Ladies and gentlemen, good day and welcome to the FY19 Q1 Interim Management Statement Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Mike Powell, CFO. Please go ahead, sir.
Thanks Holly. Good morning, everyone, and welcome to Ferguson's conference call covering our our Q1 results 2019. Myself, Mike Powell, I'm joined by Mark Ferron. And Pete Kennedy, from our investor relations team. 3rd, let me give you some highlights for the quarter, and then clearly I'll open up for questions as usual.
You'll see from the announcement we had revenue growth for the group was good. Organic growth up 6.7% in the quarter acquisitions adding a further 2.3 percent in the total growth at constant currency, of 9. Pleased with gross margin performance, that was up 50 basis points, principally as a result of acquisitions and also the exit of the lower margin wholesale business. In the UK last year and therefore underlying margins at the touch. Total gross profit at constant currency up 10.7%.
Trading profit at $432,000,000, up just over 10% on last year at constant exchange. Little more in terms of the businesses now, in the US, we generated good organic growth in the quarter, up nearly 10% about 9.6 That includes price inflation of around 3 percent acquisitions contributing a further 2.4% growth. Growth was widespread across all the regions, both geographically and across the major business units in supported markets. Sales grew well across all the end markets at pretty similar levels for last year, and we continue to take share. In terms of the markets themselves, residential markets, we're pretty similar In fact, all the markets were pretty similar to when we last came around the city, which is of course only sort of 4 to 6 weeks ago.
Residential markets, we approximate to be up 7% in Q1. Commercial markets very similar at 6% Civil And Infrastructure markets, up just over 7, and industrial grew about 12%. As expected, our organic growth rate in B2C has moderated a little as we pursue our strategy has consolidated our marketing spend on paper click advertising, into fewer trading websites And whilst that slows, the revenue growth quite deliberately in terms of the growth rate overall, going forward, the business continues to generate profitable growth. U. S.
Gross margins improved. Operating costs were in line though did include labor inflation of around 4% And in Q1, we experienced a little bit more cost pressure in distribution in areas in fleet and career costs. Our mindset now is that even though the markets are generally good, we are staying very close to the cost base. We continue to make sure that costs those, and the growth doesn't exceed growth in gross profits whilst ensuring we don't choke off any of the growth, of course, that we're generating in the business. So overall, U.
S. Good result, EUR 400,000,000, some EUR 37,000,000 ahead of last year. Turning to the UK, the UK RNI markets where we generate the majority of our sales. Been pretty weak. We continue to report like for like sales just so we give a better understanding of the ongoing business and how it's performing, given the closure of the branches that we made last year and the exit of that wholesale business, towards the end of the first half.
Bikes like sales therefore up 1.5% and includes inflation, price inflation of about 2.5% and overall organic revenue. So total organic revenue declined nearly 10% in the UK business. However, given the better mix of business, gross margins were slightly ahead. Trading profit came in at $19,000,000 That's 2,000,000 lower than last year at constant exchange rates, so that's mainly due to our investment in the B2C platform in the UK. Finally, Canada, that grew organic revenue 3.3 percent against tougher comps, with acquisitions contributing another 5.6% to growth.
Here, we see Ontario, Atlantic, and Quebec regions all growing well in our business. Ago, Alberta was slightly lower. Gross margins were ahead, operating costs, well controlled trading profit, $27,000,000. 4,000,000 ahead of last year. So moving on to the cash flow and net debt.
Net debt at the end of the quarter was in line with our expectations. At around point 9 times net debt to EBITDA, and that's as I guided at the full year. That included a cash flow of $66,000,000 relating to acquisitions in quarter 1, capital expenditure of $163,000,000 and a normal working capital outflows due to seasonality. Just to remind you, with our full year guidance, CapEx will be about GBP 400,000,000 but slightly higher this year due to the new investments in Perris distribution center going into Southern California. After that and going forward in future years, I'd expect CapEx to return to more normal levels of around 1.5% of sales.
Since the end of the quarter, we've done a further small bolt on acquisition. That's Robertson Supply. That's a business with 8 locations, covering Idaho and Oregon, and is a leading residential and commercial plumbing wholesaler in that territory. Forward M and A pipeline looks pretty sensible actually. It's worth mentioning there is still one larger bolt on acquisition in that pipeline of circa $200,000,000, which I'd expect to close shortly.
The rest of the pipeline consists of normal small bolt on $400,000,000 of deals on top of what we've done this year, but a very sort of normal pipeline thereafter. No change for group's capital allocation policy. That remains unchanged, and we'll continue to maintain a strong balance sheet with net debt to EBITDA within the range of 1 to 2 times. Several other quickies, just before I open the line for questions, Firstly, we're making good progress on the disposal of the Vasco business in Holland and I'd expect to conclude that transaction in the next few months. And in addition, since the quarter end, we've made good progress on the sale of the residual properties that we had resulting from the exit of the Nordics business.
And again, I'd expect to close those out before the end of the year into CATCH. Finally, turning to the outlook. Since the end of the quarter, U. S. Has continued to grow well.
Current indications of that growth will continue. In the months ahead, which is of course, our visibility that we have on the business. And as a result, we expect trading profit for the full year to be in line with analyst expectations. So in summary, we're pleased with the growth rates at the moment. The decent start we've made for the new financial year, particularly in the U.
S. We've banked a very good first quarter. There's still quite a long way to go, of course, and remember that revenue comps get much tougher as we move through the year, particularly in the U. S. So Holly, many thanks.
I'll hand over to you to take the first question, if I can. Thank you.
We will now take our first question from Rajesh Kumar from HSBC. Please go ahead.
Hi, good morning gents. Just on the U. S. Growth rate, some of the recent RMI data have been slightly weaker. Have you seen any indication in terms of the volume growth tapering off in any segments of the market?
And also Could you remind us how the pricing comps looks in the quarters ahead?
Yes, sure. Thanks, Rajesh, for your question. We haven't, I would remind you we have fairly short term visibility. I mean, clearly we're aware of, I guess, the nervousness around a number of pieces of sentiment. I think as you know, we tend not to look at at monthly data, just as monthly data, we tend to look at trends I think for all of our markets, you know, those trends remain.
I think importantly also, you know, order books And our customer sentiment remain unchanged since we spoke to you, so before October whenever we did the the full year release. So we haven't seen a change in the, in anything fundamental. Clearly, externally, there's been quite a big change and clearly pull our concerns. We remain vigilant on that, but we continue to manage, you know, what's in our control within the business. And, but certainly, we haven't seen changes in our order book patterns or our customers be added.
Understood. And just on the margins, the U. S. Drop through margin was slightly lower than what many would have expected. You indicated that was due to cost increases.
Do you think the volume growth is strong enough that you can recover that in the coming quarters?
Yes, no, it's fair, Rajesh. The drop through is a touch weaker than, we would have expected. That's mainly due to, inflationary cost inflationary pressures. And label is around 4% so the top end of my sort of 3 to 4 expectation. That's clearly coming in closer to the 4 I'm pretty comfortable with that number now for the year.
The distribution costs, fleet and career costs have been, certainly higher than we expected. I think that's the I think you know, we've said in the past, our own drivers are generally, our fleet is ours, but of course, you've got Fuel, you've got temporary labor and particularly career costs where we do do a reasonable amount of distribution through have gone up due to the tightness in the U. S. Labor markets. I think that's likely to persist into Q2 There's always a fine balance of how much we pass on.
As you know, we juggle top line growth, gross margins, which you've seen have gone up and also cost base. Those three things, of course, don't act in isolation to each other. So clearly, it is our job to absolutely pass on cost increases by working with our customers to help them win business going forward. We'll continue to do that. I think Satya today, I think the Q2 flow through isn't isn't going to, see much recovery from those costs.
I think we'll, we'll pay those costs through Q2. I think you would expect us to continue to look as to how we can work with our customers to pass those on as we get into the second half of the year. So I think what does that all mean, Rajesh? I think it probably means in these markets with the cost pressures, I've always said with good supported markets with the high single digit through to low double digit. I mean, it's probably near the high single digit exactly right now.
But I was wrong last year, Rajesh. I'd probably be wrong this skip. So, you know, you asked me for a guidance last my best guess today. But it's, you know, it's 8, 9 months to go. So That's my best guess.
That helps you.
That's very helpful. Thank you.
We will now take our next question from Paul Jacobs from Barclays. Please go ahead.
Morning, gents. I just wanted to ask about the acquisition spending, Mike. Obviously, it's seen an increase of late and you're saying it's going to be small. Could you at the minute, given that people are worried about where we are on the cycle, could you just elaborate on how you're approaching acquisitions to make sure you're not spending too much when when we are late in the cycle and how you decide which businesses should become part of it, the group at this stage and multiples, things like that. Thanks.
Sure. Yeah. Now are we spending shareholder money wisely? Yes, yes. I think, Paul, it's a fair question.
The The approach doesn't change, frankly. I mean, you've seen that generally as a business, we've done average about 250,000,000 spend a year other than, about a year ago, we said there was a good pipeline coming, and there was a number of those targeted strategic acquisitions. Leading to that, the States, Beth and Joan Stevens. Those are both private label and brand acquisitions. So strategic by the way doesn't mean you pay lots of multiples and you don't get a shareholder return.
That is not what that means. They were absolute strategic fix for us to go and acquire. That's part of the reason the gross margins increased, with private label and own brands. And of course, the cost base increases you have to do your own QA QC. So I think, Paul, as we talked about those, those were absolutely core and strategic.
I think we're very much back down to a normal M and A pipeline. Absent to the one that I talked about, which I would hope to conclude soon. And that's a typical, infill, if you like. In the traditional space, but it is into a territory that we would like to be number 1 in and we're not today. So don't think the thinking has changed.
That acquisition that is in the pipeline, the larger one has frankly been around for about 10 years. It's only went to the board 4 years ago, because we've had to refresh the paper selling recently. And the multiple on that has not changed, over that period. So I think we're very much down to normal M and A levels post that into the second half. And they're all in line with strategic strategic intent.
I would say, Paul, so so that's that's our approach. There is a ton of stuff coming to the market. I grant you that. We're clearly not planning to execute on that because, you know, the prices are too high. They're not attractive or they don't fit our strategy.
So the amount that, let's say, the banks are generating that's crossing our desks is definitely increasing. That doesn't mean that we're doing more work on them at all. We remain pretty focused, pretty disciplined on, what sets and what works for Ferguson. Is that okay, Paul?
Yes, no, that's very clear. I just wanted to ask a second question, which is around the B2C side and some of the comments in terms of how you're addressing challenges with Google. Could you elaborate slightly on what's happening?
Sure. I think we call it pay per click cost there, Paul. But yeah, you're absolutely right. The, I mean, the marketing costs of, attracting customers continues to escalate. That clearly economically is not a position we like, and therefore, we need to continue to control that.
So think with any B2C business, you need to control the cost of capturing the customer as best you can, and you need to get the customer to come back for repeat business often as you can. We are trying to address both of those. The first you've heard me talk about, we are willing to increase our profits for best revenues. You've seen us do that. I've just touched on that.
We did that through sort of the back end of last year. First quarter and we'll continue to do it through Q2. We have a number of sites, particularly for our U. S. B2C business, Internet sites.
They all cost you money. We are now consolidating onto much fewer sites where people commenta our domain and indeed getting repeat customers to not come through search engines to indeed type in our main direct. And those are higher repeat customers. And therefore, we pay less cost of attracting those customers. That's basically strategies of big brands, but, you know, those are certainly the tactics to reduce our spend and increase our profit that does have an impact on revenue.
We will lose, certain customers. That's affected. If you think of how it affects the business, Paul, B2C mark business is about 9% of the group. So, it's not going to affect the growth rate dramatically, but it is, it isn't 0%, but it's not 1% higher. It's somewhere between those 2 in terms of affecting the growth rate.
Importantly, we increased the profitability of the business and we've done that in Q1.
Okay. Thanks very much. Yes, it does. Thanks.
We will now take our next question from John Messenger from Redburn. Please go ahead.
Hi, Mike. Just, I think it's just one from me actually. Just want me to come back to the whole drop through gearing issue in the U. S. And flow through.
Can I just understand, obviously, the the the revenue growth was, I think, around 395 organic? And, obviously, there's about a 100 coming in from the acquisitions. Was there much profit on those acquisitions in the in the period in that, I guess, soon, what I think about flow through, I'm more interested in the organic to the organic, if you know what I mean? Because clearly, the acquisitions may have been dilutive or there may have been obviously those front end costs that you have to take against P and L just in terms of transaction costs there. So just to understand if I cut a little bit more in terms of the composition of that EBIT movement or the 1,000,000 that was added.
Can you give us a bit of a breakout as to whether there's much in the way of acquisitions in there? And the other one was just, sorry, back on the pipeline and acquisitions. I think back at the at the last set of results, I think you talked about 350 of future spend in terms of the pipeline. Obviously, you've spent about 40 in the quarter. Can I just check, was the 400 that you mentioned?
Was that incremental from here? So is there kind of being a quite a bit more as in this there's another 90 odd million that's been added into the hopper if I just think about the maths just to understand where you are
on that M and A?
Yes, it's on Mark here. Just to answer your second question first. As you as we've said in the state, we've done 2 84 so far and there's another 400 we need another 400 to come. So we think this year we'll do in the region of $700,000,000. As Mike mentioned, it's actually 2 slightly larger transactions in there of the sort of $200,000,000 order.
So if you back out those 2 M and A transactions actually, the underlying pipeline is pretty normal.
Yes. John, in terms of the acquisitions that we have done to date, once the gross margins have gone up, the cost base has also gone up. And therefore, actually, in terms of trading margin, it doesn't have a significant effect at all in terms of the deals that we've done. As I said, I think it might have been yourself indeed that Astney, I think, you know, 3 or 6 months ago, how do acquisitions affect the flow through? They're all sorts of slightly different depending on what they are and how much, 1st year integration costs we have to endure or choose to seems to put together.
I think the ones we've done so far, I think you should assume that there's little effect in terms of the trading margin.
Well, sorry, when you say
a little effect, Mike, just to be clear, as in they are kind of producing a 7% EBIT margin or they're not producing much because of you've taken as front end cost of integration?
No, I think they are producing that margin that you've just
Lovely. Thanks very much.
We'll now take our next question from Gregor Kuglitsch from UBS. Please go ahead.
Hi, good morning. Thanks for taking my questions. I've got a few. So the first one is you just normally, you talk about an exit rate and kind of how you've traded? I gather, obviously, it's only a month.
In the second quarter, but is there any discernible change from the kind of 7 odd percent growth organic that you just just printed or just so we can get a sense of where things are heading there? 2nd question is on inflate if you could provide any kind of outlook, how you think that's going to trend. Obviously, there's lots of commodity moves going on in top specifically hear about the U S. I think you had 3% in the quarter. So I want to understand if you expect that to start slowing as we sort of wind through the next couple of quarters.
And then the final question is on M and A and perhaps also on guidance. So I just understand when you're saying your EBITA outlook is in line with, consensus, what are you baking in for the M and A contribution there, please. And specifically does it include some contribution from the deals that you expect to conclude shortly. So that's $400,000,000 or is it kind of is that too precise and it kind of get lost in the rounding Thanks.
Thanks, Gregor. Yes, let me take those and Mark can interrupt as normal. Exit growth now. I mean, we've said in terms of the USA, we have seen, you know, a good November growth in the U. S.
I haven't actually got the final numbers for November. We're still scrubbing those as you'd expect, and clearly, clearly, we need to, work through, the Q2 markets are supportive. Our visibility is, as you know, only 8 weeks. The other thing I would say, the new volatility within our business and an over sort of slightly nervous at the moment in the external markets. I think we said at year end, certainly on some one on one meetings, the U.
S. Organic growth rate last year was 9.9 percent for the year. Our monthly volatility within that was between 6 12. Each month, was between 6% 12% and it averaged 9.9%. So it's a little bit back to my earlier comment that we don't really worry too much about monthly volatility, we tend to worry about trends.
We are not seeing a change in those trends at the moment. And the exit rates in November, certainly the initial field for that is absolutely within normal levels. Of volatility. And in fact, the growth in the U. S.
Has been quite good in November. Order books remain good, customer sentiment remains good. So, we are aware of the external environment, and the nervousness around that. And therefore, we remain very conscious around cost But I have to tell you from where we sit with our limited visibility, things appear relatively normal at the moment. In terms of inflation, the difficulty with inflation is, I don't know what the future inflation is.
There are a number of factors within that, if you wanted my best guess, it's somewhere between 2 to 3 for the US, because, of course, as you indicated, it stopped lapping the previous year. It's clearly quite volatile out there. I mean, you know, the discussions around tariffs, that would quite clearly to deflation if they completely stop as opposed to just not implementing the next slot. You've got oil, which last time we were on the road, people worried about the $1800 a barrel every now worried about $18.50 a barrel and it's any 6 weeks later. So there's a ton of volatility around and therefore, it's pretty damn difficult frankly to have a view, on that too much.
If you wanted my best guess today, it's 2 to 3. And in terms of the range of M and A and analyst expectations, We don't include future deals when we talk because until we conclude a deal, each deal is different back to John's around flow through, different deals have different characteristics. Some require much higher 1st year integration costs than others. So when we talk about the future, it is just on money that we have spent to date, if that helps you, Greg.
So that's $700,000,000. So that's $700,000,000. So that's $700,000,000, basically.
That's great. Thank you.
Thanks.
We will now take our next question from Manesh Bier from Societe Generale. Please go ahead.
Hello. Yeah. Good morning. So I have three questions. The first one is I wanted to know what will be the impact of IFRS 6 team accounting.
So we change in any way the capital allocation policy for you because that will increase the leases mean, that are you are creating the balance sheet. So that might change your net debt EBITDA. So so that was that was my first question. The second question was, I assume you're doing so much of acquisition now, so probably there will not be any buyback. But, but just wanted to check, I mean, how do you decide, between a buyback versus special dividend and also raising your ordinary dividend.
So what sort of criteria you use when you do either of those. And the last one is on the U. S. Margin. So going by your comments, it seems like the gross margin only expanded by 10 basis point in you guys.
It's just my calculation. I don't know how much you agree with that. So so can you comment, I mean, is the gross margin expansion in the U. S. This quarter was lower than what you probably have been doing 20 to 30 basis point expansion?
Thanks, Manish. Let me tell you, I thought we were doing a reverse order because that's the way I've written it down. U. S. Underlying U.
S. Gross margins, expanded a touch. We, by the way, you know, 10 bps a year managed, I wouldn't describe as just only. I think that would be a good performance. We always say, you know, top line growth with incremental gross margin and controller costs is a good business model.
So, expanding our UF, our underlying UF gross margins, a touch we think is good and sensible and controlled, particularly when you grow in the top line. To the order of the 9% that you've seen. We are happy with that. So, we have confirmed today, that our underlying gross margins have indeed increased a touch. So that's good with good top line growth.
In terms of capital allocation, I love rolling this out because people think I'm very boring, but it's, it is consistently solid how we think around capital allocation. We We put our capital into the business first. That's organic growth. That is the first use of cash. The second use is for growing the dividend in line with long term earnings through the cycle.
So that's the 2nd use. And then the 3rd use is M and A. For other small bolt on acquisitions or where we see a strategic need and complement such as those private owned brands, label acquisitions I talked about earlier. It is only then if we have surplus capital do we then look to return that to shareholders on a reasonably prompt basis when we are, clearly, some way outside of our net debt to EBITDA range of 1 to 2. So that is what we have done.
We've got a good record of doing it and we'll consistently do that. How we return that cash will depend on the size and magnitude of the cash and the circumstances at the time. But I think importantly, when we spend capital back into the business onto dividends and into M and A, I think it's only surface that then goes back. The Fund IFRS 16, which I'm sure you're all looking forward to, I think Manish, the guidance I gave you before I give you a couple helpful pointers is nothing changes in the real world for us, okay? So we'll continue to run the business exactly as we are.
Now clearly in accounting world, the, the operating leases will come back onto the balance sheet as will some rentals crop out. We'll give an update to the market in due course in terms of the absolute specific But clearly, if if that changes the reported net debt to EBITDA like any other company, then clearly we'll change our range. Doesn't actually change anything in the real world. I think that's an important thing to note. But yes, the current net debt to EBITDA range of 1 to 2 based on current IFRS, and clearly if IFRS changes, which it will and clearly will update the range but we won't see a fundamental real world change in our capital allocation policy.
I hope that's as clear as I can say.
Yes, that's clear. But I also wanted to check, I mean, so last year, you raised your ordinary dividend by 20%. And you talked about dividends in terms of the whole cycle. I mean, so you that means, I mean, that race was correct and you see a good cycle and you can thing even if there is a recession or a slowdown in U. S, those sort of dividend timing is sustainable.
And the second is on the buyback versus special dividends, specifically I mean, does it signal anything? I mean, when you do a buyback, rather than a a special dividend to that, I mean, the these high prices, undervalued or you do those sort of analysis, I mean, when you do decide between a buyback and specific dividends?
So if the dividend is sustainable, yes, it is. Otherwise, we wouldn't have done it. Secondly, on the buyback, it is because we had surplus capital. So when we have surplus capital, it is only then when we choose to repatriate that to shareholders.
Okay. Thank you.
Thanks.
We will now take our next question from Amigala from Citigroup. Please go ahead.
Hi. Just one question for me, please. In the UK, could you give us some more color as to what are you doing in terms of restructuring there and where are we in the restructuring process? And the second one, in the UK, you flagged that you're investing in the B2C platform. A bit more detail around what are the investments, where are the investments going there with the helpful?
Thank you.
Sure. No, thanks for the questions. No, the restructuring in the UK continues. The management team, Mark, Hixson, who leads that business and Simon, the FD, are doing some good work. The main phase of that restructuring, will clearly finish as we go through the next quarter or 2.
Some of you that certainly live in the UK, will have seen the rebranding has finished. We are just about next week to exit the National Distribution Center. So we had a big warehouse up in Remington Spa. That is just about emptied out now into the regional distribution centers, and that will close. That will save money I think importantly, whilst we are not seeing it yet in the results, the lead indicators that Mark Hickson and the team look at in the UK business such as customer service, Net Promoter Score, availability of product in the right place at the right time as ordered by the customer, all sounds fairly obvious stuff, but it's stuff we haven't done very well in the past, all those lead indicators from a business perspective are certainly turning up and have been in some cases for a couple of months now.
That's deeply encouraging. Of course, it's entirely expected by myself and John, but it is encouraging that those lead indicators are coming through. Clearly is the finance director I'd love them to be coming through in the numbers, which I'd certainly expect to start to see in the second half of this year. So don't expect anything much in Q2. That's exactly what I said 3 months ago too.
But we should start to see some of that coming through in the numbers. So there's no doubt we are trying to run a smaller, more profitable UK business. That's why we exited a ton of low margin business last year. Just takes a bit of time to get this stuff turned around and the customer's product in the right place and then subdivide again. Having not done frankly a very good job over profit over the last 2 to 3 years.
And your second question around P2C platform, is that, yeah, we continue to invest, with just opened a new warehouse in, near Liverpool, between Liverpool and Manchester. We continue to invest in systems and technology as our B2C business grows. And of course, as customers, as we know in B2C ourselves, we expect good service and availability So we continue to grow that business. The challenge as with all B2C businesses, of course, will continue to remain about customer traction. And customer repeatability.
But certainly there are a number of IT investments and platforms into that business. That we're executing at the moment.
We will now take our next question from Kevin Kammack from Suncoast. Please go ahead.
Morning to you. It's two questions, but I think they're sort of related in a way. I guess it's sort of hard set here to keep track of all that's going on on the sort of U. S. Tariffs front.
I just wonder if you could give us an idea as guide of how this may have or potentially could have an impact on the business at all. And similarly, If you look at the UK, are there any contingencies that you've had to put in place already or potentially will have to because of Brexit?
Yes. So let me take the UK and then I'll let Mark touch on tariffs. No, the the UK, I mean, the Brexit situation, of course, something is getting closer at least in a bit. No news, I'm fairly sure that is. I don't think our contingency planning has changed for that.
That's all, Kevin. We, we clearly retained quite a lot of stock in our warehouses that would allow us to service our customers. I think if you stand back from it, we've done all the sensible contingency planning. You know, if the ports get blocked, have to be honest, Kevin, you know, plumbing supplies aren't going to be the first ones that get released across the border. So, you know, we're not at a competitive advantage or disadvantage to any of our competitors.
You know, I would have thought food and medical supplies would be pretty high for this. So we're realistic about it. I think we've got good contingency plans in place as best as you can. Given that nobody really knows what a nurse is going on. But we remain vigilant to it, given that something is getting closer.
I don't think for the group, we see this as a high risk this year.
Kevin or tariffs,
We kind of set out the
COGS impact in the back of the appendix of the full year results. And just to just to remind you, We obviously were thinking then that the Section 301 List 3, which was the most recent round of tariffs gonna go up to 25% in January. Obviously now, the presence of China and the U. S. Have had a hug and we're gonna we're going to sort of suspend hostilities for a little while.
The overall impact, on the business was actually pretty minimal. So we we gave us sort of COGS impact of about $12,000,000 all in.
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Sorry about that, Kevin. So as I was saying, that's sort of $12,000,000 of COGS. We would fully expect to pass through to customers. So so overall, I think, I think a reasonably minimal impact. You know, obviously, it's it's had an inflationary impact on our business.
Obviously, the worry is if there's a stroke of a pen, Mr. Trump, and, decided to suspend hostilities entirely, deflation is not good for our business. And you saw the impact of deflation on the business a couple of years ago when we went through the industrial. So, you know, I would say a small impact, but it would have a deflation impact on the business, but I don't think
what you describe as the current suspension of hospital this is, if that were to be permanent rather than temporary. Are you saying the only unwind is around GBP 12,000,000 dollars?
Yes, yes. I mean actually actually are in terms of Chinese sourcing for us, it's pretty small. It's not a big part of the business.
Think, Kevin, just coming away from the sort of the absolute detail, if tariffs were completely taken away and that generates good demand and keeps everybody calmer, that has to be think, whether there's a small short term impact or not on pricing, it feels to us as though getting rid of them must be good long term political desire on everybody's part. But, yes, I mean, there'll be a bit of short term ups and downs as it has been to date, and we'll manage that. I think the long term, we feel that it would be good if they were completely taken away.
Thank you.
Thanks Kevin.
We will now take our next question from Clyde Lewis from Peel Hunt. Please go ahead.
Good morning, Mike. Good morning, Mark. 3, if I may. 1 on sort of the UK and Canadian businesses. If you could just I suppose follow on from your comments about the U.
S. Start to Q2, just so we could say a little bit about those two markets. Secondly, where are you with regards to U. S. Organic branch openings at the moment?
Just to sort of get an idea of what's happening in that front? And then the last one in the U. S. Was employee numbers. Can you give us an idea of what sort of rate of increase are you seeing at the moment in the U.
S. In terms of average number of employees?
Yes. Let me take UK and Canada, and Mark can take our branches and employees. The, in terms of UK and Canada, again, I don't really wanna get into monthly reporting because I think I think particularly at the current time of people, people can read way too much into monthly reporting. Of course, at some point, that'd be right. So we're not ignorant to that.
But but, listen, I think across the group, you know, US remains good. Canada, we are definitely talked about it in the in the script. You know, we're definitely seeing some weakness around Alberta, for sure, UK market. I would I would say the UK is much more our business is really about self help. The market, we don't expect to be great.
You know, in some respects, we have just got a ton of self help to do in our UK business. We are getting on and we are getting that back. And you've heard me talk about some of the successes we've had. I think it's very much, you know, we need to focus on our customers and delivering the right product at the right price. At the right time in the UK.
The market will do what it wants and we'll respond with our cost base to do what it wants as well.
Just on branches, Clyde. We so net, actually, the branch numbers overall were down by about 10. We did a little bit of pruning in the U S, some branches. So, so I don't obviously remember overall, we're not No, our strategy is not we're not putting in a lot of space growth in this business. We want to try and put more tail points and branches and more outside salespeople visiting customers rather than space growth for its own sake.
So in regions where we're underpenetrated, yes, of course, we'll put branches in but overall, you shouldn't expect organic projects that would be large in the business going forward. And similarly, on hedged, Obviously, through the acquisitions, about 400 heads are in. There's about another 500 heads come through the door.
Okay. Okay. Thank you, Raj.
Thanks, Matt.
We will now take our next question from Robert Eason from Goodbody. Please go ahead.
Good morning, everyone. And just on the U. S, and just understanding kind of the the environment there, are you seeing any change in behaviors around the use of working capital around kind of gross margin behavior, whether regionally by product, just given the volatility that we all see from our side. And, secondly, excuse the business too early given that the announcement also came out at 7. Just in terms of your thoughts on the plumbing and heating markets, in the UK, given that one of your competitors has now put up the for sale sign.
What's your initial views on that for your own business going forward?
Thanks Robert. First question is, it's a good question, Alexia. I don't think we are trying to think as you were asking the second one, the there has clearly been the only thing I can think of Robert is there's been a bit of people trying to play a little bit around the fringes on tariffs, you know, in terms of forward buys, securing supply, making sure that customers' pricing that has been given is honored, because, of course, some of the contracts, as you know, that we provide our long term. And there's been clearly a ton of work of repricing across the whole industry. Post some of these tariffs.
I don't think there's been anything fundamental, elsewhere, that we're seeing either in terms of other credit lines or or customer behavior, you know, debt debt collectability, all that sort of stuff is actually pretty normal at the moment. So no, there's nothing I would say in particular. And if I think quite hard about those examples I've just given you really. In terms of, yeah, Travis's announcement this morning, Chris and I saw it probably about half past 7, we've been pretty busy since then, fussing about our own business. So, recently, you've had my view on on the UK business.
I think for us, we remain pretty focused on sorting ourselves out, in this market. So clearly, we'll look to understand Travis's announcement in a little more detail, going forward, but we remain pretty focused on our own business, right?
Okay. Thanks a lot.
Thanks. I think we've got time for one last question operator if you have one still.
Yes, we will now take our last question from Phil Rosenberg from Bernstein. Please go ahead.
Just one last question for me.
Guidance based on a possible change in Switzerland and state taxes rising. Could you possibly give us an dates on that situation and where you see if there's any change from what you talked about in October?
Yes. I think at the summary level, Phil, there's probably no change. I mean, clearly, service tax reform is still going through trying to get regulatory approval. You might imagine we've done a bit of work on it since then. I don't think anything fundamentally change and there's certainly no change to the guidance.
I think the guidance is still pretty solid. So, I think in short, no change.
And on the U. S, side, the states raising taxes opportunistically?
Yes. So Certainly, in the U. S, there is a little more pressure on state taxes. I think for our group as well within the guidance I've given, yeah, you're right. I mean, certainly the States, you know, everyone thinks the U.
S. Has got tax rate of 21. It clearly doesn't because you've got 21 plus state tax plus sometimes the state taxes are much broader as are some of the federal taxes. So the U. S.
From a tax regime for us, as I said, at the year end is unlikely to work. That that certainly hasn't changed. But I don't need any any change to guidance at I think we continue to, to look at the various options for the group. And I think the guidance we gave is good guidance going forward.
Thank you.
Bill, thanks very much. Operator, I think that's it. I'd just like to conclude by thanking everybody, that's shown in interest this morning and on a continuing basis. Thank you very much for taking the time to dial in. We appreciate your support, and enjoy the rest of your days wherever you may be.
Thank you. Please help.
Ladies and gentlemen, this concludes today's call. Thank you for your participation. You may now disconnect.