Ferguson PLC

NYSE:FERG

Earnings Call Transcript 2021-Q1

[Operator]

Good day, and welcome to the Ferguson Plc 2021 First Quarter Results Conference Call. Today's conference is being recorded.

At this time, I would like to turn the conference over to Mr. Kevin Murphy. Please go ahead, sir.

[Kevin Murphy, executive]

Thank you, Molly. Good morning, good afternoon, everyone, and welcome to Ferguson's first quarter results conference call. You've got Bill and I presenting today. And on today's call, we'll give you an update on trading through the first quarter and how we're thinking about end markets and the outlook for the rest of the financial year.

So if I turn to the highlights. We continue to address the challenges of guiding the business through COVID-19 pandemic. First and foremost, we continue to embed safety as a fundamental principle. And now more than ever, we're committed to creating a safe work environment for our associates while supporting our customers at this critical time. This continues to be the primary driver in all that we do, and we'd like to thank our associates for all their efforts in delivering a strong Q1 performance.

Turning to the results, we demonstrated another resilient performance in Q1 with good revenue growth and disciplined control of margins and costs, leading to strong profit delivery. Cash generation was excellent, and the balance sheet remains strong, which underpins our strategy as we continue to invest in profitable growth.

Organic investment remains our first capital priority, and technology investments will continue to be our primary focus. More than ever, we want to provide a seamless experience for our customers no matter how they want to do business with us. At the same time, we'll look to unlock productivity and efficiency benefits for our business. We're providing digital tools for our customers to save them time and money, which, in turn, allows our associates to spend more time guiding our customers, thus enhancing productivity, customer service and overall relationships. We see this as an area of strong differentiation.

We're pleased to have resumed the payment of ordinary dividends following shareholder approval at last week's AGM, and the final dividend is due to be paid next week. This includes a full catch up for the withdrawn interim dividend in April.

Additionally, we're also pleased to have resumed bolt-on M&A in recent weeks. This is an important part of our strategy, and I'll give you some more color on the recent deals we've completed later in the presentation.

So overall, good progress in Q1 on many fronts, but we still have a long way to go to close out the financial year. So let me pass you over to Bill, who'll take you through the numbers.

[Bill Brundage, executive]

Thank you, Kevin, and good morning or afternoon, everyone. It hasn't been long since we last spoke to you about our full year results at the end of September. And since then, we've been meeting with shareholders. As expected, we've seen broadly flat U.S. end markets during the first quarter, and we're really pleased with the performance of our business against this backdrop.

Total revenue growth for the ongoing group was 3.1% in the quarter. Organic revenue growth was up 3.3%, and acquisitions added a further 1.4%, with the balance offset by 1 fewer trading day.

Gross margins were slightly lower due to mix, but operating expenses were well controlled, down 60 basis points in total and generating 80 basis points of operating leverage on sales.

As expected, the cost base in Q1 benefited from the restructuring actions we announced at year-end. In addition, we've also had savings in areas such as travel, customer engagement and health care. We expect to continue to benefit from these savings in the near-term with these costs normalizing over time.

So overall, underlying trading profit came in at $486 million, 12.2% ahead of last year, representing growth of $53 million in the quarter, with underlying trading margins 70 basis points ahead at 9.0%.

Moving to the regional results. First, our largest region, the U.S., which represents over 95% of ongoing underlying trading profit, delivered a strong performance. Organic revenue was up 3.3%. And as I covered in the overview, operating expenses were well controlled, benefiting from the restructuring actions announced last year. We continued to invest in the organic growth of the business through technology and improvements in our supply chain. Collectively, this allowed us to deliver an 11.3% increase in underlying trading profit. We are really pleased that this performance continues to highlight the agility of our business model.

The Canadian business performed well in Q1. Revenues were up 2.2% or 3.5% on an organic basis, with growth in residential markets, including strong HVAC growth, outweighing the drag of challenging conditions in Western Canada. Similar to the U.S., gross margins were slightly lower than last year, but tight cost control and benefits of restructuring led to a $4 million increase in underlying trading profit. We continue to be well positioned to capitalize on growth opportunities as the markets recover.

So now that we've gone through the performance of our ongoing businesses, let me cover the nonongoing operations of the U.K. Revenue in the U.K. increased approximately 5%, with organic revenue up 1.2% on a constant currency basis. Gross margins were slightly lower, but we're really pleased to see the benefits of our clear customer focus and benefits of restructuring actions coming through the P&L, with underlying trading profit up $10 million in the quarter. It's also worth remembering that we took no government furlough money last year and have not taken any in the current quarter. As we've discussed, we are progressing with the U.K. exit, and we are currently prioritizing a sale process, which is moving along well.

And finally, we continue to generate strong cash flow and the balance sheet is in good shape. After adjusting for the full year dividend payment to be paid in December, the pro forma net debt to adjusted EBITDA is 0.7x. Our capital allocation priorities and leverage targets have not changed. We are continuing to invest in the organic growth of the business, and we are pleased to resume the payment of ordinary dividends. Acquisitions are an important part of our growth strategy. We've reengaged our pipeline and have completed 2 deals since year-end, which Kevin will discuss further. Overall, we're seeing a normal forward pipeline of bolt-on acquisitions.

Finally, while we remain committed to returning surplus capital to shareholders, at this time, given the uncertainty, the share buyback program remains paused.

So let me wrap up. We're pleased with the start we have made to 2021. Good earnings while continuing to invest in the business and a strong balance sheet, put us in a great position going into the balance of the year.

Thank you for your time. Now let me hand you back to Kevin for an operational update.

[Kevin Murphy, executive]

Thanks, Bill. So let me turn to current trading and give you a little bit more color about what we're seeing on the ground. I'm pleased to say that with pretty few exceptions, the group's counter locations have remained open and active despite the recent increases in COVID infection rates. As you can imagine, this has become more challenging where infection rates are high, but we're flexing our local branch networks to ensure that we stay open and keep our associates safe.

The other area we're monitoring very carefully are product fill rates as some vendors struggle to meet higher demand, particularly in categories like appliances, while balancing the challenges of operating in a COVID environment. We are ensuring we can meet the needs of our customers, and we're using the balance sheet appropriately to support them by having the right levels of inventory so our customers can depend on us.

While we aren't going to give a monthly cadence on the top line, we have been trading relatively consistently through the first quarter. We've seen particularly strong growth in HVAC and eBusiness, together with our residential trade and residential showroom businesses. We've capitalized on good growth in both new residential and residential RMI markets.

Commercial and industrial have faced much more challenging markets in Q1, but there are pockets of growth in areas like warehousing and distribution, where projects are very attractive.

Waterworks has held up well in a mixed environment. The business is split pretty evenly, serving public and private markets with good growth in residential, but municipal remaining fairly challenging.

Overall, the order pipeline remains healthy, which leads us to expect a continuation of low single-digit revenue growth rates in the coming months.

Turning to look specifically at the performance of our end markets. Our best estimate is that overall, they've remained broadly flat in the first quarter. Residential, our largest end market by revenue, continues to lead the recovery. New residential markets have been quite strong, and residential RMI, where we generate about 2/3 of our residential sales is also growing well. We think currently, our total residential end market is up high single digits. Overall, nonresidential markets remain much more challenging, with commercial markets down mid-single digits with contraction in retail, office and hospitality, partially offset by data and distribution centers.

Civil markets are down low single digits and industrial down high teens with depressed oil prices and manufacturers hit hard by COVID. As you know, we track numerous data points from various economic, industry and research sources as well as surveying our customers and measuring our order books. Looking at this data and applying it to our business mix, our best view of markets overall for 2021 remains roughly flat. So no change to our outlook from September at the time of our fiscal '20 results presentation.

We remain pretty cautious about the trajectory of the U.S. economy given the current surge in COVID cases, but we are in good shape to adapt to any future market disruption.

In September, we announced that we would resume our M&A program, the acquisition of high-quality businesses that either broaden our capabilities to better serve our customers or expand our geographic reach remains a central part of our strategy. The acquisition of Old Dominion continues our expansion within the HVAC market, giving us greater vendor and product synergies in the Washington, D.C. Metro area, Maryland and Northern Virginia.

Atlantic Construction Fabrics adds geotextile, erosion control and storm water management capabilities to our existing Waterworks presence through a large geographic footprint along the East Coast, giving us a more meaningful offering to new and existing customers. We're rapidly integrating these businesses into our network, and we have a healthy future pipeline of potential bolt-ons.

So finally, turning to the outlook. Since the start of the second quarter, we've continued to generate low single-digit revenue growth in broadly flat markets. We remain cautious on the outlook for the year as a whole, considering current pandemic trends. Despite potential headwinds, the business is in very good shape, and we're well prepared should there be any further market-related disruption. Overall, management's expectations for fiscal year 2021 are unchanged.

So to summarize the first quarter, the business is trading well. We're extremely proud of how our associates continue to rise to the challenge of COVID every day. We're pleased with the operational delivery in Q1 and we remain focused on executing our strategy. This means investing in technology and digital capabilities, building out our world-class supply chain and delivering a consultative approach to our customers.

So thank you for your time today. Now Bill and I will be very happy to clarify anything that's unclear and take any questions or comments you may have.

Operator, I'll hand the call back over to you.

[Operator]

[Operator Instructions] Our first question today will come from the line of Keith Hughes, Truist Securities.

[Keith Hughes, analyst]

Just stepping back on your views of your market, you gave us the kind of the growth rates of residential and the non-resi markets. Are those numbers that -- are those numbers deteriorated at all from the -- from what you saw in the last quarter? I guess, maybe more on the negative markets, are you seeing any kind of signs of life or future quotations or something that could show some improvement in the medium term?

[Kevin Murphy, executive]

Yes, Keith, thank you. And I think it's a bit of a mix. And so if I look at residential, we feel as if residential has gotten a touch stronger as we've gone through Q1 and into Q2. As you can imagine, with starts and permit activity that we've seen recently. New res is in pretty good shape. We continue to see good activity inside of our showroom business, inside of our e-commerce businesses that focus on that decorative pro and that project-minded consumer. So those residential markets are getting a bit more solid.

On the commercial side, yes, it's a bit more challenging. Interestingly enough, we're still seeing very good activity around bidding and quotations with our commercial mechanical contractors with our underground utility contractors on commercial projects as they shift more towards those available pieces of work, call it, big box distribution centers and distribution in general, data centers and then some different manufacturing opportunities that are out there. And then, candidly, some health care opportunities that have started to bounce back as we've gone through the quarter in terms of bidding activity and capital spend.

But generally speaking, overall, the commercial market has gotten a bit more challenging in terms of what output we're seeing, which is why we point towards that mid-single digit decline, which is very much in line with some of the numbers that we've seen.

In terms of the industrial markets, we think that's a high teens decline. And we're probably getting to a place where we're bottoming out and troughing, and we'll start to see some degree of improvement there. We are not engaged as much in the oil and gas business as some of the marketplace, but we're seeing some degree of improvement, albeit minimal, and then that civil market is just a bit more uncertain given what municipal funding might look like as COVID funding pressures continue.

[Keith Hughes, analyst]

And second question, your margins were absolutely outstanding in the quarter, particularly the contribution margin in the United States. Are we going to be facing a period where some of these costs are going to come back and you have to give some of this margin back at some point when demand is greater?

[Bill Brundage, executive]

Yes, Keith, thanks for the question. Certainly, very pleased with the performance in Q1, as you just highlighted. The majority of those benefits are really coming from the actions of restructuring costs and actions that we put in play at the end of our Q4, really targeted around the labor costs and the infrastructure costs, which collectively make up about 75% of our cost base. We're remaining pretty cautious when it comes to those types of costs as we go throughout the next several months. If markets are more supportive, we will flex that cost base. We will invest for growth in the future. But we're going to be pretty cautious over the next several months.

As I highlighted in the prepared comments, we are getting some benefits just based on the operating environment that we find ourselves in, so areas like travel and customer engagement and even health care costs. While that's not the majority of that cost savings, those costs, I do expect to normalize over time, once, quite honestly, the world gets back to a more normal operating environment. So you'll see some of that cost come back over time.

[Keith Hughes, analyst]

Okay. Just 1 final quick one. California and the United States are having the, I guess, the biggest shutdown push right now. Are your branches in California still open, however?

[Kevin Murphy, executive]

Yes. Obviously, that's a very recent development, Keith, and we remain open today. And so we'll continue to work with state and local authorities as it relates to our business and the essential nature of that business and even the retail facing nature of that business.

Now what I will say is we've been appropriately conservative and cautious in the way that we've approached customer interaction inside of our facilities. If you can remember, as we go back into the spring/summer time horizon earlier in our fiscal '20, we shut down locations to customer activity. And as we brought that back on, we made sure that there was good PPE, good social distancing. We've really limited the amount of associates that we've brought back into the local branches. In fact, if you think about 27,000, 28,000 associates in the U.S., we still have over 10,000 a day that are operating in a virtual environment, utilizing technology and being very productive.

So I just reiterate, we've taken a conservative approach. We feel very good about the safety measures that we put in place, and we do remain open in California as we're sat here.

[Operator]

Our next question will come from the line of Will Jones Redburn Partners.

[William Jones, analyst]

Three from me, if I could, please. The first, perhaps we could just explore the residential RM&I segment in particular. Is that also seeing the high single-digit growth of the overall residential bucket, including new build? I just wondered within it, how are you seeing the difference between pro and retail? And any sign, I guess, of changing momentum within those 2 specific categories inside residential RM&I, please?

Second was just around pricing. We've had a few quarters where the broad price inflation picture has been flat but we have, I think, seen some commodity inflation in some areas recently. Do you think as you look into the second half, there might be a bit of inflation returning to the top line? And the last one really is perhaps you could just explore your earlier comments around the acquisition pipeline. I think you said it was normal. At this point, obviously, you had a few quarters before this one with little or no spend. I guess, what level of spend would you be comfortable with as you look over the current year compared to that $150 million you've done so far?

[Kevin Murphy, executive]

Yes. Maybe we'll tag team this one, Will. To start with on the residential RMI side and whether or not we're experiencing high single-digit growth. If you look at LIRA, which is the Harvard Center for Joint Housing Studies and what they look at from a remodel perspective, and that is a number that we tend to focus on, I think that's up a little over 3%. And so you think more to that mid- to low single digits. We're seeing good activity, again, inside that 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, so -- which leads us to believe there's a good balance driving towards high single-digit growth rates in the residential RMI market.

If I then take it down to, based on your question, the pro versus retail, our connected consumer business, our pro business on the remodel side is performing well. But clearly, the DIY portion of the market, given the pandemic and what's happening with current COVID positivity rates is performing slightly better. And we're seeing that inside of our eBusiness. Our eBusiness focuses principally on that project minded consumer and that decorative light pro, and it's performing extremely well, up 40% in the quarter. So very strong growth, very good balanced growth across the different product segments for those customer types.

In terms of inflation, and then I'll turn it over to Bill, you're right, Q1 didn't see inflation. But we are, as we enter Q2, seeing those commodity upticks as it relates to plastic, copper, carbon steel, stainless steel. And in fact, it's fairly quick and the velocity is moving at a pretty good pace. So we do expect that we'll see commodity inflation. Remember, commodities represent about 10% of our overall product portfolio, but we do expect that as we go into the second quarter and second half. Bill?

[Bill Brundage, executive]

Yes. And Will, on the acquisition pipeline, I would call it a normal pipeline. So you should expect to see some additional bolt-ons throughout the remainder of the fiscal year. Nothing large, but we're really pleased with the engagement that we've had with potential sellers. It is very difficult, as you know, to pinpoint or to pick a number of deals that we're going to do because for most of these businesses, these are family-run businesses 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.

[William Jones, analyst]

Great. And would it -- sorry, just as a follow-up to that, would it be possible just to get what you think the profit contribution is of those 2 you've done, broadly speaking?

[Bill Brundage, executive]

Yes. So we won't pinpoint the exact profit contribution. But if you think about on balance, generally, the acquisitions that we do have about half of the trading margin that we deliver. That will ebb and flow depending on the type of deals we do, but you can think about them in that type of range.

[Operator]

Our next question will come from Kathryn Thompson, Thompson Research Group.

[Kathryn Thompson, analyst]

First, focusing on the HVAC segment. If you could tease out a little bit more what you're seeing in terms of HVAC, is it more retrofitting? Or are you starting to see more momentum with new construction, given there's a little bit more comfort in understanding the airflow process given COVID? And if you could give just any additional color in terms of cadence of where you're seeing greater demand increases for HVAC throughout the North American market.

[Kevin Murphy, executive]

Thank you, Kathryn. Maybe I'll start. In terms of retro or RMI versus repair replacement versus new construction in that HVAC business, HVAC performed well, both north and south of the border. Canadian HVAC was solid and a very good growth rate, and our U.S. business, also good growth rates. In the U.S., our HVAC business grew, call it, 14% in Q1. So good growth rates inside that HVAC business. It went along the lines of our typical HVAC business, which is roughly about 85-15 residential to light commercial and a balance with repair replacement and new construction.

In terms of air quality, we have taken a good keen interest and dedicated some resources towards indoor air quality. We're at the early days. It's still a relatively small part of our overall business. But really solid growth rates across both the residential and commercial space with people doing retrofit on that indoor air quality side. So we do see growth in that. But really, from our perspective, it's a way to, again, add value in that consultative sales approach across all of our markets.

In terms of North America and where we see that growth, fairly well balanced. We've got a decent balance of HVAC business across the U.S. And again, if I go back to some of the things that we talked about during our fiscal year '20 year-end results presentation, we really do look to maintain stand-alone dealer-based HVAC and transactional capabilities from an OEM perspective inside of our blended branches and our plumbing mechanical branches, offering good overall choice inside the market for our customers across the U.S.

[Kathryn Thompson, analyst]

Okay. That's helpful. Going back to the residential side, one of the themes that we're seeing going into '21, when we speak to a wide variety of our industry contacts is just increasing homeownership ripple effect and in particular, the more people are in their home, the bigger the projects this year versus last year, which makes some sense. When you look at your business, there's different types of RMI business. And if you could flesh out a little bit more, at least based on past experience or what you're seeing right now in terms of how the RMI type of work has changed over the past several months, what you expect going forward? And is there any margin profile difference in the type of product you sell into those?

[Kevin Murphy, executive]

Yes. Maybe I'll start from your last question and then work our way back. In terms of margin profile differences, we don't see any real margin profile difference across what we're seeing with RMI residential markets right now in the different product sets that we're selling through. As Bill highlighted, from a margin perspective inside of our business, really pressure points that we saw were on overall business mix and then channel mix as we saw our counter locations, from an order perspective, be a bit more challenged, which I guess is to be expected versus delivered product and traditional order channels of e-commerce and interaction with our sales associates over the phone.

In terms of what that residential RMI mix looks like, as I indicated when Will asked the question, we do have good, solid light, decorative pro and project-minded consumer growth inside of our e-commerce channels as DIY has been fairly strong. And I think that we'll see some better improvement even than we have experienced on the showroom side of the business as we start to have -- as we start to emerge from COVID. I still think there's some pieces of trade professionals and in-home and some unlocking that we have to do there. But clearly, we're bullish on the residential RMI side, especially as the home really becomes much more than what it has been. And you look at home gym, you look at outdoor living, you look at office as well as a normal dwelling, we see good growth in terms of that RMI market.

[Kathryn Thompson, analyst]

Could you also speak to kind of tagging on the showroom, speak to how e-commerce has improved velocity of sales, and where do you see that business playing going forward given the fundamental changes we've seen with COVID?

[Kevin Murphy, executive]

Yes. So it has really been part of what our evolution has been in terms of bringing together a true omnichannel experience for that showroom customer. And if you think about the heart of our showroom business, it really is with that connected consumer who's connected to a trade professional, connected to a builder, remodeler, designer, architect coming in to make sure that we take care of the holistic project from appliances, lighting, plumbing, HVAC, a wide variety of different parts of that renovation project and making sure that, that consultative approach is core. But we're also growing that showroom business for that walk-in customer, that unattached consumer. And so as we think about that project base, bringing build -- Build.com together with Ferguson. And having that technology platform, be able to aid the walk-in customer, aid the small project work together with our associates in the showroom room has really added efficiency for our associates and had a real convenience for that small project as the customer looks at a true omnichannel experience. So it's been part of our evolution, but it certainly has been helpful as we've navigated the COVID environment.

[Kathryn Thompson, analyst]

Okay. And final question just on acquisitions. Any change or update in terms of types of businesses that you are focusing and has there been any change given the COVID experience in terms of your focus overall and types of companies you are targeting to buy?

[Bill Brundage, executive]

Yes. Thanks, Kathryn. No change in our focus based on acquisitions. We still look to bring in good bolt-on M&A 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. So think of areas like own brand, think of areas like fabrication, et cetera. So no real change to that, and we're continuing to continue on that path.

[Operator]

Our next question w ill come from the line of James Rose at Barclays.

[James Rosenthal, analyst]

Two for me. First one, just touching back on tighter lockdowns sort of state-by-state in the U.S. I mean have you seen any impact on the business so far? And it sounds like you're pretty well prepared versus last time. Can you just talk about what risks you see there if lockdowns were to identify? And then secondly, I mean, just touching on the U.K. and Canada, a really strong first quarter profit improvements there. And do you think they're sustainable throughout the remainder of the year? Is there anything one-off in nature, which you'd call out there?

[Kevin Murphy, executive]

Thank you, James. Yes, on the lockdowns, have we seen any impact? I think generally speaking, as we've gone through, call it, the second surge, and I think maybe Bill will touch on what's happening in the U.K. as well, we haven't seen a discernible impact as we've gone through trading. Again, I'll go back to -- we took a very appropriately conservative approach to what that safety environment looked like, distancing inside the counters and distancing in appointments and what we needed to do in terms of spacing inside of our showrooms.

So not a tremendous amount of impact, again, based on what we've taken in terms of actions. If I look to what this could bring with additional restrictions, again, I think it will happen if we see a ramp-up, it will happen local, it will happen state and region. And as we do that, the tools that we've rolled out and that our customers have become useful to will certainly play a great role as lockdowns or if lockdowns increase. Things like the Ferguson mobile experience, things like Prokeep and Text The Branch and the ability for them to get text messages and e-mail alerts that their order is ready for pickup and to be able to drive up in the parking lot, have it brought out curbside, the use of lockers, the geo positioning of our truck fleet, all of these things, all of these tools will help us should lockdowns become a bit more restrictive.

[Bill Brundage, executive]

Yes, James, on the Canadian and U.K. performance, in Canada, residential markets have returned and have been pretty supportive. As Kevin highlighted, the HVAC growth in Canada has been strong, kind of mid-double digit range similar to the U.S. business. So we're pleased with the top line performance in Canada. Nothing really one-off in nature, but also pleased with the restructuring actions coming through. And the discipline on the cost side. So with that improved top line coming through and then that flowing through to the bottom line, really happy with the performance in Canada.

In the U.K., maybe just to touch on and build up on your first question on the lockdowns, also pleased with the performance there. Even through lockdown 2.0 over the last month, that business continues to hold up and perform well. The market has gradually come back. I think what we have done over the last year or so has really repositioned that business to have a clear customer focus, aligning on individual customer types and then aligning all of our resources against that. So you couple that with the restructuring actions on the cost side, and the result is a very strong performance in Q1 in the U.K.

[Operator]

Our next question will come from Elodie Rall of JPMorgan.

[Elodie Rall, analyst]

Just maybe 2 follow-ups. One on the gross margin. You mentioned a slight deceleration, likely due to the mix impact. Could you come back on that and whether you think this is a temporary impact or something that we need to factor in a bit more long term? My second question is on the U.K. sales, the disposal process, you mentioned being contemplating a sales process at the moment. Could you give us a little bit more detail, especially on the time line, if you can?

[Bill Brundage, executive]

Yes. Thanks, Elodie. First off, on the gross margin. They were down just a touch. It actually rounds to that 10 basis points in the first quarter. And as Kevin highlighted, a bit driven by business mix. So if you go back to some of the earlier comments, HVAC grew at 14% in the first quarter. HVAC has a slightly lower gross margin profile, which drags down the overall Ferguson gross margin, but a very similar net margin because the cost to serve is lower. So there's a bit of business mix there.

And then that channel mix piece that Kevin talked about on the counter with just the environment that we're operating in today, slightly less walk-in traffic. We have an opportunity when people come into our branches and into our counters to have good gross margin profile products on the counters for them to pick up and purchase while they're coming through the door. So that, I assume that will be somewhat temporary. And as the world again, normalizes and can come back to a more normal operating environment, that pressure will alleviate but will probably continue in the near term.

On the U.K. disposal, to your point, yes, we are prioritizing a sale process, really pleased with where we sit in that process today; very pleased, as I said, on the performance of that U.K. business, which is supportive of that process. And when we have something that's more concrete and definitive from a time line standpoint, we'll certainly come back to the market and let you know.

[Kevin Murphy, executive]

And Elodie, thank you for the question around gross margin. Just to build on what Bill said, we still remain firmly committed to gross margin being the best reflection of the value we provide in the marketplace and making sure that we're driving a product strategy that makes sure that the individual SKUs, the individual products that are specified on a project are not only the best for that project to make it as successful as it can be, but also that it represents the best gross margin profile for our company. And as we drive that, we're committed to growing gross margins 10 basis points a year. Are there going to be individual times as we go through months and quarters where different channel things mix and business mix have an impact? Sure, but we're committed and we still see a long-term gross margin expansion that is sustainable and durable.

[Elodie Rall, analyst]

And maybe you could add a little bit of comment as well on the own brand, given that, I guess, it has slowed down lately, and that could have had a negative mix as well on margin?

[Kevin Murphy, executive]

Yes. So in the quarter, it grew roughly in line with overall Ferguson growth rates, which, to your point, is a bit slower than what it has been growing as we typically grow our own brand at about roughly twice the rate of Ferguson's overall growth rate. Again, I think partially, that is driven by what has happened from the order placement channel in terms of that counteractivity being slightly more challenging than the traditional order channels. And so we'll see that smooth out as we return to a more normalized environment.

You've also got a little bit of business mix in there. But that commitment to own brand is a part of an overall product strategy that works towards specifying those products of our vendors that our partners that we go-to-market with that remain, again, 90% of what we do, will continue to be our long-term focus.

[Operator]

Our next question will come from Gregor Kuglitsch with UBS.

[Gregor Kuglitsch, analyst]

Only a couple left, please. The first one is just on buybacks. I mean, you obviously said it continues to be -- the program continues to be suspended. But if you could just give us a little bit of color at what point perhaps you would consider either launching a new buyback or kind of unsuspending the suspended buyback. What the criteria are, I guess, to do that? Then secondly, I want to get your thoughts, if any, on Home Depot's reacquisition of HD Supply, whether that has any impact on you in your view or not particularly?

[Bill Brundage, executive]

Yes. Thanks, Gregor. I'll take the buyback question. I'm sure Kevin will take the HD Supply acquisition question. So to your point, yes, we are slightly under our leverage range, 0.5 at the end of Q1, 0.7, if you include the dividend that's going to be paid in the next several days. Sitting here today, still quite comfortable being slightly under that range given the uncertain markets that we're operating in.

So I think we'll let that play out over the next few months. I think we'll be in a position to come back and give you an update on our views at the half year, which will be back in front of you in early to mid-March time frame. So I'm quite comfortable sitting here today, continuing to be a little bit prudent on the balance sheet and operating under that leverage range.

[Kevin Murphy, executive]

Yes, to build on that. Obviously, given what we're seeing from COVID case rate and the questions that we were just addressing in terms of lockdown, I think that's prudent. As it relates to Home Depot and HD Supply, I suppose that makes sense as HD Supply is now a pure-play facility supply or CMRO business coming together with the interline business that the Home Depot acquired some time ago. In terms of how we see that, that's a very large market, and it's a very attractive market for us.

Now depending on how you segment that individual market, you're talking about somewhere between $55 billion and $90 billion worth of overall opportunity that is extremely fragmented. We're very pleased with the business that we've set up. We're very pleased with the structure that we put in place and the foundation with supply chain, our branch network, what we have in terms of contact center and national call center, what we've put together with the ability to sell to that national customer and offer them a uniquely local service, the focus that we've got on things like education, aging in place, health care, what we see in terms of multifamily in the building service contractor. So very attractive segments for us. We have a good product portfolio to go after, and there's plenty of room in those markets for us to compete and have good profit pools to grow.

[Operator]

Our next question comes from Arnaud Lehmann of Bank of America.

[Arnaud Lehmann, analyst]

Just a couple of questions from me. Firstly, on the dual listing, U.K., U.S., could you give us a little bit of color on the timing? I mean I think you've said first half 2021, but do you have a bit more visibility on the actual months? And related to that, a bit on the technicality, are you planning eventually to move to U.S. GAAP reporting? Or you will probably wait for a full U.S. listing to do that? And my second question is just on the trading days. I think you mentioned 1 negative trading day in Q1. Do you expect to recover that in Q2? Can you give us a bit of clarity on the trading days for the next 3 quarters?

[Bill Brundage, executive]

Yes. So let me take the first question on dual listing. So we are really focused on getting that secondary listing setup a number of work streams and processes that we have to deliver to bring that to fruition, not the least of which is going through the SEC registration process. Setting up Sarbanes-Oxley, selecting the exchange. So nothing more definitive today on timing of when that secondary listing will go live. But we are on track with those processes and feel good that we will deliver that in the first half of the calendar year.

In terms of U.S. GAAP reporting, we will eventually convert to U.S. GAAP. I think that makes sense. It's part of our path forward. It will align us with our U.S. peers. We're focused first and foremost on that secondary listing. And then we will turn our attention towards the right time to change to U.S. GAAP. When we make that decision, we'll certainly notify the market and we will provide a reconciliation and give you enough advanced warning to understand those differences between IFRS and U.S. GAAP.

In terms of the trading day, we did lose 1 in Q1. We'll pick up 1 in Q3, and we'll lose 1 in Q4. So for the year, we will be down 1 trading day.

[Operator]

Our last question today will come from Suhasini Varanasi of Goldman Sachs.

[Suhasini Varanasi, analyst]

Just 1 question for me, please. You very helpfully gave color on how Waterworks, HVAC eBusiness have trended in the quarter. Can you also maybe give some color on blended branches as a whole and industrial as a whole when compared to trends versus Q4?

[Kevin Murphy, executive]

Yes. So from a blended brands perspective, they are, in fact, truly blended in nature. And so they will address residential RMI, residential new construction through our residential trade business group through our showroom builder business group. They'll also be in the commercial markets. In many cases, they will be in HVAC and industrial. In terms of that industrial market, we think the market is down high teens in decline, and we outperformed that market.

But generally speaking, as I indicated earlier, we tend to be less oil and natural gas focused and really, the pressure point that we're seeing inside that market is as manufacturers do not want outside people and associates in their buildings and as they continue to work to ramp up production in a stressed COVID environment that what we call PVF retrofit or shutdown work to do refresh on manufacturing facilities has been put off a touch. And so we expect that to recover. But generally speaking, we've outperformed in terms of our view of the market inside that industrial space. And a lot of that business would be, in fact, inside that blended branch environment, together with commercial, res trade, res builder and HVAC.

[Operator]

That will conclude our question-and-answer session today. I would like to hand back to our speakers for any additional or closing remarks.

[Kevin Murphy, executive]

Yes. Thank you again for your time. Again, we're very pleased with what has happened from a Q1 perspective. And as we enter Q2, we'll deal with uncertainty that results from COVID case rate and continue to focus our efforts on making sure that we operate in a very safe environment for our associates, for our customers, and make sure that we take care of the essential nature of their business.

So thank you for your time today. Thank you, Molly. And if there are any further questions, please don't hesitate to contact Bill, Mark, Pete or myself. So thank you very much.

[Operator]

This will conclude today's conference call. Thank you all for your participation. You may now disconnect.