Ferguson Enterprises Inc (FERG) 2020 Q4 法說會逐字稿

Ladies and gentlemen, welcome to the Ferguson's Full Year Results call for 2020. My name is Adam, and I'll be the operator for the call today. (Operator Instructions)

I have the pleasure of handing the call over to Mr. Kevin Murphy, the Group Chief Executive of Ferguson. If you'd like to go ahead, please, Kevin.

Thank you and good morning and welcome to this 2020 Full Year Results Conference Call. You've got Mike and I presenting this morning, and I'm also very pleased that Bill Brundage is with us. I'm sure you will have seen from our press release this morning that Bill will be taking over from Mike as our CFO in early November. I'm really delighted to introduce Bill, and I'm very pleased that we've been able to orchestrate such a smooth handover between Mike and Bill.

Both are hugely talented executives that I've had the privilege to work with for many years at Ferguson, including the last 3 years, when he was the CFO of Ferguson Enterprises. He's a safe pair of hands. He knows this business inside and out. He's been shadowing Mike through our year-end process in anticipation of the handover. Bill will be joining us for the investor roadshows over the next couple of weeks, and I look very forward to introducing him to as many of you as possible.

It is, of course, also Mike Powell's final results as Ferguson's CFO, and I'd like to thank Mike for his significant contribution to Ferguson over the last 3.5 years. We wish him every success in his new role as he takes over as Mondi's CFO later this year. I'm personally grateful to Mike for all of his support and all his hard work has been critical in the company's transformation over the last several years to focus the business on its North American markets.

If I turn to today's agenda, I'll kick things off and give you the highlights, and also say a few words about how we're adjusting to the operating environment as COVID-19 started to impact our business during our fiscal third quarter. Mike will give you an overview of the numbers, and then I'll come back and give you a quick update on our strategy and some of the areas the team is focusing on. Then Mike, Bill and I will be happy to answer all of your questions.

I want to start by recognizing our 34,000 extraordinary associates who steadfastly supported our customers during the pandemic, in often very difficult circumstances. COVID-19 has undoubtedly had a dramatic impact and continues to affect almost every aspect of their personal and their professional lives. From our fabricators, technicians and drivers to our showroom consultants and sales representatives, to those working on our counters and in our warehouses, not to mention the many thousands of associates now asked to perform their jobs remotely, they have all risen to the challenge. During these extraordinary times, we're incredibly thankful and proud of what they continue to accomplish each and every day.

So turning to the highlights. Ferguson delivered a strong and resilient performance in 2020. Despite the unprecedented challenges in the second half, overall, ongoing revenue of $19.9 billion was still 2% ahead of last year and broadly flat on an organic basis. It was another good year for gross margins, despite the adverse effect in the second half from the temporary closure of our bricks-and-mortar counters and our showroom sites. The group's operating expenses were well controlled, particularly in the second half as we took decisive action to protect profit on lower revenues.

Trading profit was 4.1% ahead of last year at $1.6 billion with headline EPS down slightly, mainly due to the previously announced impact of Swiss tax reform. We also delivered another excellent cash performance by tightly controlling our CapEx and working capital alongside the strong profit delivery. The business continues to be underpinned by a healthy balance sheet, which remains a source of strength. The Board is recommending an ordinary dividend for 2020 of $2.082 which includes a catch-up from the withdrawn interim dividend. We're also restarting normal M&A activity, and we have several bolt-on transactions in the pipeline. The current share buyback program, however, remains paused.

Ferguson is successful because of our associates, and our baseline commitment is to create a safe work environment for all. We continue to embed safety as a core value driver in everything that we do, and we're pleased that our recordable injuries continue to improve with our group total injury rate and our lost time rate showing strong improvements. We're making progress in this journey to become first in safety, but we will not be complacent here.

Moving to our COVID-19 response. Overall, during a highly challenging period, our response has demonstrated the resilience of our diversified business model. It is clear this is a very different business to the one that faced the recession in 2008. Our approach to managing the business has been to focus on 3 key areas: first, to safeguard the well-being of our associates and our customers. We immediately moved to operating our business in adherence with CDC guidelines. Cleaning protocols at all sites were put into operation alongside social distancing measures. In the early weeks of the pandemic, we decided to act immediately to protect our associates and customers, and we moved our branches to pick up and delivery-only with customers encouraged to order ahead and to pick up in-store at the curbside. Our showrooms also moved to virtual appointments only.

We provide a critical function in the supply of essential products and services. In March, we took immediate steps to ensure our services were authorized as essential. Our associates continue to serve end customers, including supermarkets, hospitals, schools, utilities, food producers and other manufacturers.

Ferguson has an agile business model. Our key priority at the start of the pandemic was to ensure we maintained our strong liquidity position, even in the most pessimistic of downside trading scenarios. At the same time, it was important to preserve the ongoing cash flow of the business, and we therefore identified significant cost and cash savings. These measures, some of which were temporary, have enabled us to remain highly cash generative in the second half of the year. We also continue to stay disciplined on working capital, which remains a key strength of the business.

As local lockdown restrictions were lifted, we reopened all of our customer-facing locations. This is included: Allowing customers to transact inside our trade counters in specified locations with additional protective measures in place; reopening our showroom network with enhanced social distancing requirements; new signage, reconfigured workspaces and alter schedules to encourage social distancing; health assessments and temperature check in hotspot locations, in particular, across our supply chain network; maintaining hygiene and sanitization protocols at all sites, including disinfecting customer high-touch surface areas regularly.

Overall, in the U.S., we've seen fairly sequential recovery in revenue since April, and we returned to organic growth in Q1. Residential markets have remained fairly resilient with good single-family activity levels. Commercial markets have weakened overall, most notably in areas like retail, office and hospitality, though this has been partially offset by strong activity in distribution and data centers.

Civil markets were resilient in the initial lockdown as customer work sites are typically both large and outside. Industrial markets have remained challenging through the year due in part to depressed oil prices and overall tough operating environments for manufacturing during the pandemic.

We grew faster than the markets we serve in 2020 and continue to gain share in each sector with our outperformance estimated at about 3%. You can see that our markets sharply contracted in the second half. Since late spring, we've seen a good recovery overall as lockdown measures started to ease.

We think our markets today have recovered to about flat with residential leading the recovery. New residential is strongest. So RMI, where the majority of our revenue is generated, is also growing well. Nonresidential markets remain much more challenging with commercial markets down about mid-single digits and civils a bit weaker still.

We track data points from numerous economic industry and research sources as well as surveying our own customers and measuring our order books. Looking at this data and applying it to our business mix, our best view of markets in 2021 is flat overall. While we've made a positive start to the year in the U.S. from a revenue standpoint, we're still pretty cautious on the outlook for this year. Naturally, there is a great deal of uncertainty out there at the moment, not least caused by the pandemic and the trajectory of the U.S. economy from here. Looking forward, the strength of our business model and balance sheet positions the group well in these more uncertain markets. Assuming there is no significant COVID-19 second wave leading to the major market shutdown, we expect to make good progress this year, continuing to strengthen our market position and we're looking to the medium term with confidence.

Let me pass you over to Mike, who's going to take you through the numbers. Mike?

Thanks, Kevin, and good morning, good afternoon to everybody. I'm pleased to present the group's full year results, which clearly show we had a good finish to our financial year. Just before we get into them, it's worth reminding ourselves that the ongoing operations that I referred to throughout, includes the U.S., Canada and group costs, whilst the U.K. operating business is within no ongoing operations. I also refer in the main term numbers excluding IFRS 16, just to aid understanding.

Ongoing revenues in the year were up 2%, and we held gross margins reflecting the value we delivered to our customers, alongside which we tightly managed our cost base, which altogether means trading profit growth continues to outpace revenue growth. Ongoing underlying trading profit of nearly $1.6 billion was up $63 million, with trading margins progressing 20 basis points to 8%. Headline EPS declined 1.1%, principally due to the higher effective tax rate from previously advised tax reform. And taking into account the group's prospects and financial position, we're pleased to propose a final dividend of $2.082, in line with last year, and this effectively reinstates the previously withdrawn interim dividend and reflects our confidence in the business going forward. As you'll also see later, cash generation has again been excellent this year, and the balance sheet remains very strong with leverage of 0.6x.

So moving to revenue and trading profit growth. I've expanded on this chart, the revenue growth of 2% and the profit growth of 4.1% to the group that I have just talked about, and I've broken it down into its component parts. Organically, you can see the profit growth of 2% exceeded the flattish revenue, and this is the part of the results that I'm really most pleased about as we made quick decisions and have clearly demonstrated the agility of the business model. The significant acquisition contribution we've delivered reflects the effort put in by the teams to bring these businesses into the Ferguson family. As always, we've integrated those businesses rapidly so that we can deliver value to the customers and also extract the synergies.

Moving on to the business results. First, most importantly, our largest region, the U.S.A., which represents 97% of ongoing trading profit, and this clearly delivered a strong performance and continued to outgrow the wider market. We've got good momentum at the end of the first half, as we told you back in March, going into the second half. And then, of course, COVID-19 lockdowns started to impact our markets. Since March, the lowest revenue month was April. That was down approximately 9%. And revenue has steadily recovered since then, and we're now back to generating growth year-on-year. Growth rates across the U.S. continue to be heavily dependent on local infection rates and state-by-state lock down controls. Gross margins were well controlled, and as you know, we use this as a gauge of the value that we deliver to our customers.

Now given the environment we faced, we took a number of prudent cost-saving measures to match costs to volumes and to protect short-term profitability. And these included a hiring freeze, a reduction in associate hours, over time and temporary staff, along with temporary layoffs being implemented in the worst hit regions. Due to those quick actions, decisive actions on costs, underlying trading profit, you can see, came in at $1587 million, approximately $80 million ahead of last year with trading margins increasing 20 bps to 8.4%. Clearly, a very pleasing performance and again, just reflects the agility of the business model and the ability of the management to flex the cost base in tougher market conditions, whilst also being able to grow where opportunities present themselves.

On the next slide, you can see there were some small variations in revenue growth in the U.S. across blended branches, which is our largest business, with the strongest performance in Central, slight declines in the West. During the pandemic, the blended branches revenue declines were strongly correlated, of course, to local lockdowns. Though as Kevin has said, growth rates have recovered steadily since. In Waterworks, we generated strong growth throughout with fewer operating restrictions because of course, the majority of the work there is actually outside. And HVAC continued to grow well, generating strong performance during the year, and that has benefited from strong residential equipment sales through the summer months. We have homeowners improving their houses, which has kept our trade customers busy, and we've also seen this trend in eBusiness, particularly in build.com, which has generated strong double-digit sales growth in recent months. Adoption and use of our mobile apps and e-commerce platforms have increased significantly during the pandemic, and Kevin will touch more on this later in his presentation.

Canada representing 3% of ongoing trading profit, and that faced some pretty challenging markets pre-COVID. Revenues declined 7.5% overall for the year. That reflected the economic impact of some pretty national lockdowns in Canada, challenging conditions in Western Canada with weaker industrial markets and also some subdued residential markets. Gross margin slightly lower than last year, and despite cutting costs there, trading profit came in at CAD 58 million. However, we are well placed to capitalize on growth opportunities in Canada as the markets recover, and we are starting to see early signs of that happening already.

So now I've taken you through the performance of the ongoing business of the U.S. and Canada, let me move on to the non-ongoing operations of the U.K., where we saw revenues down approximately 14% in 2020. Again, pretty tough national lockdowns in the U.K. Revenues were down very sharply at the start of the pandemic to a low in April of minus 60%, 6-0. They have also steadily recovered, and the business has now moved back to modest growth.

Gross margins a touch lower in the year. However, we have continued to work hard to restructure the U.K. business around a clear customer proposition and to drive efficiencies. Towards the end of the year, we refocused the business by separating out building services from the core plumbing and heating business to better align our market proposition to our customer needs. We also closed the Worcester distribution center to reduce supply chain capacity and create operational efficiencies whilst improving customer service. We also took no government furlough money during the year.

Trading profit came in at GBP 6 million, and the good news is the efficiency measures that I've just talked about are now clearly coming through in the P&L as we start the new financial year.

So moving on to exceptionals, for which we charged $120 million in the year, which you can see on the left-hand side of this slide. You can see the top 2 items on the left, stirred up to $93 million. Those are the restructuring of the U.S.A, Canada and U.K. businesses. So after we stabilize these businesses with the short-term measures I described during March and April, we worked through in May what we wanted and believed we needed to do with our permanent labor cost structure. To ensure productivity and an appropriate response to the new environment, we decided to roughly take out 5% of the headcount in the U.S.A. and 10% in both Canada and the U.K. We've gone through the correct processes with the respective workforces, and this has concluded with net permanent headcount reduction in the U.S.A. of 1,400; 300 in Canada; and 400 in the U.K. Most of those heads actually left towards the end of Q4, and these actions ensure we will continue to drive efficiency into the new financial year and have the appropriate flexibility and skill set as we pass the business forward.

In the U.S., we also announced the closure of approximately 70 branches, about half of which were closed by the year-end and the remaining will work through the system through the next year. It's important to remember that a lot of these is actually where we will consolidate into better premises to improve the customer experience. And really, to keep the math real simple for everybody you can assume there is a payback of about a year on these restructuring costs. Of course, not all the cash flowed in FY '20, and I'd expect about $70 million of the cash to flow in FY '21.

Moving to the right-hand side on tax and interest. Firstly, interest costs, pre-IFRS 16, they increased slightly due to the higher level of average gross debt compared to last year that we carried, and our expectation for interest in FY '21 is approximately $85 million to $90 million, plus, say, about $50 million of IFRS, taking the total for the year to $135 million to $140 million for FY '21. And on tax, the effective tax rate for the year, totally in line with guidance that we gave of 25% to 26%, and I'd expect that same tax rate for FY '21.

I've set out the cash flows on the next slide on a pre-IFRS 16 basis, as I said, to really just aid understanding. This a full reconciliation to statutory notes in the appendix, but again, very clear evidence of good cash generation and the disciplines that we keep around cash, and these continue to be an important priority and a real quality of this business. Cash flow from operations $1,904 million, nearly $300 million ahead of last year. We saw a working capital inflow, principally from lower receivables, and we remain very well invested in inventory for our customers. However, spot cash flows on working capital always a little misleading, and I'd anticipate about $100 million of the strong working capital performance to unwind in quarter 1. Capital investment that was at the lower end of guidance that I gave last year, I'd expect for FY '21, this to be somewhere between $300 million and $350 million, but clearly, we can flex that depending on the environment that presents itself. Dividends paid slightly lower due to the withdrawal of that interim 2020 dividend, but as I've said, we now propose to pay the $2.082 per share. That's flat for last year, and that cash flow will clearly flow past the balance sheet to date.

And we also invested $351 million in acquisitions, the largest of which was Columbia Pipe & Supply in the Midwest, and we have a normal pipeline of bolt-on M&A opportunities that we are currently considering.

So the profit and cash delivery clearly leads us with a strong balance sheet at 0.6x net debt to EBITDA. That's below our targeted range of 1 to 2x.

I've shown the IFRS 16 lease liabilities on this slide so you can also see the IFRS 16 inclusive ratios. The pension net asset has become a net liability as in line with a lot of other companies a combination of people living longer and falling corporate bond yields means that the liability has increased, but clearly still remains in reasonable shape.

On our capital allocation and capital policy, there is no change.

As I think forward to the half year, we will have paid the final dividend of about $470 million. The reversal of the spot working capital that I mentioned earlier of about $100 million likely to flow out. We have the normal working capital cycle increase through to the half year and a little bit of M&A is looking likely. And of course, we have the trading cash that we generate. If you put all that together, I would expect us to be a touch under the lower end of the leverage target at the half year by the time that Bill comes and talks to you next.

We do not propose to start the balance of the buyback at this point. We will revisit that when there is a little more visibility in the business environment of keeping the balance sheet super strong for a little while longer in the current environment seems sensible.

So let me wrap up. We're pleased with the 2020 results that the team delivered in quite exceptional circumstances. Strong operating results with continued market share gains and excellent cash generation, all of which prove the agile business model and leave us with a strong balance sheet, which puts us in a great position going into financial year 2021.

It's great. I can hand over to Bill. I've worked alongside Bill now for the last 3.5 years. He and Kevin will be great together, and I am sure we'll continue to drive Ferguson forward with your continued support. Kevin, back to you.

Thank you very much, Mike. Much appreciated. Let's move on to strategy. Our strategy is consistent with the direction of travel in recent years. We will constantly evolve our approach over time, and our strategic framework is our road map for developing our business. Overall, we want to ensure that we drive initiatives to improve our relationship with our customers, our suppliers and most importantly, our associates.

We will operate with a short-term and long-term focus, not sacrificing the short for the long or the long for the short. We can and will do both. We will continue to focus on driving all our resources and knowledge to make our customers' projects better because they dealt with our company.

This is the essence of Ferguson, and we will provide the best service in our industry based on our foundation of attracting, developing and retaining the best associates. We'll be our customer's trusted supplier, giving them unrivaled choice of products, sourcing the leading brands in all our categories, including our growing portfolio of high-quality owned brands.

We will drive scale in our business so we can make our customers more successful by ensuring they have access to products and advice where and when they need, offering a true omnichannel experience that doing business with us is as frictionless as possible. We'll use technology to make our business more productive and equip our associates with tools to drive efficiency while saving time for the customer, all the while never being afraid to experiment or to innovate. As we proceed this morning, I'll hopefully give you a sense of some of the areas we're driving as we continue to execute this strategy.

We see ourselves as partners to our customers to make their projects more successful. Distribution remains a core competency, and we bring the deepest and widest inventory in our product categories with a world-class supply chain. To our customers this means putting together a bundled product and getting it to them when and where they need it. That is our core, but we have to be more than that. We'll make sure that through a consultative approach with our associates, we're guiding a customer's project to make sure that it's more successful because they did business with us.

Personal relationships are critical. We also believe that this is not enough. We need to build the capabilities that drive the best digitally enabled customer relationships. It's clear from COVID-19, technology must support our customers to make them and us more productive.

We will focus on driving the Ferguson brand to ensure customers recognize and value what we do as a consultative experience. We'll drive a focused product strategy that includes both branded and owned brand offerings. We will be part of the customer's decision-making process evolving from order taker to trusted adviser. Other important areas of focus are value-added services inside our supply chain, and the evolution of what our sales force should and will be.

We'll continue to be mindful and invest in innovation and disruption that's coming from outside of our organization that's addressing overall construction productivity.

We see 4 dimensions to growth, which emanate from our core strengths. It all begins with the customer, and we will never abandon the trade professional as our core relationship, but what we will do is address stakeholder relationships more than ever before. We'll make sure we're engaged with owners, engineers, architects to buy project specifications, and to ensure that we're uniquely positioned to secure a project. This will also serve to expand our overall gross margin profile.

Secondly, while we have no intention to own manufacturing assets, we're going to get as close to the point of manufacturing as we possibly can. We're going to continue to expand our diverse global sourcing organization to make sure that we're driving design, product development and owned brand execution. We'll source from inside and outside the U.S. for owned brand applications and drive sales through specification to that end user. We'll use product expansion to grow the bundle, providing a comprehensive range of products so that we're more relevant for not only the trade professional, but also the ultimate end user and owner.

Now I know you've seen this chart many times before, but it's a great reminder of the opportunities we have in the U.S., and how we focus our teams on the very specific needs of these individual customer types. The chart shows our 9 customer groups with our estimated market share in each bar. The important area of the chart is the gray portion, which shows how fragmented our markets are and how large our market opportunity is. In terms of business expansion, we will stay focused on our customer groups. There is a significant opportunity for strong growth and continued consolidation within each of these large and very fragmented markets. Many customer projects require a range of products and services from across the business, and we leverage our scale and expertise across the entirety of the organization. We benefit from significant synergies across our customer groups to help lower our costs and to improve our margins. We've chosen to operate in these markets because we can generate strong growth, attractive gross and net margins and good returns on capital.

We first focus on organic expansion, and then selective bolt-on acquisitions across all of our business groups. We generate benefits of scale in areas like distribution and technology, strengthening customer relationships that are uniquely local. We're always focused on ensuring the best human relationship exists together with the best digital relationship.

We've become a much more balanced business in the U.S. We're more focused on repair and remodel today than at any time in our history. This makes us a much more resilient business going forward. As an example, our Waterworks business, pre 2008, heavily focused on new single-family residential construction work. There were 2.2 million new housing starts at the time, but today, we have a much more balanced business, and we compete in a number of areas in addition to new residential construction, including commercial, public works, municipal water and wastewater treatment plant construction, meters and metering technology and soil stabilization. This type of diversification is represented in all our traditional business groups today.

A differentiated service offering happens at multiple levels in the customer journey. Our people will work to offer error-free takeoff services in the industry's best quotations, helping our customers to build their jobs. From a sourcing standpoint, we will represent a balanced product strategy to ensure the best gross margin profile for products that are also the most appropriate for the customer's design. We offer customized solutions that help customers in the construction process, saving them time and money. We offer same-day, next-day delivery of the broadest and deepest range of products in the industry, bolted together with technology solutions that will deliver true project management.

Best way to illustrate this approach is a simple example. A specialty U.S. pharmaceutical company recently needed to a largest manufacturing operation. Unfortunately, the roof of the manufacturing facility couldn't support the weight of traditional steel pipe or the air handling units that were needed for the job. The cost to reinforce the structure as well as the operational disruption that it would cause was not an option for the owner.

Together with our customer, we work to create a prefabricated system of polypropylene pipe that could be evenly distributed, reducing the load to the existing roof structure without extensive reinforcing. The results save the end user significantly in direct cost as well as the costs associated with any downtime that would have been required. We supplied a prefabricated kits with all the required components so it could be easily assembled on-site, which also reduced construction hours, and it was completed with no recorded injuries. Today, the second phase of that contract is currently being fabricated and shipped.

We seek a balanced growth strategy with same-store sales growth, organic expansion and bolt-on M&A. In March, as Mike said, we acquired Columbia Pipe & Supply, a market leader in commercial and PVF distribution in the Midwest. The Chicago metropolitan area is the third most populous in the United States, and you can see from the slide, we've got a huge opportunity to build our commercial business in the region with Colombia adding about $220 million in revenue. While we have 40 existing locations in the region, we were significantly underrepresented in commercial, and Colombia is a great fit, building out our position in some attractive cities across the Midwest. Most importantly, we welcome 375 dedicated associates who've developed deep trusted relationships in the market over many years.

Going forward, we have a number of attractive traditional bolt-on acquisitions in the pipeline, several of which we expect to conclude later this year.

In addition to bolt-ons, we'll also use acquisitions to grow capabilities that will make our branches and our digital channels more relevant. Many of these opportunities allow us to get closer to the consumer and owner while adding to our owned brand product offering.

In 2018, we acquired Safe Step, which sells owned brand's bathtubs and showering systems for the limited mobility bathing market. Since the acquisition, we've grown revenue by over 30%. The business has great returns with gross margins 2x our core gross margins and is solidly accretive to trading margins. Manufacturing is contracted out, but completed within the U.S., and the business has a direct sales model, utilizing a network of over 100 independent sales reps. Since we acquired this business, we've expanded our growth within our showroom network, our residential and commercial channels with great success.

We must provide a seamless experience for our customers no matter what order channels they choose to use. Our associates will spend less time processing orders and more time guiding our customers, thus enhancing productivity, customer service and most importantly, relationships. We've added many pieces of functionality, and we've recently launched a real game changer for us, which is a great example of how technology can enhance our service while improving productivity. Offering geo location services for our customers means that we can empower them through the Ferguson app to receive real-time notification of deliveries via voice, text or email alerts. Customers are now getting notifications as the trucks are making stops along the way, updating timing so they can better plan their day, but it's also tied to enabling them to understand precisely what is on that truck and what is about to be delivered.

If you can imagine, we have over 2,000 outside sales associates to nearly 4,000 working inside sales who are receiving calls multiple times a day, checking delivery times and inventory. Freeing up these associates to spend more time on sales and consultation will be a significant productivity improvement.

We're incredibly excited about linking that geo positioning to the Ferguson mobile experience, which we think will drive rapid adoption by our customers, unlocking so many additional capabilities through their mobile device. We're in the early innings of rolling out new releases. So if our customers want additional functionality like geo positioning, they can access it easily. This gives them enhanced functionality on the go, including buy online, pick-up in store; downloading proof of deliveries; searching the widest and deepest breadth of product inventory in the industry; accessing rich product content; scheduling delivery and installs and much more. Unsurprisingly, we've seen significant customer uptake in these tools during the pandemic. App activity has doubled since March. We've launched additional services to help customers operate in the COVID environment. For example, our PROFLO tool can be used in our counter so our trade pros to easily test orders for contactless pickup. Our overall user activity is up almost 50% on our digital platform since March. Hopefully, that gives you an idea of how we're executing our strategy.

Now on to a couple of corporate matters. The exit of the U.K. business remains an important priority. The timing of this remains uncertain, and consequently, the Board is assessing other separation options in parallel with the demerger process. Our objective remains to exit the U.K. from the portfolio as a standalone business. We've continued to make good progress on the transition of the business to a full U.S. primary listing. Post the exit of the U.K., the executive team will be entirely based in the U.S., and all of the company's revenues will be generated in North America. We continue to believe that the U.S. is the natural long-term listing location for Ferguson.

In July, following shareholder consultation, the Board sought shareholder approval for an additional listing of ordinary shares in the U.S. Shareholders voted in favor of the resolution, and we received over 99% support. We expect this new listing to be effective in the first half of calendar 2021. And in due course, we'll put forth a further resolution to furnish some shareholders to relocate the primary listing to the U.S.

In summary, sat here today, our business is in good shape. We're extremely proud of how our associates have risen to the challenge. We're pleased with the operational delivery, given challenging markets, and we will continue to focus on execution. Most importantly, we will manage the business very carefully as the trajectory of our markets remain uncertain. Our business is diversified and resilient, and we have a clear strategic direction. This includes investing in the strong foundation of a world-class supply chain, delivering a consultative approach to our customers and investing in technology.

Thank you for your attention. Now Mike, Bill and I will be very happy to clarify anything that's unclear, and take any questions or comments you may have. Adam, I'll hand the call back over to you.

(Operator Instructions)

We have our first question, and it comes from Will Jones of Redburn Partners.

I've got 3, if I could, please. The first is actually a 2-part question just around the cost-saving measures for the year ahead. Can I just check that the roughly 5% headcount cuts in the U.S. would still be competitive?

Will, we're having trouble hearing you. Could you speak up just a touch?

Yes. Is that better?

Better, yes.

Yes. Sorry, I'll speak a little loud. Apologies. Yes. The third was just around the cost savings and checking that the 5% headcount cut in the U.S. is compatible with small revenue growth, which is what I guess you might see for the current year? Or would you have to kind of bring back on some of those heads if trends remain as they are? And linked to that as well, the branch closures, I think Mike's comments suggested that you're relocating or reconsolidating to better locations. Can we assume from that you don't expect much, if any, revenue loss from the branch closures, but just to check that because entirely big number.

My second question is just around gross margin. Perhaps, just for the year ahead, you could give us a feel for what you see as the pushes and pulls on the business, I guess, things like mix, own label, cost to serve, just how it might shape up in totality?

And actually, the last one was just on strategy. Just referring back to your slide a couple of -- early on in the presentation around the market shares and the market sizes. I guess HVAC is an interesting one where you've got around 4% share. It's one of your biggest total markets there in size, and probably, an appropriate beneficiary. I just wondered if that is a market where you see kind of incremental opportunities. I appreciate it's quite dependent on manufacturer relationships there, but is that one of your kind of verticals you could put on maybe in the next couple of years?

Perfect. Thank you, Will. We did have some trouble hearing you, but I think I got the gist of it. This is Kevin, and I'll maybe take the first crack at the 3 questions, and then Mike and Bill, please fill in. From a cost headcount versus growth, as Mike had indicated, we feel like we took a much better approach to what cost control and disciplines look like versus 2008, 2009. And so depending on the market, and it was very local, we approached this with a variety of different actions from furlough, layoff, hours reduction, temporary workforce and then a reduction in force to position ourselves, yes, for what we were going through during lockdowns, but much more importantly, for what was going to face us as we went into Q1 and beyond. And so we've already seen as markets have begun to recover and certain markets have gotten better, that cost continue to put back into the system, obviously, through things like an increase in hours worked, what overtime looks like in that system.

The thing I'm most pleased with is the flexible nature, of which we've been able to preserve the intellectual capital of this business to make sure that we can continue to outpace growth as markets are supportive and that agility to make sure that we can address the cost base if markets are more challenging. And from a branch closure perspective, you indicated that many of these were small branches, yes, small very few associates in branch. And so from a revenue perspective, we expect to capture and retain 100% of the revenue of those locations as we utilize other locations in those specific market areas.

From a gross margin perspective, we look at a good balance to the year ahead. Last year, we saw good growth in areas like Waterworks, which do have a lower gross margin, even though the operating margin is consistent with the rest of our business. But again, focusing on owned brand and an overall balanced product strategy that allows us to achieve value or realize the value that we provide in the marketplace, we still believe that we can grow margins roughly 10 basis points a year over the long haul.

And then from an HVAC standpoint, it is absolutely one of our attractive growth markets. You highlighted the size of that market and our relative share position, but additionally, when you look at the needs of the consumer and the residential market and certainly, from a commercial perspective, heating and cooling, we think we're uniquely positioned. Additionally, from a COVID perspective, as we look at indoor air quality as being a potential huge driver for us as we go forward, it has a direct link to that HVAC business. The reason I say, I think we're uniquely positioned is many of the customers in the HVAC business do both plumbing and HVAC work, and we have a very successful plumbing business across all 50 states in the U.S. and then into Canada. And so the ability to offer a very unique customer experience for the HVAC business group, while at the same time, offering a very unique experience for the plumbing side of the business, allows them to shop at one location to leverage the infrastructure and the relationships of our organization and should allow us to grow significantly faster.

You highlighted the manufacturer inputs. We have great relationships across a variety of OEMs and making sure that we have access to product lines to take care of that opportunity is hugely important.

With that -- I won't go on and on. Any additional from Mike or Bill?

Yes. Kevin, thank you. Well, given your question really relates to sort of good cost in Q4 and what about the future, probably be a little rich of me to comment about the future, given that Bill is on the line. So Bill, why don't I hand over to you and introduce you to Will and the team.

Yes. Great. Thanks, Mike. First of all, let me just say how honored and excited I am to step into the role. I look forward to meeting many of you virtually over the next couple of weeks and then hopefully, soon in-person when appropriate. Look, to Kevin's point from a cost perspective, as we were going through the lockdowns, we did first flex really hard on the temporary items and actions. At one point, we had about 2,500 people that were on temporary furloughs or temporary layoffs. Recall, the revenues were down about 9% in April. Clearly, we then shifted focus towards the future, setting up the cost base for certainly, an uncertain environment, but the revenue base that we expected to be operating in coming out of the initial lockdown phase. That's where we took the action on the 5% of heads in the U.S.

To Kevin's point, revenue was a bit better than we expected coming through Q4. Most of those temporary actions are now brought back from a cost perspective. Because of those actions and because of slightly better revenue, we certainly had a good solid Q4, certainly from a flow-through perspective and a profit flow-through perspective. As we manage into Q1 and into this fiscal year, as we look forward, you would expect some of that cost base to come back if revenue exceeds those expectations. But these are things that we manage day in, day out, month in, month out, very closely across the organization. Maybe just to put it in perspective that the 1,400 people that we reduced from the organization. Remember, we've got about 1,400 locations. So that's about an average of one per location. So these are very tactical decisions that we make day in, day out. And we'll be very cautious as we move forward into the new fiscal year.

Our next question comes from Priyal Woolf of Jefferies.

Can you hear me okay?

We can, Priyal. Thank you.

Okay. Brilliant. So I've got 3 questions. The first one is just on current trading. So obviously, in the U.S., you said your back to organic growth since August. Can I just double track that this does mean you're back to organic growth in your core blended branches division as well? Or is this more just a function of really strong growth in some of the smaller units like eBusiness?

Second question is just on M&A. I know you said you've got a pretty decent pipeline, but has this pipeline improved through COVID? Are there more sort of distressed assets out there that you could pick up?

And then the last one is just a quick one. You said that you will go back to shareholders in due course in terms of approval for that primary U.S. listing. Can I just push you in terms of time frame in terms of that?

Thank you, Priyal. In terms of current trading, as we indicated, we're really pleased with the way in which we've had sequential recovery from the spring time through the close of the fiscal year and into Q1. I'll let Bill comment on where we sit in terms of blended versus the rest of the businesses, but generally speaking, we're pretty pleased. If you look at the different pressure points that we have on the business from an order channel perspective, our residential trade business are builder business and showroom business performing quite well. Commercial, a bit more challenged, and so that gives us a pretty nice balance actually for what we had expectations.

In terms of the pipeline for M&A, we don't see distressed assets out there. I think we've said before, and Mike said it very well on past calls that our local competition runs their business quite well from a cash perspective and can really, I use the words, hunker down to take and see themselves through a challenging period. I do believe, though, as we go through COVID and beyond that the investments necessary for foundational technology for what an omnichannel experience looks like, so the tools that are necessary to drive this business, I do think will create opportunities for us to acquire businesses that have great local relationships that we can plug together with that technology, with that supply chain, with that breadth and depth of product offering to make them more successful. So that's what I'm most bullish about in terms of bolt-on M&A as we look forward.

And then from a second listing on to a primary, we've got a lot of work that we need to do right now. And so when we use language like in due course, it really is to reflect the fact that we've got work to do around SEC, (inaudible) base actually, but maybe most importantly, we've got work to do to run this business appropriately through a challenging environment. And so we're not going to get ahead of ourselves. We have that view of the future, and the Board has stated that publicly, but we first need to set up that and stand up that secondary listing, run the business appropriate through really uncertain markets and continue to deliver. So that's where we are.

Maybe, Bill, you want to comment a little bit more on blended and eBusiness?

Yes. So blended getting back about flattish, I would say, as we entered into the first quarter. And then the strength, as Kevin mentioned, from an HVAC perspective, from a Waterworks perspective, performing very well, delivering on balance at low single-digit growth.

We have a another question. This one comes from Kathryn Thompson of Thompson Research Group.

I'll just hand the questions out individually after answering them. The first area I want to focus on is on plumbing, and this is really feedback that we've received over the past 2 to 3 months. And it's from our U.S. contacts that are pointing to an increase in a pretty meaningful one for demand for commercial plumbing products. So this would include mobile hand washing stations and water filtration systems. And they do this as a change in trend line for commercial demand versus more DIY demand and calendar Q2. Could you clarify what you're seeing in the field for commercial, particularly against the backdrop of what could be perhaps, one of the biggest nondiscretionary models that we're seeing in public spaces.

Okay. Thank you, Kathryn, very much appreciate it. From a commercial demand perspective, and you're right, there are different ways of working. There are going to be different demands on what commercial space should look like, and what those retrofits could look like. You mentioned a few of them.

The other area that we're seeing are, quite frankly, very simple retrofits -- small retrofits on indoor air quality, filtration and the like. And we are taking advantage of that today, although it's not material in terms of what the overall revenue impact is at this time. I think, more broadly, from a commercial perspective, what we're seeing is, there is certainly an effect out there as we look at multi trade commercial development and the length of time for a project, making sure social distancing is in place, making sure that the spacing out of trades is done.

It will lengthen the time of a construction project to a certain degree, but we're pleasantly surprised with the lack of cancellation of projects or pausing of projects that we're seeing across the bulk of our business. Although we remain cautious because we certainly know that there is going to be pressure on bidding activity and funding for projects that may have been previously in the pipeline around areas like hospitality, office, retail and the like.

But as we've discussed, the need for data centers, the need for distribution capacity, certain education and health care assets, although not as much, are really -- we're really bullish from that perspective. So we're more cautious on the commercial market, but pleasantly surprised at just to what we're seeing across the nation thus far.

And tagging along that with HVAC, we see a lot of opportunity with HVAC, based on our primary research as there is increased focus on airflow and public spaces. I take it from your prepared commentary, you're seeing more positive trends right now on the residential side. What types of conversations are you having with commercial as a -- as buildings are being reconstructed to face the post-COVID world?

Yes. The bulk of our HVAC business is, in fact, residential. Most of our commercial work is in the light commercial area. Although from a VRF perspective, we are engaged in the larger commercial market. And then certainly, we have a large mechanical commercial business on the plumbing side of our world that has some impact from an HVAC perspective. I think, residentially, we're seeing some pent-up demand as well as good impact of residential new construction. The biggest issue right now, candidly, from an HVAC perspective is just making sure that we've got good access to product. If you think about a perfect storm for our business in HVAC, the pandemic hit about the time that typically distribution builds up some inventory levels, and manufacturers are ready for the upcoming summer season.

And so there was a bit of disruption and dislocation there and so making sure that proper access to product and leveraging our supply chain, and making sure that we can take care of customers on the residential side is very important. And then as we talked about from an indoor air quality perspective, we think it's, call it, roughly a $10 billion opportunity potentially for us as we move forward across residential and commercial. It's a big market. We're just now starting to analyze what we think our role can be, but that business is growing rapidly for us right now off of a fairly low base.

And then following up on your U.S. margins. The way we looked at it for Q4, your trading profit margins expanded over 100 basis points, despite a pretty challenged topline, as you were managing through quarantine and coming out of that. You have made some comments on just the flexibility of the model, but what we'd like to better understand is how much more is onetime in nature? And how much structural costs you've been able to take out? And also, please clarify what is any mix impacted margins in the quarter?

Yes, Kathryn, it's Bill. So let me jump in on that. So first off, from a structural cost standpoint, I think you should think back to the exceptional charges that Mike outlined. That's the real go-forward take out of ongoing heads from a labor perspective as well as the consolidation of those 70 branches. Again, on those 70 branches, about half of those were physically closed by the end of the quarter. The other half are going to come through principally in Q1. And that really gets that, the bulk of our cost base, 60% roughly of our cost base is in labor, another 15% is in infrastructure cost.

If you go back to your comment, though, on the trading margins, you're correct. Certainly, in the U.S. at about a 10% trading margin in Q4. Again, back to my earlier comments, very pleased with that result. Most of those temporary actions that we took, again, the 2,500 people that were temporarily furloughed or laid off, those 2,500 are now back. The overtime that we reduced significantly in Q4, part of that is back. And that's where we will remain very cautious as we move forward to manage that over time as well as the permanent ongoing head count up or down, depending on the volumes that we see.

Okay. Final question goes into the bucket of "it seems conservative". First, on the topline guidance for flattish, maybe some puts and takes based on that outlook? And then second, ending the fiscal year with pretty incredibly low leverage at 0.6x, what should we read into this? And how should we think about growth initiatives going forward?

Yes. Maybe I'll take a first cut. Bill might jump in. On balance, we see some green shoots and are positive around the residential side of the business. As you think about new construction, residential, we are positive about single-family new construction, not the least of which is what you see in a COVID environment and the desire for people potentially to want single-family construction, expanding of the commutable distance, given the nature of remote work and the acceptance of remote work, low interest rates, pent-up demand, and then obviously, from a starts perspective, seeing 1.4 and plus 2 on that is very positive.

We also see some positive around home improvement as you look at LIRA being plus 2%. So even if you take mid-, single-digit positive from a residential perspective, I think that offset starts to look as you get to the commercial side of the world and looking at what ABI looks like below 50 for 6 months, and what we're seeing from an overall project funding perspective and the uncertainty around the commercial markets.

And then industrial remains a bit challenging. Planned shutdowns in our PVF business getting in there and doing maintenance, repair and operations inside those plants still remains challenging, oil and natural gas and the like. And then the civil markets, when you look at the funding levels for local and municipal government and what that might mean to the public works construction of our civil markets. So when we take all of that together and balance it out, our Fire and Fabrication business as part of that commercial market. On balance, what we get to is a roughly flat market. That said, those numbers are changing fairly quickly as you look at a COVID world, and I think that there is still enough uncertainty out there.

Are we pleased with what we've been able to produce from a revenue standpoint in outperformance? Absolutely. Will we continue to drive for that? Absolutely. But there is just a fair amount of uncertainty as we go into the latter part of our first quarter and really the rest of the fiscal '21.

In terms of that low leverage ratio, we think it's a prudent place to be, given that uncertainty in the market and the strength of our balance sheet is a very positive thing for us, especially as we look to get back into good solid bolt-on M&A. And again, trading through challenging markets where from a U.S. perspective, we don't even have consistency in young people going back to school. And so what are we going to see from a virus perspective, maintaining that conservative position is prudent at this time, and we're pretty pleased with where we are.

We have our next question. This question comes from Keith Hughes of Truist.

Kevin, in the prepared statement, you had discussed future initiatives and getting closer, still serving your...

Keith, I'm sorry, could you speak up just a touch? We're having trouble, Keith.

All right. Is that better?

Yes. Thank you.

Is that better? Yes. Okay. So my question is, Kevin, in your prepared statements, you had discussed, getting closer to the end-use customer still serving the contractor. They're getting closer to the end-use customer, which has always been part of the commercial world more than residential. So I guess my question is, are you talking about extending that further into the, let's call it, nonresidential world? Or is that an initiative in residential? And how do you get that goal accomplished?

Yes. Keith, thank you very much. We see it across all of our different businesses, and it can't be firm enough in saying, the trade professional is our customer. And we work hard every day to make sure that we deliver that value, best breadth and depth of product, supply chain, consultative experience being able to find search special items to make their jobs easier, making their business more successful. But where we really need to go, especially from a product strategy perspective, is working with designers, engineers, architects.

Is it commercial? Yes. Is it infrastructure? Yes. Municipalities, is it designers in the builder showroom space? Absolutely. So just making sure that we are up funnel across all those different aspects, helping our contractor to make sure that we have a smooth flow of product that meets the design criteria for that end user, that stakeholder, but at the same time, we're guiding what that product selection looks like to benefit Ferguson and our contractors. And so that is not just owned brand, that's also our partner vendor relationships on the branded side, where we've got great exclusives that are unique to Ferguson, that allow us to have a specification inside of a project, giving us a better chance to secure that overall job, while at the same time, helping our margin profile and delivering a better product for the end user with good timeliness for the contractor.

So really, it's across all of our different business groups. It is in-person through relationships, but it's also through technology, especially as we start to see building information modeling becoming a bigger part of not only the commercial business but beyond.

Okay. Second -- final question and a follow-up to Kathryn's. As you look at business the last sort of 60 days, I think you've shown some caution on your nonresidential business. If you look at those 3, the commercial, the civil infrastructure and industrial, in last couple of months, which of those has been the weakest market?

Keith, could you repeat that last part? We lost you on the last part.

Yes. Sorry. Let me speak a little louder. Which of the nonresidential businesses -- you define them as commercial, civil infrastructure and industrial. It seems though they're weaker than residential in the last couple of months of business. Which of those is the weakest, which is causing the lowest trend?

Industrial is. And again, we don't have a tremendous amount of exposure to oil and natural gas, but it is the weaker of all those types of businesses, really commercial then civil, municipal and industrial.

We have our next question. This question comes from Yves Bromehead of Exane.

Just a few questions on my end. Could you maybe come back just on the end market developments? And especially, looking at the comments you've made on the municipal funding, you kind of use a backward tone on the press release. I wanted to understand if you've seen any improvements with regard to that subsegment in recent weeks? And how you think going forward on that specific point?

My second question is on your slide where you show your positions and your vertical exposure. I'm trying to figure out maybe with your new strategy with the U.S. listing, looking ahead in the next 5 years, where do you see the largest opportunities in terms of market growth, but also in terms of potential external growth opportunities through M&A?

And maybe just last question. Your outlook is essentially saying that with some product of your exposure, you expect flat market conditions. Can we extrapolate the outperformance of 2019 into 2020, which would suggest a low single-digit environment for Ferguson?

Great. Thank you very much. And from a municipal perspective, I think this is more our caution around what might happen. We haven't necessarily seen that today, but if you look at stress and strain put on local and state budgets, given the COVID response and the need for funding, you do get concerned as to whether or not the general fund versus Wastewater infrastructure, how that interplay happens. The good part about that is that our Waterworks business, as indicated during the presentation, is a very balanced business. So, yes, municipal, yes, public works construction, water, wastewater treatment plants, but also new residential and commercial. And in fact, we've seen good new residential work across the bulk of the U.S. in terms of that new residential work inside of Waterworks. So it is more a concern, a caution about what could happen.

From a vertical exposure and largest opportunities, both in market and M&A, I think you see a couple that we're really working hard to grow and expand it. HVAC, as we've spoken about before, is one of them. Certainly, the commercial maintenance, repair and operations business, what we call Ferguson Facility Supply, which is a huge, very fragmented market with good trading margins and good returns on capital, where we are continuing to make good headway in conjunction with our blended branch infrastructure to make sure that we can offer same day, next day product availability to that customer set. But I can't reinforce enough across all the different businesses that we operate in, we do see good opportunities, both with M&A. And then depending on the market, what does that organic investment look like depending on the market conditions that we operate in.

And then from a flat perspective, yes, we intend to outperform the market. We typically push for, call it, 200 to 300 basis points worth of market outperformance, making sure that we do it in the right way, achieving value for the services that we provide, reflected in our gross margins and value for the relationships, both digital and human.

We have our next question. This question comes from Gregor Kuglitsch of UBS.

Can you hear me well?

Yes, Gregor. We can.

Okay. Brilliant. I've got a few questions as well. Maybe one kind of big picture one on the margin potential of the U.S. So I think last year, you were slightly shy of 9%, that's including obviously IFRS 16. You're flagging kind of technology investments, some cost savings, and I don't expect you to sort of give me a precise basis point number maybe for this year. But as you maybe take a 5-year view, what do you think this business is capable of doing? I mean, could we be talking about double digit? Or is that too negative? That's question one.

Question 2 is relating to the M&A commentary again. So I want to understand if your kind of approach to M&A has changed a little bit. Maybe it hasn't, but I just want to explore whether you're prepared to maybe go for slightly larger deals. So historically, the last decade or so, you've kind of done 1%, 2% annual sales contribution from acquisitions. I want to understand if you're kind of flagging a step change in that? Or it's just going to be more of the same?

And then on e-commerce, if you could just give us some growth numbers in your introductory remarks. If you could just remind us kind of the absolute number. So I think the B2C is relatively easy, but in terms of the B2B, how many of your customers are basically using online channel? How many subscribers have you got? Just so we can understand the sort of absolute figures there because I think you were mostly flagging the rate of growth relative to March, but I want to understand where you are in those 2 terms, please?

Great. Thank you, Gregor. I'm going to take a quick turn on all 3 of those questions, and then turn it over to Bill for a little bit more depth. From a big picture view in terms of double-digit being too aggressive on margins, we do not put a ceiling on that, and we have historically looked at gross margin expansion as a good reflection of the value we provide, and that's been the driver of trading margin expansion. We really need to look at both, and I think that you're seeing that, hearing that in some of our comments for today. How do we get 10 basis points worth of gross margin improvement annually that is sustainable, built on value. And then how do we make sure that we invest in technology, which are already embedded in that constant movement from a technology perspective in both OpEx and CapEx is embedded in side of financials and what we are talking about today. But we need to have that in order to drive the productivity of our salesforce, the productivity of our associates, things like distributed order management technology. That's sort of activity that makes our people more efficient, but also gets great value for our customer and makes us relevant for the long haul.

Secondly, on the M&A side, there is no step change to what you're seeing. We will look at all opportunities, big and small. That is our responsibility. But when it comes to our ability to take small to medium-sized bolt-on with local relationships, bringing into our organization, take out some overhead costs, add technology, supply chain, to local relationships. It's a good, solid, effective way of growing our company that also protects and enhances shareholder value.

We also want to do capability acquisitions. What does that mean? Yes, valves and automation and what are our capabilities in the local market that we can spread across a larger book of business, but also owned brand and bringing product brands into our organization that we can use across our digital and bricks-and-mortar channels to make us more effective and make the business that exists more relevant.

From an e-commerce perspective, I think that you will have seen good growth in B2C e-commerce, good adoption of digital tools in our B2B customers, but we look at it more than just revenue. It really is that stickiness of how we bring value to the trade professional so that they can check order status, look at the truck coming down the road and understand when they need to come off the 14th floor of a mid-rise to get their materials. Things like rich product content, sourcing, all those things are equally as important to us. And what you'll see is our B2C operations, really coming together with our bricks-and-mortar operations in Ferguson so that the best digital platform that exists, for build.com, for example, starts to really enhance what that showroom offering looks like and really starts to build an omnichannel operation that's very durable.

So with that, Bill, any comments from you on margin?

Maybe just on that first piece, Kevin, on margins, to fill that out a little bit more to your point. We don't put a ceiling on it. We do want to incrementally improve year in, year out in supportive markets, not only the gross margin side, but Kevin talked about the technology investments. Technology spend for us today is about 6% of our cost base and that continues to grow. We absorbed that in the ongoing cost base of the overall organization because not only does it improve the customer service aspect and the capabilities we bring to the customer, but Kevin, you also mentioned the productivity side. So in addition to that OpEx investment from a technology standpoint, we also invested about $100 million of CapEx this year, again, embedded in our overall CapEx guidance, but in technology because that's what's going to make us better not only for those customers, but from a productivity standpoint so we could get better operating leverage over time.

We have our final question. This one comes from Steven Goulden of Deutsche Bank.

I just wanted to ask you on -- obviously, you've talked quite a lot in the Q&A about M&A and bolt-ons, et cetera. You said earlier on that you're not really seeing any kind of fire sale assets or particularly, desperate sellers right now. But can you give us a little bit of a feel for the typical multiple that you'd be paying kind of on an EV/EBITDA basis as possible just because, obviously, that kind of links to your trading profit focus.

And then typically, what would you -- what kind of margin would you be buying a business like that on? And how quickly could you sort of get it up to group levels of traditional group margin basically through synergies. And I guess, just to sort of put that into context, obviously, your buyback is currently on pause. Clearly, if you were able to pick up these businesses that, let's say, for example, 9, 10x and your stock, say, 14, 15x, does that have any implication for: A, your willingness to do more M&A than do a buyback; and b, obviously, the potential mix of equity versus debt that you may use in any particular potential acquisition?

So maybe I'll take very quickly the last portion and then hand it back to Bill. From a buyback perspective, M&A versus buyback, I really focus on what our capital priorities are. When you look at organic investment, dividend goes through-cycle and M&A, followed by a return of capital to shareholders. And we're really, from a buyback perspective, just wanting to better understand how we come through this COVID environment, the uncertainty that's in all of our markets today, and really need to evaluate that as we move through our fiscal year from a decision-making standpoint. But maybe I'll hand it back to Bill to get after returns and multiples and whatever.

Yes. I would tell you, typically, we're seeing -- and I'll give you somewhat of a wide range of multiples because every deal is different and unique and clearly, brings different synergies to the table. But in general, I'd say, we're in that 7 to 10x is what we're seeing in the marketplace over the last couple of years. From a margin standpoint overall, clearly, the vast majority of those acquisitions that we do have a lower margin, lower trading margins than what we have. And we look to bring those synergies in quickly and get them up to our trading multiples over a couple of years. So if you think about the traditional bolt-on, M&A deal that we do, we go in quickly. We put them on our system. We hook them up to our supply chain. We get the distribution and the fleet synergies. We get sourcing synergies, and then we can take a little bit of back-office cost out as well in the acquisition. So those are typically kind of how we approach the M&A front.

Steve, it's Mike. The only thing I would add is just remember, when we buy businesses, the fit is so important for us. So there is a lot of sort of corporate finance theory. But the most important thing for us is, we're buying the people, and they often don't end up on our balance sheet. A lot of goodwill does. And I've always said, we need to buy good quality businesses and good relationships that fit with Ferguson. And that is really, really important for us as well as the financial period because people can walk out the door, and then you left with a whole lot of goodwill to write-off. So it's the people and the relationships, which comes back to the core value with Ferguson that we care just about in M&A as well as corporate finance area. We've talked to those alongside it.

Well given that's the last question. If I could echo my earlier statements when we began this call, great to welcome Bill into the new role, really looking forward what the future holds for us.

And I can't let the call go without saying, again, thank you to Mr. Mike Powell, wish we were together on the same side of the ocean for this call, but you've been an incredible help to me and an incredible asset to the growth and development of our company. So thank you very much, and thank you for your time today on our call.

Ladies and gentlemen, this does conclude the call for today. Thank you for joining, and you may now disconnect your lines.