# Ferguson business model remains attractive and cash generative

- Link: https://www.directorstalkinterviews.com/ferguson-business-model-remains-attractive-and-cash-generative/412812516
- Published: 2020-04-15T07:19:06+01:00
- Author: Amilia Stone

At the time of the half year results on 17 March 2020 we gave a brief update on 
the impact of the COVID-19 outbreak on our operations. **[Ferguson plc](https://www.directorstalkinterviews.com/ftse-company/ferguson-plc/ferg.l)**(
LON:FERG) has announced today a further update on the impact of the virus and a 
trading update for the period to 31 March 2020.

**Protecting Ferguson’s associates and supporting our customers**

Ferguson provides a critical function in the supply of essential products and services
which has been widely recognized by the relevant authorities in our trading geographies.
Our trade customers maintain heating, ventilation and air conditioning (HVAC), clean
and wastewater services to millions of homes and businesses. We keep key residential,
commercial, industrial and public sector facilities running and we also support 
the major public utilities with the products they need for repair and maintenance
of their networks.

During these challenging times, our immediate priority is safeguarding the health
and wellbeing of our associates and customers. We have implemented new precautions
across our business in adherence with the recommended Center for Disease Control(
CDC) guidelines. Cleaning protocols at all sites have been enhanced and we are practicing
social distancing at all locations. Our branches have moved to pick up and delivery
only with customers encouraged to order ahead with pick-up in store / at the curb
side. Associates who can work remotely are doing so, including over 14,000 US colleagues,
with new processes and protocols implemented to keep our drivers safe. All our bricks
and mortar showroom sites are closed though virtual consultations are continuing
and we are driving strong adoption of ecommerce tools.

**Current trading**

Group trading to 31 March 2020 was not materially impacted by COVID-19, though revenue
growth weakened towards the end of the period. Further details of the financial 
performance and market conditions in the Group’s businesses are set out below:

| Revenue growth % | % revenue
contribution | H1 2020 | 2 monthsto 31 March^(1) | 
| USA | 85% | +5.0% | +8.2% | 
| Canada | 5% | (6.5%) | (7.7%) | 
| Ongoing Group | – | +4.3% | +7.3% | 
| UK (non-ongoing) | 10% | (4.7%) | (10.3%) | 
| Continuing operations | 100% | +1.1% | +5.1% |

^(_1_)_ One additional trading day in current year added 2.5% to both US revenue
growth ongoing operations respectively._

In the US since the half year, revenue growth accelerated in the two month period
to 31 March and was broadly based across the regions and major business units with
the order book at record levels. Within the last ten days the impact of COVID-19
has significantly increased mainly as a result of government actions and societal
reactions as individual cities and states in the US have been increasingly impacted
by the virus.

As a result the overall trading situation on the ground is therefore mixed across
the US. For example, in recent weeks revenue has deteriorated in New York which 
has experienced severe outbreaks of the virus and have implemented widespread lockdowns.
In contrast, revenue trends have continued to hold up well in many other regions
and cities which are currently less affected by the virus.

To date, the majority of our US branch network has remained open. However, we are
preparing carefully for lower activity levels given the likelihood of further regions
experiencing disruption due to the spread of the virus. In light of recent CISA^(
2) guidelines we have been working with the relevant authorities across each state
and local jurisdiction to ensure we can continue to support our customers.

In Canada most of the markets are in lockdown and the current situation in the UK
is extremely challenging with a widespread lockdown currently in place. In both 
regions our branch networks remain open where essential services are being provided.

As indicated at the time of the Half Year results given the unprecedented uncertainty
around the impact of COVID-19 it is not possible to assess with certainty the impact
it will have on the Group’s financial performance for the year. The Company is therefore
not providing guidance for the year to 31 July 2020.

^(_2_)_ Cybersecurity and Infrastructure Security Agency (CISA) is a Federal body
providing guidance to US state and territorial jurisdictions and the private sector
on defining essential critical infrastructure workers._

**Cost reduction actions**

In light of the evolving COVID-19 situation, the Company has moved quickly to protect
liquidity and cashflow while ensuring it is well positioned to benefit when the 
recovery takes place. Ferguson benefits from an agile business model and, as we 
prepare for short-term revenue pressure our approach has been to protect our skilled
workforce which is critical to the long-term success of our business. We have already
taken a number of prudent cost saving measures to protect short-term profitability
and cash generation of the business. This has included a hiring freeze, a reduction
in associate hours, overtime and the use of temporary staff, and temporary lay-offs
being implemented in the worst hit regions. We have taken decisive action in the
worst hit regions whilst ensuring the business is appropriately sized for the post
COVID-19 operating environment.

**UK demerger**

The Board’s strategic intent to demerge the UK business is unchanged. The demerger
of Wolseley UK remains on track to be completed this calendar year as previously
announced. This will of course require market conditions to normalize by the latter
part of the year.

**Robust financial position**

Ferguson has a proven cash generative business model and enters the current period
with a strong balance sheet and significant liquidity headroom. The Company’s net
debt excluding leases at 31 March 2020 was $1,929 million and the ratio of net debt
to the last 12 months adjusted EBITDA was approximately 1.0 times. As at 31 March
2020 the Group had c.$2.5 billion of available liquidity comprising readily available
cash of approximately $0.7 billion and $1.8 billion of undrawn facilities. Since
31 March the Company has been approved and has issued commercial paper under the
Bank of England’s Covid Corporate Financing Facility (CCFF).

The Company has also introduced the following measures to protect its cash position:

·    We have suspended the $500 million share buy back announced on 4 February 2020.
At 31 March 2020 the Group had completed about $100 million of the program.

·    The Company has paused current M&A activity due to current market uncertainty.
In the current financial year to date we have invested c. $340 million in 6 businesses
which are in the process of being rapidly integrated. Selective bolt-on and capability
M&A remains an important part of the Company’s strategy.

·    After careful consideration the Board has decided to withdraw the interim dividend
due for payment on 30 April 2020. While the balance sheet remains strong, the Board
believes this is currently in the Company`s immediate best interests, balancing 
all our stakeholders’ interests against a background of significant uncertainty 
as to the impact and duration of the current COVID-19 disruption. We recognize the
importance of the dividend to our shareholders and the Board will review this decision
later in the financial year as trading conditions become clearer.

·    Following a careful review of existing capital expenditure plans we now expect
it to be in the region of $280-300 million for 2019/20. Given our strong liquidity
position the Board’s intention remains to scale future capital investment to ensure
we continue to invest in and develop the business and execute our strategy for the
long-term. 

Beyond the near-term challenges of COVID-19 the Group remains well positioned to
deliver consistent outperformance.

> **Kevin Murphy, Group Chief Executive, commented**
> “Given the significant challenges of COVID-19 we have adjusted our operations 
> rapidly to both safeguard the health and wellbeing of our associates but also 
> to support essential services in our local markets. We would like to thank our
> associates for their commitment and dedication to our business and we are incredibly
> proud of their efforts in recent weeks as we support key industries.
> “Ferguson is a strong and resilient business and our business model remains attractive
> and cash generative. We are taking appropriate actions on cost and cashflow given
> the uncertain near-term trading outlook. We have good liquidity which positions
> us well to navigate this period of uncertainty and to support the recovery when
> the effects of COVID-19 subside.”

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