Ferguson Enterprises Inc (FERG) 2014 Q2 法說會逐字稿

All right, good morning. I think we'll get started then. Thank you all for coming. John Martin and myself are here and some other members of the Wolseley Board, Gareth Davis, our Chairman, and Tessa Bamford, one of our non-execs is somewhere as well. There she is, lurking, halfway back. I think overall we made decent progress again in the last six months. The US has continued to make good progress with a 14.7% profit increase and an improved 7.4% trading margin. UK has grown, although the growth rate has slowed more recently. Nordics has returned to like-for-like growth as well as France but Canada and Central Europe have remained tough.

However, we were a little disappointed in our top-line performance and we know that we will have to retain a close control on incremental cost and CapEx investment over the coming periods.

At a Group level, we maintained our like-for-like growth rate and we grew or held market share in our key markets. Encouragingly, our gross margins were 40 basis points up and our net margins also increased. The strong cash flow capabilities of the business have allowed us to rebase our dividend by 15% and increase the overall dividend by 25%.

We've continued to invest in developing more efficient productive business models and we're encouraged by the progress that we're making. But as we've said before, these changes will deliver improved results over years rather than months.

In the first half we invested in line with our expectations. For the full year we expect about GBP30m of incremental CapEx and GBP25m of incremental OpEx. We anticipate this run rate of expenditure will continue for another couple of years.

We've continued to make progress on driving consistent performance across the Group in terms of measuring and managing all of our key variables -- customer service, employee engagement, on-time-in-full performance, pricing management, financial management, productivity as well. But there's still more to do; we are not yet at our peak performance.

We completed three bolt-on acquisitions and the pipeline looks reasonably attractive.

Let me now hand over to John and I'll come back and update on strategy later.

Thank you very much, Ian, and good morning, everybody. There are a number of themes that I'd like to highlight up front in the numbers this time around. Firstly, like-for-like growth rate of 3.2% is a bit behind our plan, specifically in the second quarter, with some weather impacts, particularly in North America, but continued weak markets in Europe. Importantly for us, the US has returned to normal growth trends in the third quarter to date.

Secondly, we made excellent progress on gross margins in the period, up 40 basis points.

Third, on the cost side we made really good progress on some of the investments in technology and process and infrastructure that we planned. Overall those investments are absolutely on schedule. But we didn't make as much progress in the short term as we wanted on productivity.

And fourthly, cash overall is in great shape and we expect to hit our cash targets for the year.

Overall, the continued good profit growth and strong cash generation has enabled us to rebase and grow the dividend, up 25%.

Like-for-like growth dipped 2.8% in the second quarter. This is the first time that we've made reference to the weather but we really need to to understand the Q2 growth rates in North America. The US was hit by an ice storm in January and that disrupted both customers and deliveries over several days. The growth rate in the US since then has broadly returned to Q1 levels. Several provinces in Canada have had the most severe winter for about 20 years and that's dragged the Group's overall growth rate down in the second quarter.

In the UK, we remain focused on the residential RMI market and that was pretty resilient. But growth in the second quarter was slightly lower than earlier in the year.

You can see we made some gains in Nordics in the second quarter, too. It's too early to call that a recovery but the business has continued to grow modestly since the end of the period. Despite the gains in France in the second quarter, lead indicators, I'm afraid, are slightly less positive and in Central Europe our markets remain pretty challenging.

The Group's overall growth rate in the third quarter to date is about 4%.

In the USA, we achieved like-for-like revenue growth of 6.2% and that was net of price deflation of about 0.7%. Acquisitions chipped in 0.8% of revenue growth. Blended branches and Waterworks grew well and we continued to take market share. HVAC grew well and improved its profitability and fire and fabrication grew very strongly as commercial markets recovered and we continued to take share.

Build.com, which is our consumer Internet business in the US, continued to grow, albeit at a slightly lower rate against very strong comparatives. The industrial segment was down as we continued to withdraw from servicing the shale gas sector which we talked about last time around.

Gross margins though improved in every business in the US and that's through focus on higher margin channels such as counters and showrooms, higher rebates, growth in e-commerce and also improved utilization of pricing matrix.

Operating expenses were 9% higher in constant currency, including planned investment in technology and process of GBP5m as well as GBP8m of additional healthcare costs and another GBP4m of additional B2C marketing costs.

So the flow-through of 13.5% was driven by the strong gross margins. Trading profit of GBP255m is well ahead of last year including GBP2m from acquisitions. And the trading margin improved by 40 basis points to 7.4%.

We bought Karl's Appliances which is a six-branch business with annual revenue of GBP37m and that's being integrated into our blended branches business.

In Canada, the markets continued to be depressed, particularly in Quebec, resulting in like-for-like declines of 1.9%. There was negligible price inflation. Blended branches actually achieved modest growth but both Waterworks and industrial were slightly lower.

Gross margins improved and cost growth was restricted to 2% in constant currency and that included about GBP1m worth of the additional technology and process investment. Headcount was down by 1.8%.

The trading profit was GBP24m; half of the shortfall was due to exchange rate movements. And the trading margin dropped to 5.9%.

In the UK, residential RMI markets, these account for about 60% of our revenue in the UK, and they remained steady. New residential was buoyant but that only accounts for about 5% of our UK business. The boiler market was disrupted really by the ECO scheme, the government's ECO scheme. That displaced some volumes from our traditional heating market.

We have really tried to focus on the core trade customers in the UK, that's where we add most value, rather than on short-term or non-recurring low margin business. Though frankly, with the benefit of hindsight, we probably didn't compete aggressively enough in the ECO space in the second quarter and that's reflected in the like-for-like growth rates of 3.2%. That includes price inflation of about 1%.

The core plumb and parts business continued to grow and held its share, as well as improving gross margins. Pipe and climate was pretty flat in terms of revenue growth and profits were hit by the bad debt charge, GBP2m in the first quarter. The acquisition of Burden added 7.8% to revenue growth. It's been really well-integrated; it's growing again now and rebuilding profitability from when we acquired it.

For the UK overall, gross margins were lower as a result of the acquisition but expenses were well-controlled. They include GBP4m of investment in technology and processes. Headcount reductions really here came from the rationalization of Burden but we have been very careful on headcount across the rest of the UK business. The 30-basis-point reduction in trading margin is principally due to the dilutive impact of the acquisition.

Markets in the Nordics remained pretty challenging. Finland's still in recession and very weak demand still in Denmark where construction volumes hit 50-year lows. Like-for-like revenue growth was down 1.2% and that includes about 1% of price inflation. In Sweden, our building materials business there achieved low growth but the other businesses were either flat or declining though all of our major businesses maintained their market-leading positions.

Gross margins in the Nordics were slightly ahead overall and operating expenses increased by 2% in constant currency. That includes GBP2m of non-recurring restructuring and acquisition costs and GBP3m of investment in technology and process. Headcount was broadly flat. Trading profit was GBP9m lower and the trading margin fell to 3.4%.

We bought two branches in Sweden. They've got annualized revenue of GBP15m and they'll be integrated into Beijer. And in February we announced the acquisition of Puukeskus. It has 23 branches in Finland; they've got an annual turnover of about GBP190m and they will be integrated with our Starkki business in Finland.

The strategy we set out this time last year in France to really simplify and focus our branch portfolio, including the disposal of 88 branches to Chausson, that's been really well-executed and now that is pretty much complete. Revenue for the remaining business was slightly ahead in the first half but lead indicators suggest that the market may decline in the second half.

Gross margins were under pressure due to lower rebate levels. There was no price inflation. But operating costs -- even in the difficult French market operating costs were very well-controlled. Again headcount was much lower. The trading profit though at GBP5m does include GBP4m of one-off property gains. We do expect the business to break even in the second half.

In Central Europe, like-for-like revenue fell by 2.6%. In Switzerland, volume growth was offset by continued price deflation. In France, the wood solutions revenue, actually that was slightly ahead, but the markets remained very tough, both in Austria and Netherlands where revenue fell. The acquisition of Keramikland, completed last year, generated 1.8% of revenue growth.

Gross margins were ahead in Switzerland, in Austria and in Holland, but they were offset partly by a fall in wood solutions. Operating expenses were well-controlled and reduced by 1% in constant currency with headcount down just over 3% from last year. So trading profit overall and margin remained flat.

Group costs well under control, same as last year at GBP22m. We are exiting Cheapy which is a small retail DIY format that we operated in Sweden. We've sold 18 branches and we'll redeploy 11 branches into Beijer which is our building materials business in Sweden. The results of that business and a couple of other small operations that we've closed or sold in the period were GBP8m loss.

Just touching on revenue. We are aiming to take measurable market share gains in each of our successful businesses. And we achieved that in some parts of the Group, most notably in the largest businesses in the US. But we do need to focus now more sharply on improving the growth rate across the Group as a whole. And we also aim, as you know, to incrementally grow our gross margins. And again on a Group-wide basis we made very good progress, up 40 basis points on last year. But we need to be achieving that across all of our markets, and particularly in Europe.

In terms of costs, the investments in technology and process that we talked to you about in October are really well on track. They cost us GBP14m of additional OpEx in the period. To put that into context, it's about 1% of our overall cost base; really important investments to make. However, we are a bit disappointed in the productivity savings in the core business. They were weaker than we planned and they were outpaced, as you can see from the chart, by pay rises and cost increases in the first half. In particular, labor productivity in the US was offset -- sorry, was off target as a result of additional overtime and commission payments.

In the short term, we've made the changes that we need to improve that productivity position. As you can imagine going into next year's budget round, that's absolutely front of mind.

There's only one line on the income statement that we don't cover elsewhere and that's exceptional items where the charge that arose from impairment of Cheapy assets was offset by small gains elsewhere.

Net financing charges came to GBP14m. They actually came down in the year, principally due to the improved pension position. And the effective tax rate, 27.5%. That is broadly as we expect now for the foreseeable future.

The working capital outflow in the first half, that's consistent with our normal seasonal working capital profile and it includes the unwind of the timing differences we told you about at year-end of about GBP160m. Working capital overall is well under control; our average cash to cash days improved again and we expect a working capital inflow in the second half of the year.

There are two other cash flow numbers that we should cover relating to acquisitions and CapEx. Acquisitions, we completed two small bolt-ons in the US and Nordics, absolutely in line with our strategy. And since the end of the period we acquired Puukeskus in Finland. A large part of the purchase price of Puukeskus relates to freehold property. The cash outflow for that acquisition is in the second half.

On the organic investment, we're making really good progress with the project we talked about in October. We've invested GBP90m in CapEx in the first half and that includes two freehold distribution centers, one in Ohio in the US and one in the UK, and further investment in centralized distribution hubs which is a theme across the business.

Importantly, all of our businesses are developing the technology, process, network infrastructure that we need to help us to become more productive over time. And just to give you a few examples, that includes during the period just ended successful implementation of Oracle financials in the UK, a new European datacenter, major telecoms and network infrastructure upgrades, both in the US and in the UK, new master data management and middleware projects that support our business model development initiatives.

Net debt at the end of the period was GBP927m. Due to large payments into the pension scheme over the last few years and good asset returns, we actually had a net pension asset across the Group at the end of the period, and that's for the first time in many, many years. We maintain a very strong liquidity position with GBP2.4b worth of committed facilities.

If we can touch on foreign exchange. Foreign exchange had little impact in the first half but there are some analysts out there still retranslating the dollar at $1.50ish. The rate for February was $1.67 and at those rates our second-half profits are going to be worth more than GBP30m less than last year.

And we'd also like to just update you on the guidance that we gave you back in October for the full year. Like-for-like growth rates in February and March to date have been about 4% and we expect second half like-for-like growth rates to be similar. Our guidance on capital investment of between GBP200m and GBP220m remains the same but we are increasing our guidance slightly on the impact of operating costs which are now expected to be between GBP25m and GBP30m.

We've just talked about foreign exchange. Our guidance in respect of restructuring costs charge to trading profit has come down. That should now be GBP10m less at about GBP10m.

The effective tax rate has come down slightly. We now expect it to be in the range of 27% to 28% for the full year and actually broadly for the foreseeable future.

We expect working capital to grow at about 12% to 13% of incremental sales. We will keep a conservative balance sheet. We're planning on investment grade metrics and net debt of no more than 1 to 2 times EBITDA. And we now expect losses for the businesses that we've sold or held for sale to amount to about GBP10m in the year.

Finally, let's summarize our dividend policy. Over the last two years, the Group has generated significant cash balances and these have been surplus to our short-term investment needs. As a result, we've returned surplus cash to shareholders. We have very attractive and significant opportunities in the business to reinvest for profitable growth and also for selective acquisitions. Notwithstanding that, the Board has decided to rebase the dividend by 15% in addition to the 10% growth rate that we've applied over the last couple of years. As a result of that, the interim dividend will be increased by 25% to 27.5p per share. There are no changes to our expectations of the future dividend growth rate; we expect that to be based on a prudent view of the long-term earnings growth potential of the business.

Many thanks and I'll hand you back to Ian.

Good, thanks, John. The six key components of our strategy remain unchanged. So today I thought it would be most useful if I gave you a brief update on progress in just two areas. Firstly, how we're working to improve our profitable growth rate and secondly, progress on the business model work in the three major clusters of the US, UK and Nordics.

Turning then to accelerating profitable growth, we've used this chart in the past to give you a sense of all the profit levers that are available to our teams; also how given different market conditions we will pull certain levers harder than others, and finally, to make the point that our business does not yield to grand gestures. Many small improvements will over time generate very good results.

Therefore looking at our two largest business units in the US, blended branches and then Waterworks. Firstly on blended branches, which is about 60% of our US business, we've continued to make very good progress across most of the profit levers. Our customer service has again improved to an all-time high. We've continued to gain good share. Our facility maintenance business continues to grow well. At the same time, gross margins have again improved by better price matrix compliance, continued growth of own label and good growth in our two most profitable channels of counter sales and also showroom sales.

We're also working at improving productivity and e-business transactions, which now represent just over 9% of our total sales as well as well self-service events have grown hugely. We continue to drive incremental DC utilization which is over 86% now and the contact per day and revenue generated by the national sales center continue to outpace the core business.

Our labor ratio has improved as a percentage of gross profit again, but as John outlined, there has been significant cost increase driven by planned investment and some cost overruns that we are tackling now. Our teams have at the same time done a good job at delivering leverage over our fixed costs to improve margins by 70 basis points and also on improving cash performance and return on capital.

Now turning to Waterworks which is 17% of our total US business. Again here as well we've made good progress. Our customer service as measured by net promoter scores increased to over 67. This has driven a significant increase in our market share by 4% over market growth. We've maintained our on-time-in-full performance to customers from branch and an SKU level at more than 96%. At the same time we've improved gross margins by maintaining our pricing discipline, improving our share of counter sales and at the same time improving our mix of vendors.

Our own-label business has held share of our total business and we've always said that gross margin is a key driver for us rather than own label share per se. Again, we've seen explosive e-business growth and this now represents just over 9% of sales. We've increased DC utilization to nearly 45%. Our labor cost ratio has improved and we're carefully managing the cost base. Like blended, we have also managed to generate good leverage and much better returns.

Turning now to the UK and plumb and parts which is almost 60% of our UK business. Again we've made good progress. The market has grown steadily but there has been substantial switch in business towards the ECO funded -- the government-funded ECO activity which is fulfilled by the major energy companies. This has taken share away from the smaller customers and the majority of this activity is now completed but it's certainly pulled forward activity into the first half and especially in Q2.

We've continued to make good progress in terms of customer service and also on time in full but because of the shift towards ECO activity that we did not compete aggressively in, we've held share rather than continued to gain share as we have done in the last couple of years. As yet, we've not managed to get enough of our customers to adopt e-commerce, unlike in the US. We have a very competitive transactional site now and we are investing resources to train and help our customers to convert. We believe that once they are set up they will adopt, just like the US.

We were very focused on improving our gross margins and avoiding potentially low margin business. Our gross margin has improved and continues to trend in a better direction driven by better pricing discipline, better sourcing in some core categories and also improving the mix of our customers by focusing more on smaller customers.

Productivity has also improved as we gradually move to a more flexible labor cost model and increase the utilization of our DCs. Our labor cost as a percent of gross profit has improved again. Our returns have improved but our average cash to cash days for the first half have gone backwards slightly but we have plans to improve that position by the full year.

In the Nordics, where we have finally begun to see some signs of growth coming back, it's still early days but the trends look to be improving gradually across the region. Looking specifically at Stark, our core business in Denmark, we have, despite having reduced our staff count again, managed to increase our service to customers. We're still being very careful about competing in a very low margin business with large contractors in Copenhagen but we've managed to gain share in our core customer base and also managed to achieve marginal like-for-like growth in the second quarter.

At the same time we've held gross margins but on an improving trend and maintained the percentage of business with higher margin end consumers. Disappointingly, we haven't managed to push on with own label but our pricing discipline has improved markedly and our push into e-sourcing and e-auctions has been successful and we're using the Nordic region to drive e-sourcing across the rest of the Group.

Our average cash-to-cash days are slightly worse than last year but they are still the best in the Group. Because of improving market conditions, we decided that we should keep our branch network intact, having closed the unattractive branches last year, and that we should maintain a competitive level of service. This explains why our total cost base has increased slightly which has led to a trading margin reduction. Clearly, this is disappointing but given the return to better levels of activity we feel it's the right decision longer term. And remember, our returns are still by far the best in the industry in Denmark.

Turning now to a brief update on progress on developing more efficient and productive business models, this is the slide we used last full year results to try and give you more clarity on exactly what we meant when describing how we can improve our business models and where we were in terms of our current performance. We've continued to invest the CapEx and costs to drive improvements in our processes across all aspects of the business. We're encouraged from the results we've generated so far but also know this is a long journey. Embedding better pricing discipline, managing our sales teams really well, executing well-planned category strategies, integrating our supply chain processes, installing up-to-date infrastructure, these activities will take years rather than months.

Looking first in the US and in this year what we've been doing for the customer. I'll pick out three areas for a bit more detail, segmentation, national sales center and B2B commerce. But in terms of customer service, we're now at greater than 99% availability. Our showroom channel continues to grow well ahead of the core business and at better margins. We have in total 1,800 outside sales folk and more than 2,000 inside sales people and we've only just started to implement a CRM system to manage this huge investment in people. And in the facility maintenance business we're making good progress and beginning to gradually expand our offering into the MRO market.

In terms of segmentation, we're currently working at differentiating our service propositions even more but we now have three clear segments against which we are investing. Firstly, our core trade customers who are serviced by our branch network. We've developed a campaign using Terry Bradshaw, one of the all-time great Pittsburgh Steelers quarterbacks. We advertise in branch, on selective radio and cable channels, as well as executing a loyalty program to support our key customers.

Secondly, for the high-end consumer who's looking for more expert advice, suggestions, ideas as to how they can remodel or rebuild -- or build a new home, our showrooms are now very clearly targeted at this segment, having originally started as a way to support our trades craftsmen. We've developed a separate positioning for these 300 Ferguson showrooms and support it again with media spend on targeted cable channels, magazine inserts and also online advertising. Clearly, totally different from the targeting of the contractor market.

And thirdly, Build.com, our B2C business, is targeted very clearly to the end consumer who wants to pay by credit cards and is looking for reliable fast delivery to home for a clear value proposition with minimal advice. Here we're spending aggressively to support a mix of pay-per-click but increasingly build our own consumer traffic by developing brands, our brand on YouTube, specialist magazines, and we're now also testing targeted cable channels as well.

In terms of developing the national sales center, we're up to about 100 sales people and it's now handling over $75m of revenue a year. It's designed to service different parts of the business -- supporting the facilities maintenance business, which is not reliant on a single branch but does need rapid response from a network of branches; supporting a national service such as our emergency water heater replacement business; parts of our business which require less product knowledge or expertise. We have a good business, selling our range of products to much smaller wholesalers in areas that we have chosen not to compete in.

The center can also take calls from branches when they are very busy. Clearly, having access to all our different channels of order entry and delivery is critical, and investing in one center is the best way to scale up this business net we can meet the customer needs better and at lower cost.

B2B e-commerce after a slow build over many years has begun to accelerate rapidly in the US. The critical steps are having an excellent transactional site and then investing resources to get customers confident in using that site. Once they have seen the benefits they increase usage rapidly, particularly as they increasingly use tablets and mobile devices. Over 9% of our business is now conducted via e-commerce and it is rapidly gaining share of our business with more than 70% growth, mostly existing customers, but also some new customers as well.

We have 30 people dedicated to converting customers to our e-commerce site and now 83,000 out of our total 400,000 odd customers are signed up with their own terms and conditions. The benefits for us are higher average order size, margins are better because of consistent pricing without the ability to negotiate, and in addition, it's lower cost to serve for us; our customers will conduct nearly 9m self-service events this year.

We're continuing to drive this channel hard and will invest further to improve and replatform our business over the next 12 months so that is the -- so that we will increase our advantage versus smaller distributors and can compete with the larger e-commerce players who are beginning to come into our space like Amazon and Home Depot. We are obviously adopting our US learnings as we look to drive this channel harder in Europe; it is only a matter of time before most customers will be using this channel.

We've also made progress in the other three parts of the business model development. We're driving hard into improving our sourcing processes and abilities. Firstly, we are embedding category management in the similar way to the major retailers. We're increasing our exposure to low cost country sourcing, also improving our ability to understand what drives our suppliers' cost structures. We're using e-sourcing and e-auctions to ensure we do get best prices because of our scale and customer coverage. Again, this is common work across the whole of the Group.

We will continue to invest significantly in our supply chain, about GBP60m, in building efficiency and capacity. The large CapEx numbers are driven by freehold acquisition for strategically important locations. We've opened a small hub in Houston to support our blended branch and industrial business growth, also a DC in Ohio based solely on transport savings, and further, we're going to make significant investment in the New York area with both a DC and a ship hub to make sure we can supply this enormous market with customer service proposition that we do not believe the customer -- the competitors will be able to match.

And we believe this will lead to significant share gain as we integrate Davis & Warshow successfully, open new branches and potentially add further acquisitions.

In terms of better branch operations, let me explain how we're testing and rolling out better configurations for the future. We've tested in five branches in Fort Myers a far more radical approach to sharing resources between branches rather than each branch being more standalone. We've used the largest branch as the hub and we pooled all the sales teams inside and outside into that hub branch. We stopped each branch making its own deliveries and introduced logistics planning across the network. Better pricing and customer term framework were established and the branches were all connected by modern telephony so that each customer could still have their dedicated person, even if they were remote from the location.

Sales planning has been introduced across the network rather than by branch. We achieved a huge jump in productivity efficiency, more than 25% uplift in sales, from better customer service and calls were handled faster by more knowledgeable people. We have dedicated product knowledge experts across the region rather than just stuck in one branch. We've got better coverage of the outside sales teams with better scheduling of deliveries, executed more reliably and at a lower cost. We've since rolled it out to 64 locations with plans to roll it out to another 175 locations in the next 12 months and further where there is sufficient scale of business to justify investment of a major hub branch.

We're running similar programs with exactly the same themes in the other clusters. There will be some differences in terms of timing and execution depending on the start points but the similarities from the plumbing and heating businesses in North America and Europe to the building materials business in Nordics and France are huge. So if we look at the UK, we're well advanced in terms of implementing a clearer segmentation -- customer segmentation within the business. We're progressively improving our service proposition with better ranges and availability, later cut-off times in the day, same day delivery and dedicated boiler and radiator offering based on our DC network.

The UK national contact center is well-established and is increasingly being used for outbound telesales programs. We're trialing a more focused showroom concept, building on our US experience. In the UK, we have over 400 outside sales people and over 1,000 inside sales people and we're installing the same CRM system as the US will.

We now have two clearly defined propositions in drainage, Burden's for the below-ground drainage contractors and plumb with drainage implants or standalone drainage branches will tackle our traditional customers.

And finally, we know we must accelerate e-commerce adoption.

In terms of supplier management, the agenda is exactly the same as that in the US. And in terms of investing in our supply chain, we plan to build a new DC in a better low cost location to replace the DC in West Horndon. We've now installed the same processes and platforms across our DC network as in the US and we will use these in the rest of the Group.

In terms of improving our branch operations, from 7 to 11 in the morning all branches now are solely focused on serving customers. All deliveries and head office requests will be handled later in the day during slower periods. We're gradually changing our mix of staff to give a more flexible cost base, more like retail; we're updating our telephone system to ensure calls are not missed and that high speed Internet access is available so we can begin to transport customers to our e-commerce sites. We've just gone live with new financial systems in the UK and this is the first part of gradually transferring processes from the old legacy systems to modern supported platforms. Similar migration plans exist across the rest of the Group.

And turning finally to progress in the Nordics, you can see the themes are exactly the same as in the US and the UK. The segmentation work is at an earlier stage and we're focusing first on recency, frequency and monetary value to know where we are winning and losing customers. The more targeted segmental work will follow on from the US and the UK learnings.

We've managed to continue to drive service by better measurement and focusing on availability and implementing systems-driven demand, planning and forecasting. This has been aided by removing outbound logistics management from many branches so they can focus on servicing the pick-up customers.

Like in the US and UK, we're beginning to implement CRM systems for the sales forces. Also, we're moving to regional or national job quotation centers. Historically this was all done in branch; now we have dedicated experts who can quote the job accurately, work with the suppliers to get the best price and follow up to make sure we do get high conversion rates.

The actions in terms of supplier management are the same as in the US and UK. We also now will integrate Puukeskus into our terms and contracts which, given our coverage, customer numbers, branch footprint, should enable us to achieve better results.

And in terms of supply chain, we're learning from the rest of the Group. Our DC in the Stockholm area has worked well so far in terms of better servicing cost reductions so we believe a DC model can work well in significant metro areas in the Nordics. It will also mean that over time we will need less space in each branch which will allow us to reduce our property costs. Also a DC model requires significant scale and investment in an area and it will be difficult for small independent competitors to follow us.

Lastly, we're taking a region in Denmark and testing, like we did in Fort Myers in the US, to see how far we can regionalize our business model.

So in summary, we've continued to make good progress. We know we still have a lot to do and we believe we can improve our top-line performance profitably based on our superior service delivery and at the same time we need to continue to improve our cost performance. We've started to invest in developing more efficient productive business models and we do believe this will allow us to generate better leverage going forward. The issues we face now is more about executing successfully many parallel work streams and at the same time continuing to drive performance. We still see enormous opportunity to drive for profitable share gain and deliver better leverage in our business.

Thank you. On that we will happily take questions.

If you could just wait for the microphone and say who you are, that would be great.

Just two questions. Firstly, I wondered if you could comment a bit more on the UK and whether you expect -- obviously you've lost a bit of share on the ECO side you mentioned but I just wondered if you could comment on your expectations for the next two or three quarters. Do you expect accelerating growth?

And then secondly, just on acquisition pipeline. If you could comment on that and also in the context of special dividend should we still expect that balance to remain the same or do you see more acquisitions making it less likely for special dividends?

Let me have a go at those first two and John, you can do the divi. Look, in terms of the UK, the market overall is growing at about 2% or 3%. And we've continued to gain share in that market, not at the rate that we had done in the past but we've gained share, we've boosted our margin, both at a gross and a net level, and therefore I think, as John said, we absolutely have executed our strategy of focusing on the core trade customers and really driving up the margins.

ECO, what's happened is that over the past 12 months there's been a significant growth in the ECO funded business, driven by obviously the large energy companies, and particularly in the last quarter there was a huge amount of activity, around about 20% of the total market was driven by ECO. Now we competed in ECO, we held share. Other competitors competed very aggressively, did well I think in it, and actually made better margins than we thought they would do in that respect. But ECO is -- it is relatively low margin work; it is pretty lumpy. And I think our only concern, and we can see it in the numbers at the moment, it seems to have pulled forward some activity into Q4 out of Q1. So rather than seeing growth in Q1 we're seeing more flattish. We'd expect that to return during the rest of the year to about 2%, 3% growth as we've been seeing in the past.

But I think we're going to keep on plugging away and executing our strategy and not get too distracted with lumpy pieces of business.

I think the acquisition pipeline, it's looking a bit more interesting now. We have about GBP300m revenue wise; we expect about four or five reasonable size deals; we expect to complete -- I don't know, about half of that would be sensible. So it's looking a bit more interesting but again, very consistent, good bolt-on acquisitions to our core businesses in core geographies. And the divi?

Yes, on the dividends, it's worth going back and just reiterating what we said before on capital priorities. The first is to fund organic growth which clearly has excellent economic returns for shareholders. The second is to fund the ordinary dividend through the cycle; we want to maintain that and grow it. The third is to do bolt-on M&A when it suits the strategy and when we can extract good synergies from those acquisitions. And then finally, if we've got surplus capital we'll return it to shareholders.

So there's no change in that waterfall or that list of priorities if you want. Clearly the more that we put on the special dividends, the less there is further down. But the Board is very clear and very positive that the dividend that we talked about, the dividend increase, is the right thing to do and it's not going to leave us short of investment dollars.

So, as Ian said, with the M&A pipeline at the moment we could imagine deploying, I don't know, GBP75m, GBP100m throughout the rest of this year just from that pipeline. But new things come into the pipeline all the time and some of them move rather quickly. So it's possible that we would do more. But there's no change in that list of priorities.

And the Board do look at this pretty frequently. I think you should expect the Board to look at it sort of a couple of times every year. And at each balance sheet date we'll have a look at the balance sheet and see where we are with those priorities.

Okay, good. Do you just want to pass the microphone along one and then we'll come back.

Good morning. It's Andy Murphy from Bank of America Merrill Lynch. Just a couple of questions. Can you just talk a little bit about the US drop-through rates? They were comfortably into double figures in Q2 and I think it was better than the previous quarter, but given the investments you're putting in, are you comfortable that that level can be either maintained or pushed further forward?

And just secondly, just further clarity on the dividend. Assuming that we have a normal cycle at some point and I guess profits come down in the course of that, given what you said about the dividends, can we expect the dividend to effectively follow earnings per share down in times of weak markets?

So yes, Andy, on the drop-through, the thing that's really powered the drop-through in the second quarter in the US is improvements in gross margins and to be fair to the team, they have done a really cracking job at driving gross margins in the business. So we said this morning that we felt that we could do slightly more on productivity. Fine. But that's the thing that's powered the performance in that second quarter.

There are one or two headwinds on gross margins. There always are. So, for example, now you'll have seen in March there's been a substantial devaluation of copper values. That's usually a bit of headwind for us. Fine. It's not going to wreck the margins, but nevertheless, it's just a headwind.

I don't think that you should expect 40 basis points a year on gross margins. I think that's -- that is probably the highest that we've ever done. Certainly the most significant increase in the last four or five years. So in that sense the drop-through is likely to revert, I think, back to our long-term expectations. And we've said before that double-digit flow-through, that's incremental profit and incremental sales, is a good -- it's a good performance. And if we carry on achieving that, whether that's from gross margin expansion or it's from productivity or a combination, which is what it usually is, we are -- that's a decent performance.

In terms of the dividend, this -- it's always a call on where you are in the cycle. And we have done quite a lot of work on that and we do do quite a lot of work on sensitizing what happens going forward over many years, as you can imagine, the modeling that we do. And it is our desire to maintain and grow the dividends through the cycle in accordance with our view of the long-term growth rates, so the long-term net profit rate of the -- net profit growth rate of the Group. So that's our intention. That's our desire. That's what we would aim for now.

Okay. Do you want to come? Do you fancy it?

Thanks. It's Charlie Campbell from Liberum. I've got two questions really. First one just to push you a bit further on that US gross margin question. It seems to me there's three big drivers of it have happened in the first half. One is more showroom; secondly, more matrix-compliant; and thirdly, some rebates. I'm just wondering how much more progress there is to go on those three. So what is the percentage of showroom usage and what can they get to? What's the degree of matrix compliance and how much further can that go? And also just surprised to hear you talk about more rebates now because that would seem an odd time in the cycle for that to be happening perhaps.

And the second question was a more general one on pricing. Just wonder if there's any changes in the pricing environment in the second half so far compared to the comments you've made about the first half.

In terms of the gross margins, we see over the long haul still lots of opportunity. The showroom business is over $1b of sales now. It's growing at the moment north of 20%. The gross margin in the showroom business is a good 4 percentage points higher than our core business. We have 300 showrooms. The good thing is that by putting more staff on the ground we can get a fair bit more traffic through. So we absolutely continue to see that growth.

The other thing you didn't mention, Charlie, there's been good growth as well in our counter business, which is the walk-in trade, so people coming into the branches, regular customers, coming in, picking up inventory they need on a day-to-day basis. That again is over $1b of sales, and again better margin than the average margin because obviously we do get depressed when we're into contracts and bidding.

In terms of matrix compliance now, we're well north of 50% in terms of the business that we believe we can use the matrix. And clearly you can't use a matrix in the contracted area because each of those are bespoke. And there is more progress we can make, but it's going to be relatively limited progress. It's going to be more incremental than a big jump in matrix improvement in the States. I think in the -- particularly in the Nordic region though, we have a lot of opportunity where we can drive far greater matrix compliance. They're relatively at the early stage of that conversation.

Look, in terms of rebates, it's a constant dialogue with our suppliers. We want more from them. They want to give us less. So a constant partnership, should I describe it as? So as you can imagine, those conversations just go on and on and on.

I think as we though become a larger share player in the industry, it does give us the opportunity to continue to drive those rebates to marginally higher each year. We are pushing progressively on own label development as well, and that is an important part of the mix of the business.

So look, we see -- I think as we've always said, we're looking for incremental gross margin improvement. We've had a good first half, 40 basis points. I think John's absolutely right. Wouldn't assume that would continue into the second half. But 10, 20 basis points a year is absolutely what we're looking to deliver because, to the earlier question, there's constant downward pressure the other way, all the time.

Pricing environment. Honestly, I don't think there's much change. I think compared to two or three years ago in the States the pricing environment has got a little bit better on the regular run-of-the-mill activity. But of course there is now a lot more new build going on in the US and across the rest of the Group. New build activity is materially more or lower margin because we're bidding on sealed contracts or things like that. So the bidding environment I don't think has changed. The mix of business is changing, and that does work a little bit against us as new build becomes a more important part of the total mix again.

Does that give you a sense, Charlie?

Yes. Sorry, just to follow up, so the question on pricing was a bit more general across the Group. So no change in the US, but I'm just wondering if there's change anywhere else.

And secondly, just a follow-up on the showrooms. You said there's 300. Have you thought about how many you could have across the US, looking at metropolitan markets and population dynamics and things?

To the showroom one and we'll come back to the pricing one, yes, we absolutely can see how we can increase the showroom footprint. Another 30, 40, 50 over the coming years makes sense. But again, we're very keen that we drive the adoption of e-commerce into the showrooms as well so that we actually have to rely less on physical assets and more obviously on electronic traffic, which we are beginning to do. And we're putting virtual showrooms into the physical showrooms and potentially into our branches as well, which would give us more coverage.

The pricing environment and the rest of the Group, again I think the Nordic region has probably got, again, marginally better. It's still pretty tough. UK again not -- no significant change. Probably again marginally better, although clearly the ECO business was at pretty low pricing. And in Central Europe, no real change. France was -- again, so nothing significant, Charlie.

Okay. Tom?

Tom Sykes at Deutsche. Morning. Just your comments on the e-commerce business. Is that 9% of the US you seemed to think was e-commerce? Does that include build.com?

No.

And when you look at -- and how big is build.com now as a percentage of the US?

Yes, it would add another 4.5%. It's a $500m business for us.

Okay.

So total would be about 15% when you add B2B and B2C together.

Okay. Thank you. And when you look at the growth rates of build.com then and how big that can be, and it seems like the growth has slowed down a bit there, and you think about your other B2C initiatives, so -- and perhaps the e-commerce ones, can you just explain a little bit about why the growth rate may be coming down on build.com and what you might be doing to reaccelerate the growth rate there?

Sure.

And then also just on the productivity in the US and those cost increases in the US. Were there planned cost increases by you and that you were expecting slightly faster growth, or is that the branch manager level that they have the responsibility to do it? And how quickly can you get the productivity gains back, please?

It was all John's fault, just so we get that straight upfront, Tom.

And the gross margin was all (multiple speakers).

That's the way it goes, John. That's the way it goes. Let me take build.com. Yes, look, the growth rate did slow down and it was a bit disappointing. It was driven predominantly by this move to IMAP for our major branded suppliers. So the big suppliers that we service have now moved to a policy where they have absolutely now strictly made all e-commerce retailers like us stick to a minimum advertised price. Okay? So if you now look at the pricing across ourselves, Home Depot, all the other, Amazon, you'll find for Koehler, Moen, American Standard, Delta, massively more commonality than there would have been historically. So bad from a revenue point of view in the period, but actually it's been very good for gross margins.

And actually far more importantly for us looking forward, I would rather -- far rather we were able to compete on service and availability than just actually who's going to be the person that's going to drive the price down to the lowest. And the trading profit in the business was up H1 versus H1.

So I think from a performance point of view, we'd expect the growth rate in build.com to pick up again as we're going into H2, and we're seeing that already. So I think we saw a temporary phenomena which we would now expect to recover. But we are investing a lot of money. And you have to spend a lot of money. About 8% of the revenue is in pay per click or advertising or however you want to describe it. So it's a game you've got to keep investing in to stay with it. But it's a good profitable business for us and we absolutely see that growth.

And the other acquisition we made, [PD], is also growing very well. Interestingly it's far less dependent on pay per click, far more dependent on self-generated traffic. They do a great job in servicing the customer's needs and really getting people into the site rather than just relying on Google spend.

Productivity. Do you want to?

Yes. So on the productivity, Tom, no, I'm afraid it wasn't planned, so there were some overspends. And I'd reference there are two areas. It's labor productivity, by the way, that we were talking about here. And the two areas, healthcare cost, you're aware of, I'm sure. Us and Europe are US-exposed investments. We bleat on about it and it's a very difficult one to manage because the political arena in the US is trying to put more responsibility for healthcare into the private sector. And we've got to live with that. But nevertheless, it's part of our cost base and it is our job to manage it. It was up GBP8m in the half. But if you remember this time last year it was also up quite a lot on the year before as well. So there are plenty of things that we can do to manage that, and we are.

The more frustrating one, if you want, was we had some commission overspend. We implemented new commission arrangements in the US last year, very much targeted on gross profit and gross margin measures rather than just driving the top line, driving the value. And with the best will in the world, you do a huge amount of modeling. We've got a lot of sales people in a lot of markets selling a lot of products to a lot of different customers and it all needed figuring through. And you tend to only change sales schemes fundamentally infrequently.

We made the changes. It's absolutely driven gross margins and it absolutely gave us a headache and to the tune of about GBP10m on extra commission and payments. So we have tweaked those commission schemes appropriately. It will take us about 90 days. We haven't just tweaked them. We tweaked them six or eight weeks ago. But it will take really until Q4, sorry, our Q4 before we will see the benefits of that tweaking come through. And that really is to just make sure we get the right balance between incentivizing our sales people to do the right thing and their remuneration for it.

Great. Thank you very much.

Good.

Hi. It's Gregor Kuglitsch from UBS. I've got a couple of questions. One is just on the cost increases. I think you mentioned that you think they're going to last for a couple of years. Was that incrementally or is that now the run rate that you're running at in the first half? And should we think about that part of the cost into IT processes and on the CapEx side and dropping away again afterwards, or is that the run rate? Just a bit of clarity on that.

And then coming back on the balance sheet and special dividend. The thing is that you're talking 1 to 2 times leverage, which obviously at the GBP800m, GBP900m EBITDA is obviously a massive range. And I think traditionally you've been at the lower end. Now, for example, I'm guessing could you be thinking about putting that up a little bit. In other words, say to go to 1.5 times so you can support the special dividend. Obviously things like the pension have gone in your favor. I just want to explore your thinking within that range. Thank you.

So on the cost increases, Gregor, if you look at the current rate of investment, I think that it's not incremental. We're not going to be putting more and more in over time. I think that level though of investment now is likely to be sustained for quite a period. It's a level which -- and there's been a lot of activity in the organization in all of our regions, in all of our businesses now to really look at all those projects we talked about, the type of categories that they fit in, but technology in process is the overarching phrase that we use. And that rate of investment I would expect to continue. GBP25m to GBP30m this year and the same next year. So there'll be no incremental -- from what we can see at the moment, there shouldn't be an incremental impact next year.

I also don't expect it to drop off. And I tell you why, because some of this cost is backfilling. You need to take your own people out of their day jobs and put them onto a project for often quite long periods, six months, one, two years for the longer projects, depends on the projects. And then they need to be at least partially backfilled. And that is the biggest part of this investment. We're not paying consultants huge amounts of money. There is some external help in some of this. But a lot of this is our people, figuring out how to improve our business and the technology that should go with that.

So I think you should expect that rate of investment to remain with us now for some period. Will it drop off in four or five years? I don't think we can make that call today. I don't know.

On the leverage point, well, it's right that we should think -- we've always thought, as a Company, we've always thought of the pension liabilities as debt ourselves. It is an obligation clearly to our staff and it's an important one. But I think if you look at the 1 to 2 times range, we've also said that we have always aimed to be at investment grade credit. I think we would be investment grade credit, and Mike's here so you can quiz him on this afterwards at greater length. But I think we would be investment grade up to about 1.5 times at the moment.

So it would seem -- I would have thought we'd be pretty reluctant to increase the debt level broadly from where we are now. But it has -- and it has got an interaction with pensions in the sense that now that issue seems to be much better under control.

Okay. Good. [Fast] one and we'll come back to.

Hi. It's Paul Checketts from BarCap. Can I just -- I've got three, if you don't mind. Firstly there's a lot of initiatives going on across the Group at the minute, which I suppose does create some disruption. Is this the most intense period of that and over what time do you see it starting to normalize slightly?

And as an adjunct to that, you've removed pricing discretion or the ability to negotiate prices in the US from some of the branch employees. Has there been any resistance to that move?

And the second question is you've made some strong efforts to move into the FM market in the US. How are they going?

And lastly, e-commerce in the UK. You've said it hasn't really been taken up as you expected. Can you explain a bit more why not?

Sure. Look, I think in terms of the -- actually it's a good question, the intensity of what we're doing at the moment. Yes, it is. And there is a lot on, as I said at the end. The real challenge for us as managers and for the whole organization is we know what we want to do; it's doing a lot of these things in parallel at the same time. So yes, it's busy at the moment.

I think the good thing is we've been relatively low in terms of the amount of M&A we've been doing, which allows us some capacity, because clearly if you're doing a lot of integration at the same time, it makes it even more difficult. But to be honest, Paul, I don't think it's going to drop off much in the next, I don't know, three, four years, and it's just still a hell of a lot to do. And we absolutely want to get at it and keep driving the performance of the business. So sadly John and I won't be on the beach for long periods of time unless we can do something about productivity.

So secondly on pricing discretion, I think it's -- I want to be very clear here. What we're doing is gradually moving the model away from a far more decision made locally. We are not going to a retail model. Okay? And we're progressively moving. We're training. We're bringing our people with us. We're making sure they've got the right data, the right information. We're having a hell of a lot of conversation about that because you're absolutely right; if we made a jump overnight from a lot of discretion to no discretion, I think we would end up with a lot of dissatisfied customers.

The way we check is really doing two things. One, we constantly measure customer service down into the branch. And secondly, we measure employee engagement as well. So if we were getting it wrong, I think we'd have some pretty early indicators that actually it was going the wrong way. And actually, I think, you know what, as we go down this path, increasingly we find our staff are saying the good thing is, if we trust the matrices, if they're right, they're accurate, they're up to date, you know what, it just takes a whole chunk of the conversation away from the customer that we don't want to have, because we actually want to give them the right product, the right advice, the right service. We don't want to be spending half our time negotiating on price.

The other thing that we're doing, and this does come back to the point John was making about finance and master data management, the major criticisms our customers have of us is inconsistency of pricing. They'll go into one branch, the latest whatever, ideal boiler will be GBP1,000. They'll go into another branch, same SKU will be GBP50 more or less. That's what gets up their nose. So actually we need to -- that's why we do need to get our data sorted out so that we can actually offer a consistent pricing platform, and we're working hard on that and making some -- I think getting some sort of traction.

FM market is still growing very well for us. We're up to about $200m of sales now. It's growing more than 20%. The whole -- I highlighted the whole national sales center really supports that initiative. We think there's an enormous amount to go out there. And at the moment we're limited really by the number of people we can get up -- sales people we can get up-skilled properly because it is not a trivial sale. You've got to be reasonably knowledgeable in the categories.

And e-commerce in the UK, yes, it is disappointing. We spent -- we've invested a lot, getting a very good transactional site up and running. We benchmark it not just versus our other competitors in our space, but versus Amazon, those sorts of people, Grainger. We want to have the best transactional site. It just takes a long time to get a plumber set up on his site with his own terms and conditions and then regularly transacting. Exactly the same thing happened in the States. We started putting dedicated people against it about six, seven years ago. You can now see the rapid growth that happens as the quantum really begins to pick up.

The same will happen in the UK. We're now putting dedicated people against it. We've got to help our customers transport them from not using the site to into using the site. It's just going to have to be a patient game though.

Thanks.

John. Sorry.

John Messenger from Redburn. Three, if I could. First one was just on property. The DC in New York coming in 2015, can I just understand, because you're not that big in New York, I assume is this taking some pressure off Front Royal or is there another dynamic just for us to think around here, or is it a precursor of what you hope to deliver in New York in terms of sales presence?

And the other property one was just looking at the slide in the back of the pack. I this is probably one of the first times in a more steady market where you're closing or disposing of branches everywhere bar Canada. And I just look at that slide and think is there -- is this part of that regionalization point of what you're doing in Fort Myers, or is there something else here in terms of just what's going on? Clearly, Cheap is the understandable point when you look at Nordic. But is there something else here in terms of property-related costs that we should be thinking around?

Second question was segmentation. It's the theme around the UK, the US and everywhere. I just wonder, when you look at that segmentation of your customer base and the prices you're charging, would it be fair to say that actually you can look at some of those customers and you would be charging a different price if the rest of your competitor base was evolving in the same thinking process? In that I just want to understand do you think you are probably ahead, as in it's all very well for you to segment and work out that supplying a house builder maybe isn't the best thing you could be doing. But if somebody else keeps charging them at a price 5% less than you, that's well and good but you've lost the business. So just to understand a little bit, is there a gap there that over time you'd hope, if the rest of the world moves forward, it will allow you to move your profitability forward?

And then the final point was just around the UK. In plumb and parts, you point out in your slides gross operating margin up 0.4 on 60% of the business, so that's worth about 0.25 on the margin out of the UK overall. The other 40%, it implies margins went down about 101.3%. Can we just understand the shape of the whole UK, as in 60% plumb and parts? But I think ECO -- I assume ECO's in those numbers. When we look at the rest, where was the pressure in terms of drainage and the rest of it, just to understand what went -- to drive the 0.3 down?

Okay.

So from the beginning, property in New York, yes, actually it's both of those. It's both of those, John. So there is some relief of Front Royal. Front Royal is at capacity now. So there was a decision to make, do we top size it. And also it is partly our -- this is not an aspiration; this is an absolute plan. We are absolutely going to be much bigger in that area.

It's isn't small at the moment. If you just take New York, New Jersey, that's an $800m business today. So at the moment we've got a lot of 40 footers heading north from Fort Royal. So the economics of it are not a huge drag immediately, but it's not self financing like the Ohio DC is.

So on the closing and disposing, yes, there is absolutely a piece of this, which is we don't just want to plant flags in a town; we want to go and sell -- we want to provide our services and sell products in a place. If we can do that with a low bricks and mortar, fine. It was kind of you to reference Canada. Canada's a big place and it needs lots more branches.

In terms of segmentation, John, I think it's a good point you're making. But let's be very clear, the segmentation absolutely has to be drilled down into very practical, pragmatic things that we can do and will do in branch. So to your point, I've seen segmentation work that is great in theory. But actually when it hits the checkout, it falls apart. And we are still competing with all of our usual competitors now. So we're very conscious that the segmentation work is the right direction to move in. And it does mean that we then can, I think, be more thoughtful about AR pricing and where we really do and don't want to be very price-competitive and therefore look to gain some share versus -- thus price-competitive and hold share.

It also challenges us in terms of cost to serve and the way we think about our business models. So absolutely, for some of our larger contractors, larger customers now, we're talking to them about do you really want to actually have deliveries coming from different branches? If we can deliver to you from -- direct from the DC, actually we can lower our cost to serve. We can lower your cost to serve as well. Let's have a sensible conversation about that, which means that both of us can take costs out of the supply chain rather than us putting it in and then trying to charge you a premium for all of the activity that we've put in there.

So as we talked, and this is not just in the UK, this is across all the business, in the Nordics, in Stark in the last six months, we've moved half the branches to be collect-only branches. Historically they would have been doing all their deliveries. So I think those sorts of changes mean that segmentation become very, very real for us.

Does that -- now again, I think, assuming we do well, then I would anticipate that competition would follow us, assuming we're winning the game, which would be important for us.

On the UK margins, so in Ian's chart on UK plumb and parts, it shows the trading margin up 40 bps in plumb and parts. So three other things happening. One is pipe and climate margins were lower because of the bad debt. Essentially that's the extent of it. There's a Burden's mix issue which is not in there. Sorry, issue's the wrong word, but there is a Burdens mix impact, I should say. And thirdly, the technology investments are held actually centrally, John, so the investments that we've been making now are for the benefit of all of the UK businesses because they all share the [Wallsend] platform and the Oracle platform too.

And John, from memory, Burden's was about 50 basis points reduction in -- simply on the mix of the business. Yes?

Brilliant. And, sorry, just on that, industrial, where does your industrial activity sit in the UK?

Pipe and climate.

It's in the pipe and climate.

Yes.

And is that a business that makes a better margin than the one reported for the whole of the UK? Obviously there's been extra disclosure from some of your competitors recently.

Yes. Its margin is slightly better than UK average.

Thank you.

Yes. Good. Yes?

Good morning. Yuri Serov from Morgan Stanley. Three topics. First, acquisitions. And apologies for this; I just want to better understand the numbers and what to expect in the future. So, John, you were saying that it's quite plausible that you will spend another GBP75m to GBP100m on acquisitions in the second half. On the other hand, the chart that you were showing earlier suggested that your target for the full year of GBP200m-plus still remains intact. So how do I reconcile those things? Obviously you've spent GBP20m in the first half, plus Puukeskus is coming in. Is that enough? Does that -- is that how I square all the numbers together?

The second topic, in the US, you're showing blended branches outperforming the market by 2 percentage points. In recent years we have seen that our performance reaching up to 4% to 5%. Does that suggest that you're running out of your ability to outperform the market or was this just a feature of this particular period?

And then finally on the Nordics, your profitability in Q2 was really poor, despite the fact that you showed like-for-like growth for the first time in the last two years. Could we discuss that a bit? I understand that you're saying that you're not closing any more branches, but nonetheless your margin keeps on dropping. What should we expect there?

And then a related question with Puukeskus. Could you give us an idea -- I don't know whether you have already planned that and whether you can reveal this, of the branches that you acquired, how many do you reckon you're going to close or how many of your branches you're going to close. So within that market, what's the rationalization like? Thanks.

Sure. Do you want to do the first one, John, acquisitions?

Yes. So the acquisitions, I think the cash out on acquisitions in the first half was GBP16m and we've got the Puukeskus number, which is just over GBP50m, which went out yesterday. That's done. We could well do another between GBP75m and GBP100m for the remainder of this year. So if you take the total consideration to date, it's GBP70m-odd.

We could well do GBP75m to GBP100m in the rest of the year. We could do more or we could do none. So we absolutely have no targets. But that is quite possible given -- so if you think Ian's GBP300m in the pipeline, so if there's GBP150m of value or something like that in there and we'll convert half of them, two-thirds of them. We might convert all of them. We might convert none. But that's quite possible.

You're saying GBP300m in pipeline. I thought it was revenue, yes?

Revenue, yes. So of those that we may well convert, they may well cost us in the region of GBP75m to GBP100m.

Okay.

Okay? Is that clear on acquisitions?

In terms of the blended branch growth, it is actually, Yuri, quite difficult to read at the moment given the weather impact in Q2. There's nothing -- and therefore the number difference is really very small. Okay? And we don't have really accurate week-by-week market share data. And there's nothing that we've seen so far that would suggest that our outperformance has changed in any way. There's been no change in the dynamics of the market.

We've continued to improve our customer service. Actually, if anything, I think we've upped our game. I think we've got better propositions out there now, better cut-off, later cut-off days, better same-day delivery, more ready to pick up, the will call initiative that we've had, we've rolled that out. So difficult to read at the moment, but nothing that we see that would lead us to think that the share gain has dropped off.

I think around the edges it may have done a little bit. We had a very good six months on gross margin. We did hold our pricing up. And there was some business that we probably decided that we didn't want to go for.

In terms of the Nordics, Q2 profitability?

Yes. So Nordics, there's GBP5m of investments, restructuring and M&A cost in that reduction. So it's a GBP9m reduction. GBP5m of that we absolutely know, we absolutely planned. We decided to plough on with the investment. There's a good reason for plowing on with the investment. Stopping and starting on the investment is a nightmare because these are longer-term projects. We have to take people out of their day jobs, backfill them. We need the external stuff. So it's very important that we plow on with those things.

So there was a GBP4m drop from the shortfall in the top line. So there's a 2.6% constant exchange revenue reduction and we got a GBP4m drop in profit. I'm not happy with that. It's very tough.

I would say two things though, Yuri. One is if you look back last year, we were actually pretty resilient in Nordics. The Nordics business held up its profitability well. We did have a little bit of labor cost growth this year.

And the second point that I would make is now we have seen three months of slightly better, slightly improved conditions. I think the big challenge for us now is to make sure that we don't put in excess seasonal labor, which is quite easy to go into the business if you're not careful. So we need to be very, very careful on seasonal cost now. But I would expect the profit margins now, if we get some top-line growth, I would expect those margins to rebuild and to rebuild reasonably promptly.

Good. Sorry, yes.

The Puukeskus rationalization. Look, we've got some sites that we are combining with ours, with theirs. There are going to be no out-and-out closures, I don't think. Simon Oakland is here, just there. And he's the guy who executed this transaction. Have I just thrown you a curveball, Simon?

Yes, slightly. Look, the answer is that we completed on the transaction only yesterday, so we're going through a detailed communication plan with our employees, with the acquired employees, etc. In advance of going into the transaction, we've got a detailed integration plan. We have a plan for every single site as to what we're going to do with them. Many of them are going to be converted to Starkki branches in their existing format. We're going to create a slightly different hybrid concept for some of the smaller branches. And then, as John says, there will be a small number of branches where we've got very overlapping footprints that we will combine. And there are actually a very small number that we do intend to close.

It's really not appropriate though in terms of the HR side of things to go into details on those. We haven't announced it to the employees yet. And we certainly want to keep on running those branches for a period of time before we can take over the business into a combined entity.

Good. Thank you, Simon. Time for one more, if there's any more. We don't have any more. Even better.

All right. Thank you very much. Thank you.