Ferguson (LON:FERG) has announced its trading update for the 3 months to 31 October 2019.
First quarter highlights
− Ongoing revenue 5.3% ahead of last year including 6.2% in the USA.
− Continued tight cost control ensured good profit delivery.
− Underlying trading profit of $433 million was $20 million ahead of last year.
− Invested $62 million in acquisitions in Q1, healthy forward deal pipeline.
− UK demerger progressing as planned.
− Completed $400 million of the $500 million share buy back as at 31 October 2019.
1) ‘Ongoing businesses’ excludes businesses that have been closed, disposed of or are classified as held for sale. The UK has been moved to ‘Non-ongoing operations’.
2) The increase or decrease in revenue excluding the effect of currency exchange, acquisitions, disposals and trading days.
3) Before exceptional items and amortisation of acquired intangible assets.
4) Ratio of net debt before leases to pre-IFRS16 last twelve months EBITDA.
Group results
The Group generated revenue of $5,208 million in the first quarter, 5.4% ahead of last year at constant exchange rates and 2.5% ahead on an organic basis. While gross margins were slightly lower at 29.7% in the quarter, operating costs were well controlled which led to a good overall trading performance. Underlying trading profit of $433 million was $20 million higher than last year. The impact of IFRS16 added a further $18 million to trading profit. Trading days were the same in Q1 compared to 2019.
Regional analysis
| US$ millions | RevenueQ1 2020 | RevenueQ1 2019 | Change(at constant exchange rates) | Trading profitQ1 2020 | Lessimpact of IFRS16Q1 2020 | Underlying Trading profitQ1 2020 | Trading profitQ1 2019 | Change (at constant exchangerates) |
| US | 4,893 | 4,607 | +6.2% | 442 | (17) | 425 | 400 | +6.3% |
| Canada | 315 | 340 | (5.8%) | 20 | (1) | 19 | 27 | (26.3%) |
| Central costs | – | – | (11) | – | (11) | (14) | ||
| Ongoing Group | 5,208 | 4,947 | +5.4% | 451 | (18) | 433 | 413 | +4.9% |
| UK (Non-ongoing) | 541 | 580 | (2.2%) | 15 | – | 15 | 19 | (16.9%) |
Quarterly organic revenue growth
| Ongoing businesses | Q1 2019 | Q2 2019 | Q3 2019 | Q4 2019 | Q1 2020 | |
| US | +9.6% | +9.7% | +3.3% | +3.0% | +3.1% | |
| Canada | +3.3% | +0.5% | (2.9%) | (5.2%) | (6.4%) | |
| Group | +9.2% | +9.1% | +3.0% | +2.5% | +2.5% |
USA
Our US business continued to outperform with revenue growth of 6.2%, which comprised 3.1% organic growth and 3.1% from acquisitions. Price inflation during the quarter was about 1-2%.
New residential housing starts and permits from the US Census Bureau improved in the quarter. The Architectural Billings Index, more closely linked to commercial markets, was lower in the quarter. Our order books have grown year-on-year consistent with continuing modest revenue growth over the coming months.
The major business units of Blended Branches, Waterworks and HVAC all continued to grow well. Revenue in Industrial was lower against strong comparators arising from two large capital projects last year. Gross margins were slightly lower mainly as a result of strong prior year comparators. Operating expenses were well controlled, up 3.8% compared to last year on a pre-IFRS16 basis. Underlying trading profit of $425 million was 6.3% ahead of last year.
We completed one small acquisition in the quarter, Process Instruments & Controls, a California based industrial business with annualised revenue of approximately $8 million. After the quarter end we acquired S.W. Anderson which provides HVAC equipment and supplies to residential and commercial contractors, retailers and commercial property owners. The company operates in the New York metro area, which is one of the largest and most attractive construction markets in the USA. In the year ended 31 December 2018 it generated revenue of approximately $90 million.
Canada
Organic revenue in Canada was 6.4% lower. Residential markets remained weak as a result of government measures to restrict mortgage credit and the impact of foreign buyer taxes. Underlying trading profit of $19 million was $7 million below last year at constant exchange rates.
Non-ongoing operations
The demerger process for Wolseley UK is on track and we expect to complete the transaction in 2020. Organic revenue declined 4.2% in the quarter against a backdrop of uncertainty in repair, maintenance and improvement markets where the majority of our revenue is generated. Trading profit of $15 million was $3 million lower than last year at constant exchange rates. We continue to actively manage the cost base in the UK given the challenging market environment and exceptional costs of $5 million were incurred, principally relating to the announced closure of a further distribution center in Worcester and headcount reductions. We completed one acquisition in the quarter, Continental Power Equipment, a high quality infrastructure business which has annualised revenue of around $60 million and contributed 2.0% of revenue growth in the quarter.
Financial position
Net debt excluding leases at 31 October 2019 was $1,381 million after a cash outflow of $62 million relating to acquisitions, capital expenditure of $83 million and a better than expected working capital performance which is expected to unwind in the second quarter. The IFRS 16 lease liability recognised on the balance sheet as at 31 October 2019 was $1,439 million.
Following shareholder approval at the AGM, the final dividend of 145.1 cents per share, amounting to approximately $328 million, was paid to shareholders on 28 November 2019. On 10 June 2019 we announced our intention to buy back $500 million of our shares; this program is ongoing and at 31 October we had completed $400 million. We expect the buy back will be completed before the end of the calendar year.
Our capital allocation policy is unchanged and the Group aims to operate with investment grade credit metrics and within a through cycle range of net debt of one to two times EBITDA on a pre-IFRS16 basis. Our investment priorities remain focused on investing in organic growth, maintaining and growing the ordinary dividend in line with earnings through the cycle and investing in bolt-on acquisitions that meet our investment criteria. Any surplus cash after meeting these investment needs will be returned to shareholders promptly and Ferguson has returned $3.5 billion of surplus cash to shareholders over the last 6 years.
Given the cash outflows for the final dividend, acquisitions and normal seasonal working capital movements the Group expects to be operating within its stated net debt to EBITDA range by the half year.
There have been no other significant changes to the financial position of the Group.
Outlook
We expect to make further good progress in the year ahead. While US market growth is currently broadly flat we remain confident of outperforming our end markets and our order books support continued modest revenue growth in the months ahead. This strong focus on growth with continued cost and margin discipline gives us confidence in our expectations for the full year which remain unchanged.
Kevin Murphy, Group Chief Executive, commented:
“Ferguson continued to take market share against a backdrop of flat US markets and we remain firmly focused on maximizing organic revenue growth, while tightly managing gross margins and costs. We are pleased that this disciplined approach enabled us to grow US trading profit in line with revenue growth in the quarter. Cash generation in the quarter was good and our balance sheet remains strong. We will continue to invest organically in our businesses and in selective bolt-on acquisitions which will be integrated into our network.
“We expect to make further good progress in the year ahead. While US market growth is currently broadly flat we remain confident of outperforming our end markets and our order books support continued modest revenue growth in the months ahead. This strong focus on growth with continued cost and margin discipline gives us confidence in our expectations for the full year which remain unchanged.”
