Ferguson Enterprises Inc (FERG) 2004 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to Wolseley's Interim Results announcement for 2005. And also welcome to those of you that are listening through the webcast. We're glad you could join us and all of you that are here will be glad to know that we're not using autocue this year. That's an inside joke for those that have been for the last couple.

For those of you in the room, please make sure your phones are turned off so we don't have any disturbances during the broadcast, and when we come to the questions at the end, if you would wait for the microphone before speaking, we would appreciate it. That way, everyone can hear.

In a moment, Steve Webster will go through the financial review, after which I will give you a flavor of what the companies have done over the last 6 months, and what we intend to do going forward. At the end, we'll be delighted to answer your questions. I have other executives here with me, most of whom you know, that will help me with the questions. Familiar faces are Chip Hornsby from Ferguson Enterprises, Fenton N Hord from Stock Building Supply, Adrian Barden from Wolseley U.K. and the newcomer on the table is Rob Marchbank, the new CEO of Europe. Somebody's going to give you a hand, Rob! Anyway, we're glad to have you, Rob.

Starting with the operating highlights, though, just for a minute before Steve starts, we have produced another set of record results, and for the 9th successive year. And we're justifiably proud of what we've accomplished, again, this past 6 months. We'll come back to the details in a minute, but from an operational point of view, the key highlights are that in constant currency terms, organic sales growth across the Group was up more than 11%. Ferguson grew 17%, Stock grew 15.1%, and Canada, 11.2%.

The Group's trading margin rose from 5.3% to 6%, with all 3 divisions seeing improvement, despite additional central costs and infrastructure investment. Several of our businesses showed significant improvement in performance, and they outperformed the market again. Notably, Ferguson had strong organic growth, with continued supply chain efficiencies. Stock continued to get benefits from their restructuring and enhanced market focus and the U.K. achieved a 7.7% organic growth, well ahead of the market.

PBM achieved profit growth ahead of expectations, and in fact, we achieved underlying profit growth in almost all of our European businesses. All in all, it was an excellent start to the year, but we'll cover more on that later. First of all, Steve will run you through the numbers. Steve?

Thanks Charlie. Good morning everybody. I'll come back to the figures in a little more detail in a moment, but these are the headlines. I won't comment on every line, but let me just pick out the highlights for you. Reported sales in sterling were up 10.4% at £5.3b. Trading profit is up 25.4%, at £322.3m. Currency translations again impacted our numbers of course, negatively, by just over 5%, reducing sales by £250m and trading profit by £14m.

Group trading margin has risen from 5.3% to 6%. Moving down to the gearing line, still at a modest level, at 55%, and interest cover is strong, at 21 times. Operating cash flow in the first half was strong, and increased by £200m over the £99m generated in the first half of last year. The interim dividend is up 12.8%, to 8.8p per share, and is expected to be 1 third of the total dividend for the year. Return on gross capital employed increased by 16.7% to 19.4% for the first half.

So in summary, we'll report strong sales and profit growth, with an even higher return on capital, and a return to strong cash-flow generation. And let's look at some of the results both in sterling and on a constant currency basis. You will see in the blue column, as usual, the percentage increases on a constant currency basis, with sales up 16.5%, operating profit before goodwill up 32.6%, profit before interest up 34.1% and profit before tax, and again before goodwill, up 32.9%.

Across the board, we've significantly exceeded the Group's double-digit growth targets. The sterling figures, after currency translation are shown in the percentage change column. The interest charge increased marginally, from £11.6m to £14.3m, primarily as a result of higher Group debt because of acquisitions and of course, higher working capital to support the growth. And finally, profit before tax before goodwill is up 25.5% to £308m and after goodwill, is up 26.9%.

The weakening of the U.S. dollar is, of course, the principal reason for the £249m adverse currency translation effect on sales and just over £14m effect on the trading profit, although this time round, we also have the euro weakened against the pound as well. U.S. dollar flows represent around 59% of Group trading profits, and euro flows about 18%.

Earnings per share, in constant currency, highlights again in blue, on the next slide. EPS before goodwill is 33.7% up, and after goodwill, is 36.3% up. After currency translation, EPS before goodwill is up 26.1% and post goodwill, up 28.4%.

Moving on to cash-flow, this is 1 area, remember, which had quite a lot of attention in relation to our results for the previous financial year due to the high level of cash being absorbed into working capital, to fund our strong organic growth and additional stocks of commodity products. If you remember I said that this year, for the year as a whole, we'd expect to get back to our normal level of more than £200m in free cash after dividends, and you can see we're making good progress towards that.

Cash flow from operating activities increased £99m to just over £300m. Last year, we had a working capital outflow of £217m, whereas this year, it was only £71m, despite that very high level of organic growth. Below the operating cash-flow line, items worthy of note are the increase in the cash acquisition spend from £73m to £206m, which I'll come back to shortly.

CapEx was up £38m, from £72m to £110m, reflecting further investment in the business, for example, the new distribution center in Iowa, the extension to 2 other DCs in the U.S. Investment also continued in the new U.K. and French corporate offices, and also in the common IT platform.

In the other category, at the bottom there, we have amongst other things the sale of fixed assets at £57m, primarily relating to the disposal of properties that we acquired as part of the Brooks acquisition and £18m purchase of shares by the Group's Employee Benefits Trust. Overall, net debt increased by £174m.

Just a word on the working capital ratio at the bottom, because we calculate our working capital to sales ratio based on a 13 months rolling average basis, the higher working capital levels of last year are still having an impact on the calculation now, so we have seen an increase in that ratio from 15.2% in the first half of last year to 15.5% this half. The target remains 15%. More importantly for this year is that we expect to get back to more than £200m of free cash-flow after dividends for the year as a whole, and of course, we are using the capital deployed in the business more effectively now, as demonstrated by the significant increase in the return on capital for the first half.

Turning to acquisitions, we made 13 acquisitions during the first half, with the consideration of £217m. Those 13 acquisitions are expected to contribute an additional £354m of sales in a full year. The largest acquisitions were Brooks in Ireland, Panel Martin in the U.S., Klockner in Austria and Iser Zauli in Italy. We continue to pursue a number of acquisition opportunities in North America and in Europe, and our current target remains to spend around £225m on bolt-on acquisitions on average each year, supplemented by a large acquisition every 2 or 3 years or so.

We are also continuing to invest in our organic growth through new branch openings. We added a further 122 net during the first half. 46 new branches were opened and 76 were added through acquisition, giving a total of 3759 as at January 31, 2005. The roll-out program of the XpressNet stores in Ferguson is progressing well, with 15 of the planned 50 openings this year added in the first half.

Moving to the balance sheet, you will see goodwill is up from £659m to £732m. That movement, of course, reflects the acquisition spend, offset by the amortization charge and a bit of currency translation. There are no impairment provisions required. Tangible assets were up from last year, again mainly due to acquisitions and CapEx, partly offset by the impact of the weakened U.S. dollar on the translation of our U.S. assets.

Net current assets are up from £1475m to £1750m. Net debt is up, as we saw on the previous slide, to just over £1.1b, and shareholders' funds, overall, are 15% up to more than £2b for the first time. And let's look briefly at the financial performance of each of the 3 divisions, first European Distribution.

In the blue box, as usual, the constant currency figures show sales up 11.9%, and operating profit up 19%. After currency translation, sales are up 11.2% and profit is up 18.2%, a great achievement when most of the European markets have been pretty flat. Overall, we saw good organic sales growth of 5.3% for the division as a whole, with strong performance from the U.K., which achieved 7.7% organic growth and more than 7% was also achieved in Italy, the Netherlands and Luxembourg.

Acquisitions, principally Tobler, Brooks and Klockner, contributed £132m of sales and £8m of trading profit. Increases in the net margin were achieved by almost all of the operating companies in Europe, and this led to the divisional margin increasing from 5.3% to 5.6%.

Now North American Plumbing and Heating, another outstanding set of results. In constant currency, sales were up 19.8%, and trading profit up 43.8%. After currency translation, sales were up 10% and trading profit was up 31.3%. Currency translation, as you can see, reduced sales by £149m, and profit by £9m. Organic growth for the division as a whole was 16.3%, reflecting 17% organic growth in the U.S., including, of course, that commodity price effect, and just over 11% organic growth in Canada.

The divisional trading margin rose sharply to its highest ever level of 6.9% compared to 5.8%. Wolseley Canada improved its margin, but the big gain was from Ferguson whose margin was up from 6.1% last year to 7.4%. Also benefiting profits was commodity price inflation in the first half, which boosted Ferguson's profits by approximately $12m to $15m.

In U.S. Building Materials Distribution we're delighted with the continuing improvement in the performance of the U.S. Building Materials division, primarily, of course, resulting from management action to improve market focus and restructure the business. The benefit from higher lumber prices was partially offset by lower structural panel prices, but stripping out the effects of these, the underlying performance was much stronger.

In constant currency, sales were up 20.5%, trading profit up 42.3%. After currency translation, sales were up 9.6%, and profit by 28.6%. The 15.1% organic growth was less than 5% price related and more than 10% volume related. The trading margin for the division, which of course is after the allocation of central costs, was up from 4.4% to 5.2%. Stock Building Supplies' own trading margin increased sharply from 4.7% to 5.5%.

Let's take the usual brief look at commodity lumber prices which, together with the structural panel prices, directly affect about 44% of Stock's product range. We had a further benefit from lumber price in the first half and the figures at the top of the slide show how the $399 for the first half compares to an average of $340 in the first half of last year, which is an increase of just over 17%.

The price at February 2005 was $420, which is 12% up on the February 2004 figure of $376, and that gives an increase of 16.5% for the year [playing]. Our expectation is that lumber prices will hold up pretty well over the next several months. Longer-term, however, we continue to expect prices to stabilize in the $340 to $380 range.

The effect of high lumber price and the 15.4% decline in structural panel prices, from $474 per 1000 square feet to $401 was to increase Stock Building Supplies' sales by $66m overall, or around 4%.

Now, the exciting bit, IFRS's. This slide is just to remind you what I said in September about the effects that International Accounting Standards are likely to have on the Wolseley Group. Now, the current European proposals require to adopt IFRS's in the preparation of our financial statements from August 1, 2005 onwards, those to the year ending July 31, 2006.

Based on the initial assessment, the areas of greatest impact for us are those listed, no surprises there, I don't think. The presentation of the financial statements will, of course, be affected, but at this stage, we don't expect there to be any significant distortion. I'm very well advanced with the project to quantify the precise effect on the financial statements, and we're planning to provide more information at the time of our trading statement update in July.

So in summary, our financial performance for the first half was very strong, with sales, earnings and return on capital all up strongly. Trading margin increases were achieved in all 3 divisions. We're on track to achieve our target of £200m of free cash-flow, after dividends, for this year. The interim dividend is up by 12.8% and is expected to be 1 third of the total dividend for the year. I'd now like to hand back to Charlie for his operational and strategic review.

Thank you Steve. Well, Steve's told you, the European businesses had a good performance overall, and again, it was the U.K. that continues, with the best economy, and turning in the best performance. Sales were up 13.6% and trading profit increased 17.5%. Organic sales growth was up 7.7%, which is significantly ahead of the market. And I really think this is a fantastic performance by Adrian and his team, particularly when you consider all the initiatives that we have going on in his business.

We've gone over these with you in the past, but if we think about the re-branding that we're doing, that still continues. Part of the effort to bring these brands together, we were going to close certain sites that we had mentioned, and some of those have already been closed, and consolidated. We've started progress on our new HQ in Leamington Spa, and that's well underway, and he has over 250 employees now in Warwickshire waiting for the new HQ to be finished in August.

On top of that, in January, we announced £100m investment to expand logistics and supply chains. This includes a new, national DC which will be built alongside the new HQ in Leamington Spa, a regional DC to be built and opened in the North West, and significant support technology to be implemented to support these new initiatives.

All of this will be operational within 3 years. These investments will help us meet the growing demand for wider product range, better service to our branches and our customers and lower our costs. Over time, this should lead to improved margins as well.

Across the U.K., gross margins improved slightly, on a year that there was strong competition and toughening markets. We did benefit from increased Government spending and RMI continued to be strong although with an increased interest rate, the rate of growth in the second half may slow. But I will say that we haven't seen any of that yet.

Overall, Wolseley U.K.'s trading margin was up from 6.7% to 7%, in spite of all the distractions that Adrian and his team have been dealing with. As I've already announced, there are a number of costs expected in the second half that will impact margins for the year. You've got the re-branding, you've got relocation, you've got an extra £6m pension charge which we've talked about in the past, and you've got the initial cost of the DC. After this year, we would expect the upward trend in U.K. trading margins to continue.

The branch opening program continued with 13 net new additions, and the Brooks acquisition in Ireland added 18 new locations which have been performing ahead of expectations. This new Irish acquisition is a great complement to Heatmerchants, our Irish plumbing and heating business, which continues to grow strongly, with sales up over 20% in the first half of the year.

On the continent, French government tax incentives have been helping the new residential market, but RMI is the principal driver behind Brossette and PBM. And RMI continues to grow at a slower rate than new construction. With a weak industrial market, and high levels of unemployment holding back consumer confidence, the market environment is likely to remain the same. We should see more benefit from new housing feeding into our businesses in the second half, with PBM which tends to be earlier in the construction cycle than Brossette having a good start to this new year.

Overall, sales for Wolseley France were up £22m to £783.9m. Brossette's local currency sales and trading profit increased 1.2% and 1.3% respectively. This is probably slightly behind the market. To remedy the situation, we have made changes in some of our regional management. We have implemented a new branch and management structure which are deep cultural changes for the Brossette team to handle. Managers are still getting to grips with their new responsibilities, in addition, changes to the reporting lines and personnel changes. We're also moving to consolidate our product range, which will allow us to manage the business more effectively and a move to centralized purchasing.

These changes should lead to a stronger second half performance and improved margins. We are now focusing our attention on their logistics and enhancing their whole distribution efforts. As part of the program, we are considering a new regional distribution network to replace a large number of warehouses over the next 18 months. This will enhance our customer service, facilitate future growth, give us better control over our inventories and improve our working capital and our profitability.

Although PBM is also mostly focused on RMI, it performed ahead of the market and ahead of our expectations, with local currency sales up 6.6% but more importantly, trading profit up 9.7%. New housing helped sales at PBM, particularly in roofing, insulation and materials. But the market in this area tends to have lower margins than RMI, and the competition is very aggressive in the new construction area.

Furthermore, a shortage of contractors and labor means that the RMI work is being lost as labor is pulled into new housing. The forecast for the rest of the year is for more social housing in France, at the expense of private housing, and this is an area that PBM doesn't really operate that aggressively. Despite this, we were very pleased with the progress made by PBM, and we are expecting a good second half performance.

The rest of continental Europe has encountered flat markets again but our business made good progress. Austria has a new management team, and they're off to a good start. Overall, OAG achieved more than 30% improvement in profits, on a flat like-for-like sales base. Both Hungary and the Czech Republic market conditions remain difficult and competitive, but both companies increased sales and profit.

In the Netherlands, the market continues to be difficult, with new housing continuing the fall. We are working to expand our product range and move more towards the RMI market and moving to a central distribution network. And the first half saw sales up more than 8%, but profits were up more than 50%. And this effort has really been greatly aided by members of our U.K. Wolseley team going over and providing guidance and management assistance.

In Italy, we had organic sales growth of 8% in a falling market. With the recent acquisition of Iser Zauli, we have increased the size and the number of our locations and we are now the number 3 sanitary and heating playing in Italy. Tobler continues to trade in line with expectations, in a competitive market, and Luxembourg boasted a 7% increase in sales and a 15% improvement in profits.

As you can see, we made good progress in our European business, with the underlying performance in almost all of the companies making sales and profit improvements. The division made further progress in implementing its strategy to manage the businesses in a more integrated way across Europe. A number of initiatives are underway to identify preferred European suppliers who will work with us to improve supply chain costs.

We will continue to share best practices across the operating companies in areas such as branch formats, progress, products and service offerings. I think that the Dutch experience shows the benefit of starting to work with the companies working together, and we made significant progress there and expect more there and in other places.

Let's now look at North America, and after I look at their operating performance, then I'll discuss the new North American structure that we announced today. North American Plumbing and Heating has delivered an outstanding performance. Both the U.S. and the Canadian businesses have increased market share, and showed strong sales and profit growth. We have been able to take advantage of the strengths of the new housing and the RMI markets and also we've benefited from the commercial segment which continues to improve on a gradual basis from the very low levels of the 3 years ago.

Some of this is being boosted by increased Government spending, and we're seeing the industrial sales starting to look slightly better than what they have in the past. The benefits of having a single plumbing and heating business in the U.S., along with the benefits of the distribution network, continue to be demonstrated by the results turned in by this Group.

For those of you that have been following Wolseley for a few years, you will remember that several years ago, Chip made a prediction that he would hit 6% trading profit by 2005. There was a little skepticism, but we said in September, after we had beaten the 6% a year early, that we wanted to go aggressively for organic growth, and we wanted to take market share while holding our margins, subject, of course, to what happened with commodity prices.

Well, Chip and his team have emphatically done both. Ferguson sales were up more than 21%, with trading profit up almost 45% for the year in constant currency terms. Organic sales growth was 17%, well ahead of the market generally. Ferguson achieved a trading margin of 7.4% in the first half, well ahead of last year's 6.1%.

This was all achieved while we continue to invest in the infrastructure that we need for future success, and take advantage of all the opportunities in North America. In the first half, we added an additional 500,000 square feet of distribution space by moving from a 290,000 square foot facility in Southern California to a new 585,000 square foot facility. We also expanded our [Fort Payne] DC an additional 200,000 square feet.

As a consequence of this additional space, product volume through the DC increased by 46%, and over 48% of the branch sales now go through the distribution center. The target remains 60%.

In the second half, we will open our 8th distribution center in Iowa. It will be a 600,000 square foot facility, and we will also complete the 200,000 square foot expansion of our [Fort Royal] facility. The [DC] infrastructure has proved critical to our growth in both sales and profitability, and it's essential to our branch growth program. It will provide the support necessary for our new smaller, XpressNet operations. 15 of these branches were opened in the first half. These branches are more accessible to our smaller customers, and they have an RMI focus. We still aim to hit over 50 of these locations by the year-end.

In Canada, construction and housing markets remain strong, with low interest rates supporting a strong residential market and a buoyant energy section in Western Canada helping sales in industrial and commercial. We continue to see pricing pressure in HVAC and waterworks, but overall, we had a very strong first half. Local currency sales growth was more than 12% with more than 11% of that being organic growth. Profits were up 17%, despite investment in a number of areas, and the addition of 135 people since the first half of last year.

You may have seen Canada's mobile warehouses, featured in the annual report last year. This is an excellent way of storing and supplying material to customers who are working on projects. We now have over 20 mobile warehouses because we've added 17 in the first half, and we plan to double that number over the next several years. We're also looking at the possibility of putting in regional supply houses in the major Canadian metropolitan areas. These will help to improve stock levels to our branches, better supply to our customers, and enable us to utilize the branch footwork in Canada more effectively.

As far as U.S. Building Materials is concerned, we had a very good first half. The level of new housing units remains strong, and consumer confidence is holding up well. Job opportunities are still good in the States, and the latest figures on the inventory of unsold new houses is at 4.8 months, against a historical average of about 6 months. However, in certain regions of the country where we operate, business is still flat. If you look at the Mid West and areas like Atlanta, we saw some flatness this year, but in other areas like the Middle Atlantic states and Southern California, business was robust.

On the operating side, Stock's restructuring is certainly paying dividends. The regional structure, with consolidated purchasing payables and credit across districts has improved efficiency and removed duplication and reduced costs. On the supply side, the new focus on market segments is improving customer service and showing other benefits. Sales were up in the first half 20%. 15% of that was organic growth and trading profit was up nearly 40%.

We continue to expand the value added products and services that we offer. This part of our business grew 20% last year, or in the first half, compared to the first half of the previous year. Installed services, which we've been stressing, have moved up and have grown 80% in the first half. This is now a sizeable business, and both of these are helping to get our margins back towards the traditional 6%+ that we want Stock to move to in the next several years, the quicker the better. Hopefully lumber will stay up.

The business has turned the corner. We are more competitive in the market. We are more focused, and we're restoring our growth pattern. We now expect to see continued improvement in sales and profit margins as we go forward.

In September, I outlined programs that we would be embarking on in order to support our strategic objectives. As the rate of growth continues to accelerate, we've got to continue to look at the infrastructure that we have to have and the management structures necessary to manage a growing and expanding business. We want to make sure we've got what we need to hit our strategic objectives, particularly in the areas of continuous improvement and also hitting our double digit sales and growth targets.

The idea of Wolseley being a £20b sales company over the next several years has captured a lot of people's attention, not to say the least internally where a lot of people have focused on the fact that while this is very exciting, it's also a daunting prospect. To support a business of that size and complexity, and to maximize the benefits of the scale like that, to get international leverage, we need to continue to bring in new people, put more money and effort into developing management for the future, develop better systems and improve our supply chain management.

The work on the common IT platform continues. The common financial applications are now being rolled out, and we expect this to be completed in the next 12 months. And there are other applications on HR, warehouse management, branch operations that are all being piloted and developed. The common IT platform will support initiatives such as international sourcing, supply chain management, shared services, standardized processes and consolidating our data centers. And it's vital to programs like the XpressNet and getting any kind of common logistics effort in Europe.

Within the supply chain heading, you've already heard how we're looking at our infrastructure, in the U.K., U.S., Canada, France and Italy. We take this seriously because we believe that along with international sourcing and procurement, this initiative will lead to a real competitive advantage and superior performance in the future.

Because of our listing of AD in the U.S., with our ADR there, we're required to comply with Sarbanes-Oxley. And although the implementation deadline has been pushed back a year, we're still driving to hit most of our original schedule because we don't want to lose the momentum. The plan, the act didn't go away. They just gave us a little more time to comply. This is extremely time consuming and a costly endeavor, and will cost as much as £5m this year.

Finally, we're also being more aggressive in the way that our North American businesses work together. And we feel that the only way we can truly get the benefit of this and be effective over time is to have a new North American structure. As you've already seen from the announcement this morning, we're creating a Wolseley North American structure with Chip Hornsby as the Chief Executive.

As Wolseley continues to grow, we need to adjust our organizational structure to ensure that we make the best use of our assets, including our management assets, and maintain a continual focus on our customers. In recent years, we've consolidated the building materials business under Stock Building Supply, and we've consolidated the plumbing and heating business in the U.S. under Ferguson Enterprises.

By creating a North American management structure, we have 3 main objectives. First of all, it's to leverage our management resources and focus on accelerating the growth in North America. Secondly, we have consistently talked about our double digit sales and profit targets for the whole Group, and we need to ensure that we have the proper structure to manage this constantly expanding business, particularly in North America, which is 3,000 miles away.

Lastly, by leveraging our assets and our talent, we should be able to operate more efficiently, share best practices more effectively, and improve our overall trading margins and performance in North America. As you can see, this is all about focusing on growth of sales and profit.

To achieve these objectives, a new North American structure will comprise 4 components, all headed by senior Vice Presidents from within the Group that have a very successful performance record. The first component will be a Strategic Planning group that will work to align strategic and operational planning at the continental level, as well as the business unit and the branch level.

This role will identify new opportunities, as well as monitor trends and challenges that are affecting our customers and our business. This group will focus on our business diversity and on new initiatives that will help us sustain our growth going forward, and strengthening our leadership position in North America.

The second component will be Asset Management. Within this team, the 2 main functions are finance and supply chain. The finance team will come under the newly appointed North American Finance Director, who will focus on the management of the elements of working capital - something I know is dear to all of your hearts, and Steve's - as well as overseeing our financial management, our reporting and our compliance in North America.

Our supply chain team will be built around the DC network which has helped Ferguson to improve customer service and improve their margins over the last several years. These assets will be North American owned, and we will expand and leverage our supply chain opportunities across all the business units and geography. 1 big advantage of operating in North America is our relatively low market share in a fragmented industry.

As a consequence, we believe that there are still significant growth opportunities for our business, and therefore the third component will focus totally on growth. There will be 3 distinct and important parts to this. First of all, same-store sales will get a major focus. In this area, we will have 6 senior managers for each of the product groups, HVAC, waterworks, or residential plumbing, piping, both commercial and industrial, residential building materials and commercial building materials.

Next, new-store growth will identify business opportunities that exist throughout North America by looking closely at the construction spend and the demographics to ensure that we are moving into areas with the highest possible sales potential and with the appropriate branch format. This could mean many more joint sites between plumbing, heating and building materials or other new and creative formats.

The third part of the growth component is acquisitions. We will continue to put a heavy emphasis on the search for acquisitions. With the new format, we will be more proactive across all of North America.

The fourth component of our overall structure for North America are the business units themselves. We will continue with 3 business units. Chip will retain his role as President and Chief Executive Officer of Ferguson, although we are appointing John [Steagermann] as COO of Ferguson. Until now, John has been running the waterworks division which has been growing very rapidly and successfully.

Ferguson, Stock and Wolseley Canada will all report to Chip. These business units will continue to focus on their customers and their market segments that they serve today, but they will be expected to participate in opportunities that leverage their combined positions and better serve their customers.

The new structure will become effective August 1, 2005, but we've already started positioning the people to take their new responsibility and to fill the voids created by these promotions. We are excited about the opportunities this new structure creates and we want to be ready to hit the ground running on August 1.

Finally, looking at the outlook for the next few months, we believe that we will continue to outperform the markets. We keep saying that, and that's what we expect and so far, they have been delivering. Broadly, market conditions in North America and the U.K. will continue to be favorable, and we would expect to make good progress in the second half, although before you get carried away with your models, I want to remind you that the growth rate is likely to be somewhat slower than it was because the second half comparators from last year are much stronger.

In the U.K. we expect RMI to be the principal driver of growth, as the economy continues to grow steadily, and we should see more government spending coming through, particularly in the social housing area. Although U.K. house price inflation may be slowing down a bit, and there are risks that the consumer sentiment may soften, RMI is still a good market for us. We continue to see an under-build on new houses, and interest rates and unemployment are still at very favorable levels.

Another word of caution - second half margins in the U.K. will be affected by some of the extra costs that I mentioned earlier. In France, the new housing market will benefit our businesses in the second half, but RMI spend in France will remain modest, or at least any growth will remain modest. PBM should carry on with the good progress that they're making, and the initiatives being implemented in Brossette should start to bear fruit. We expect the continental markets to remain flat, but we think that our companies will continue on the progressive trend that they have shown over the last year or so.

In the U.S., we expect housing to remain strong, and the stronger economy should continue to benefit RMI, industrial and commercial markets and prevent further opportunities for us and organic growth. The Canadian market is expected to remain positive, although the new residential market may soften somewhat from the higher levels that they've had in 2004.

Overall, our geographic and product diversity, our strong management team, we believe are well placed to take advantage of the favorable conditions in our trading markets. And as you've heard many times, we will continue to invest in our infrastructure and our human resources so we're prepared for the opportunities and the future growth that's ahead of us as we move forward. We will continue to also focus on short-term market out-performance.

Ladies and gentlemen, we have had an excellent first half. We have a number of exciting initiatives going on, and we have a very strong management team in place. We're very excited about the future, and we'll be happy to answer your questions. I would ask if you would be kind enough to wait for the microphone to come, and please state your name and the firm that you represent. Thank you very much.

Good morning, it's Chris Grant from ABN, 3 questions please. Can you quantify for us in France the impact of the short-term disruption that you refer to on Brossette, and if possible, financially there? Secondly, with regard to distribution centers, you gave us in the States, Charlie, an indication of the percentage of product that's going through distribution centers now and then to the stores. Have you got the kind of equivalent numbers for the European side of the business, particularly the continental element there? And then finally, perhaps, if I may ask Rob to comment perhaps on what he's seen in the early stages he's about in his new role?

Well, I'm also going to let Rob comment a bit on the French impact, but first, since he's more new to it, yes, Brossette has been a very stable and consistent performer for - well, since we've owned them, and has made a lot of progress. The French economy over the last 2 or 3 years has not been particularly helpful, particularly in the RMI area and they have, through some management changes, not made a lot of adjustments for their infrastructure that we feel we need for the future.

I mean, I think you can see when Adrian came in, he immediately attacked the distribution and logistics infrastructure that he had, as well as the organizational piece. Alain Domenget, who runs Brossette for us, has taken a look at his management structure, which is basically the same as it was in 1982, and has had to make some changes. We're also trying to get more efficiencies out of the way that we support the branches and our customers.

So it has been disruptive. I don't know, Steve may have some numbers. I don't know that we can quantify it. I think Rob having just been there can talk a little bit about the impact on how management's feeling and responding, but I think considering the fact that they haven't done much change in a while and now we are attacking some of their cultural structural pieces, and trying to prepare for the future, that there's no doubt it's had some impact on their ability to focus on that and grow the business, which I will say as aside, shows the strength of our U.K. management team being able to attack all of that and continue to grow organically at 7.7% with everything they have going on, but Steve, out of the numbers, and then let Rob talk about [inaudible].

[Inaudible] numbers, Charlie, and the problem is, you can often quantify the costs. What you can't easily quantify is the lost sales, if you like, Chris, and you've probably seen that we've got just a 1% sales growth in Brossette which we have acknowledged is a bit below the market. The market probably is up by 2% or 3%, probably, so you can see that we're just a bit behind, so although I know the costs side, I don't really know the sales side.

And I think in addition to just the disruption, you get a mindset. We've got some very, very positive people. I believe they've taken and identified the necessary corrective actions. The question is getting the momentum going back into an organization that, if you look back a year or so ago, they really hadn't added a lot of new locations, so just compared to the U.K. in terms of growth, it's about changing a mindset, and that's not something that happens quickly overnight, so we feel positive and confident that they've identified the right issues. They've got plans in place, but it's not turning on a light switch and having them turn right back around and generating the kind of results that we would expect.

And the DC question was about, what?

As a percentage of product, Charlie, you mentioned the target of 60% versus the 48% that's going through there in the States at the moment, and I just wondered if you've got some flavor for the potential in Europe in that regard?

Well, I think it's early days for us in Europe. I'm going to let Adrian comment on sort of what he thinks with his -- basically, because that's the -- I mean, that's the £100m to start off with. Now, we are looking at what we can do in France.

We had some other structural changes to make so we could figure out where to put them, if we're going to do it, and we've also been working on looking, now that we've made this big acquisition in Northern Italy, we're pretty -- we've got pretty good presence on the ground now from Florence north. So we need to look at how we want to manage that going forward, other avenues of moving or perhaps doing some things where we could get into Austria and Switzerland the same way.

So there's a lot going on, but I don't have any specific numbers, other than Adrian is further along than anyone else, and do you want to comment on that, sir?

Yes, basically on the lighter side of the businesses, Plumb, climate, spares, etc, would be over 90% of the product that goes through the DCs.

Already?

Already, and we continue to rack that up. With regard to the heavier end, pipe sales and fittings and the build brands, it's probably around about the 30% mark, so it depends on the products. Obviously there's not much sense in putting concrete products through DCs, so it varies on the types of products you're selling.

And I think too that 1 of the things with what we're doing, the DCs that we have are not highly automated, and they also have space constraints already, with the growth that we've been generating in the U.K. over the last -- so we need more space. We'd like to diversify the product group even a little bit further than what we've done, to take advantage of that, and we think that the logistics of the transportation, as well as the management of the warehouses themselves can be improved with the technology and better space. I mean, that's sort of the part of your program, right?

I think the other thing is that we've been trying to -- a lot of the infrastructure investment is so that we can really maximize our ability on low-cost country sourcing, the ability to take in container loads and product, and that's 1 of the elements of it, because we see, obviously, our DC central distribution policy as being a key essential to our competitive advantage in the market place.

All right, Mark?

Thank you, Mark Stockdale at UBS. Could I ask 3 questions, if I may, first 1 to Chip or Charlie, just about the U.S. I'm just looking at the stated margin pre-overhead and it's gone from 6.1% to 7.4% with the actual disclosed asset overhead 5.8% to 6.9%, i.e. the overhead has increased, as we would expect. The first question is, does that go further with the new structure, and if so by how much and in due course, when do you start to slim it again? And I wondered also, Chip, if you could just possibly expand about obviously what may be early thoughts about the scale of the 2 products, 2 companies working together, the opportunities for the extra growing of the top-line?

The second question was coming to the U.K., and just simply, does the £100m investment in the U.K., Adrian, raise U.K. margin by a percent, thinking about the type of returns that you're after? I would assume that's what you're shooting for?

And then thirdly, I was talking to 1 of my colleagues within UBS who said a [duct] supplier was feeling seriously beaten up on his new February contract with you. He was still trading with you, but obviously you'd gone into it and obviously just tying it with what we've just seen in Holland, is that indicative of what, Rob, you aim to roll out now in France, bringing this global nature to go back to your suppliers and say, look, we have got low-cost countries here. We need to actually debate with you on a different level?

Chip, do you want to go first?

Yes, the answer to your question, Mark, as Charlie indicated, we're just rolling this out today, and obviously have a lot of planning to do. We've put people in place. We have the structure that's involved. It's not just getting myself, it's also Canada that will be participating in this. But our plan is to continue to grow the business, to support what Stephen indicated back in January, to double the business every 5 to 7 years and our numbers, that's some big numbers going forward that we've got to be prepared for, and by the most critical aspect of it, in addition to the DCs that we've already drawn attention to, is the people side, and the investment that we have there.

Ferguson this year is targeting over 1000 college graduates to come into the organization, Stock between 50 and 100. We're envisioning that Canada will begin to participate in that, so a lot of those are investments this year that will pay dividends in year 2, year 5, etc, so that will support the growth, and at the market share, Ferguson less than 10%, Stock, well under 5%, Canada above 20%.

There's still a lot of opportunity for us to continue to expand, not only in the businesses that we are today, but we're going to begin to envision other construction distribution products that we can participate in, particularly as you begin to look at towards the end of the decade. So a lot of these investments, I would envision, will continue as long as the business environment will allow us to support that, and if we see a dramatic downturn in the economy, which we don't anticipate, we'll obviously regroup and react to that, generally on a short-term basis, but still position ourselves to continue to grow.

And if I can just comment and push you on that overhead, does the overhead grow before you bring it back again? Is it necessary what you're doing that this adds costs to the future or is it minimal?

We think it will be relatively minimal. I mean, most of these, for all these positions were promoted from within. We have individuals that are stepping up, I mean, what we call the domino effect. I can't imagine, I mean, hundreds of people are going to be promoted and all this occurs over the next 4 months in all of our organizations, but again, we will, in most cases, replenish through individuals in the organization, so I don't envision it becoming an enormous overhead, and particularly with me continuing to be involved in Ferguson for at least an extended period of time. There will be some, but I think most of it's going to be on the planning processes, and some of the minimal support that we'll need.

There is a focus on growth, and some of the functions that they're going to be doing, or are to be done in the companies, each 1 of them, so there will be some consolidation and things like that positioned in other pieces. So we're not -- we're looking for the growth to keep the percentage of the overhead somewhat in line, and we're looking for some of the duplication to come through without having to add more overheads, so we'll see.

Yes, the Group last -- there was a [inaudible] last year, being the last fiscal year was a little over $10b. They hit our targeted numbers, as Steve indicated, 5 to 7 years. We've got a lot of planning to do, and the exciting thing is that we think we're capable of doing it, but very, very early stages of all of this.

What was the other question then? It was about?

Does the £100m in the U.K. raise the U.K. margin by 4% on your type of [reverberates]?

I mean, you're correct on the assumption that the investment of £100m is to push the margin up over the 8% mark, but that was only just 1 of the elements. It was to get low cost country sourcing. It was to create a platform so we can continue to grow the business the way that we have been growing it, so these are all these elements that are weaving in, and also, to improve our customer service proposition. So it's a balanced thing here, and as the market moves, we've got to have the investment in the DCs to make sure that we are adaptable to what our customers require, so it's all of those things, you're absolutely right.

[Inaudible].

Are you going to go around beating up all the suppliers in Europe, or what?

Well, in a high pressure, win-win sort of way. Yes, I guess, and, actually, to take over where Adrian was going, what we want to be is the preferred channel to market for our suppliers, and in order to do that, we've got to be able to have the customers and provide the fill-rates and the necessary order of commitment that we can provide for them, with a network, with confident sales people, with a quality brand. We are going to be asking more of our suppliers.

We have to, on the other side, have the ability to deliver and live up to our commitments, so part of building the infrastructure in the continent is about providing that infrastructure for the future, so I'm glad to hear that there's a little bit of pain out there. That means our procurement teams are working. I think there is some work going on at the national level, whether it's at the U.K. themselves or at the pan-European level, or at the international level with Mike [Runcomyer] so I'm glad to hear there's a little noise but we have an obligation also that we have to deliver on that it's not just about beating the supplier up for an extra margin because if we can't provide our channel of the market that's preferred then that won't be very sustainable for the long-term.

And I think our view is, both here, internationally and in North America is that suppliers need to not get particularly comfortable and they need to keep looking at their car. We do. We emphasize things to be competitive, and I think you can see the benefit of that in what we've done in North America. You go back into the '90s and the way we've restructured the business.

We came out with an enhanced DC program, a lot more automation of functionality, a lot more consolidated purchasing and we always said we'd never get the 6% margin in the old days and then all of a sudden now we're at 7% wondering how high can we go, and I think part of that is we've gotten better, and we expect our suppliers to get better, and there are suppliers that won't be able to compete and there suppliers that will, and I think that any company that sits back and doesn't respond to the increasing competitive nature is going to have difficulty, not only with us, but other people selling the same product.

And the interesting thing to us is they don't seem to be too concerned about a home center, or someone like that, taking their product line, taking a very narrow part of their SKUs and selling them at very cheap prices into the market. But they worry like hell if we put pressure on them and we're buying their whole product line, selling the whole thing, representing it, selling each segment of the market, and driving the product into the market, and then they say, well, that's different. We have a retail sales force and a wholesale sales force. Well, we're saying hey, get together. It's a globalizing world. It's a competitive world. We're going to defend our tariff and we're going to grow and we're going to be a surviving supplier of choice for customer and for the best suppliers.

Thank you.

Yes, right behind you.

Thanks, Charlie, it's a question for Chip. Assuming 2 things, that we do have the kind of housing market this year which is a surprise to some, that looks like it might actually challenge last year, and assuming that the commercial and office building sector continues improvement that it had last year from a very low level, about 50% in each case, if those 2 sectors should get into double digits by the end of this year, are you invulnerable to a mild weakness in housing?

Okay, obviously I've got a Superman shirt on underneath. Well, I think the area that you're - obviously a lot of attention is drawn to the new housing starts, for Fenton as well as the Ferguson operations. The thing that is to understand the amount of what we envision the repair remodel is going to begin to occur and already has. John, as you well know, over the last 3 years there's been almost 20m existing homes sold. Everything that we can gather is somewhere in the range of 25% to 30% and the likely repair remodel, a kitchen and/or a bath, we intend to participate in that a lot more than we have in the past and are focusing a tremendous amount of attention through what we call destination share rooms, and are beginning to see a real impact there.

So certainly new housing has an impact. The other thing is, as even as housing, if it does begin to drop off a little bit, what you really have to look at is the type of housing that's being built. In the 2 previous years, there's a lot of entry level housing that went on. We're beginning to see some nice increases in much larger, much higher price per square foot homes which is a lot more exciting to participate in.

And you're right. The commercial is definitely coming back. We're encouraged by that. The industrial will be stronger than we've seen in the past, but it won't be anywhere near what we've seen back in the '90s. You've got 2m+ jobs that have gone offshore, and they're not coming back, but there are still opportunities, so yes, we're pretty optimistic about the future and probably the only difference between 2005 and 2004 is that we don't see anywhere near the commodity increases that we saw last year. We don't see a real retrenching occurring on the plumbing side of the business, but we don't expect anywhere near what we've seen in the past with plastic and carbon steel and copper, etc, much more moderate.

And you did touch on something, plastic growth is driven by oil prices. Has that worked its way through the system yet?

Well, which price, because obviously it's up and down and it's moderated a lot.

[Inaudible], the $56 price is probably not in the polyethylene market yet.

Not yet, but we expected it, when it dropped back down closer to the $40 a barrel to see some drop in pricing, and we didn't see that happen as quickly, but these numbers are moving in a matter of 30 and 60 day increments, not like you've seen in the past, so -- and again, there's no 1 commodity that has an enormous impact on our business. Our finished fixture line is our largest supplier [collar] company, and we haven't seen anywhere near the price increases in china or in brass that we've seen in some of the other commodities.

Some of it, they're moving manufacturing offshore, so they are becoming -- some of them are becoming more efficient. It takes longer because they buy their base products ahead of time like contracts and those things so it takes time for it to come through. The market still is pretty competitive which doesn't allow them to pass through as fast as they would like to, and I guess the other thing I would like to point out is that a significant part of our business, both in Europe and in the U.S. is industrial, commercial and RMI and other things, not just new housing.

Housing is good for you guys as it's easy to measure. You get nice statistics that say you get many made, this many sold, and it's easy to measure, whereas RMI spend, industrial repair remodeling and all those sorts of things aren't easy to get your hands on, but frankly, we like that kind of business because it's the best -- it's the most profitable, and it's the -- you know, it's our bread and butter.

I have 1 last thing. Chip, we did 5 years ago see Enron and Electricity in California playing the kind of games we're seeing now.

Yes.

Back there?

It's Clyde Lewis from Citigroup, a couple of questions, if I may, probably again for Chip I think, but in terms of market share gains that you've made in the U.S. Plumbing and Heating market, I'm intrigued to know whether you think that's been won by better service and better product availability from the DCs or whether it's down to, again, being a little bit cuter on price and a bit more aggressive on 1 or 2 areas. And there may be a follow-up question on the competitors. What are they doing in reaction to what you're doing in that part of that environment?

And the other question I had was on XpressNet. What's your initial experience been in terms of the returns and are you getting more excited or less excited about the opportunities for that business, and I have 2 further ones.

Well, I'm going to let Chip answer all 3 of those, but I guess the 1 comment I would say is that I think if you look at his margins and knowing his team, that I think they have the capability now to be cute on price when they need to be, but you don't get those kinds of margins if you just keep on passing through everything and having a lot of old friends that are customers and people that I've dealt with in the '70s, '80s and '90s. There's no question the service is better. They have a much broader operating.

They're more complete, and the whole quality of the operation is taking market share because their competitors, frankly, I don't know if he'll say this about himself, but I mean, they're more focused, they're more driven and they're providing a better service proposition to their customers than any of their competitors and that's why they've taken market share, and other than that, [inaudible], but, I mean, they're doing a great job, and he's not buying his -- he's earning it, not buying it. Chip, you can do the rest, or you can disagree with me, actually, if you want, if you think I'm giving you too much credit!

No, it's obvious. Our gross margins are, we feel, we are very solid. We've put a tremendous amount of emphasis on the availability of product, and the services that we provide, far greater than we've been able to do in the past as we continue to expand the distribution network. But also, the focus, primarily, at the business group level, we've gone in and broken it down and we have 4 senior executives driving each business group, HVAC, waterworks, the residential sector, the industrial piping and all, and that's had a huge impact.

When these guys wake up every day, and that's what they do, and they begin to drive that focus through the branch network, it's an enormous opportunity. It's been demonstrated in waterworks. We obviously, our businesses in plumbing and piping, can really begin to see the momentum developing with the direction of John Garrett in HVAC. That's an enormous business opportunity for us to continue to grow, so yes, we're out taking market share and we're very proud and pleased with the gross margins that we have today.

To answer your question specifically on XpressNet, very encouraged and very enthusiastic about it. We've told you about this back in September. It was this time last year we were potting the program that we'd learned from Adrian's team. We began to bring it back to the States and figure out exactly how we could utilize it there, and the 15 that we opened are just the top of the iceberg, so to speak. We will easily open the 50 that we targeted this year. By the time we meet with you again in September I think we can give you an update, but I envision that that will be accelerated much faster than even what we'd envisioned a year ago, so we're encouraged by that as well.

All right, Darren? Oh, did you another 1?

I did have a follow-up in terms of the competitors, Chip. Are they changing the way they do business at all in respect to how you're doing it?

I think you'd have to ask them, to be honest with you, Clyde. I mean, we obviously keep an eye on every direction that we know that we're competing with today, and ones that we envision in the future, but we have our own strategy and I'm sure they do as well.

Darren? You're on.

I'm on. It's Darren Shaw, hi, of Dresdner. I have 3 questions if I may. Firstly, for Rob on 1 of the current initiatives, global sourcing, I wonder if you can give any examples of where you've actually managed to do global sourcing and really, are the manufacturers ready to do deals on a global basis?

A second thing is, in February, I wondered if you could give us a little run-through of the businesses, Charlie, on how you guys have been doing in February? Specifically, I'm sure the U.S. is doing very well, but specifically in the U.K., worries over the sort of consumer, or whatever?

And finally, I think on record you guys may have said that you looked at the Wickes deal which Travis Perkins bought, so I wondered if you can just give an example of whether you're looking at any other areas in DIY or that was just a one-off? Thank you.

Okay. Give me - it's harder. Give me the first 1?

Global sourcing.

I've got it. All right. 2 things, I'll start from the bottom of the question, are they ready to do deals? Every 1 of them is reluctant to do deals that way, simply because they don't want to. They really would rather keep us fragmented. They'd rather price us individually by market, ultimately because I think they believe, or probably do make more money that way, so are they ready to? Probably. Do they go there willingly? Not exactly, and so it's not something that you show up and on the first call to them, you know, you automatically get 4% of the bottom-line and that's good, so it's a long process.

Some examples of ones, however, that we've been able to do, Fenton was able to help us 6 months or so ago with a company called [Jeldwin] and negotiated a deal. They're a big provider for Stock. They also do business with Build Center in the U.K. and PBM, and so they were able to put together a program that applied, as a result of our global spend with that provider. Some of it is I go back to the question I think Mark asked, is what's the value we bring to them? It's buying that's 1 thing, but it's also the route to market and the ability to serve our customers.

In addition to that, we've got some opportunities around ball valves that we're working, where we source them from the Far East, so the low-cost country sourcing that Adrian referred to. We're beginning to look at those as a whole list of source where we go to 1 supplier as a result of all our individual buying, so it's very doable. It takes time. They certainly want something for the additional value that we create but we'd like a little bit in return as we begin to change the model and the way we go to market. So we feel pretty good about the opportunity that's there, but it's not an instant, make the phone call and you get the extra money.

It really does take some time, and quite honestly, because you need to change the model so that it can't be replicated by your competition, so if I could just show up and say hey, you know, give me an extra 5, well, that's easy for my competition to do. So we want to change the way we go to market with these suppliers because that then creates a unique process that's not easily [replicatible] by our competition, so hopefully you're able to sustain some advantage for a period of time.

What was the next 1?

It was February.

February, I'd actually like each 1 of you guys to sort of give a quick view, but I think in general we were -- February continued the momentum we did have, a few places where weather was particularly bad that had some short-term impact. We think that will come back quickly but there was a lot of snow and some really bad weather in some of the places that we don't usually have to deal with for 3 or 4 days and February is usually a short month. Adrian, why don't you start, and we'll work our way across to everybody, because I want to take 1 more question, and we need to be through in about 5 minutes.

Okay. You also asked about the consumer, I think, Darren. Yes, February was a strong month as far as we're concerned. The U.K. consumer side of things was fairly buoyant. I know that goes against other reports and I think we've actually got some momentum going in our business that is creating a real focus on each 1 of the brands at the moment, so I think that's carrying us through, which I think is a period where the market is flattish.

Well, just a quick about the rest of Europe. I mean, there was a --

Yes, I guess overall, France was, I'll say an adequate February. We didn't blow the doors off but it was, because of the weather and some other things, just -- we weren't as positive as we would like to be, but I think we saw some opportunity. The rest of the continent performed pretty much in line with expectations and we believe that will be the trend going forward.

And February was a very good month for us. It was not as good as perhaps the first 6 months in terms of comparison but I think we've tried to position ourselves in the second half of the year to make the comparisons understandable as since last year we had a great second half. We think we're going to have a great second half this year, but maybe it might not be quite as good as last year's.

Well, it will probably be better, it just won't be as much as [inaudible]. We're talking about rates of growth here. I'm trying to manage expectations, not trying to say we're going to get -- we're not going to do better.

Oh, we're going to much better than last year, but again, I think the rate of growth is to be watched.

Chip?

The same, solid.

Good.

We've met the expectations that we had. It's always a tenuous month, as Charlie indicated, with some of the weather issues, probably more so in California with the monsoons ahead out there, but overall, we were pleased.

And as far as your question about DIY, I mean we were interested in Travis for the trade side -- I mean -- Freudian slip! We were interested in Wickes because we really saw that, the trade side of that as a very desirable place for us to get into. We weren't interested in going in retail, the DIY side, so no, we're not looking at DIY, at least at this stage. I just think that we're very focused on the professionals in most -- any product line that they're doing business with. We like that kind of business, and it suits our credit policies and other ones, so that's sort of where we're going, and that's what we would have been interested in as opposed to Travis saying they want to go DIY. We wanted the professional side.

All right, 2 more questions, back there, and I'll do 1 on this side. Oh, while you're -- hold on just 1 -- go ahead, you were next, I'm sorry. I got him the mike and now I didn't let him talk.

It's Tobias Woerner from Mann Securities, 2 more general strategic questions please. Firstly, with regard to your new structure in the U.S., clearly this is for investment for the future but could we also perceive this as a pre-empted strike against [Home Depot] trying to move into your markets more aggressively? That's the first question with regard to strategy.

The second 1, you see your company being a £20b sales company in a number of years, depending on the growth rate, clearly, which is very exciting. What sort of geographical product mixture could we see at the end of that period?

Well, as far as being pre-emptive on Home Depot, no, I think it's really more, if you just go back a few years, we were a £6b company, and this year, if we maintain our rate, we feel we're going to be significantly ahead of the £10b we were last year.

So managing that kind of scope, because what we don't want to be is a big, bureaucratic company that removes the decision making from the customers and the market, and as I said in my talk, those 3 businesses will still focus on the market segments, the customers and the people that they have. It's just we want to leverage the management talent we have, and we want to make sure we're positioned for the future, and we want to leverage our assets, so Chip, I think Home Depot, in my mind, wasn't an issue. I don't know if you see that -- this in any way being a response to that, or that making any difference?

No, I mean, Fenton, you may want to comment because of the lumber aspect of the heavy side, or whatever, but in my view, it's not -- this is an opportunity for us to continue to grow and meet the objectives that we've outlined internally and share with you externally recently and to position ourselves to being even more focused on the construction distribution business for where we participate today, and possibly even in the future.

No, I think not at all, because I think that we still have great respect for Home Depot where we see their customer base, and what they call the contract is not the same customer base as we're dealing with, although we perceive that we'll be dealing with them for some time to come.

I mean I - as I said, this is a focus on us growing our business and maintaining focus on customers. That's not cost-cutting and it's not defensive. It's aggressive, so that -- as far as where we would be geographically and product-wise, I think we have stated that we are focused on Europe and North America. We still see opportunities in those areas, particularly in products. I mean, there are a lot of the products that we have that we don't sell in each 1 of our markets, so we're driving that, and there are markets in Europe that we're not in.

As we consolidate those positions and as we develop our competitive advantage, as we see it, and logistics, and as we become better at low-country sourcing, low-cost country sourcing and those things, that might lead to other opportunities, so I wouldn't say we'll never go there, but right now we're very focused on Europe and North America, and feel like we can continue the momentum, particularly as we continue to organize and invest in the infrastructure so as far as products, we see ourselves as a distributor of construction materials.

That gives us purposely a rather wide pallet of products to pick from, and a wide group of customers to go after. We look at our customer base as contractors, government and industry. We under-supply industry and government now compared to the potential, and of course, there are geographic places and there are other construction materials that we could go after that we don't, so that's 1 reason why we generally are pretty positive about outperforming and continuing to grow.

So we've got 1 more, and then we've already asked you to stay 15 minutes extra, so --

Sorry, John Messenger, Morgan Stanley, 2 briefly, if I could. Just to Rob first of all, when we look at France, some of the structure you're suggesting about distribution centers going forward, should we expect a step-up in capital spending in the -- you know, you spent £100m in the U.K. Are you going to proportionately, you think, maybe £70m might be required to actually put a DC structure in place that will allow you to get the most of the supplier base and deliver for the customers? Is there anything like that in prospect in terms of a stepped level of investment in France or in Europe, ex U.K.?

And secondly on that, Steve, from a CapEx profile point of view, the Group's maintenance CapEx last year was about £108m. What sort of profile should we expect and how does that £100m and anything further come through over the next 2 to 3 years, just to have a profile?

And finally, it was in the press after the trading update, Charlie, I won't mention your age in public here, but 1 of the issues is succession, both, you've highlighted fantastic growth opportunities for the future, but are you able to tell us or share with us at all any thoughts as to whether there's an extension to the retirement age in Wolseley or whether 65 is the cut-off point, or anything you can help us with there please?

All right, we'll take them in order.

Yes, I guess in our analysis, which we're still working on in France and in Italy, we don't have an exact number as to how much we would actually spend. A lot of it has to do with the distribution model and the balance of products, and how we integrate that. I mean, do we start looking at it? Do we ship across into Switzerland? Do you ship into Austria? So it's not just a country model, it's more of a continental model. So it's work in progress right now to come up with that answer. Can you expect there to be an incremental capital spend? I guess the answer would be yes, because we don't have those facilities today. What it will be, it's too early to tell.

I think as the quantum of the CapEx, John, you can expect a continuation of the rise in CapEx in the second half of similar levels compared to the first half. I mean, traditionally we spend about 1.5 times our depreciation. For the next 12 months or so, it may well be 2 times depreciation because we don't do it unless we can attain our normal requirements, a 20% return on capital, on that incremental capital investment by Year 3, so you will see the CapEx carry on, but obviously there will then be the follow-on of the improved returns. But remember, many of these projects, the U.K. 1, for example, the benefits, really, are over a 2 to 5 year period, so it's not going to be immediate. It will be a gradual move up in things like margins that will come through.

And I think if you look at what we did in the U.S., I mean, every 1 of those DCs was expensive, and for somebody to duplicate that 8 DC system, particularly at the current size and ability to deliver, is going to be very expensive. And we've put a lot of money into it but we've put it in over a period of time now that's 5 -- 7 years, and we've gotten better returns every time we've put more money in it, so our view is that we keep investing in the infrastructure. You can't run a £10b or a £20b business in 13 countries the same way that we ran a £2b in 3 countries back 10 or 12 years ago, so we've got to move on with it, and hopefully, touch wood, we're making the right investments.

As far as your other question, there has not been a decision or time. The board has a nomination committee that does deal with succession plans. We have had some discussions. There is nothing set at this stage. I'm having a great time. I'm having a ball. I feel good. I get a physical every year.

I think we are outperforming the market, and I've got permission to stay for a couple of -- I don't know, a few more years as long as they want me to stay, so we're doing fine. I don't think I've lost the confidence of my team. My wife's healthy and she likes being over here, so we're -- you know, we'll just have to see what happens. Clearly there will be a time and there are issues that have to be dealt with that are the best thing for the company and for us, but right now, as long as I'm healthy and we're doing well, and I've got the support, I'm happy to hang around.

All right, I really appreciate you coming. Thank you very much, and those of you on the webcast, thanks for joining us. We'll see all of you again in September. Take care. Thank you.