Ferguson Enterprises Inc (FERG) 2008 Q2 法說會逐字稿

If you would please turn your phones off. It does interfere severely with the technology.

Good morning ladies and gentlemen, welcome. Thank you for joining us for Wolseley's annual results presentation. I'm Chip Hornsby, Wolseley's CEO and with me is Steve Webster, our Chief Financial Officer, and sitting alongside Steve is Frank Roach, CEO of North America and Rob Marshbank, CEO of Europe.

In a moment I will make some introductory remarks on Wolseley's trading in the first half and then Steve will take you through the financials and the outlook. I will then come back and give you an update on our operations and strategy.

Now, before we get into the numbers I wanted to start by giving you my own take on how our markets have fared in the first half. Since the last date in January our markets have continued to weaken. U.S. housing, in particular, is still declining against the backdrop of a global credit squeeze. This is affecting consumer confidence in many of our markets, including Europe. Up to now the commercial and industrial market, and to a lesser extent the RMI markets, have remained relatively robust. However, there are signs of further weakening of RMI in both the U.S. and in Europe.

During the first half the commercial and industrial markets have held up well with good growth. I know many of you have picked up the statistics in the U.S. from Maguire Hill recently, which showed the first month on month slowdown in the sector in January. Today, we're not seeing that in our numbers and we expect the segment to stay stable through the second half. However, we do anticipate it will soften in the next financial year.

So, overall, it seems clear that the markets in general will get worse before they get better. Our response will be to reduce cost by targeting specific locations, customer type and shifts in local economies. So as there's no misunderstanding about this, we will be taking further action in the second half.

As you all know, market conditions have been and continue to be very difficult to read in terms of the overall macroeconomic direction. However, I think we all need to match healthy realism about today's conditions with an equally realistic long term view. When I hear people say construction is dead, personal experience teaches me otherwise.

A simple look at demographics indicates that there's nothing structurally wrong in the U.S. Typically the U.S. needs 1.6 to 1.8 new housing starts per annum. And the fundamentals of population growth in the U.S. going forward hasn't suddenly changed overnight. There is the industrial and RMI markets, which aren't going away either. So, underlying everything you hear from us today I want to be clear on three basic points, and I'm not going to make an apology for repeating these over and over again.

First, managing through this cycle is all about experience. It's about strength and it's about depth. I know this from my 30 years of my own working life at Wolseley. I've seen it through the 70s downturn, through the 80s runaway interest rates and the through the 90s savings alone collapse and the Asian market crash.

Second, when in a storm like the one we're weathering right now there are real opportunities. Opportunities and tough decisions. Tough decisions about cost. I'm determined to break the link between cost and revenues in our business to create operational leverage, tough decisions about attacking inventory and reducing working capital, and tough decisions about focusing relentlessly on better customer service. We're taking these decisions. We're seeing results and we're far from done.

So, over the next few months we'll be pursuing every inch of cash flow improvement, every ounce of fat in our cost and every opportunity we can find to deepen our customer relationships.

And that takes me to my third point, which is when we get this right, we will come out fighting fit with added market share, a lower cost base and a more streamlined business model than ever before, while keeping within sight our opportunities going forward. It's the companies with real depth and scale who will gain market share in hard times, whilst smaller competitors and we're already beginning to see this, begin to hit the wall. So, it's our responsibility to ensure that we're well positioned to move forward when the upturn comes.

Now, I'd like to pass you to Steve to take you through the numbers and I'll be back to give you an overview of our operations.

Thanks Chip and good morning everybody. The overall results shown on the slide are, of course, significantly affected by the loss in stock building supply due to the U.S. housing downturn and this does mask some very good performances elsewhere in the Group. With that having been said, here are the usual key financial metrics for the Group as a whole.

Firstly, revenue grew by 2% or 3.1% in constant currency. Trading profit was down by 23.1%. Virtually all of the GBP90m decline in trading profit is attributable to stock. That translates into a trading margin for Group at 3.7% compared to 5% last year. The finance costs were slightly higher, reflecting the higher debt levels as a result of the GBP173m worth of acquisition spend in the first half and also, of course, the higher interest rates. As a consequence of the lower profit after tax, earnings per share are down 31.1%, or just over 30% in constant currency.

The interim dividend increase is 3.7%. We think that's an appropriate balance between our confidence in the fundamental strengths of the Group, whilst acknowledging the current market uncertainties. There's no change to the dividend policy.

Our cash conversion rate, which is the rate at which we convert our profits into cash, has improved, 122% compared to 115% following our continued focus on cash flow. Although, of course, cash flow from operations is lower at GBP367m due to the decline in trading profit.

Return on gross capital employed is lower at 11.4% due to the lower profitability of the Group. And that's still well above the Group's pre-tax weighted average cost of capital, which we currently estimate to be 9.4%.

I'm now going to go straight on to the cash flow, the working capital and the banking covenant position of the Group, and first cash flow. As you know, we've put a tremendous amount of focus over the past 18 months or so on improving the cash flow generation and that will continue. With the reducing trend of EBITDA it was always going to be challenging to increase the operating cash flow from last year's GBP447m.

The important point for me is that we have improved our cash conversion. That's the rate at which we convert our trading profits into cash. We've seen already the rate is higher at 122% compared to the 115% last year. We have made excellent progress on improving our working capital, cash to cash days, and I'll come back to that shortly.

Let me just highlight a couple more items on the slide, before we leave this particular slide. Below the cash flow from operating activities line you will see the cash acquisition spend, including net debt acquired, reduced from the GBP1.6b last year which, of course, did include DT Group, to GBP179m in the first half. Following our previously announced decision to curtail capital expenditure, you will see it decreased from GBP206m to GBP155m.

We will pursue a highly selective approach to acquisitions and CapEx in the second half. We now expect total CapEx this year to be some GBP75m to GBP80m below the GBP400m target we announced previously. In addition, our acquisition spend is likely to come in quite a bit below the GBP450m target for this year.

The end result of all the cash flows on the slide is an increase in net debt of GBP427m. Gearing is down to 84%. The interest cover is 4.3 times.

Let me just come back to the working capital cash to cash days. This slide illustrates the great progress we've made over the last couple of years in improving our working capital cash to cash days. On the inventory side our inventory days have reduced by seven days, or 10%, from January 2006 to 2008, with great progress in Ferguson and the U.K. in particular.

Inevitably with the deteriorating market conditions, the receivables days have moved out slightly by 3.7 days over the last year. Payable days have increased by eight days over the last year, around 13%, reflecting negotiation of improved terms with many of our suppliers in both North America and Europe.

Overall, our working capital cash to cash days have improved by 18 days, or nearly 25%, over the last few years. We will keep the pressure on improving our ratios and would expect further improvement during the second half.

Looking at this another way in terms of averages rather than the spot position that we've seen here, over the last few years we improved our working capital to sales ratio by 2% to 3%, to around 15% of sales. And we still think we have the capacity to improve the ratio by similar amounts. In other words another 2% or 3% over the next few years, with working capital improvement being one of the key benefits from the business change program.

I'd now like to move on to our debt covenant position, which I know many of you are taking a closer look at with the recent decline in our EBITDA. As many of you know, we are required to assess compliance with our banking covenants twice a year, January 31 and July 31. And this needs to be done on a 12 month rolling basis bringing a full year's profit from the acquisitions we've made during that particular 12 month period. So, it is a pro forma basis, rather than one which you can take directly from our announcement.

All of our facilities have net debt to annualized EBITDA ratios of 3.5 times, except for two, which total GBP270m and those have a 3 times covenant. On the pro forma basis I've just outlined, at January 31 the net debt to EBITDA ratio is 2.85 times. We're therefore fully in compliance at January 31. And for reasons that I'm now going to explain, expect to stay that way.

For several years we've operated a policy of maintaining committed facilities of at least 120% of the highest projected funding required within the next couple of years. As at January 31, we had committed undrawn facilities of around GBP1b. This gives us flexibility to either refinance or repay the two facilities, totaling GBP270m, on the old covenant package and still remain within our funding policy.

We continually negotiate the borrowing facilities around the Group as part of the normal funding cycle. And while we, like everybody else, have seen considerable tightening of credit availability and increase in the margin that we pay, we're still finding more than sufficient sources of debt for us to maintain our policy.

Given this prudent approach, we do not envisage any liquidity issues, as we have sufficient committed facilities to repay all maturing facilities until July 31, 2010. However, we will continue arranging borrowing facilities where they are commercially sensible and appropriate.

Turning to the position relating to the 3.5 times covenant, there have been some analysts' reports that we may breach this covenant in 2009. Firstly, I'd like to remind you that for many years the Group has clearly staged its capital structure target, and one of these is to maintain the net debt to EBITDA ratio within the normal range of 1.5 to 2.3 times.

When our projections diverge from these targets, we take whatever action is necessary. You've already seen the aggressive cuts we have made in headcount and the discretionary spend. And as Chip's already said, there will be additional measures taken in the second half. And those will further benefit the EBITDA in the second half and we expect a reduction in our net debt between now and July 31 as well.

You've also heard about the highly selective approach we're now pursuing on acquisitions and CapEx. There are plenty of other actions we could pursue if we felt it necessary to further manage the relationship between net debt and EBITDA.

As you'd expect given the lack of visibility surrounding the macroeconomic outlook over the next year or so, we have developed a number of contingency plans. We remain confident that our approach of developing strategies to cope with the likely impacts of further possible downturns ensures that we will not reach our covenants under any credible scenario.

This Group is financially strong with an enviable bankable balance sheet, where the working capital represents around 78% of net debt. We've built a sound business model, which is capable of withstanding major economic shocks and remain confident in its robustness in the current markets. So, as far as banking covenant compliance is concerned, we're extremely confident that we'll be in compliance at July 31, 2008 and will remain that way in any circumstances we can envisage.

So, let's now move on to the performance of the businesses and start with the U.S. Plumbing and Heating business. Ferguson had to contend with a slowdown in the new housing and RMI residential markets, but delivered another strong performance -- a strong market outperformance, in fact. Constant currency revenue growth of 3.2% was achieved with the benefit of acquisitions. The gross margin improved as a result of higher private label sales, improved sourcing programs and a better product mix, which more than offset the effect of the more competitive market. The trading margin increased by 0.1% to 6.3%.

There's no doubt that Ferguson has strengthened diversity in business areas, such as water works, industrial and commercial, and high end RMI enable it to outperform the market generally and take further market share.

We've also been reducing our cost base, particularly related to the slower residential market. And as a result, we reduced headcount by more than 1,500 employees in the first half, which is about 6% of the workforce. This should save GBP38m in a full year and cumulatively Ferguson has now cut headcount by around 12% since the peak.

Let's move on to Stock & U.S. Building Materials. As you'd expect Stock was most affected by the decline in new housing starts during the period with around 75% of its business going directly into the new residential sector. Compared to the 25% decline in housing starts, Stock's like for like volumes were down by 23%. It outperformed in 12 of its top 15 markets. In response to further declines in housing, Stock's headcount was reduced by further 1,750 people in the first half, which should give rise to annual savings of GBP26m. Since the peak, Stock has now reduced headcount by around a third.

Overall, local currency revenues for Stock were down by 25.7% and reported trading loss of GBP44m in the first half, compared to the trading profit of GBP42m in the previous year. Acquisition revenues were GBP26m as Stock continued its strategy of diversification and reducing its dependency on the new residential market, and expanding its presence in the commercial, industrial and RMI markets.

In view of the further deterioration of the housing market we've taken another look at the carrying value of goodwill and other intangibles in Stock, and have decided to recognize an impairment of GBP89m. This relates to the districts of Texas, Florida, the North East and the Construction Services business in Nevada, which have all been impacted severely in this downturn. We felt that a prudent approach was appropriate in view of the uncertainty as to how quickly these particular markets are likely to recover. The short term focus of Stock will remain on business diversification and streamlining and improving the residential business.

And finally in North America, Canada. In Canada the residential market held up well. It was not significantly affected by U.S. housing concerns or the sub-prime market. Economic activity was positive, although the strength of the Canadian dollar is affecting export business and causing some price deflation in products from the U.S. Activity in the energy sector continues to be weak.

As a result, Canada's constant currency revenues were up 3.7%, including 2.3% organic growth, although profits were 15% lower due to branch closure costs and property gains in the previous year, but were not repeated this year. Excluding those items, underlying profit in Canada was flat.

Now let's move on to Europe and start with the performance of our U.K. and Ireland business. In the U.K. the new housing market is declining and the rate of growth in the RMI market has been weakening in response to deteriorating consumer sentiment and, of course, the tighter credit conditions. Government spending, however, on social housing, on health and education still remains positive.

In Ireland the picture is more challenging with housing starts in the period having declined by about 50% below the prior year. And against that background Wolseley U.K.'s revenue, was up overall 3.1%, including organic growth of 2.1%. The gross margin improved slightly, partly due to better pricing and an increase in private label sales.

The half year on half year comparison for the U.K. is affected by lower property profits, which were only GBP1.2m in this half compared to GBP8m in the first half of last year. Overall, trading profit was lower at GBP85m, although excluding Ireland the U.K. business achieved organic profit growth. The trading margin was lower at 5.3%, due to Ireland and the lower property profits, although particularly good performances in Plumbing Center and Bathstore.

Now moving on to France. In France the new residential market slowed in the period as a result of tighter credit and lower consumer confidence, which led to a generally less positive business environment. The French management team has continued with the strategy of repositioning the business and building towards improving its efficiency.

Overall, constant currency revenue for Wolseley France was up 1% to GBP942m due to acquisitions. Trading profit was 29% lower at GBP30m, earning GBP2m to GBP3m of the previously announced restructuring costs. The trading margin was 3.2%, reflecting those internal restructurings and some start up issues at the new National DC. Our new DC in Orleans is now fully operational with fill rates improving. The recent trends of the French business are more encouraging with a better performance in the second quarter of the first half and we do expect a better second half.

Now on to the continued strong performance from DT Group in the Nordic region. The results here for DT do, of course, reflect an extra months trading compared to the comparable period last year since DT was acquired at the end of September 2006. Markets in the Nordic region have generally held up well, although as we've previously indicated, the Danish DIY and new housing markets have softened and the rate of growth in the professional market has also slowed. In Sweden the DIY market has also started to slow, but the other sectors and also markets in Finland and Norway remained robust. DT generated revenue of just over GBP1b in the first half with 3.9% overall organic growth. Trading profit was GBP65m and the trading margin was 6.3%.

And finally in the European segment, Central and Eastern Europe, profits in this division were impacted by restructuring, particularly in Italy, the integration acquisitions and the IT implementation in Austria. This region achieved revenue growth in sterling of 8.6%, primarily due to acquisitions. The gross margin was lower with price deflation in some commodities, mainly affecting the Austrian, Eastern European and the Belgian businesses, and overall trading profit declined to GBP11m.

Excellent progress was made in many countries, however, with operations in the Netherlands and Switzerland performing particularly strongly. We also expect a better second half in this division as the effect of the unusual factors affecting the first half are behind us, and the markets are generally in pretty good shape.

Now finally from me, turning to the outlook. In North America we expect a further deterioration in the U.S. new residential market, which will put further pressure on the U.S. RMI market. The U.S. commercial industrial market is likely to remain stable over the next few months, but soften thereafter.

Growth rates in Europe are likely to slow. But the RMI and commercial industrial segments, that drive the majority of the Group's European business, are expected to remain marginally positive. We do expect business conditions in a number of the Group's markets to become more challenging in the short term. Our short term focus will, therefore, remain on maintaining a cost base that's appropriate to market conditions with significant further cost reduction to be expected in the second half and on the maximization of cash flow. We'll also be pursuing a highly selective approach to acquisitions and capital expenditure.

We remain confident that the long term fundamentals of the Group's markets remain sound and the fragmented nature of the industry provides significant opportunities for further growth.

With that, I'll hand back to Chip.

Thanks Steve. So, undoubtedly this has been a challenging year. Not only have our results been affected by the toughest slowdown in U.S. housing since World War II, but we have also had to deal with the lowest commodity prices in lumber and panels as long as I can remember. Despite that, we've not been distracted from our mission and have continued to make sound progress towards our longer term objectives.

Today many of our businesses continue to show resilience in tough markets. Ferguson, Canada, U.K. and Nordic regions all put up credible performances in the first half, which account for 70% of the Group. For me, one of the outstanding performances was Ferguson, which despite the slowdown in RMI and new housing, continued to grow revenue and trading profit. Most importantly, it continued to outperform the market by a considerable margin.

As you're aware, we invested significantly in the DCs in Ferguson and this clearly demonstrates that the DC network is good in good times and phenomenal in bad times. In a down cycle they allow you to improve customer service through higher availability and fill rates at a time when our competitors find it hard to match this.

Clearly, the loss in Stock is disappointing, but they did manage to outperform the market. They also continued to pursue an aggressive cost reduction program.

So, while our long term aim is to diversify this business away from some of the heavy reliance on new residential housing, the short term continue to look to reduce focus -- reduce our focus on our cost base without cutting into the muscle.

Some of you have asked are we at the limit of our cost cutting options for Stock? My answer is that we will continue to look at the business region by region and take cost out where the current conditions and outlook warrants it. We will continue to adopt this approach going forward, but we will not sacrifice customer service.

In Europe Wolseley U.K. improved its underlying performance, although its results were heavily impacted by the weakness of the Irish housing market where housing starts were down by over 50%. And once again, trading margin improved in the U.K. with good performances from Plumb Center and Bathstore. In addition, our acquisition of DT Group continues to bear strong overall performance. Switzerland and the Netherlands also performed strongly.

As you know, I've spent a lot of time in our businesses over the last 18 months, with particular focus on Europe. A lot of work has been focused on France, as we address a more challenging market and continue to improve our operations. I'm confident that we have the right management team in place to deal with the issues the business faces today.

The first half performance was impacted by a slower market growth, which improved quarter one to quarter two. Additionally, the performance of our new national DC in France has improved with fill rates going from 80% to 91% in the last three months, which is encouraging. We continue to focus on expanding the joint site programs, cross-selling initiatives and centralizing the sourcing and purchasing functions. As I said last year, France is a two to three year project. We are addressing the structural changes in the markets and designing a new operating model to address the market realities there.

Steve has already outlined our cash flow performance, which, as you know, is the central pillar to our earn, turn and grow strategy. We will continue to maintain the organizational focus on driving cash out of our balance sheet and the results are encouraging.

So, what have we done in the first half to respond to market conditions? We've cut cost. We've preserved cash and we improved the business in the process. Over the last 18 months we've reduced headcount by about 10,000 people across the Group. The majority has been in the U.S. where market conditions are the most severe.

In Europe headcount reductions have also been implemented in line with local conditions. In France, as I just mentioned, and in Central and Eastern Europe further rationalization and integration of the business has been undertaken. We also have a headcount freeze across the Group.

In addition, we have focused within each region on the underlying conditions and outlook and we've closed branches where it makes economic sense. We have also slowed some of the branch openings which, of course, tend to be a drag on profitability during their first six months.

As you know from our AGM statement, we have streamlined the central management team to help us focus on priorities and ensure rapid decision making and accountability. We have reduced the amount of discretionary and capital spend in order to preserve cash and focusing on gaining benefits from prior year investments.

Following our recent review, we've also redefined the spend on business change program to implement a common IT platform. Again, we've re-established priorities and expect to spend about GBP130m on IT in this current year, then GBP75m to GBP100m a year in subsequent years. I'll talk more about our specific plans on that later.

Finally cash flow, it's been a significant focus over the last 12 months and through the turn element of earn, turn and grow we've established an aggressive improvement target for each business in inventory, receivables and payables. We intend to keep our operating companies focused in continuing the momentum.

So in summary, we've made some tough calls in the last 18 months and I have no doubt before this is over we have more to come.

Longer term our strategy is unchanged. We continue to invest in our business to increase our long term competitive advantage, the full benefits of which we have not seen yet. To that end, the 7% margin target remains in place. However, as I've said before, it does assume we're back to normal market conditions.

We have a flexible business model at Wolseley, which allows us to adapt quickly to changing conditions. Given that 60% of our costs are labor, we can reduce overheads accordingly. So, whatever happens we're confident that we can outperform in most of our major markets to weather the storm better than our competition, reduce our cost and come through any downturn as a stronger, more competitive company.

The themes you've seen in the first half will continue in the second, cost reduction and cash containment in response to changing market conditions.

On acquisitions we've raised the bar even higher and intend to adopt a highly selective approach. We see even better opportunities at even better prices coming down the track in 12 months time. On CapEx we expect the full year capital expenditure to be well below the previously announced number of GBP400m.

Many of you have asked me why, in current business conditions are you pushing ahead the business change program, including a move towards a common IT platform? Well, many of our businesses need replacement systems now to improve their performance and operating efficiency. Specifically, business change will improve working capital efficiencies, deliver a more efficient business process leading to higher productivity and better customer service. Overall, better information will allow us a greater insight into our business, our customers and our suppliers. Efficient processes will be a key catalyst as they will enable us to deliver a higher overall net margin, which I think is worth investing in.

In Austria we recently completed the implementation of a pilot SAP program. Valuable lessons have been learned from this. I recently visited the region and was able to see for myself the benefits coming through. We're already seeing a better gross margin and improved inventory efficiency now that the platform is embedded.

Beyond that, I recognize that we must be careful not to cause further disruptions in the businesses, which are trying to adapt to changing market conditions, particularly in our major markets. This will be reflected in a risk adverse approach and will involve phasing further implementations.

Finally, I'm conscious we need to remain within our banking covenants and we have taken action in the first half to ensure we have headroom. In the second half we will pull the levers we need and are confident we can remain compliant.

We've now embedded earn, turn and grow into our businesses, each playing a role in improving efficiency, generating cash and increasing our like for like sales. In this industry size matters. As we develop more critical mass over the long term it will allow us to outperform, improving margins and return on capital. Particular emphasis is in the areas of purchasing and supply chain going forward. Supply chain is certainly the heart of our distribution network and a major source of competitive advantage.

A fine example of this recently, when Wolseley U.K. won an expanded supply contract for heating products for British Gas. We're now able to deliver products to the customers direct from the DCs rather than through the branch, which with improved efficiencies, higher service levels and which gave us a great competitive advantage.

We also continue to focus on private label across the Group, which has proved extremely successful. Recently, for example, we introduced into Ferguson a private label range of hand tools originally marketed by the DT Group across the Nordic region. Raptor has now been launched in 840 locations in the U.S. and uses the same global sourcing as DT out of China. In the U.K. Bathstore is a real success story and a sound business platform for marketing private label products to the end users.

I think all these examples emphasize the tremendous potential we have to leverage our global strength. Overall, our objective in private label is to double our percentage of sales from 5% to 10% with a minimum double digit additional net margin.

We will also keep the focus on how we can grow like for like sales. Our customers are at the center of everything we do. We're a people business after all. That means getting more business from our existing customer base, as well as attracting new customers in surrounding areas. This is being done through intensive customer focus training, which will improve customer service and now being rolled out across North America and the U.K.

I see this cycle as an opportunity and a catalyst for change. During the good times businesses put on a certain amount of fat and fundamentally this is a unique opportunity to lower our cost to serve, to break the link, to create more operational leverage. We will drive a much more competitive cost base. This means growing our profits faster than our sales. Yes, we want to lower our costs in the short term, but at the same time we must continue to build our long term business model.

So, while we deal with the challenges of the downturn we're not losing sight of the opportunities to continue to leverage our scale to create a competitive advantage through improved productivity and cost efficiency.

Our markets will return. Let me repeat that. They will return. The fundamentals of our business remain absolutely sound. We must remember this is a cycle. As I saw during the 90s recession as a Regional Vice President in Florida, at a time when everybody was ready to shut down the state we stuck with it. We tightened every bit of that business and came out with a truly dramatic recovery.

As I've said many times before, our market opportunity is huge, representing some GBP700b of annual spend in North America and Europe. Our market share today is still single digit and without a doubt there remain significant opportunities to expand our presence on both continents.

At the same time as an industry leader in distribution we can generate scale economies through supply chain and purchasing strategies. Naturally, in the short term our priorities in current conditions remains on cost reduction. But we shouldn't lose sight of the opportunities Wolseley has in its markets. We will be ready to capitalize on the opportunity that brings when the upturn comes.

So in closing, I just want to leave you with -- leave you by reinforcing the three basic points I started out with today. First, experience and strength in depth. That's something Wolseley has at every level of the organization, something which will allow us to better serve our customers who are dealing with the same pressures of this cycle.

Second, real opportunities to create a leaner fitter Wolseley. Opportunities to attack inventory and to reduce working capital, to break the link between cost and revenues in our business and to focus relentlessly on better customer service. We're doing it now and we'll keep on doing it.

And third, not losing sight of the opportunities going forward. By getting this right we'll come out fighting fit with adding market share, a lower cost base and a more streamlined business model than ever before.

Now is not the time for us to become complacent about the difficulties in the short term. However, as challenging as it is today, if we concentrate on getting the fundamentals right, I'm confident we will emerge from this downturn as a stronger, more efficient business than ever before.

Thank you, ladies and gentlemen.

We'll now take your questions. Please state the name of your company. Try to keep to the time if you will and limit your questions to two if we possibly can. Thank you.

You, sir. I think she's bringing it up, right behind you.

Thank you very much. Howard Seymour from Numis. Can I ask one specific question and one general if I may.

The specific one is Steve, when you were going through the divisions, you mentioned two markets where you'd expect the second half to be better, France and Central Europe. I didn't hear really if that was just the markets you'd expect or whether the likes of DT etc, you'd similarly be expecting progress. Maybe I just wrote down those as two specific ones.

The comments I made were really about our business rather than the markets necessarily. In relation to France we're saying that because the trends were better in the second quarter of the first half we expect our own business trends to carry on being positive and have a better second half and also in Central and Eastern Europe. There's lots of rationalization, lots of things going on in the first half and not least the IT implementation. So again in relation to our own trends and performance we'd expect a better second half than you've seen in the first half.

So it's not to infer that there is not potential growth in the other European markets in the second half but just that they've been more problematic?

Yes, I was just picking out those because I think we obviously have to be disappointed ourselves with the performance in those particular sectors. And we're looking for improved performance going forward in those two.

Right, thanks. The second one was as I said more strategic and you mentioned the purchasing benefits etc. In the shorter term, as you see a situation where there's more stabilization in what you're doing, is there any potential for those economies of scale to actually move backwards or do you still say that you can drive those through? Is it not just dependent on the growth model?

I think that Wolseley in particular is more appealing to many of our suppliers today than they have been in the past for the fundamental reason of our financial stability. As we're seeing more and more of our competitors deal with very, very serious issues, we intend to continue to position ourselves about how fundamentally strong we are to be able to go forward.

Thank you.

Mark Stockdale, UBS. I'll stick to the two.

Firstly, on the cost initiatives, I know it's always difficult when one is talking about employees. But I wonder if you can give us any flesh about the second half. You obviously used the word significant. So in our speak, that's 10% or so. Or is that wrong? I wonder if you can just give us some thoughts about where you're likely to look. Obviously on Stock you've said before you wouldn't want to go into the fabric of the business. It now sounds like you're going into it. So are we looking at job losses and depot cuts now in selected areas? That's my first.

Let me answer it in general and then Frank and Rob can comment. We are -- as I indicated we're looking at region by region, location by location. We're evaluating performances based on what we envision or really the word I guess is anticipate is going to happen next, trying to get out ahead of it. And that's not just limited to Stock. That's across the board from that aspect.

More than likely it would be a consolidation of locations where it makes sense to go from -- for example, in the state of Florida we've gone from six (inaudible) to two, because there's just not enough demand down there. We can haul it a whole lot cheaper from one end of the state to another than we could have considered in the past. So again I think it's a matter of the market, going in and determining what makes the most sense and really beginning to anticipate what's going to happen next by market and by customer type.

You guys want to add anything to that?

Yes, I'll talk about Stock. Of course we'll do what we need to do but if you have headcount reductions with our process improvements then it does cut into the muscle of the organization. So we feel like there are a number of initiatives underway be it fleet optimization, supply chain initiatives, centralization around purchasing that'll allow us to become more efficient and do the right thing without affecting customer service. That's a concurrent activity.

And I would just add for Europe, we're not going to treat all the markets the same. Obviously, Finland is still -- we're very bullish about it. It's doing very, very well. So we probably won't take the same approach in Finland as we will say with Ireland in terms of where the market goes. So as Chip said, it's going to be business by business, branch by branch opportunity. But it won't be a one size fits all across the European group. But we will take some action.

But we are looking to restructure where it makes a lot of sense and again trying to anticipate what's going to happen three to six months down the line.

Thank you. And my second one was specific on Stock. And it's trying to get a handle on trading and bad debts. At the five months when you gave us the update you said profits would be just over GBP25m negative. They've come in at GBP44m. So obviously January, if you do the maths GBP19m loss. January is a small month. But I wonder if you'd just give us some dynamic about that. Or is that just a massive step change down which then does require my first question to step in?

Well, it's hard to determine but again -- how do you say this. It was less worse than January. But it's still very challenging and we are looking for some seasonality from the business. I'm not here to give you a weather report but they had more winter over there this year than we have traditionally with the north east, even down into the mid Atlantic states and certainly the rains on the west coast. Hopefully we'll see some pick up from that. It's just been dampened. But I can tell you the state of Florida is not an issue on weather any time.

Just to follow up on that. That obviously does look from the outside as though haemorrhaging profit and cash. Are you into, or should we expect something pretty radical on Stock in the second half?

Well, I think if we cancel assuming January is indicative of the rest of the year, you're obviously right it's a short month, a small month. And usually the activity levels are one of the lowest in the year and there's a certain amount of a fixed cost base. So obviously you end up with a lower profit usually in January. So don't necessarily assume that's the run rate going forward.

You mentioned bad debt, certainly bad debt up through up to the half year were a factor in the general results as well. And just trying to help you a little bit, I think we talked before about bad debts rising and obviously that's inevitable in the U.S. with the construction markets the way they are. The incremental bad debt cost in Stock in the first half was just into double digits compared with the previous year. So in a six month period you got a number --incremental bad debt provision is just in double digits. That'll give you some idea.

So it's unfortunate, it's not catastrophic and the effect in Ferguson is much less and the incremental effect is a fraction of that amount. So it's really the new residential sector that is giving rise to most bad debts.

(inaudible) from Exane BNP Paribas. Two questions.

The first one is that you mention in your press release some price deflation in Central Europe. Could you comment on this?

Go ahead.

Yes, I thought he was going to do two questions. They always do two and then come back. Sorry.

Yes, we did have and it was specifically in the insulation in Eastern Europe where we saw new capacity coming online so it had an impact on the prices in the market. And we saw some marginal decrease in stainless steel pricing which with OAG Group and [Cloche d'Or] which is one of the acquisitions we'd done with them a couple of years ago as well as the Belgian business had some minor influence. But the major impact was on the insulation in Eastern Europe.

And could it spill to the rest of Europe? We're seeing a lot of insulation capacity in Europe?

In the rest of Europe, actually we saw price increases on insulation. It was predominantly in the Eastern European market where you had a significant amount of capacity coming on line. So we did not see the same impact in France or the DT Group.

Thank you. The second question refers to debt and covenants. As (inaudible), could you just redefine for me how you calculate EBITDA? Is that trading profit plus depreciation, that would be a preliminary question.

And the second is a big question. You're saying you're not expecting to breach your covenants. My question is if you do breach them because the markets collapse, how would you rate your options between cutting the dividend, increasing capital, doing disposals. Could you put Stock under the protection of Chapter 11? How would you rank your options?

(Multiple speakers)

Firstly, how do we calculate EBITDA? It is the trading profit as we would define it before interest and adding back the deprecation charge. But what I would say there bringing in the effect of acquisitions because obviously the acquisitions we make in a period affects the debt side. We are allowed to bring in the full twelve months EBITDA of those acquisitions which we've made. So that's why it's a pro forma base so you can't pick it up straight from the announcements. So that's the EBITDA side.

Obviously we have to look at all sorts of scenarios in terms of the macro economic situation. We look at all sorts of scenarios in terms of the actions we can take. There are lots and lots of different actions. As I said in my little speech, in any scenario we envisage we don't breach the 3.5 times covenant. If you want to assume your dramatic Armageddon situation, that's (inaudible).

The first thing you'd do is go along to a bank before you breach wouldn't you and have a sensible discussion. And there are plenty of examples of other companies who've been able to refinance their position. But again, we don't expect to go there. We have plenty of headroom. And remember we have about GBP1b of spare facilities as at the end of January. That gets us through. There's no question there. And there's all sorts of different levers we could pull if we needed to. And of course the cost reductions and the CapEx reductions and the acquisition spend being at a lower rate they all help the relationship between the net debt and the EBITDA. And remember all the time it's the inter relationship of those two factors that you have to look at and not just one in isolation.

Okay. Does that answer your question?

Would you consider at some point selling some businesses?

And remember we're always doing property disposals and that's one of the levers we can pull. We can either accelerate or decelerate as the case may be. We'd be able to do the same. So property disposals would be one thing and there's lots of other things you can do. I'm not going to go down the whole list but there are lots of other things that one can do but property disposal is one of them.

Thank you.

Clyde Lewis at Citi. Staying with the U.S. theme if I may, firstly could you just say a little about Stock's competitors and Steve, you mentioned some of the competitors obviously finding it quite a bit tougher than you guys.

And maybe Frank can talk a little bit about whether you are seeing some serious capacity being taken out in that market. And how bad has it got for the other side of that part of the market at the moment?

The second one I've got, sorry I'll ask the two together if I can. The second one I've got is in terms of your macro forecast if you like for the U.S. I don't know if you've seen it but the PCA came out with a big adjustment to their construction forecast for 2008 and 2009. Where are you in your thoughts in terms of the res, the non res and the RMI markets as well?

I'll do that one firstly and ask Frank to do the one about the competitors. The RMI market is still pretty stable but one can only envision that as commercial banks begin to tighten up on home equity loans etc. personal lines of credit and that type of thing that will be impacted. We haven't seen a dramatic downturn, Clyde yet. But we would anticipate it will begin to come.

But more or less we can see it 90 days before the hit because if you come into our showrooms you usually don't walk out with it. You usually ship it when the job's getting further along from that aspect. So we're monitoring that very, very closely. But our showrooms are still relatively busy.

On the commercial market again as I indicated it appears to have peaked in the last quarter of last year or January. But I can tell you after being out personally into the market I was out seeing contractors in Boston two weeks ago today, they're busier. They have more backlog than they have ever had. So we know if that's coming. We've got to be able to anticipate it. But as you can see with the Ferguson numbers you don't want to start making adjustments too soon. You want to be able to capitalize on that.

So I would envision as we get into the second half of the calendar year, particularly the fourth quarter, we're going to have to be in a position to be able to react to it. But right now it's still reasonably robust based on the backlog that they have. And the neat thing about Commercial, it is really about Commercial, is that it doesn't stop on a dime like residential. If you start a five storey midrise you don't stop at the first floor and say we won't build the rest of it. We'll just lease this out. It ain't going to happen. They're not going to allow you to do it whereas a sub-division you just stop at a house and leave the rest of it and let grass grow over it.

But I think we're solid as we indicated through the balance of our financial year. As we get into the third and fourth quarter of the calendar year we're going to need really evaluate market by market what the impact will be.

On the competitive base where the building materials is concerned, Frank.

Yes. And just to draw a comparison between Stock and Ferguson and the Canadian group, what I'm about to say about Stock is not -- and their competitors, we don't see in the Ferguson world or the Canadian world, and that is a significant number of closings. I did on the plane coming over a little math in around 15 of our major markets. And I counted 140 competitors that have closed in the last 120 days. So definitely capacity is coming out.

Our biggest competitor in the Stock world that is similar to the other two companies is the small local lumber yard. And they're definitely closing and we don't see a lot of activity from others. BMHC has got their challenges. Pro-Build is buying a few but it's pretty quiet out there and we see capacity coming out. So we think in the longer term that's a good thing for us.

Good morning, it's Paul Steegers at Merrill Lynch. Just coming back to Steve's comments on the covenants I'm afraid.

I can see why you won't breach in fiscal '08. But if you look at '09 then perhaps if we could just look and you're saying things are deteriorating in some of your markets, what assumptions are you making for U.S. housing starts in your worst case scenario under which you still won't breach?

And does that imply that your Ferguson margins go back to the early nineties trough, mid 3%? Is that what you've tried to model? And if so where's the upside coming? Is there a lot more -- it sounds like you can clearly do more on working capital but should we be seeing the kind of working capital inflows we saw last year? Or is there a likelihood that CapEx will continue to be cut going into fiscal '09 as well? I'm just trying to get a sense.

Yes, we consider a lot of scenarios. As I said before it's the inter-relationship sometimes of the profit side and the debt side that you've got to look at rather than one of those two components in isolation. Remember obviously we've taken a lot of action in the first half that hasn't yet come through in the second half and will impact the run rate of profitability going forward. Remember that we will take further costs out in the second half that will benefit '09.

Remember that the performance of some of our businesses in the first half have been affected by unusual things of one sort or another so the run rate or profitability should be better in those regions as well. Remember as I said before there are lots of levers we can pull, one of which is property sales. I've mentioned that. And lots of other levers we could pull but I'm not going to go into this whole list of levers we could pull. That wouldn't be appropriate here. And we've considered lots of different scenarios.

Remember what Chip said, it's not housing starts per se. It's the level of housing activity in our markets and then separately the level of RMI market, separately the level of commercial industrial activity. So in all sorts of combinations of scenarios we still feel have plenty of liquidity going forward before we have to pull the additional levers we can pull.

So unfortunately short of me showing you a spreadsheet and looking at all the things we considered I can't give you specifics but I can assure you we spent a lot of time looking at this. Obviously the Board is very interested in this sort of stuff. So we are -- if we weren't confident we wouldn't be saying we're confident.

But you knew -- the extra facilities of GBP1b, that's on covenants of 3.5 times as well isn't it?

Yes.

Okay. And then where you've got 60% of your debt in euros as well so that's not going to help clearly given that --

We've seen a lot of the adverse currency translation impact already. It's already hit the balance sheet side. So you won't get another significant -- who knows you may. But a lot of the pain has been taken already from exchange rate point of view on that closing balance sheet number.

Okay, thanks for that. And my last question is on DT Group. I think at the five months stage, correct me if I'm wrong, you were saying organic growth at DT Group was still, certainly above 5%. And now you've done 3.9% or something around 4% in the first six months. So it looks like clearly things are getting tougher in some of the markets, DIY in Denmark.

What's the run rate there? Are you still very confident to see positive organic growth in the second half at DT Group?

As we've indicated we're definitely seeing some slowness in Denmark. The other countries are still relatively solid. Rob, you may want to come in a little bit further on the DIY business etc.

I think the straight answer to your question is yes, we'll continue to see positive organic growth in the second half. Where it will come from obviously the DIY in Denmark has been slow. The DIY in Sweden which is a real small business for us, also we're seeing in that. But Finland is doing very, very well, touch wood. Sweden as a professional market continues to do very well. Norway, the rate of growth has come off a little bit but it's still very positive. So we feel good about positive organic growth in the second half.

Paul, just going back to the question you asked Steve, we haven't got our head in the sand. We're looking at as many scenarios as possible. When you start talking $200 a barrel for oil or if you're talking -- if you're predicting $2 euro or whatever else it is, we're getting out as far as we can. We really are trying to anticipate what's going to happen next and not be reactive but sit back and say what if, what if, what if and doing everything we can to manage the business accordingly.

Tobias Woerner from MF Global, two questions if I may.

Firstly when you look at the down trend at the moment and you compare it to the 1990s I suspect it would be easy to judge is this better or worse than 1990. So maybe just give us your sense of comparison given that you have the comparison yourself.

And secondly it's easy for us to fall into the trap of looking only at bad things when periods are bad and only good things when periods are good. So maybe just set out in the shortest form possible what has changed since 1990 in your business which should make you more sustainable or more stronger than was the case in the early nineties.

I'm assuming you're asking the question about the U.S. so that's the direction I'm going in and if you've got something on Europe. I would say from a housing standpoint this is more severe. Again the fall off was so dramatic to go from 2.2m housing starts to sub 1m whatever number you guys are plugging in from that aspect. Lumber prices from what I can remember have fallen even further from that aspect. At the same time the commercial market or the non-residential market hasn't been impacted anywhere near that severe at least to date. And again as we've stated, if that's going to be a major issue it's going to be likely more than a problem in the latter part of '08 and early '09.

What's different today, I can tell you in the early nineties Wolseley in the U.S. and let's just talk specifically around the plumbing business, had Ferguson and (inaudible) and Northwestern and there was absolutely no synergies whatsoever amongst those group. Even at that time the distribution network within Ferguson didn't exist. We were very fragmented -- to a degree even a federation of businesses even within the Ferguson organization. Since then all of that's been consolidated. Everything's tied into the supply chain piece. They're on for the most part with the exception of the few acquisitions a single IT platform. I'm not telling you that platform isn't antiquated but it's very solid from that aspect.

So I guess what I'm really saying is we're much stronger as a competitor than what we were in the early nineties in the U.S. where plumbing is involved to be able to weather through this and to be able to capitalize on the strengths of the organization particularly with that supply chain pieces.

As I indicated those distribution centers are good in good times, they are phenomenal in times like this. You are able to ratchet your inventories down to a very low levels at a local level and replenish it every day or every three days or whatever the timeframe is, in the size or scale of the business. So to date, I think the housing market has been more severe. The non-residential side hasn't been as severe as what I remember in the early nineties. But we've just have to determine and see what happens next.

Kevin Cammack at Kapthing.

Could you just address the trends in the non-employment part of the business, the 40% of the cost base outside of labor you referred to? I just assume things like transportation etc. are going up not down. I just wondered if you can address the trends in that.

And the other small point, is it possible to give some idea of the size and scale of the Irish business in the context of U.K. and Ireland?

Yes, I'll take it first and then flip it over to these guys. That 40% is mainly what we call (inaudible) costs of our facilities, where we've got to pay rents. Most of these properties are not owned. We certainly own a fair amount of them. Transportation has an impact particularly with rising fuel costs. From that aspect we've begun to plug in some figures as to what impact that that would have.

I would say the biggest challenge right now has been the increase in bad debt on our accounts receivables, our debtors so to speak. And as Steve indicated that we've seen some slippage, but it hasn't been as severe. I think we've got tremendous credit management particularly in North America to deal with that.

Frank, you want to talk a little bit about what you're doing in the supply chain and the transportation piece and then let Rob talk about --

Yes. It was what I mentioned earlier about fleet optimization. We're looking at opportunities now to look at our fleet for all three companies and determine what we need, how we need it, how we deploy it. And in the process we think we can realize significant savings to on one side, to counterbalance the rise in fuel costs on the other and in the process actually improve our service to our customers.

So we've got a couple of pilots going on now, one in Ferguson, one in Stock, and then we're going to roll this out regionally beginning in two months in the West Coast and then have it migrate east. These are the kind of opportunities to attack other costs because like Chip said so much of it is fixed. But there are still opportunities to drive our costs out and improve efficiency and customer service.

Just going back on the cost base in the U.K. in reference to the estate that you had. These presumably, the vast majority in the U.S. are under some form of lease agreement rather than freehold. To what extent are you tied in to these costs for three, four, five years?

In the U.S. in particular?

If you close a whole range of depots, do you sit with the lease liability on the rent for five years or more?

Yes, but much shorter term leases in the U.S. Most average about three years. Very rarely do you go over five. There are certainly some exceptions to that. So there would be some potential closures or whatever and the one offs associated with that. But again they are not 10 and 15 year leases which are more traditional in Europe.

Okay. Thank you.

You want to address Ireland, Rob?

Yes, Ireland's roughly about 10% of the U.K. business. That's about 10% of the sales turnover.

Just the U.K. Other questions?

Hi, it's George Gregory from Credit Suisse. First question, on the freehold properties, I think Chip you mentioned you've got a reasonable amount of freehold properties that would allow you the option to perhaps sell your lease back options there. Can you outline your strategy with regards to those? Clearly that would increase your leverage there. Is that a consideration?

And the second question I have, I don't really want to get drawn into the question of whether or not you would breach under any conceivable scenario. But my question is with regards to your contingency plans, firstly, I think Steve you mentioned, if and when, say you did breach, you would sit down with your banks. Could you provide us with some idea of whether there are ongoing discussions with your banks? Are you able to comment on that at all? And finally, would a rights issue feature within your contingency plans at all or is that just completely off the cards? Thanks.

I'll take the first one, then Steve the second and we'll share the third.

On the locations that we would go ahead and sell, it would certainly generate an opportunity for some free cash if you will. We feel that we've been in a position in the past to be able to negotiate very amicable rents for us because we're a good tenant. Obviously none of us can invest in these locations or whatever else because there's going to be a conflict. But we can package some of these up particularly with sources that we've had in particular, especially in this slow interest rate environment from that aspect.

So we do this routinely, this is not just something that's a knee-jerk reaction. I guess the key thing is we could accelerate it if it made sense from that end. And again, it's a situation where we free up a lot of cash so it would be helpful.

Steve if you want to take the second --

It's not (inaudible) lease back either George. All those properties are where we have development potential so some of those are straight sales. And again as Chip said, we're doing those all the time. But there are always a bank of opportunities you can get into if you want to do that. So it's not just selling lease backs.

As I mentioned again during my little speech, we're always talking to bankers to make sure we maintain this 20% headroom compared with the peak borrowing environment. And it can be anything from assets (inaudible) things, so we're always talking to them. We're certainly not talking to them about breach of covenants or anything like that because we're confident that we don't need to do that. So they're just part of normal, ongoing discussion. We obviously have a lot of banks who need to understand where we are with things as well.

But they are, let me stress again, normal discussions nothing to do with breach of covenants or refinancing of the type you are talking about. And rights issues are not on our radar screen. It makes no sense to us to even think about that.

Right. I was just wondering, clearly as I think your final point Chip, it's a hugely fragmented industry. The potential over the next five years to expand in the market is huge. You are quite constrained, the balance sheet is clearly quite constrained. That would allow you huge opportunities to continue to consolidate the market. Surely you view the situation whether or not you'd breach that covenants as being quite constrained.

I agree with you. The biggest difference is that I don't anybody would want us to go out and hoard cash to be able to do acquisitions 12 to 18 months from now. And I can assure you, from my experience, those valuations will be considerably better 12 months from now than they are today.

Wolseley has dropped over half of its privately traded company, mom and pops have not acknowledged that. That will come, it's just too early. Until the commercial banks get in there and start reevaluating their assets, and saying we are wondering how long you had this on your inventory, and this on your receivables. No one wants to sell right now, looking at this they want to talk to you about what they did in 2005. We don't want to buy at the 2005 values I can assure you.

So, again, I think you're accurate within your statement. But we don't want to be doing that right now and building up a war chest that we will use 12 months from now, particularly in this environment. We've got other things that we can do internally, but before we'd ever get to that point.

Okay, thanks very much.

John Messenger (inaudible).

John Messenger, ABN and I will limit myself to two. The first one is maybe following on from that point. When you look back in 1991 when I think you mentioned you were running Florida, the opportunities that were thrown up then -- I am just trying to understand.

Was there ever an occasion where actually Head Office, either Charlie or Jeremy back in the U.K. said, look we haven't got the financial fire power right now for you to start talking to that guy, even if we are thinking about an acquisition in nine to 12 months time when they are already in distress.

In that, what I am driving at is do you not need to be credible today with your finances to actually get the dialogue going so that be it 12 months from now that you are picking up these businesses that you really want to get, because you need to look as though you are solid for it today rather than in (inaudible).

I didn't say we are stopping the dialogue I just said we are not writing the checks right now.

Okay.

Because I really do -- there is ongoing dialogue, and the people that we are talking to. But again I think their valuations are out of line with what their businesses are worth. And it will come, but we've got some time to go.

Going back to the early 90's John, we had so many things going on I can't tell you what the mandate was from Jeremy or Charlie. It was just fix it, tighten up get your house in order. And at that point in time we were the smallest kid on the block, coming up against the Hughes' of the world and some of the others who were headquartered out of there. And we did what we needed to do, and got the results up to the level of performance by the late 90's that were some of the best in the whole area.

And the second one was just, when we look at what we've seen so far in the U.S. and to an extent in Europe it's been new build rather than in the RM&I market. When you look at -- if you lose a dollar or a euro in Europe, in terms of where we go from here. I am looking at the big house builders. You didn't make huge margins from them, but they were great for overhead coverage and making some net margin.

Should we be actually thinking about a more significant leverage factor in that you make the point you want to break the leverage. But I would assume that in the U.S. some of the plumbing and heating -- we went to a showroom in California, I can imagine that's a pretty rich gross margin business.

Do we need to be thinking about those dynamics when we are looking forward from here as the RM&I market softens? And the same question into Europe really for Rob, just to understand it. Because I would have thought DIY is certainly a full higher growth margin business with the cost base it runs with. Just so we can understand the dynamics as we try to model it forward.

Yes. I think, John, what you to look at is one to offset the other. We think that we've got tons of internal opportunities for us to be able to go in and improve our overall gross margins, just by more business intelligence if you will. One of the reasons I won't say SAP system, but we are doing some of this but it's on a very fragmented basis. I can't take somebody from Copenhagen and move them into Raleigh, and say this is how you get it done. It's just too -- too many differences from that aspect.

I also think that we are in a position where we can continue to truly leverage our size. I think we are more appealing today as an organization than we were two years ago when things were running as hard as they could go, when people could hardly get material in or out the door.

But the key thing is it's not just to renegotiate your position to what you're dealing with this year. It's the benefits that you get two years and three years out that you can compound.

Robert do you want to comment specifically on the European markets or any others?

Yes. I think it is a mix and it's about the diversity. And you are right DIY has hit a significantly higher margin in DT. It's about 11% to 14% of volume. So as it moves DT has an impact. But part of the diversity is looking for the others opportunities, whether it's a spend in RMI and moving into the commercial, or moving in to the industrial side.

Just, -- it's -- probably best example for me is Ireland, where we've added implants for hire, we've added implants for electric, moving into the more, I'll say, industrial heavy side -- pardon, not heavy side, commercial side of the business, because we are more RMI in new constructions.

So the more we can begin to move into the markets that are still rising, we have a better chance of preserving that margin side. Now if all the markets go to pot it's a different game. But it's that diversity play that we look at market by market.

Thank you. And sorry, just the cost save GBP58m --.

GBP58m (inaudible) you've got it in the statement.

He raises (inaudible).

You've got accumulative GBP58m in the statement, just to understand the dynamics, has some of that already been there in the first half, the cost saving numbers, the two you gave in the statement? Or is that really all coming second half, or is it slightly delayed? Just in term of ripping those costs out before we see the full benefit.

The answers is yes, yes and yes. The calculated -- we are looking more forward, meaning looking at what we've spent and where we want to end up. So to go back John and say well this showed up in November, and this showed in February. We are just looking at where we are going to end July 31, and what's the carry forward into the new financial year. So I am sorry we can't give you more details, but that's, again, we are trying to anticipate what's next versus looking back.

So, yes sir.

Good morning it's Tom Sykes from Deutsche Bank. Just on the cost base in the U.K. if you do end up seeing year on year declines in the sales side, what's the spare capacity that you are running at in your U.K. businesses? And is the flexibility in the U.K. similar to that in the U.S. or is it tighter like it might be in continental Europe?

It's not similar to the U.S. but it's a whole lot easier than Europe.

Right.

It's sort of in-between. Obviously we've got to be careful and do it in the right format based on the local conditions. But we can react accordingly it's just got to be well planned out.

And so what level of spare capacity do you think? Is there any estimate you could put on that in the U.K. businesses? Just that, obviously you could potentially match some of the -- any fall off in revenues by fall off in cost to begin with. Is there is a slowing in the U.K.?

Spare capacity?

By capacity do you mean possibility of cutting, or do you mean [people]?

Yes, certainly on those -- on the labor side, because obviously you might potentially be able to match SG&A cuts with the sort of sales cuts to begin with if the sales cuts weren't too strong.

Yes, I guess I would respond by brand, we would look at not only the footprint but also the market penetration and the margin that's been generated. As you know last year we closed 47 locations as part of a rationalization. We continue to do that. So when we look at Steve's favorite market Derby, now where we have significant number of footprint. We take a look at how many branches we've got of all brands, and then figure out how do we optimize that footprint. Do you consolidate, do you close? Do you use one as a master location? So that work goes on all the time.

Okay. And if I could just ask quickly, on the GBP1b of the committed facilities, I suppose that -- how committed is committed? Is there any chance that that can be --?

It means 100% committed. That's absolutely committed.

Okay. Thanks a lot.

Okay. Let's wrap this up. I appreciate the time that you guys have given us. I guess the key message is again that we are going to continue to reduce our cost. You can expect sustained cash flow. And we will be restructuring the business. In addition we are very focused on our customers who are experiencing the same cycle. And we feel like that opportunity to even get closer to them will benefit us today as well as in the future. Thank you again.