Good morning, everybody. And, welcome. Welcome to our full year results presentation. You've got Mike and I presenting this morning. You've got our chairman, Gareth Davis.
He's not presenting, but he's here with us too. And, Tessa is with us somewhere in the audience as nice to have some of the non execs along. Look, from a performance perspective, our strong organic growth of 7a half percent last year that arose from a combination of good market conditions and continued outperformance across North America, particularly in the US, where we posted organic growth just shy of 10% and we continued to take market share across the business. We are very pleased with our gross margin performance, up 30 basis points, over the year and ahead of our expectations. That really reflects 2 things.
Firstly, it reflects our compelling value proposition, but it also reflects the ability of our sales associates to capture a fair share of the value that we add in the pricing to our customers Costs were in line, so trading profit was up nearly 15% and our cash conversion was good despite some headwinds from tariffs in the second half. Later on, Mike's going to explain the, rationale for the rebasing of the dividend, which we grew 21%. This does reflect our confidence in the business going forward and our confidence in the long term growth and profitable growth opportunities in the business You already know about the substantial capital returns that we made during the year continuing our policy of returning surplus cash to shareholders and rewarding them for their continuing support of our company. From a corporate perspective, we continue to focus both our management and our financial resources where we are best equipped to win over the long during the year, we successfully completed the exit of the Nordics, And we returned the proceeds to shareholders. We've also started, to, the process to sell a wasco in Holland.
This is a really good business with excellent management, but we've got no roots through to market leadership. We can generate better returns in North America. During the year, we also got out of the wholesale business in the UK that just generated returns for shareholders which were below our threshold. The most significant progress though last year, it isn't in the P and L or the balance sheet, but it is in the continues strategic development of our business. It's that that we're most proud of and that's what we're going to spend a little bit of time, talking about today.
But first, Mike's going to take us through the operating and financial review.
So 2018 has been another good year for Ferguson. I've had revenue growth driven by the US and Canadian businesses, we've delivered revenue of $20,800,000,000. Gross margin 30 basis points ahead as we continue to deliver incremental year on year improvement. Operating costs well controlled, and we achieved good flow through in the year. Trading profit just over 1,500,000,000 dollars, $200,000,000 ahead of the prior year with a trading margin of 7 point 3%.
Headline EPS up 21.4 percent, net debt at the end of the year, touch under 1,100,000,000 and we've increased the dividend by 21%. Getting into some of the detail of that, and you can see on slide 7. Revenue growth in the US continued to improve through the year, supportive markets, We have some inflation in the US that increased during the year. It was about 1% in Q1, growing to about 3.5% in Q4. We presented the UK on a like for like basis on this slide to remove the impact of those brunch closures and the exit of the low margin business that John's just touched on.
That really helps just provide a better view of the underlying business and you can see on a like for like basis, therefore, in the UK broadly flat for the year, pretty tough markets, inflation around 3% in the UK. Canada and Central Europe, revenue grew well, slightly lower level of growth in the second half as that laps tougher comps inflation in Canada, Central Europe around 2%. And as John just mentioned, we initiate the process to sell, Vasco, the remaining business in Central Europe, just so we're really clear given that decision was made after the balance sheet date, those numbers are included, in the numbers that I present today. Clearly, the next set of numbers, the next time I talk to you, we will exclude Vasco and show it as a non ongoing business. So moving to the breakdown of revenue and trading profit.
On the left, we've bridged the 10.1 percent revenue growth from the 18845000000 last year to the 20 752 of this year. You can see the adjustment for foreign exchange of 229 giving constant currency growth of 8.8 Acquisitions were 1.3 and therefore the underlying the organic growth of our business at 7.5% for the group. On the right hand side, a similar chart, bridges the 1307 of prior year to the 1507 just delivered. FX adding 7 acquisitions adding 8 and the organic growth adding 185,000,000 of trading profit. So moving to the regional performance and first, our largest, the USA, which delivered a great performance.
We've continued to outgrow those supported markets in all of our businesses to deliver good revenue growth. Gross margins ahead due to improvements in procurement, and disciplined pricing. And as we guided at the beginning of the year, labor cost inflation was 3% to 4%, operating expenses well controlled, leading to good flow through slightly better than we guided at the beginning of the year. Trading profit came in at 1000000,202000000 ahead of the prior year and trading margin of 8.4 percent, 40 basis points ahead of last year. You can see the breadth of that organic growth in the US, on page 10, it was broadly based geographically, and across all of our businesses.
Blended Branches growth across the country was good, as you can see in the chart on Waterworks, continued to grow well. Turning to the end markets in the US, we've shown the market growth and separately our organic growth here. Residential markets have continued to grow well, driven by the strong growth in RMI that represents the majority of our revenue. Commercial growth has increased slightly towards the end of the year, and our growth has increased in line with that. Infrastructure markets also growing.
We had a pickup towards the end of the year, and industrial markets continue to improve as the year progressed. And overall, importantly, you can see that we've outgrown the market again, we've over performed those markets by some 3 to 4% overall. In the UK, we are disappointed with the results. We've continued to execute the restructuring program against the backdrop of a tough market that's showing few signs of improvement. The restructuring actions will help us build a better business here Though that will take some time and John will cover more on the UK a little later in the presentation.
Revenue in the UK was lower at constant currency from the impact of those closures and the exit of a low margin business that happened midway through the year. Gross margins broadly flat costs a little lower and therefore trading profit of $73,000,000, some $29,000,000 lower than the last year on a constant currency basis. In Canada And Central Europe, good solid year of revenue and profit growth in good markets. All businesses generated good revenue growth with industrial growing strongly. Gross margins up on last year due to improved procurement and mix, operating costs well control, and we benefited from a one off legal settlement here of about $6,000,000, which is in the numbers.
Trading profit was 83,000,000 dollars, $17,000,000 ahead of last year on a constant currency basis, and excluding that one off gain On to Slide 14, during the year, our Swiss associate made a number of market announcements regarding difficult trading conditions which generated a trigger for management to reassess the recoverability of our investment. We've assessed the carrying value of the investment and taken an impairment charge of $122,000,000. Exceptional costs in line with expectations totaling 82,000,000 most of those in the UK as expected. Financing and tax on the next slide, financing charges came in as expected slightly lower than last year. This was in the main due to the lower level of average net debt through the year as of course we had the proceeds from the Nordics before we gave those back to shareholders and tax was as expected with the ongoing effective tax rate of 25 percent for the full year lower than last year due to the reduction in the Good cash generation continues to be a key strength of our business.
Cash flow from operations of 13,23,000,000 also includes an additional 99,000,000 that we chose to put into the pension fund this year. Interest and tax outflows materially lower year on year, reflecting the reduction of the US corporate tax rate and also the timing of some payments and capital investments pick back up to the level as we guided. Goodyear of acquisitions. As guided at Q3, We closed a number of acquisitions in the final months, total 13 acquisitions in the year. John will talk about the strategy behind a couple of those later on.
And the cash received from disposals, you can see on the slide predominantly relates to the Nordics business. Returns to the shareholders just over 2,000,000,000 through dividends and buybacks, and we finished the year with net debt just over 1,100,000,000. So on slide 17, that all means that we finished the year with a strong balance sheet net debt EBITDA of 0.6 times. Net pension liability of previous years has turned into an asset that's mainly due to the contributions we put into the pension fund. And I've also included here operating lease commitments remained pretty similar to the year before at 1 1,000,000,000.
So looking ahead to next year, we thought it'd be helpful to give I've included the effect of the completed acquisitions. Most of those are in the USA, I've also included the details of Vasco there as well so we can pull that out into non ongoing. UK exceptional costs, I'd expect both income statement, exceptional costs and cash of about 1,000,000 most of that will be in the first half of the year as we continue with the restructuring program. And with the recent acquisitions and with the recent capital deployed, the average net debt will be higher this year and I'd expect interest therefore to be nearer the $80,000,000 mark. Effective tax rate for FY 'nineteen, I'd expect to be between 22% 23% as we get the full year benefit of that reduction in the US corporate tax rate Due to the Swiss tax reform announced last week, we do expect the tax rates will push higher by about 3% to the mid twenties in the medium term.
Timing is uncertain on that legislation, but it could be as early as FY Twenty 20. Capital investment will be higher, in FY19 as we invest in new facilities, particularly a new distribution center in Paris, again, more of which later and underworking underlying working capital assumption, I don't see any change to normal absorption rates as we grow the business of around 12 to 13%. So finally, I want to remind you of our capital allocation priorities. You can see that on the top half of the slide, and I've covered these in previous sessions, no change to our capital allocation policy. We continue to generate strong cash flow and the balance sheet remains strong.
However, having reviewed previous generation and future projections, we have increased the level of dividend paid by rebasing upwards, the dividend by 10% and then applying 10% growth to that and that compounds to a 21% increase in the year. So given our cash generation qualities, balancing the capital requirements of the business. We believe that that rebasing is entirely appropriate and at this level, entirely sustainable moving forward and also reflects our view of the ongoing strength of the underlying business. And we expect to grow dividends through the cycle in line with long term earnings growth. So with that, let me wrap up I'm very pleased with the 2018 results, good earnings, strong cash flow, and a strong balance sheet and therefore in good shape going into 2019.
Thanks very much, Mike. Now, these are the strategic priorities that we've set out before we're going to focus on today, particularly on those strategies which are which we're using to generate the best profitable growth in the US. When I joined the company back in 2010, the group had more than 50 businesses across 20 countries. Now we're focused on 15 businesses across 3 countries where we're well equipped to win and also to make the most attractive returns. Upfront on this chart, just a reminder of the markets that we operate in, in the U.
S. This chart shows our 9 strategic business units, with our estimated market share in each one, with a market leader in a number of these where we aren't the market leader, we've helpfully named them on those charts. You can also see the other large competitors in the space. Those are in that mid blue color with a number of large competitors. That's any competitor with broadly speaking more than 1% of market share.
The message here, there is a lot of gray on this chart, and that's because we generally operate in very fragmented markets. Why does each of these businesses make sense to us? Well, firstly, from the circles on this chart, You can see the extent of the shared infrastructure between those 9 business units, leveraging our assets across those business units generates very attractive financial returns. Secondly, just down at the bottom, if you see our other large independent competitors, operate across the 1st 6 across some of those segments. And if we didn't operate in them, we would be at a competitive disadvantage.
Thirdly, all of these markets are attractive to us. We generate strong growth. We took market share in the, in each of these markets. We generate decent gross margins, good net margins, and ex and returns on capital in each of these segments. That's good for our customers.
It's good for our suppliers. It's good for our associates. And it's also good for our shareholders. Now with all the focus on financial results, We don't spend too much time with investors, with analysts with yourselves talking about some of the cultural aspects of our business, which really differentiate us in the place even though these things are very important. We showed on the charts, last time.
Looking back over last year, last year was a year of significant change in the leadership of our business. After several years as COO of Fords And Enterprises, it was Kevin Murphy's full year as the, leader of the US business. That handover from Frank Roche was seamless. You can tell that from the excellent financial results in the US which, the US team has produced under Kevin's leadership. The whole of the US team should be very proud of that.
But just as significantly has been the progress in developing and implementing our operational strategies that has been truly outstanding. In Canada, Kevin Fancy joined, as MD of Canada. He's brought a really fresh perspective and a real operational focus to the Canadian business. Which also had its best year ever. And in March, Mark Higgsen joined as MDA Wallsley UK, he's been very focused on getting clear accountability and driving availability and service, which are now improving rapidly.
We decided last year to relocate some of our support functions, the functional leadership of technology, of HR, of legal and compliance over, in Virginia. And that substantially improved the leverage that those functions have within our business sharpened our focus on what's most important for our business. Our strategic initiative in innovation and our renewed focus on own brand have been brought to life by allocating some of our most senior and best talented associates. To those initiatives, both very significant commitments. And in addition, we bought more senior operational resource onto the executive committee from Ferguson Enterprises really reflecting the shape of the group going forward.
All of those leaders now, they've been focused on making ensure that their teams are well equipped and properly organized to drive our business over the coming years. But what about the leadership in 10 or 20 years time in our group. We recruited 2a half 1000 associates last year. The recruitment, the training, the development of talented graduates has been a cornerstone of our culture since the foundation of Ferguson Enterprises. This year, we're recruiting a further 600 graduates from some of the top universities in America.
As they join our company, they get 5 months of specialist training in their chosen discipline in groups of about 15 in training centers around the country. And there they learn about our service culture, they learn about our sales process, they learn how to use our technology, they learn how to run our branches and showrooms. Trainees are also supported by an assigned mentor that mentor guides them and inspires them during that training program so that they can have some impact when they move into the field. And when they're in the field, they can expect to move between inside and outside sales between the counter, the warehouse, credit management, anywhere else in the business. Later on, many often will pursue opportunities either in other business units or in other disciplines or geographies across the company.
Ferguson is a great place to develop a career in a service oriented business with a passion to support our customers to grow profitably and the ambition to be number 1 in our marketplace. Our culture and values are very attractive to bright, ambitious people who want to work in a customer centric organization. That's why more than 7a half 1000 graduates chose to join Ferguson and to develop their careers with us. If you look at our latest associate survey, this gives a glimpse of the type of company that we are. Over ninety percent of our associates feel confident to recommend Ferguson to potential customers, and the overwhelming majority of our associates feel Ferguson is a good company to work for.
Now it's our job and our commitments to take the actions that move those ratings up even higher as we go forward and to make sure that the leadership lives up to the expectations of our associates as well as our customers and suppliers. Now I'd like to touch on some of the other drivers of profitable growth today, which are particularly relevant right now. As Mike said, we've been pretty busy on acquisitions last year, particularly in Q4. Since then, we've done another $240,000,000 of acquisitions across the group. Going forward, we've got a number of pre attractive acquisitions in the pipeline, Several of those we expect to conclude later this year, they would add $300,000,000 to $400,000,000 to that total investment and of course, further opportunities might arise going forward.
That would bring in the last 14 months that 650 plus that 3 or 400,000,000, that would bring us to a $1,000,000,000. Shortly this later this year. Most of the opportunities in the pipeline now are for bolt ons that would expand our existing branch network. Another part of our strategy is own brand products and categories. You might remember 2 years ago, we bought Signature Hardware.
This is a high end owned brand bathroom business space in Cincinnati We took the board there. Actually earlier in the summer, it was great to see that the progress the business has made, particularly in making products available to distribute through our other channels through the showrooms and also to our online customers. And we've just done 2 other great acquisitions in the own brand space. Safestep specializes in walk in tubs and showers that provide easier access often to customers with restricted mobility. So if any of you are interested, there are buying opportunities available.
The business has a direct sales model that utilizes independent sales reps, which fits neatly with our ambition to leverage more of the rep community. The equipment installed by 3rd party installers, and that will extend our installation capabilities We'll also leverage this through our showrooms, through our residential and commercial channels, and our supply chain to generate synergies. All the manufacturing in the safe, safe step business is, is contracted out onshore in the US. Now, Joan Stevens, we've just completed this, this acquisition. This supplies distributors and retailers with own brand residential and light industrial, rough plumbing and some specialty plumbing products, both sourced in the US and oversee.
These businesses are very high quality businesses with good margins, and a strong track record of profitable growth. Now we still expect the majority of our own brands expansions that come from organic investments. And that's particularly in the people needed to both design, source, QA, import market sell, these, products in our chosen categories. And our own brand products, what do they do for us? They extend the range that we can offer to our customers, ensuring great value and great quality.
Does take more work on our part and it also means that we have to make a larger investment in infantry. On the slide here, you can see some of the own brands that we use in the US, but we could have included Frederick York or meridian valves or soak or any one of a number of brands that we also use in Canada and the UK. Let me just touch on a couple of examples. FNW which you can see there, this is a brand which focuses on commercial mechanical applications. It includes a range of valves, hangars, clamps, support systems really recognized in the industry as quality products, but up by excellent technical and specification support.
Proflow, which is up there on your right. This provides trade plumbers and builders with a wide range of quality fixtures, faucets, rough, and specialty plumbing products, which represent really great value, particularly in the commercial space. We plan to extend our lighting range and we'll develop categories that are underserved by suppliers or where there's insufficient choice for our customers, including groove fittings, push fittings, PVC fittings, fastenings, clips, hinges, and also further expansion of our Janssen range of papers and liners. Now in recent presentations, we focused on the opportunities to significantly expand our share in markets like New York and in adjacent is like Waterwood. We're going to focus a bit more today on another market, which is Miami.
This is a huge market for us. The 8th largest Metro area in the US with growth both from immigration and migration from other cooler parts of the country. Local development as developers, sorry, have got very ambitious plans here, both for commercial and for high rise residential development in the downtown area. We already have an exceptional business here worth more than $400,000,000 a year. And we have good market share in Waterworks.
You can see it on the chart in commercial, in showroom. But if we can move our residential trade to what we refer to as best in class that's another $400,000,000 opportunity. Now in Miami, demand for Luxury condos is growing very strongly, These projects are large. Yeah, we're usually supporting general contractors helping them to win in a competitive auction and then supplying them over quite long construction. Cycles.
These projects fit into this chart last time on a customer wants in many places. Let's just dig into the project support role. These larger scale projects, we don't just take orders and get the product out of the door as quickly as possible. We have specialist project managers, they're equipped with the right software to make sure that customers can control the call off of orders throughout the project. We've got specific delivery and install managers making sure that all the various parts of the project are delivered at the right time and the right place on the on the site to minimize double handling for the customer.
Specialist contract administrator administrators make sure that change orders, cancellations, returns are processed efficiently, they're billed accurately, and also that the accounts are prop properly reconciled. And all the tools, some of which you see on the chart, we share these collaboratively with a customer, it gives them the best visibility and the best service. Now last year, we've also, continue to drive e commerce. This is now 23% of sales, we implemented new B2B platforms in the US, in Canada, and the UK last year with no interruption to our service. That's enabled customers to enhance the to to access enhanced functionality, some of which you can see on the slide.
They demand they need this more sophisticated functionality to add value to their business, and that's a key area of focus for the team. We're focused on driving of technology. Now, I might remind you of the investment priorities the first and most important priority we've also made some substantial capital investments in capital commitments during the year. And just to give you a flavor of some of them, we have a 1,000,000 square foot distribution center in Paris I got a call earlier that said, are you going back into Paris? No, this is Paris Southern California.
Okay. That's going to come on stream next year that will that will serve all of our business units across the region. In Baton Rouge, we're developing a 70,000 square foot facility accommodate the strong growth in our industrial, markets. In Holly Springs, North Carolina, We're building a 100,000 square foot, primary ship hub servicing the branches in the Raleigh area. In Indianapolis, 120,000 square foot facility, and that's a ship hub, which consolidates a number of other smaller units.
Those four investments represent $170,000,000 of investments. They include a number of hubs and that's important because this enables us to consolidate final mile delivery in metropolitan areas, giving customers the best access to the deepest range of inventory and also providing greater opportunities for efficiency in our distribution. And through all this, we continue to review the suitability of all of our sites. We actively look to relocate facilities where there are better sites available and also of course to support the future growth ambitions wherever that's appropriate. As we grow, we also continue to invest in working capital.
This is needed to support our customers. We added $400,000,000 during the, of additional inventory and receivables. Now clearly part of that is financed by payable. But we do have to make these investments as we go along. Couple of years ago, when we had headwinds from industrial slowdown and commodities, We were rather keen to get back to business as usual and get our growth rate back up.
You can see now it's great to be back north of that 8% a level. Even if that was partly attributable in the second half of the year, both to some inflation and strong recovery of industrial markets. Right. Moving on to the UK. As Mike said, Firstly, we are disappointed.
We're very disappointed in the financial results of the business last year. The results do reflect a difficult and very competitive underlying market. We made some good progress in some key areas, but there are a number of things frankly that we need to do much better. Signon Glass Technologies has been implemented across the network that is delivering results Branch replenishment has been moved to Ignite. That's a big investment, but that also will yield significant service benefits going forward.
The wholesale business has been closed. That was painful, but it was necessary. And we've significantly reduced headcounts in the support functions to reduce the cost base by $30,000,000. In the second half, we recruited a new management team, and that was to improve the execution, the pace, and the focus of the business. They've reorganized their leadership team and created a regional structure to drive performance.
Some of the other valuable initiatives are in process but frankly should have been completed before now. The range has been simplified and revised Rebranding will be complete now in the first half and we've piloted the destination branch formats. We need to make sure now that those are going to yield the appropriate benefit before rolling those out. We've introduced non discounted pricing, but there's a lot more work frankly to do in that area. Most importantly though, Mark and the team, they are rebuilding availability and developing service levels.
So there are some important parts of the transformation now that are going to be complete this year, including the closure of excess DC capacity and the relocation of the UK Support Center in Leamington. Also improved pricing and rebate controls and implementing better demand management systems. As Mike said, we do think that the central principles of the transformation plan remain valid and they will lead to a more robust and better business. As an aside in the UK the infrastructure business and also at SOKE UK. Those businesses have continued to do very well increasing both growing and increasing profitability during the year.
Walsey Canada had another great year, good growth in a supportive market and impressive gross margin expansion. We're pursuing some clear and very valuable strategies here both to develop our service proposition and also to improve the quality and sustainability of the business. But a new warehouse management system implemented in Montreal in the new DC there and improved demand management software that's continuing to drive availability. We've also got implemented new systems for rebate management and a new customer loyalty platform. We joined the Octo buying group and that's enabled both benefits of scale and also further improvements in gross margins.
We invested in more resources to drive own brand sales, including a new sanitary brand and a new hand tools range. And as I said before, the business also implemented a new e commerce platform that's continued to expand usage got an exit rate there of more than 15%. And the team has also won and renewed some very important accounts during the year. The business now is better positioned than it's ever been to execute bolt on acquisitions and the team completed 3 smaller ones during the year once since year end. Now on the innovation fronts, Our customers are facing today unprecedented challenges with the shortage of skilled trade professionals and also the needs to improve productivity in the construction cycle.
We created Ferguson Ventures to help us to discover, to invest in and partner with companies from startup stage to accelerate the use of emerging technologies and new business models in our business. The team is based on the West Coast, It's partnered with RocketSpace, which is a, a Silicon Valley accelerator and that's brought some startups and us together, in our chosen areas of focus. We've also created an innovation lab and the purpose of that is to explore industry changing technology and business models and to do specific trials within our business. Ferris And Ventures, we've made our first investments Right? That includes, for example, here on this chart, you can see a company that provides software and services in the BIM space.
Yeah. They've got cloud based solution, and that assists mechanical electrical plumbing professionals to develop workflow solutions to help them to plan to collaborate. To order fabricating trap jobs. It's very early days for folks and ventures and also for our innovation but we are learning what is out there and we will figure out how to capitalize on it. Let me finish up with the outlook.
Look, Mike shared the market growth in the US over the last year. Just touch on what we're seeing right now. Regarding the residential market, new residential volumes are pretty steady and selling prices have have risen. More importantly for us, the RMI market remains good with growth around 7%. Commercial Markets ticked up a bit actually over the second half of the year.
And so the full year growth rates were about 6%. And industrial markets also continue to grow strong into the double digits in the second half of the year. The Canadian market also continues to grow well, slightly softer there towards the end of the year. In the UK, the heating market remains pretty flat at best. Let me also touch on tariffs.
These originally targeted commodities, and that put up the cost, for example, of imported steel pipe. Domestic manufacturers absolutely followed suit. Since then there have been 3 rounds of tariffs applied to finished products, the latest of which was introduced last week that will have the widest impact. The most significant impact initially so far has been on Canadian importers of US manufactured goods because, of course, they supply chain is impacted by tariffs in two places. We've talked to our customers.
We've let them know what's going on. We've told them we don't expect supply, to be disrupted in any area. We do expect 1 or 2 prices to go up. You can get an idea of the magnitude of that from the data that we put into the appendix, which covers direct imports. Regarding the impact on Ferguson, look, we expect to recover increased input prices and our selling price.
And today, we don't expect this to impact our P and L in any significant way. Finally, look, the outlook, during September sorry, August September, growth rate in broadly in line with growth rates last year. Alta is a little bit higher. September is a little bit lower. Order box, they've continued to grow absolutely commensurate with decent continued growth rates going forward in the coming months.
Thank you all very much for listening. Now Mike and I will be very happy to take all of your questions.
Thank you. Howard Seymour from Numis, it's a couple really. I suppose one is partly on the tariffs, but you alluded to the fact that the industrial has been strong and growing and also price inflation has been strong. Tsuno, Emond, some of this is a sort of lapping of what we've seen on the weakness over the past 2 years. As you look forward, When do the comps start getting tougher on that?
Do you perceive that there's the sort of the growth in the industrial because you allude the fact that it's actually accelerated can continue by its underlying growth. And similarly on the tariffs with the tariff position, does the price inflation remain at similar levels to where it is at the moment?
On the industrial side, we saw a tick on the tick up in the markets in the second half and also our growth rates. So our overall industrial growth rate is 20%. If you look where that growth I'm sorry, that's in the stand alone industrial branches, which is threefour of the industrial product that we sell that growth came really from three areas. There there were a couple of larger projects in there worth bottom line. $5,000,000.
There has been some decent growth in Texas, which, I think you'd say was oil and gas related probably about a third of that growth and the rest is more broadly across the industrial across the industrial customer base. So to answer your question, how does that does that and I think it's not really until the second half this year that we will go on, sorry. Your second was on tariffs.
What pricing, though? Because, obviously, what you've seen is the price recovery of oil related was element of lack in the match with with the tires feeding through, do you foresee that price inflation will fully ring at the sort of levels that you've seen at the moment?
More broadly or for industrial? Yes. And we've asked a lot of our suppliers what their intentions are with, regarding tariffs. Now, actually more modest than you would expect, there is still a lot of our product, which is manufactured domestically. The large majority of our product is manufactured domestically in the US.
There are some suppliers that are looking to put up prices higher than usual, but if you look at the if you look if you look across the larger vendors, they're talking sort of 3%, 4%, 5% even when they have quite a lot of imported products. And there are quite a few vendors who have no intention of doing anything usual with pricing. So, Mike, in terms of the overall, do you want a comment on the overall inflation, Mike?
Yeah, I mean, I think it was probably behind your question, Howard, which is, you know, we saw the 2nd half, you know, inflation increase and therefore you'd probably see the harder comps come through in the second half just building on what John said. So does that help? Yes.
Thanks. Amy Lammer from Canaccord. Just two please. Wonder if you could just give a bit more context around the absence of any share buyback or special dividends. Does that just reflect the fact that the pipeline on acquisitions is stronger?
An element of caution just where we are in the cycle? Just interested in your thoughts there. And then secondly, just on cost inflation, maybe the ease of finding kind of drivers and labor inflation rates in the US wonder what your your views are worth, the trends for the next 12 months?
Thanks. I'll start. I'm sure John will interrupt. Yeah, no, the, interesting, your, your phrase of absence of buybacks, and we've only just finished the last the last set. So I think we have we've absolutely delivered.
We've got a very clear, capital allocation policy. I think your question is probably relating to the net debt EBITDA being at 0.6 at the end of the year. Is that correct? Yeah. So if you just let let me share how I think about that, if you if you add on the acquisitions that we've done since the year end, that 0.6 on Saturday, that's about 0.8.
I've got a good pipeline of acquisitions ahead of ourselves. And of course we always have our busy season of investment in working capital up to the sort of December, January. So I think I'll be sat here at the half year talking to you with a net debt EBITDA of one point something, somewhere between 1 and 1a half, that's sort of how I tend to think of ourselves as being shed today. Rather than the 0.6 that you might see in the accounts. That's absolutely within our range.
I think also you've heard John talk about you know, we we have got, you know, something like 450,000,000 of CapEx guidance, investing in the organic part of the business, that's what I call box number 1 on our capital allocation. We've talked about the dividend already, so we're increasing the dividend and the pipeline looks pretty good. We've just talked about that. So I think with all that told that really says that we always continue to monitor none of those are mutually exclusive as a board we continue to review do we have surplus capital I think we've also got a record of demonstrating that when we believe that we do have surplus capital, we do get it back on a reasonable prompt basis So again, I think we keep it front and center. I don't think you should be you should be too worried that at point 6 and under levered, we've got good uses of that cash And if that pipeline does dry up or we can't execute on it, clearly we'll continue to look through those through that waterfall as we call it.
Cost inflation, which I can carry on. Cost inflation, I think it's pretty similar to last year. I think labor we'd expect to be in the US about 3 to 4 and we have managed drivers very well, actually. We, some a couple of years ago brought a lot of our drivers in house, partly because we wanted to control those drivers and for health and safety reasons, actually, as it happens in this recent period, that's actually benefited us too. So I think there's no change in our cost inflation base sort of 'nineteen over 'eighteen clearly keep an eye on that, but as John says, you know, whether it's tariffs or cost inflation, you know, our job daily is to make sure that we're helping our customers win business and making sure we're passing through those cost increases and helping our customers to do that as well with our service levels.
Gregor Kugush from UBS.
Can I just come back on the acquisitions? I don't know if it's as simple as dividing roughly the 650 by the 40,000,000 to kind of get a sense of the multiples that you're paying, I'm probably not not quite accurate, but if you can give us maybe some color on what kind of multiples you're paying, I guess, that's on a pre synergy basis and then how you think over time those, those multiples, evolve as as you integrate, the bolt ons. That's question number 1. Question number 2 is on the flow through rate. I guess overall, you've given some color on cost inflation.
Obviously, last year was a good year any color you would like to provide for the year ahead would be helpful. Obviously, I guess, it does depend a little bit on the level of growth as well. Especially, especially in the US. And I'll leave it there. Thanks.
So I'll do the first one, Mike. Yeah. You do the second one. Good. I think on the acquisitions, they really fall into 2 categories.
There are and we're only talking about buying quality businesses. But it is important that we get them integrated and those integration costs, we routinely, as you know, in the US, we've always charged those direct to to P and L and we get on with it. There was one acquisition in the year which was sort of reasonably sizable which was not at that point profitable but we were very, very positive about the synergies that we were going to generate from that business. Other than a sort of an outlier like that, the multiples haven't really moved very much. We are still paying normal multiples that we've paid over several years and we expect to get benefits usually there are buying benefits for bolt on.
For bolt ons of a couple of percent on gross margin and then we are more efficient on the back office end. So usually multiples are coming down by sort of 2 in a multiple of 2 or 3 times earnings within the 1st 12 months. That's pretty typical. But there's no change really overall on the multiples that we've that we've paid for good quality businesses.
In terms of the flow through, no, I mean, again, I think we have we have been consistent that you know, in in good markets, we would expect the flow through to be high single digit, whether that's 9, 10, or 11, there's no change to that guidance at all. So I think and certainly the notes I've seen this morning, I think are expecting us to flow through. It's about 10% in good markets. So no change there.
It's Charlie Campbell from Liberum. I've got 3, one of them is the first one's quite quick really. Just following on the acquisitions, obviously a step up in activity. Is that because vendors are becoming, choosing to sell as it were or you're looking harder? Is there an element of that there?
2nd question, I suppose, which may be related just thinking about the U. S. Residential RMI cycle. You've told us you're very confident in the strength of that, but clearly mortgage rates rising and others perhaps less confident So just wonder where the mortgage rate ties in with confidence in U. S.
RMI? Then the third question on the UK, You've talked about another $30,000,000, I think, of restructuring this year, if I heard right. I'm just wondering what that is. Is that really furthermore branch closures should we be thinking of that when we're modeling the UK going forward?
Yes, thanks. Look, on the M and A We have absolutely been looking hard and working hard and trying to find the acquisitions that we want to do. That's the key here. So there is part of that part of this is just what did you say last time? It's like buses.
They come along in they come along in threes or whatever. That are sometimes even more, but, so we've absolutely been working hard to find the acquisitions that we wanted to do first point. There has been a step up in opportunities. There's been a marked step up, for example, in the industrial space. You'll see we haven't really we haven't really done a lot in there.
We're very selective about what we're pursuing here, very selective. So whilst there is a step up it's a step up that we absolutely, wants to do. We're in control of. This isn't just people put in their businesses for sale and, hey, let's buy anything in our space. It needs to fit culturally with our organization.
It needs to be a quality business. People need to wants to join, you need to want to be part of the Ferguson story, for example, all of those things are very important to us. Having the right margins and the capability for us to add value through Synagis as well. On the on the sort of RMI, I think if you look at if you look at, some of the lead indicators, for example, LIRA, we still see that remaining a pretty positive indicator today. Clearly, if you look back and I remember sort of 4 or 5 years ago, we said well, you know, if we're not going to get 10% growth in new build, how is the market going to carry on growth or whatever else?
And but I think that we've shown that in a market of 1.2or1.3000000 new starts in the US, we can do very well. So we don't need to see those new starts really stepping up, you can see new starts in the US, it's about 70% of our business. Fine. It's good. It's good business.
We like doing it. It's good margin. We can do it well. Absolutely, our customers want the service, but it's not at levels that it was at. A decade ago, but prior to the prior to the financial crisis, I think the other sort of indicators in INRMI affordability to us when you look at the affordability levels, they still seem to be okay, actually close to the long run average.
And so, you know, most of those indicators to us still suggest continuing, you know, continuing decent demand and certainly, they are suggestive of a market which we can continue to press on in and do well with. Mike, do you wanna come over here? Yeah.
In terms of the the UK, the as I said, I'd expect all of those p and l and cash cost to be in the first half of the year. That's really the, the balance of the program that was announced a couple of years ago. The three main items in that are all public and I'll be on worked on already. It's really 3 main buckets. 1 is the rebranding and getting the sites under one brand, and in a fit for purpose state with the new product range in them.
The second one is the closure of the National Distribution Center up in Remington Spa and the sale of that land up in Leamington Spa. That land is held in assets held for sale. And the third one is the continuing roll out of the IT system, those are the 3 main buckets of which we've got left to to complete by the end of the half year.
Charapadia, HSBC. I could talk a little bit more about the investment in the organic expansion that you have, just some details on whether what the 400,000,000 is going into in the inventory types? And then also a little bit perhaps on what sort of savings you see from any of the branch closures and where that's being spent into the expansion.
Yeah. So I we we got the the chart with the 4, with the 4 proges on, that's 170,000,000 actually is the 400,000,000. And then there is a fairly normal mix of technology refurbs some new, for example, showrooms and those types of investments. So I don't think there's anything out of the ordinary. It looks a little bit strange this year that it's sort of a little bit higher we were a bit lower last year, so I think we just got and that is just because 1 or 2 of these are a bit lumpy, I'm afraid If you look at the investments in working capital, you know, it was just a reminder, our investment in working capital is absolutely proportionate really to the to the go, we make incremental improvements but it's really pretty proportional to the growth in the business I think going forward there's a little bit more inventory required for our own brand investment, but from a from a big sweep of the of history and the balance sheet perspective, it won't make any difference to the investment returns.
Thank you. It's Karl Green from Credit Suisse. Just a couple of questions on own brand following on from that point. You indicate how fast it's growing overall, including the M and A and also organically, I guess, thinking about the penetration as a proportion of overall sales? Probably having to run quite hard to keep up with a good growth that the US is seeing overall.
So just some indications as to how that's performing, because I'm wondering if it's had any, obvious or no will impact on the gross profit margin or or indeed the EBITA margin. And and they're following on for that, just to to your comment about most of the own brand manufacturing or contract been taking place in the US. Are you minded at all to consider perhaps cheap M and A optionality overseas where there might be a discount available for the uncertainty around tariffs? Thank you.
Yeah, it's a great point about the growth. We did struggle last year actually to stay to stay up with the with with the growth but we were putting resources in throughout last year for this initiative which really you know if you look it just takes time, frankly, to do all of the specification, the design work to guard their source product do all the QA, all the importation stuff that you need. And then actually interestingly, one of the things that we've learned along the way is you can't just land this product into your distribution center and think it's going to sell itself. Our vendors travel around all of our branches constantly trying to excite our salespeople and our branch people to sell their products. And we have to do the same, slightly strangely with our own product, you know, just telling people, oh, you know, here's a product, please go and say, no, actually, they need to believe this is a good quality product, with a good pricing point and it's suitable for this application in these circumstances.
You've got to go and provide all the support that's needed to sell that into the business. But what I will tell you is my challenge to all of our teams is I want us to get own brand growth at double the rate of growth of the business. We're not there yet. Alright? Now what that would actually tell you if you work the maths back with the acquisitions we've just done, I think we're at 8% Mike.
So it would tell you that we would gently drift up from 8% to 9% to 10%, you know, 1% broadly a year. I think it's the way it's sort of broadly would would work. I would love to see that. We didn't, we didn't achieve that last year, but actually if you look back over 3 years, we went from 5.6, I think, to 7 now to 8. So but it's still a relatively modest part of the part of the business.
It does it is it is accretive to gross margins, but of course, we have to do more work down beneath the gross margin line. All of that resource that we have to put in, we just have to do, you know, we just have to do more work. There's a reason the margins are higher. Let's put it that way. Does that answer your first your first question.
Look, on on the second, yeah, we have we have resources out in the Far East that are sourcing. Actually not just one group, we've got them inside different places. And that's entirely, you know, entirely supporting of the own brand that we import into the US, which is now running at 600,000,000 dollars, $700,000,000 a year. But that's still, you know, there's still plenty of opportunity there. And I would still say, you know, if you compare that to, for example, in a big US retail DIY chain, we have a long way to go.
So I don't think I'm being unreasonable asking our teams to get there, double the growth rates. Let's put it that way. And yes, that'll be that'll be a mix of onshore and and low cost country. I think it will be more low cost country.
Thank you. Clyde Lewis at Peel Hunt 3, if I may. 1, I think in Canada, you mentioned that you've joined a buying group, which surprised me a little bit for someone who had a major major major materials, merchant joining or buying groups? Could you just maybe explain the thinking behind that? Obviously, what the what the savings may be as well?
The second was on facility supply in the US, obviously low market share, huge market. Can you maybe just sort of say a little bit more about the strategy of what you're hoping to do to try and grow that market share. And the last one was the UK You've announced obviously the plans to sell WOSCO. UK looks increasingly like, again, lost soul, and has it got future within the, the new Ferguson?
Mhmm.
You can help me out there. You're welcome. I wish I'd had the inflation one. Yes. Look, I'll tell you.
It was it was very interesting. It it came along as an opportunity. We talked to them over quite a considerable period of time. Their members originally had similar market share process so that there's no data leakage. So we got a third party professional services firm to do all that.
We like the people that are doing some sensible things, and we felt this was, an eminently sensible thing to do. We do maintain if we can negotiate better, we still maintain the term. So for example, we maintain our own payment terms, for example, and of course, if there is unbundling because we're going through a central distribution center rather than to branch and we retain those benefits as well, but it just made sense. Initially it wasn't the only time in the group that we joined a buying group because we did we did it in France a number of years ago when we owned the business in France in the south, which we did for a while, as well, just pooling our essentially pooling our buying resources with you know, with with other people. So, you know, it made sense.
It gives us it gives us economic advantage and and we'll see how it goes. We don't, you know, we don't have a, you know, a lifetime's commitment to this. Our commitment is really and their commitment as well is yes, it works whilst it works and today it works. So I'm very pleased with the team for being imaginative and also for implementing because it clearly had a favorable impact on our business last year. Facilities Supply, I visited really well, last year, very pleased.
So last year, when we sat here, I said the focus at that time was to was 100 percent organic last year to make sure that we could meld miss Meld, what we've got. We've done 2 earlier smaller acquisitions. We need to make sure that those were servicing well and also that we were focused on improving the gross margin of what we've got. That really meant selling the right mix of products. And I'm really pleased with the team this year.
We did we ended the year $550,000,000, so it's good growth. Grew even faster than the rest of Ferguson, which was great, did exactly what they were meant to do with the gross margin. And just just very, very pleased with the performance they're bringing the gross margins up. That was important. And, you know, this is a nice decently profitable business.
It's not quite at our average margin yet, but I'm pretty sure it will get there. So continuing to make good progress there. And, you know, I think the key there is to make sure that your you mean something to the group that you're addressing. So for example, if we're selling to multi family to multi occupancy homes or if we're selling to government or hospitality to the hotel chains to make sure that you tailor your, your offering really well and you serve those customers customers really well. That's the key, I think, in that space.
The UK Look, today, this is this is the way that we see it. We've got a strategy that we believe is going to deliver us a better business. We need to execute that strategy. Today, I do feel good with the management changes that we made during the year. I feel very good about that.
The team are driving absolutely the right things, driving and availability and driving service. That's what we get paid for. If we continue to make the progress that we're making now on that, I feel very positive. And, yeah, and we need to we need we need to achieve that because you saw the results last year, the results are non acceptable. But we're going to keep the business, we're going to grow the business, we're going to develop business, we're going to develop its service, that's the way to go the business, service upwards.
John Messenger from Redburn. 3, if I could. 1st, could you just give us a bit of a flavor on how build.com has done in overall terms, John, and are you happy with kind of a 13% organic growth? It kind of it's not that different to the rest of the division, I guess, is just to understand if that's something that you're comfortable with and for that business unit on its own right, does it need to get bigger and broader quicker? I guess it's my question particularly given the costs of pay per view and the rest of it that goes with that business unit.
So is it profitability broadly in line at margin with the rest of the U. S? Is it or is it better or worse? The second one was just on And obviously the M and A, we can see from the numbers that your kind of pre tax return on what you spend in 'seventeen in the first full year was about an 11% pretax return. Now historically, you've shot for a 15% number.
Clearly we're in a low inflation lower rate world. Is double digit on 11twelve the right kind of number in terms of hurdle that you're using? In reality today. And then the final one, just and it's domicile and it's listing, and sorry to come back to it. But on the domicile point, given the tax changes, would it make sense to redomicile back to the UK or jump and go straight to the U.
S? And secondly, on the listing, is the board at least going to actually be in a position maybe to move quicker in that obviously politics is changing Brexit risks are there. But if the lunatics take over the asylum, shouldn't you be ready or maybe move move in advance of that given what we heard about over the last couple of weeks. So, you know, if you wait too long, is there not a logic here rather than ending up getting 10% of the share base away? For example, to share to the employees or to the government in reality, should you not move and make preparations?
Right. Yes. Got those. Yeah, build. Let's start with build.
I'm am I pleased with 13% growth. I'd like I'd like more growth it's not my nature to be either patient or tolerance, as you know. So now, you know, I'd like a stronger growth rate, but here's the here's the thing. And my, myself, Kevin, the rest of the team, we absolutely we want to grow a, you know, we've always said it is profitable growth that we want. We don't want the other type, alright?
Today, I think we have a decent, we have a good business, which is differentiated from the other operators in that space. And it's had good it's had good double digit growth for a long time. But it is important that we maintain the profitability from that business, okay? You asked a question about its margin, actually gross margin are slightly lower than the business, not a long way off, but they are slightly lower. Net margins are also slightly lower, but not a long way off.
Okay? So I think it's it's it's important for us that we have the same we we we apply the same principles to build.com and the other, and the other B2C businesses that we have that we have for the rest of for the rest of the business. I don't think it needs to be. I don't think it needs to sort of do something dramatic scale wise to be a sensible business for us. If you go back to why we acquired the business and why we've grown it since.
We did that because it's synergistic with the business. We use our distribution centers We use our access to products. We use we use some of our our our our back office too. So So, that's, yeah, it does not need to be the size of Amazon or or or Wayfair or whatever else, and it definitely doesn't burn that type of that type of expense. The key to us is to be differentiated, I think, because otherwise, if you're just bidding on search terms forever.
Those search terms get more expensive over time. We've seen that. We know that. And so we need to be smarter than that. Remember, we do have call centers is so and we do also have quite a lot of repeat custom from trade buyers in that space.
I think both of those things are cause for optimism that we can continue to make a good return from that part of the business. Does that cover off your bill.com question, John? Is that okay? Yep. M and A, Mike, do you wanna cover the hurdle rate?
Or I thought
you're gonna give me lunatics on the silent. No, the the the the metrics for us, haven't changed at all, John. Again, we do have, I think John mentioned, we we do have some 1st year integration costs on some of the acquisitions, not all, it tends to depend on the type of acquisition, but no, I mean, we always say sort of 15% 2nd year, the ones that we have recently done, I'd expect those to absolutely deliver that if not some more. So, no change to the metrics or our thinking, all the multiples going back to the last to the previous question either.
When you think of the way much I always think of the 15% is as we talked before about the terms of synergies that you get, if we get 3 terms of synergies, you know, 15% is 6, you know, just over six times, you have 3 turns of synergies, you can sort of get back to the types of multiples that are normal for good quality businesses. Does that make sense?
Yeah. That's it.
Well, you do the domicile.
Let me do the domicile. You can do listing analytics. Tax domicile, again, just to go back on Switzerland because I'm sure most of you aren't plugged into Swiss parliament and tax, So last Friday, the government passed legislation on a whole range of Swiss tax measures that they would like to enact. In Switzerland, they have a 100 days for the public to get enough signatures if they want to take it to a public vote. That public votes, if they get enough signatures, we'll go to a public vote in May and they will either accept or reject.
If it doesn't go to a public vote, then the act will pass. As with most tax legislation, it's unclear when it's likely to be enacted, which is why I've guided to FY 20. It certainly won't come in before our FY 20 year is our belief it could be later and I think that'll add about 3% to our tax rate as we go into the out years. I think as before John, there's really no change, but clearly it's higher up the list. We continue to keep our tax domicile sort of front and center to see where else, provides us with stability, both politically and economically.
Switzerland's been very good to us clearly we'll continue to put that higher up the list given the recent changes. So I think the US is unlikely to work I think there are other jurisdictions that we'll continue to look at. Okay.
Connor, then the lunatics and the asylum, were you talking about the Birmingham the Manchester mob, which
more and more in terms of, obviously, shelving, membership in the very switch, which is it?
Look, John, I I'm not sure that I'm not sure that anything which has happened sort of politically in the in in the recent past. Should color our view or will color our view, you know, over the over the short term. I definitely wouldn't like to be making headlines on that one. Any others? One other and then we'll and then we'll pack up.
Amigala from Citi, just two questions from me. First one, a clarification on your, guidance on the operating profit drop through in the U. S. Is this the underlying flow through that you're talking about or would this include the acquisitions that you've made, and which, which also a follow-up question, is your underlying drop through actually much higher than the 10 level that we're talking about. My second question is really on the competitive side in the U.
S. I mean, we've always talked about how the market is fragmented, but the competition is also quite tough. Home Depot rolling out next day delivery across 35 Metropolitan Cities. It grabs headlines to what extent does this impact your business on an ongoing basis?
Yeah. So on the flow through, we always generally guide overall. Of course, that's never quite right. Because it sort of depends on the types of acquisitions that we do. You've heard us do some own brand but clearly if we do some bolt on classic bricks and mortar, it does slightly change because on some you tend to have more 1st year costs than others.
So I think overall is the best guidance we tend to think of around 10% both last year and the year, ahead of us.
Yeah. I mean, the, you saw on the chart that of the 9 business units that Home Depot was really competing with the residential trade column on the left, which is our counter business, okay, that's where that's where they, they compete and then a little bit in the on the B2C side, which is the one on the far right. Not really in areas like Waterworks or HVAC, they're rather specialist. I I think we with all of our competitors. And by the way, Home Depot has always been, you know, Home Depot and Lowe's are there as, you know, as as competitors in that bar and have been for a generation, okay, so that there's nothing new or significantly changing about that.
We have to absolutely stay stay ahead of the game. Our we have to offer the best service. If our service isn't as good as home depots, we deserve to die at their hands. Yeah. So the only way we we we don't have a right to exist every day.
We don't have any contracted business. We haven't got any contractual protection for that business every day, whether somebody goes right to home depot or left to Ferguson depends on us and our service. What I would say with things like delivery, we already do, you know, a phenomenal amount of our delivery is either state or same day. We do a lot of same day deliveries, okay? There are lots I don't know whether you saw the spider chart last we put up, there are lots of attributes of our service that are not very easily replicable.
So the little example, when I go to our branches, our customers have almost always got a mobile number of our associates, someone who can go and open the branch out of ours. I don't see that at my local Tesco. It just doesn't happen. You know, when they close their doors, they close their doors, and that's gone. 20% of our product is non inventory products that we that we access for people, we we we we we find for them.
Again, that just doesn't happen in a in a usual sort of retail environment. Those types of things that, you know, the the the support with bidding and tender over half of our business is bid intended. It's already highly competitive. Those bids are going out to, I don't know, you know, sometimes it doesn't different a dozen different, supply houses. So all of those things, we have to be really good at servicing the customers in those ways and many, many more to make sure that we stay ahead of, that we stay ahead of the, the the competition.
Are we blase absolutely not, we truly have to be better than the local competition, whether that's Home Depot or whether it's someone whose name you've never heard as a local, as a small local independent, they can both be very good. So we just have to we just have to make sure that we got the right service for our customers. Okay? All right. Well, we'll call her today there.
Thank you all very much indeed for coming along this morning.