The 2020 Mid-Year Economic Update_long

Ferguson’s 2021 Forecast Bolstered by M&A, Residential Strength 

After low-single-digit growth in 1Q, plumbing and HVAC distributor Ferguson PLC projects for the coming year accelerating M&A activity plus upbeat residential construction and renovation to offset softness in the commercial market.
Ferguson 1Q 2021

In late September, when Ferguson PLC reported its fiscal 2020 results, the normally acquisitive HVAC and plumbing distributor vowed to resume M&A after it had paused activity for months due to COVID-19.

The UK-based company has already made good on that promise. Ferguson earlier this month added a couple of bolt-ons to its portfolio when it acquired Old Dominion Supply Inc., a wholesale distributor of HVAC parts and supplies in Maryland and Northern Virginia, and Atlantic Construction Fabrics Inc., a geotextile company operating along the East Coast.

With those two deals now complete after the lengthy drought, Ferguson is poised to access its pipeline of acquisition targets throughout 2021 and return to a normal M&A cadence, said CFO Bill Brundage on Tuesday’s conference call to discuss 1Q earnings.

“I would call it a normal pipeline,” said Brundage, who was appointed in September. “You should expect to see some additional bolt-ons throughout the remainder of the fiscal year, but nothing large.”

Acquisitions play an integral role in Ferguson’s growth strategy and contribute about half of the company’s trading profit margin in a typical quarter, Brundage said. But the pandemic could spark additional activity as the company targets smaller, independent distributors looking for an early exit. Economic turmoil could bring ample opportunity.

“We’re pleased with the engagement that we’ve had with potential sellers,” Brundage said. “It is very difficult to pinpoint deals that we’re going to do because most of these businesses are family-run, and this is the biggest decision of their lives. So, trying to culminate those deals and pinpoint the timing is always difficult. But you will see several more deals as we move throughout the year.”

While Ferguson’s acquisition appetite is renewed, what hasn’t changed is the type of business that Ferguson will pursue, Brundage added.

“We still look to bring in good bolt-on M&A [targets] to expand our geographic footprint or individual capabilities in certain geographies, as well as more enhanced capabilities to bring into our organization to then leverage across our geography and our footprint,” he said. “We’re going to continue on that path.”

Residential Outlook Remains Bright

Before Ferguson paused deal activity in March due to the COVID-19 crisis, it had already invested $351 million in six acquisitions during the fiscal year, so a return to normal should make a substantial difference in future earnings reports.

Ferguson Enterprises ranks No. 1 on MDM’s Market Leaders list for the Top 40 Industrial & Construction distributors. Not only is it the largest U.S. distributor of plumbing supplies, PVF, waterworks, and fire and fabrication products, but it’s also the third-largest distributor of industrial and HVACR products.

What’s more, M&A — in addition to expected gains in residential construction and remodeling — would be another way to bolster the company’s top line in 2021 and offset potential softness in the commercial construction market. Ferguson dealt with some of those continued trends in the construction and remodeling end markets during its last quarter.

As MDM reported Tuesday, the company reported sales of $5.4 billion for the first quarter of fiscal year 2021 ended Oct. 31, up 3.1% compared to the same quarter a year ago. Profit of $486 million marked a 12.2% increase from the year-ago period.

The company’s U.S. division — Newport News, Virginia-based Ferguson Enterprises — posted revenue growth of 3.2% to $5.1 billion and underlying trading profit growth of 11.3% to $473 million.

Here are some trends that Ferguson outlined for the U.S. market in its 1Q investor presentation:

  • Residential customer groups strong across new and RMI [Renovation Maintenance Improvement]
  • Strong HVAC growth supported by a pick-up in repair and remodel work in residential
  • Non-residential customer groups (particularly Commercial and Industrial) remain challenging
  • Waterworks continues to hold up well, robust residential sales but more challenging in municipal
  • E-business continues to generate exceptional growth as a result of demand from project minded consumers and light pro’s
  • Order books remain healthy consistent with low-single-digit revenue growth

Residential, which composes 54% of Ferguson’s U.S. revenue, was the only category to show growth in 1Q with “high-single-digit growth.” Commercial, which composes 32% of U.S. revenue, showed “mid-single-digit decline.” And civil/infrastructure and industrial, each of which compose 7% of U.S. revenue, showed “low-single-digit decline” and “high-teens decline,” respectively.

Amid an overall cautious outlook for 2021, Ferguson does see runway for organic sales growth primarily in the residential markets. The company’s moderately bullish forecast is based on Harvard’s Leading Indicator of Remodeling Activity (LIRA), the “number that we tend to focus on,” said CEO Kevin Murphy.

“That’s up a little over 3%,” he told analysts on the earnings call. “We’re seeing good activity, again, inside the showroom business, specifically. And when you look at existing home sales, which we also look at in terms of a leading indicator for what remodel activity can be — that existing home turnover is fairly strong. That leads us to believe there’s a good balance driving toward high-single-digit growth rates in the residential RMI market.”

He added: “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.”

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