Good day, welcome to the Ferguson full year 2018 quarter one interim management statement conference call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mike Powell, CFO. Please go ahead.
Thanks, Keith. Good morning, everybody, welcome to the Ferguson conference call covering our Q3 2018 results. You've got myself, Mike Powell, I'm here joined by Mark Fearon and Nick Hopkins from the IR team that you will all know. First of all, let me give you the highlights. 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 a further 0.9 to the growth rate, bringing the total growth at constant currency to the 8% mark. Gross margin performance was good. Apologies, we just had a fire alarm test. Gross margin performance was good. We continue to make incremental improvements across the business.
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 U.K. The rest of it clearly, therefore, the improvements in North America gross margins. We control operating costs. They continue to be well controlled. Trading margin came in at $356 million. That's 16.3% ahead of the last year's numbers at constant exchange. In terms of net debt at the end of the quarter, that was in line with expectations of GBP 260 million. 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 million, through the share buyback program.
That brings the total amount purchased in shares to 6.7 million, which is $482 million at the end of the quarter. Since the end of the quarter, you'll also be aware from recent RNS 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 billion will be paid on the 29th of June. Whilst net debt to EBITDA at the end of the quarter was around the 0.2 times leverage. If you add both of those elements back to that number, we're operating at a pro forma net debt to EBITDA of around 0.9. We therefore remain with a very strong balance sheet. There were no acquisitions in Q3, though we have completed a small one in the U.S. since the end of the quarter for GBP 8 million.
However, the pipeline for M&A remains very encouraging. We expect to complete further acquisitions in the remainder of this financial year. Therefore, I maintain our guidance of $350 million-$450 million 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 included price inflation, which has increased to around the 3% mark, with volumes similar to the first half, and acquisitions contributing a further .8%. That was widespread across all business units. They continued 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.
Therefore, on a year-to-date basis, our organic revenue growth by end market, if I just run through the four end markets. Firstly, residential, we have growth of 10%-11% versus the market growth of 7%-8%. Commercial is 6%-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%-5%. Industrial generated around the mid-teens organic growth with the market at around the 10% level. Gross margins are ahead due to, again, continued mix of better pricing, and improvement in vendor rebates due to the strong volumes we achieved. As I've said, operating costs continue to be well controlled, leading to good flow-through. All in all, that leads to a trading profit in the U.S. of $334 million.
That's $57 million ahead of last year, which is a good result. In the U.K., we're reporting like-for-like sales to help you better understand how the ongoing business is performing, given the closure of branches and the exit of the low-margin wholesale business towards the end of the first half. Like-for-like sales were up .7%. That includes price inflation of around 3% in the U.K. In total, you can see that organic revenue declined 10.9%. Given the better 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 U.K., and costs in the plumbing and heating business have reduced as a result of our restructuring actions. Therefore, trading profits at $23 million came in $9 million lower than last year at constant exchange rates.
Canada and Central Europe grew well. Organic revenue growth 6.5%, includes inflation of 2%, gross margins ahead, giving a trading profit of $11 million, $1 million ahead of last year at constant currency. That's the whiz 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 six weeks further on. Revenue growth has been in line with the third quarter. Clearly given that third quarter outturn, the group is well positioned for a successful outcome for this financial year. 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.
Thank you, sir. If you'd like to ask a question, please signal by pressing star one on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, please press star one to ask a question. We'll pause for just a moment to allow everyone an opportunity to signal for questions. Okay, we will now take our first question from Paul Roger from Exane BNP Paribas. Please go ahead.
Hi. Good morning, everybody. Just two questions from me, please. Firstly, when looking back to what you said in H1, you were mentioning that the comps become progressively tougher in H2. Obviously, we haven't seen any real impact of that in Q3. Does this suggest that actually trading is probably stronger than you originally anticipated when you last spoke? Also, when you say successful outcome, do you imply by that you are comfortable with consensus and maybe you can do a little bit better? The second question is on the U.S. drop-through. Obviously, 13%, that's the best, I think, for some time. Presumably, that's benefited from the 3% price increase. I guess the question is whether that's the new norm going forward. Thank you.
Paul, thanks very much. I think there was three questions there. The first one was half one comps versus half two, 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 Q2. Q2 was growing around the 9%, so we're probably overall about 1% stronger than we expected, just to put it into context. I think that's certainly in line with normal course of a large business. Why are 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 continue to work. We've always said we need to grow the top line and outperform the market whilst improving gross margin.
I continue to be pleased with the gross margin progression. I think your second point, Paul, was on consensus. The notes I've certainly seen that are already out this morning have nudged up, Mark, I think consensus a couple of percent?
Yes, sort of $20 million-$30 million-ish.
That's where some of the sell side are taking the numbers. I think in terms of the flow through, how is the flow through of just north of 13% been achieved? From those factors that I've talked about, really, we've had good, strong top line, good gross margin, and well-controlled costs. The comps the year before, if you remember Q3 last year, we let costs get ahead of ourselves in Q3. We invested ahead of the curve in Q3. I think the comps were a bit easier, to be fair. 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 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. Paul, does that answer your questions?
Yeah, it does. It's obviously an impressive performance. When you look at what some of your peers are talking about in terms of the U.S. labor market being quite tight, it doesn't look like you're really seeing any big impact of either higher inflation or any impact of that tightness maybe impacting the ability of your customers to actually do the work, and therefore your demands. That's why I asked the question. It's sort of a little bit more optimistic than maybe some of your peers.
No, sure. I think we've always said, Paul, that an inflationary environment on labor is an opportunity because we are a labor saving device for our customers in many respects. As we can deliver better service, to the right place at the right time with the right products, to what they need, that has a value to them, it has a value to us. 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. You're absolutely right. It is one that doesn't just happen in the quarter, of course.
What you're seeing in Q3 is the result of some good work in the prior months, getting ready for these types of environments and having a flexible business model that can cope with the growth. I'd agree.
Yeah, that's great. Thank you.
Thank you, Paul.
We will now take our next question from Emily Biddulph from JPMorgan. Please go ahead.
Morning, guys. I've got two questions, please.
Yeah.
The first question just on price. Obviously, it's a little bit better than the 1%-2% you previously guided to. What are the drivers of that, and can we assume that continues going forward? Secondly, on those industrial orders that you called out, when do they come through, and Is there much more in the pipeline of those, or should we assume that industrial reverts closer to the market growth that you referred to sometime soon? Thanks very much.
Morning, Emily. On price inflation, yeah, it is 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 its simplest level, that's what's happening. We continue to keep a close eye. I mean, of course, the world today continues to be an interesting place. I think back to that flexibility of business model, we have to be nimble. When we get increases, we work with our customers to ensure that they're getting value, but we also don't get squeezed. I think where we continue to demonstrate value to the customer, we clearly pass those through. We've also got the tariff issues that have been around for months, frankly. I mean, there's announcements 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 is any differential between our suppliers and our competitors' suppliers, those are clearly the ones that we need to keep an eye on. At the moment, again, I think we've said in the past, our imports are about $ 500 million. Again, I think that sort of scales the size of the issue. The team are conscious of where we're getting supplier cost push onto us. We're keen to clearly help our customers pass that through, and get them to win the job still. Again, the end result of that, of course, is you end up with U.S. inflation, which is what you're starting to see, and you're starting to see the Fed react to that. 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. All we're trying to signal there is I think our numbers are up significantly in Q3. I've said our half year is about 15%. I think our Q3, Nick, was about 20-something%. It's just lumpy. It just is, and some months it'll be under the market. I think all we're trying to say there is that's the business we're in. The actual orders that are quite lumpy will run through Q3 and into Q4, Mark.
Yeah.
Of course, our job is to continue to find new orders. Those specific orders that are a bit lumpy at the moment run through Q3 and Q4. Is that okay, Emily?
Perfect. Thanks very much.
Thanks.
We will now take our next question from Phil Roseberg from Bernstein. Please go ahead.
Yeah. Good morning, everyone. Couple of questions from 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 million, if I can recall. This seems quite a low number compared to the guidance that you are maintaining for the full year. Could you therefore just remind us of where you are year-to-date on acquisition spend? And what sort of expectation we should have, therefore, for the fourth quarter? That's the first question. The second question is just going back to your drop-through, the impressive drop-through. I think you mentioned this was 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 a 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?
Thanks, Phil. Morning. On acquisitions, at the end of April was $124 million. In terms of spend of dollars, we've done a further eight since the end of the quarter, and I'm maintaining my guidance of $350 million-$450 million. I think as we've discussed, Phil, in the past, 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, that's my best guess sat here today. We're not going to push a deal just because of an accounting period end, and we will clearly only do the deal if we believe it's value creative and sensible for our shareholders. Therefore, it probably tells you that we're in the latter stages of a number of deals.
As ever with these until you close them, you haven't closed them. Our best guidance at the moment is $ 350 million-$ 450 million, and we'll clearly keep you posted as those progress, as we always have done. In terms of the comparatives comment, the Q3 was actually due to a labor investment. It was actually we increased our headcount in Q3 a bit quicker than we would have wished in hindsight, ahead of the revenue coming through. It actually wasn't acquisitions related. 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 that those acquisitions should flow through. You clearly generally have year one acquisition costs to integrate. It often depends on the acquisition, in truth.
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. We always are pretty cautious about 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 quite different to manufacturing businesses where you crush together a couple of factories and drive out synergies in year one. We are buying people and relationships when we do acquisitions as a whole. Therefore, 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 who 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.
They tend to be a longer germination in terms of getting into the deal, and therefore, a much longer relationship at the back end. We're in essence, buying a lot of goodwill, and you see that through our accounts. Goodwill 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 it for a number of years, which is what we do, of course.
Phil, 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. That's why we think that 10% flow through is good in this business, but that would include the investment that we're making in the business on an organic basis as well.
Okay, understood. Just to quickly clarify one point there. 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. As we come through the year-end, and as we do these deals, we'll clearly keep you fully informed. I think in the scale of the group, you shouldn't really be expecting too much at all.
Very clear. Thanks so much.
Thanks, Phil.
We will now take our next question from Howard Seymour from Numis. Please go ahead.
Thank you. Morning, gents.
Good how are you?
It was just really a question on the U.K., Mike. You allude to the fact that 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 costs that 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 revenue at the top line that was low gross margin, just the mass of the business that remains behind means our gross margin, as I wasn't clear, I really talked about the gross margin going up as a whole. That will happen as you lose much lower gross margin business, and therefore the mass kicks up. What I was saying, though, is if you excluded that business out of both sets of numbers, there's not a lot happening around the gross margin of the underlying go forward business. We have taken costs out, so under gross margin, we've taken costs out to cope with losing that low gross margin business. Because clearly that did contribute some absolute dollars of gross margin. You therefore have to take cost out commensurate with that loss, if not more.
That's the reduction in operating costs. Mark Higson has been in now three months. He's doing a good job. He is very focused on now with the business that's on a go forward basis, just getting above market growth, whatever the market does, getting above market growth and just slowly nudging up that gross profit. That's what we need to do in the U.K. now going forward on the business that's going forward.
Okay.
Does that help, Howard?
Yes, it does. Thank you. Could I also just ask, because you looked at the price inflation above 3% again. Is that across the piece, or is that quite specific in terms of commodity pricing?
No, generally across the piece.
Okay. Lovely. Thank you very much.
Thanks, Howard.
We would now take our next question from Carl Green from Credit Suisse. Please go ahead.
Thanks very much. Just a couple from me. 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, in terms of Canada and Central Europe. The trading profit growth was relatively limited despite the gross margin expansion. Can you talk about the cost environments in Canada, please, specifically?
Sure. Thanks, Carl. Vendor rebates is a mix, actually, quite an unhelpful answer. There are some tiers in there, clearly, as you sell more and your partners on the vendor side continue to see more volume, you do get some tier rebates. It's a whole mix in there actually across all of our businesses as we've grown up with different vendors and different rebates suit different partnerships that we have with the different vendors. I recognize that's not a particularly helpful answer, but it's where we are.
Basically, it wasn't a proportionate benefit for the third quarter year.
No, there's a little bit in there. I think the important thing is choosing the right vendors. It's a little bit like what I said on M&A. Having the right partners on both the customer and the supplier side is incredibly important. I think, myself included, at times, we all forget, growing a business at these sorts of rates does not take some management. I've got a history of closing some businesses. I can tell you that's a skill set too. Growing a business, it doesn't just come as easy as if it's put in your lap. It's about continued relationships on both outbound and inbound. 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, Central Europe.
Yeah, Canada, I agree with you. I think the drop-through in Canada, on the face of it, was disappointing. I would say generally in Canada, the environment's good. There is a little bit of seasonality in Canada, and I never like talking about the weather in 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. They did have a late winter in Canada. That meant that the HVAC season kicked in a little bit late. I think if you join Q3 and Q4 together, when you see Q4, there is nothing changed in Canada. The math does point to a lower flow-through. I'm not at all worried about that.
I think when you get the half year two numbers, they'll be in line with what we would have expected. I think it's just a bit of a timing issue in Canada. Therefore, there's no real cost issue. It's just that we didn't really see the top line kick in as quick as we thought through Q3. We're seeing that come back in Q4. Again, just need to be slightly careful that the math doesn't drive us nuts here because the numbers are quite small. A small change in the absolute U.S. dollars changes the percentages quite a lot. 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 Eason from Goodbody. Please go ahead.
Good morning, everyone. If I just focus on the U.S. first, it's going back to kind of an earlier question as well. Just in relation to potential operating cost headwinds in the U.S. Firstly, can you just give us guidance on the quantum of your labor costs in the U.S. and energy-related costs? 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? That's my questions on the U.S. Just on the U.K., can you just give us a bit more color on the segmental performance of the U.K. business by the main segments, i.e., commercial, res, RMI, and what you're seeing on the ground in each of those.
I'll touch on Mark's first.
U.K., this is Mark here, Robert. Just to say yes. Morning. Commercial, fine. I think the underlying plumbing and heating business is where we're finding life toughest. There, we're not being helped by the RMI market, the business is overwhelmingly RMI, new construction in the U.K. is only 7% or 8% of sales. I certainly think that that plumbing and heating market has not got any easier. We're still finding it tough.
For your second question, labor inflation is still of the order of about 4% in the cost base, that's been fairly uniform through the year. We're still seeing pressure, particularly in areas like drivers and distribution center staff. Those are particular tough areas. As Mike says, actually, that labor cost inflation is in a strange way good for the business because it helps our customers use our services.
If I could just go back to the U.K. for a second, if you wouldn't mind one last question. Given what the majors have been doing, yourself kind of consolidating your network, making it more efficient, other majors are doing something similar. Are you seeing any consolidation among the independents as the majors just focus on right-sizing their networks?
No, I think what the public companies obviously is in the public domain. I don't think we're seeing significant change other than what the public large companies are doing, including ourselves. I think how much you need of bricks and mortar going forward in the U.K. 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. No, I don't think we've seen a behavioral change. Clearly, the market, we're up 1% and inflation's up 3%, that tells you that the volume is down to flat. There's nothing fundamentally changed. 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 we will continue to be, and I think that still provides us with significant opportunity as we move forward, Robert.
Okay. Thank you, guys.
Thanks.
We will now take our next question from Gregor Kuglitsch from UBS. Please go ahead.
Morning. 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 as sort of temporary. I think you kind of alluded to the industrial side. I get that in the fourth quarter it looks like you're continuing to flip at that growth, but obviously, I think people are starting to increasingly think about next year, looking at some sense of some big step down. I want to understand what could justify that kind of step down in growth other than just obviously bumps. The second one is maybe easier. Can you just update where you expect leverage to end of the year? You said 0.9 pro forma.
Is that broadly where you would expect to land, obviously subject to the M&A that you were talking about materializing?
Thanks, Gregor. Yeah. Let me take the second one first. Leverage, I'd expect, if we're at 0.9 pro forma at the end of Q3, we would generate cash in Q4. I'd expect leverage to be just from the underlying business and with those acquisitions and the CapEx guidance numbers, probably expect that to fall a touch from the 0.9, maybe 0.8, somewhere around that type of leverage. The growth question, again, the market will do what it does, Gregor. I think we've always said our job is to continue to outperform that market. 200, 100, 300 basis points, that will clearly vary quarter-on-quarter. Overall, that's our job to outperform that market. The markets are good at the moment.
If I looked at any of the sort of indexes that we tend to look at, which you know and are all public, both for residential, we look at permits, we look at starts, house prices, Case-Shiller, and the JCHS LIRA. 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 recognizes that's 1% on a large business, and clearly that has an impact. 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.
I think for growth, rather than an absolute figure, which is clearly difficult because it will depend on the markets, I think we will just continue to look at that outperformance. I think your other part of that question was, is there anything specific other than we've already mentioned? The answer is no. I think it's been good across all of the businesses. I think if John was here, he'd probably say all of the businesses are firing. That might be slightly unusual, but it is sort of our job to make sure all of the businesses fire at the same time. You do normally, in most businesses, have one that is having issues on the top line for various reasons.
We don't today, therefore, 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, Gregor, this is a business with five weeks of order visibility, there's a fair amount of noise in the world at the moment with tariffs and other things. Some people think that the U.S. economy's had a fantastic run, and that will come to a grinding halt any time soon. I don't think we believe that, 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. I think consensus next year for organic is just over 5%. 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.
All right. Thank you.
We will now take our next question from Manish Beria from Societe Generale. Please go ahead.
I had a question on the gross margin. You said one-third of the gross margin improvement was coming from the U.K. sale of wholesale business. Just trying to understand, what does it mean? Does it mean 15 basis point improvement to the group is coming from the U.K. sale of wholesale business? You can clarify how much the gross margin improvement was in the U.S. business.
Yeah. Thanks, Manish. Yes, what I was trying to say, of the 40 basis points across the group, back to Howard's question, about a third of those 40 basis points, we call it 15 to keep the math easy, is a U.K. issue, and then 25 basis points therefore is the remainder of the group, call it North America, so U.S. and Canada. We don't split that out separately, but given that the U.S. is by far the largest, you can clearly put that against the U.S. Yes, I think your assumptions are correct. It's the exit of the low margin U.K. business, that's the 15 basis points improvement.
Is this contribution 25 basis points will be equivalent to the improvement in the business or the improvement will be slightly less because it's more contributing to the business?
I'm not sure I understand your question. 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. Up by 25. Okay, I understood that.
The second question is on your net debt. You are saying something like 0.8x. That seems to be slightly higher side, I would say. Can you clarify, is there something that has gone up in terms of cash flow, CapEx, or something like that? Because it seems like it will be something like GBP 1.5 billion in terms of net debt, you are talking about 0.8x, and I have something like GBP 800 million in my model, there's quite a lot of bit of difference. Just trying to figure out why there is so much of difference.
Well, maybe Manish, you can pick up with Mark later.
I'll be here.
On those specifics. I think our guidance has been clear in terms of what's happened during the quarter. We will do the special dividend after the quarter.
Yeah.
We finish the buyback. We generate the cash, as normal for Q4. We will outflow for CapEx, and the acquisitions are forecast about another sort of $200 million- $300 million. Maybe Mark can pick up.
Yeah. I'll give you a call, Manish. That's fine.
Yes. No problem. Yeah, that will be great. Yeah.
Thanks, Manish.
We will now take our next question from Arnaud Lehmann from Bank of America. Please go ahead.
Thank you very much. Good morning, gentlemen. Two questions for me, hopefully fairly short. Firstly, I'd like to come back on the tariffs risk. I think you mentioned that you are importing only $500 million. Is that in USD or in GBP? Also, I guess beyond the actual imports, which are actually quite small, have you identified any risk in terms of your supply chain? Because I'm assuming that some of your U.S. suppliers are importing some of their product as well. Does it create an upside risk to your cost base heading into next year based on what has been announced so far? That's my first question. My second question is on the share count, where do you expect it to land after the share consolidation and the buyback program?
Thanks, Arnaud. Yeah, in terms of imports, that's in USD. Those are our direct imports. Of course, the issue on imports is also our supplier imports because whilst we deal directly with a number of American suppliers, I am sure that some of that product may well be coming over the pond. Therefore, overall, there might be some 20%-30% overall of our imports. Sorry, of our products that's imported is our best guess. You don't always know because there is an element of American suppliers that's quite difficult to get behind.
I think the important thing for us, Arnaud, is where that if there is cost pressures on imports, wherever they come from, either direct or through vendors, if that is market wide, actually we will react to that as will 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 what tariffs do if you still have to import. I think where we continue to work is if there is an element or where there are elements, of course it's a continual feast because the game keeps changing almost daily at the moment, where there are any differentials between us and the competition importing product. Firstly, there's a lot of product that gets imported into the U.S. You can see that from public statistics.
I think if it's industry wide, it's something we'll cope with. If it's specific, the team are on the case. It is a changing picture. I think on the share count, I think the average number at the end of this year is 246 million because you take a weighted average through the year. I think the share count, the sort of spot share count, at the end of the year is 232 million.
That's including the buybacks?
Yeah, that's all in. That's assuming the buyback's finished and everything's happened. Yeah, the spot share count, I would expect at the end of the year to be 232 million shares.
Thank you very much.
Thanks, Arnaud. Okay, I think we've got time for one last question, operator, if we could.
Perfect. Thank you. We'll 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 Roger's 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 or medium-
Low double
to high single, just so we're all clear about what the group's view is on a longer-term basis, given where the group's margin is and where gross margins sit. That was just that one to clarify.
Thanks, John. I've clearly messed up by your very question, I'd better let Mark answer this one.
Low double digit. Sorry, Paul, if I've said that incorrectly, it is definitely in good markets. It will be.
Brilliant
low double digit. Thanks.
Great. Kind of gave it. The other two questions were just coming back from this point around tariffs and your business units relative to the competition, Mike. 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, that point you made around where you may have a rather 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? Are we talking here in Waterworks just in terms of how you're buying? Because I'm just thinking OEMs versus replacement part kind of, not commodity, but the non-branded stuff that you would tend to sell through HVAC. Is that where the issue is if you're to look at the group?
My final question was just around acquisitions and obviously recent consolidation. A cheeky one, but did you have a look at MORSCO given the Reece deal? I assume you probably had problems doing it in parts of the overlaps, but just 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'd be great.
Sure. Yeah, I don't want to overplay 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. It's not certainly as big an issue as the headlines in the newspapers for us. I don't think it's specific to areas. I think the one area that actually you might argue the other way, which is if you look at our private label percentage that we sell compared to one or two other large publicly quoted companies, we still have room to go on private label. We've been very clear about that. Therefore, one might argue that we import somewhat less of our cogs than one or two others. That doesn't mean we don't manage the issue. I wouldn't want to overplay the issue.
It's just an issue like many others that we manage on a daily basis, I don't think it's specific particularly to any particular area. In fact, own brand, of course, crosses a number of those business units in the U.S.
Great.
Yes, John, it was a very cheeky question. Yes, you'd expect us to look at everything in the space but not comment on it publicly. Sorry.
Worth a try. Thank you very much.
Yeah.
Okay, John? You okay with those?
Yeah.
Thanks very much.
Thank you.
Okay. Operators, 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. You know where myself, Mark, and Nick are. Thanks for your interest, and have a good day. Thanks.
This concludes today's call. Thank you for your participation. You may now disconnect.