Good day and welcome to the Ferguson Full Year 2018 Quarter One 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 myself, Mike Powell and 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 and then clearly we will 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. 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 gross margins. We control operating costs, they continue to be well controlled and trading margin came in at $356 million, 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 at 260 million. That was after receiving the proceeds from the Stark Disposal Group which we announced -- that we completed in March and also after purchasing of 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. Through to the end of the quarter, you will also be aware from recent RNS announcements that we finished the buyback last week and also…

[Operator Instructions] Okay. We will now take our first question from Paul Roger from Exane BNP Paribas.

Good morning, everybody. So just two questions from me please. Firstly, when looking back to what you said in H1 stage, you mentioned that the comps become progressively softer 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? And also when you say a 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 drop through, obviously a 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 is the new norm going forward? Thank you.

Paul, thanks very much. So I think the first, I think there were three questions asked. 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 indicated at the half year that we exited the half year in line with Q2. I mean, Q2 was growing around the 9%. So we’re probably overall about 1% stronger than we expected, just to put that into context. So I think that’s certainly in line with sort of normal course of a large business. Why we are 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 margins. So I continue to be pleased with the gross margin progression. Then your second point, Paul, was on consensus. The notes, I have certainly seen, it’s already out this morning have nudged up, Mark, I think consensus, couple of percent.

Yes. Sort of 20 million to 30 million-ish.

So, I mean, 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 has the flow through of just north of 13% been achieved. From those factors that I have talked about really, we’ve had good strong top line, good gross margin and well controlled costs. And the comps the year before, if you remember Q3 last year, was -- 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 [indiscernible] at the beginning of the year said that we would be high single digits. 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 is any change for the longer term guidance on that basis.

Yes. I mean, it’s quite interesting because – yeah, it doesn’t mean – 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 have really seen any big impact of either higher inflation or that it is 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 why I asked the question it’s sort of a little bit more optimistic than maybe some of your peers?

No. 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. So 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. And therefore, whilst our US 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, you’re absolutely right. It’s 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.

We will now take our next question from Emily Biddulph from JP Morgan.

Two questions please. The first question just on price. Obviously, it’s a little bit better than the 1% to 2% you previously guided to. What are the drivers? Is 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 those sort of come through and can we sort of, is it much more in the pipeline if those or should we sort of assume that industrial was sort of closer to the market growth you were certainly sometimes seeing?

So on price inflation, yeah, it’s a little bit stronger than we expected. A lot of that has come through inflation through to supply chain, which clearly we have passed through. I mean, at the simplest level, that’s what’s happening. We’ve continued to keep a close eye. I mean, of course, the world continues to be an interesting place. I think back to that flexibility of business models, we have to be nimble. So when we get increases, we work with our customers to ensure that they’re getting value, but we also don’t get squeezed. So I think where we continue to demonstrate value to the customer, we clearly have passed those through. We have also got the tariff issues that have been around for months frankly. I mean, there are announcements that we wait, the license won 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 or 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, our imports are about 500 million. So again, I think that sort of scales the size of the issue, but the team are 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 jobs. So, and again, what that end result of that of course is you end up the US inflation, which is what you are 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 US. I think your second question was on industrial orders and yes, industrial tends to be lumpy. So what 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 percent. It’s just lumpy. It just – some, we are under the market. So I think what 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. Of course, our job is to continue to find the orders, but those specific orders that are a bit lumpy at the moment run through Q3 and for Q4.

We will now take our next question from Phil Roseberg from Bernstein.

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 US, it was 0.8% and in the first half, I think, we were talking about $120 million 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 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, impressive drop through. I think you mentioned the, it’s relatively easy comps compared to previous year, mainly because I think you had a number of investments going through in to 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?

Thanks, Phil. Good morning. So on acquisitions, at the end of April, it was 1 million to 4 million and in terms of spend of dollars, we’ve done a further 8 since the end of the quarter and I’m maintaining my guidance of 350 to 450. I think as we discussed fairly in the past, that’s likely to be wrong and so it is my best guess today. I mean, [indiscernible] and there are a number of deals within that number, it’s not one deal. And therefore, that’s my best guess 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 central 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 haven’t closed them, so our best guidance at the moment is 350 to 450. 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 ahead of the, a bit quicker than we would have wished in hindsight, ahead of the revenue coming through. So it 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 the acquisitions in – those acquisitions should flow through. You clearly generally have year one acquisition costs to integrate. It often depends on the acquisition. So again, as we guide through the acquisitions, particularly, if we finished the year end, we will give you a little more color…

Okay. Understood. Just to quickly clarify one point there. Should we – so if the 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 acquisitions, 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 we come through the year end, and as we do these deals, we will clearly keep you fully informed. I think in the scale of the group, you shouldn’t really be expecting too much at all.

We will now take our next question from Howard Seymour from Numis.

Just maybe just really question on the UK, like 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 the product of timing in terms of the costs that you’ve taken out or is this something more to that?

If you think of putting a line through some revenue at the top line that was low gross margin, just the math of the business that remains behind, means our gross margin, so 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 math kicks up. What I was saying though is if you excluded that business, as opposed to that’s numbers, there is 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 margin low gross margin business, because clearly that contributes some absolute dollars of gross margin. You therefore have to take costs out commensurate with that loss if not more and that’s the reduction in operating costs. I mean, Mark, he’s sort of been in three months, he’s doing a good job. He’s very, 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 UK now going forward on the business that’s going forward.

And can I also just ask because you allude to 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.

We will now take our next question from Karl Green from Credit Suisse.

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 the 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. Yeah. Vendor rebates is a [indiscernible]. There are some tiers in there. So clearly, as you sound more and your partners on the vendor side continue to see more volume, you do get some tier rebates. But it’s a mix, there is a whole mix in that across all of our businesses as we’ve grown up with different vendors and different rebates, different partnerships that we have with the different vendors. So I recognize that’s not particularly helpful answer, but it’s where we are.

So basically, so it wasn’t a portion of that benefit for the third quarter, yeah?

No, there is a little bit in that. I mean I think the important thing is choosing the right vendors and the vendors, it’s a little bit like what I said, having the right partners on both the customer and the supply side is incredibly important. I think myself and clearly the times, we’re also growing a business at these sorts of rates, doesn’t also take some management and I’ve got a history of closing some businesses. I can tell you that’s a skillset too, but growing a business doesn’t, it doesn’t just come as easy as it’s putting a 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 and 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 is good. There is a little bit seasonality in Canada and I never like talking about the weather. It’s such a big business. So whilst snow in the ground, because I’ve landed there at the end of April, it was actually snow on the ground at the end of April with beautiful sunshine. So they did have a late winter in Canada. That meant that the season kicked in a little bit late. I think if you join Q3 and Q4 together, when I say Q4, there is nothing changed in Canada. The math does point to a lower flow through. I’m not at all worried about that. So I think when you get the half year 2 numbers, they will be in line with what we would have expected. I think it’s just a bit of a timing issue in Canada. And therefore, there is 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 we see, slightly cash flow, but the math doesn’t drive us, because the numbers are quite small. So a small change in the absolute dollars changes percentages quite a lot. But nothing fundamentally kind of a change since the half year and I continue to be able to also think about the Canadian business and the place that Kevin and the team are taking that to.

We will now take our next question from Robert Eason from Goodbody.

And if I just focus on the US first and just – and just going back to kind of an earlier question as well, just in relation to potential operating cost headwinds in the US, firstly, can you just give us an guidance on the quantum of your labor costs in the US and energy related costs and on each of those categories, what if 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 question on the US. And just on the UK, can you just give us a bit more color on the segmental outperformance of the UK business by the main segments, i.e., commercial, res and what you’re seeing on the ground in each of those?

So UK, this is Mark here, Robert. Just to say, yeah, good morning. Commercial, fine, I think the underlying plumbing and heating business is where we’re finding life toughest. We’re not being helped by the RMI market and the business is overwhelmingly RMI and new construction in the UK, it’s only 7% or 8% of sales. So I certainly think that plumbing and heating market has not got any easier. So we’re still finding it tough. The second question, I mean, labor inflation is still in the order of about 4% in the cost base. And that’s been fairly uniform through the year. And we’re still seeing pressure, particularly in areas like drivers and distribution center staff. Those are particularly tough areas, but as Mike said, actually, that labor cost inflation is in a 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 don’t mind, one last question. Just given what the majors have been doing, yourself kind of consolidating your network and making them more efficient, other majors are doing something similar, are you seeing any consolidation among the independents as the majors just focus on getting or rightsizing their networks?

No. I mean I think what the public company 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 UK market, we clearly need to look at and make sure that we have our supply chain correct. You’ve already seen that we’re 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 the behavioral change. I mean, clearly, the market, I mean, we’re at 1% and inflation is up 3%. So that tells you that the volume is down to flat. So there is nothing fundamentally changed. We’re not. I mean, frankly, we’re not expecting a lot from the half year time. 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.

We will now take our next question from Gregor Kuglitsch from UBS.

Just had a few questions as well. I guess coming back to the US growth, you said, it was obviously very impressive, 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 sit with that growth, but obviously I think you’ve touched on, it’s increasing I think about next year, it looks consensus was down, I want to understand what’s just by that kind of step down in growth other than just obviously some? The second one is maybe easier, can you just update where you expect leverage to end at the year. You said 0.9 pro forma, is that broadly where you expect to land. Obviously subject to the M&A that you’re talking about materializing? Thanks.

Thanks, Gregor. Yeah. So let me take the second one first. Leverage, I’d expect I mean, if we’re at 0.9 pro forma at the end of Q3, we would have cash in Q4. I would expect leverage to be just from the underlying business and with those acquisition 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, but overall, that’s our job to outperform that market. The markets are good at the moment. If I look at any of the sort of indexes that we tend to look at, which and are all public, those full residential, we look at permits with starts, how [indiscernible], very little has actually changed since we last spoke to you at the half. I think that’s also true in our view that the Q3 was slightly better than we expected, but I don’t think everybody, as we recognize that 1% on a large business and clearly that has 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, improving 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 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 other than we’ve…

We will now take our next question from Manish Beria from Societe Generale.

So I had a question on the gross margins. So usually, one third of the gross margin improvement was coming from the UK sale of wholesale business. So I was just trying to understand, I mean, what does it mean? Does it mean 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 US business?

So yes, what I was trying to say is of the 40 bps across the group, back to Howard’s question, about a third of those 40 bps and call it 15, 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 large – sorry, given that the US is by far the largest, you can clearly put that against the US. So yes, I think your assumptions are correct. But it’s the exit of the low margin UK business that’s the 15 bps improvement.

So is this contribution, 25 basis point will be equivalent to the improvement in the business or the improvement will be slightly lesser because it’s more contributing to the business?

Not sure I understand the question. So I think what we’re getting to is that the US margins are up with the Canadian margins overall 25 basis points on the gross margin.

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 it seems like it will be something like 1.5 billion in terms of net debt, you’re talking about 0.8x and I have something like 800 million in my model. So there is quite a lot of bit of difference. So just trying to figure out why there is so much of difference?

Well maybe, Manish, you can pick up with Mark later with specifics. I think our guidance has been clear in terms of what’s happened during the quarter. We’ve then obviously done, we will do the special dividend 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 that maybe, Mark.

Yeah. I will give you, Manish.

We will now take our next question from Arnaud Lehmann from Bank of America.

Two questions from me, hopefully fairly short. Firstly, I would like to come back on the tariff risk. I think you mentioned that we’re importing only 500 million. Is that in dollar or in sterling and also I guess beyond the actual imports, which are actually quite small, have you identified any risks in terms of your supply chain, because I’m assuming that some of your US suppliers are importing some of their products as well. So does it create upside risk to your cost base, heading into next year or 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, Arnaud. Yeah. In terms of imports, that’s been in dollars and those are our direct imports. The – of course, the issue on imports is also our supplier imports, because once we deal direct with a number of American suppliers, I am sure that some of that product may well be coming over the pond. And therefore overall, there might be some 20% to 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 is 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, then actually we will react to that as will 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 and 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 and of course it’s a continual phase, because the game keeps changing almost daily at the moment, where there are any differentials between us and the competition importing product. Plus there is a lot of product that gets imported into the US. You can see that from public specifics. I think if it’s industry wide, it’s something we’ll cope with it specific, the team are on the place, but it is a change in picture. I think on the second, I think the average number at the end of this year is 246 million because you take the 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 million.

That’s including the buybacks?

Yeah. That’s all in. So that’s assuming the buyback finished and everything is happened. So yeah, the spot share count, I would expect at the end of the year to be 232 million shares. Okay. I think we’ve got time for one last question, operator if we could.

Perfect. Thank you. And we will now take our last question from John Messenger from Redburn.

Sorry, there is 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 missed it, but for the benefit of the transcripts in the future, I think you talked about that long term that you have low single digit drop through. Can you just clarify the, I think it was low – or medium to high single, just so that we’re all clear about what the group’s view is kind of on a longer term basis, given where the group’s margin is and where gross margin is at? So that’s one to clarify?

Thanks, John. I was clearly messed up by your very question. So I will better let Mark answer this one.

Low double digit.

Sorry, Paul. If I said that incorrectly, it is definitely in good markets. It will be low double digits.

I have two questions. Just coming back on 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 or 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 what works, just in terms of how you’re buying, in terms of thinking OEMs versus replacement part kind of not commodity, but yeah, the non-branded stuff that you would tend to sell through HVAC, is that where the issue is, if you look at the group? And then my final question was just around acquisitions and obviously your recent consolidation. Did you have a look at Moscow, given the reach, and 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 would be great.

Sure. Yeah. I don’t think it’s a tariff issue. I don’t think I see it as a large issue at all for the group. It is one of those issues we continue to manage. So it’s not certainly as big an issue as the headlines in the newspapers for us. So I don’t think it’s specific two 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 that we sell, compared o one or two other large publicly traded 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. 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 particular area and in fact the own brand of course crosses a number of those business units in the US.

And yes, John, it was a very cheeky question and yes, you would expect us to look at everything in the space, but not comment on it publicly, sorry.

Okay. Operator, thank you very much. Clearly, appreciate you all joining this morning and taking an interest in the continued Ferguson story. If there is any follow-up questions, please do get in touch with myself, Mark and Nick. Thanks for your interest and have a good day. Thanks.