Ferguson Enterprises Inc (FERG) 2010 Q2 法說會逐字稿

Right, I think we'll get started, if we may. Good morning, everybody. Just before we get into the actual presentation, I'd just like to thank Steve Webster, who's been with the Company for 15.5 years. He tells me I'm the sixth CEO that he's seen through this process, and he's going to miss these sorts of days like a whole in the head. So, Steve, thank you for your enormous contribution to the business; thank you, sir.

And also in the front row somewhere, we have Mr. John Martin who's hiding over here. You can buttonhole John at the end of the Q&A and find out what he thinks about the business; and next to him is John Whybrow, the Chairman of Wolseley, who's also happy to take any questions.

In terms of the highlights of the year, I think we made a solid start to the first half of 2009/2010, particularly given the market conditions. Our revenue of GBP6.3 billion is down 15%, and I think the point we've made in the announcements are that the markets are still very difficult to predict at the moment.

Pleasingly though, our gross margin has held broadly flat. There's still significant pricing pressure out there in the markets, but I think we've done a good job to hold that flat, and the half-year costs have reduced by GBP272 million. Now on a monthly run-rate basis, they're broadly flat.

Trading profit of GBP167 million.

We've exited some our unattractive businesses, and the resource allocation process that I'll come back to during my presentation has now been completed for 2009 -- for 2010.

So let me now hand over to Steve, and I'll come back and talk more about resource allocation.

Thanks.

Thanks, Ian, and good morning, everybody. I'm going to start with the usual slide on the financial metrics for the Group. Let me just first remind you that the comparators for the period have been restated to exclude the results of Stock Building Supply that, of course, we've gone into a JV in May of last year with.

So for the Group as a whole, for the half-year to January 31, 2010, revenue from continuing operations was GBP6,331 million, down by 15.1% in sterling, or 17.1% in constant currency.

Trading profit was GBP167 million, which in sterling was 33.5% lower in the same period last year, or 34.1% in constant currency.

Exceptional items came out at GBP255 million, and I'll talk more about that in a second.

The GBP119 million charge for amortization and impairment of acquired intangibles includes a GBP71 million charge for impairment relating to Brandon Hire and Encon in the UK, and the GBP512 million comparative included GBP459 million of impairment charges. So the operating loss was GBP207 million compared to a loss of GBP381 million in the prior year.

Finance costs, as you can see, were lower, due to the much lower level of debt during the period. The GBP13 million share of after tax loss from associates relates to our share of the losses of Stock Building Supply.

Net debt at the half-year stage was GBP910 million compared to nearly GBP2.5 billion at January 31, 2009. That, of course, is mainly as a result of the proceeds from the capital-raising, but also a very strong cash flow performance over that period. So consequently, the Group continues to operate with significant headroom in relation to its net debit to EBITDA banking covenant limit of 3.5 times, with a ratio of 1.5 times at the half-year stage.

Financial gearing was down to 28.3% compared to 79.7%, and interest cover was 4.8 times compared to 3.2 times.

This next slide shows the like-for-like revenue and cost trends over the last 18 months. It also shows how well the gross margin of the Group has held up over that period, despite the challenging markets.

As far as the like-for-like sales trends are concerned, you can see that the trends improved significantly in H1 2010 compared to H2 2009, and I'll give you more detail in a minute on the quarterly sales trends across the Group.

As far as the cost base of the business is concerned, you can see that both labor and other operating cost monthly averages have come down considerably over the past 18 months, as we proactively took action to counter the adverse market conditions.

We now feel we've pretty well done all of the heavy lifting in terms of cost reductions, and that the cost base for the second half is going to be pretty similar to the first half numbers that you see here. Whilst we've yet to get the full benefit of cost reduction actions taken in the first half, the benefit of these will be broadly offset by cost inflation elsewhere in the cost base.

So the emphasis now has switched to preserving the branch network and maintaining cost discipline to maximize the Group's operational leverage as markets recover. Needless to say, if there is an unexpected lurch down in markets and activity levels, we would, of course, review the situation again.

So let's have a look at those quarterly sales trends on the next slide. Here you can clearly see the improving sales trends across the Group over the last four quarters. This is, in most cases, because comparators are becoming more favorable, rather than markets themselves improving. However, it is fair to say that most markets are now stabilizing.

The highest like-for-like decline is at Ferguson, which reflects the continuing decline in the later cycle commercial industrial market segment. So overall for the Group, like-for-like revenue declined by 9.5% in Q2 2010, which is half the rate of decline in Q4 2009 of 19.2%.

Now let's change tack and have a look at the Group's cash flow performance. The Group continues to place a great deal of emphasis in driving strong cash generation but without prejudicing customer service. Cash flow from operating activities was lower at GBP56 million compared to GBP573 million, primarily due to a cash outflow from working capital.

You'll remember we said previously that we pushed very hard at July 31 last year to reduce our working capital, and that we expect an unwind in the first half of 2010. For the full year to July 31 2010, we continue to expect a modest inflow of cash relating to working capital.

Let me just highlight a few more items before we leave this slide. On the tax line, you can see there's an inflow of GBP100 million relating to tax. This was mainly as a result of an inflow of just over $200 million relating to tax losses crystallized on the disposal of Stock Building Supply.

As far as CapEx is concerned, we continued throughout the first half to control that very tightly, and that reduced to GBP41 million compared to GBP87 million in the prior year, and the CapEx level for the full year is now expected to be around GBP120 million.

Currency translation increased debt by GBP31 million, and the end result of all those cash flows gives us a decrease in net debt for the period of GBP49 million, which resulted in that debt number of GBP910 million at January 31. We do expect to make further progress in reducing our net debt by the year-end.

So let's have a look at what makes up the charge in exceptional items. You see here they include GBP42 million of exceptional restructuring costs, which I will come back to again in a minute. You'll also see the GBP49 million charge relating to the loss on disposals, primarily relating to the Irish businesses that we sold back in January.

The GBP164 million charge in respect of the business change program relates to our decision to defer the implementation of the supply chain management part of the Group's business change program for a minimum period of at least 24 months, although we are going ahead with the pilot SAP implementation in North America. This decision will reduce costs in the short term and avoid business disruption in what remains difficult markets, after which time the future migration plan in North America will be reconsidered.

The GBP164 million charge you see here includes an impairment charge of GBP137 million, and GBP27 million of other related exceptional costs. After that impairment, the carrying valuing of the remaining BCP, business change program asset in the balance sheet is GBP32 million. We do expect around GBP8 million of additional charges in H2 relating to that North American pilot.

As I mentioned earlier, we feel our cost base is now broadly where we want it to be, so restructuring costs in H2 2010 are likely to be modest.

So let's just remind ourselves of the extent of the cost reduction activities we've undertaken recently; this is since August 1 2007, this particular slide.

Over that period, we've incurred something like GBP458 million of exceptional costs, which have resulted in a headcount reduction of nearly 15,700 which is around 30% of the workforce, and achieved annualized savings in the ongoing businesses of GBP574 million. These figures do include the actions taken in H1 2010, which is on the next slide.

So the actions we've taken in the first half resulted in exceptional costs of GBP42 million, headcount reductions of 1,900 and annualized savings of GBP64 million.

Of that GBP64 million, we've had the benefit of GBP10 million in H1, a further GBP34 million of benefit is expected in H2, and the remainder in the first half of 2011. Remember though that there will be some inflation in our costs going forward.

Now let's have a look at the financial performance of each of the clusters starting with Ferguson.

Ferguson produced another strong performance and took further market share. During the first half, the market trends followed a more consistent pattern, with new residential markets having stabilized, and RMI markets having bottomed out.

As expected, during the first half, the commercial and industrial sectors, which comprise about 60% of Ferguson's revenues, have weakened further due to the continued scarcity of finance available for projects.

In performance terms, the local currency revenue was down by 21.4%, driven by a like-for-like sales decline of 18% compared to a decline of 22.6% in the second half of last year.

Ferguson's gross margin was only 40 basis points down on the prior year, a great result given that the market deterioration and underlying price pressure hadn't helped.

Local underlying trading profit, excluding property profits, was down by 44%, which left the trading margin lower at 4.2%.

Let's move on to Canada. The construction market in Canada continues to hold up relatively well in line with an improving GDP trend, and the business continued to outperform the market.

New residential and RMI markets, which comprise 46% of revenue here, have stabilized and the commercial and industrial market was broadly flat in the first half, with government stimulus expenditure providing a floor for activity levels.

Canada's local currency revenue was down 12%, driven by a like-for-like sales decline of 6% compared to a decline of 9% in the second half of the prior year.

The gross margin trend improved in the first half, and ended 0.7% higher. The trading margin was 5% for the first half compared with 4.7% as the businesses benefited from a lower cost base from prior year actions.

Now on to the North American Loan Services operations on the next slide. This slide, of course, relates to the construction loan business of Stock Building Supply that we retained following the joint venture. Outstanding loans have been reduced further over the past six months, reflecting the highly selective lending, new lending, with the planned disposal of the business over the next two to three years.

At January 31, 2010, net construction loan receivables on Wolseley's balance sheet financed by an equivalent amount of construction loan borrowings was GBP124 million, or 54% below January 31, 2009.

The net trading loss for the half year was GBP3 million compared to GBP11 million in the prior year, and the run-rate of losses is expected to decline gradually over the next 12 months as the housing market continues to recover.

Moving over to Europe now and starting with the UK and Ireland, as I mentioned earlier, in January we announced the disposal of the Irish businesses, which made a trading loss of GBP30 million in fiscal year '09. The numbers on this slide include a loss of GBP4 million in the first half relating to the Irish business.

In the UK, the residential markets in the first half remain relatively stable, although the commercial industrial markets did continue to decline. Again, in performance terms, revenue was down by just over 12%, driven by a like-for-like sales decrease of 4%, compared to 13% in the second half of 2009.

The UK's gross margin was 1.3% down on the prior year, due to competitive pricing pressures. However, the trend has improved in the second quarter.

The benefits to the business from cost reductions in the prior year are now coming through very strongly, with trading profit up 68% to GBP33 million, which meant the trading margin increased from 1.4% to 2.7%.

The Lightside plumbing and heating brands continued to perform strongly in the first half despite the challenging markets, and achieved an overall trading margin of 6.5%, performing at or above the market.

Also during the first half, the Heavyside building materials operations benefited from the lower cost base and from the action in the prior year to focus the build center business, in particular, and move back in the profitability.

Let's move on to France. In France, the business environment remains weak, and the construction market continues to decline. New housing starts between November and January were down by about 14% on the prior year. Local currently revenue here was down 16.6%, driven by a like-for-like sales decline of 11.9% compared to a 14.6% decline in the second half of 2009. The gross margin improved slightly on the prior year, despite pricing pressures as a result of the decline in market activity levels.

So the overall trading loss in the first half was GBP5 million compared with a trading profit of GBP22 million. The prior year number included a GBP4 million profit on disposal, which was later reclassified as exceptional in the second half of 2009.

The Heavyside business continued to track the market, but the Lightside continued to under-perform. A detailed review of the underlying causes of the poor trading in Brossette has recently been completed, and an action plan developed. Ian will talk more about that in his presentation.

Moving on to the Nordic region. The construction markets in Denmark, which represent about 47% of Nordic's revenues, continued to be the worst affected, but the new residential construction markets in Sweden, Finland and Norway have, however, continued to stabilize.

Despite the tough markets in the Nordic region, it achieved a resilient performance in the first half, with all constituent countries at least tracking in line with the market.

Performance-wise, constant currency revenue fell by 14.6%, driven by a like-for-like revenue decline of 12.7% compared to 22.3% in the second half of 2009.

There was a small improvement in the gross margin which, again, was an excellent performance, given the challenging conditions.

So overall, trading profit of GBP46 million was slightly up on the first half of the prior year at GBP44 million, although it did include non-recurring profits of GBP7 million.

Finally, moving on to the Central and Eastern European segment, the improved performance here was driven by the benefits of the restructuring exercises undertaken in the previous year, and also, of course, by the elimination of losses from the Lightside businesses that we disposed of in the Czech Republic, Belgium and Slovakia.

Constant currency revenue was down 15.9%, but trading profit improved to GBP5 million from a loss of GBP1 million in the prior year. The 2009 numbers, just to remind you, include the one-off charge of GBP2 million relating to the impairment of an IT asset.

Total revenue from the continuing businesses in this segment in euros was down 6%, with a like-for-like sales decline of 4% compared to 6.5% in H2 2009.

The gross margin from continuing businesses was flat in the first half, and trading profit improved to GBP6 million on the continuing businesses from GBP2 million in H1 2009.

In January, Ole Michael Jensen was appointed as the new Managing Director of the Central and Eastern European business segment, and he joins the business from DT Group, where he was responsible for sourcing for the European Heavyside business.

With that, I'll hand back to Ian.

Great. Thanks, Steve. Let me just come back then and explain a bit more about resource allocation operating performance.

In terms of today's agenda, we've broken it down into seven sections. The first section is how we see the Group at the moment in terms of strengths and weakness. The other sections really cover how we see the business developing going forward.

This was the slide that I used in September to give my early impressions. They are just as relevant today, with some changes in emphasis, and let me highlight a few.

I think the Group is fundamentally very strong. We have many leading positions in our key geographies, both at a local and at a national level. This strength will allow us to generate good organic growth in the future. Gross margins have stayed pretty flat, even during this deep recession, and that, I think, is a testament to the strength of the business model. There's clearly room for gradual gross margin improvement over time, especially as the markets come back, by improving our mix of customers, products and suppliers.

Our priority in the last six months, though, has been very much around resource allocation and driving performance, not on cross-border synergies. We will get round to cover this in the next 12 months. But we do see the opportunity for branding, for sourcing of branded goods to be not as big as we thought, initially because of the differences in product spec and supplier footprint. However, the opportunity for low cost country or own label development and best practice sharing is greater than I originally thought.

Market conditions continue to be challenging as we predicted in terms of depressed activity levels, and also competitiveness on pricing, although as Steve's already mentioned, the activity levels in the last six months are pretty stable compared to where we were two years ago.

In assessing Wolseley's history, it's clear that for a long time, Wolseley did well in terms of earnings growth, but the last few years have been characterized by a lack of strategic approach to resource allocation; also a lack of focus on performance management.

We executed many acquisitions, some in new market segments and businesses with very little synergies for the rest of the Group. We were then slow to integrate some of these acquisitions. We also focused a lot of resources on global initiatives in fundamentally a very local business, and at a time when the markets were beginning to turn, especially in the New Year our [PIT] systems, as well as building large capacity distribution center networks in several countries, including increasing our capacity in the US.

Clearly, our timing of the DT acquisition and other acquisitions in 2007 was poor in terms of overpayment and leveraging the balance sheet. However, the DT Group is a very strong business strategically, and well managed, so we did buy a high quality asset. However, in the last few years, as Steve highlighted, we have responded with aggressive cost reductions across the businesses. Clearly, we now need to focus on investing and driving organic growth.

In terms of delivery, we've made reasonable progress over the last six months. Financial performance, as Steve outlined, has been okay. Gross margin performance is critical, as well as the cost reductions coming through. We have now in place customer service measures in all of our businesses. And overall, these show that we're not in bad shape, but we still can do much better.

Specifically, our service on average is better than competition, but we're no better than the best local competitor. It's also very variable with some branches being best in the industry and some others falling well short. We've had some issues with product availability across some of the business units. We do not seem to have problems though with managing the customer-facing processes of billing, pricing or the capture and returns.

The performance review process is bedding in, and we will explain more of this later. We've continued to reduce costs where possible without reducing the branch network coverage or effectiveness. Our market share performance is okay, except for Brossette, and I'll come back to Brossette later. And the resource allocation process for '09 and '10 is now complete.

We clearly have made several changes to the executive team and below, and I believe these changes will give us the right team for the future, performance-dependent, of course.

We postponed the SAP program and are now developing local plans. Remember, the key reason for the SAP program was to give us a big step-up in capacity, and the business is now some 30% smaller than we were in 2006/'07. And finally, we exited some businesses and some geographies where we feel we cannot generate the right degree of returns.

In terms of the future, we're focusing on creating value by having a clear strategy coupled with great operational performance. The strategy is based on a top-down resource allocation process to allow us to choose which businesses will give us best returns in the long term; then the bottom-up detailed business unit strategies to make sure we invest in the right projects and plans to deliver our growth; in parallel making sure we do deliver the best operational performance possible from each business unit, and also across the various business units.

We've now completed the top-down resource allocation process, thus we're clear which business units we want to drive for faster growth [net] where we believe we can win versus the competition.

We're now building the individual business unit strategies and three-year plans. This includes functional strategies, especially IT, following the postponement of the BCP program. This will lead naturally into the budgets for 2010 and '11.

So let's look at the resource allocation process and the outputs of that work.

To evaluate each business unit, we looked at four main criteria. Remember, I highlighted last time that we are in many different business units in our geographies. We have 41 different business units in total across the Group.

We analyzed each business unit based on how attractive the market is; how our strategic position is in that market. We looked at the track record of performance over the past four years, and finally, what synergies exist within the various business units. These four factors were then compared to get a clear classification for each business unit within the Group. This degree of analytical rigor was missing historically.

For example, the Blended Branch core business in Ferguson is an extremely attractive business unit; and also so is the Stark business in Denmark and the Plumb Center in UK, with great growth potential. They play in large profitable markets, especially in the US where we have an absolute market share of only 10%, and yet we're twice as large as our nearest competitor.

There are clear leadership positions with plenty of growth and consolidation opportunity. There are clear sourcing synergies and cost-sharing opportunities within the business; national scale really matters for us here. There's great return on sales, and also good return on capital employed and cash flow, which have held up well even in this deep recession.

These strategically strong businesses are fundamentally more resilient in a downturn. I've picked these three very strong examples. Clearly, we have 41 business units in total; many of the smaller ones are not as attractive. This allowed us then to classify each business unit into one of three categories.

Firstly, the growth engines, where we will invest proportionally and expect to deliver accelerated growth. Examples are residential and commercial, waterworks, HVAC in the US, Plumb Center in the UK, Stark and Starkki in the Nordics.

Secondly, the synergy drivers. They will generate good growth by gaining advantages from synergies with the growth engines. Silvan in Denmark and the wood solutions business in France are examples.

Then thirdly, performance builders. These are not delivering the right levels of performance at the moment. Over time, the next year or two, we will resolve these underperforming units, and either get them to deliver results that can justify reclassifying them into the top two categories, or we will exit them.

But as I said last time, we're not rushing to exit businesses that are under-performing. We've shown we will do it where we believe there is no realistic option for profitable growth, but rushing to sell underperforming units into a poor financing market will not create acceptable returns for shareholders. So we'll take our time in this process, but we will resolve these businesses and not let them become a drag on performance.

So at the moment, our focus is to drive their performance, and most of them are responding to treatment. Examples of this would be, obviously, Brossette in France, and Build in the UK.

We're not going to give you a full list of the businesses by grouping because we believe this is commercially sensitive. But within the Group, all business units and all employees know where they stand within the classifications.

Without getting into too much detail, here's a quick summary of how the three categories play out. The good news is that the bulk of trading profits, 95% of profit and 81% of sales, come from the growth engines and the synergy drivers. But clearly, we have a lot of capital, over GBP0.5 billion, nearly 30%, tied up in the performance builders, and over the next couple of years we must reverse this position. So I think we're very clear which business units can give us best returns, and where we should focus our effort to get best bang for our buck going forward.

Just to give you quickly the next level of detail, this chart shows each business unit and its overall strategic position. Along the horizontal, our relative market share, so more than 1 times is market leader, and return on capital invested along the vertical.

By definition, our best businesses are proportionally towards the right -- top right hand side of the chart, and you can see how attractive they are. Our actions will mean that over time, the yellow and blue businesses, growth engines and synergy drivers, will get larger and move towards the top and right, as we grow their market share and performance. Also, the number of red performance builders will either get promoted into the first two categories, or we will exit them.

We won't let them become a drag in terms of resource or time. Some of the performance builders are clearly large and severely under-performing, and these require turning around, and I want to know what their earnings potential is before deciding their fate, but I believe our exiting Ireland shows that we're not going to dally on this for too long.

Net, these outcomes of the review, and how the shape of the Group will change over time. As we said, we will allocate resources very aggressively to invest and build the growth engines first. These engines are intrinsically far more attractive. They will get greater focus on organic growth, by building our e-commerce offerings, ensuring we have the best product availability in product categories, developing customized solutions where we can gain a high share of our customers' business, and making sure our customer service for our smaller customers is supported by the right quality of trained staff.

Acquisitions have a part to play over time, but they will be bolt-ons to our best businesses, and initially smaller transactions. They will have to meet our return criteria. We will be disciplined in our acquisitions, and after acquisition we will rapidly integrate to get the synergies and share best practice.

In terms of performance builders, as I've already said, we will improve their performance, then either reclassify or exit.

We will not expand our footprint into unrelated construction material businesses or new geographies. Synergies must exist for us to invest. And finally, we will be conservative in terms of our balance sheet. This is a highly cyclical industry.

Now let's look at how we plan to develop our bottom-up business unit strategies. Our approach for each of our business units is very simple. We make no excuses for boiling this back down to some very key messages for all of our people.

We clearly have to grow our profitability faster than competition. To do this, we have to gain share of existing customers and gain new customers. In many markets with many customers, we have only 25% or less of their business.

This we can do by providing them with best service, by having preferred relationships with vendors based on our market coverage. But fundamentally, this has to be underpinned by having the best branch staff. This is a local business and the local relationship is critical.

The majority of our nearly 1 million customers travel 10 to 20 miles maximum to reach our branches. They need a great local distributor to make their business a success.

But we then need to make sure that our scale works for us and we should have the lowest cost, most efficient operating model in our industry. To achieve this, we want to have great local service and many of these local positions so we have a leading national scale, which gives us better terms from our vendors. They need distributors who can give them access to many smaller customers cost effectively. So we should be able to beat the best local player, who's often our key competition, by having the best total offering of services and products at the right price.

Just to give you a quick example of what a business unit strategy looks like, I've chosen the heating, ventilating and air conditioning work in the US.

We decided to accelerate this work because we weren't sure which classification this business unit should go into.

I'll run through these slides very fast just to give you a feeling of what we mean.

Stage one, we quantify the market and look at the long term growth trends within the market segments. Stage two, we then looked at how we were positioned compared to competition in the addressable market, and then we analyzed our business, which is Lyon Conklin, so that we sure that we knew where we were making the best returns, and also where we weren't making the best returns. And then finally, we allocated resources within the business unit in a similar way to the Group approach to where we believe we can get accelerated growth for the longer term.

This is just a quick example of the output we're now working with all our business units to repeat this work. We're obviously not going to give you copies of these slides for reasons of commercial confidentiality.

So let's switch now and look at how we're tackling the underlying operating performance of the business units. We've now established across the Group a structured performance review process. I look at each of the key business units every month, and the smaller ones on a quarterly basis. Each review covers the key areas developed in our strategic approach.

Firstly, customer service where we are now starting to use external surveys, as well as looking at our internal performance to our branches of on time in full. We also review our market share performance, and we're beginning to monitor our performance with key customers to see if we're gaining or losing share of their business. We also review the performance of key vendors by sales, by margin, by service within our -- to our business.

We're now conducting performance discussions with individuals down to a branch manager level. This is an essential input for whatever changes we need to make to our branch manager population in terms of training, developing, retention, potentially replacing, and also reward.

As part of the review, we'll also look at key operating metrics across the branch network in terms of gross margin management, and other key ratios; and finally, obviously, the core financial metrics.

This simple process has now been established, and we use it to drive accountability down into the organization. There's still a long way to go to extract full value here, and we will continuously improve this process over the coming years, but this discipline needs to become part of our collective DNA going forward.

If we take an example of how this works, let's look at Brossette. In the time available, we can't cover the full story, but I believe we do have a very clear diagnosis of what went wrong at Brossette and, most importantly, what we can do to return the business to a decent level of profitability.

We've analyzed where and why the business has declined so markedly. Our poor customer service has been key to why we have lost share and profitability.

And you can see from this chart, we've underperformed the market by about 8% over the last two years, the blue line being the market and the red line our sales performance. This was certainly in part because of the switch to new energy sources, but mainly because we performed very poorly on product availability over this time, especially in the branded sanitary area, and also in the commodities of steel, copper and PVC.

Our customer service has been poor, particularly in certain regions, although this looks to be improving in recent months.

Our business is run regionally, and the execution of the branch closure plan, coupled with the opening of the distribution centers in the East of France, our largest region, has led to very poor performance in this region. In contrast, some other regions have actually been growing, so it's not that the business model is fundamentally broken.

In summary then, Brossette has been a decent business for us historically, and although smaller than its largest competitor, Saint-Gobain, its strategic position has not changed substantially.

Our problems have been largely self-created by poor execution; from taking too much stock out of the business to deliver cash, causing poor service and then loss of customers. This poor service then led to significant reduction in the sales force confidence, coupled with a poorly aligned bonus structure.

The distribution center network was only half completed, and then not integrated with the rest of the supply chain, because resources were taken to save costs. Pricing discipline was lost as branches were closed, and many experienced staff were lost.

The branch closures were not well implemented, especially in the East of the country, and the DC network was duplicative, and hence, other costs have risen by some 4 margin points; and an inexperienced GM and management team were not supported sufficiently by the Group in these difficult times.

Most importantly, in terms of actions, we have completed the detailed diagnosis. We've increased inventory and changed the cash bonus targets to improve product availability to improve service. We've changed the sales force bonus scheme and put in increased incentives for the second half of 2009/2010. We've segmented customers on size and needs and re-priced accordingly. We've renegotiated key vendor deals; established a national key accounts team; developed and resourced action plans by the 10 regions.

We've also put in place a new experienced general manager, as from October 2009, who has reorganized his team to improve the execution of these plans.

The new team looks to be getting some traction, but it's early days. We now need to doggedly stick to and deliver the plan. There are no magic bullets in this business, and sadly, this will not be a fast turnaround. It's going to take us several years, but it's critical we do see some progress in the year 2010/2011.

Finally, let's look briefly at how we are trying to extract value across businesses, although we know we have more to do here. We've done quick evaluations of the opportunities as part of the resource allocation process to make sure we know where the opportunities are. We've focused on where we believe the big prizes are.

From a management perspective, the performance review process is highlighting areas of best practice that we will begin to execute across the Group in the second half, examples being gross margin management processes in Plumb Center in the UK; branch ratio comparison analysis in Stark in Denmark; category management approach, including vendor management, in Ferguson; as well as good pricing by product group and customer segmentation work, also in Ferguson; and also, sales force productivity developed by the Reseau Pro team in France.

We've completed the cross-business resource allocation process. Clearly, choosing correctly which business units will give us the best returns will have a significant effect on the Group's performance as our mix of businesses improve.

We've also reviewed our top 100 managers and agreed where we need to upgrade and move people around and bring in new talent, and we'll benchmark key appointments against the external market, hence the UK MD process is both internal and external.

We already run treasury, as you would expect, globally, including a global cash pooling process. Joint buying across the business units will become more important as we grow our own label and low cost sourcing approach. We already have a global low cost IT infrastructure that we will continue to build on which will reduce our Group running costs, going forward, and head office costs have been further reduced.

All the theory's great, but fundamentally, it's now about delivery, and that is what we are holding ourselves accountable for.

In summary then, our markets are still very tough. We have limited visibility and demand is variable, but the residential markets are certainly stabilizing. However, commercial industrial are continuing to decline at quite a pace.

The majority of our businesses are strategically attractive, and the business model has held up well, even in these market conditions, as seen by the gross margin.

Our future direction is clear in terms of driving growth from the growth engines and the synergy drivers, at the same time, resolving the Performance Builders.

Our business is now well under control in terms of costs and the balance sheet, and our branch network is now stable. We have very few loss-makers. So the easy wins though have been taken in terms of costs. However, if the markets turn down again, we will look at taking out more costs but, obviously, do everything we can to protect the branch network.

We still have lots of opportunities to improve our performance by focusing on customer service, vendor relationships, and developing our branch staff. This means we should be able to grind out a few more basis points of gross margin over the coming years, and significantly raise net margins as activity picks up from the market, and also by our own actions.

Thank you for that. I'm now happy to take questions.

Morning. Tom Sykes from Deutsche Bank. I was just wondering -- one on the resource allocation. Do you think that the growth engines were adequately capitalized in the past? And were they at all constrained by a lack of capital if other parts of the Group were over-capitalized?

And given that your -- if they were adequately capitalized and you're looking like you're going to reduce capital from other parts of the Group, but at the same time perhaps only make smaller acquisitions, what would you intend to do with some of that excess capital that you may end up with in the Group?

And then just on the cost side, I was wondering if you could maybe say something about where bad debt provisions are trending at the moment and whether there would be an improvement year-on-year in 2010? And also, just on the onerous -- the leases you took on, on early branch closures, whether any improvement in the economic environment has meant that some of those may not be as costly as you thought they might be, please.

Yes, by definition, I think, given the analytical rigor we've got now, we can see that we can allocate the resources far more accurately to where we want to get the growth. So in the past, I think there has been some element of not supporting the growth engines and the synergy drivers sufficiently, and proportionally [spending] the resources more in line with revenue as opposed to return on capital employed and return on sales.

So absolutely, moving forward, we've very clear how we're going to allocate those resources, which should give us, again, accelerated growth out of the growth engines and the synergy drivers and as I've said, we need to, therefore, resolve our performance builders.

But, yes, in the past, I think there was some degree of under-allocation towards the real growth opportunities within the Group, and particularly in the past couple of years, by definition, we've been holding back on almost everything, understandably. The market conditions have been hideous, but going forward, I think we're very clear where we're going.

In terms of bad debts and lease, Steve, do you want to --?

Yes. The bad debt environment is improving a little bit. In fact, the charge for the first year, Tom, first half of the year is 0.4% of sales for bad debt provision compared to 0.9% the previous year. That doesn't mean the market's getting better to that extent. What tends to happen, I think, when you're setting up bad debt provisions is that the [age] of receivables triggers a bit bigger balance sheet provision, which occurred in the previous year. Once you're there, you don't need to top it up to the same extent.

So the good news is that the P&L charge is improving, but it's still a tricky environment out there. We're not out of the woods yet.

Where was that in the second half of last year, sorry, as a percentage of sales?

The second half was slightly better than the first half, actually, so trends definitely improving.

As far as the leases go, I think it's too early yet to make any assessment. Broadly, our provisions, we are meeting those provisions in terms of the way these are being settled, and in some cases, we're having to negotiate on an individual-by-individual basis with landlords.

The property market is still quite tricky. There's still quite a lot of excess property on the market. So happy with the level of provisions, but I think we just need to relook at this probably in 12 months time to see how quickly these are shaking out.

Okay, thank you.

Nicolas Godet from Exane BNP Paribas. The first one is a bit blunt. You sent a press release one month ago to say that consensus was a bit low. Are you now happy with the level of consensus for the full year? I think it's around 360 of trading profit. That's my first question.

Second question on the reorganization. You've talked a lot about France. Just to understand a bit, how many business units do you have in France? That's the first question, just to understand, and what is exactly a business unit? Is it a business? Is it a geography? What is it?

Second question; I understood from your presentation that the wood business, or PBM in France was a synergy driver, whereas Brossette, if I understand correctly, was more in the third category. Then why is the wood business a synergy driver? With what other business do you expect to have synergies? That's my second question.

And the last one, on France; you said that you would put less focus on cash and more on margins. I think when you arrived, you said that at Wolseley, there would be more focus on margin generally speaking, and less on cash in order to benefit fully from the potential recovery of the business. As of today, are you going to be more relaxed on your working capital performance in order to boost your margins for the Group as a whole? Or is it going to be only for the French businesses?

Thank you.

Okay. In terms of consensus, I think that's not a question for us. I think it's more a question for you gentlemen, so I'm sure you'll make your own minds up about what the right number is.

In terms of France, look, basically, there are three broad categorizations of our business. We've split them into three in terms of the building materials business, Reseau Pro; you then have the wood solutions business; and then we have Brossette. So those are the three key business units within France.

As I've said, there are 41 business units across the Group in total, so a business unit is a -- it's a collection of customers, costs, and a profit and loss account that we look to manage towards. So within France, there are three key business units.

And in terms of less focus on -- or cash or margins, I think I was talking very specifically there about Brossette in terms of we know we have a problem; we knew we had a problem with customer service because we'd taken out too much inventory.

Clearly, we had to get the inventory back in. That is what we have done. Therefore, in Brossette in France, my expectation is that our inventory numbers, those will go up. And at the moment, I don't want to drive them any harder in terms of receivable or payables, because fundamentally getting the customer service right is what we have to do. So that was very specific to Brossette.

Do I think -- are we driving hard across the rest of the Group for getting the right balance between cash, inventory, gross margin, and net margin? Yes, absolutely. So certainly, I was not indicating any change in our desire to continue to drive cash performance out of the Group. And as Steve has already said, we're expecting in the full year our net debt to be slightly modestly lower than our net debt at the position at the end of last year.

And regarding synergies between the wood business?

Sorry, yes, between wood business -- yes, the wood solutions business and Reseau Pro, there's huge synergies. About 25% of what the wood solutions business sells goes through the Reseau Pro network.

Okay? Sure, over here. Sorry, and then we'll come back.

Howard Seymour from Numis. Two, if I may. Really, just on definition of growth engine, because if you look at the UK market, I would assume that in terms of numbers of branches, market share, etc., you'd be saturation there or thereabouts. Do you regard that as a growth market because you're not making the right margins at the moment?

Well, firstly, in terms of the UK, if you just take Plumb, for example, which I said is obviously one of our growth engines, we have an absolute market share of about 22% to 23%, so we've still got an enormous amount to do. If you just take some specific examples, in Newcastle, we have a market share well in excess of 25%; in Birmingham, we've got a market share of less than 10%.

So do I consider Plumb in the UK as a growth opportunity for us? Absolutely, yes, both at a top line, but also at a margin line as well. Steve's made the point that margins held up well in the current environment, and I think there's more we can get out of it. So certainly, Plumb in the UK would be absolutely a growth business for us.

Yes, very clear. Thank you. Secondly, on your SAP deployment, a couple of questions. One; I assume you don't want to talk about the costs of SAP, but I assume you have to keep on paying effectively for the software. And secondly, if you decided not to deploy the [full thing], would there be a break clause in terms of the utilization?

Just in terms of where we are on SAP, again, Steve went through; we are putting all of the platform that we developed into a small part of our business in the States called Frischkorn, and it's one of the small areas of the States. I think that's absolutely the right thing to do, because we have spent a hell of a lot of money on that platform. We want to keep it alive, because when we do need to come back and replace CRPs, clearly, we would start with all of the work that we've done historically.

And in terms of the actual write-off, Steve, and where we are, I think --?

Yes, the charge of GBP164 million in exceptional is two parts, Howard. One is the GBP137 million writing off the carrying -- at least, writing off most of the carrying value of the asset, which leaves GBP32 million on the balance sheet going forward. The other bit is providing for future costs that we know we'll incur but we're writing off now because they're in the nature of onerous charges.

Once those costs are written off, there will be some further costs going forward, but they're relatively small unless, of course, we completely change our minds in terms of what we do, which is unlikely. So there's not a lot going forward that isn't covered by the exceptional provision in the first half.

I did just flag in my presentation there's another GBP8 million or thereabouts that will hit the second half as exceptional, but there's not a lot we're committed to going forward beyond that.

Thank you.

Oh, you got there first. Next.

Apologies. Tobias Woerner from MF Global. Three questions, if I may. Firstly, thank you very much for a very detailed top down coherent approach, and actually bottom up as well. But one trend which I was missing in there was the renewables, or the energy-saving angle, and how you weave that in, or whether you weave it in at all.

Secondly, with regard to stock, we see lumber futures going up actually now above the $290 per thousand [board feet] level. Are we going to see most of it in the second half? And as a sub-question of that, where do you see your long term position with regard to stock?

And just lastly, thirdly, you say you won't dally when it comes to selling under-performance of builders -- performance builders, as you call them; in some areas, I actually see a market for your businesses, even if they're not profitable. Would you be willing, if people come forward, to sell at the right price?

Okay, in terms of renewables, and by definition, I didn't go into the detail of all of the business unit work, but renewables is an interesting one, because it will undoubtedly grow and develop over time, but it's hugely dependent on what an individual government will give in terms of rebates or support for that.

We saw that in France; enormous growth in renewables three to four years ago, business growing 60% to 70%. Actually, what happened a year ago is the French government reduced the incentives by about a half, and the renewable business is now declining at 30%. So it is hugely dependent on what the governments will sponsor or support.

By definition, we're looking at renewables as part of the business unit strategies very much in France and the UK, in the US as well, so that will form part of the business unit strategy work. But I don't want to lead anyone with the impression that renewables is suddenly going to be a massive growth engine for us. It will come through over time, there's no doubt about that.

Secondly, in terms of stock, Steve, do you want to --?

Yes, the share of loss in the first half was 13 million, as you saw there, Tobias. I made the comment that we expect the run-rate of loss to decline a little bit, but it's fundamentally driven by the housing market, as well as lumber prices. And the housing market, as you all know, is still bumping along the bottom a little bit, and we don't really expect any significant improvement in that for some time to come.

Lumber price certainly have improved a little bit. So I think it's probably all consistent with the run-rate of losses improving a little bit. But I think most of the next few months will be pretty similar, to be honest, and that improvement is more likely to come in fiscal year '11 than fiscal year '10. So compared to that run-rate of GBP13 million, I wouldn't expect a massive improvement in that run-rate in this particular year, and we'll obviously see what happens next year relating to housing starts and lumber prices.

And in terms of the performance builders, let me be clear; we are not at the moment disposing of any of the performance builders, because we've got a hell of a lot of work to do in terms of improving their performance. That's why they're called what they are.

And I think to your question, Tobias, over time though, as I've said, we will improve this performance, then either reclassify them into the top two groups or, at that stage, we'll exit them. But no, we're not open to offers at the moment, unless you want to put a ridiculous offer on the table, Tobias, then, of course, there's always a price. But, no, we have no intention of selling the performance builders short term, but we will resolve them over the coming years.

Yes?

Thank you. Mark Stockdale, UBS. I've got a few, if I may. Ian, at previous presentations you talked about the complexity of some businesses, and particularly the UK. I just wonder if you could share, as you've delved into that, do you see too many brands. Are you going to cut some down, or actually just run them more efficiently?

The second, staying with the UK, was that again, you said you thought you didn't have scale at the Heavyside and would possibly shrink that business. Is that still your view?

My third one was then, and I don't know if you're prepared to actually say what Brossette lost, to actually pull that one out as obviously one of your worst performers.

And then, finally, Ian, are you prepared to give us a timescale over which you get your target normalized margin? And also, if you're prepared to share what that margin would be on a Group level. But the timescale, I'll accept, it's not the actual (multiple speakers).

Mark, absolutely; absolutely. Look, in terms of the UK, yes, it is a complex business, but we do have many different business units in there, ranging from [Brand] and Bathstore, Build, Plumb; you know the list. So the fact is, we are where we are. I can't see any radical way in which we can simplify or merge those brands, because Build is just a different business from Plumb. There are no synergies of any real merit between the two.

So absolutely to your point, absolute focus at the moment is driving the performance of each of the brands in their own set of customers and their own set of competitors. That's absolutely where our focus is. And wherever we have any potential overlap or confusion, certainly as I've got more into the UK, we are simplifying that business model so that the guys running Build have absolute clarity, Plumb, commercial industrial as well, so there's no confusion as to who's running which part of the business.

In terms of the scale in Heavyside, yes, as we've said in the past, Travis are 2.5 times larger than us. We know they run a good business. Actually, our Build business has changed its performance quite a lot in the past year or so. We've taken out over 1,000 people; 40 branches have gone. And actually, there's been a change in profitability of nearly GBP7 million from half-to-half.

It's still in a just loss-making position, which is disappointing, but in the next half I'm sure we'll get it back into profitability. And it's now performing at least in line, if not slightly ahead, of the market. So I think the share loss problems we were having a couple of years back, they've arrested that.

I think the team have done a good job there, focusing very much on the reduced branch network that we now have. And that is stable; we're not planning any significant changes in the branch numbers; and where we possibly can, looking for specialization, be it ironmongery, be it wood; whatever we can within the local area. So I think the team have done a good job there.

Brossette's losses are about the same as what they were in the second half of last year.

Yes, I don't want to be too specific, but it is in the EUR5 million to EUR10 million range.

Yes, and your last question I can't remember; something about timescales or targets or margins, or something like that.

Yes, timescale to receive a normalized --?

We have, as I said, 41 different business units with a very, very different, or broad spread of gross margins, return on sales, return on capital employed, and increasingly, as you can see, our focus is looking very hard at return on capital employed. Some of our very attractive businesses, particularly say in the Nordic region, have phenomenal, phenomenally low working capital in their business.

It's a very cyclical market, as you know, Mark, and you can see even our good businesses suffered 3 or 4 margin points of decline from their peak. There's a hell of a lot we can do, as I've outlined in terms of performance management, but the business model per se is, I think, very robust, as is evidenced by the gross margin performance.

So I think within a -- when the markets come to reasonable conditions, absolutely, I can see the growth engines and the synergy drivers getting back to the levels of historic profitability they had. I think it's going to be tougher in some of the performance builders by definition, but that is only 5% of the trading profit of the Group. And as I've said earlier, most of the performance builders are beginning to respond to some treatment.

Bluntly though, the timing of it, I can't give you a good sense, Mark, because it depends a lot on -- we can do a lot, but we do depend on the markets coming back as well. So I think that's -- it's unhelpful for me to try and give you a sense there, other than to say each business unit, as we put our plans in place, will have their own targets in terms of return sales, gross and return on capital employed. So I don't think at the moment there's any value in having a Group target, because it'll depend as the mix of businesses change.

Thank you.

Clyde Lewis from Citigroup; three, if I may please, Ian; two probably on the US. I'm just wondering if you can give us a little bit of an idea as to how the trading has been in February and the first part of March. Certainly, the weather patterns have been pretty mixed out there, so I'm just trying to get an idea of what sort of pattern you've seen in the last six to eight weeks.

And the second one on the US in terms of the non-residential market; have you got a feeling for the split between the public/private split within that category?

And the third one I have, going back to the performance builders, and if we come back here in a year's time or in two years' time, how many do you think you'd have left in that category from that 19 that you've got now.

We're still counting. Yes, in terms of the US performance, yes, February was a tough month, but I'm always worried when the weather's being used as a reason for under-performance. Actually, if you look at Jan, Feb, March where we are at the moment, we're very much in line with our expectations.

So, yes, February was a bit weaker; March has started a bit stronger. So no change, I think, from what we've seen in the past. I think the guys are doing you a good job. Clearly, the market is bloody tough, particularly in the commercial industrial sector, as you know.

I think in the split between -- in non-residential between private and public, Steve, sorry, I don't have that on the top of my head. Do you have it?

I think it's -- the difficulty is, of course, we never quite know what our customers are doing with the product really. And so I think indicatively, we think it's probably nearer 20%, 25% government related, but that's a bit of guess based on other things. So we can't track what our customers are doing with it, so don't treat that as a gospel number.

And one to two years from now, in terms of the number of performance builders, honestly, I don't know, because if we'd already taken the decisions, I'd tell you the answer, as it were. What I do absolutely commit to, we will -- we'll get at them seriously, and certainly, we're not at all afraid to dispose of a business that we think has no long term potential for the Group.

On the other hand, there are some large businesses here that we've got to turn round and disposing at the moment, I think would be seriously destructive in terms of value for shareholders.

It's Kevin Cammack at Cenkos; a couple of points clarification and then a general question. Could you just identify what the one-offs in the Nordic region actually were? I assume, maybe wrongly, it's property you're referring to, but if you could do that.

Secondly, with regard Ferguson, just taking things in the round, balancing the market with the costs savings, etc., could you just give some feel for whether you sense that margins at the trading level have actually bottomed out in that business yet, or maybe there could be worse to come?

And just going back to this -- the classification of the businesses, if you look at the bubble chart thing, it's pretty clear that the classifications do -- a large part of that is around the profitability by the look of it of the businesses as they are now, or as they have been through recession. And clearly, as markets over time improve, your financial expectation of those businesses I guess must improve with it.

So I suppose what I'm really asking is, in what circumstances does the market itself either reclassify under-performing businesses up? Or indeed, is there even a case that some of the businesses identified in the top two categories could actually move down if their performance doesn't equate to how the markets recover?

Okay. One-offs in the Nordic region, Steve?

Yes, the one-offs in total are GBP7 million. GBP2.5 million or thereabouts is probably profit, and these are in pounds by the way, rather than any other currency.

The balance is just accounting provision releases. We provided for specific liability (inaudible) July that hasn't come about and, therefore, the provision has been released.

And there's nothing more you're anticipating over the year?

Thank you.

No, nothing else, Kevin.

In terms of Ferguson, we've talked already about how difficult the market is in terms of commercial industrial; residential, we now feel is certainly stabilizing.

The good thing is our gross margin, we're fighting a tough battle. I think if we try and look at like-for-like comparisons on contracts, you probably see gross margins being quoted by customers in the States 2 or 3 points lower than they would have been two or three years ago. I was out there a couple of months back and talking to some large contractors. That's their sort of rough estimate, in terms of what's happening. And you can actually see that in our Fire and Fabrication business, which is a relatively smaller business unit, but it's right at the heat at that, which is new build and commercial industrial new build, its gross margins are off by 250 basis points. Okay?

Now on the other hand, I think the team have done a damn good job actually recovering that loss margin and getting it back up in terms of I think some of the things we talked about last time, mix of customers, mix of product, and the mix of business. So our gross margin in the States has held up reasonably well.

I think in the rest of the year, we'd expect the same sort of performance, holding our gross margins about where we are at the moment.

And then bluntly, in terms of net margins, a lot of that comes back to the question Mark asked around really what's going to happen in the markets. If the markets perform in line with our expectations, we'd see some net margin improvement, but again, year-on-year, you're still going to see margin decline in Ferguson, compared to where we were a year ago.

In terms of the classification, there are two angles. It's not just the return on the capital employed. Obviously, the relative market share is very important to us.

But I think you make a good point, Kevin, that clearly, we've taken an average performance here over four years, so we haven't just taken a snapshot in any given year; so we've tried to smooth out year-on-year odd performance as it were.

But you're absolutely right, if a business unit in the top right hand quadrant, for whatever reason, starts to materially under-perform where we think it should be in the longer term, we're going to have to challenge that as well.

So certainly, this is not a static picture. It's a process that we re-do, renew, refresh every year, because as I said earlier on as well, we want to be clear how do we get some of the performance builders up into the other two categories as well.

So certainly, there will be movement, but I think your point is well made though that by definition, the markets moving will effectively move some of the bubbles further north. But again, you can see from that picture that the underlying strength of the business, we do have in many businesses with bloody good return on capital.

Thank you.

Hang on. There are some new ones.

Good morning. It's Joel Spungin from Merrill Lynch. Just a couple of questions; just following on from the last question, actually.

If I've understood this correctly, just to clarify with the bubble chart, it's on a four year average basis. Therefore, if we were to imagine a business in the future which was just the growth engines, would it be fair to say that the overall margins would actually be higher than -- if you'd taken out all the red blobs, then the overall margins if you looked at it back in '07 at the last peak would have been higher than was reported at the time?

And the second question is just a simple one for Steve. It's just, I think you said you lost GBP4 million in Ireland in the first half in the UK. Can you just give us the revenue number, so that we can see the underlying UK margin going forward?

Actually, in terms of, if we look back in time, there's no doubt that the growth engines, on balance, have a slightly higher return on sales but, clearly, materially higher return on capital invested in the business.

So you're absolutely right, mathematically, if we just took out the performance builders, the overall average would have moved up in terms of a little bit on return in sales, but substantially I think in terms of return on capital employed.

And in terms of Ireland, Steve?

Yes, the -- for the year July 31, 2009, in euros, EUR237 million was the annual revenue.

John Messenger at RBS; sorry, I've got four if I could.

If I give you the quick and easy one first; bad debts you mentioned earlier, are they taken in arriving at the gross, or do they come in in operating expenses underneath? It's a very quick one.

In operating expenses underneath.

They're underneath, brilliant. The second one was just, Ian, you described France in terms of some of the issues around the DCs that'd been put in and the lack of operating efficiency on the back of that with some duplication. Just thinking about DCs and where they sit, have you changed your view on the UK? Just to understand where you are with Leamington, and how that's going to sit going forward.

The second one was just on slide 29, the one looking at resource allocation and the bar chart there. Can I just understand how you are defining capital employed, because that GBP1.7 billion there, I can't get to that number. I'm just trying to work out how you got to that, whether it's fixed assets plus stock, or how that number's arrived at.

And then the other one was basically in terms of the cost savings versus cost base. You obviously mentioned a flat picture going forward for the second half.

Yes.

So we don't go away with the wrong impression, 80% of that cost base is the distribution content. Should that continue to edge down though in terms of if your volumes are still declining at, say, 4% in the second half of the year, do we need to feed that in? Or are you absolutely sort of saying, look, cost base-wise, pounds million, adjusting for currency, it's about GBP262 million a month going forward? Because it would look like you should see some attrition in that before we start to then inflate it for inflation.

That's great.

Okay, in terms of we've done the bad debts. So, look, in terms of DCs, no, I don't think I've changed, inverted commas, my view or the Group's view on DCs. For certain businesses, our Plumbing and Heating business in America, they have an enormous role to play.

But of course, remember, we don't put all our business, even in the States, through the DC network. A lot of it goes straight to site. The Waterworks business, only about 5% of the sales of Waterworks and that's a billion dollar business, goes through the DC network.

So I think, John, it's very much by product, by customer, horses for courses. In the States, therefore, the DC network I think gives us an enormous advantage.

In the UK, with Plumb, again, the DC network gives us huge advantages. But similarly, Build doesn't use the DC network, quite rightly, because the majority of deliveries are either straight to site or straight to branch. There's no point, bluntly, putting an artic lorry full of sand or concrete through a DC network. It adds absolutely no value. So the fundamental question or the fundamental thrust has got to be we'll use DCs where it gives us a service and/or a cost advantage.

So moving forward, longer term, in France, do I think we should complete the DC network? Yes, I think we probably should, but I want to be at the first stage though before we start investing more in France. With the footprint we had historically, we used to generate 5% return on sales, okay? Can we get back that short term? No, but that's the sort of objective we've got to get back to before we start putting more money in.

So don't read my criticism of what we've done about DCs in France as a kind of generic criticism of DCs as a route forward. But DCs should be very much a part of the strategy, not the strategy itself, because it can give us some advantage.

In terms of the slide 29 and capital employed, Derek, can you give us the four hour version, or do you want to pick that up with John?

Let me pick it up with John offline. It is a four hour version, John, so I'll take you through it later.

I trust our numbers add up, Derek. I'm sure they do.

They do; it's an internal classification to make them comparable across the piece, so you won't get to it from external numbers.

But you'll pick it up with John?

Sure.

Okay, Derek. In terms of cost base, John, sorry, you said something about 80% is distribution, so just so I can confirm the question you're asking.

Yes, if we look at the total cost that you identified there, the GBP262 million a month.

Yes.

If you actually look at breaking that down between the fixed admin of the Group, that was GBP301 million in the half year. There's GBP1.273 billion, which is more in the distribution definition, which I assume will float up and down with volumes to some degree.

I know the distribution centers are a relatively fixed cost, but when we're thinking about it, if like-for-like you have another 4% or 5% decline still to bear in the second half, do you expect that GBP1.273 billion, which is driving about 81% of that cost base, should that not still be edging down before you then inflate it up for whatever underlying cost base inflation is?

Because I'm just thinking, if the cost savings are wiping against that, then clearly, the like-for-likes will ratchet through quite sharply in the second half.

Yes, the message we're trying to give you, John, is the cost base in the first half of GBP263 million or thereabouts that you mentioned, I think, is likely to be a very similar number in the second half.

Yes, it's fair to say that we've still got some benefit coming through from the cost reduction action that we've taken in the first half; yes, some benefit there. But under things like lease costs, they're growing all the time, unfortunately, in relation to indices and inflation and all that sort of stuff. So the message really is, yes, that GBP263 million is very indicative of the likely cost base of the second half.

Thank you.

Just throw it, John. Yes?

Maybe it's the same question, but if we look at the cost cutting measures that you have put in place, in H1 2010, you had GBP10 million from the new measures of cost reduction. How much -- what was the impact of 2009 -- I mean, measures implemented in 2009, what was their impact on the H1 2010 cost base?

And how much do we still have in H2 2010 of cost reduction implemented in late H2 2009, for example?

Maybe if I answer the second question first, because the first one's quite difficult to get at, actually. And that is we don't expect that there's much more benefit to come through in the second half, Nicolas, from the actions taken 12 months ago or six months ago, or even in the first half.

So it's about at the same point. Put it this way, what we're trying to tell you is that cost base in the first half as it stands is going to be indicative of the cost base of the second half, because there's little benefit still to come through.

Thank you.

Good, any more?

Sorry, just one on product price inflation, just whether you can update as to what you expect to see through both the rest of your financial year and the rest of this calendar year in terms of underlying product prices going up.

Yes, as you know with our business, it's difficult to get a really good handle on that, but our anticipation is we've seen product price inflation of something between 0% and 1% in the first half of the year, and that's what we'd expect to see throughout the whole of the year.

So we're not seeing wild fluctuations. Commodity volatility has come down. Commodities are only about 15% of our total business, and there's some small degree of price inflation in the majority of our branded goods, but 0% to 1% would be a sensible assumption.

Very good. You may be the last one, John.

I always like to get the last word. Just one final one; coming back to that slide 29. Obviously, the way it's laid out, you're giving us GBP459 million of performance builders revenues back on the pro forma numbers you're using here, and a margin of 0.85% on sales. You're obviously defining them as businesses that are either under-scaled or just poor performers in terms of operating cost structure.

When you look at that sales base of GBP460 million, how much of that would you say is where they're structurally just too small to step up to where you want them to be? So you're on a two stage process here, as in you guys get out there and prove you can make some sensible numbers, but then to go to the next level, they have to move classification to get the extra capital to lift them to a decent size.

Just to have a broad shape of how much of that is just purely and simply too damn small, and how much of it is big enough and, therefore, they can go all the way?

Yes, John, I think for the business units that we felt we had effectively no hope, [a la -- and] Ireland, we just moved on, because we could not see a way of getting that business back to profitability in anything like a reasonable timeframe.

Actually, when you look at all the performance builders, if you go back three or four years, at some stage during that time period -- now, it was a very buoyant market, actually, they made decent returns. We've talked about Brossette, we've talked about Build. Quite a few of those other businesses have actually performed pretty well in a very buoyant market.

And again, if I look at their gross margins at the moment, most of them -- again, I'm generalizing, I know, but most of them are holding up. They may be down 50 basis points, something like that, but they're not down 5 basis points.

So actually, I don't think we have any of the performance builders that I think to your question are strategically completely flawed. Nothing has really substantially changed in terms of the business models or the competitors that they compete against. So at the moment, our judgment is that we can get their performance up. Now it's a good question; can we get it back up to what it was three or four years ago? That I think is going to be more challenging simply because that's where scale does have a disadvantage for us.

Again, as we've talked, Build being 2.5 times smaller than Travis in the UK, Travis' returns I think will always be significantly higher than us, but again, Build running at break-even, Travis running at 8%/9%, that's not acceptable. We can do better.

So I don't think there's any of the performance builders in any material way, John, that I think are strategically flawed. Does that give you a sense?

Thank you very much.

Good. I think that's it. Thank you very much. Thanks for coming.