Ferguson PLC (WOSCF) Q1 2019 Interim Management Statement Call (Transcript)

|
About: Ferguson plc (WOSCF)
by: SA Transcripts

Ferguson PLC (OTCQX:WOSCF) Q1 2019 Interim Management Statement Call December 4, 2018 3:30 AM ET

Executives

Mike Powell - CFO

Mark Fearon - IR

Peter Kennedy - IR

Analysts

Rajesh Kumar - HSBC

Paul Checketts - Barclays

John Messenger - Redburn

Gregor Kuglitsch - UBS

Manish Beria - Societe Generale

Ami Galla - Citigroup

Kevin Cammack - Cenkos

Clyde Lewis - Peel Hunt

Robert Eason - Goodbody

Phil Roseberg - Bernstein

Operator

Ladies and gentlemen, good day and welcome to the FY '19 Q1 Interim Management Statement Conference Call. Today’s conference is being recorded.

At this time, I would like to turn the conference over to Mr. Mike Powell, CFO. Please go ahead, sir.

Mike Powell

Thanks, Holly, morning everyone and welcome to Ferguson's conference call, covering our Q1 results 2019. You’ve got myself, Mike Powell, and I’m joined by Mark Fearon and Peter Kennedy from our investor relations team. First, let me give you some highlights for the quarter and then clearly, we will open the line up for questions as usual. You'll see from the enhancement, we have a revenue growth for the group. It was good, organic growth up 6.7% in the quarter, acquisitions adding a further 2.3% given the total growth at constant currency of 9%.

Please refer this margin performance that was up 50 basis points basically the results by acquisitions and also the exits of the lower-margin wholesale business in the UK last year and therefore underlying margins up a touch. Total gross profit at constant currency up 10.7%, trading profit of 432 million, up to 10% on last year constant exchange, a little more turn the businesses now in the U.S., we generated good organic growth in the quarter, up nearly 10% of 9.6% and increased price inflation of around 3% acquisitions contributing a further 2.4% growth.

Growth was widespread across all the regions both geographically and across the major business units in supported markets. Sales grew well across the end markets at pretty similar levels to last year and we continue to take share. In terms of the market and sales in residential markets were pretty similar, in fact, all the markets were pretty similar to when we last came around the city, which is of course having sort of 4 to 6 ago.

Residential markets, we approximate to up 7% in the Q1, commercial markets very similar at 6%, civil and infrastructure markets up just over 7, and industrial grew about 12%. And I'd expect that our organic growth rate in B2C is moderated a little as we pursued our strategy of consolidating our marketing spend on pay-per-click advertising into fewer trading websites. And once that slows, the revenue growth quite deliberately in terms of the growth rate overall and goes forward to the business continues to generate profitable growth.

U.S. product margins improved. Operating costs were in line, though did include later inflation of around 4%, and in Q1, we experience a little bit more cost pressure in distribution and areas in fleet and courier costs. Our mindset now is the even though the markets are generally good. We are now seeing very close to the cost base. We continue to make sure that cost base and the growth doesn’t exceed growth in gross profits once we show them our shared cost and the growth of course, that we're generating in the business, so overall U.S. good results 400 million some 37 million ahead of last year.

Turning to the UK, the UK RMI markets where we generated majority of our sales have been pretty week. We continue to report like-for-like sales just so we give a better understanding of the ongoing business and how it's performing given the closure of the branches that we made last and the exists of that wholesale business towards the end of the first half. Like-for-like sales therefore up 1.5% and include inflation, price inflation of about 2.5% and the overall organic revenues, the total organic revenue declined at nearly 10% in the UK business. However given the better mix of business, gross margins were slightly ahead. Trading profit came in at $19 million. That’s a 2 million lower than last year constant exchange rates that are mainly due to our investment in the B2C platform in the UK.

Finally, Canada, that grew organic revenue 3.3% against tougher comps with acquisitions contributing another 5.6% to growth. Here, we see Ontario, Atlantic and Quebec regions all growing well in our business; although, Alberta was slightly lower. Gross margins were ahead, operating profit well controlled, trading profit $27 million, 4 million ahead of last year. So moving onto cash flow and net debt; net debt at the end of the quarter was in line with our expectations at around 0.9 times net debt to EBITDA, and that’s as I guided at the full year, that included cash flow of 266 million relating to acquisitions in quarter one, capital expenditures of 163 million and the normal working capital outflows due to seasonality.

Just to remind you with our full year guidance, CapEx will be about 400 million and that’s slightly higher this year due to the new investments in the Paris distribution center going into Southern California. And after that, we’re going forward in future years, I’d expect CapEx to return to more normal levels at around 1.5% of the sales. Since the end of the quarter, we’ve done a further small bolt-on acquisition, that’s Robertson Supply to business at 8 locations covering Idaho and Oregon, and is a leading residential and commercial wholesaler in that territory.

Forward M&A pipeline looks pretty sensible actually. It’s worth mentioning there’s still one larger bolt-on acquisition in that pipeline of circa $200 million, which I’d expect to close shortly. The rest of the pipeline consisted normal small bolt-on deals predominantly in the U.S. The overall guidance would be to prevent another $400 million of deals on top of what we’ve done this year, but a very sort of normal pipeline thereafter.

No change to Group’s capital allocation policy that remains unchanged, and we’ll continue to maintain a strong balance sheet with net debt to EBITDA within the range of 1 to 2 times. A couple of other quickies just before we open the line for questions, firstly we’re making good progress on the disposal of the Wasco business in Holland, and I’d expect to conclude that transaction in the next few months. And in addition since the quarter end, we’ve made good progress on the sale of the residual properties that we had resulting from the exit of the Nordics business. Again, I’d expect to close those out before the end of the year into cash.

Finally turning to the outlook, since the end of the quarter, U.S. has continued to grow well. Current indications are that growth will continue in the months ahead, which is of course our visibility that we’ve on the business. And as a result, we expect trading profit for the full year to be in line with analyst expectations. So in summary, we’re pleased with the growth rates at the moment. The decent start we’ve made for the new financial year particularly in the U.S., we’ve banked a very good first quarter, there’s still quite a long way to go across and remember revenue comps get much tougher as we move through the year particularly in the U.S.

So, Holly, many thanks, I’ll hand over back to you to take the first question, if I can. Thank you.

Question-and-Answer Session

Operator

[Operator Instructions] We will now take our first question from Rajesh Kumar from HSBC. Please go ahead.

Rajesh Kumar

Just on the U.S. growth rate. Some of the recent RMI data have been slightly weaker. Have you seen any indication in terms of the volume growth tapering off in any segments of the market? And also, could you remind us how the pricing comps look in the quarters ahead?

Mike Powell

We haven't -- I would remind you, we are probably short-term visibility, I mean clearly, we are aware of I guess the nervousness around a number of pieces of sentiment. And I think as you know, we tend not to look at monthly data just as monthly data. We tend to look at trends. I think for all of our markets, those trends remain pretty importantly also, order books and our customers' sentiments remain unchanged since we spoke to you for 3rd or 4th of October whenever we did the full-year release so we haven't seen a change in the in anything fundamental but clearly externally there's being quite a big change, including people are concerned. We remain vigilant on that, but we continue to manage what's in our control within the business. And certainly, we haven't seen changes in our order book patterns or our customers' behavior.

Rajesh Kumar

And just on the margins. The U.S. drop-through margin was slightly lower than what many would have expected. You indicated that was due to profit increases. Do you think the volume growth is strong enough that you can recover that in the coming quarters?

Mike Powell

It's fair, Rajesh. The drop through it is a touch weaker than we would have expected, that is mainly due to inflation -- cost inflationary pressures, and labor was around 4% so as the top end of our 3 to 4 expectation, that's clearly coming in closer to the four. I'm pretty comfortable with that number now for the year. The distribution cost, fleet and carrier costs have been certainly higher than we expected. I think that's the -- I think you know we have said in the past, our own drivers are generally -- our fleet is ours, but of course you've got fuel, you've got temporary labor and particularly carrier cost where we do a reasonable amount of distributions through have gone up due to the tightness in the U.S. labor markets.

I think that's likely to persist into Q2. There's always a fine balance of how much we pass on. As you know, we juggle top line growth, gross margins which you've seen have gone up and also cost base. Those three things of course don't act in isolation to each other, but clearly it's our job to absolutely pass on cost increases by working with our customers to help them win business going forward. We will continue to do that and in fact here today, I think the think the Q2 flow-through isn't going to see much recovery from those costs. I think we'll take those costs through Q2 and I think you would expect us to continue to look as to how we can work with our customers to pass those on as we get to the second half of the year.

So I think what does that all mean Rajesh? I think it probably means, in these markets with the cost pressures, as I’ve always said, with good supported markets with the high single digit through to low double digit, I mean it’s probably nearer the high single digit just here right now, but I was wrong last year Rajesh, I’d probably be wrong this year. So just in terms of the guidance that’s my best guess today, but there’s eight-nine months to go, so that’s my best guess out here today, if that helps you.

Operator

We’ll now take our next question from Paul Checketts from Barclays. Please go ahead.

Paul Checketts

I just wanted to ask about the acquisition spending, Mike. Obviously, I’ve seen an increase of late and you’re saying there’s going to be some more. Could you just at the minute give the people a word about how we’re on the cycle? Could you just elaborate on how you’re approaching acquisitions to make sure you’re not spending too much when we’re already in the cycle? And how you decide which businesses should become part of the group at this stage and multiples, things like that?

Mike Powell

Sure, yes -- no. Are we spending shareholder money wisely? Yes. I think Paul it’s a fair question, the approach doesn’t change frankly I mean you’ve seen generally as a business, we’ve done average about 250 million spend a year other than about a year ago we said there was a good pipeline coming and there was a number of both targeted strategic acquisitions, read into that the Safe Step and Jones Stephens. Those are both private label, own brand acquisitions. So strategic, by the way doesn’t mean you pay lots of multiples and you don’t get a shareholder return, that is not what that means. They were absolute strategic fit for us to go and acquire and that’s part of the reason the gross margin increased and with private label and own brand, of course cost base increases, you’ve to do your own QA and QC.

So I think Paul as we talked about those, those were absolutely core and strategic, I think we’re very much backed down a normal M&A pipeline, absent the one that I talked about, which I’d hope to conclude soon. And that’s a typical infill if you like, in the traditional space, but it is into a territory that we’d like to be number in and we’re not today. So, I don’t think the thinking has changed and that acquisitions is in the pipeline of larger ones, has frankly been around for about 10 years, it certainly went to the board four years ago, because we’ve had to refresh the paper fairly recently, and the multiple on that has not changed over that period.

And so, I think we’re very much down to the normal M&A levels post that, I think for the second half, and they’re all in line with strategic intent. And I would say Paul -- so that’s our approach, there’s a ton of stuff coming to the market, and I grant you that, we’re clearly not planning to execute on that and because the prices are too high, they’re not attractive or they don’t fit our strategy. So the amount let’s say the banks are generating that’s crossing our desks is definitely increasing, and it doesn’t mean that we’d do more work on this whole. We remain clearly focused. Pretty disciplined on work space and what we’re works the first. Is that helpful?

Paul Checketts

And I just wanted to ask the second question which is around the B2C side, and some of the comments in terms of how you’re addressing the challenges with Google. Could you elaborate slightly on what’s happening?

Mike Powell

Sure, I think we call it pay per click costs, Paul, but yes, you’re absolutely right -- I mean the marketing costs of attracting customers continues to escalate. That clearly economically is not a position we like and therefore we continue to control that. So, I think with any B2C business, your need to control the cost of capturing the customer as best as you can and you need to get the customer to come back for repeat business as ultimately you can. And we are trying to address both of those, but first you've heard me talked about, we are willing to increase our profits for less revenue. You've seen us do that. I just touched on that.

We did actually sort of the back end of last year, first quarter, and we’ll continue to do through Q2. We have a number of signs particularly for our U.S. B2C business, Internet sites. They’ll you cost you money. We're now consolidating onto much fewer sites where people can enter our domain and indeed getting repeat customers to not come through search engines, so indeed type in our name direct. And those are higher repeat customers and that will repay less cost of attracting those customers.

That’s basically strategies that they've grown, but there is a certain way of tactics to reduce our spend and increase our profit. Those have an impact on revenue. We will lose certain customers and that's the fact. And if you think of how it will affect the business for B2C business is about 9% of the group. So, it’s not going to affect the growth rate dramatically. But it is in zero percent, but it’s not 1% higher, it’s a much between those two in terms of affecting the growth rate. Importantly, we increase the profitability that business we did in Q1. Does that help?

Paul Checketts

Yes, thank you very much. Yes, it does. Thanks.

Operator

We will now take our next question from John Messenger from Redburn. Please go ahead.

John Messenger

Hi, Mike. Just one for me actually. Just let me come back to the whole drop-through gearing issues in the U.S. that flow-through. Can I understand, obviously, the revenue growth was I think around 395 organic and obviously there was about 100 coming in from the acquisitions? Was that much profit on those acquisitions in the period? And I guess somewhat I think about flow-through, I'm more interesting in the organic to organic, if you have any just clearly the acquisition may have been dilutive? Or there may have been obviously the frontend costs that you have to take again P&L just in terms of transaction costs there? So just to understand, if I could a little more in terms of the composition of that EBIT movement on the $37 million that was added, can you give us a bit of a breakout where those much in the way of acquisition during that? And the other one was just the sort of back on the pipeline acquisition. I think back of that sort of result, I think you’ve talked about 350 as future spent in terms of the pipeline. Obviously, you've spent about full fee in the quarter. Can I just check with the 400 that you've mentioned? Was that incremental from here? So, is there kind of quite a bit more and there is another 90 million odd that’s been out there into the holiday? That was just think about math just to understand where you're on the M&A?

Mark Fearon

Yes, I am Mark here. Just onto your second question first. As we said in this, we’ve done two 400 so far and there is another. We think another 400 to come. So, we think this year will be in the region of $700 million. As Mike mentioned, it's actually two slightly larger transactions in there of that 200 million order. So you back out those two M&A transactions actually, the underlying pipeline is pretty numbers.

John Messenger

Okay.

Peter Kennedy

John, in terms of the acquisitions that we have done to-date the -- whilst to gross margins gone up, the cost base has also gone up, the cost base has also gone up and therefore actually in terms of trading margin, it doesn’t have a significant effect at all, in terms of the deals that we've done. As I said I think and most of you calculate data actually I think initially or six months ago, how do acquisitions affect the flow as they are all sort of slightly different depending on what they are and how much first-year integration costs we have to endure or choose to put together. I think, the ones we've done so far I think you should see with these little effect in terms of the trading margin.

John Messenger

We are seeing center effect, Mike, just to be clear, as in they are kind producing the 7% EBIT margin or they're not producing much because obviously you're taking those front end cost to encourage.

Mike Powell

No, I think they are producing that margin that you've just described.

Operator

And we will now take our next question from Gregor Kuglitsch from UBS. Please go ahead.

Gregor Kuglitsch

Hi good morning, thanks for taking my questions. I've got a few, so the first one is. Can you just normally you talk about an exit rate and kind of how you've illustrated and gather obviously it's only a month in the second quarter? But is there any discernible change from the kind of 7% growth organic that you've just printed or just so we can get a sense of where things are headed there? Second question is on inflation, if you could provide any kind of outlook how you think that's going to trend obviously that's also commodity moves going on and talking specifically here about the U.S. I think it's 3% in the quarter. So I want to understand if you expect that to start slowing as we sort of line to the next couple of quarters? And then the final question is on M&A and perhaps also on guidance. So let us understand, when you are saying your EBIT today outlook is in line with consensus. What are you baking in for the M&A contribution that these and specifically does it include some contribution from the deals that you expect to conclude shortly to that $400 million or is it kind too precise and then kind of gets lost in the rounding?

Mike Powell

Yes, let me take those unlock and interrupt on that rule. Exit growth and normally, we said in terms of the USA, we have seen a good November growth in the U.S. I haven't actually got the final numbers for November. We are still scrubbing those as you would expect, and clearly, we need to we look through the Q2. Markets are supportive. Our visibility is as you know only eight weeks. The other thing I will say, you know the normal volatility within our business -- and then everybody is sort of slightly nervous at the moment in the external markets. Even I think we have has a year-end certainly on some one on one meetings, the U.S. organic growth rate last year was 9.9% for the year. Our monthly volatility within that was between 6 and 12 each month was between 6% and 12% and the average 9.9%.

So it's a little bit back to my earlier comments and we don’t really worry too much and about monthly volatility, we tend to worry about trends we are not seeing any change in those trends at the moment and the exit rate for November certainly the initial feel for that is absolutely within normal level of volatility and in fact the growth in the U.S. I think was good in November all the books remain good, customer sentiment remains good. So, we’re aware of the external environment and the nervousness around that and therefore remain very conscious around costs, but I have to tell you, from where we sit with our limited visibility and things appear relatively normal.

In terms of the inflation the difficulty with inflation is I don’t know what the future inflation is and there’re a number of factors in that. If you wanted my best guess, it’s somewhere between 2% to 3% for the U.S. because of course as you indicated, it starts lapping the previous year, and it’s clearly quite volatile out there, I mean the discussions around tariff, that could quite quickly lead to deflation if they completely stopped as opposed to just not implementing the net loss. You've got oil, which last time we were on the road, people were worried about the $1,800 a barrel, everybody is now worried about $1850 a barrel, and it’s only six weeks later.

So there’s a ton of volatility around and therefore it’s pretty difficult frankly to have a view on that too much, but if you wanted my best guess today its two to three. And in terms of the range of M&A and analyst expectation, we don’t include future deals when we talk because until we complete the deal and each deal is different, back to John’s question around flow through, different deals have different characteristics, some require much higher first year integration costs than others, and so when we talk about the future it is just on money that we’ve spent to-date. Does that help you Gregor?

Gregor Kuglitsch

So that's $700 so not in the guidance.

Mike Powell

Yes.

Operator

We’ll now take our next question from Manish Beria from Societe Generale. Please go ahead.

Manish Beria

So I’ve three questions. The first one is I wanted to know what will be the impact of IFRS 16 accounting, so will it change in any way the capital allocation policy for you because that will increase the leases, I mean that you’ve placed in the balance sheet, so that might change your net debt-EBITDA? So that was my first question. The second question was I assume you’re doing so much of equity share now, so probably there’ll not be any buyback but just wanted to check I mean how do you decide between a buyback versus special dividend and also raising your ordinary dividend, so what sort of criteria you use when you do either of those? And the last one is on the U.S. margins, that’s also going by your comments, it seems like the gross margin only expanded by 10 basis points in U.S. in just my calculation I don’t know how much you agree with that, so can you comment, I mean is the gross margin expansion in the U.S. this quarter was lower than what you probably have been in 20 to 30 basis points expansion?

Mike Powell

Thanks Manish. Let me take those, I’ll probably do them in reverse order because that’s the way I’ve written them down. U.S. -- underlying U.S. gross margin expanded a touch, we -- by the way, 10 bps a year Manish and I wouldn’t describe as just only, I think that would be a good performance, we always say top line growth with incremental gross margin in control of costs, is a good business model. So expanding our U.S. -- our underlying U.S. gross margin a touch we think is good and sensible and controlled particularly when you go in the top line to the order of the 9% that you see, we’re happy with that, so, and we’ve confirmed today that’s a par underlying gross margin having the increase to touch as we go top line growth.

In terms of the capital allocation, I love rolling this answer people think it is really boring, but it is consistently solid how we think around capital allocation. We put our capital aim to the business first, that’s organic growth that is the first use of cash. The second use is for growing the dividend in line with long-term earnings possible. So that’s the second use. And then the third use is M&A, for are the small built on acquisitions or where we say strategic need and complement such as those targets own run late acquisitions.

I talked about earlier. It is only that, if we have surplus capital that we then look to return that shareholder on a reasonably basis when we are clearly someway outside of our net debt to EBITDA range of 1 to 2. So that is all we have done, we’ve also have a track record today and what we see speed data. How we return that cash flow depend on the size and not to the cash in the second stances of the count. And, but I think importantly and we spend capital back into the business onto the -- adding to M&A and any surplus the things goes back.

And the fund IFRS-16 we can show you all looking forward to and I think the guidance that I gave you before I can give couple of sort of helpful point of business, nothing changes in the real world for us, okay. So, we’ll continue to run the business exactly as we are. And clearly in a counting world the operating leases will come back onto the balance sheet and add some rentals got that. We’ll give an update to the market NGO cost in terms of the specific. But clearly, if those changes are reported net debt to EBITDA again the Company than clearly we’ll change our range, it doesn’t actually change anything in the real world. I think that’s the important thing to note. But yes, the current net debt to EBITDA range of 1 to 2 is based on current IFRS. Clearly if IFRS changes, which is well and clearly we’ll update the range, but you won’t see a fundamental real little change in our capital allocation policy. I hope that answers clear there.

Manish Beria

Yes. That’s clear, but I also wanted to check I mean so last year you raised your ordinary dividend by 20% and you’ve talked about dividend in terms of the whole type like this. So, you correct me if I mean that raise was correct and you see good type and you can maintain even if there is a recession or a slowdown in the U.S., those sort of dividends timing is sustainable. And the second is on the buyback versus the cash dividend specifically I mean does is signal anything I mean when you do a buyback rather than a special dividend to that I mean these have price on undervalued you do those sort of analysis I mean when you do decided between buyback and special dividend?

Mike Powell

So, it was in the final yes it is otherwise we won’t have done it. The second day on the buyback it is because we have a surplus capital. So, when we have surplus capital it is only then that when we chose to represent that to shareholders.

Operator

And we’ll now take our next question from Ami Galla from Citigroup. Please go ahead.

Ami Galla

Hi, just one question for me. In the UK, can you give us a more color as to what are you doing in terms of restructuring there and where are we in the restructuring process? And then the second one, in the UK, you’ve flagged that you’re investing in the B2C platform a bit more detail around what are the investments there would be helpful?

Mike Powell

Sure. Thank you for your question. The restructuring in UK continues to. The management team; Mark Higson, who leads that business; and Simon, the FD, are doing some good work and the main phase of that restructuring will clearly finish as we go through the next quarter or two and some of the certainly lived in the UK will have seen the rebranding has finished we are just about next week to exit the national distribution center. So we had a big warehouse up in Leamington Spa. That is just about emptied out now into regional distribution centers and that will close that will trade money.

I think importantly whilst we are not seeing it yet in the results the lead indicators that Mark Higson and the team look at in the U.K. business, such as customer service, Net Promoter Score, availability of products in the right place at the right time and ordered by the customer all time selling obvious stuff, it's stuff we haven't done very well in the past all those lead indicators from a business perspective are certainly turning up and have been in some cases for a couple of months now. That's deeply encouraging. Of course, it's entirely expected by myself and John.

But as I say the encouraging that the lead indicators are coming through clearly as a financed development to be coming through the numbers which I certainly expect to start to see in the second half of this year. So don't expect anything much in Q2. That's exactly what I said three months ago too but we should start to see some of that coming through in the numbers. But there's no doubt, we all are trying to run a small and more profitable UK business that's why we exited a ton of low margin business. Last year, it's just taking a bit of time to get this stuff turned around and the customer product in the right place and certify again having not done frankly a very good job over the last two to three years.

And your second question on B2C platform is that we continue to invest we've just opened a new warehouse in -- near Liverpool, between Liverpool and Manchester. We continue to invest in systems and technology as our B2C business grows and of course as customers as we know in B2C ourselves we expect a good service and availability so we continue to grow that business. The challenge, as with all B2C businesses, of course, will continue to remain about customer traction and customer repeatability, but certainly there are a number of IT investments and platform into that business I hope that were executing up in those.

Operator

We will now take our next question from Kevin Cammack from Cenkos. Please go ahead.

Kevin Cammack

Two question while I think this sort of relates why. I guess it's all hard that is can you track of all those going on the U.S. tariffs. I was just wondering if you could give us an idiot's guide of how this may have or potentially it could have an impact on the business it's all. And similarly if you look at the UK are there any contingencies that you've have to put in place already or potentially you have to because of Brexit?

Mike Powell

Yes, so let me tell you UK and the last I'll let Mike touch on tariffs. And then, the UK, I mean the Brexit situation of course it's something that's getting closer at least, nobody is entirely sure what that is. I don't think our contingency planning has changed for that at all Kevin. We clearly retain quite a lot of stock in our warehouse if that would allow us to service our customers. I think, if you stand back on it, we’ve done all the defensible contingency planning. If the ports get blocked, have to be honest Kevin and if plenty of supplies on aren't going to be the first ones that get released across the border. And so, we’re not at a competitive advantage or disadvantage to any of our competitors. But I would have thought surgery and medical supplies would have been pretty high up the list. So we’re realistic about it, I think we’ve got good contingency plans in place as best as we can given that nobody really know what on earth is going on. But we remain vigilant to it, given that something is getting closer, I don’t think the group we see this as a high risk issue.

Mark Fearon

Kevin on tariff, we kind of set out the cognitive impact in the back of the appendix of the full year results. And just to remind you, we obviously were thinking that the Section 301 list 3, which was in those recent rounds of tariffs. Was getting out to 25% and obviously now, the Presidents of China and U.S. have had a hug, and we’re going to sort of sustain hostilities for a little while the overall impact on the business that was actually pretty minimal; so we gave a sort of COGS impact about $12 million all in.

Kevin Cammack

[Multiple Speakers]

Mike Powell

So I am going to say, that’s a 12 million in COGS, we would fully expect the pass through to customers, and so overall I think a reasonably minimal impact; obviously it’s had an inflationary impact on our business, obviously the worries, is if at a stroke of a pen Mr. Trump and -- decided to suspend hostilities entirely, deflation is not good for our business, and it solely impacted deflation on the business, couple of years ago when we went through the industrial. So I would say it’s small impact but it would have a deflationary impact on our business, but I don’t think that would be…

Kevin Cammack

What you described is a current suspension of hostilities? If that were the permanent rather than temporary, are you saying the only unwind is around 12 million?

Mike Powell

Yes. But actually in terms of Chinese whole thing for us is pretty small, it’s not a big part of the business.

Mark Fearon

I think Kevin, just going away from the thought of the absolute detail, if tariffs were completely taken away and that generates good demand and keeps everybody calm. That has to be a good thing. Whether it’s a small short term impact on pricing, it feels to us getting rid of them must be a good long term political desire on everybody’s part, and but, yes, I mean hopefully a bit of short term ups and downs has been today and we’ll manage that, I think long term we feel that that’d be good if they were completely taken away.

Operator

We’ll now take our next question from Clyde Lewis from Peel Hunt. Please go ahead.

Clyde Lewis

Three, if I may. One, on sort of the UK and Canadian businesses, if you could just, I suppose, follow on from your comments about the U.S. start to Q2 just so we could say a little bit about those two markets? Secondly, where are you with regards to U.S. organic branch openings at the moment? Just sort of get an idea of what’s happening in that front? And then the last one on the U.S. was employee numbers, can you give us an idea of what sort of rate of increase you’re seeing at the moment in the U.S. in terms of average number of employees?

Mike Powell

Yes. Let me tell take UK and Canada, and Mark you take branches and employees. In terms of UK and Canada, again I don’t really want to get into the monthly reporting, as I think particularly current time, people can read way too much into monthly reporting. And of course, at some point, they will be right. So, we’re not getting into that and I’m -- but listen I think it’s across the group and U.S. remains good.

In Canada, we’ll definitely I talked about in the script, we definitely seeing some weakness around Alberta. For sure, UK market, I would say the UK is much more our business is really about self health. The market we don’t expect to be great. In some respects, we have just in terms of self health in our UK business, we are getting on and we are getting out back. And you’ve said we’ve talked about some of the successes we’ve had, I think it’s very much we need to focus on our customers and delivering the right products at the right price, at the right time in the UK at the market, we’ll response with our cost base.

Mark Fearon

Just on branches Clyde, we -- so net actually we brought some of the grower down by about 10. We hit a little bit of curding in the U.S. for some branches. So, I know obviously remember we’re not – our strategy is we’re not put seeing a lot of space growth in this business, we won’t try and put more to employee and branches as more outside sales people, visiting customers rather than space growth for returns sake. So in regions where we’re underpenetrated yes, of course we'll put branches in, but overall you shouldn’t expect organic branch be large in the business.

Mike Powell

And similarly I'll add obviously through the acquisition about of about 400 adds are in, they planned another 500 heads come through.

Operator

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

Robert Eason

Just on the U.S., just understanding comfort environment there. Are you seeing any change in behaviors around the use of working capital, around kind of gross margin behavior whether regionally by product and just given the volatility that we all see and from our side? And secondly, excuse a bit if it’s too early given the finance that all came out at 7. Just in terms of your thoughts on the plumbing and heating market and in the UK given that one of your competitors now have put up the for sales sign, what's your initial views on that for your own business and going forward?

Mike Powell

Thanks, Robert. First question is a good question, Robert. We are trying to think as you are asking the second one. There was clearly been -- the only thing that I can think of Robert is, there is been a state of people kind of play a little bit around the fringes on tariffs in terms of forward buys, securing supply, making sure that customers pricing has been given is honored, because of course some of the contracts as you know that we provide are long-term.

And I think there has been clearly a ton of work of re-pricing across the whole industry post some of the tariffs. I don’t think if anything fundamental elsewhere that we're seeing either in terms of either credit lines or customer behavior, you know that capability or that sort of stuff is actually pretty normal at the moment. So that is nothing I would say in particular but we think quite hard about you know those examples I've just given you really.

In terms of, yes, Travis' announcement this morning. Listen, I saw it probably about half past seven we've been pretty busy since then, fussing about our own business. So listen, you've heard my view on the UK business I think for us we remain clearly focused on stocking our power guidance in this market. So clearly we'll look to understand Travis' announcement in a little more detail and going forward that we remain pretty focused on our own business right now.

Operator

Yes. We will now take our last question from Phil Roseberg from Bernstein. Please go ahead.

Phil Roseberg

Just you had mentioned at the full-year the changes to your tax guidance based on the profitable changes Switzerland and state taxes rising. Could you possibly give us an update on that situation and where you see it's that any change from what you talked about in October?

Mike Powell

Yes, I think that the summer level, Phil, there's probably no change. I mean, clearly, the Swiss tax reform is still going through trying to get regulatory approval and you might see we've done a bit of work on this thing and I don't think anything fundamentally changed and there is certainly no change to the guidance I mean the guidance is still pretty solid so I think in short no change at all.

Phil Roseberg

And on the U.S. side the states rating taxes opportunistically?

Mike Powell

Yes, so certainly in the U.S. there is a little more pressure on state taxes. I think, for our group that's well within the guidance I've given. Yes, you are right I mean certainly the state's overall I think the tax rate of 21 and it clearly doesn’t as you've got 21 plus state tax plus sometimes this state taxes are much broader as are some of the federal taxes and for the U.S. from a tax rating for us as I said at the year-end is unlikely to work and as that pattern we haven't changed but I don't give any change to guidance I think we continue to look at the various options for the group's earnings I think the guidance we gave you is good guidance going forward.

Mike Powell

Phil, thanks very much. Operator I think that's it. I just wanted to conclude by thanking everybody for showing their interest this morning and on a continuing basis. Thank you very much for taking the time to dial-in. We appreciate your support and enjoy the rest of your day, wherever you may be. Thank you. Back to yourself operator.

Operator

Ladies and gentlemen, this concludes today's call. Thank you for your participation. You may now disconnect.