Business unit portfolio and profile
In the US we operate seven business units. Ferguson is the primary operating brand although a number of other brands have been retained to service specific markets. The business operates in all 50 states and is served by 10 distribution centres across the country that can provide next day product availability, a key competitive advantage. Ferguson predominantly serves the RMI markets with relatively low exposure to the residential new construction market.
The Ferguson Blended branches business sells to customers across the residential, commercial and industrial sectors for new construction and RMI projects through its national branch network. In smaller markets that may not justify a stand alone presence for HVAC and Waterworks, a blended location can also provide the products and services for these customers.
The Waterworks business distributes pipes, valves, hydrants, fittings and meters to residential, commercial and municipal contractors. This is a strong business which has been diversifying its customer base into private water companies and treatment plants, and expanding its product range into new areas such as metering technologies.
The HVAC business distributes heating, ventilation, air conditioning and refrigeration equipment to specialist contractors, predominantly in the residential and commercial sectors. Vendors have a strong position in this market, and branded dealerships of high quality equipment are the most important parts of the business. The majority of revenues are generated by providing parts for the repair and replacement market.
The Industrial business distributes pipes, valves and fittings, including specialty high-density polyethylene pipes, to industrial customers across all sectors including oil and gas, mining and power generation sectors. Although project driven, the business has historically performed strongly over the economic cycle. The industrial business also offers maintenance, repair and operations services (MRO) and integrated services, off-site integrated supply with centralised procurement, storeroom and commodity management.
The other smaller business units include:
- Fire and Fabrication: The supply and fabrication of fire protection systems.
- B2C (Business-to-consumer): Websites and platforms to support e-business. Through the website Build.com, sales are made directly to consumers using the product range and distribution network of the Blended branches business. This is a particularly fast growing area of the US business.
- Master distribution: Distribution of plumbing, heating and pipe supplies to retailers and small wholesalers.
These business units have synergies with the distribution and branch network of the larger units, and frequently share vendors.
Market position and competitive environment
Ferguson is the market leading distributor of plumbing supplies in the USA. The market positions of the main business units are estimated as follows:
Ferguson has no direct competitor that competes across all business units, but rather each business unit has its own competitor set. Competitors range from large national players, including professional sales from the national home improvement chains, to single-branch operations. The market remains fragmented with a large number of small and regional competitors making up the majority of the market.
Management believes that Ferguson has continued to gain market share in the year to 31 July 2011, growing sales significantly ahead of the market.
Revenue in the USA was 9 per cent ahead of last year on a like-for-like basis. Growth was broadly based, supported by price inflation of approximately 3 per cent with all of the major businesses ahead. The RMI segment has been resilient although it remains subdued as a result of lower consumer confidence. The recovery in new construction was modest as factors such as high unemployment, low availability of credit and high levels of unsold housing inventory have continued to constrain demand. The Commercial sector showed some resilience although continued to be restricted by the lack of availability of finance for construction projects. Industrial markets were generally better. We believe all of our major businesses in the USA continued to gain market share in the period.
The gross margin was ahead of last year as we continued to focus on improvements in the business mix towards showrooms, counter sales and private label products. Operating costs increased by 7 per cent in constant currency due to some additional headcount, the reinstatement of merit increases, pension contributions and higher volume related costs. The combination of strong revenue growth and margin improvement led to a significant increase in trading profit to £314 million (2010: £239 million). There was a one-off charge of £12 million in the period in respect of the settlement of litigation dating back to 2004.
Growth in Blended branches continued throughout the year. A strong focus on gross margins contributed to good profit flow through and the business was a major contributor to the overall improvement in the Group’s trading profit. The Industrial and HVAC businesses made good progress. The Industrial business in particular benefited from a buoyant oil and gas sector. The Waterworks business was resilient despite a fall in state and municipal funded projects. Our Build.com consumer internet business grew strongly at margins consistent with the rest of the US business.
In the first half of the year we completed a small Waterworks acquisition in Alabama. Since the year end we have also completed two further small acquisitions of a PVF business in Louisiana and a Blended branches business in Chicago.
The USA trading margin was 5.7 per cent (2010: 4.6 per cent).