Good day,
and welcome to the Ferguson Full Year 2018 Quarter 1 Interim Management Statement Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mike Powell, CFO. Please go ahead.
Thanks, Keith, and good morning, everybody, and welcome to the Ferguson conference call covering our Q3 2018 results You've got yourself Mike Powell, and I'm here joined by Mark Fairan and Nick Nick Hopkins, from the IR team, that you'll all know. First of all, let me give you the highlights and then clearly we'll open the line up for questions. Overall, we're pleased with the performance in the quarter. We saw revenue growth for the group. It was good organic growth at 7.1% ahead in the quarter.
Acquisitions adding your 3rd point 9 to the growth rate, bringing the total growth at constant currency, to the 8% mark. Gross margin performance was good. We continue to make those incremental Apologies. We just had a fire alarm test. Gross margin performance was good.
We continue to make incremental improvements across the business. And gross margin was ahead 40 basis points in the period. About a third of that was the mix effect from the exit of the low margin wholesale business. In the UK. The rest of it, clearly, therefore, the improvements in North America first margins.
We control operating costs, they continue to be well controlled and trading margin came in at $356,000,000. That's 16.3% ahead. Of the last year's number at constant exchange. In terms of net debt at the end of the quarter, that was in line with expectations of GBP 260,000,000 that was after receiving the proceeds from the stock disposal group, which we announced, that we completed in March, and also after purchasing a further 1.9 million shares, which is $147,000,000 through the share buyback program. That brings the total amount of purchased in shares to 6,700,000, which is $482,000,000 at the end of the quarter.
Since the end of the quarter, you'll also be aware from recent R and F announcements that we finished the buyback last week, and also following the shareholder vote at the end of May, the special dividend of approximately $1,000,000,000 will be paid, on 29th June. If you, so whilst net debt to EBITDA at the end of the quarter was around the point two times, leverage If you add both of those elements back, to that number, we're operating it's a pro form a net debt to EBITDA of around 0.9 and we therefore remain with a very strong, balance sheet. No acquisitions in Q3. So we have completed a small one in the US, since the end of the quarter for 8,000,000. However, the pipeline for M and A remains very encouraging, and we expect to complete further acquisitions in the remainder of this financial year.
And therefore, I maintain our guidance of $350,000,000 to $450,000,000 for the full financial year. A little more insight into our operations. Just in the U. S, first, we generated strong organic revenue growth in the quarter, you can see from the numbers up 10.6%. That's included price inflation, which has increased to around the 3% mark.
With volumes similar to the first half and acquisitions contributing a further 0.8%. That was widespread across all business units they continue to generate good organic growth, it was widespread geographically also. We saw strong, in the residential sales. Commercial markets improved. Industrial business grew particularly well.
And benefited, from a small number of larger projects. And therefore on a year to date basis, our organic revenue growth by end markets. If I just run through the 4 end markets, firstly, residential, we have growth of 10% to 11% versus the market growth of 7% to 8%. Commercial is 6% to 7% for ourselves versus a market of around 5%. Civil and infrastructure continued to do well.
We're up about 11% with the market growing at 4 to 5 and industrial generated around the mid teens organic growth with the market at around the 10% level. Gross margins ahead due to, again, continued mix of better pricing and improvement in vendor rebates. Due to the strong volumes we achieved. And as I said, operating costs continue to be well controlled, leading to good flow through. So all in all, that leads to a trading profit in the U.
S. Of $334,000,000, that's $57,000,000 ahead of last year, which is a good result. In the UK, we're reporting life cycle sales to help you better understand how the ongoing business is performing given the closure of brunches and the exit of the low margin wholesale business towards the end of the first half. Like for like sales were up 0.7%. That includes price inflation of around 3% in the UK, And in total, you can see that organic revenue declined, 10.9%.
Given the back of mix of business in Q3 margins, as we exit that lower margin business, you can see that gross margins were ahead, though. I would say that underlying margins remain weak in the UK and costs in the Plumbing and Heating business have reduced, as a result of our restructuring actions. And therefore trading profit of $23,000,000 came in at $9,000,000 lower than last year at constant exchange rates. Canada and Central Europe grew well. Organic revenue growth of 6.5% includes inflation of 2% and gross margins ahead.
Giving a trading profit of 11,000,001,000,000 ahead of last year at constant currency. That's always around the regions and the Q3. Turning to the outlook, since the end of the period, since the end of April, we're clearly some 6 weeks further on. Revenue growth has been in line with the 3rd quarter, and clearly given that 3rd quarter downturn, the group is well positioned. For a successful outcome, for this financial year.
So I think that's, enough for me. Operator, many thanks. If I can hand over back to yourself, and we'll open the lines up for questions
If you're using a speaker phone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, Okay. We will now take our first question from Paul Roger from Exane BNP Paribas. Please go ahead.
Hi. Good morning, everybody. So just two questions for me, please. Firstly, when looking back to what you said in H1 stage, you mentioned that the comps become progressively tougher in H2. Obviously, we haven't seen any real impact of that in Q3.
Does this suggest that actual trading is probably stronger than you originally anticipated when you last spoke? And also, when you say successful outcome, do you imply by that that you are comfortable with consensus and maybe you can do a little bit better? And then the second question is on the US to opt through. Obviously, at 13%, that's the best, I think, for some time. Presumably, that's benefited from the 3% price increase.
And I guess the question is whether that's the new norm going forward? Thank you.
So I think the first, I think there were three questions there. The first one was, half 1 comps versus half 2. And the question around tougher comps. That's true. I think trading was a little better than we expected.
We did actually also indicate that the half year that we exited the half year, in line with q 2. I mean, q 2 was growing around the 9%. So we're probably overall about 1% stronger than we expected just to put it into context. So I think that's certainly, you know, in line, with sort of normal course of a of a large business. You know, why we 1% better?
We have had slightly better volumes, and a little bit better inflation. I am very pleased how we continue to progress on gross margin. The team continued to work. We've always said we need to grow the top line and outperform the market whilst improving gross margin. So continue to be pleased with the, the gross margin, progression.
Then your second point, Paul, was on consensus. The the notes I've certainly seen that's already out this morning have, have nudged up, more, I think consensus couple of percent? Yes. Sort of 20 to 30,000,000 ish. So, I mean, that that's sort of, I think, where, some of the sell side are taking the numbers And I think in terms of the flow through, how is the flow through of just north of 13% been achieved?
From those families that I've talked about, really, we've had good, strong top line, good gross margin and well controlled costs. The the comps the year before, if you remember, q through, q 3 last year, was, we we let costs get ahead of ourselves in Q3. We invested ahead of the curve in Q3. So I think the comps were a bit easy to be fair. But I don't think it changes our guidance.
I think most of you always have a laugh at my expense that I, at the beginning of the year, said that we would be high single digit. I think, you know, we've always said as a group, as I have, in good top line and in good markets, we should be low single digit. That's exactly where we are. I don't think there's any change for the longer term guidance on that basis.
Yeah. It does. I mean,
I just I mean,
it's obviously an impressive performance. When you look at what some of your peers are talking about in terms of the US labor market being quite tight. It doesn't look like you're really seeing any big impact of either higher inflation, or any any impact of that tightness may be impacting the ability of your customers to actually do the work, and therefore your demand. So, I mean, that's that's why I asked the question. It's sort of, little bit more optimistic than some of your peers?
No, Sean,
I mean, I think we've always said before that an inflationary environment on labor is an opportunity because, you know, we are a labor saving device for our customers in many respects. So as we can deliver better service, you know, to the right place at the right firm with the right products, you know, to what they need. You know, that's how they value to them. It has a value to us, and therefore, whilst our U. S.
Team in particular are managing the tight labor inflation market, if you like, in the overhead line, We also see it as an opportunity to better serve our customers and help our customers be more efficient too. So so you're absolutely right. It's, it is one that just happen in the quarter. Of course, what you're seeing in Q3 is is the result of some good work in the in the prime months, getting ready for for these types of environments and having a flexible business model that can cope with the growth. So I'd agree.
Yes, that's great. Thank you.
Thank you, Paul.
Will now take our next question from Emily Biddoff from JP Morgan. Please go ahead.
I've got 2 questions, please. And the first question just on price. Obviously, it's a little bit better than the 1% to 2% you've previously guided to What are the drivers of that? And can we sort of assume that that continues going forward? And then secondly, on those industrial orders that you called out, when do they sort of come through and can we sort of put a much more in the pipeline of those?
Or should we sort of assume that industrial revert sort of closer to the market growth that you referred to? Some time soon. Thanks very much.
Good morning, Emily. So on price inflation, yes, it's a little bit stronger than we expected. A lot of that has come through inflation through the supply chain, which, clearly, we have, passed through. I mean, at the simplest level, that's what's happening we continue to keep a close eye. I mean, of course, the result is that it continues to be an interesting place.
I think back to that flexibility of business model, we have to be nimble. So when we get increases, we work with our customers to, to ensure that they're getting valued, but we also don't get squeeze. So I think where we continue to demonstrate value to the customer, we we clearly have passed those through. We've also got the tariff issues that have been around for months I mean, there's an absence every week, the latest one a couple of days ago, we continue to watch those. I think where they are market wide, That's fine.
I think if there was any, that are differential between our suppliers and our competitor suppliers, those are clearly the ones that we need to keep an eye on. But at the moment, again, I think we've said in the past, you know, our our imports are about 500,000,000. So Again, I think that sort of scales the size of the issue. But the team are more conscious of where we're getting, supplier cost push on to us, working to clearly help our customers pass that through, and get them to win the job still. And again, well, that's the end result of that.
Of course, you ended with U. S. Inflation, which is what you're starting to see, and you're starting to see the Fed, react to that. So I think how that pans out will be interesting from an economic perspective in the U. S.
I think your second question was on industrial orders yeah, industrial just tends to be lumpy. So all we're trying to signal there is, you know, I think our numbers are up significantly in Q3. I've said, half year is about, 15%. I think our Q3 Nick was about 20 something percent. It it's just lumpy.
It just is, and some months it'll be under the market. So, I think all we're trying to say there is is that's the business we're in. The actual orders that are quite lumpy will run through Q3 and into Q4 mark. Of course, our job is to continue to fund new orders, but but those specific orders that are a bit, a bit lumpy at the moment, run through Q3 and Q4. Thank you.
Perfect. Thanks very much.
Thanks. We will now
take our next question from Phil Roseberg from Bernstein. Please go ahead.
Yes, good morning, everyone. A couple of questions for me, if you don't mind. Just one on the acquisition spend. I think you talked about, well, I think in the U. S, it was 0.8% and in the first half, I think we were talking about $120,000,000, if I recall.
So this seems quite a low number compared to the guidance that you are maintaining for the full year. Could you therefore, just to remind us of where you are year to date on acquisition spend and what sort of expectation we should have therefore for the 4th quarter? That's the first question. The second question is just going back to your drop through. Impressive drop through.
I think you mentioned the relatively easy comps compared to previous year. Mainly because I think you had a number of investments going through into your accounts last year. How should we think about investments going forward? Do you have, investment number of investments that will or could come back into the accounts in the next few quarters or should we believe that those are basically done for now?
So on acquisitions, at the end of April was 124,000,000, and, in terms of spend of dollars We've done a further exit at the end of the quarter, and I'm maintaining my guidance of 3.50 to 4.50. I think as we've discussed, fail in the past, you know, that's likely to be wrong. But it's my best guess today. I mean, deals will either close or they won't. And there are a number of deals within that number.
It's not one deal, and therefore, you know, that's my best guess set here today. We're not gonna push a deal, just because of an accounting period end. And we will clearly only do the deal, if we believe it's value created and sensible for our shareholders. Therefore, it probably tells you that we're in the latter stages of a number of deals but, as ever with these until you close them, you know, you haven't closed them. So I'll best go into the moment.
It's 350 to 450. And we'll clearly keep you posted as those progress as we always have them. In terms of the comparatives comment, The Q3 was actually due to a labor investment. It was actually we've increased our headcount, in Q3 ahead of the a bit quicker than we, would have wished in hindsight ahead of the, revenue coming through. So actually wasn't, acquisitions, related but still picking your question up, which, is still absolutely valid, Phil.
We tend to think of acquisitions. We've sort of guided in the past acquisitions in those acquisitions should flow through. You clearly generally have year 1 acquisition costs, to integrate it often depends on the acquisition in truth. So again, as we guide through the acquisitions, particularly if we finish these by the year end, we'll give you a little more color on the specific acquisition, but we always are pretty cautious about the first one guidance, the year one guidance, and then they become accretive. Thereafter.
Again, just to remind you, we generally buy long term relationships as a business. It's more different to manufacturing businesses where you cross together a couple of factories and drive out synergies in year 1, you know, we are buying people and relationships when we do acquisitions as a whole. And therefore, you know, I tend to think of us as buying a long term annuity, because we are buying customer relationships. We're buying people that want to work for Ferguson and folks and want them to work for us, and have careers with us for many, many years. They're often family, owners or sons or daughters.
That are part of this. So they tend to be a longer, germination in terms of getting into the deal, and therefore, a much longer relationship of the of the back end. We're in essence buying a lot of goodwill, and you see that through our accounts. Good will can walk out the door if you don't get the right chemistry, at the front end. It can walk out the door quite quickly.
On the other hand, it's extremely valuable. If you can retain it and develop for a number of years, which is what we do, of course.
So you're right. There is a market. There is a wider impact on drop through from general investment in things like technology. That's in our guidance for flow through. So that's why we think that 10% flow through is good in this business that would include the investment that we're making in the business on an organic basis as well.
Quickly clarify one point there. Should we so if acquisitions do ramp up, it will have a dilutive effect on your drop through, just through the sort of the mechanics of integrating businesses and so forth?
It will depend on the acquisition, Phil, unfortunately. If we're buying lots of businesses, where we can integrate back offices, then clearly there are synergies to be had depending on other businesses. It really depends on the type of business that we buy. So as as we, come through the year end and as we do these deals, we'll, we'll clearly keep fully informed. I think in the scale of the group, you shouldn't really be expecting too much, at all.
Very clear. Thanks very much.
Thanks, Phil.
We'll now take our next question from Howard Seymour from Numis. Please go ahead.
Thank you. Good morning, gents.
Good morning. And just maybe just a really question on the UK, Mike, you alluded to the fact the gross margin was actually a bit better, but then said the underlying margins remained weak. Is that just a product of timing in terms of the cost you're taking out? Or is there something more to that? Thanks, Howard.
Yeah. No, if you think of us putting a line through some some revenue at the top line that was low gross margin. And just the math of the business that remains behind means our gross margin So I wasn't quite really talked about the gross margin going up as a whole. That will happen as you as you lose, you know, much lower gross margin business. And therefore, the math kicks up.
What I was saying though is if you excluded the that business out of both sets of numbers, there's not a lot happening around the gross margin of these underlying go forward business. We have taken costs out. So under gross margin, we've taken costs out to cope with reluving that low margin, low gross margin business, because clearly that did contribute to some absolute dollars of gross margin, you therefore have to take cost out commensurate with that loss. It's not more. And that's the reduction in operating cost I mean, Mark Gibson has been in now 3 months.
He's doing a good job and he's very, very focused on now with the business that's, on a go forward basis, you know, just getting above market growth, whatever the market does, going above market growth and just slowly nudging up that gross profit. That's what we need to do in the UK now going forward on the business that's going forward. Yes. You do. Thank you.
And could I also just ask, because you you lifted the price inflation about 3% again. Is that across the piece? So is that quite specific in terms of commodity pricing? No, generally across the piece.
Please. Okay. Lovely. Thank you very much.
Thanks, Ed.
We'll now take our next question from Cole Green from Credit Suisse. Please go ahead.
Yes, thanks very much. Just a couple from me. Just firstly, on the vendor rebates that you mentioned in terms of helping the gross margin, can you just clarify? Are they relatively linear in terms of how they pay out, or do you see any kind of step changes once you hit certain hurdles and volume, targets That's the first question. The second question, just in terms of Canada And Central Europe, the trading profit growth was relatively limited despite the gross margin expansion.
Can you just talk about the cost environments in Canada, please, specifically? Sure.
Thanks, Carl. Yep. Fender rebates is a mix actually, so it's quite an helpful one. So, there there are some tiers in there. So clearly, as as you sell more, and your part, you know, your partners on the vendor side continue to see more volume.
You do get some keyer rebates. But it's a mix It is a whole mix in now actually across all of our businesses as we've grown up with different vendors and different different rebate suit, different partnerships that we have with the different vendors. So, I recognize that's not particularly helpful answer, but it's it's, it's where we are. So basically
so sorry. Just to
so so, basically, so sorry. Just to so so, basically, it wasn't
a disproportionate benefit for the third quarter. Yeah.
No, there's a little bit in there. I mean, I think the important thing is choosing the right vendors and the vendors. It's a little bit like what I said on M and Ed, you know, having the right partners on both the customer and the supplier side is incredibly important. I think, you know, myself included at times, we'll all forget you know, growing a business at these sorts of rates, doesn't our take some management? I've got a history, you know, of of closing some businesses.
I can tell you that's that's, that's the skill set too, but growing a business doesn't, you know, it doesn't just come as easy as it's put in your lap It's about continued, relationships on both outbound and inbound. So it's a case of working both of those hard. To be able to grow a big business, with a big number on the top line and still ensure profitability at the same time. If I can move on to Canada, the Central Europe, yes, Canada, I agree with you. I think the drop through in Canada on the face of it was disappointing.
I would say generally in kind of the environment's good. There is a little bit of seasonality in Canada. And I never liked talking about the weather. It's such a big business. There was snow on the ground because I actually landed there at the end of April.
There was actually snow on the ground at the end of April, with beautiful sunshine. So they did have a a late winter in Canada. That meant that the, HVAC season kicking a little bit late. I think if you join Q3 and Q4 together, when you see Q4, there is nothing changed in Canada And the max does does point to a lower flow through. I'm not so worried about that.
I think when you get the half year two numbers, That'll be in line with what we would expect. I think
it's just a bit of
a timing issue in Canada. And therefore, there's no real cost issue. It's just that we didn't really see the top line kicking in as quick as we fall through Q3. We're we're seeing, that come back in Q4. Again, just makes me slightly careful that the math doesn't drive as nuttier because the numbers are quite small, so a small change in the absolute dollars changes percentages quite a lot.
But nothing fundamental in Canada changed since the half year. And I continue to be optimistic about the Canadian business and the place that Kevin and the team are taking that to.
Great. Thank you very much.
We will now take our next question from Robert Ethan from Goodbody. Please go ahead.
Good morning, everyone. If I just focus on the U. S. First, just going back to an earlier question as well. Just in relation to potential operating cost headwinds in the U.
S, Firstly, can you just give us, you know, guidance on kind of the quantum of your, your labor costs in the US, energy related costs? And on each of those categories, what is the underlying cost inflation that you are seeing in them currently and what are your expectations as we go into the coming quarters. So that's my questions on the U. S. And just on the UK, can you just give us a bit more color on the segmental performance of the UK business by the main segments, I.
E, commercial, red, or am I plus you're seeing on the ground in each of those.
And touch on market search? Yes.
So UK, This is Mark here, Robert. Just to say, yes, I mean, yes, morning. Commercial fine. But I think the underlying plumbing and heating business is where we're finding life toughest. There we're not not being helped by the RMI market and the business is overwhelmingly RMI in new construction in the UK is only 7% or 8% of sales.
So I certainly think that that plumbing heating market has not got any easier So we're still finding it tough. The second question I mean, labor inflation is still of the order of about 4% in the cost base. And that's been fairly meaningful through the year. We're still seeing pressure, particularly in areas like drivers, and distribution center staff. Those are particular tough areas.
But as Mike says, you know, actually that labor cost inflation is in strange way good for the business because it helps our customers use our services.
And if I could just go back to the UK for a second, if you wouldn't mind one last question. To give them what the majors have been doing, you know, yourself kind of consolidating your network, making them more efficient, others other majors are doing something doing something similar. Are you seeing any consolidation among the independence as the majors just focus on getting right size in their networks?
No, I mean, I think what the the public companies obviously is is in the public domain. I don't think we're seeing significant change, other than than what the public, you know, large companies are doing, including ourselves, I think, you know, how much you need of bricks and mortar going forward, in the UK market we clearly need to look at and make sure that we have our supply chain. Correct. You've already seen that we are closing our national distribution center and moving to our other DCs in terms of our supply chain. But no, I don't think we've seen a behavioral change, I mean, clearly the market.
I mean, we're 1%, inflations up 3. So that tells you that the volume is is down to flat. So, there's nothing, nothing fundamentally changed. We're not I mean, frankly, we're not expecting a lot from the market either. If the market ticks up, that's great.
We are still in self help territory. We have been and will continue to be. And I think that still provides us with significant opportunity, as we move forward
Okay. Thank you guys. Thanks.
Thanks.
We'll now take our next question from Greto Kupitsch from UBS. Please go ahead.
I've got a few questions as well. I guess coming back to the U. S. Growth, as you said, obviously, very impressive at, over 10%. I want to understand if there are any factors that you want to call out temporary.
It sounds fair. I think you kind of alluded to the industrial side. I get that in the fourth quarter, you look like it looks like you're continuing to flip that growth, but obviously, I think the question is increasing since about next year, looking at incentives to sort of step down, I want to understand what could justify that kind of step down in growth other than just obviously from? Second one is maybe easier. Can you just update where you expect leverage to end of the year?
You said 0.9 pro form a Is that broadly where you should expect land of a subject to the M and A that you're talking about materializing?
Thanks, Gregor. Yes, so let me take the second 1 first. Leverage, I'd expect, I mean, if we're a 0.9 pro form a at the end of Q3, we generate cash in Q4, I'd expect leverage to be, just from the, you know, the underlying business and with those acquisition and the CapEx guidance numbers probably expect that to fall a touch from the point 9, maybe point 8 somewhere around that type of leverage. The growth question, Again, the market will do what it what it does, Greg, I think we've always said our job is to continue to outperform that market. You know, 200, 100, 1300 basis points.
That will clearly vary quarter on quarter. But overall, that's our job to outperform that market. The market's all good at the moment. If I look at, any of the sort of indexes that we tend to look at, which you know, and are all public, both for residential. You know, we look at permits, we look at starts, you know, house prices, Kay Shiller, and the GACHS LIRA, but very little has actually changed since we last spoke to you at the half.
I think that's also true in our view. The Q3 was slightly better than we expected, but I think everybody's everybody recognizes that's 1% on a large business and clearly that has a as an impact, but I wouldn't say fundamentally that the markets have changed, since the half. And certainly, as we look at the forward indicators, including our own order book, and some of the commercial market data. Again, we don't see a significant change in those markets. So I think for growth, rather than an absolute figure, which, you know, is clearly difficult because it will depend on the market.
I think we will just continue to look at that outperformance. I think your other part of that question was, is there anything specific of them we've already mentioned? The answer is no. I think it's it's been good across all of the businesses. I think all of the businesses, I think John was here probably taking all of the businesses are firing.
That might be slightly unusual, but it is it is sort of our job to make sure all of the businesses are at the same time. So, you know, you do normally in most businesses have one that is is having issues on the top line for various reasons. You know, we don't today and therefore, you know, the growth is good, and we should take advantage. Of working with our customers in what are good markets. Understood.
Thank you very
much. Your question on sort of why don't you just flow through current growth rate into next year, remember, Greg, this is a business with 5 weeks of all the visibility. So, there's a fair a fair amount of noise in the world at the moment with tariffs and other things. You know, some, some people think that, the U. S.
Economies had a fantastic run and that will come to a grinding halt anytime. So I don't think we believe that, but But even so, I think there's a fair degree of caution about next year in a business which doesn't have a huge amount of visibility. So I think consensus next year for organic is just over 5%. I mean, I'm sure people have a look at their numbers, but I don't expect people to get carried away on the growth rate next year.
We'll now take our next question from Manesh Barriah from Societe Generale. Please go ahead.
Yeah. So I had a question on the gross margin. So you said 1 third of the gross margin improvement was coming from the UK sale of wholesale business So just trying to understand, I mean, what does it mean? Does it need, like, 15 basis point improvement to the group is coming from the UK sale of wholesale business? And also you can clarify, I mean, how much the gross margin improvement was in the U.
S. Business?
Yes. Thanks, Manish. So yes, what I was trying to say about the 40 bps across the group, back to Howard's question, about a third of those 40 bps and call it 15 to keep the math easy, but is a UK issue and then 25 bps, therefore, is the remainder of the group, call it North America. So US and Canada, we don't split that out separately, but, given that North America is by far the largest, sorry, given that the US is by far the largest, you can clearly put that against the U. S.
So, yes, I think your, your assumptions are correct. But it's the it's at the low margin U. K. Business, that's the 15 bps improvement.
So so is this contribution 25 basis points will be equivalent to the improvement in the business or, the improvement will be slightly less, because, more contributing to the business?
I'm not sure I understand the question. So I think what we're getting to is that the U. S. Margins are up with the Canadian margins overall 25 basis points on the gross margin. Okay.
The second question is on your net debt. I mean, you are seeing something like 0.8x. That seems to be slightly higher side, I would say, but can you clarify, I mean, is there something that has gone up in terms of cash flow, CapEx, or something like that? Because, because it seems like it will be something like 1,500,000,000 in of net debt, you are talking about 0.8 tax. And I have something like 800,000,000 in my model.
So there's quite a lot of bit of difference sir. So just trying to figure out how why that why there is so much of difference.
Well, maybe Manish can you can pick up with Mark later. I'll give you a specifics. I think our guidance has been clear in terms of, you know, what's happened during the quarter We've then obviously done we will do the special dividends after the quarter. And we finished the buyback and then we generate the cash as normal from Q4, and then we will outflow, for CapEx and the acquisitions our forecast, about another, sort of 200 to 300. So maybe Mark, you could pick up
I'll give you a call, Manish.
That's fine.
Yes, no problem. Yes, that will be great.
Will now take our next question from Arnold Layman from Bank of America. Please go ahead.
Thank you very much. Good morning, gentlemen. Two questions for me, hopefully, fairly sharp. Firstly, I'd like to come back on the tariffs, risk. I think you mentioned that you are importing only 500,000,000 Is that in dollar or in sterling?
And also, I guess, beyond the actual imports, which are actually quite small, do you have you identified any risk in terms of your supply saying because I'm assuming that some of your U. S. Suppliers are importing some of their product as well. So does it create upside risk to your cost base? Heading into next year based on what has been announced so far.
That's my first question. And my second question is on the share count. Where do you expect it to land after the share consolidation and the buyback program?
Thanks, Tanya. Yeah, in terms of imports, I think, in dollars, and those are our direct imports The, of course, the the issue on imports, is also our supplier imports because whilst we deal directly with a number of American suppliers, I'm sure that some of that product may well be coming over the pond. And therefore, overall, you know, there might be from 20 to 30% overall of our imports, sorry, of our of our products that's imported our best guess. You don't always know because there is there is a, there is an element of American suppliers that's that's quite difficult to get behind. I think the important thing for Agano is where that if there is cost pressures on imports, wherever they come from either directly through vendors.
If that is market wide, then actually we will react to that as well with the competition because it just puts increased cost pressure into the market, which we believe we are in a good place to help our customers pass that on into projects. That's one of those 2, if you still have to import. I think where we continue to work is if there is an element or where there are elements. And, of course, it's a it's a continual feast because the the game keeps changing, you know, almost daily at the moment. Where there are any differentials between us and the competition importing product.
So I suppose a lot of products are getting imported into the U. S. You can see that from the public statistics. So I think if it's industry wide, it's, it's something we'll we'll calculate if it's specific. The the team are on the case, but but it is a change in picture.
I think on the, Shaikan And the I think the average number at the end of this year is, 246,000,000 because you take a weighted average through the year. And I think the share count, the sort of spot share count at the end of the year, is 232,000,000
And that's including the buybacks?
Yes, that's all. So that's assuming the buyback for this and everything's happened. So yes, the spot checkout, I would expect at the end of the year to be $232,000,000 shares.
Thank you very much.
Thanks, Alan. Okay, I think we've got time for one last question, operator if we could.
Perfect. Thank you. Now take our last question from John Messenger from Redburn. Please go ahead.
Hi, Mike and Mark. Sorry. There's one point of clarification and a couple of questions if I could. Sorry. First was earlier to Paul Rogers question when it came to drop through and the long term drop through, Mike.
I may have misheard, but for the benefit of the transcript in the future, I think you talked about the long term view of low single digit drop through. Can I just clarify that I think it was low, on medium to high single? Just so we're all clear about what the views group's view is, kind of on a longer term basis given where the group's margin is and where gross margins sit. So that was just one to clarify.
Thanks, John. I've clearly messed up by your very questions. I've got to let Mark answer this one. Low double digit. Sorry, Paul, if I said that incorrectly, it is definitely, in good markets.
It will be a double digit. Thanks.
And
there you have two questions. Just coming back from this point around tariffs and and your business units relative to competition like. Can I just dig a little bit? When you think about the nature of what you're distributing and what some of your peers distribute. It that that's point you made around, you know, where you may have a seen by the different supply chain and may have a greater reliance on imported goods.
Would I be right to think that that's probably most pertinent in HVAC,
or are
we talking here in Waterworks just in terms of how you're buying I'm just thinking OEMs versus replacement part kind of come not commodity, but, yeah, the non branded stuff that you would tend to sell through HVAC is that where the issue is, if you had to look at the group? And then my final question was just around acquisitions and obviously recent consolidation. Cheesy one, but did you have a look at Moscow given the the restyle? And and I assume you probably had problems doing it in parts of the overlaps, but if you could give us a bit of a flavor as to whether that was something that came across your desk and why it didn't stack up? That would be great.
Want to apply the tariffs issue. I don't think I see it as a large issue, at all for the group. It's one of those issues we continue to manage. So it's not certainly as big an issue as the headlines, in newspapers, for us. So I don't think it's specific to areas.
I think the one area that actually you might argue the other way, which is where we, if you look at our private label percentage, but we sell, compared to 1 or 2 other large, publicly quoted companies, you know, we still have room to go on private label, we've been very clear about that. Therefore, what might argue that, you know, we import somewhat less of our cogs than, 1 or 2 others. And that doesn't mean we don't manage the issue. But I wouldn't want to overplay the issue. It's just an issue like many others that we manage on a daily basis.
And I don't think it's specific, particularly to any. Any particular area. And in fact, owned brand of course crosses a number of those business units in the U. S.
Correct.
And yes, John, it was a very cheapy question. And yes, you'd expect us to look at everything in the space, but not comment on it publicly.
Sorry. We'll try. Thank you very much.
Thanks very much.
Thank you.
Okay. Operator, thank you very much. Clearly. Appreciate you all joining, this morning and taking an interest in the continued Ferguson story. If there's any follow-up questions, please do get in touch with you now and myself.
Mark and Nikar. Thanks for your interest and have a good day. Thanks.
This concludes today's call. Thank you for your participation. You may now disconnect.