And welcome to the Ferguson Q3 Treating Update Conference Call. This conference is being recorded. At this time, I would like to turn the conference of John Martin. Please go ahead.
Mayan, thank you very much, and good morning, everybody. Welcome to the Ferguson conference call this morning covering our third quarter results for 2019. You've got me, John Martin here, and I've got Mike Powell, CFO, and Mark Fearon, here with me as well. Look, let me give you an overview of the results at IT, then Mike will give you more detail on operations and cash And then I'll cover how we're seeing the markets. Firstly, overall, we grew revenue by just over percent, including just under 3 percent organic growth.
That's lower than the first half, which we talked about in interim. And it's clear that our markets have slowed, though the Q3 growth rate should be seen, I think, in comparison with a very strong growth in the same period last year, and I'll come back to that in a few minutes. 2nd point, we continue to edge up gross margins at very important to us, and as you know, a very consistent part of our playbook here at Ferguson. We're pleased with that, particularly given the impact of tariff changes on the pricing environment. We just make these things more challenging to deal with in terms of the volume of work that we have to do.
Thirdly, we brought down our costs in line with the lower growth rate. That's not easy, but I am very proud of the team this time. They've done a very professional job here and put the business on a good footing to continue to deliver profitable growth if softer market conditions prevail. And fourthly, cash generation has been excellent, again, very strong free cash flow, good working capital control, and careful capital investment, all supporting the return of surplus cash that Mike will talk about in a minute. So to me, these four things are the highlights of today.
Now, Mike, you're going to go further a bit more detail on our performance in the quarter.
Thanks, John. Good morning, everybody. All the numbers that I'm about to talk to are for ongoing operations. Overall, the group generated good revenue growth in Q3, seven point three percent ahead in the quarter in constant currency, and that includes 4.6 percent from acquisitions. As we highlighted at the half year, revenue growth did moderate in the quarter compared to the first half And organic revenue growth in Q3 was 2.7%, and that growth rate was pretty consistent across the 3 months of the quarter 3.
Gross margin performance was good, had by 20 basis points in the period, and we continue to make valuable improvements across the business here. Operating costs also well controlled. These were better than Q2 on an underlying basis. Acquisitions contributed about 10,000,000 to the trading profit in the quarter. So overall group trading profit came in at $359,000,000, that's $9,000,000 ahead of last year at constant exchange rates.
And to complete the P and L exceptionals of $18,000,000, in line with full year guidance and cover both the redomiciliation and the exit from the Silk business. Now a bit more insight into our operations. In the U. S, we generated organic revenue growth in the quarter of 3.3% against some pretty tough comparatives. Acquisitions contributed a further 5.1 percent.
The major business units continued to grow across all regions in the quarter, So growth rates moderated from the levels generated in the first half. Geographically, trends were pretty consistent and we continued to gain market share. Blended branches, waterworks, industrial, and facility supply all grew organically, and HVAC grew particularly well. Revenue was lower in our standalone E business as we continued to execute the strategy we set out last year to focus. Our marketing spend on
fewer websites.
U. S. Gross margins also improved and underlying operating costs improved. These were lower than in Q2. Our mindset now is that even though markets are still growing, we stay very close to the cost base.
To ensure that the cost does not exceed the growth in gross profits, whilst ensuring clearly we don't choke off any growth that we're generating in the business. With this in mind, we principally use attrition over time and expense control to optimize the labor cost base. So far, we've not needed compulsory redundancies. And at the moment, we continue to expect to follow this approach as we move through the remainder of Q4 and into the new financial year. So in summary, in the U.
S. Trading profit $358,000,000 ahead of last year. Moving on to the UK, like for like sales were up 2.8%. Gross margins were slightly weaker we continue to lower our costs, which were better than last year, meaning that trading profit at 1,000,000 was flat on a constant currency basis. In Canada, organic revenue declined 2.4% as we continue to face the headwinds from rising interest rates there and government tightening of mortgage credit.
Gross margins were ahead. Trading profit of 1,000,000 was 1,000,000 below last year, at constant currency. And given the weaker market conditions in Canada, we continue to look to improve the cost base further there. Moving on to cash. Our cash performance was excellent.
Net debt to EBITDA finished at 0.9 times 30th April below our target range of 1 to 2 times. As expected, after quiet sorry, after a quite busy period, for M and A in the last 12 months. Activity was modest in Q3 with just one acquisition completed in the quarter, and that brings the year to date investment up to nearly USD 630,000,000. The M and A pipeline today has a number of smaller bolt on opportunities, though nothing large And therefore, we expect to complete 1 or 2 further small acquisitions in Q4. You'll see from the press release today, we announced 500,000,000 share buyback.
That's in line with our capital allocation strategy. Let me just remind you of that strategy and the mindset. The business clearly remains strongly cash generative. In our organic need for the business in organic growth, but clearly in subdued markets, our investment needs are more modest with maintenance CapEx at about 1% of sales. Working capital needs are also relatively modest, principally relating now to our expansion of owned brand products.
Secondly, we expect to grow ordinary dividends over time commensurate with the long term earnings growth of the business. We also continue to look for great bolt on opportunities and our investments has typically been in the range of 200 to $300,000,000 per year. Over the last year or so, investment has been higher, but going forward, I'd expect a much more normal pipeline and we'll focus on making sure the deals that we do add value to our shareholders and are not too expensive. So beyond these investment needs, we'll continue to maintain an efficient balance sheet. Over the past 6 years, we have returned over 1,000,000,000 of surplus cash to shareholders.
Our current balance sheet is very strong and with net debt below our target range, free cash flow likely to be beyond our reinvestment needs for the foreseeable future, a buyback of $500,000,000 of our own shares over the next 12 months is entirely appropriate to return that surplus capital to our shareholders. So that's a quick overview of the numbers. Let me hand back to John to go on and talk a little bit about the markets.
Mike, thank you very much. So how to read the current market? Let me touch on what suppliers are doing. We got, if you look at our top 20 suppliers, 7 of those are quoted and therefore published revenue data that might be given to some some direction. We're talking about the likes of Lixil, Masco, Whirlpool, Fortune Brands, Mueller A.
O. Smith, those types of businesses. If I look at the average growth rate of those distances between January March, so their calendar Q1, they were flat. And that compared with more than 8% growth in the comparative period last year. Now just comparing that to Ferguson's growth rate, We were over 3% this year and over 10% last year.
So it's clear that our vendors have also seen a pullback from last year's strong growth rates. Moving on to competitors. We have relatively few quoted competitors and non that are directly comparable. But we still look at quite a number open. And if you look at Hermdepra, they were up 3% in Q1.
MRC was down 3%. What scale, which is an HVAC competitor, was up 0.5% in Q1. AIT which competes with us in the PVF space in industrial was up 2.3% in Q1, all down from high growth rates last year. And again, behind our own U. S.
Growth rates. Looking at some of the economic statistics, leads and residential markets, the latest data from the Census Bureau in the US shows housing permits down 5% starts down two and a half. And that suggests low growth in new housing on a dollar basis. The JCHS LIRA indicator of remodeling activity, that's showing some declines from current rates, but expected to remain in growth. And Case Shiller, which is the composite, index of house price increases, if you look at the Case Shiller for the top 20, at cities in the U.
S. That's 2.7% in March. But there was very widespread growth, actually growth in all twenty metro areas. That's down from highs of last year, but should still be reasonably supportive. On the commercial side, the, architectural billings index was at 50.5 in April.
That indicates low growth. You might have seen the latest Dodge Momentum Index for commercial on Friday. The May print was quite a bit down on last year. But overall commercial market seems to have held up better than residential actually so far. And if you look at the latest construction put in place data from the Census Bureau, That shows commercial growth seasonally adjusted to April of 0.6% with a residential, in decline.
Against all those numbers, our estimate of the end market growth in the Q3 period for which we're reporting today We reckon residential markets grew between north 1%. Commercial markets grew between 1% 2% and industrial grew between 34%. So for our mix of business, we think the market grew between 1% 2% overall in dollar terms during our Q3. Talking to our customers, they remain very positive. Some of them had an excellent year in 2018, and they expect similar levels Perhaps little growth or contraction in 2019, there are no significant projects being downsized, being deferred, or cancels today.
And our order books, our order books standard just over $2,000,000,000, but they have continued to grow on a year on year basis. Overall, so overall, whilst markets have slowed, they don't look overheated and presumably that's why the fair took the position that they did on rates. We expect markets to continue to grow at low single digit levels throughout 2019. So given that potentially lower growth environment, how do we expect this to affect how we focus our business in the coming months? Look, it's important for for us to stay focused on what we can control and not to get too sidetracked by the other stuff.
Just going all the way back to our customers, they want great availability and depth of range. They want prompt attentive service and they want us to support them when they are bidding and tendering for work. We're going to keep our focus on providing those things a driven share gains for a long time and we expect that to continue. We also need to make sure that we recover the cost of the value that we provide in our pricing. To defend and develop gross margins as we have done, as you know, for quite some time.
As part of the DNA of Ferguson, we'll continue to focus on it going forward. We've adopted a strategy of profitable organic growth for many years, and we're not going to change direction. On that now. Earlier in the year, our investment in new associates and other P and L investments, they got a bit ahead when we were growing strongly in the first half, But over the last 4 or 5 months, Mike and I have been very impressed with the discipline and close management of the cost base adopted by the team. If growth is lower, then the cost base will be lower.
Sure. The 2 won't be perfectly managed, but we will respond very quickly to market conditions. We've got lots of opportunities to drive productivity and make our business model more efficient. The growth of the profit of the business over the last 8 or 9 years, it's been hard won, and we're not going to relinquish that easily. So we'll continue to very actively manage our cost base.
At the same time, profitable and very attractive business with great opportunities to continue to take profitable market share. We've set out certain strategies, including, for example, the development of our own brands, and we'll continue to pursue those. We'll continue to invest appropriately in next generation technology, both customer facing and the development of our platform. Actually, technology investments in the quarter grew at 13%. Now look, much of that investment is in multi year that process and commitment.
And again, we're not going to be knocked off course in pursuing that strategy. Mike touched on it. Working capital investment is absolutely available where it supports our strategy, but naturally, it'll be lower if growth rates are lower. And capital investments now will be focused on those projects where we can generate the strongest quickest, most returns, but we don't expect to add capacity to our capacity to real estate until future demand for state becomes clearer. We will continue to work on acquisitions where the economics are compelling and we will stay highly targeted, in M And A.
And as Mike touched on, we'll keep a conservative balance sheet. We don't want to worry any stakeholder in our business, and we do want to maintain freedom to execute our strategy. Whatever we are in this cycle. Finally, look, you've seen the statement this morning reaffirming our guidance for the current year, so I won't read that out. But now I will pass it over to Marion so you can put any questions you want for me and Mike.
So, Marian, over to you. Thank you.
Thank We will take our first question from Howard Seymour from Numis. Please go ahead.
Thank you. Good morning gents. Good morning,
Alex. Good morning. Question, I think you're probably going to quite a bit on in terms of the U. S. 2 for me, really.
1, when you look at the fact that the gross margins up and the operating costs better, would that be on an organic basis? Because Mike, you alluded to the fact that there's a $10,000,000 acquisition benefit, which I assume is predominantly U. S. Therefore, the US would look like it hasn't really moved forward on an organic basis of profit terms. So I wonder if you could talk us through that.
And then secondly, just on a more general basis, I hear everything you say in terms of the market, but just your thoughts really as to why the market has now moved so rapidly to this low growth environment? Because if you look back at lots of stuff that you've shown before, everybody else the market growth has been 3% to 5%. And we're certainly looking at effectively a 0 growth rate going forward. Do you think that's a sustainable growth rate into next year? So they're the 2 questions.
Thank you.
Thanks, Howard. I'll take the first one.
It's Mike here. Yeah. No, in terms of the acquisitions, they are gross margin accretive, your analysis that the organic a profit improvement for the U. S. Only went up a touch is correct on a 3% just over 3% organic sales growth.
The challenge of course, Howard, as you look sort of year on year is the cost base decline from 2Q from Q2. Of course, as we invested the costs in Q4 last year, we've taken the cost down Q2 on Q1, Q3 on Q2, you need that cost base to continue to decline. That is now pretty much in check. So as we go into q4, I certainly expect the year on year cost base to be a much more aligned, as you look year on year. So you do get a very different impression when you look year on year to to q on q.
So for example, you know, the q 3 sales over the Q2 sales organically for the group, went up about $80,000,000, but you can see the profits went up significantly more than that. So there was very good progression going on Q on Q, And clearly, when you look year on year, we were in quite a different space last year with growth rates, and therefore, the numbers The numbers obviously work out very differently. So I think our job is to continue to manage that cost base, get that growth there is in the market and continue to outperform the market and then the numbers will clearly drop through nicely.
Yeah. Go on. I'll take the second one then, Mike, on the market and why have they moved so rapidly? Look, I think looking back over the last, sort of 6 to 12 months last autumn, there was clearly a wobble in the resi market. You can see that from the resi house builders.
You can see the valuation of those companies as well. So there's clearly something, there in that. And I think, Mike, when we went around shareholders last autumn. They were very gloomy at that time. Yeah.
And partly that was attributed at the time to the Fed stands at that time. Now I could sort of reverse as that one seems to have gone away. Look, second point, there seems to have been a lot of background noise We haven't talked about things like tariffs very much because quite frankly, economically, they probably don't particularly impact the business that much. But they have created a lot more work. The amount of our business that has needed repricing, because remember, the majority of our business is digital tendered, And the amount of business that needs to be reworked is really quite remarkable.
During that period. And that background noise is has generally not been positive. It's generally been, you know, at best neutral and sometimes negative So point, I think, comparatives were very strong. We're up against a very strong period last year. It's a reminder, last year, we added $200,000,000 to the profit of Ferguson Enterprises in the state.
Which was by far the biggest increase in profit. And it was interesting, I mentioned the customers The customers who had a good year last year and are holding on to those gains this year still see that as a good performance because they they saw this scoot up in that business last year and and in sort of and in historical context, that remains a good environment. So I think the comparatives on a on a 22 year look through, actually, the comparatives still seem good because of the growth last year. It's a slight slight strategy. And I think the other piece, we've seen inflation coming off a little bit.
It's actually not as much as we would have I think inflation is likely now to revert back to more normal longer term level, come down a 4 hour technical product set possibly to sort of fight lower levels, and that's fine. The one thing to say about the market at the moment if you look across the business geographically and by business units, the slowing of the growth rates has been very consistent. Across business units, across businesses, across geographies. So this isn't a question of one particular metropolitan area or one particular business unit So it's been pretty broadly based. And regarding where we go into court, our expectation remains today.
But there are smarter people than me out there who don't have a better view of where this is going, but our expectation remains low single digit market growth. Throughout the rest of calendar 'nineteen.
Okay. John, one thing you didn't mention, and I think you possibly could have weather because a lot of people have mentioned the weather. And obviously, I know it's always difficult in the US, but, you know, this this year around, it seems to
be significantly worse. I'm a
volatile has that had any impact?
It's a great it's a great question. And, you know, if my colleagues were on, they would all say, you know, they'd not behave vigorously and say, you know, how it's on the money. Yeah. Look, for for those who are not familiar with US weather, it has been very wet. Okay.
And I certainly recall going back into the spring. There were places Southern California, around Houston, when we're in Atlanta, Mike, it had been really, really wet. And there was one, I think it was, it's one of the largest residential development sites in the country where they haven't put in any residential homes for 3 weeks And you sort of think, but the issue, the reason why I don't think that's a primary driver here, Howard, is because you would expect that to be relatively short lived and relatively related to certain geographic areas. And this and the slowing of the growth rates has definitely been broader than that and, you know, broader across the geographies. But in the very short for any one for any 1 month, there is no doubt that weather also has an adverse impact.
Yes. All right. Thank you, John. Thanks very much.
Thank you.
We will now take the next question from Paul Jacobs from Barclays Capital. Please go ahead.
The first, John, can I just come back to that comment about the different business units that give us a bit more color? If you looked at the earlier cycle, businesses or the more cyclical ones? How are they doing? The first one? And the second one is, if you look at guidance for the full year, effectively there's 2 parts to it.
There's the 3% to 5% organic sales growth in the second half and there's a trading profit. Q3 is coming just shy of that low end of the organic growth. Is it still conceivable that you land in that or is there reiteration of guidance more about the trading profit? And then the last one, Mike, can I just ask about the cash, that reduction in net debt in the quarter? Probably the largest we've seen in quite a few years.
Can you walk us through what was it, what it was that drove that?
Sure. Let me take the financials first. So, the on the guidance, but Paul, it is our job to deliver the bottom line. I don't know what the top line will be yet. John has just said we don't have the visibility.
You've had our best guess John just. If it isn't that, you know, we're heading into our normal seasonal busy quarter, we would normally add cost for this time of year. If we don't see that growth, Paul, we won't have the costs. So, it's really that simple. So So we will, set out absolutely to deliver the trading profit guidance regardless of the top line.
And we'll do that, as I say, through the labor line in the main, and therefore, we won't miss out on the growth opportunities if they're also there. So if the growth exceeds our expectations, then clearly we can put costs in, through over time and temps as well, which is what we'd normally do at this time of year. So we're just being quite careful on the labor line, but also we're also wanting to take opportunities of growth as we move forward. Your question on cash, yes, it has been a good quarter. I think there was a couple of people at the half said we'd missed by 50 to 100.
And at the time I said, yeah, don't worry. That's a balance sheet to date issue. And it will come back So that did come back in Q3, but there was also good cash generation. Clearly, we're not spending as much on M And A. We are spending on maintenance CapEx and CapEx that the business needs organically.
But as John said, we're not needing to deploy as much CapEx on capacity expansion and therefore, the cash that the business generated and will continue to generate was was pleasing, but, probably in line. Again, Paul, if I'm being really honest in line with where I expected it to be. So sure your Q3 on Q3 might look good, but it's totally in line with where I expected the debt to drop down to and continue down. Towards the end of the year?
Yes. So look on the on the cyclical, the more cyclical In the last downturn, we were 30% geared to newbuild. And now we are 16 17% to 18% newbuild sorry, new residential, I should say. And it is fair to say that New Reddy has been weak and weaker since last autumn as well. You can see that from the new starts and permits data.
But if there isn't
a pronounced There's nothing pronounced in the business. If you look at, for example, Waterworks, now Waterworks is up against some very tough comparatives, continue to grow throughout the quarter. And, yeah, and that growth has been pretty decent. HVAC, which is at the more more the RMI end for our has done very well. But there's no sign particularly, I mean, industrial growth rate have slowed more because they were very strong, I think we said last, in the first half of the unit, 30%.
So those those growth rates are lower, but the growth rate is still good. So there's nothing in the mix that would tell you there is you know, there's nothing there that suggests this is early cycle and therefore, it's going to be doom and gloom is month or 12 months, I'm afraid. There's no color we could particularly give you, that would help.
Thanks. Just come back to the cost side. Do you think if we say we're in this 3% to 4% growth environment in the U. S? Organic sales perspective, going through the next slightly longer than the next quarter, the next 2 years.
And if it was in that range, what would that mean for margins given what you're doing on the cost side?
Well, look, I think overall, if we get low growth, then we expect low profit growth. If we get mid revenue growth, we expect mid profit growth. We absolutely are required. We expect it of ourselves. We expected of this company, you and our shareholders should too, for us to generate sensible profit growth of the revenue that we generate and that's absolutely where we will, where we'll focus.
I know we've come off a prolonged period of very strong growth, time, we might have to get used to a period of slightly low cost. We still need to cut back off accordingly. And we'll do so. There are plenty of opportunities for us to become incrementally more productive in our business. The other thing that I would say when you refer to margins, I think you're referring to net margins for us defending those growth margins, defending the value that we that we're providing generating for our customers, that is very important.
That's the starting point. When we have a last few months trading, Usually, the indicators are there in the gross margin if we have a good month's trading, the reverse is true. And looking after our gross margins is particularly important in this business. Culturally, we're very strong with that. And so All the way back to your question, if we get 3 or 4 percent top line growth, Mike and I absolutely expect that we're going to get the bottom line growth that's broadly commensurate with that.
Thanks.
We'll now take the next question from Gregor Koplish from UBS. Please.
Hi. Thank you a few questions. Can I just come back to the CapEx point, please? So I think last time around you were talking 400,450 for memory all in for this year and then dropping down next year, if that's correct. Can you just remind us considering where we are now with lower growth, what those absolute numbers are because I appreciate your maintenance CapEx you've talked about, but presumably there's still some tail end of some of the investments that need to complete over the next 18 months or so?
The second question is, so what was inflation for the U. S? In the quarter and you kind of pointed towards that potentially slowing in the future. Is that kind of considering tariffs and all of that. And then just maybe on your guidance, so just kind of challenging it a bit perhaps on the organic profit growth.
So I think in the quarter, it was probably kind of 0 all in, right? For Q3. I think my calculation suggests you're going to go back to the 3%, 4% for Q4, assuming what you said for M and A prior still holds.
I presume it doesn't. There was a
one off last year. So is that correct, first of all? And is that basically just the cost base realigning itself as you suggested on the U. S. And basically everything else equal?
Thank you.
Thanks, Gregor. Yes, let me take those. The CapEx, so yes, the CapEx guidance for this year hasn't changed. I'd expect that between $400,000,000 to $450,000,000 is what I guided at the half. I'd probably expect it to be towards the lower end of that number.
But again, given the cash generation of the business,
but that's good.
I think in terms of the way we think about CapEx, Gregor, is in a maintenance CapEx scenario, we need to spend about 1%, again, in round numbers for that 200 clearly, therefore, anything over 200 is for expansion. We do have some some tail, if you like, into next year, particularly the first half. I'd expect next year, I mean, we haven't, you know, got into next year, you know, says we don't really know what the growth rate is for next year. But, you know, sat here today, 300 to 350, picking up some of that tail, And I think that's more likely to be front end loaded than back end. So clearly, if we stay in a low growth environment, we won't, in the second half of next year, be adding, that capacity CapEx, if you like.
So hopefully that's clear. In terms of the US inflation, in terms of selling price inflation, it's about 2% to 3%, probably nearer 3%. I think we do see that moderating I'd love to be able to answer your question on tariffs. I think it depends where tariffs go. Clearly, as John says, the issue for us as a business is really the, the disruptive factor of tariffs rather than big impacts on our on our P and L.
The issue really is one where we need to continue to support our customers, to help them win business and price jobs and that just generates a ton of work. And your last question was on
Just remind me, organic profit growth
for this year and kind
of Yes, so there's no change to the acquisition guidance for full year, I'd expect that to be about 45,000,000, and therefore, you'll see the balance of that fall into Q4. So, yes, as I said earlier, you know, costs align themselves in Q4 to the prior year, Q4, clearly, depending on the top line, that number will be higher if there are growth opportunities or it'll be lower if those growth opportunities diminish. So, we will manage the cost base accordingly, and we'll absolutely, as John says, you know, make sure that we provide our customers great service and get paid for that great service. And therefore, we'll absolutely look after the gross margins.
We will now take our next question from John Messenger from Redburn
If I can ask 3, if I could, please. First was just during your talk early on, John, you mentioned kind of operating cost growth and the fact that that should be in line or less than gross profit growth. Can I just understand from where the group's coming from, yes, is that the benchmark or is it the top line? And maybe it's because of commodities, because of unlabeled, but when you're thinking about how your costs need to be controlled, why do you strike it against growth rather than revenue? Second one, was just around the expansion that we've already heard about in the California, can we just understand is that other some dual running costs, or is that kind of a clean switch over now?
And the new Denver market distribution center. I assume that is still progressing, but is it a case in point that there is limited new MDCs planned then over the next 12 months? And then finally, could you just give us a bit of a comment in terms of Canada, obviously, this was the first quarter of like for like sales down? Are you thinking of that given legislation changes in mortgage credits availability and rules applying to people qualifying, are you thinking that is something that kind of, I mean, stays operational impacting for the next 12 months? Or do you think there's any reason why there could be a quicker snapback in terms of Canadian activity?
Thanks, John. Look, let me start on those and I'll play myself out. On the operating cost growth, in relation to our overall growth or gross margin, it's a great question. We do actually, and we have always, although we talk about the links between revenue and cost growth, Actually, internally, we do use more for the connection with between gross profit and cost growth. And the reason for that is it's a better, it's a more consistent measure across the businesses.
There is some variation in gross margin across the businesses And for those businesses where we deliver more value, it is more expensive to deliver that value. So we need to recover it. If I took you to the extreme example, if you just looked at operating cost growth proportion to revenue, you would never invest in own brand. Okay, whereas if you looked at it in proportion to a gross profit, you absolutely would. So that's the reason that we that's the reason that we do that.
Actually over short term period, 1 to 2 years, it doesn't make a lot of difference. Does it happen? Look, on the others, the DC in California is we've, we are, we are starting now to, to move in and stock that up. The, dual running costs are there. I think, Mark, if you give them guidance on the dual running costs in California, they are relatively modest.
Okay. So I don't think that's something that is going to change your financial model. Sandler Hospitality is going ahead, but it's quite a long quite the long term, project. Canada is interesting. So Canada, the The reduction in the growth rate in Canada started earlier.
So it started from sort of middle of last year calendar. And it started out in the west, actually, when oil prices were weak, but it clearly has spread. Certainly east and certainly into Ontario and the Atlantic Coast, partly we think related to the restrictions that the, that the central banks are imposing on mortgage lenders. We are slightly more geared towards new residential property in Canada, about 30%. So that's sort of somewhat in the eye of the storm.
I think the good news in Canada, a team around this, I know it doesn't quite look like that from the numbers this time, but we're in a very short period in Canada. We are we're doing all the things that you would expect to control and reduce costs now. And, but also, the chapia runs cadre said to me recently, you made a very interesting observation, he said, but somewhere in Canada that's always in recession. I'm quite sure what he does, but, but nevertheless, if you were looking, you know, if you were looking even this year, if you look, for example, into Quebec, actually Quebec did some very well this year, and we've got a good, very good business there, a good sized business there. So You just have to be careful not to apply up too much of a one size fit all in in Canada.
But what I would say over the last 10 years. Canada has been a little bit more volatile, than the US as a whole. It's clearly a much smaller economy. It's more, mineral resources, oil based as well. But it is still a good this is a very good business for us.
It makes very good returns, very similar margins, gross margins to the U. S. And we just need to knuckle on down, get to the, get the work done to control costs that we are doing and carry on there in Canada. Does that help, John?
We will now take the next question from Daniel Robden from Credit Suisse.
Good morning, guys. Just two from me, if I may. I know you're expecting that a couple of levels of sort of cost inflation. I was wondering what sort of impact you're seeing from the commodity prices And then the second question, I think you said that the level of growth was fairly consistent across the 3 months of Q3. Just wondering if you had any sort of clarification or color you could provide for the 1st 6 weeks of Q4 at all.
Cheers.
Thanks, Daniel. I've got to, I'll take both of those. In terms of commodities, again, just a reminder, commodities is about 10% of our business. It's mixed across those commodities. I think the simplest way to describe it is we've probably seen a about a 4% deflation effect, in those commodities.
But again, if you scale that into the total business, not that material for us, but that's the data set for you. In terms of you know, what have we seen over
the last little while?
I'm not gonna go into monthly trading. I think if people know that. So, hence, we've tried to give the steer that within Q3, the growth rates, that we have experienced have been pretty consistent across the 3 months of Q3.
We'll now take the next question from Arnaud Lehman from Bank of America.
Three very sharp questions, hopefully. Firstly, slightly better organic growth in the UK. I mean, I don't want you to comment on the Brexit uncertainty. I think we all had enough of that, but any marginal improvement recently? Do you think it's sustainable?
Secondly, could you please update us on your corporate tax rate guidance after the redomiciliation? Do we go back to the low 20s? And lastly, in terms of your share buyback, there's only a couple of months to go in for fiscal 2019. Should we expect the share buyback to start today and like pro ratai into fiscal year 2020. So what a bit more color on the timing, please?
Sure. Thanks, Alamo. Let me take the share buyback. I'm certainly going to take tax. I wouldn't let John know that one.
He can talk to you about the UK. So on the tax rate, when we announced the redomiciliation, I said there was no change to guidance. It simplifies the group's affairs and corporate structures, and it's entirely appropriate for the shape of the group we run today. So again, just a reminder, I'd expect in FY 'nineteen 22% to 23% and in FY20, to be 25% to 26%. So there's no change to guidance there.
And in terms of the share buyback, the way I think about the share buyback is, again, you generally can do, with the number of restrictions around share buybacks in terms size quantity, prices that you can, buy to ensure that the market isn't affected by the sharp share buyback. You should assume roughly that we do about 60,000,000 dollars a month. That clearly goes up and down depending on various days. But $60,000,000 a month is a good guide. And hence, it'll take us, you know, something 9 to 12 months, to execute We won't be starting today because clearly we have to stay out of any days
where the share price can
be affected by the buyback But I think you can assume that we will start imminently, and therefore, you should factor in, for sure, about 6 weeks' worth of a buyback at an average of about $60,000,000 a month on
I mean, yes, thanks. Regarding the UK, look, it's, it is good to see a little bit of growth But I'm afraid it's, you know, it's early days. Let me tell you what I'm very pleased about in the UK. Team has been on board now as a new team been on board for just over a year. I know there's some really good things just getting on with, with fixing a lot of the basics in the business.
And executing some of the bulk of the strategy, that just needed to be completed. So it's pleasing to see the top line, you know, where where it is. They've also taken a lot of top as the business, and they are very cost conscious. I think that's very important. I don't think we've yet quite fixed pricing and margins.
So we've got plenty of work to do there. So relatively early days, but it was good to see the profit in the quarter same as last year given the backdrop in the UK of any lackluster market.
Sounds good. Thank you very much.
We'll now take the next question from Rajesh Kumar from HSBC.
Just following up on the U. S. Inflation for those you just gave, 2% to 3% overall. That employs about a percent volume growth, something like that. So how are your discussions on the supplier rebates progressing with the supplier?
Are you changing the accrual rate early on or would you wait for the trends from Q4 before you take the call? The second one is on the freight inflation. Some of the market data is showing that even though the contract freight rates are up, but the spot rates have started tapering down. Have you seen some of that effect in your numbers or your negotiations. And the last one is on the tariff.
You very helpfully give some color around how tariff might impact the repricing, etcetera. Can you give us some idea on how the pass through of related cost inflation is progressing either with customers or with suppliers or with your own brand products?
Thank you, Rajesh. Yes, look, on the, the first on the supplier rebates, we we have a number of different structures depending on the individual vendor, these things tend to be, steeped in history and steeped in sort of continuity by by vendor. The majority of them though are volumetric. So in that spent are just linear. The majority, there is no, judgment if you want to apply.
There are some where we are required to hit certain tiers, and those tiers, of course, need to be negotiated each year. Of course, the case is then negotiated within year as well, depending on what the, the economic conditions are. But I would say, overall, that has not really had a material impact on our gross margins in the period. Freight inflation, I think we saw last year the highest rates of inflation. And that's going to knock on to the labor rates.
And we had to reset quite a few labor rates in warehouses and also in amongst drivers last year. And fully expect that now to come back to just a more normal ongoing type of environment. The rates available from carriers, they don't wash through very quickly and they aren't as material as you think because most of our distribution is still done by ourselves our own drivers on our own trucks. And then on tariffs, we've written Successively for each of the, individual tariffs that have been introduced, we write to our customers in advance and let them know this is what's happening. I'll let them know that, those price adjustments will need to be passed on both in tenders and of course in the final pricing product.
I think you should assume therefore that the tariffs have negligible impact on gross margins overall. And that we just get on with the business of accommodating those in our business. That doesn't mean to say that any individual tariff rise won't have an impact because there might be a difference between we hold inventory. And in some instances, we'll buy inventory forward, or we did last year anyway, in some instances, buy inventory forward to protect our customers from, from tariff rises. But in essence, when you look back on it or the impact of tariffs across the business was pretty, was pretty modest last year.
Does that help Rajesh?
Hello. It's very helpful. Thank you very much. Just on the rebate point, for you saying should not have an impact. I'm assuming you're saying you hit your guidance of 3% to 5% organic growth then it should have no impact.
Would you have to change it if the growth was lower than 3%.
No. Because the the, the important thing for us from a, when we're negotiating with our vendors, The important thing is that we make sure that if we are gaining market share, we are being rewarded appropriately for that. But I'd come all the way back to the large majority of rebates are volumetric. Rather than stepped anyway. So you get a 3% you get rewarded for every sale you make on a linear basis.
Does that make sense? There are some around the edges of the staff, but it is up to our skillful negotiation with suppliers to make sure that both steps are, steps that we believe that we that we can achieve in combination with our marketing efforts in combination with our product selection in combination with our supplier vendor selection. We can achieve those and achieve the relevant rebates. So we would not expect to see a step up or down in our gross margins as a result of rebates.
Understood. Thank you.
Thank you.
We'll now take the last question from Aynzi Lehman from Canaccord. Please go ahead.
Hi, good morning and thanks. Just three questions actually. First of all, wondered if you could comment on the difference you're seeing between U. S. Residential new versus the remodeling side?
Some of the kind of stats and census you're seeing are quite a big drop off on the remodeling. So any comments you have there? And then secondly, if
you could just remind us
what the incremental impact on acquisitions will be both sales and profits for the U. S. FY 2020 for the acquisitions you've made to date? And then lastly, just interesting your thoughts of kind of the decision to go with the share buyback versus a special dividend?
Okay, Aynzi, thank you very much. Look, I'll take the first of those and Mike can take the second too. I think if you look, if I look back over the last sort of 6 to 12 months, the it's the new resi area that's been slightly weaker and the remodeling has held up pretty well. And it's interesting. I always look at the I referenced the JCHS data before, which we always look at because It's one of the few indicators that support to be a forward looking indicator.
And that's still that is still indicating decent growth out into the future. Now that growth includes both materials and labor. So disaggregating those for our purposes is interesting. But I think you should see at the moment that whilst remodeling has been or remodeling repair and maintenance has been lower than it was. That market sells up sort of sort of pretty, pretty well and it is more of a new construction that has, that has come off a little bit, in our numbers, albeit from very high levels last year.
Does that help on the new versus remodeling FP, thankfully?
Yes, that's great. Thanks.
Thank you. Thank you, Gavin, Mike.
Yes, and, Aynsley, there's no change to any of the technical guidance that I put up on the half year slide. So the total group acquisitions revenue is $750,000,000, a $45,000,000 trading profit. Clearly, most of that is in the U. S. Is a little bit in Canada but mostly in the U.
S. For the full year. In terms of share buyback versus special dividend, the share buyback, I believe, will create value for ongoing shareholders. It is also flexible. We have used both instruments in the past.
We've tended to use the, the special where we have disposed of, if you like, earnings accretive assets, and where the sum is very large, We've tended to use the buyback to repatriate the free cash flow of the business, if you like, to our shareholders that we don't need. And we've said that we have enough cash today for our organic needs. We've said that M and A and CapEx is clearly back to sort of normal levels or even lower levels in a lower environment and therefore returning the surplus free cash flow that the business generates, the share buyback is a great flexible instrument. Because, of course, should something larger come along when we need the capital, then clearly it is a flexible instrument. But just to remind you, this business has, and will do this year generate more than 700,000,000 of free cash flow, if you look back over the last 4 years as well.
And therefore, if you think of the buyback, I said, we were executing about 60 a month, plus or minus, that's also the free cash flow of the business roughly. Again, it's a neat way, where we don't need the cash and we can't deploy the cash, it's important we get it back to shareholders on a reasonably prompt basis.
I'm sure it's on the slide, but the 1,000,000 of acquisition revenue benefit, how much of that falls into FY 2020 incremental?
Sorry. Your question was what's the sort of lag into next year?
Yes, yes.
It's $200,000,000 in revenue.
$200,000,000 into next year and about $15,000,000 of profit, correct. Sorry, Angie. I misread your question. Thank you.
Thank you. I think that was our last question. Just before we quit, let me just remind you of my for overall message from this call. Revenue growth overall 6, including just under 3% organic growth, it's slower than foner was last year. We've talked about that today.
Secondly, we are pleased with the gross margin performance this year and this quarter, edging those up again. Thirdly, I'm very pleased to see now from Q1 to Q2 and then Q2 to Q3 have brought our cost base down on an absolute basis. That's a very professional job And we will continue to manage costs very carefully. And finally, cash generation, again, has been very strong I'm very pleased with that obviously leading to the return of surplus cash that Mike talked about. So, thank you very much, and Marion, thank you very much for curating the call.
If you've got any other follow-up questions, please call either Mike or Mark or myself. Thank you.
Thank you. That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.