Ferguson PLC: Plumbing, Waterworks, & HVAC Business Quality

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You mentioned that Ferguson has seven or eight lines of business, diversified across plumbing, HVAC, bathroom, and waterworks. Why diversify across all these? Why not focus on just one area like Watsco?

That's a good question. It's a fair question because we always felt that our value was less than the sum of our parts. But they all had something in common. They either had a similar customer base, bought similar products, or were products that could go through our distribution centers. So, if it fit one of those three parameters, there was enough synergy to make it make sense for us. There are a couple that you could question, but most of them, like waterworks, was a great business for us. Some of the customers were the same as our plumbing. Some of the products were the same, and HVAC was a good business for us. They used the distribution centers to some extent, and they're all B2B industrial distribution. So they had that in common as well.

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How much pricing power does Ferguson have in plumbing and HVAC? For instance, how much do you increase prices above inflation each year on average over a 10-year period?

When I was there, we believed that we should be able to raise our gross margin every year by at least 25 basis points. It didn't always happen that way. Some years we might raise it by 75 basis points, but over time, the goal was at least 25 basis points a year. We achieved this through better service, more value-added products, and our pricing power, which varied depending on the business segment. We had more pricing power in some segments than others, but we were careful not to undersell ourselves. We wanted to keep prices high. We didn't want to be the low-cost provider in most cases, because we believed we added value and didn't need to compete on price. Even though we probably had the best cost base for the products, we tried not to undercut ourselves in the market. We aimed to set prices at the median to upper end of the market to maintain high margins and consistently increase them.

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