# Ferguson delivers strong trading growth in a challenging period

- Link: https://www.directorstalkinterviews.com/ferguson-delivers-strong-trading-growth-in-a-challenging-period/412945839
- Published: 2020-12-08T07:41:37+00:00
- Author: Amilia Stone

**[Ferguson plc](https://www.directorstalkinterviews.com/ftse-company/ferguson-plc/ferg.l)**(
LON:FERG) has announced its trading update for the 3 months to October 31, 2020.

| **Ongoing businesses^(1)
US$ millions
 | Q1 2021 | Q1 2020  | Change | 
| Revenue | 5,372 | 5,208 | +3.1% | 
| Gross margin | 29.6% | 29.7% | (0.1%) | 
| Trading profit^(2) | 504 | 451 | +11.8% | 
|      Less impact of IFRS16 | (18) | (18) |  | 
|      Underlying trading profit | 486 | 433 | +12.2% | 
| Adjusted EBITDA^(3) | 558 | 495 | +12.7% | 
| Net debt : adjusted EBITDA^(3) | 0.5x | 0.8x |  | 
| Trading days | 64 | 65 | (1) |

**First quarter highlights**

− Ongoing revenue 3.1% ahead of last year, despite one fewer trading day.

− US ongoing revenue growth of 3.2% and underlying trading profit growth of 11.3%.

− Gross margin down 0.1% driven by mix.

− Tight cost control ensured strong trading profit delivery.

− Restarted M&A program with two US bolt-on acquisitions in the new financial year.

− Excellent operating cash generation.

− Strong balance sheet with net debt : adjusted EBITDA of 0.5 times, 0.7 times pro-
forma if adjusted for expected $467 million cash outflow from the final dividend
payment in December 2021.

> **Kevin Murphy, Group Chief Executive, commented:**
> “We are pleased with the revenue growth in the first quarter and today’s results
> further demonstrate the resilience of our business model. We are firmly focused
> on revenue growth and continued market share gains at the same time as carefully
> controlling gross margins and costs. This approach has enabled us to deliver robust
> trading profit growth in the first quarter. Cash generation was good and our balance
> sheet remains strong. This has enabled us to continue to invest in the business
> including our technology platforms to drive the best digitally enabled customer
> relationships and a seamless omni-channel experience.
> “Our continued focus is on protecting our associates and supporting our customers
> and we would like to express our sincere thanks to all of our 33,000 associates
> for their dedication and commitment during these challenging times. Our associates
> are the main contributors to our success as they continue to deliver outstanding
> service to our customers.
> “Since the start of the second quarter Ferguson has continued to generate low 
> single digit revenue growth in broadly flat markets although we remain cautious
> on the outlook for the year as a whole, considering current pandemic trends. Despite
> these potential headwinds the business is in very good shape and we are well prepared
> should there be any further market related disruption and overall management’s
> expectations for FY 2021 are unchanged.”

_1)     ‘Ongoing businesses’ excludes businesses that have been closed, disposed
of, or held for sale. The UK has been moved to ‘Non-ongoing operations’._

_2)     Trading profit is defined as operating profit before exceptional items and
the amortization of acquired intangible assets._

_3)     Net debt excludes lease liabilities and adjusted EBITDA excludes the impact
of IFRS 16._

**Group results**

The ongoing business generated revenue of $5,372 million in the first quarter, 3.1%
higher than last year and 3.3% ahead on an organic basis. Gross margins of 29.6%
were down 0.1% driven by mix but operating costs continued to be well controlled
which led to a good overall trading performance. Ongoing underlying trading profit
of $486 million was $53 million higher than last year despite one fewer day in the
quarter compared to 2020. Underlying trading profit excludes an $18 million impact
arising from IFRS16 (2019/20: $18 million). 

**USA**

Our US business generated revenue growth of 3.2%, which comprised 3.3% organic growth,
1.5% from acquisitions offset by 1.6% arising from one fewer trading day in the 
quarter. Price inflation during the quarter was broadly flat.

Residential end markets, which comprise just over half of our US revenue, have remained
solid in the period generating good growth. New residential housing starts and permits
grew well in the quarter and residential RMI has remained resilient. Commercial 
markets were more challenging with Civil markets impacted as a result of more restricted
municipal funding. Industrial markets remained soft in part due to a tough environment
for manufacturing during the pandemic. Overall, our order books grew year-on-year
in the first quarter consistent with continuing modest revenue growth over the coming
months.

Residential trade and residential showroom grew well while Commercial growth continued
to be restricted by more challenging non-residential markets. HVAC continued to 
grow well, as did eBusiness which generated exceptional growth from strong residential
demand. The Waterworks business was broadly flat while Industrial revenue also remained
weak. Gross margins were a touch lower than last year and operating expenses were
well controlled benefiting from restructuring actions announced last year and continued
savings during the pandemic in areas such as travel, customer engagement and healthcare
costs. Underlying trading profit was strong at $473 million, $48 million ahead of
last year, driven principally by the lower cost base which delivered improved operating
leverage as revenue growth returned.

We completed one small acquisition towards the end of the quarter, Old Dominion 
Supply, a residential and commercial HVAC distributor with annualized revenue of
approximately $55 million. The business gives us greater vendor and product synergies
in the Washington D.C. metro area, Maryland and Northern Virginia markets.

After the quarter end we also acquired Atlantic Construction Fabrics, a geotextile
company offering erosion control solutions and geosynthetic products. The company
operates along the East coast and generates annualized revenue of approximately 
$100 million. Its additional geotextile capabilities will further diversify our 
Waterworks business and complement our existing customer offering in geosynthetics,
erosion control and stormwater management.

**Canada**

Revenue grew by 2.2% in Canada with inflation of approximately 2%. Organic growth
of 3.5% was offset by the lower number of workdays. Residential end markets showed
signs of growth but trading conditions remained more challenging in Western Canada.
Gross margins were slightly lower but underlying trading profit of $23 million was
$4 million ahead of last year, benefitting from restructuring actions and a lower
cost base.

**UK (non-ongoing operations)**

Revenue grew by 5.2% in the UK with organic growth of 1.2% and inflation being broadly
flat in the quarter. Gross margins were slightly lower due to product mix but underlying
trading profit of $25 million was $10 million ahead of last year. The business continues
to benefit from refocusing on a clear customer proposition and targeted sales initiatives
combined with recent restructuring actions to significantly improve the cost base
and focus the business on operational efficiencies.

In September 2019, the Board announced its intention to separate its Wolseley UK
operations by way of a demerger into an independent UK listed company, subject to
shareholder approval. As announced in September 2020, this remains uncertain in 
the current economic environment and consequently the Board is assessing other separation
options in parallel with progress towards the demerger to facilitate the exit of
the Wolseley UK business.

**Financial position**

Net debt excluding leases at October 31, 2020 was $866 million after a cash outflow
of $103 million relating to acquisitions and capital expenditure and a $189 million
outflow relating to working capital. The IFRS 16 lease liability recognised on the
balance sheet as at October 31, 2020 was $1,212 million.

Following shareholder approval at the AGM, the dividend of 208.2 cents per share,
amounting to approximately $467 million, will be paid to shareholders on December
11, 2020.

There have been no other significant changes to the financial position of the Group.

**Outlook**

Since the start of the second quarter Ferguson has continued to generate low single
digit revenue growth in broadly flat markets although we remain cautious on the 
outlook for the year as a whole, considering current pandemic trends. Despite these
potential headwinds the business is in very good shape and we are well prepared 
should there be any further market related disruption and overall management’s expectations
for FY 2021 are unchanged.

**Investor conference call and webcast**

A call with Kevin Murphy, Group Chief Executive and Bill Brundage, Group Chief Financial
Officer will commence at 1200 UK time (0700 ET) today. The call will be recorded
and available on our website after the event www.fergusonplc.com.

| Dial in number | UK: | +44 (0)330 336 9105 | 
|  | US: | +1 323 794 2093 |

Ask for the Ferguson call quoting 2792963. To access the call via your laptop, tablet
or mobile device please click here. If you have technical difficulties, please click
the “Listen by Phone” button on the webcast player and dial the number provided.

**Provisional financial calendar**

| H1 Results for period ending January 31, 2021 | March 16, 2021 | 
| Q3 results for the period ending April 30, 2021 | June 8, 2021 | 
| Full Year Results for year ended July 31, 2021 | September 28, 2021 |

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