Ferguson Enterprises Inc (FERG) 2014 Q4 法說會逐字稿

Okay, good morning, everybody. We've got the new super-bright screen to keep you all awake this morning, so here we go.

Overall, we made good progress again in the year. In H2, at a Group level, our top-line growth picked up a bit, and we gained or held share across the businesses, except for the UK. For the year as a whole, our gross margin improved 20 basis points.

The US has again in H2 returned to really good growth. Like for like in the year was 8.2%, and we have again improved margins to a new high of 7.7%, and we continue to gain good share, as well.

In Canada, we managed to make better progress in H2, and the momentum has continued into the current year. The UK growth was disappointing in H2, but we did achieve our aim of building our gross margin, and in the last six weeks, we have returned to flat performance.

The Nordic markets have remained tough, particularly in Finland, and the rest of continental Europe was even more difficult in H2. The dividend has been increased by 25%, and we're commencing a share buyback of GBP250m, in line with our disciplined approach to capital allocation.

We've continued to invest across the Group, as we highlighted last year and in March, in developing more efficient and productive business models, which will, longer term, deliver better leverage in our businesses. We're pleased with the progress that we're making, and we'll give you some details later on.

In the full year, we invested GBP60m in CapEx, in infrastructure and process and improvement and GBP30m in incremental OpEx. As we have said before, these investments will continue for another couple of years. They will pay back over time, but short term, they are a little bit of a profit drag.

We completed eight bolt-on acquisitions in the year and the pipeline looks a bit more interesting.

Let me hand over to John to take you through the numbers.

Thank you very much, Ian, and good morning, everybody. Let me just touch on the highlights from this year's numbers. This was an excellent year in Americas -- strong growth and good share gains, good margin progression, costs under control and very strong cash generation. We also invested in some really interesting development opportunities and concluded some decent acquisitions, and those US results shape the results of the Group with like-for-like revenue in the Group up 4.2% and trading profit up 8.6% on a constant-currency basis. Elsewhere, in Canada, UK and Nordics, top line remained pretty flat. France and Central Europe were lower than last year.

Foreign exchange had a significant impact this year, knocking GBP450m off revenue and GBP30m off trading profit, so throughout this presentation, we're going to talk about all of the results at constant exchange rates.

We continued to work very hard on gross margins. Those are up 20 basis points overall, and we converted that well to the bottom line, with productivity improvements helping to offset cost inflation and investments. Tax and finance charges were in line, so despite those FX headwinds, headline EPS was up nearly 10%.

We delivered another strong performance on cash, ending the year with net debt of GBP711m, and that's after paying GBP490m out in dividends.

Good earnings growth, strong cash flow. That's enabled us to grow the dividend this year by 25%, including the rebasing that we announced at half year, and we're also announcing today that we are going to start a GBP250m share buyback program, which we expect to complete over the next 12 months.

This chart highlights the growth in the fourth quarter. US growth was excellent, with good market growth, strong, sustained gains in market share, and that's achieved from constantly working our customer proposition and our service delivery. Elsewhere, you can see growth was more mixed. Canada ended the year okay, with nearly 2% growth in the final quarter, but Nordics was weaker, following a very strong third quarter, and you'll remember that third quarter was flattered by weaker comparatives last year.

The UK started the year well, but like-for-like growth rates were lower in the second half, as we protected gross margins. But in Central Europe, our markets were pretty dull, and the French market was very challenging, deteriorating over the year.

We had a very good year in the US. Like-for-like revenue growth was 8.2%, including price deflation of 0.7%. Acquisitions added another 1%. Growth was very broadly based across the business units and the regions, and we've got some detail on that shortly.

Gross margins improved across all business units in the US. Operating expenses were 10% higher. That includes GBP15m from acquisitions, GBP10m from increased healthcare costs and GBP13m of additional investment in new business models. Headcount was very well controlled, and over half of the incremental headcount growth came from the acquisitions.

On the acquisition front, notably in June, we bought HP Products. This is a GBP106m turnover MRO business, which has extended the range of products that we are able to offer our customers. Total acquisitions in the US added GBP184m of annual revenue to the business there. We also made another small acquisition since the end of the year, which turns over GBP9m. Trading profit in the US overall was up 16%, at GBP542m, and the trading margin at 7.7% was a new record.

Blended branches in the US achieved really good like-for-like growth, 7.7%, with strong growth and share in each of those regions. And the chart there just shows the geographical balance of our business in the region.

Waterworks grew by more than 13%, continuing to take market share, with a little bit more new residential work coming through. Within the other businesses, HVAC generated good like-for-like growth, industrial PVF did very well, and fire and fabrication was very strong.

Build.com accelerated in the second half of the year and got back to its historical attractive growth rates. The only thing holding back growth was the exit of a small business servicing shale gas sector that we talked about last year.

Moving on to Canada, in Canada, like-for-like revenues were slightly lower, with negligible price inflation. Market conditions are very different, actually, across the regions, so out West in Alberta, we continued to grow strongly, offset by weakness in Quebec. Blended branches grew modestly, but that was offset by a weakness in waterworks, though both major businesses held onto their market share.

Our valves business in Canada performed very strongly, partly offset by a weaker performance in HTP pipe. Gross margins were slightly ahead, and operating expense growth was restricted to less than 1%, and that includes GBP2m of additional investment in new business models. Headcount was well controlled. But overall trading profit of GBP44m was GBP2m behind last year on a constant-currency basis, so the trading margin was down 20 basis points at 5.6%.

In the UK, like-for-like revenue was flat, with 0.7% price inflation. Acquisitions added a further 5%. The new residential market continued to be strong, but it does represent just 7% of our overall business in the UK, and the RMI market, which is the majority of our business, grew much more modestly.

Growth in the first half was offset by a drop in the second half. We didn't compete aggressively enough on some pretty low-margin opportunities in the plumb and parts center business, and we lost a bit of market share. Pipe and climate was overall weaker, but growth is very good in the Burdens utility business that we acquired last year.

Like-for-like gross margins were higher in all businesses, offset by dilution from last year's acquisition. Operating expenses in the UK were 5% higher, and that includes GBP15m from acquisitions. It includes GBP2m of acquisition costs and GBP6m investment in new business models. Headcount was flat, including the 200m -- sorry, the 200 heads from the acquisitions.

The CMA have now cleared us earlier in the year to acquire the Fusion and UPS business. We're now integrating that with our utilities business.

Trading profit of GBP96m was GBP1m ahead of last year, but trading margin was down 20 basis points, and that's principally due to the dilution of the acquisition last year.

In the Nordics, like-for-like revenue was just in positive territory, including 0.9% price inflation. Acquisitions added another 4%. Market conditions improved a bit in the second half, and we achieved modest growth over the year.

The market was a bit better in Sweden, but it remains challenging in Denmark, and revenue is only slightly ahead. In Finland, revenue was lower. Markets in Finland remain very weak, but the major business units in the region did maintain their market share.

Gross margins were ahead before the dilutive impact of the Puukeskus acquisition. Operating expenses were 6% higher, including GBP12m from acquisitions, GBP3m of nonrecurring restructuring and GBP6m of additional investment in new business models. Headcount was well controlled, all of the headcount increase coming from the acquisitions.

There were two bolt-on acquisitions that added GBP200m of annualized revenue, and those are being integrated with our existing businesses. The trading profit of GBP80m was GBP7m behind last year on a constant currency basis. The trading margin fell to 4.2%.

Following the recent disposals, we decided to consolidate Central Europe and France into one segment. Like-for-like revenue here fell nearly 2%, and that was after price inflation of 0.7%. A small acquisition last year in Switzerland added 1%, but the markets in Switzerland and Holland remained difficult. France was really poor and continues, I'm afraid, to get worse.

Gross margins were lower, too, though operating expenses were held flat, including GBP5m from the impact of the acquisition last year in Switzerland and GBP3m investment in new business models. Headcount was reduced by 6%. Trading profit of GBP34m was GBP12m below last year, and the trading margin fell to 2.8%.

I should say, in the first half, we recognized GBP4m of property profit in France that by the full year was sufficiently large to be classified as exceptional, so they are out of those numbers.

We operate a wood solutions business in France, and that serves new build and retail markets. In line with all the work that we've done with the resource allocation over the last few years, we apply that to all of our businesses, and we have decided to pursue exit options for that business. The business had sales of GBP210m, made GBP1m of profit last year from a net asset base of GBP70m.

Central costs benefited from GBP5m of nonrecurring insurance gains. Otherwise, they are well under control and in line with last year. We've taken the disposals in France, Austria and Sweden out of the ongoing business, along with a small non-core industrial business in the US, which we are currently selling.

Looking at the revenue and gross profit bridge, like-for-like growth added GBP480m of revenue and nearly GBP140m of gross profit in the year, though in the reported numbers, those numbers are pretty much offset by unfavorable FX movements. Acquisitions added another GBP250m of revenue and GBP50M of gross profit.

At the bottom of the chart, you can see the impact of the gross margin, which actually on an ongoing basis was up 30 basis points but with 10 basis points of dilution so 20 basis points ahead overall.

On operating expenses, at the half year, we talked about some specific cost challenges. We've now made the changes that we talked about to US commission plans and we're closely managing healthcare costs though healthcare costs were still up GBP10m over the year.

Efficiency savings of GBP40m helped to offset other operating cost inflations.

On the investment side, we're making good progress with the development of more efficient business models. And in line with our guidance, we invested GBP30m more in operating costs and that's developing middleware for business intelligence, master data management, CRM systems, telecoms, infrastructure finance transformation projects. Ian will take you through some of those a little bit more later on.

Even after those investments, we increased productivity. If you look at the bottom of the chart there, the ration of trading profit to gross profit was up from 21% to 21.2%.

On the income statement slide, I would highlight the exceptionals which net to a credited GBP18m this year. GBP27m of gains on disposal in Central Europe and France and GBP17m of cash receipts from loan notes on earlier disposals in the UK were offset by GBP18m of integration costs in Nordics and GBP10m of losses on disposal.

Financing costs have come down as the pension position has improved which you'll see later.

The effective tax rate, which is just under 28%, is within the range that we shared with you earlier in the year and that's the sort of range that we expect also going forward.

Working capital movements include EUR70m due to the timing of year-end payment runs and that's offset within the adjusted net debt slide that you'll see in a minute. The remaining working capital outflow relates to additional investment in inventory and receivables at the end of the year in line with our growth and some changes to the remuneration schedule in the US.

Our KPI for working capital, our principle KPI is cash to cash days and that was 1 day better again than last year.

As it's a hot topic at the moment, let me just touch on rebates. About 80% of the rebates that we receive are volume based and the calculation is mechanical. Our policy in terms of recognizing rebates is conservative. When we true up at the end of our year on rebates, we usually end up with a small net credit.

Overall at the end of the year, we had rebates receivable in the balance sheet net of inventory provisions just over GBP50m. I am confident that our rebates are prudently and accurately stated.

This chart is a reminder of how we use our very strong cash flow for acquisitions, for capital investment and dividends and we'll talk about that in a minute.

One other item that we should mention on this chart is the GBP71m of cash proceeds from the disposal of businesses and assets.

We were really pleased to invest nearly GBP200m this year in eight acquisitions and Ian will tell you a little more about the acquisition strategy in a minute. Puukeskus is a large building materials business in Finland and we're merging that with our Starkki business in Finland.

HP Products is an MRO business in the US that we bought in June to expand our product offering to our existing customers and Capstone is a sourcing agent in Taiwan and that will provide improved access to private label products across the Group. After the year end, we acquired Pollard which is an online waterworks business in the US.

Going forward on acquisitions, the pipeline is good. We expect the investments to be lumpy but total investment of GBP200m to GBP300m this year is quite possible.

We stepped up the level of capital investment to just over GBP200m in the year and made good progress on projects including two new freehold DCs and investment in centralized distribution hubs as well as significant work on technology and processes supporting the new business models. We also substantially improved the network infrastructure in both the US and the UK. Those [products] had an incremental OpEx of GBP30m in the year. That's a lot of money but it is 1% of our overall cost base, we think a quite commensurate investment.

Net debt at the end of the year was GBP711m. The underlying position was about GBP90m higher.

Over the last few years, we've made some significant investments into our DBCs and at the same time asset returns have improved so at the end of the year there was a small surplus on pensions on IAS-19 basis.

It's also worth a reminder at the bottom of that chart we have plenty of liquidity with GBP2.2b of committed facilities.

In terms of guidance for FY15, over the next six months we expect like-for-like revenue growth to be about 5%. Capital investment should continue broadly at current levels. We plan to step up again our investment in systems, process, technology and infrastructure for the future and we'll make further investments of another GBP30m in the year ahead.

At the latest spot rates, FX would reduce trading profit by about GBP5m. Trading days are the same as last year. We do expect to charge restructuring costs of up to about GBP20m through the P&L as we go. And net working capital investment should be 12% or 13% so with the balance sheet we will maintain investment grade credit metrics. And net debt is likely to be in the range of 1 to 2 times EBITDA.

At the half year, we announced the rebasing of the ordinary dividend by 15% and that was in addition to the ongoing growth of 10%. That's also what we're recommending for the full year. That'll take the full-year dividend to 82.5p. That's covered 2.4 times by headline EPS.

We've told you before, each year, we do a detailed review with our advisers of the capital structure of the Group, and that's to make sure we're not missing anything particularly in comparison to our US peers. We ended the year with net debt to EBITDA of 0.8 times. And reflecting the strong balance sheet and the continued strong cash generation of the business and our continued confidence in the business, we intend to buy back GBP250m of our own shares and that should be concluded in the next 12 months.

Finally, let me just cover the outlook. The growth rates in the new financial year so far have been similar to those in Q4. Over the next six months, we expect like for likes to be about 5% overall. We expect the US to continue to grow well and the UK to return to growth. Canada and Nordics are likely to be pretty flat. In Central Europe and France, we expect market conditions to deteriorate further.

Many thanks. I'll now pass you back to Ian.

Great. Thanks, John. Terms of the six key components of our strategy have remained unchanged, and today, we want to focus on the key elements of accelerating growth both organically and also what progress we have made with our bolt-on acquisitions and also give you an update on the progress we are making in the business model work.

Looking first at organic growth, we have used this slide before, to give you a sense of the profit levers that are available to our teams, and just to reemphasize the point, our business does not yield to grand gestures, but many small improvements will over time generate great results, and especially when the market is with us, like in the US.

So when market conditions are good, we will put more emphasis on top-line growth, gaining market share, improving gross margins incrementally, as can be seen in the US, whereas when markets are very tough, like in France or Finland, we will focus far more on protecting share and gross margins, keeping a tight control on costs and working the mix of our business to try and offset cost pressure and protect profitability.

Looking at our two biggest businesses in the US, first, blended branches, and then waterworks. Blended, which is 63% of our US business by revenue, had a very good year overall. In a market growing by 5%, we continued to outperform the market by 3%. This was driven by great service, better product availability, improved efficiency of our sales teams and better price management.

As part of the blended business, we continue to grow our facilities maintenance business, as well. Our gross margins grew incrementally, driven by good management of the mix of our business. Sourcing performed well on the back of the growth. Our pricing compliance again nudged up, and our most profitable products of own label and our most profitable channels of branch sales and showrooms also grew faster than the business in total.

We've continued to push on with productivity growth, as well. Our e-commerce business continues to grow rapidly, and is now 9%, which is some $650m in revenue of our total blended business. 92,000 customers have now signed up, and the number of self-service events exceeded 7m last year, which was up 40%.

We've also managed to continue to push on incrementally in terms of DC utilization, and the national sales center has grown significantly and now has more than 200 people in it. All the above activity enabled us, whilst we were also investing in the new business model work projects, to improve our total cost as a percent of GP by over 2%. Cash performance was great, with lower levels of inventory and better receivable days, and finally, cost leverage was good, with margins up 0.8%.

Turning to waterworks, our second-biggest business, which is 16% of our US, like blended had a very good year overall. Our service levels improved significantly, and our in-branch product availability improved, as well. This allowed us to gain good share versus many local competitors. We grew by more than 6% above the market.

At a gross margin level, we were flat, though managed to offset some of the price pressure from new build projects by increasing our own label penetration and also driving the higher-margin counter business. Like in blended, there is some excellent growth in e-commerce and is now up to nearly $200m, which is 10% of our total business. And the top-line growth has helped to pull through great cost productivity, 2% improvement, even as we are continuing to invest in the new business and development work.

Trading margin was well up in the year, and the only disappointment was cash to cash days going backwards. This was caused by an increase in the new build work and increased inventory to improve service.

All our other US businesses had good momentum by the year end, as well. As John highlighted, the industrial business had a tough first half but came back to good profit growth in H2, and also our B2C business accelerated in H2 to 11% growth and an improving gross margin, as the full effect of moving to IMAP pricing worked through the business.

Looking now at the UK, plumb and parts, which is 57% of the total business, the market overall has returned to growth of about 2%, but this was heavily skewed in the early part of the year. In H1, the market was growing 4%. In H2, the market was flat, driven by phasing of ECO funding.

Our performance was also skewed. We started the year well, gaining some share, but in the second half, our performance disappointed, and we did lose a bit of market share. We did manage to improve our service and our on-time and full performance, but these actions were not sufficient to overcome the competitive pricing situation.

We flagged clearly at the half year that we had not competed aggressively enough in the government-subsidized ECO business. In retrospect, we should have been more aggressive. We wanted to improve our gross margin performance. We anticipated that the ECO business was going to be very low profit margins, and it turned out to be better than we thought because of extra support from suppliers.

This business is also mainly contracted, so it's more difficult to turn around quickly. As the ECO business comes back into the new calendar year, we will want to make sure we retain our fair share, as well as protect our margins.

During this period, we were very focused on rebuilding our gross margin by better sourcing, better price management and faster growth in our higher-margin showroom business, and our gross margins were up in H2. We also managed to get some traction in migrating customers to e-commerce, which although still only 3% of our business, is now growing well at 30%.

We're gradually getting a more flexible cost structure, with more part-time labor, but with our investment in more resources to accelerate top-line growth and some new business model work of about GBP6m, our cost productivity worsened. Clearly, we need to deliver some top-line growth now to improve productivity.

Our cash to cash performance slipped a little over the year, and we're taking steps to regain momentum here. But since the year end, the performance has improved, and we're now back to flat and expect to see some growth in the rest of the year, as John highlighted.

Overall, in the Nordics, it's been another tough six months. As we predicted at our half year, our Q3 performance was somewhat anomalous, given the very poor weather in the previous year. But since the year end, performance has picked up a bit, and we're now back to flat, with Denmark and Sweden looking a bit better, and this represents 70% of our Nordic business.

But Finland is still in high-single-digit decline. We've held share across the markets, but we're not seeing any signs of rapid recovery. In Stark in Denmark, which is 36% of our business, we did manage decent progress in terms of improving customer service, share of loyal customers, and we did manage to bring in some new customers.

Progress on gross margin was a little disappointing in H2. We dropped marginally due to some one-off items. Underlying margin was flat year on year. Our consumer sales dropped proportionally in line with the market, but this also lowered our own-label sales.

And we continue to buy better, using e-sourcing tools and processes. This helped offset some of the margin pressure. In terms of productivity, we continue to invest in building more productive business models and more sales resources, with GBP6m of costs and GBP4m of CapEx, but this did reduce our productivity ratio of costs and also reduced our trading margin by 0.8%. However, we are still the most profitable player in our industry.

We did manage to improve cash generation, which given market conditions was good. And although the Nordic performance is disappointing, we believe we still have good opportunities for growth in the longer term. We have strong market share businesses. They perform far better than competition in terms of profitability, and even in the past five tough years, we're still are making more than 4% total margin.

Turning now to bolt-on M&A, last year, as John said, we invested GBP200m in buying eight businesses. We've been very disciplined in terms of focusing on bolt-on M&A to our core businesses and to our adjacent businesses.

In the US, we acquired Davis & Warshow in October 2012. Historically, we were relatively weak in New York in our core plumbing and heating business, which is clearly a massive potential for us. Competition is still very fragmented, and with D&W, we are now up to 12% share, which is about GBP300m of revenue, and we are the leading player in the New York area. We completed the integration and achieved good growth, great gross margin and net margin improvement and a decent return, in line with our targets.

We're investing further now in the New York area to build more capacity, with five more local branches and two more showrooms over the coming couple of years, a DC to cover the region and a ship hub in Secaucus, New Jersey, to deliver better daily service into the city.

Burdens was acquired in late 2012. It was a strong business, but with a terrible balance sheet. It was number-two position in the utilities market, an adjacent market for us. Wolseley was historically, with our drain brand, very strong in the aboveground drain business but weak in the belowground utilities market.

So this move allowed us to split the drain brand and integrate our belowground business with Burdens' and integrate the aboveground drain business into plumb and parts. This means we now have a stronger proposition, better targeted at both market segments.

As you know, a component of our strategy is to build on our adjacent businesses as well. In the US, the MRO segment is large, profitable and one we believe we can do well with over time. This is a large market in residential and commercial loan. It's over $100b, and even larger in the industrial market. Margins are good, as well, because customers are prepared to pay for rapid service and high availability.

We acquired HP Products, based in Indianapolis, earlier this summer, to give us access to a scaled player in janitorial and sanitary products, which is a key category for MRO customers. We will gain synergies by gaining higher wallet share of existing Ferguson customers by selling them HP product lines that they are currently buying from other distributors. We can also sell Ferguson product lines directly to HP's 10,000 customers. We can source all these product lines at scale together and utilize Ferguson's national sales center to call on new customers for HP.

HP also had a relatively weak e-commerce offering, and migrating to Ferguson's platform will give us a significant edge. Many MRO competitors are family businesses who will struggle to match our investment in this area. Net, we are expecting good revenue synergies, as well as a healthy uplift in operating profit.

Finally, we're continually evaluating how far we should integrate further along our value chain, and where we believe we can make good return and benefit from management control, then we will invest. Hence, our acquisition of our sourcing partner based in Taiwan.

Historically, Capstone provided support mainly for Ferguson own-label bath and sanitary wear. Now, we have access to over 200 suppliers based broadly across Asia, and we will convert the rest of the Group and capture more margin and also reduce total transportation costs.

Critically, we will also have direct control over QA and QC processes, which are becoming more demanding as our own-label business expands. We expect to get about a 17% pretax return in the first full year.

Net, we're making solid progress on bolt-on M&A across the Group. We're being very consistent and sticking to our strategy. We will continue to try and invest about GBP200m to GBP300m per year, which is affordable and manageable, and focus on bolt-ons to our strong core and adjacent businesses and make sure we do extract the synergies rapidly to deliver the 15% return we require.

Turning now to an update on progress with respect to developing more efficient, productive business models. We plan to continue to invest in this program. The extra CapEx and costs are captured in the guidance that John gave earlier.

Fundamentally, we need to continue down this path to generate better top-line growth and leverage in the business and get benefits of scale that exist. We are progressively moving the business away from a highly distributed branch network to a more centrally managed systematic business, so that the branches can focus on giving great service and managing their customer relationships and have the right tools to optimize the business locally.

But above-branch processes should then drive the rest of the business, be it sourcing special products, chasing credit queries, organizing transport from the branch, building better e-commerce platforms, setting a framework for pricing by SKU, by customer, and managing the sales team. We are making progress in this multiyear journey, and so far the results are good.

In terms of the returns on this investment, we track as accurately where we can. Areas like pricing management have a very clear, rapid payback, but other projects, like improved master data management and middleware investments, cannot be tracked to specific benefits. Net, about half the projects have a decent two to three-year payback.

Last time, we used this chart to lay out the elements that we are working on. We look at the business in four major areas and then at the subprocesses below. I highlighted last time where we were as a Group overall. Clearly, in some clusters, we are further ahead, and generally, the US is our most advanced cluster, because we've focused our investments there. But we are making progress across the whole of the Group.

In terms of progress, you can see here in green where we feel we've stepped forward. I won't go through all the subprocesses. We spent quite a lot of time six months ago looking at some specific work in the UK, US and Nordics. The overall focus of this program is now beginning to switch from getting the basics in place in terms of data and core processes, and now more attention is being invested in the customer management and front-end processes.

We want to make sure our customers get consistent pricing that supports their business. We want greater wallet share of existing customers. We want to know when customers are beginning to down trade so we can take action fast. We want to attract new customers with properly customized propositions.

Our approach to developing better business models is common across the whole Group. Each cluster is moving at a different pace, given their start point, but the overall approach is common, which is important to ensure we do get the benefits of scale that come from using the same processes and platforms. We've made significant progress in segmenting our customer bases, getting this understanding into the businesses, and are now developing clear and distinct propositions that address their specific needs.

Our pricing structures are improving; our customer terms are being updated. We have in most businesses managed to increase our percentage of matrix pricing. In terms of order capture, we've improved our e-commerce platforms and have or are launching highly functional mobile sites across the Group.

Across our major businesses, we're now rolling out CRM systems so that all our customer data is captured and readily actionable. And we have improved our use of centralized contact and sales center. Our category management planning processes have improved, and we can, by acquiring Capstone, utilize the low-cost-country sourcing capability across the whole Group.

Product availability, again, has improved as we worked demand planning processes into the business, and we now have middleware platforms in the major clusters so that we can begin to interface the legacy systems with better processes and best-of-breed packages. So in the US, our e-commerce, CRM and sales reporting packages are interfaced through the middleware to [Trilogy].

Across the supply chain as a whole, we continue to invest to ensure we have the right assets in the right locations. Last year, we invested some GBP60m in supply chain projects, all with clearly defined paybacks. In terms of branch operations, we've made significant progress in updating our telephony and infrastructure in both the US and the UK.

And the test we described six months ago at Fort Myers continues to perform well, with revenue up still 20%, and we're using this learning to roll out to the rest of the branch network in the US, the UK, the Nordics.

So overall, good progress, but I want to make it quite clear why we are investing in these changes, and the best ways to bring these to life is to look at these improvements from the customers' point of view.

Some customers have very different needs, depending on the type of project. Some want high service, advice and delivery frequency and are prepared to pay for this. Others want low price and can take a weekly delivery direct to the job site. Flexing our propositions and prices to each is fundamental to giving us more market share.

The biggest complaint from customers about pricing is not the absolute level but the lack of consistency. Between branches, they sometimes can get different prices for the same material. For a customer, it is essential that they trust our pricing and know they're getting the right discounts and that they are not disadvantaged versus their competitor down the road.

For new build, it's all about project support. Can they get their quotes back from us faster and from our competition? Are we 100% accurate with the bill of materials, and assuming they win, what else can we do together to lower delivered costs?

Often, being the fastest responder to a quote can help our customers win business. Clearly, they will be able to order from us using branches, telephones, e-commerce, EDI, whatever they need in 24/7 online. Our customers can also benefit from us being the easiest to do business with.

Accuracy of invoices, the right technical advice, readily available, simple returns processes, can reduce their cost of doing business and make them more money. But us having better supplier relationships, our customers can also have a wider, deeper and more readily available product range. This allows them to compete for jobs faster and more reliably.

In certain categories, we can provide unique products that allow our customers to differentiate their propositions from their competition and possibly make more margin. Similarly, own label can be used by our customers to generate better prices for themselves, better margins for themselves or lower prices.

A totally reliable supply chain will allow our customers to be able to make guarantees on project completion timings and get to the next job sooner, have any form of delivery option that is lower cost to them and for us, be it branch delivery, pickup, direct to site, direct from DC or supplier. And later cutoff times from us allows our customers to be more flexible on the job and meet unexpected needs of their customers.

Faster response from us means better service for them and higher project conversion ratios and wallet share with their customer base. And having better branch operations also gives them benefits. They can win more business by being faster to respond to queries, have access to our technical folk quickly, be it at branch or contact center. They can use any mechanism they want, depending on time of day or night. And we can have their orders ready to go within 60 minutes' notice, getting them in and back to the jobsite faster than competition.

So net, all the work we are investing in to generate better, more productive business models allows our customers to win more business more profitably and gain share of their chosen market.

In summary then, we continue to invest significantly improving our business, and we want to get this work executed rapidly now given the economic cycle. Last year, we spent in total about GBP60m CapEx and GBP20m OpEx alone to improve infrastructure, processes and systems. Much of this investment was to develop the more productive business models, and we have continued to invest further in e-commerce, master data, better finance processes, middleware and also telephony and contact centers.

We are continuing to make great progress on e-commerce in the US but also now in the rest of the Group, even though it's from a low base. But this growth trajectory we see in the rest of the Group is what we saw in the US more than five years ago. We anticipate the level of incremental spend to continue for another couple of years.

Overall, then, another decent year. In the US, in a reasonable market, we made great progress, but we are disappointed about our performance in the rest of the Group, and we are working hard to turn this around. We will continue to invest in the business, particularly in the US, but also in the rest of the Group. We want to be well positioned when markets do turn around, which in the UK and Nordics, they seem to be doing slowly.

We firmly believe our investments will pay back over the coming years. We will gain profitable top-line share and also better leverage of our cost base over time. Our strategy is clear. We will continue to grind out the execution. This is fundamental to the future success of our business.

And overall, given the fragmented nature of our markets and the profit pools available to us, we still see huge potential to continue to grow our business. Thank you. We are happy to take any questions now. If you could just say your name and who you're from, that would be great to start with.

Come down, start at the front here. Just wait for the microphone.

It's Olivia Peters from RBC. Four questions, please. Just on -- sorry. Just firstly on private label, I was wondering where you are in terms of revenues coming from there and where you expect to be, given the acquisition of Capstone.

Secondly, on the Nordics, given the tough market conditions, particularly in Finland and also the fact that, overall, the operating margin declined, I was wondering if there is any more potential for cost cutting there. I know you said it's been five tough years. Have all the costs kind of already been taken out, or is there more you can do?

Thirdly, in terms of the businesses which you highlighted were kind of new, FM and government contracts and even showrooms, potentially, could you tell us -- again, given that they could be potentially higher margin, where you are now and where -- what sort of growth you're seeing at those businesses because we didn't really touch on that?

And then on pricing in the US, sorry, John, I may have missed it, but I think you said there was 0.7% price deflation. Is that something you expect to be ongoing into 2015? I'm just wondering what the pricing trends are like in the US. Thank you.

Any more, Olivia? Private label, look, as a Group, we're running at just over 7% at the moment, and I think as I've made the point in the past, we're not obsessed by growing private label. We're very obsessed by getting our gross margin up. We see it as a fundamental lever in terms of clearly having the right negotiating leverage with our suppliers.

But we do expect private label to nudge up over time. Half percentage point, 1 percentage point over the coming years would be a very sensible progress. Clearly, certain categories won't yield to private label -- copper tubing, it is already a commodity. So quite a large part of our business won't yield to private label, but we do expect to make progress, and clearly, acquiring Capstone is a part of that. We now feel better set up. We have the right controls in place.

In terms of Nordics and cost management, clearly, in Finland, we're still taking quite a lot of costs out, because we are integrating Puukeskus and Starkki, which will now give us a 23%, 24% market share player, and actually, we will be the leading chain in that country. So it's a good strategic move.

The market is very tough at the moment. There's been eight quarters of GDP decline in Finland, and it's going to be I think hard yardage for the rest of this year, so more costs coming out there. And I think as I said earlier on, clearly, in a declining -- rapidly declining -- market, we will look to take more costs out.

We don't want to damage the structure of our business. We desperately want to keep the right number of branches open, but we will absolutely see if we can take more out. In the other two big markets of Denmark and Sweden, we're not actively taking much more costs out at the moment.

We think those markets are beginning to turn around. It's early days, though, so I don't want to call a rapid recovery. And we think we are well set up now to benefit from a little bit of market growth, and actually, we are investing a bit more in both Denmark and Sweden, a bit more in marketing, and clearly, the investment we're making in the business model work as well, so we're expecting that to come through. So that should flow through to an improvement over time in the operating margin.

In terms of the other segments we're talking about, I think probably particularly in the US, be it FM, be it government, be it MRO and showrooms, yes, look, we are pushing ahead sensibly, as fast as we can, into these adjacent areas where we make a lot more money.

We have 300 showrooms in the States now. We're doing well over $1b of sales through that channel. It is appreciably higher margins, sort of 4, 5 percentage points higher margin than the rest of the business. The MRO business that we talked about in terms of the acquisition of HP Products gives us more product lines we can sell to existing customers.

We can also sell more of the existing Ferguson products to HP customers, so we see good growth there. Again, slightly higher gross margins than our core business, and it's early days, again. We're a month or two in, but the growth rate looks to have picked up since the acquisition.

And on pricing, John, do you want to?

On price deflation, if you look around the piece, actually, measured inflation is very low and in one or two areas, it's been deflationary. I find it surprising.

Earlier in the year, it was related partly to commodity movements. We don't think that's really the case now, because commodities seem to have stabilized somewhat over the second half.

I would be surprised if there isn't returning inflation at some point in actually most of our markets, but particularly in the US, and particularly given that, clearly, employment is looking better on a monthly basis over there, as well.

Good. Do you want to go straight behind?

Harry Goad from Credit Suisse. Two, please. Firstly, on the incremental margin in the US, unless my maths are wrong, it looks like it's a high-teens number again. I think, John, you've talked about that number in the past being -- you think it trends more to mid-teens. Is this the new normal, or will this be the year when it does trend down a bit?

And the second question is could you just talk a little bit about the thinking behind share buyback as opposed to special dividend, as it's been structured in the past and what we can think about in the future?

The incremental margin, the US, particularly in the second half, after we had some of the cost issues we talked about six months ago resolved, if you want, [the floater] was good. It was good in the second half, and I'm pleased with that.

I don't think that establishes a new trend. You've seen today we are really signaling we are going to carry on the step-up on these technology, system, process investments. They are important to the future of the business. They are driving the efficiency, and we absolutely need to do that to stay ahead, frankly, of the rest of the pack.

The thing that's really boosted the flow-through in the US this year has been the gross margin performance on top of good top-line growth. So in that sense, it's been a perfect storm. If you look at the top-line growth overall, over the last four or five years, we've broadly been in the range 7% to 10% pretty much all the time. That's what I would expect.

We said when we sat here six months ago that we thought that the winter period -- if you recall, we had a very poor period. We said that was weather impact, and we said don't worry about it. It was a bit of an outlier. I think that you could also say that at the top end of the range.

I see the US growth for the foreseeable future in that 7% to 10% range, and I see margin gains being more modest, frankly, than we've done in the last six months. So I still think that double-digit flow-through in this business is a good performance.

Should it be slightly higher in the US? Yes, at the moment, because we're getting good top-line growth, and we need that to compensate for poorer growth elsewhere.

On the share buyback, I think what does this represent? I guess you could say we are confident in the business, and we do think that the share buyback is going to generate good value for ongoing shareholders. We are pretty agnostic, I think, as a Board, on what's the right approach to the return of capital, so we looked at it this year completely dispassionately.

It wasn't that we were wedded to special dividends or buybacks. We think we should have a look at that each time. There's two pieces to this equation. One is, have we got the resources to do it, which we clearly have, and then the second is, what's the right method at that time? So that's the reason for the buyback this time.

All right, Harry.

We'll come down, and then we'll work backwards.

Thank you. Howard Seymour from Numis. Pretty obvious question I suppose, really, on the UK lost market share last year. You're looking to regain market share this year. Could you talk through your actions, how you do that and protect margins, and your thoughts as to whether we should assume margin's flat on that assumptions? Or whether it could actually go up?

And also can you just sort of discuss how you see the overall market, Ian. Because you mentioned it was -- that the market was actually -- in the UK, yes, sorry. The market was up in the first half, flat second half. How you see the market and your potential performance, thank you.

Sure. Looking at the market first. I think absolutely, I think we talked a year ago and six months ago, we did see the pull-forward effect of the ECO funding, which actually we said we thought it would be about 2% to 3% across the year, which in fact it turned out to be; we were remarkably accurate. But 4% growth in the first half, flat in the second half.

Looking forward there's going to be more ECO coming down. There's ECO2 which starts in March 2015, runs for two more years. Any excess delivery from January 1 of this year, though, can be counted into it. So we're not anticipating the same sort of frenetic activity in a short period of time. And actually the quantum of the ECO funding, or the requirement, has been reduced by around about 20%, 25%. So it should be a less dramatic impact on the business.

No, absolutely. We're disappointed to lose market share. A year ago we were gaining good share, we actually were holding our margins. We stepped forward. We actually got good gross margin growth. We weren't as competitive as we should have been, particularly in the ECO area. We thought it was going to be a lot lower margin than it transpired to be. I think one of our major competitors did very well out of it, and they got good support from the suppliers. I think we've learned from that.

Going forward, absolutely, we'd want in the overall long term to be gradually nibbling away at market share gains, so that's what we've been doing in the past sort of two, three years. We want that to continue like we've done in the States. And that's driven very much around all of the sort of core things that we've been talking about, the core service proposition, better segmentation of our own propositions, be it high service, higher price, lower price, lower service, lower cost to serve for us, better mix of our business. That's really where the gross margin can be sustained, showroom growth in the UK, counter growth in the UK, growth also of controls, valves, which are higher margin than boiler sales, so we're pushing that hard. A little bit more around own label as well. So we think that we can do quite a lot to improve the mix of our business.

Thirdly, I think we -- if I'm quite straight in the last year, I don't think the execution in our sales force has been as sharp as it should have been. We're working very hard on that now in terms of the number of customers that are churning, lapsed customers, lost customers, and gaining new customers. And we are putting more resources, dedicated resources, against certain specific channels that we're looking at, be it again government spend, housing association spend, and we now have a more segmented sales force. And actually we've separated out from the branch operations as well. It now reports into a sales director.

So I think there's therefore going to summary. We absolutely do want to gain a little bit of market share. We don't want to do it by giving it away on price. We want to keep just nudging our gross margin up, a bit of share gain, a bit of gross margin; we'd be pleased with that performance. Yes?

Thank you.

Let's go over there.

Hi, Gregor Kuglitsch from UBS. I've got a few questions. One is just maybe you can summarize where we are on e-commerce? You gave some data points, in some instances B2B, some B2C. Obviously in the US you've got both. Is there an opportunity to roll that out in the UK, to move that forward? And then to what extent that has a margin impact. Because my understanding is obviously you don't need branches necessarily, although there's some click and collect as well. So just maybe the strategy there.

The second question is just on Continental Europe. I don't know whether the numbers from last year now already exclude wood solutions. It's becoming a smaller segment. Obviously you're consolidating France in Continental Europe into one line. You're trying to sell wood solutions. Is there a case to be made that you just get rid of basically all of it? I think there's basically Switzerland, a little bit of Netherlands left. Doesn't it just basically distract?

And then finally on the investment, you say another incremental GBP30m of OpEx. Is that the new run rate? Or is there another GBP30m the year after? Is it sort of then -- because I guess that's GBP60m in total. And where we end up in terms of CapEx, whether that's GBP200m to GBP220m for a few years, and does that tail off or is that the new run rate into perpetuity, I suppose? Thank you.

Sure. Look, in terms of e-commerce, two separate parts there. Firstly, B2B, absolutely essential for us to have the leading B2B e-commerce offerings in our business. And we're not benchmarking here against the other local players in the States or in Europe. We're benchmarking against Amazon, against Grainger, Fastenal, all of the really, really good e-commerce players.

In the States we're now up to nearly 10% of our total business is B2B e-commerce. You saw the numbers have been growing very well, high pickup also in the self-service events. This is people checking, inventory credit, stock availability. So we're pleased with that progress. We are re-platforming the business. We're investing about another $5m, $6m in the coming year to make sure the platform again steps forward. So absolutely fundamental for us.

Similarly in Continental Europe we've been working hard at that for two or three years on the B2B side, and beginning to make some progress now. It is still only 2%, 3% absolute share in our business but across the UK and in Canada and the rest of Europe we're now getting growth rates, 30%, 40%, and beginning to work hard at migrating some of our customers across from the physical network to the e-commerce business.

You're absolutely right, from a margin point of view, it's slightly accretive. At the moment what we see is two -- several things. One, the average order size is slightly higher. And secondly, clearly the great advantage is you can't negotiate with the machine, therefore we don't have the usual haggle that you sometimes see on pricing. But it's marginally better. And is it just that the mix of customers have moved that way first? We can't really tell yet, but certainly slightly better for the business, and we expect that to continue.

Where we do expect and are seeing, and I think coming back to the flow-through and leverage point, 7m, 8m self-service events in the States, that equates to about 200 people that you could argue we've saved, and that I think is part of the reason why we've managed to make some progress.

B2C, it was good, particularly in the US, to see a big improvement in the growth rate in the second half of our B2C business. That is now up to about 5% of our total business in the US, growing well again, growing by more than 10% and the margin is -- the gross margin is picking up again, which is great to see after the whole destabilizing effect of the IMAP pricing that I think we talked about about a year ago, that has worked its way through.

And we still are looking very hard to grow a larger B2C business in Europe. We think there's real potential for that. And we're looking at both M&A opportunities and organic growth opportunities as well. We want to get on with that.

In terms of CE, and then John can handle the numbers questions, no, we don't absolutely want to exit the whole of CE. I mean, we have a great business in Switzerland, and a very good business in Holland as well, which I think turns -- they both turned in very good performance in tough markets. We've worked hard at those businesses in the last four or five years. They are in a better shape and absolutely we think we can grow and develop them.

We've announced today our intention around IWS. That's predominantly because it is so heavily skewed towards the new build market in France that is really declining in the order of 15%, 20%, so we really don't think that has much of a profitable future, whereas on BM, the rest of our French business, we've put a new management team in place, and it's hard going, but I think they're making sensible progress.

In terms of OpEx and CapEx, John, do you want to -- ?

Yes, I think on the GBP30m, if you look at where we invested last year's GBP30m, part of it is in one-off project resource. But part of it is a step up in the cost base, because there's a lot of systems design work, project management work, there's a lot of software licenses and the consequent depreciation, a lot of new hardware in there as well, in particular in the US and the UK.

So, of that GBP30m probably north of two-thirds of it has gone onto the cost base. The point really about next year's GBP30m is on top of that 2014 cost base in our 2015 budget, we have GBP30m more that we're investing on top of the 2014 cost base today, which we have agreed in the budget.

And, what returns will it get? It's all required to get the same returns as any other capital investment project. They are actually just part of our overall capital investment process structure.

When will it carry on? Quite frankly, we will carry on approving any investments where we believe the investment returns are there and that are good for the business. I certainly think for the next two or three years this is going to be a fixture. We are going to be talking about this every year, and the only -- the real positive about this is every one of these projects is improving our business and is improving it for future either revenue generation or margin enhancement or protection, delivering better service to customers, or being able to sell better to customers. So these are not pipedream projects.

On the capital investment, you can see, actually interestingly if you look at the step up from GBP140m to GBP200m, the big swing factor in the year was a couple of DCs. Going forward, there are going to be fewer DCs, but there will be some -- there will be more hub expenditure, I think, because part of the plan now is to look at what we can do better, what we should be doing in a hub that was previously done in a branch.

But I still think the GBP200m-ish guidance that we've given is decent guidance for the foreseeable future. Will it go down thereafter? It'll depend on top line growth rates, really. We still have decent capacity throughout most of our network to grow. So there's no reason for it, at the moment, to step up, Gregor.

Thank you.

Okay. Good. Shall we go along the front line and then we'll --

Hi, it's Paul Checketts from Barclays Capital. I've got three, please. First is on a couple of particular competitive behavior points. Maybe you could give us your latest intelligence on that. E-commerce in the US in particular, maybe you'd give us the latest. And also in Denmark, on the DIY side. It looks like some of the budget DIY players are having some success. So are they taking some of your share?

Second question is on the pipeline of M&A. Maybe you could give us a bit more detail on the size of that, where those -- where it might happen, what types of business and on pricing.

And the last is a short one, which is on the US remuneration. You mentioned you've made some changes. Can you just tell us why you've done that and what you've done, please?

Sure. Just in terms of the first one, the competitive behavior in the US. Again, I think we flagged it pretty clear, about two years ago, AmazonSupply had launched. We track their unique visitor numbers; it's not moving at all. I mean, there is -- it is absolutely flat and it's at a very low level. So, so far we haven't seen any material penetration of Amazon Supply coming into our business. The last we heard is that they were employing and recruiting some sales people to try and get that moving. That flurry seems to have burnt out a little bit. So again, at the moment we're not seeing anything particularly extreme.

In terms of all the other e-commerce competitive behavior, we're seeing at Home Depots out there big time, Lowes are out there. In the B2C space we're the number three player, behind Home Depot and Lowes. But we are gaining share in that overall category. But Home Depot and Lowes are as well. So the bigger players are gaining share from the smaller B2C e-commerce players. So I don't think, Paul, there's anything radically different from where we are. We're slugging it out, we keep a close eye on Amazon, though. I haven't seen them make any moves in Europe yet in terms of B2B e-commerce.

In Denmark, look, our DIY chain Silvan prices very competitively against all of the low-price players, Jem&Fix and also Bauhaus and people like this. So we're constantly benchmarking against those players. We gained a little bit of share in the last 12 months. But it's small because we wanted to keep our pricing at a competitive level. We didn't want to go any lower in terms of pricing.

So it's -- we're slugging it out with the other competitors. But again, nothing dramatic that has changed in the past six months. It's still very competitive out there across the whole of the Nordics, Denmark in particular. But as I said earlier on, slight improvement in Denmark and Sweden in the last -- since the year end.

Pipeline, do you want to -- ?

Yes, sure. The pipeline is -- yes, the pipeline's all right. There's nothing huge in there, Paul. There's no sort of multi-billion deals in there. There's about GBP400m of turnover in there at the moment. And I think I said this six months ago, we said we are being a little bit more proactive to try and go out there and find the businesses that we want to acquire rather than waiting for them to come up for sale. So that's an attribute of the pipeline at the moment.

So -- and in terms of conversion, we've typically converted about half of the pipeline, perhaps a little bit more. So if you look at that GBP400m there are some quite nice businesses in there, there's some quite nice margin businesses in there. So it's not necessarily that you'd look at a multiple of sales on those businesses. So there might be, if we converted half of it, it might be a couple of hundred million in terms of cash out the door. And of course, that pipeline, you would expect to refresh it. It turns pretty much in its entirety over a six-month period. You either do the transaction or you don't.

US remuneration, there were two changes in the year. One is we funded what was previously an unfunded pension liability. It's about GBP20m which appears there in the working capital. Just housekeeping, Paul. And then the second is we've done a more widespread project just to make sure that all our employees are properly -- all of our associates are properly classified, who should be hourly paid, who should be salaried. That's quite a -- it's quite an important area in the US. So we've done that. We did move a number of associates away from salaried onto hourly paid just for correctness purposes. And the working capital implication of that is people came off bonus and it's been on higher hourly rates. The impact of that was about another GBP20m.

Thanks. Just one follow-up. If you were to buy, make acquisitions at the upper end of your range, at GBP300m, would that still be consistent with the GBP250m share buyback?

Yes.

Good. Thanks, Paul. Sorry, can you go -- yes.

Thanks. Aynsley Lammin from Citigroup. Just wondered on the US, if you could talk or give a bit more color on the kind of end markets, the RMI resi and private non-res. Is there any particular area that's driving the growth and your expectations for the next 12 months?

And then secondly, on the US again, obviously margins are at 7.7% now. I just wondered if you could share with us your thoughts about where that margin could get to in the medium, two, three years, and how you balance that against the market share gains as well? Thanks.

Sure. Look, end markets, I think John made the point earlier on, the growth in the States was very broad-based geographically, so we saw actually a bit of a pickup on the East side, good pickup on the West and down in Florida as well. In the end markets, the growth rate in resi has reduced a little bit. It's come off 1% or 2%. But we have seen a commensurate increase, which is pleasing to see, in commercial and industrial. And crudely one-third of our business is residential, one-third is commercial/industrial, one-third is waterworks/civils.

So from our mix of business point of view, actually there hasn't been that much change. But good to see commercial and industrial beginning to come back. And we anticipate that happening -- continuing over the next 12 months. So overall growth in the States about 5%, just over 5%, 6%. But we expect the growth rates to come off a little bit, possibly residential will pick up more in commercial and industrial. So -- but no change to the overall trajectory in the business.

In terms of what can we get to in the States, a great question. We don't know. The great thing is that Frank and the team in the States, they just keep driving forward. 7.7% is what we did this year. Our plans get us to higher trading margins going out over the next couple of years. Clearly it depends on the market. We're assuming reasonable market conditions.

But assuming we have reasonable market conditions, you'd expect to get the sort of share gain that we've achieved in the past four, five years. I think all the investments we've made around the core service proposition, the work we're doing around segmentation and pricing, management of the mix of the business, actually getting better execution of both the marketing and the sales teams, and getting better productivity throughout the business, I don't think we feel at all limited by where we can get the margin up to.

I'm not going to give you a number, because I just don't know. We're just going to keep pushing on and getting there. Each year we've put on about 0.5 a percentage point of return on sales. That's a sort of ambition that we'd have over the coming years. But certainly nothing that means that we would stop the share gain and the margin, gross margin and leverage improvement.

You should stop talking before you give out any more numbers.

Right. Go next door. Go next door.

Thanks. Clyde Lewis at Peel Hunt. Just two, if I may, one on Capstone. Is that just going to be servicing the US business? Or will you be using that to help out within the European operations as well?

And the second one was on headcount. I'm thinking again particularly US and probably UK. But what should we expect to see the Group do? Listening to John's comments about OpEx and certain investment, the extra GBP30m there. There's obviously going to be some people involved in that expansion as well. But just trying to get a flavor for again the extra revenue per head that you can achieve going forward. Where are we in that equation at the moment?

Look, we'll actually use Capstone to source everything for the whole Group. So over the next year we will move all of the current product flows we have with either different agents or different manufacturers through the Capstone organization for the whole Group. Yes?

Yes, just on the headcounts, it's a great question. And in a sense, we aren't tied to an answer to that question in any place. Because if we could become more productive by having more -- more cheaper heads, then we would. If we be more productive by having fewer heads and more technology, then we'd do that as well.

So I think that if you look what's -- if you take the US example, the US, I think, were severely burnt in the last downturn by having to release so many colleagues through restructuring. And so they've been very cautious. We've been very cautious in the US about bringing new heads on. And I think that's acted as a great stimulant in the business, to make sure that we really do work [on need] I'm sure that -- you hear us talk about new business models, I hope we've given a flavor of that. But we do mean this, we do mean that we are trying to change in the way in which we're doing business. It's -- we're being more thoughtful about who goes where and does what. And that should lead to improved productivity per head over time and that should also follow in the other markets.

Of course in the other markets headcount growth has also been held back by the fact that we haven't got enough growth at the top line. So ideally we get back to growing at the top line, and then clearly we'll need more heads to service that business.

But remember here, we're not just talking about pushing more and more volume through the same channels. We are doing more distribution. The whole of this hub concept is to do more distribution from hubs and DCs. That's where the B2C business is executed from, or fulfilled from, and that's more and more what will happen as well for servicing ongoing customers.

So there are changes that are happening there, where we put people. We want people at the branch to be more sales-focused, more customer-focused, and to take administration away from them, and the administration to become more efficient on a back office basis. So net we should be more productive. And it is important for the business over time, particularly in Europe, because you suffer cost inflation and if there isn't enough top-line growth it is very hard, it is hard work, to generate profit growth. So I think that overall we should see headcount growth substantially less than top line growth, but of course there'll be salary inflation eating part of that.

Good. Do you want to come across here? John, and then we'll go back. Yes.

Alastair Stewart from Westhouse Securities. You've aggregated France this time around. Just bearing in mind that you've put so much emphasis on it in the actual statement, is it possible to split off this once the trading result in France and then look at the end markets? Is it -- by subdivision, and also the year? Is it top line price, cost base, etc., that's causing the issues?

In terms of results, the wood solutions business made GBP1m and the BM business made GBP7m during the year.

But it was the majority of the reduction in profitability of CE was driven by the France numbers.

Yes. Yes.

Yes. I think in terms of the end markets, crudely, new build in France at the moment, if you look at permits, starts declining between 15% and 20%, depending on the month. RMI is about flat. Our business across France is crudely 50/50. So at the moment we're looking at a market declining 7% to 10%. We don't see it getting any better. We -- in the last couple of months it's got worse. I think it's going to be a very tough 12 months in total in the French market.

Gross margins are actually holding up reasonably well in a pretty brutal pricing environment. And we continue to take costs out. I think the teams have done a good job, continuing to shake costs out of the business.

We aren't reducing the branch footprint anymore. We have 144 branches in BM, which is the business we're going to retain. We think that's the right footprint. That's based predominantly in and around the northwest of France, Paris and northwest of France, which is a decent area. And as I think I said earlier, we've got a new management team in place who I think are tackling a tough market with the right actions. But it's predominantly price, brutal, tough, gross margin just about holding up and costs coming out.

Okay. We'll come here, then we'll come back over for the last couple.

Thanks. John Messenger from Redburn. Four, I'm afraid, Ian, if I could. First one, just playing devil's advocate on your dashboard for the US blended branches and waterworks. If I look at the residual, as in the balance, it's the 21% that's HVAC and everything else. It kind of implies that the trading margin there was down 1%, if I take the 0.8 and the 0.8 for the other two parts. Can I just understand, when you look at the rump, is that in a way challenged by the very means that you're pushing your competitors in the other areas? As in you are -- you need to be bigger basically in industrial, HVAC and other areas, and are you losing some advantage on margin because of that size differential? So just wanted to understand the delta in terms of what was happening in there.

Second one was just on wood solutions. Would it be fair for us to assume that you'd written that thing down, given the disposal process ongoing in those year-end numbers? And is the GBP70m a clean number, hard assets, as in there's no goodwill in there? I don't think there is, but just to check. And therefore we should be looking for some exit around that figure.

Third one was just UK B2C. I think, Ian, you mentioned possibly developing a business in B2C in the UK. Can I just check that that was the right understanding? Because you sort of look at the history of Home Outlet and everything else and think, well, is that a realistic proposition? Don't you need to buy something that catapults you into that kind of consumer awareness arena?

And then finally, behind all the IT model-ware, and all the various bits and pieces of technology, if I'm a customer in the UK, Nordic or the USA, what is my experience today in Wolseley in terms of my interface on ordering? And is that going to step change in the next 18 months? Are we at a point where I can order by phone, iPad, telephone, in person, with my own particular pricing metrics appearing in front of me on screen? Or is that something that's 18 months away and where we're at around the various countries?

That's it, thanks.

Right. John, let me sort of work through them and hand some to John as well. Look, just on the fourth question, absolutely, we are now, and I think we're going live in -- we're in November in the UK, we've gone live in the US, we've gone live in Canada, we've gone live in Nordics with mobile device applications. And those will be order entry. So you're absolutely right, you can dial -- you can connect up, you'll have your own unique customer number, you'll have your customer terms there ready available, you will be able to see product availability, nearest branch, what you can get anywhere. So just as if you were ordering online via a PC.

So I think from an order-entry point of view, clearly you'll be able to do it with voice telephone, as always, and increasingly we will be doing more -- in the States we call it will call or basically rewarding customers to place their order, give us an hour, it'll be ready for you within an hour. So I think there will be some changes there.

In terms of UK B2C, yes, we were disappointed with the outcome of TapOutlet UK. We learned a hell of a lot. It cost us some money, but we learned a lot. And we still think it's a very, a very attractive business for us. We're going to go at it a slightly different way. We'd go at it with a different mix. And you're absolutely right, John. If we can find the right M&A opportunity, we'll take it. If we can't, we will push on organically as well, though, because we think it's a good opportunity that we should get after over time. We'll need to be patient, but that's the case.

Wood solutions, John?

The wood solution assets at GBP70m are hard assets, predominantly wood, actually.

Is that your joke for the morning? It's as good as it gets, eh?

I'm afraid that's it.

Well, it's a cracker.

And so that -- so they're in the book at net book value. You can't actually write down those assets, slightly strangely. There's no accounting methods to do that. There is no goodwill. So they principally comprise wood receivables less payables.

And are they recoverable is a different subject. If we can convince somebody to pay 70 times last year's profits, yes. That's Simon Oakland's job. And if we can't, then it is possible that we will take a charge, I'm afraid. That's just the way it is there.

And if you think about why we're looking at an exit for that business, it's the fact that you can't step forward, and clearly you can't step forward and invest shareholders' money making those types of returns. So there is only one strategy for the business, which is either downsize or the balance sheet needs fixing.

Just on the residual businesses, you referred to them as the rump businesses. Just to put on record, they are, they're good businesses. We should just check the numbers through because they did grow very well in the year, so you and I, Mark, should sit down and just go through the numbers.

What's in there, we've got a nice HVAC business that's done well, really well, Design and Fabrication, which is the commercial fitout business. That's done really well now for several years. Actually it's been a very strong performer around the Group. The B2C business which Ian's talked about, which has got back into good growth, the margins there are comparable with the margins in the rest of the business. So we don't see those -- sorry, we put them on the screen all together, but they are distinct, individual businesses. They are all good, profitable, making good returns on capital, growing well, with good and growing margins in the year, and most importantly, they generate plenty of cash. We do want to expand those businesses, too.

John, you're -- also the industrial businesses are in there and they again are a very good set of businesses. And actually the PVF business and the OEM business and integrated actually had a very good year. So you're right, we need to tie the numbers together, John. I think it may be the total overhead costs in the US, or something.

But John, to your point, we're not suffering, you know, we're not suffering performance in those businesses because of the good performance in blended and waterworks; far from it. That spine, as we build out the spine and the DC network, the ship hub network that John's been talking about, absolutely that will benefit the other business units. Less so because they are less dependent on D C and central delivery. But waterworks would benefit, the industrial business has more, their programs, valve programs, going through the D C network now. So we absolutely do want to grow those adjacent businesses as well. Okay?

Good. Let's go back over there.

Morning. Emily Biddulph, JPMorgan. Just two questions, if I may. The first one being, you've talked about pricing in the US being sort of -- the outlook being slightly better. If we're looking at modeling this year, is flat an okay assumption? And beyond that, if we forecast a reversion to 2% to 3%, is that a silly starting point? Is there anything structural that impacts that?

And then secondly, I'm sure I'm revisiting something that's been talked about before. But it looks increasingly important in the sense that now we're looking at 70% of profits coming from the US and you're domiciled in Switzerland. And you look across at US peers potentially looking -- trading on much higher multiples. Do you look at your London listings as sort of sole and primary listing being a sensible place to be?

Look, let me do the second one and then John can handle the first one. Every year we've made it very clear. We do a very thorough exercise with our incredibly intelligent, highly paid investment bankers. And we take -- but we take a really serious look at are we in the right place, do we have the right structure, do we have the right listing, is there anything value gap here? Some of the parts valuation, we really do a drains up on it. We're doing the exercise again at the moment. Early indications is there's nothing untoward, there's no change in the conclusions we've drawn historically. If at any stage in the future there was, we would do something different. I think John and I and the Board are very, very clear and keen on value creation for shareholders. So if there was a big gap, we would absolutely do something about it. At the moment there doesn't appear to be anything.

In terms of pricing?

Yes, I think in terms of pricing, I think flat is a good assumption for this year. And is there any reason it shouldn't revert to normal? No, I don't think so. We don't see anything structurally different, materially structurally different happening in the marketplace with the supply chain. There's the usual sort of -- some consolidation, some deconsolidation. But there's nothing which would change the view that actually long term, our products are going to get back to normal industrial product inflation.

Good. Can we go straight behind you? Yes.

Hi, yes, morning. Yuri Serov from Morgan Stanley. I have four questions, I'm afraid, as well, but hopefully they're all going to be reasonably short. First of all, the UK. It's a positive market, but your like-for-like growth has been negative. Can that happen elsewhere as well? In a positive market you're underperforming, or is the UK market somehow unique? Could you talk about that, please?

Secondly, looking at Nordics, like-for-like growth negative after a very strong performance in Q3. You're saying that Sweden and Denmark, you believe is turning around. We know that Finland is weak, but Sweden and Denmark are the larger part of your business. What's your expectation for next year? Is the negative in Q4 just quarterly volatility or you think that the performance in FY15 may actually turn negative again?

Thirdly, restructuring costs. You're again showing restructuring costs for the next fiscal year. We understand there was structuring that you are doing at Puukeskus. What else do you need to do? And will these restructuring costs actually now become -- should we treat them as an ongoing feature of the business?

And then finally, the buyback program. Could you just give us some idea as to how you're going to manage that? Price -- your share price moves around, what if it surges by 50%? What will you do? Will you scale back the pace? Let's imagine, let's have a dream here.

Thanks, yes --

And the other thing is, how will you inform the market about your progress? Thanks.

Okay. Let me do the first two, John, you can do the second two. Look, we've said it, we're not happy with the top line performance of our UK business. We were happy with the gross margin performance, but overall we didn't do as well as we want. And therefore it would be an unusual situation to be in with the market improving and us declining, okay? We're not happy with that performance. We think we can do better. We have plans in place to do better.

Can it happen? Yes, sorry, yes, of course it can happen, we've just demonstrated it. I wouldn't anticipate that happening, though, in other countries, and I think particularly our expectation over the next 12 months is the UK probably will return to a couple of percentage points' growth. We'd like to see growth along those sorts of lines as well.

Nordics, yes, Sweden, Denmark, it's early days so crikey, we've been here before. Three years ago, if you remember back, we -- out of the recession we actually had Sweden growing about 5%, 6% post the deep recession in 2008/2009, and then it went back into decline again. But our anticipation is that we will see those businesses, those two -- or those two countries, returning to positive growth over the rest of this year. We've seen a little bit of pickup since the year end, but it is six, seven weeks. It's difficult to call, but we do anticipate better performance out of Sweden and Denmark.

Yes, Yuri, restructuring costs. We've got about -- last year we incurred about GBP13m of restructuring costs. Will they recur year on year? Yes, I think so. If you look at a cost base of GBP3b, sat where we sat, you want to make sure that all the managers are doing the right thing for the business. If something needs its structure changing, if it needs a rethink, then you absolutely want to encourage that. And there will be a charge every year for relatively proportionate restructuring. The only time when that will be separated out as exceptional is if it is, if it is really material to the Group. GBP13m is not, it's ongoing. It's 0.25 of a percent of our overall cost base. So I would expect that.

Slight difference with Puukeskus. We did provide in exceptional items for the Puukeskus integration costs, GBP18m. So they -- and that's just on the grounds of materiality, it clearly is just a very big number for that business. We'll get on with that. Where will they be next year? It will depend on market conditions, partly. And you can see where we're most challenged. It doesn't mean to say we wouldn't do any. In the US, we did I think GBP4m in the US last year. But it's proportionately smaller. So that's our sort of attitude on restructuring.

In terms of the buyback, how will the market be kept informed? Well, every -- when we make acquisitions we're required to put out an RNS. So each day there will be an RNS if there's been any purchases. Other than that, we will keep it under good review with the Board, and we will see. But we do expect to do a GBP250m buyback, and we would expect that to be done over the next year. And I think you'd expect us to be somewhat coy about our intentions of what we intend to buy and at what price and when.

And 50% up?

50% up. (multiple speakers) We'll all go and sit on the beach.

Let's move on. Any more questions? We've got time for one more. Who's going -- yes.

It's Kevin Cammack at Cenkos. I'm just trying to read the Indian signs which are confusing me slightly on the US margin. You referred earlier to -- you're sort of guiding us to a pull down rate of 7% to 10%, admittedly in normal conditions. But equally you've expressed some confidence that you can improve the operating margin of the US even this year from the existing 7.7%. If you saw a 5% top-line growth, for example, in the US, you'd be disappointed if it was only -- if it wasn't a double figure pull through, presumably, wouldn't you?

So the 7% to 10% is a growth, it's a top-line growth number, that's just what we have achieved. That range is broadly what we've achieved for the last four or five years. And within that --

That's not flow-through.

That's not margin and that's not flow-through, that is -- 7% to 10% is the growth, okay? In terms of what we would expect from that, we would expect within that range to get low double digit flow-through. So we would expect whatever it is, 10%, 11%, 12%, of those additional sales to flow through to the bottom line.

Now, it's a good question about what happens when the growth drops, particularly given that we've had great momentum in the US business. Though it is interesting if you look in the second quarter, third quarter of the year, when we had the weather impact in the US, we still did get -- actually we got okay flow-through. We do manage the cost base. You have to manage the cost base in this business very tightly. So we still got reasonable flow-through. I think it was high single digits, Mark? And that's what we would expect. We would still expect good flow-through from decent growth. But today, of course, we would be disappointed with 5% top-line growth. Is that -- has that clarified it at all, Kevin?

Yes. No, no, that's fine, yes. Yes.

Okay.

Good. I think that's it. No new questions? Excellent. Thank -- oh, sorry. Is it a quickie? Go on, last one and then we're done. Yes.

Sorry, thanks. Will Jones from Redburn. Just in terms of the fourth quarter like-for-like in the US, the plus 11%, was that still with a negative deflation number? If so, was the volume about 12? And if so, was that the best quarter you've seen post-downturn?

Then if we were to extend that, and you've talked about the Nordics maybe growing a couple, the UK a couple, add that into US, I think you've got about 85% of sales. It starts to make the 5% guidance [arguably] conservative, if the US can maintain the run rate it has. Is that fair?

Will, I would love to think that you're right. But over the last few years we've certainly called -- outside of US we've certainly thought the recovery might be better than it was.

I think in the US, we couldn't give you a quarterly inflation number with any degree of confidence at the moment. I see the Q4 number -- I still stick to that 7% to 10% range. I think that's good growth in the US consistently. The market's growing at about 5%. And as Ian said, we've taken 3% of market share overall, a little bit more in waterworks and one or two areas.

It doesn't seem like the underlying market is going to scoot up, particularly from where we sit. And neither does it seem like our market share gains should be eroded in the short term. So I think it would be great to think that the US is about to accelerate. At the moment it's not what we see. So we've given 5% of our first-half likely growth rate for the Group overall because that's what we've seen consistent with the last quarter and what we expect overall now.

Good. Excellent. Thank you very much.