gross margin profile. It's really our sales associates, both inside and outside, driving the right product for the job and the application for the customer and then secondarily, those that have the highest gross margin profile for Ferguson as a company. That's the way we look at expanding gross margin over time.
Patrick Baumann, Analyst
Makes sense. Helpful. And then on the commodity product pricing side, you mentioned some increase in resin as a good sign for PVC pipe, I suppose. I'm wondering if you could comment on any differences you're seeing in the smaller diameter plastic water pipe for residential trade versus the bigger diameter stuff for the Waterworks business. You said something about like a 20% decline overall, I think. I'm just wondering if you could give any color on differences between the types of PVC pipe.
Kevin Murphy, CEO
If you look at the commodity-based basket of products that we have, it's again, PVC pipe, steel pipe, cast iron, ductile iron, copper tube. Inside of that basket, we've said that they're going to move at different paces and potentially move quite differently. PVC is one of those. We've seen a bit more movement on the small diameter and plumbing PVC pipe than we have on large diameter and Waterworks PVC pipe. We've seen more stability. That said, resin price increases are going to affect both sides of that. Although we've seen a bit more pricing pressure or deflation in plumbing, we do see that moving in a different direction as we're sat here today. It really has had different movements across the first two quarters, especially this year.
Patrick Baumann, Analyst
I have one more question regarding your MDC rollout. Can you provide an update on its progress compared to your expectations? What are the plans for this year from an MDC perspective? Additionally, could you share any financial metrics on how it's impacting the business?
Bill Brundage, CFO
Yes, Pat, we're pretty pleased with our rollout to date. To date, we have three MDCs that are open: Denver, Phoenix, and Houston, with Houston being our most recent MDC that we've opened. As we look at this year from a calendar year perspective, we'll open our first MDC in Canada in Toronto. We'll have Nashville come online later this calendar year. Then as we roll into next calendar year, Dallas and Washington, D.C. So the rollout strategy of two to three per year over the next several years is very much on track. Early reads on productivity levels are quite good and positive. We've made a lot of investments in automation within those warehouses, and just from a pure labor standpoint, we're getting 20% to 30% productivity out of those components of the warehouses. So good productivity, but maybe more importantly, from a strategic standpoint, what we're bringing is best same-day availability of inventory into these major metropolitan markets, which is really improving our customer service scores, product availability, fill rates, and in-stocks in those markets. We think this is a real core component of our continued organic growth strategy over the next several years. So very pleased with the rollout to date, and we'll continue to march down that path.
Patrick Baumann, Analyst
Great. Thanks a lot for the update. Best luck.
Bill Brundage, CFO
Thanks, Pat.
Kevin Murphy, CEO
Thank you, operator, and thank you all for your time with us today. We appreciate it more than you know. Again, I'll end where we started, and thank you to our associates for their efforts to really make our customers' projects better because we were on the job with them. As I take a step back, we are pleased with how the year is progressing. It's generally progressing as we expected, and as we look forward to the second half, our seasonally stronger second half, we look forward to continued improvement as we lap some easing comparables. So again, thank you very much for your time, and we look forward to seeing and talking with you soon.
Operator, Operator
That concludes the Ferguson second quarter results conference call. I'd like to thank you for your participation. You may now disconnect your lines.