Good day, and welcome to the Ferguson's Q3 Trading Update Conference Call. This conference is being recorded. At this time, I would like to turn the conference over to John Martin. Please go ahead..

Marian, thank you very much. And good morning, everybody. Welcome to the Ferguson conference call this morning covering our third quarter results for 2019. You've got me, it's John Martin here, and I've got Mike Powell, CFO; and Mark Fearon here with me as well.

Let me give you an overview of the results as I see them then Mike will give you more detail on operations and cash, and then I'll cover how we're seeing the markets. Firstly, overall, we grew revenue by just over 6%, including just under 3% organic growth.

That's lower than the first half, which we talked about at interim, and it's clear that our markets have slowed, though the Q3 growth rate should be seen, I think, in comparison with the very strong growth in the same period last year, and I'll come back to that in a few minutes. Second point. We continued to edge up gross margin.

That's very important to us, and as you know, a very consistent part of our playbook here at Ferguson. We're pleased with that, particularly given the impact of tariff changes on the pricing environment, which just make these things more challenging to deal with in terms of the volume of work we have to do.

Thirdly, we brought down our costs in line with the lower growth rate. That's not easy, but I am very proud of the team this time. They've done a very professional job here and put the business on a good footing to continue to deliver profitable growth if softer market conditions prevail. And fourthly, cash generation has been excellent.

Again, very strong free cash flow, good working capital control and careful capital investment all supporting the return of surplus cash that Mike will talk about in a minute. So to me, these four things are the highlights of today. Now Mike, you're going to go further in a bit more detail in our performance in the quarter..

Thanks, John. Good morning, everybody. All the numbers that I'm about to talk to you are for ongoing operations. Overall, group generated good revenue growth in Q3, 7.3% ahead in the quarter in constant currency and that includes 4.6% from acquisitions.

As we highlighted at the half year, revenue growth did moderate in the quarter compared to the first half and organic revenue growth in Q3 was 2.7% and that growth rate was pretty consistent across the three months of the quarter three.

Gross margin performance was good, ahead by 20 basis points in the period and we continue to make valuable improvements across the business here. Operating costs, also well-controlled. These were better than Q2 on an underlying basis. And acquisitions contributed about $10 million to the trading profit in the quarter.

So overall, group trading profit came in at $359 million, that's $9 million ahead of last year at constant exchange rates. And to complete the P&L, exceptionals of $18 million, in line with full year guidance and cover both the redomiciliation and the exit from the Soak business. Now a bit more insight into our operations.

In the U.S., we generated organic revenue growth in the quarter of 3.3% against some pretty tough comparators. Acquisitions contributed a third of 5.1%. The major business units continued to grow across all regions in the quarter though growth rates moderated from the levels generated in the first half.

Geographically, trends were pretty consistent and we continued to gain market share. Blended Branches, Waterworks, Industrial and Facilities Supply all grew organically and HVAC grew particularly well.

Revenue was lower in our stand-alone eBusiness as we continued to execute the strategy we set out last year to focus on marketing spend on fewer websites. U.S. gross margins also improved and underlying operating costs improved. These were lower than in Q2. Our mindset now is the team, their markets are still growing.

We stay very close to the cost base to ensure that the cost does not exceed the growth in gross profits, whilst ensuring clearly we don't choke off any growth that we're generating in the business. With this in mind, we principally use attrition over time and expense control to optimize the labor cost base.

So far, we've not needed compulsory redundancies and at the moment we continue to expect to follow this approach as we move through the remainder of Q4 and into the new financial year. So in summary, in the U.S., trading profit, $346 million, $12 million ahead of last year. Moving on to the U.K. Like-for-like sales were up 2.8%.

Gross margins were slightly weaker, but we continued to lower our costs, which were better than last year, meaning that trading profit at $20 million was flat on a constant currency basis.

In Canada, organic revenue declined 2.4% [ph] as we continued to face the headwinds from rising interest rates there and governing - government tightening of mortgage credit. Gross margins were ahead, trading profit of $4 million was $3 million below last year at constant currency.

And given the weaker market conditions in Canada, we continue to look to improve the cost base further there. Moving on to cash. Our cash performance was excellent. Net debt to EBITDA finished at 0.9x, 30th of April, below our target range of 1 to two times.

As expected, after quiet - sorry, after a quite busy period for M&A in the last 12 months, activity was modest in Q3 with just one acquisition completed in the quarter, and that brings the year-to-date investments up to nearly US$630 million.

The M&A pipeline today has a number of smaller bolt-on opportunities, though nothing large, and therefore, we expect to complete one or two further small acquisitions in Q4. You'll see from the press release today we've announced a $500 million share buyback. That's in line with our capital allocation strategy.

Let me just remind you of that strategy and the mindset. The business clearly remains strongly cash generative. The first call on our cash is always to invest in our organic need for the business, in organic growth. But clearly, in subdued markets, our investment needs are more modest with maintenance CapEx that's about 1% of sales.

Working capital needs are also relatively modest principally relating now to our expansion of own brand products. Secondly, we expect to grow ordinary dividends over time commensurate with the long-term earnings growth of the business.

We also continue to look for great bolt-on opportunities and our investments have typically been in the range of $200 million to $300 million per year.

Over the last year or so, investment has been higher, but going forward, I'd expect a much more normal pipeline and we'll focus on making sure that deals that we do add value to our shareholders and are not too expensive. So beyond these investment needs, we'll continue to maintain an efficient balance sheet.

Over the past six years, we have returned over $3.5 billion of surplus cash to shareholders.

Our current balance sheet is very strong and with net debt below our target range, free cash flow likely to be beyond our reinvestment needs for the foreseeable future and a buyback of $500 million of our own shares over the next 12 months is entirely appropriate to return that surplus capital to our shareholders.

So that's a quick overview of the numbers. Let me hand back to John to go on and talk a little bit about the markets..

Mike, thank you very much. So how to read the current market. First of all, let me touch on what suppliers are doing. We got - if you look at our top 20 suppliers, 7 of those are quoted and therefore published revenue data that might give us some direction. We're talking about the likes of LIXIL, Masco, Whirlpool, Fortune Brands, Mueller, A.O.

Smith, those types of businesses. If I look at the average growth rates of those businesses between January and March, so their calendar Q1, they were flat and that's compared with more than 8% growth in the comparative period last year. Now just comparing that to Ferguson's growth rate, we were over 3% this year and over 10% last year.

So it's clear that our vendors have also seen a pullback from last year's strong growth rate. Moving on to competitors. We have relatively few quoted competitors and none that are directly comparable, but we still look at quite a number of them.

If you look at Home Depot, they were up 3% in Q1, MRC was down 3%, Wasco, which is an HVAC competitor, was up 0.5% in Q1, AIT, which competes with us in the PVF base in Industrial, was up 2.3% in Q1, all down from high growth rates last year, and again, behind our own U.S. growth rate. Looking at some of the economic statistics.

Some residential markets, the latest data from the Census Bureau in the U.S. shows housing permits down 5%, starts down 2.5%, and that suggests low growth in new housing on a dollar basis. The JCHS LIRA indicator of remodeling activity, that's showing some decline in some current rates but expects the remaining growth.

And Case-Shiller, which is the composite index of house price increases, if you look at the Case-Shiller for top 20 cities in the U.S., that's 2.7% in March. But there was very widespread growth, actually growth in all 20 metro areas, that's down from highs of last year but should still be reasonably supportive. On the commercial side.

The Architectural Billings Index was at 50.5 in April, that indicates low growth. You might have seen the latest Dodge Momentum Index for commercial on Friday, the May print was quite a bit down on last year. But overall, commercial market seemed to have held up better than residential actually so far.

And if you look at the latest construction put in place data from the Census Bureau, that shows commercial growth seasonally adjusted to April of 0.6% with residential in decline.

Against all those numbers, our estimates at the end market growth in the Q3 period for which we're reporting today, the residential markets grew between zero [ph] and 1%, commercial markets grew between 1% and 2% and industrial grew between 3% and 4%.

So for our mix of business, we think the market grew between 1% and 2% overall in dollar terms during our Q3. Talking to our customers, they remain very positive. Some of them had an excellent year in 2018 and they expect similar levels. Perhaps it'll grow or contraction in 2019.

There are no significant projects being downsized, being deferred or canceled today. And our order books, our order books stand at just over $2 billion but they have continued to grow on a year-on-year basis.

Overall - so overall, whilst markets have slowed, they don't look overheated and presumably that's why the Fed took the position that they did on rates. We expect markets to continue to grow at low single digit levels throughout 2019.

So given that potentially lower growth environment, how do we expect this to affect how we focus our business in the coming months? Look, it's important for us to stay focused on what we can control and not to get too sidetracked by the other stuff. Just going all the way back to our customers, they want great availability and depth of range.

They want prompt, attentive service, and they want us to support them when they are bidding and tendering for work. We're going to keep our focus on providing those things, they've driven share gains for a long time and we expect that to continue.

We also need to make sure that we recover the cost of the value that we provide in our pricing, to defend and develop gross margins as we have done, as you know, for quite some time. That's part of the DNA of Ferguson. We'll continue to focus on it going forward.

We've adopted a strategy of profitable organic growth for many years and we're not going to change direction on that now. Earlier in the year, our investments in new associates and other P&L investments, they got a bit ahead when we were growing strongly in the first half.

But over the last 4 or 5 months, Mike and I have been very impressed with the discipline and close management of the cost base adopted by the team. If growth is slower, then the cost base will be lower. Sure, the two won't be perfectly matched, but we will respond very quickly to market conditions.

We've got lots of opportunities to drive productivity and make our business model more efficient. The growth of the profit of the business over the last 8 to 9 years has been hard won and we're not going to relinquish that easily. We will continue to very actively manage our cost base.

At the same time, we're going to continue to pursue our strategic objective. This is a very large, profitable and very attractive business with great opportunities to continue to take profitable market share. We've set out certain strategies containing, for example, the development of our own brand and we'll continue to pursue those.

We'll continue to invest appropriately in next generation technology, both customer-facing and the development of our platform. Actually, technology investments in the quarter grew at 13%. Now look, much of that investment is in multiyear projects and commitments, and again, we're not going to be knocked off course in pursuing that strategy.

Mike touched on it, working capital investment is absolutely available where it supports our strategy, but naturally it will be lower if growth rates are lower.

And capital investments now will be focused on those projects where we can generate the strongest, quickest, most certain returns but we don't expect to add that capacity to real estate until future demand state becomes clearer.

We will continue to work on acquisitions where the economics are compelling and we will stay highly targeted in M&A, and as Mike said, somewhat keep a conservative balance sheet. We don't want to worry any stakeholder in our business and we do want to maintain freedom to execute our strategy wherever we are in the cycle.

Finally, look, you've seen the statement this morning reaffirming our guidance for the current year so I won't read that out. But now I will pass it over to Marian so you can put any questions you want for me and Mike. So Marian, over to you. Thank you..

Thank you. [Operator Instructions] We will take our first question from Howard Seymour from Numis. Please go ahead..

Thank you. Good morning, gents..

Good morning, Howard..

Morning, Howard..

Good morning. A question I think you're probably going to be asked quite a bit on is in terms of the U.S., two for me, really.

One, when you allude to the fact that the gross margins and the operating cost better, would that be on an organic basis because, Mike, you alluded to the fact that there's a $10 million acquisition benefit, which I assume is predominantly U.S. Therefore, the U.S. should look like it hasn't really moved forward on an organic basis in profit terms.

So wondering if you could talk us through that. And then, secondly, just on a more general basis.

I hear everything you say in terms of the market, but just your thoughts really as to why the market has now moved so rapidly to this little growth environment because if you look back it, lots of stuff that you've shown before everybody else, the market growth has been 3% to 5%.

And we're certainly looking at effectively a zero growth rate going forward. Do you think that's a sustainable growth rate into next year? So they are the two questions. Thank you..

Thanks, Howard. I'll take the first one. It's Mike here. No, in terms of the acquisitions, they are gross margin-accretive. Your analysis that the organic profit improvements for the U.S. only went up a touch is correct on 3%, just over 3% organic sales growth.

The challenge, of course, Howard, as you look sort of year-on-year, is the cost base declined from 2Q -- from Q2. Of course, as we invested the cost in Q4 last year, we've taken the cost down Q2 on Q1, Q3 on Q2, you need that cost base to continue to decline. That is now pretty much in check.

So as we go into Q4, I certainly expect the year-on-year cost base to be much more aligned as you look year-on-year. So you do get a very different impression when you look at year-on-year to Q-on-Q. So for example, the Q3 sales over the Q2 sales organically for the group went up about $80 million.

But you can see the profits went up significantly more than that. So there is very good progression going on Q-on-Q. And clearly, when you look year-on-year, we were in quite a different space last year with growth rates and therefore the numbers obviously work out very differently.

So I think our job is to continue to manage that cost base, get that growth there is in the market and continue to outperform the market and then the numbers will clearly drop through nicely..

Yes, I'll pick the second one then Mike on the markets and why have they moved so rapidly. Look, I think looking back over the last sort of 6 to 12 months, last autumn, there was clearly a wobble in the resi market. You can see that from the resi house builders, you can see in the market's valuations of those companies as well.

So there's clearly something there in that. And I think, Mike, we went around shareholders last autumn, they were very gloomy at that time and partly that was attributed at the time to the Fed's done at that time. Now -- that's sort of reversed, that one seems to have gone away. Look, second point. There seems to have been a lot of background noise.

We haven't talked about things like tariffs very much because, quite frankly, economically, they probably don't particularly impact the business that much.

But they have created a lot more work, the amount of our business that has needed repricing because, remember, the majority of our business is H2 [ph] dependent and the amount of business that needs to be reworked is really quite remarkable during that period. And that background noise is -- has generally not been positive.

It's generally been, at best, neutral and sometimes negative. So far, and I think, comparatives were very strong. We're up against a very strong period last year. Just -- it's a reminder. Last year, we had a $200 million to the profit of Ferguson Enterprises in the States, which was, by far, the biggest increase in profit and it is interesting.

I mentioned the customers who had a good year last year and are holding on to those gains this year still see that as a good performance because they saw this scoot up in their business last year and then sort of -- and in historical context, that remains a good environment.

So I think the comparatives on sort of a two year look through, actually the comparatives still seem good as opposed last year slightly strangely. And I think the other piece. We've seen inflation coming up a little bit, actually not as much as we would expect.

I think inflation is likely now to revert back to more normal longer-term level, come down for our technical product set possibly to sort of lower levels and not fine. One thing to say about the markets at the moment.

If you look across the business geographically and by business units, the slowing of the growth rates has been very consistent across business units, across businesses, across geographies. So this isn't a question of one particular metropolitan area or one particular business unit. So it's been pretty broadly based.

And regarding where we go in due course, our expectation remains today, but there are smarter people than me out there who will have a better view of where this is going, but our expectation remains low single-digit market growth throughout the rest of calendar '19..

Okay. John, one thing you didn't mention and I think you possibly could have, weather, because a lot of people have mentioned the weather. And obviously -- I know it's always difficult in the U.S., but this year around seems to have been significantly worse and more volatile. Has that had any impact? I wouldn't normally ask that question..

Look, Howard. It's a great question. And if my colleagues were on, they would all say -- they'd nod their heads vigorously and say Howard's on the money. Look, for those who are not familiar with the U.S.

weather, it has been very wet, okay? And I certainly recall, going back into the spring, there were places, Southern California, around Houston, when we were in Atlanta, Mike, it had been really, really wet.

There was one, I think it was -- it's one of the largest residential development sites in the country where they hadn't put in any residential homes for over three weeks and you sort of think.\ But the issue - the reason why I don't think that's a primary driver here, Howard, is because it's - you would expect that to be relatively short-lived and relatively related to certain geographic areas.

And this - and the slowing of the growth rates has definitely been broader than that and broader across geographies. But in the very short term, for any one month, there is no doubt the weather also has an adverse impact..

All right. Thank you, John. Thanks very much..

Thank you..

We will now take the next question from Paul Checketts from Barclays. Please go ahead..

Morning, everyone. I think I've got….

Morning, Paul..

Three questions, please. The first, John, can I just come back to that comment about the different business units to give us a bit more color? If you looked at the earlier-cycle businesses or the more cyclical ones, how are they doing? The first one. And the second one is, if you look at guidance for the full year, effectively there's two parts to it.

There's the 3% to 5% organic sales growth in the second half. And as a trading profit, Q3 has come in just shy of that low end of the organic growth. Is it still conceivable that you'll land in that? Or is the reiteration of guidance more about the trading profit? And then the last one.

Mike, can I just ask about the cash? That reduction in net debt in the quarter was probably the largest we've seen in quite a few years.

Can you walk us through what was it -- what it was that drove that?.

Sure. Let me take the financials first. So the -- on the guidance, Paul, it is our job to deliver the bottom line. I don't know what the top line will be yet. John has just said we don't have the visibility. You've had our best guess and John just -- if it isn't that, we're heading into our normal, seasonal busy quarter.

We would normally add cost at this time of the year. And if we don't see that growth, Paul, we won't have the costs. So it's really that simple. So we will set out absolutely to deliver the trading profit guidance regardless of the top line.

And we'll do that, as I say, through the labor line in the main, and therefore, we won't miss out on the growth opportunities if they're also there. So if the growth exceeds our expectations, then clearly we can put costs in through over time and temps as well, which is what we would normally do at this time of the year.

So we're just being quite careful on the labor line, but also we're also wanting to take opportunities of growth as we move forward. Your question on cash. Yes, it has been a good quarter. I think there was a couple of people that, at the half, said we'd miss by 50 to 100 and at that time I said, yes, don't worry.

That's a balance sheet date issue and it will come back. So that did come back in Q3. But there's also good cash generation. Clearly, we're not spending as much on M&A. We are spending on maintenance CapEx and CapEx that the business needs organically.

But as John said, we're not needing to deploy as much CapEx on capacity expansion, and therefore, the cash that the business generated and will continue to generate was pleasing but probably in line. Again, Paul, if I'm being really honest, in line with where I expect it to be.

So sure, your Q3-on-Q3 might look good, but it's totally in line with where I expected that to drop down to and continue down towards the end of the year.

John?.

Yes. Paul, look, on the cyclical -- the more cyclical -- in the last downturn, we were 30% geared to newbuild and now we are seeing 16%, 17%, 18% newbuild - sorry, new residential, I should say. And it is fair to say that new resi has been weak and weaker since last autumn as well. You can see that from the new starts and permits data.

But there isn't a pronounced -- there's nothing pronounced in the business. If you look at, for example, Waterworks, now Waterworks is up against very tough comparators, continued to grow throughout the quarter and that growth has been pretty decent. HVAC, which is the more of the RMI end for us, has done very well.

But there's no signs particularly -- I mean Industrial growth rates have slowed more because they were very strong, I think we said last -- in the first half it's been at 30%. So those growth rates are lower but the growth rate is still good.

So there's nothing in the mix that would tell you there is - there's nothing there that suggests this is early cycle and therefore it's going to be doom and gloom in 6 months or 12 months, I'm afraid. There's no color we could particularly give you that would help..

Thanks. Just coming back to the cost side, do you think if, let's say, we're in this 3% to 4% growth environment in the U.S.

organic sales perspective going through the next - slightly longer than the next quarter, the next two years, if it was in that range, what would that mean for margins given what you're doing on the cost side?.

Well, look, I think, overall, if we get low growth, then we expect low profit growth. If we get mid-revenue growth, we expect mid-profit growth.

We absolutely are required, we expect it of ourselves, we expect it of this company, you and our shareholders should, too, for us to generate sensible profit growth of the revenue that we generate, and that's absolutely where we will focus. I know we've come off a prolonged period of very strong growth.

I may -- might have to get used to a period of slightly lower growth. We still need to cut our costs accordingly and we'll do so. There are plenty of opportunities for us to become incrementally more productive in our business. And the other thing that I would say, when you refer to margins, I think you're referring to net margins.

For us, defending those growth margins, defending the value that we -- that we're providing, generating for our customers, that is very important. That's the starting point. When we have a lag [ph] month's trading, usually the indicators are there in the gross margin. If we have a good month's trading, the reverse is true.

And looking after our gross margins is particularly important in this business. Culturally, we're very strong with that. So all the way back to your question, if we get 3% or 4% top line growth, Mike and I absolutely expect that we're going to get bottom line growth that's broadly commensurate with that..

Thanks..

Thank you..

We will now take the next question from Gregor Kuglitsch from UBS. Please go ahead..

Hi. Thank you for taking my question. There are a few questions.

Can I just come back to the CapEx point, please? So I think last time around, you were talking $400 million, $450 million from memory all-in for this year and then dropping down next year, if that's correct? Can you just remind us considering where we are now with lower growth, what those absolute numbers are because I appreciate your maintenance CapEx you've talked about, but presumably there's still some tail end of some of the investments that need to complete over the next 18 months or so.

The second question is so what was inflation for the U.S. in the quarter, and you kind of pointed towards that entry slowing in the future. Is that kind of considering tariffs and all of that? And then just maybe on your guidance. So just kind of challenging it a bit perhaps on the organic profit growth.

I think in the quarter, it was probably kind of zero all-in, right, for Q3? I think my calculation suggests you need to kind of go back to the 3%, 4% for Q4 assuming what you said for M&A prior still holds, I presume it does and there was a one-off last year.

Is that correct, first of all? And is that basically just the cost base realigning itself as you suggested on the U.S. and basically everything else equal? Thank you..

Thanks, Gregor. Yes, let me take those. The CapEx, so yes. No, the CapEx's guidance for this year hasn't changed, I'd expect between $400 million to $450 million is what I guided at the half. I'd probably expect it to be towards the lower end of that number. But again, given the cash generation of the business, that's good.

I think in terms of the way we think about CapEx, Gregor, is in a maintenance CapEx scenario, we need to spend about 1%, again in round numbers, call that $200 million. Clearly, therefore, anything over $200 million is for expansion. We do have some tail, if you like, into next year, particularly the first half.

I'd expect next year -- I mean we haven't gotten into next year. As John says, we don't really know what the growth rate is for next year. But sat here today, $300 million to $350 million, picking up some of that tail, and I think that's more likely to be front end-loaded than back end.

So clearly, if we stay in a low-growth environment, we won't in the second half of next year be adding that capacity CapEx, if you like. So hopefully that's clear. In terms of the U.S. inflation. In terms of selling price inflation, it's about 2% to 3%, probably nearer 3%. I think we do see that moderating.

I'd love to be able to answer your question on tariffs. I think it depends where tariffs go. Clearly, as John said, the issue for us as a business is really the disruptive factor of tariffs rather than big impacts on our P&L.

The issue really is one where we need to continue to support our customers to help them win business and price jobs and that just generates a ton of work.

And your last question was on - just remind me?.

Organic profit growth..

Organic profit growth....

For this year and kind of….

Yes, yes. So there's no change to the acquisition guidance for the full year. I'd expect that to be about $45 million, and therefore, you'll see the balance of that fall into Q4. So yes, as I said earlier, costs align themselves in Q4 to the prior year Q4.

Clearly, depending on the top line, that number will be higher if there are growth opportunities or it'll be lower if those growth opportunities diminish. So we will manage the cost base accordingly. And we'll absolutely, as John says, make sure that we provide our customers great service and get paid for that great service.

And therefore, we'll absolutely look after the gross margins..

Okay. Thank you..

Thanks, Gregor..

[Operator Instructions] We will now take our next question from John Messenger from Redburn..

Hi, good morning. .

Morning, John..

If I can ask three, if I could, please. First was just during your talk early on, John, you mentioned kind of operating cost growth and the fact that, that should be in line or less than gross profit growth.

Can I just understand from where the group's coming from? Is that the benchmark or is it the top line? Or maybe it's because of commodities, because of own label, but when you're thinking about how your costs need to be controlled, what do you strike it against growth rather than revenue? Second one was just around the expansion that we've already heard about in the U.S.

I assume the new DC is up and running in South California. Can we just add these others into your running costs or is that kind of a clean switch over now? And the new Denver market distribution center, I assume that is still progressing.

But is it a case in point that there is limited new MDCs planned then over the next 12 months? And then, finally, could you just give us a bit of comment in terms of Canada? Obviously, this the first quarter of like-for-like sales down.

Are you thinking of that, given legislation changes in mortgage credit availability and rules applying to people qualifying, are you thinking that is something that kind of we have to - it stays operational and impacting for the next 12 months or do you think that there’s a reason why there could be a quicker snapback in terms of Canadian activity? Thank you..

Thanks, John. Look, let me start on those and I'll play myself out. On the operating cost growth in relation to our overall growth or gross margin, it's a great question.

We do actually and we have always, although we talk about the link between revenue and cost growth, actually, internally, we do use more for the connection with -- between gross profit and cost growth. And the reason for that is it's a better -- it's a more consistent measure across the businesses.

There is some variation in gross margin across the businesses. And for those businesses where we deliver more value, it is more expensive to deliver that value. So we need to recover it.

If I talk to you to the extreme example, if you just look to the operating cost growth proportionate to revenue, you would never invest in own brand, okay, whereas if you look at it in proportion to growth profit, you absolutely would. So that's the reason that we do that.

Actually, over short-term period, 1 to 2 years, it doesn't make a lot of difference as it happens. Look, on the others, the DC in California is we are starting now to move in, stock that up. The dual running costs are there.

I think, Mark, have you given guidance on the dual running costs in California? They are relatively modest, okay? So I don't think that's something that is going to change your financial model. Denver outfit is going ahead, but it's quite a long burn -- quite the long-burn project. Canada is interesting.

Canada, the reduction in the growth rate in Canada started earlier.

So it started from sort of middle of last year calendar and it started out in the West actually were not all prices were weak, but it clearly has spread certainly East and certainly into Ontario and the Atlantic Coast, partly, we think, related to the restrictions that the Central Bank are imposing on mortgage lenders.

We are slightly more geared towards new residential property in Canada, about 30%. So that's sort of somewhat in the eye of the storm. I think the good news in Canada, the team are on it. I know it doesn't quite look like that from the numbers this time, but we're in a very short period in Canada.

We are -- we're doing all the things that you would expect to control and reduce costs now and -- but also the chap who runs Calgary said to me recently, made a very interesting observation, he said there's somewhere in Canada that's always in recession. I'm not quite sure what he meant.

But nevertheless, if you were looking -- even this year, if you look, for example, into Quebec, actually Quebec has done very well this year and we've got a good -- very good business there, a good sized business there. So you just have to be careful not to apply too much of a one size fits all in Canada.

But what I would say, over the last 10 years, Canada has been a little bit more volatile than the U.S. as a whole. It's clearly a much smaller economy, it's more mineral resources, oil based as well. But it is still a good -- this is a very good business for us. It makes very good returns, very similar margins -- gross margins to the U.S.

And we just need to knuckle on down, get to the -- get the work done to control costs that we are doing and carry on there in Canada.

Does that help, John?.

Yes. Brilliant. Thank you..

Thank you..

We will now take the next question from Daniel Hobden from Credit Suisse..

Good morning, guys. Just two for me, if I may. I know you spoke about a couple of levels of some cost inflation. I was wondering what sort of impact you're seeing from the commodity prices? And then the second question, I think you said that the level of growth was fairly consistent across the three months of Q3.

I was just wondering if you had any sort of clarification or color you could provide for the first 6 weeks of Q4 at all? Cheers..

Thanks, Daniel. I've got - I'll take both of those. In terms of commodities, again, just a reminder, commodities is about 10% of our business. It's mixed across those commodities. I think the simplest way to describe it is we've probably seen about a 4% deflation effect in those commodities.

But again, if you scale that into the total business, not that material for us. But that's the data set for you. In terms of what are we seeing over the last little while, I'm not going to go into monthly trading. I think people know that.

So hence, we've tried to give the steer that, within Q3, the growth rates that we have experienced have been pretty consistent across the three months of Q3..

Thank you..

Thanks..

We'll now take the next questions from Arnaud Lehmann from Bank of America..

Thank you very much. Good morning, gentlemen. Three very short questions hopefully. Firstly, slightly better organic growth in the U.K. I mean I don't want you to comment on the Brexit uncertainty, I think we all had enough of that.

But any marginal improvement recently do you think it's sustainable? Secondly, could you please update us on your corporate tax rate guidance after the redomiciliation? Do we go back to the low 20s? And lastly, in term of your share buyback, there's only a couple of months to go in fiscal '19.

Should we expect the share buyback to start today and like pro rata it into fiscal year '20? So a bit more color on the timing, please..

Sure. Thanks, Arnaud. Let me take the share buyback. I'm certainly not going to take tax and John knows that one. He can talk to you about the U.K. So on the tax rate, when we announced the redomiciliation, I said there was no change to guidance. It's simplifies the group's affairs and corporate structures.

It was entirely appropriate for the shape of the group we run today. So again, just a reminder, I'd expect in FY '19 22% to 23% and in FY '20 to be 25% to 26%. So there's no change to guidance there.

And in terms of the share buyback, the way I think about the share buyback is, again, you generally can do -- we -- there's a number of restrictions around share buybacks in terms of size, quantity, the prices that you can buy to, ensure that the market isn't affected by the share buyback.

You should assume roughly that we do about $60 million a month. That clearly goes up and down depending on various days, but $60 million a month is a good guide, and hence, it'll take us something - 9 to 12 months to execute.

We won't be starting today because clearly we have to stay out of any days where the share price can be affected by the buyback, but I think you can assume that we will start imminently. And therefore, you should factor in, for sure, about 6 weeks worth of a buyback at an average of about $60 million a month on it..

Okay..

Yes. Thanks. Regarding the U.K. Look, it's -- it is good to see a little bit of growth, but I'm afraid it's early days. Let me tell you what I'm very pleased about in the U.K.

The team has been onboard now, the new team has been onboard for just over a year and they've done some really good things, just getting on with - fixing a lot of the basics in the business and executing some of the parts of the strategy that just needed to be completed. So it's pleasing to see the top line where it is.

They've also taken a lot of costs out of the business and they are very cost-conscious, I think that's very important. I don't think we've yet quite fixed pricing and margins, so we've got plenty of work to do there. So relatively early days, but it was good to see the profit in the quarter same as last year given the backdrop in the U.K.

of fairly lackluster market..

Sound good. Thank you very much..

Thank you..

We'll now take the next question from Rajesh Kumar from HSBC..

Hi. Good morning, gents. Just following up on the U.S. inflation figure you gave, 2% to 3% overall. That implies about 1% volume growth, something like that.

So how are your discussions on the supplier rebates progressing with the suppliers? Are you changing the accrual rate early on? Or would you wait for the trends from Q4 before you take the call? The second one is on the freight inflation.

Some of the market data is showing that even though the contract freight rates are up, but the spot rates have started tapering down. Have you seen some of that effect in your numbers or your negotiations? And the last one is on the tariff. You very helpfully gave some color around how tariffs might impact the repricing, et cetera.

Can you give us some idea on how the pass-through of related cost inflation is progressing, either with customers or with suppliers or with your own brand products?.

Thank you, Rajesh. Yes. Look, on the first, on the supplier rebates, we have a number of different -- there are a number of different rebate structures depending on the individual vendor. These things tend to be -- it seeps in history and seeps in sort of continuity by vendor.

The majority often though are volume metric, so in that sense, are just linear. The majority, there is no judgment, if you want, applied.

There are some where we are required to hit certain tiers and those tiers, of course, need to be negotiated each year and of course they're negotiated within year as well depending on what that economic conditions are. But I would say overall, that has not really had a material impact on our gross margins in the period. Freight inflation.

I think we saw last year the highest rate of inflation. I'm not going to knock on to the labor rates and we had to reset quite a few labor rates in warehouses and also in -- amongst drivers last year. I fully expect that now to come back to just a more normal ongoing type of environment.

The rates available from carriers, they don't wash through very quickly and they aren't as material as you think because most of our distribution is still done by ourselves with our own drivers and our own trucks. And then on tariffs, we've written successively for each of the individual tariffs that have been introduced.

We write to our customers in advance and let them know this is what's happening and let them know that those price adjustments will need to be passed on both in tenders, and of course, in the final pricing of products.

I think you should assume, therefore, that the tariffs have negligible impact on gross margins overall and we just get on with the business of accommodating those in our business. That doesn't mean to say that any individual tariff rise won't have an impact because there might be a difference between -- we hold inventory.

And in some instances, we'll buy inventory forward, or we did last year anyway, in some instances buy inventory forward to protect our customers from tariff rises. But in essence, when you look back on it all, the impact of tariffs across the business was pretty modest last year.

Does that help, Rajesh?.

It's very helpful. Just on the rebate point. So you're saying it should not have an impact. I'm assuming you're saying you hit your guidance of 3% to 5% organic growth, then it should have no impact.

Would you have to change it if the growth was lower than 3%?.

No. Because the important thing for us from a -- when we're negotiating with our vendors, the important thing is that we make sure that if we are gaining market share, we are being rewarded appropriately for that. But I'd come all the way back to the large majority of rebates are volume metric rather than steps anyway.

So you've got a 3%, but you get rewarded for every sale you make on a linear basis, if that makes sense.

There are some around the edges that are set, but it is up to our skillful negotiation with suppliers to make sure that those steps are steps that we believe that we can achieve in combination with our marketing effort, in combination with our product selection, in combination with our supplier vendor selection that we can achieve those and achieve the relevant rebate.

So we would not expect to see a step up or down in our gross margins as a result of rebates..

Understood. Thank you..

Thank you..

We'll now take the last question from Aynsley Lammin from Canaccord. Please go ahead..

Hi, morning. And thanks. Just three questions, actually. First of all, wondered if you could comment on the difference you're seeing between U.S.

residential new versus the remodeling side? Some of the kind of stats and census, if you're seeing quite a big drop off on the remodeling? Is there any comments you have there? And then, secondly, if you could just remind us what the incremental impact from acquisitions will be, both sales and profits for the U.S.

at FY 2020 the acquisitions you've made to date? And then, lastly, just interested in your thoughts of kind of the decision to go with a share buyback versus a special dividend. Thanks..

Okay. Aynsley, thank you very much. Look, I'll take the first of those and Mike can take the second two. I think if you look -- if I look back over the last sort of 6 to 12 months, the -- it's the new resi area that's been slightly weaker and the remodeling has held up pretty well.

\And it's interesting, I always look -- I referenced the JCHS data before, which we always look at because it's one of the few indicators that purports to be a forward-looking indicator. And that's still -- that is still indicating decent growth as into the future. Now that growth includes both materials and labor.

So disaggregating those for us is interesting.

But I think you should see at the moment that whilst remodeling has been - or remodeling, repair and maintenance has been lower than it was, that market has held up sort of pretty well and it is more than new construction that has come off a little bit in our numbers, albeit from very high levels last year.

Does that help on the new versus remodeling piece, Aynsley?.

Yes, that's great..

Thank you. Go on there, Mike..

Yes. And Aynsley, there's no change to any of the technical guidance put up on the half year slide. So the total group acquisitions revenue is $750 million, $45 million trading profit. Clearly, most of that is in the U.S., there's a little bit in Canada, but mostly in the U.S. for the full year. In terms of share buyback versus special dividend.

The share buyback, I believe, will create value for ongoing shareholders. It is also flexible. We have used both instruments in the past. We've tended to use the special where we have disposed of if you like earnings accretive assets and where the sum is very large.

We've tended to use the buyback to repatriate the free cash flow of the business, if you like, to our shareholders that we don't need. And we've said that we have enough cash today for our organic needs.

We've said that M&A and CapEx is clearly back to sort of normal levels or even lower levels in a lower environment, and therefore, returning the surplus free cash flow that the business generates, the share buyback is a great flexible instrument because, of course, should something larger come along and we need the capital, then clearly it is a flexible instrument.

But just to remind you, this business has and will do this year generate more than $700 million of free cash flow if you look back over the last four years as well. And therefore, if you think of the buyback, I said we were executing about $60 million a month, plus or minus. That's also the free cash flow of the business roughly.

So again it's a neat way where we don't need the cash and we can't deploy the cash, it's important we get it back to shareholders on a reasonably prompt basis..

I'm sure it's on the slide, but the $750 million of acquisition revenue benefit, how much of that falls into FY 2020 incremental?.

Oh sorry, your question was what's the sort of lag into next year?.

Yeah. Yeah..

It's $200 million of revenue..

It's $200 million into next year and about $15 million of profit growth. Sorry, Aynsley, I mis-answered your question..

Thank you. I think that was our last question. Just before we quit, let me just remind you of my core overall message from this call. Revenue growth overall 6%, including just under 3% organic growth, it's lower than it was last year. We've talked about that today.

Secondly, we are pleased with the gross margin performance this year and this quarter, edging those up again. Thirdly, I'm very pleased that the team now from Q1 to Q2 and then Q2 to Q3 have brought our cost base down on an absolute basis. That's a very professional job, and we will continue to manage costs very carefully.

And finally, cash generation, again, has been very strong, I'm very pleased with that, obviously leading to the return of surplus cash that Mike's talked about. So thank you very much. And Marian, thank you very much for curating the call. If you've got any other follow-up questions, please call either Mike or Mark or myself. Thank you..

Thanks, all..

Thank you. That will conclude today's conference call. Thank you for your participation. Ladies and gentlemen, you may now disconnect..