Ferguson Enterprises Inc (FERG) 2015 Q2 法說會逐字稿

Good morning, everybody. Welcome to the Wolseley half-year results.

In terms of the highlights, we saw a good improvement in like-for-like growth at the top line and good gains in market share. This was driven across the Group by improvements in better service, product availability and the scale and efficiency of our sales teams and more tailored customer propositions.

Clearly the US had an excellent six months and we did see improving top-line performance in the rest of the Group, as we'd planned.

Gross margin progress remains a constant battle. Our initiatives around managing our mix better, improving pricing management and better sourcing are all gaining traction. But, as we begin to see recovery in markets, there is also some growth in lower margin segments new residential and commercial and, in the UK, the heating products market.

However, we absolutely believe we can grow our gross margins over time. We do not believe that we have to accept lower gross margins to gain share. We know that there are plenty of profit actions we can execute better to offset the margin pressure we feel.

We've continued to invest in gaining share and improving the efficiency of our business model. This work is beginning to pay back in the US, as you can see from the leverage we delivered. And we believe we will see the same in the rest of the Group, as markets recover slowly.

Flow through was good in the US, at 12%, but disappointing in Europe, driven by increased investment to drive growth and some gross margin pressure.

However, we do expect to see better productivity and profitability in the second half of the year.

Our whole focus continues to be on executing our strategy as effectively as we can.

Now let me hand over to John, who'll go through the numbers, and then I'll come back and give you some color on the progress on some of the initiatives that we are undertaking.

Thank you very much, Ian, and good morning, everybody.

This time last year we said we were going to redouble our efforts to get a bit more top-line growth into the Group. And it's great to see now that we've got the best top-line growth that we've achieved since the financial crisis, with growth at constant rates of over 10% in total and 7.8% on a like-for-like basis.

The cost price of our products over the last six months has fallen slightly, with lower commodity prices giving us modest deflation in the US, in Central Europe and in the UK. That makes the growth that we've achieved even more valuable.

Despite that deflation and some FX headwinds, like-for-like gross margins are slightly ahead in the period.

The trading profit of our ongoing business of GBP390 million is 12% higher than last year, and that's despite the investment that we've made in the continuing development of improvement of our business model.

The trading margin is 20 basis points higher than last year and now we're closing in on that former peak of 6.3%.

Headline earnings per share; 13.3% ahead.

And our net debt, which is usually at a seasonal high in January, is in line with expectations after the final dividend and after share buybacks at GBP1.2 billion.

Ferguson has delivered a really sparkling performance with top-line revenues up 11.7%. Market conditions across the United States are good, with market growth at just over 5%.

Residential growth rates have slowed a little, consistent with housing starts and also with house price indices, but commercial markets have picked up a little, though the AIA commercial and industrial index came off a little last month.

Overall, the market in the US looks fine. We've got no reason to believe that it's going to either substantially speed up or slow down in the short term.

Gross margins in Ferguson were higher again. And that's as a result of our ongoing work on pricing compliance, on vendor selection, on choosing the best channels. Gross margin gains may become a little bit more difficult with the increase in the mix of commercial in the months ahead.

Good headcount and good cost control has given us that strong growth in trading profit, with Ferguson profits up 22%.

All of our businesses in the US have made impressive market share gains. Customer service, which is measured using our net promoter score, is at highs of 68.

Inventory availability is also at very high levels.

Ferguson, as you know, has a really strong sales culture and we continue to implement best practice to support even greater efficiency with things like CRM tools, customer and product availability and sharply focused incentive schemes.

Ian's going to give you some more detail in a few minutes on the sales management initiatives, both in Ferguson and also across the rest of the Group.

The performance in blended branches, the biggest business in the Group, was exceptional across all three regions; all three regions showing strong growth and continued progress driving gross margins combined with good cost control.

Waterworks, which is the second largest business in the Group, that continued to grow at double-digit growth rates and to take market share. And that's despite being up against tough comparative numbers. Excellent margins and good cost control gave very strong profit growth.

HVAC, you might remember this time last year was somewhat weather impacted. That's performed very well this year.

Pipes, valves and fittings, and also our other industrial businesses, have also grown well, as has fire and fabrication, with both gross margins and trading profits nicely ahead.

The MRO acquisitions, we did one last year and one this year, they've both performed well. They're ahead of plan and they've been integrated successfully.

Build.com, which is our online business-to-consumer business in the US, that grew even more strongly, at margins that are comparable with the rest of Ferguson margins.

Since the start of the year we've done nine acquisitions and those have been integrated both with our supply chain and also into our Trilogy systems very successfully. That means that we can get the synergies as quickly as possible.

Headcount and costs were well managed. We kept a very sharp focus on the delivery of results. But, at the same time, we've continued to make the investment in the ongoing growth and development of our business models. These investments cost us an additional GBP11 million in the period.

We're beginning to see some of the benefits of that development in areas such as future state architecture, CRM, national sales center, regional quotation centers and branches of the future.

Our B2B and B2C e-commerce offerings appeal to a wide range of customers. They can check availability. They can check pricing. They can check proof of delivery. We can be invoiced and settle an invoice via the Internet.

As well as providing excellent service, that also gives us a great opportunity to drive efficiency and to drive economies of scale. Ian's going to cover some of the progress that we're making in e-commerce across the Group later on.

Customer-facing activities in our business are very local, but we get good leverage by supporting those with effective central services. And the combination of those things in Ferguson has delivered a very strong financial performance.

Overall flow through at 12% was in line with our expectations and the trading margin reached a new high of 7.9%.

In Canada the blended branch network grew well with decent flow through to profitability and we opened 10 new branches and showrooms.

Waterworks was pretty flat, but we have taken on a number of new sales and operations staff, both to generate a bit more top-line growth and also to improve the consistency of our service.

The industrial PVF business also continued to perform well and we made a small acquisition.

The only weak part of Canada is a small HDPE pipe segment, which went backwards.

But, overall, trading profit was 5% ahead of last year at constant currency, FX cost us GBP1 million, the trading margin 5.9%.

Let me just touch on oil, about 4% of Group sales are directly into the oil and gas sectors, concentrated in Texas and Alberta.

In Texas our customers are generally more focused on downstream activities and we think the impact of falling oil prices is going to be modest.

In the West of Canada we have a strong presence. Our customers are more focused on upstream activities. Falling oil prices clearly hit drilling activity and that hits the profitability of our customers and also a knock-on onto Government revenues.

So we do expect revenue and profit in Canada next year to be lower. We're reducing our costs now and we'll be very targeted with future investments.

About 6% of Group purchases are made from oil-based products and we expect some purchase price deflation. But it is interesting; the linkage between oil prices and those products is not always very strong.

Fuel, power and freight costs are already falling. They're about GBP1 million a month lower than they were.

So, all in all, so far the impact of oil prices falling on the Group has been negligible.

The impact on Canada going forward should be broadly offset, we think, by benefits elsewhere in the Group. So we don't expect any material impact on profits.

In the UK the heating market declined by about 1%, and that's because there are no ECO volumes in this year's figures.

Against that backdrop, our plumbing and heating business grew by 1% on a like-for-like basis, but the market weakness did impact pricing. The market became even more competitive and our gross margins were 70 basis points lower than the same time last year.

Pipe and Climate Center grew more strongly, though the pricing environment was equally challenging.

Burdens and Fusion, which were the two acquisitions over the last couple of years serving the utilities market, they both performed very well.

Costs continue to be well controlled and we continue to do that investment in our infrastructure and technology to support the capabilities of our business going forward.

Trading profit in the first half of GBP43 million was 10% lower than last year. The trading margin was 4.4%.

Now ECO2 should generate some additional demand and we expect profits in the second half of the year to be slightly higher than last year.

Like-for-like revenue growth in the Nordics was 3.3%, with a further 8% coming from last year's acquisition in Finland.

The Finnish market remains depressed. Like-for-like sales were down 4%, but our team have done a good job integrating the Puukeskus acquisition. We now have a much stronger market position, though profits were lower in the period.

The building materials markets in Denmark, in Sweden and Norway were lackluster. We took a decision to try and gain market share in those markets and, as a result, we got like-for-like growth between 3% and 7%.

Combined with good pricing discipline, gross profits were comfortably ahead of last year.

Overall, though, like-for-like profits were down GBP8 million and that's because of two areas in investment. Firstly, additional sales and marketing resources to generate better profitable growth; and secondly, investments we've made in development of the business model.

Notwithstanding those investments, we need to do better on productivity. We are reducing the current run rate of our cost base by GBP7 million a year for the remainder of this year. And we expect second-half profits to be better than the same period last year.

Reported trading profit in the seasonally weaker first half of GBP22 million is at a margin of 2.4%. That was impacted by FX, which cost us GBP3 million.

If we just touch on the impairment charge, we took a significant impairment charge against Nordic goodwill and that reflects the high price that we paid for the acquisition of that business in 2006.

We do have really strong market positions in quite sensible and stable markets, so we continue to believe that we can generate very attractive shareholder returns from these businesses.

Central Europe now comprises our businesses in Switzerland and Holland. Like-for-like sales were down 1.5%.

Trading profit was GBP2 million lower at constant currency. That's primarily due to the sharp movements in the Swiss franc towards the end of the period. That's led to some quite heavy discounting across the industry in Switzerland.

We are rebasing the Central European overhead structure and we do expect to reduce costs now by GBP2 million a year.

Notwithstanding the disruption in Central Europe because of currency, the trading margin was still a respectable 6.5%.

Last year when we said we were going to focus on generating a little bit more top-line growth, the reason for that you can see in this chart.

Organic growth has delivered nearly GBP440 million worth of additional revenue in the period, giving GBP47 million worth of additional profit.

Acquisitions added just over GBP200 million of sales and GBP8 million of profit. The flow through from those acquisitions is lower than the flow through on our organic business because we're absorbing integration costs in the first year before we realize all the synergies.

Underlying gross margins were 10 basis points ahead again, despite some headwinds and some pretty fierce price competition in the UK and FX turbulence in Switzerland.

The investment in developing our business model across the Group was GBP19 million. We're going to come back to that in a minute. Ian's going to show you where some of those investments are paying off.

Other cost inflation was more than offset by efficiency gains.

We've said before, we have a measure of our productivity, which is the conversion of gross profit into trading profit. And that was up by 50 basis points to 21.7% in the period.

We had one fewer sales day. That cost us about GBP6 million. We will get that back in the second half.

Perhaps surprisingly, on an average basis FX still cost us GBP2 million but, of course, now FX is going back in our favor.

We've flagged before the sensitivity of the carrying value of Nordic goodwill to changes in growth assumptions. Trading conditions in the region have not improved as we expected and we've taken an impairment charge this year of GBP245 million.

After taking that charge we have GBP116 million of goodwill left in Nordics on the balance sheet.

Our operations in France are now classified as discontinued. We are pretty close to concluding the sale of our two wood businesses, subject to consultation. We'll then just have the building materials business left to sell. We're working on that at the moment.

The assets in this business are classified as held for sale in the balance sheet, but we're not allowed to provide for them. And it's quite likely that when they're sold there will be a loss on disposal in the region of GBP60 million to GBP70 million.

Further down that chart you'll see an GBP8 million gain that arose on the disposal of Specialty Pipe in the US and a GBP5 million finance charge, which was the recycling of FX losses previously put through reserves, through operating profit as we continued the Group simplification; the entity-reduction process.

All of those charges gave rise to a cash outflow of GBP4 million.

Further down the P&L, central cost and underlying finance charges are in line with last year and the expected tax charge this year is 28%, slightly higher than last year because of that richer mix of US profits.

Just coming to cash, our managers, ourselves and our managers, are incentivized on cash as well as P&L measures. Our business is highly cash generative. In the first half we saw the normal seasonal working capital outflow consistent with last year.

Disposals, net of the [US], were GBP44 million; cash tax slightly higher because of the higher levels of profitability.

Investment on acquisitions and CapEx was GBP144 million and in line with our plans. And we returned GBP358 million in the six months' period to shareholders through dividends and share buyback.

The dollar strengthened against sterling by 8% on a spot basis. Our FX hedging is very straightforward. We hold borrowings proportional to EBITDA so borrowings were revalued upwards by GBP62 million compared to last year.

All in all, cash very much under control.

M&A is a valuable addition to our organic growth plans and added 3.5% to top-line growth in the period. The businesses that we bought over the last six months really fall into three categories.

Some acquisitions provide access to products, to expertise that would otherwise be either costly or expensive, time consuming to obtain. Those products can then be rolled out throughout our network.

Other acquisitions in that second bucket they give us access to either new channels, new capabilities, experienced associates, system knowledge, knowhow, process. They bring those things into the Group. Several years ago that's how build.com in the US came into the Group and it's been a huge success. In a similar light, we're really pleased with the recent acquisition of a majority stake in BathEmpire.

And then, of course, in that third bucket there are bolt-ons. These extend our geographic reach. We integrate them promptly and that yields us benefits of scale.

The M&A pipeline continues to present some good opportunities. There's nothing very large in the pipeline today but we'll carry on trying to convert the good opportunities and avoid the lousy ones. We have substantial resources to pursue attractive targets where we can add value to them.

As planned, we stepped up our organic investment this year. Capital investment was GBP116 million; split actually pretty evenly between technology, freehold and maintenance CapEx.

Technology projects to improve our business model; that includes business intelligence tools, middleware, master data management, CRM solutions, e-commerce applications and also the whole implementation of our future state architecture strategy.

Investment in freehold DCs, and Ian will come back to this in a moment, those principally in the period relate to a new ship hub in Secaucus and a new DC in Coxsackie in upstate New York.

And finally, branch expansion and refurbishment costs. They're a bit higher this year, bit higher than usual, because of a major upgrade program across our showroom network in the US supporting new vendors.

The associated operating cost was GBP19 million.

Our approach to capital structure remains the same. The half year usually represents a seasonal high in our borrowings. Net debt stood at GBP1.2 billion; 1.3 times EBITDA. Before M&A we expect net debt to be about 1 times EBITDA by the end of the year; at the bottom end of our target range.

The net pension position is showing a deficit of GBP84 million and that's because bond yields have fallen. This time last year I think the discount rate was 4.4%. It's now 3.1% in the UK.

We've got committed facilities of GBP2.3 billion. That provides substantial headroom if the appropriate acquisitions come up.

And headline EPS up 13.3%. Along with a continued good cash generation that's enabled us to buy back GBP214 million of our own shares at an average price of just under GBP33.

It also supports the interim dividend, which is up 10% at 30.25p per share. Using full-year consensus earnings, headline dividend cover would be about 2.5 times.

So what's the outlook like? Well, we expect like-for-like growth in the second half to be about 6%.

We're going to continue to invest in the development of our business models at similar rates to the first half.

In light of market conditions in Europe and Canada we're going to be extra vigilant on cost. We'll take cost out that we've talked about. We do expect some associated restructuring costs; about GBP10 million in the second half.

We were a trading day short in the first half. We'll get that back. And at a dollar exchange of $1.51 last year's second-half profits would have been worth GBP26 million more. The effective tax rate should be 28% and there are no other changes to our guidance on capital and working capital.

So those are the highlights in the first half. I'd like to hand you back to Ian now to go over the strategy review.

Thanks, John. Our strategy has basically remained unchanged but clearly we are emphasizing different aspects of it now and the bulk of the Group-wide resource allocation work has now been completed. And, as we explore ways to exit our last business in France, this is the remaining significant action of getting the right portfolio of businesses in the right geographies; assuming, of course, these businesses perform well going forward.

So now we are focusing more on point three, accelerating profitable growth, both organically and by bolt-on M&A, and also point four, improving the efficiency and productivity of our business model.

Most of the Group's synergies are being captured and John has also explained how we plan to keep an appropriately geared balance sheet going forward.

So today I want to focus on points three and four. For point three, specifically how we are accelerating growth organically, we reviewed progress on bolt-on M&A at the last set of results. For point four, how we are trying to improve our productivity and generate the benefits of scale we know exist, specifically today looking at how e-commerce is becoming an important channel for our customers.

In terms of growth, then, the first half has shown a significant pickup from the low point of the first half of 2013. We are now at 7.8% like for like versus 3.6% two years ago. Clearly this has been driven by better like-for-like growth in the US, where we are now hitting 11.7%, but we're also growing again in the UK by just under 2% and the Nordics is growing again by nearly 3.5%.

Overall the trends are improving, although H1 was particularly strong [flatter] compared with some weak comparators of last year.

That's why we believe that about 6% growth is the right forecast for the rest of this year, although, of course, we'll be trying to beat this number. However, we want to make sure we do also keep nudging our gross margins ahead in all our clusters, not just the US.

We've been focusing on six main levers to improve our organic growth.

Customer service is fundamental and we constantly work to keep moving ahead here in terms of better availability, speed and range; better than the competition.

Employee engagement. We strive to have the best employees in the industry, train them better and keep them longer; relationships in this industry do count.

Building out our network in all our geographies where we are under-represented, particularly in the faster growing metro areas in the US, Canada and Europe, and I will use New York as an example in the next couple of slides.

We continue to roll out our customer segmentation work to develop better targeted customer propositions.

And having the biggest and best sales team in the industry is also critical in terms of winning new work, solving problems for our customers, ensuring that more sales resources are deployed more efficiently. This is part of why we have gained share in the first half. I'll come back to this topic later as well.

And finally, pricing management is becoming even more important, particularly as larger project work returns to the market.

We've explained many times that there is no silver bullet to our business but improving in these six areas will allow us to increase wallet share as well as retain and gain new customers.

Looking at how we expand our networks, New York is a good example. In New York we've mapped out the growth opportunities down to a very local level. So we're taking the resource allocation process we use at a Group level down into each business and now down into each specific geography.

Just to remind you, before we get into the details of New York, if we look at our regional share across the US it is very variable. We have some highs of over 30% in some areas but also some other areas, which are economically important, where we have market shares of less than 5%.

We have some very strong positions, like Virginia, Florida, California, but also some relatively weak positions in some key metro areas, particularly in the South and Northeast and New York. So it's very important we prioritize rigorously from a US perspective and invest where we can get growth and returns rather than what the local manager might prefer to do.

So looking at the detail of Greater New York, clearly it's a huge market opportunity for us. Nearly $6 billion of our products are sold in this market. The market is clearly buoyant. There is good growth across all end markets, plus the competitors and customer base is pretty fragmented, which improves our chances of gaining share at better margins as well.

We're now the local market leader with only a 9% absolutely market share. Three years ago we had one-half of that market share.

To ensure we have the right network we have quantified down to zip codes for each of our businesses where the best opportunities are for us; based on overall RMI and new building activity, based on building permits, job locations, applications to build and other local activity measures.

This example is for our plumbing and heating business in terms of the commercial opportunity in the New York metro area. Some areas, like Suffolk, Queens and downtown New York, all look very attractive but close by in Nassau and Rockland activity levels are much lower.

This detailed analysis allows us to plan out branch network expansion, the people resources required and also the best logistics network to deliver best service at lowest cost.

But if we cut the data using a waterworks lens then we end up with different areas being more or less attractive. Hence we need to flex our investments between our lines of business. Because of new-build infrastructure projects, Nassau is now very attractive and also Ocean in New Jersey, whereas Rockland and Warren are still not great opportunities for us.

So this sort of local opportunity mapping is fundamental to deliver faster growth and better returns. This approach means we can have dedicated sales people and branches but benefit overall by sharing infrastructure costs.

If we look back to 2012, when we started this approach in New York metro, we were relatively poorly placed with only 22 branches. We had only 400 people on the ground in the whole of the metro area. We were shipping from Front Royal, our distribution center 300 miles away, providing relatively poor availability and service, and this led us to having only a 5% share and just over $0.25 billion of sales.

Since then we've invested both organically about $65 million in building a competitive supply chain, and bolt-on M&A we've invested about $100 million.

We now have 40 branches and employ over 820 people. 21 of these branches are also showrooms. We're building a new DC in Coxsackie and a ship hub in Secaucus, New Jersey, which will give us daily pick to order delivery into the metro and downtown area, significantly improving our availability and service and also significantly reducing our unit costs.

We're now the local market leader with over 9% market share in the area and revenue just in excess of $0.5 billion and at a better margin because of the better customer mix and lower costs.

So the New York approach has been driven by detailed analysis of end markets and customers. We've built organically but also by successful bolt-on M&A, and the Davis & Warshow acquisition being the largest investment.

The local management structure now supports each line of business, be it blended branches, waterworks or HVAC. We're specialists rather than generalists. And we have an integrated infrastructure, both logistics and call centers, to support the business now and into the future, giving us a great platform for future growth.

We see no reason why we cannot gain at least another 3 or 4 points of share over the next few years or so, which could be worth $0.25 billion in revenue at a good healthy margin.

This approach is being replicated in another 19 metro locations across the US, like Houston, Chicago, Pennsylvania, and also into the rest of our business in Canada and Europe.

Turning now to another of the key profit areas for generating profitable share growth across the Group, I want to review the progress that we are making on sales management, although recognize we still have a long way to go here. If you remember last year I explained that we did not benchmark well compared to analogous businesses outside of our own sector.

We have two primary ways of dealing with our customers. Small customers, who use the branches regularly for their needs, are serviced by the local branch staff.

But larger customers, who are looking for more support when they are bidding for large contracts and need more technical support, are designated to a specific sales team, which is a culmination of inside sales people, who are located within our offices, and also external sales people, who are out calling on regular and potential new customers.

These customers are large enough and profitable enough to be served by our outside sales team.

Roughly 60% of our Group revenue comes from customers who are the responsibility of our commissioned sales teams, and this is pretty consistent across all the clusters.

We have nearly 8,000 sales people, over 20% of our total staff, made up of nearly 5,000 inside sales folk and 3,000 external sales people. So making sure we are getting the right return by allocating them to the right customers and that they are as efficient as they can be has a massive impact on our growth rate as well as our profitability.

The value that these sales teams bring to our customers is enormous. In all of our research the relationship between our sales people is often a critical reason for winning or losing wallet share.

Our sales team help customers bid for new work, by developing tailored solutions to meet the bid conditions, help to meet technical spec demands, provide lower cost alternative products for our customers and generally provide solutions to problems from product availability, to logistics, to billing queries.

This is often the basis of a strong long-term relationship and some customers are very loyal to our sales people and will follow them if they decide to go to a competitor.

Clearly, we need to have the right number of sales people and we have been investing in more, about another 150, in the past six months. We are implementing CRM systems across the Group and also making sure our training and reward schemes do incentivize the right behavior and retain the talent we need.

We do see our sales people as an essential part of our increasing wallet share regaining lost customers or winning new customers.

We now have good sales management dashboards down to each sales person in each business unit and have, in the US, introduced a cost-to-serve customer profitability module so that we can work out ways with our customers to improve their and our profitability. This module is being rolled out to the rest of the Group along with the CRM systems and processes.

From the dashboard we can look at the performance of a specific sales person in terms of sales and gross profit versus budget in the last year. We can also look at the product mix they are selling within the sales rep customer base and look for opportunities for add-on sales compared to other customers. And we can benchmark the performance of the sales people with a similar mix of customers and identify reasons for under or over performance.

And, in terms of customer profitability, the model analyzes the specific customer costs of their order channel, their delivery channel and also their payment terms and the discounts that they receive.

When we see margin problems we can work jointly with our customers to reduce wasted cost, lowering the level of product returns, reducing delivery during high-cost times of the day or encouraging them to use the most efficient order channel, which, of course, is e-commerce.

In the Nordics our dashboard also captures more forward-looking metrics. So not just sales and gross profit versus targets, but also what is the average bid value per job and how old are these bids. Have they been actively chased down to a conclusion? How many are still alive and worth chasing, plus what is our hit rate? This is crucial in terms of getting better top-line performance.

Sometimes we have different branches competing for the same job and, clearly, that is not efficient for us. We can see retention rate of regular customers and we're also looking at the order books that are booked and not yet invoiced as a forward measure.

This data is now available daily by business and down to each branch and sales person. So we are serving up far more useful and actionable data to our teams on a far more timely basis than we were, say, five years ago.

In the UK we're taking a similar approach. On top of the financial performance of each salesman, like in the US, we can now look at our activities on a daily basis down to a branch or a person, which allows us to course correct during the week or the month.

Jobs that we bid for can be up to 60% of our revenue and, depending on the business and customer mix, managing this process better will obviously drive faster growth.

We are monitoring all the new quotes going out and have real visibility on how successful different regions and people are at actually quoting for a value of business. Again we've found a lot of duplication and also lack of professionalism in our bidding and pricing processes.

We've set up regional pricing and bidding offices so that experts are doing this work and making sure the quality and margins are higher and also that duplication is reduced.

Lastly, for each person we can track their bid record and what they have won, lost and what is still to come and the reasons why.

Now turning to how we are trying to improve the productivity of our business model and, as part of this, specifically what progress we are making in terms of increasing our e-commerce business.

We do see the e-commerce channel as a way to better meet the needs of our customers but also it's a lower cost serve to channel for us; leveraging the brand, the branch and the logistics network without extra capacity being added. There will be, over time, real benefits of scale from e-commerce, given the investment required in platforms, data and dedicated sales people.

In the first half we sold over GBP800 million in all our e-commerce channels. This now represents 13% of our total sales and is still growing much faster than our traditional channels.

In the US 18% of our sales in total are e-commerce. B2B was just over GBP0.5 billion sales in the first half and B2C was nearly GBP200 million. Again, both continue to grow rapidly at 23% for B2B and 16% for B2C.

The other clusters are also beginning to get some rapid growth, albeit from a much lower base. But this is how the adoption pattern developed in the US over five years ago.

And even where we are most penetrated in Switzerland and Holland, at about 30% of sales going through e-commerce, this channel is still growing faster than the traditional channels, showing there is plenty of room for expansion longer term.

Taking reasonable assumptions for the next six months, we can see an e-commerce business Group wide of between GBP1.7 billion to GBP1.9 billion of sales and reach about 15% of our total business by the yearend.

The reasons for the uptake are clear for our customers. They can order and transact and check product availability with us 24/7. We are now seeing significant traffic at the weekend.

Clearly, our customers have their own discounts with us and they can easily compare this to market pricing. It is far easier to access technical data from our product catalog online. And customers can choose which delivery option works best for them depending on their work schedule.

For us we've continued to invest significant resources across the Group. This year we'll continue to invest in improving all aspects of our offering from this platform, in terms of data, in keeping the specs up to date. We have dedicated sales people in each cluster working with our customers to get them set up online. And we know once customers are set up and have tried the channel, they quickly become adopters.

For example, in the US alone this investment is around GBP10 million of CapEx and GBP3 million of OpEx.

We are now testing click and collect with 21 branches in the UK. Early signs are encouraging. And, as a distributed branch business across the Group with more than 3,000 outlets, we are well set up to provide a good click-and-collect service.

Also we benchmark ourselves versus best-in-class players, like Amazon and Grainger, to make sure we stay well ahead of our traditional competitors and catch up with the best.

The benefits for Wolseley are clear. Our customers rate our e-commerce offering highly. The net promoter score in this channel is 73 in the US, which is higher than our core business at 68; building loyalty amongst our customers.

The economics are slightly better in terms of basket size, gross margin and net margins, given the lower cost to serve. It is clearly an area where local players often do not have the resources or skill set to invest, yet customers are beginning to value it very highly.

Taking some examples across the clusters. In the US our B2B business has grown from $370 million to nearly $800 million. From the data we have so far, the majority of this business is transferred from our traditional channel. But we're now beginning to see some new customers coming to us simply because we have a great online offering.

In terms of self-service events, which improves our productivity, we are now up to an annualized rate of over 10 million and this is still growing by about 30% a year. And finally, our customers are continuing to convert with another 40,000 signing up in the last couple of years.

We have in the US improved our search functionality with multiple my-list options. We have personalized each site to meet the exact needs of each different customer segment, be it waterworks or facilities management. And our mobile transactional site has been live for over one year now and is growing healthily.

We've also set up e-enabled inventory management systems with barcode reading and replenishment processes. And this now takes up nearly 30% of our e-commerce sales. The same for dispensing machines, which we are finding have some real traction, especially for our industrial customers. We are e-trading with large customers and are running at a rate of about $100 million in sales in H1.

The other huge benefit of e-commerce is that we can test different executions. The example here being we tested a promotion and it gave us a 40% increase in share of business from existing customers ordering online.

In the UK we're adopting the same path as the US in terms of implementing what we know works well. E-commerce now represents over 4% of our B2B business, but it is growing at nearly 40% per year.

We are trading well with some larger customers and continuing to convert more with dedicated sales resources and there are over 150 larger customers in the pipeline.

During H1 we have re-platformed the site to improve functionality and ease of usage. Our mobile transactional site went live late last year and we're already seeing large usage visits are up to 140,000 per week and growing rapidly. The trial of click and collect in 21 branches has started.

We also acquired the number 2 B2B e-commerce business in the UK, which has annualized revenue of GBP25 million and is growing strongly at decent margins.

In Switzerland and Holland, where e-commerce is nearly 30% of our business, we're continuing to improve our offering. Although the growth has slowed it is still at 7%, which is faster than the core business. And we have enhanced the technical product specs to a new level of accuracy and picture quality. Product can be electronically ordered by scanning storage boxes using a simple low-cost scanner and labels printed from a standard sheet. And we're also e-invoicing many of our customers to save costs.

In summary then, we've continued to make good progress over the last six months with broad-based, better top-line performance across the Group. Flow through was good in the US, but we need to improve flow through in Europe in H2. And we do expect, as John said, to grow our profits in the UK and Nordics in H2 versus last year.

We have plenty of attractive long-term growth opportunities to invest in. And we plan to continue to invest behind the six key levers I outlined earlier to continue to gain profitable market share.

Today we only focused on three of them: firstly, the network expansion in key metro areas, particularly in the US; secondly, how we plan to grow larger and more productive sales teams; and thirdly, continue to drive more activity through our existing network so that we do drive better leverage. Supporting further e-commerce growth is an important part of doing this.

Overall, the investments we are making are beginning to deliver good returns and these investments are incremental and relatively low risk. And this is why we believe we can continue to deliver attractive returns for our shareholders over the short and longer term.

On that note we will happily take any questions.

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

Andy Murphy, Bank of America Merrill Lynch. Two questions. First of all on the e-commerce slide, obviously things are moving quite quickly and it's obviously offering you a lot of opportunity. Can you just give us a flavor for the like -- well, the growth rates you quoted? Are they including M&A? I suspect they might be.

But perhaps more importantly could you maybe, if you can, give us a flavor what margin improvement a growing proportion of e-commerce might be able to offer the Group?

And just secondly on the potential disposals in France, could you give us a flavor for the amount of cash that might be raised, if that's possible? And just a flavor of what might be left after disposal in terms of properties and what income that might generate. Thank you.

Just on e-commerce, all the data we've got there is organic e-commerce. We haven't got the M&A information there of BathEmpire and anything like that, or build.com. So all the data is organic.

And in terms of margin improvement, as I said, we are seeing, this is why we're encouraged by it -- now this may just be a function of the customers who adopt early so we can't be absolutely sure that it will happen across the whole of our customer base, but a little bit of an improvement in the basket size. People are buying a few more items. It seems as if they're being more planful about it.

Secondly, marginally, marginally, better gross margins. And that's predominantly because people, customers, can't effectively negotiate with us. They have a set of trade terms or discounts. If they come into the branch they'll often, if they have a big job, want to negotiate again. So we're seeing clearly when you're buying online you don't have that opportunity.

And thirdly, just slightly better net margins for us as well because it is a lower cost-to-serve channel for us. So if we got to 50% of our business, how much of an impact it would have would be very difficult to tell at the moment, but it is positive for us.

France, do you want to --

France, yes. So I mentioned we've got about GBP60 million of working capital assets on the ground in the building materials business. And I think it would be optimistic to think we're going to recover those. That's where my GBP60 million to GBP70 million estimate of loss on disposal comes from.

There are about the same again in terms of property assets, real-estate assets, associated with that business. It would be disappointing not to be able to recover those.

So we ought to be able to exit France with the receipt of our property valuations of about GBP60 million or GBP70 million.

Is it -- does that exclude the wood solutions business (multiple speakers)

Yes. The wood solution business, all the accounting has gone through, except for there are some loan notes on our books. But they're not material, Andrew.

Howard Seymour, Numis Securities. A couple from me, if I may. Firstly, could I just start on the UK, because there's -- the two things you mentioned were one, the market's weak, but two, competitor action.

Difficult to quantify, but do you perceive that the biggest issue at the moment is the weakness of the market? Because you mentioned you're a bit happier about life going out into the second half, because there does appear to be an element of market-share warring going on between the two biggest players.

I think actually, if you look back over the last five years, in fact, if you take the market share of ourselves and our nearest competitor, together we have actually gained market share. Now, clearly, we have and we do compete absolutely head to head with Travis day in, day out.

But I think your point's well made. At the moment it's more to do, I think, with market weakness than our behavior. There are probably three things going on, but the market is weak, John outlined. Why, because there was a lot of ECO activity a year ago? ECO2 hasn't kicked off; it only kicks off in April. And our suspicion is that, because of the election, all of the big players will be waiting to see what happens in ECO2.

ECO2 is quite a lot smaller in the boiler activity. It's about 15% in quantum terms. Secondly, you do have to have two measures of efficiency improvements to get a qualification. And thirdly, some of the big players did have some hangover from ECO1 over delivery that they can use to count in ECO2. So we're not anticipating anything like the disruption that we saw in ECO1.

I think the other factor is, clearly, the boiler manufacturers have been -- they've had a very tough time in the last six months. They had a good time a year ago. They've been very aggressive in the market as well. So I don't think it's just down to the distributors.

Okay. Thank you. And secondly, probably a general question, but you mentioned the sales management, what you're doing there, etc. Does that require a change in terms of the incentivization to the salesmen as well? Because obviously you are -- on the one hand, you're judging them to a greater degree but, on the other hand, do they then expect a bigger share of the wallet as a result?

Yes, I think, and we look across all the clusters, and it does vary quite a lot between the clusters. The US have got a well-established commission structure based on a matrix of a gross margin and then obviously being the scale and size of the customer that they're dealing with. That has worked very well. You can see it in the results and we pay our salesmen good commissions in the US.

In Europe, and when we come back to Europe, the commission structures historically have been far less ambitious and we have increased the degree of leverage in those schemes. And that is part of the reason why costs in H1 have gone up a bit. We have put more money at risk, in terms of these incentivization schemes.

We have also, I think, become -- because of the data we've got now, we've been able to really penetrate the management, the day-to-day management of the sales teams and, bluntly, weed out the really strong performers from the not-so-strong performers and making sure that the strong performers are really getting the rewards that they thoroughly deserve.

So I think we'd like to move all of the businesses more towards a more geared commission structure. And, bluntly, we've got to test our way to get to the right position here. We just don't know in the UK and Nordics, and also in Canada as well, where will be the right sort of balance between incentivization and top line trailing off a bit. But I think we've still got a fair way to go in that respect.

But we're working, it's a good point, we are working very hard to get those incentivization schemes to work for us now.

Thank you.

Gregor Kuglitsch, UBS. Can I ask a question on Scandi? It's obviously been more difficult, reflecting, I think, your impairment charge. Can I get a sense of where you think this business can go to long term? I think you are now 4% margin, used to be north of 7%. Is there any reason why you think you can't get there, and perhaps some kind of view on how quickly?

The second question's on US flow through. You mentioned 12%. I think in the second quarter it was quite a bit lower than that. Can you maybe elaborate on expectations of flow-through rates from here, obviously we're at a higher level now, in terms of revenue base and have recovered quite a bit?

And then finally, in terms of -- you're obviously getting rid of France. Now you've got a relatively small Continental European business left. It's performing well. Is there any reason -- I know it's performing well, but is there any reason that it should remain in the Group, considering it's a little bit isolated now? Thank you.

If I do one and three, John, you can have a crack at two.

In terms of Scandi, we do think we can get back to far better margins than we have now. The peak margin in Scandi was 7.4%. That was, let me stress, that was at the time when a buyout company was selling it to us and we were undoubtedly paying, I think, a full, very full, price.

Reason for that is several fold. Firstly, we don't see any structural differences or any material major shifts in the market, that would prevent us from doing it. Our gross margins are very similar to where they were pre the recession, so there hasn't been a decline in gross margins. And, clearly, in a market like the US, where we've now had four or five years of good growth, you can see what we can do in terms of net margins and it's pleasing to say that we're now well ahead of our historic peak.

But I think, as we've always said, we do now need three or four years of good growth in the market that we're playing in. Scandinavia has been -- I think it's been a surprise to us, in terms of actually out of the recession, the first few years out of recession, if you look back at the numbers, we actually did get some good leverage. We got the margins back up to the sort of the 5.7%, 5.8% level and it's come down again since then, which is disappointing.

But the markets have been very tough for the past three years. Only in the last six months, literally, have we begun to see a little bit of growth in Denmark, I think some reasonable growth in Sweden but Finland, as you all know, is still a very tough place for business.

So it's pleasing to see our top line performing better and that was obviously a very conscious decision on our part, to invest in more sales and marketing activity to drive that top line. And we do anticipate that top line coming through in the second half to better profitability.

But to get back to peak we're going to require three or four years of good, solid market growth but, fundamentally we don't see any reason why we can't get back, in terms of the margins.

In terms of the Swiss and the Dutch business, they're both very good businesses. They're plumbing and heating businesses. We know them. We understand them. They are in relatively good market share positions. They're well run. They're decent businesses. They are well above the WACC for the Group, so they're not in any way dilutive to us.

Switzerland, we have a super business there. It has a north of 8% return on sales. In Holland it is tougher. But, again, I think from an e-commerce perspective we're learning a lot from both these businesses. And actually we do plan to invest more in trying to build a B2C business based out of our Dutch platform, which is a very, very efficient platform, because it's a relatively lower gross margin business.

So we think those are two good businesses for the longer term.

The US flow through in Q2 was slightly lower than I guess we'd expect. We lost a trading day, which has an impact. The GM was tough. It was quite tough going on margins in Q2 in the US. And the third is, the acquisitions were quite dilutive as well, and you can see that in the numbers.

So I think, going forward, we haven't changed our outlook, our view. The team haven't changed its view. This is very much a 12-week period, so we are looking forward to getting better flow through than we had in Q2, going forward.

Good. Thank you.

Paul Checketts, BarCap. I've got three questions as well, please. The first one is on the US opportunity, Ian. Perhaps could you summarize what you think in the US really are the biggest opportunities, either by vertical or by geography? I suppose New York sounds like it would be on that list.

And the second is on the acquisition of BathEmpire. I appreciate it's not new news today, but perhaps you could explain what it was that attracted you to this business, because I know there's another one out there that was probably on the agenda. And what's the strategy from here to grow that?

And, as a second part of that, why was it that build.com didn't work in the UK?

And the last one, for John, please. Maybe you could outline what the M&A pipeline looks like at the moment.

I think in the US, we have (inaudible) we really do see a sort of matrix here of growth opportunity. We can see very good growth in all of our core lines of business.

Our blended branch business, we've got an 18% absolute market share. We're the market leader. There's a huge amount of fragmentation still to go. So a lot of organic growth there across the whole of the geographies. Certainly organic, but also we would do bolt-on M&A wherever we see that coming up and we'll take that opportunity.

Waterworks, we're over 20% market share. We're the number 2 player, just behind HD Supply. Again, lots of opportunity for organic growth there. We would take all of the big metro areas and look to see how we could expand that business. Probably more limited in terms of bolt-on M&A because in certain states we will be probably running into some competition issues and very few of those companies have come up for sale.

But exactly the same, we'd say, for HVAC industrial and also in terms of fire and fab. And the B2C e-commerce business, we'd want to grow all those businesses organically and sensible bolt-on M&A.

And to your point geographically, it really is now far more around the big metro areas, as I outlined. Sure, New York is a huge one. We've put a lot of capital deployed there. We won't need to deploy the same amount of capital, obviously, in some of the other metros. We've already got good infrastructure, DCs and branches that we can use. But absolutely, we see a huge way of growing organically across the geographies.

In terms of BathEmpire, it's a very nice business. It is predominantly driven by an own label offering, the BathEmpire offering, and that's what really attracted us. So it was the size, the scale, the growth and the own label nature of the business, which does give far higher gross margins.

And that, Paul, was really the reason why we were not succeeding in TapOutlet UK, the business that we set up, because we were selling branded products there. They weren't own label and the gross margins were just nowhere near the degree, or the level, that we thought was going to be exciting for us, moving forward.

So I think BathEmpire, for us -- and had we not acquired BathEmpire, we were absolutely going to do this organically. So it came along at the right time for us.

In terms of M&A pipeline, John?

M&A pipeline. There are eight or 10 opportunities in the M&A pipeline at the moment; GBP300 million or GBP400 million of turnover in total. So it does move quite a lot if one or two of the larger end of those -- so it does move a little bit month on month. But it would be nice to land some of those in the second half. There's nothing very large in there, Paul.

Thanks. And just the last one is on Chicago. Is that possible organically to replicate?

It will be a combination of organic and bolt-on M&A in Chicago. Again, we'd like to do more bolt-on M&A but, if not, we will be doing it, and are doing it, organically now.

Thanks.

Tom Sykes, Deutsche Bank. Just a few questions on the US, please. So firstly, just you mentioned the gross margin was a bit weaker in the quarter in the US. Were you getting a benefit, though, of SUI and workers comp rates coming down? So was the gross margin weak including those? And if you haven't got the benefit yet, would you expect the benefit of those to come through over the course of the second half?

And then, just when one looks at the gross margin improvement over the last, say, three years, could you say roughly how much of the operating margin improvement has come from gross margin improvement? And how much may have come from the leverage overall, or scale advantages leveraging the business?

And then just finally, you gave that diagram, which you've given before, of the percentages of market share by state. I just wondered if you could say how consolidated your business is in, say, the top five states in the US. How important -- how much of sales and, in particular perhaps at the moment, how much of the growth are they accounting for as well, please?

Gross margin workers comp is totally irrelevant to our cost base. So it's just immaterial, Tom. GM over the last three years it's a nice, it's an add-on.

Why have we been relentless in talking about gross margin since Ian and I arrived in the business? The reason is to make sure that we don't get them bid down, because it's very hard work when they start getting bid down. But most of the leverage has come through volume growth, essentially. That is very important in the business.

The third is, the revenue of the top five states is 45%. That is pretty similar to the GDP of those top five states. You can guess which, certainly, four of them are, and, given that our home is Virginia, you can probably guess the fifth.

And the growth, though, is very broadly based, the growth in those states. There is no significant difference between the growth in those top five states and the growth in the other 45, on a percentage basis; obviously, the numbers are bigger.

Okay. And just, would you be able to split out Texas from that? How important --?

Texas is about 10% of the US business.

And growing --?

And growing similarly to the US business.

Okay, great. Thank you. And just going back to what you said about the gross margin, I think you did say before that your gross margin was mainly plus/minus 100 basis points over the course of the cycle. So, therefore, have you seen that kind of movement in the US gross margin, given that you're stating that you're back at record highs?

Well, we're back at record highs on the net margin of 7.9% (multiple speakers)--

And the gross margin, you're there as well.

As it happens, the gross margins are at peaks as well. But, if you look back over time, the gross margin for 20 years has improved pretty consistently in the US. Not every single year but, nevertheless, if you put it on the chart, the chart goes from the bottom left to the top right. It's a few percent. It's 2.5% over 20 years, but that's the sort of progression that we've had. That's neither accelerated nor decelerated, particularly in the last two or three.

Lots of different reasons, by the way, for that margin at different points in that evolution. Does that answer your question?

Yes, it does. Thank you.

Yuri Serov, Morgan Stanley. A few questions, not that many. First of all on acquisitions, may I just ask you a bit more specifically? You only spent GBP28 million in the first half, then you had five more acquisitions since the ending of the period. What is your expectation on the total spend, including those five, for the full year?

And also could you also give us your expectation as to whether you think that you're going to spend on acquisitions more in your FY16 than in this year? What's your intention? (multiple speakers) And yes, I know that it's hard to predict and it's lumpy, but, from your perspective, what are your desires, what are your plans?

So, as you said, in the first half the investment was about GBP30 million. Since the end of the period it's been about another GBP50 million.

If you look at conversion of the pipeline, are we going to get to GBP200 million this year? Don't know. Doubt it, actually. It's likely to be less than that this year, less than GBP200 million. I would think GBP150 million is a decent estimate. Don't hold me to that in six months' time. (laughter)

So next year, we haven't really changed our view, Yuri, on the likely incidence of M&A coming up and our ability to sift them through and convert the ones we want to. GBP200 million or GBP300 million a year would continue to be our estimate of what we're likely to bring home.

And your expectation is that that level will basically remain in the future years. You don't expect to grow it at, I don't know, 25% every year.

Well, I think it will be -- they're volatile. I think we said before, we've looked at three or four over the last four or five years, which have been quite a lot bigger that would break through that. I think they will continue to be somewhat lumpy.

If you bring one of those home, by which I mean if it arises as an opportunity and it stacks up in due diligence and we really want to buy it because we can add value to it, then it's quite binary.

So I don't really see that it will step up at 25%. I think it will be volatile along the way and GBP200 million to GBP300 million remains our best view of the likely range.

Okay. Thanks. The next question, if I may. So you're pushing for market share in many markets. In the US you're growing very rapidly, faster than the market. At the same time, there is price deflation and you were talking about gross margin pressure. Is there a correlation there? Are you being more price competitive? Is that your current tactic? And you're also talking about investing and increasing your revenue more now than in the past.

Yuri, very, very specifically, we do not want to become share gainers by reducing our prices. I think we've highlighted quite clearly, as the markets have come back, there is growth in new build. New build, be it residential, commercial or institutional or industrial, is big contracted work. That is lower margin work. So, as you get market growth recovery, there will be margin pressure. Point one.

I think the second thing is we are very explicit with our teams about what we're trying to achieve here, which is to manage the mix of our business to improve our gross margins going forward. So there is no desire for us to reduce price on a given product or a given SKU to gain share.

Now, around the edges, at the margin, there's bound to be some element of that. Clearly we can't control 8,000 sales people on a day-to-day basis and we have made it very clear in the Company we do want to step up our rate of organic growth but not at the expense of gross margin.

So the good news in the States, we've managed to hold our gross margin, nudged up a bit. In the Nordics we got good growth and held our gross margin.

We talked about the UK. It was disappointing from a gross margin point of view and the team are hard at it trying to improve the mix of the business, because where the gross margin improvements have come from over time, it's not by selling more of a standard SKU; it's by improving the mix of the business. So selling more plumbing equipment, a bigger showroom business, more pipe valves fittings business, more drainage products. Those are the products where there are far higher margins and better pricing control.

So we believe there's still a hell of a lot that we can do to gain market share but to do that profitably, without increasing the price pressure.

It's probably just worth commenting, Yuri, on deflation and what we mean by deflation. That's a measure of our input prices, our purchase prices. So we said that in the US, the UK and Central Europe this time we've got modest deflation. Actually it was less than 1% and we got modest inflation in Canada and Nordics of about the same amount.

And then the only other area where deflation really has shown is if you've got a commodity, and you know copper has come up, for example, quite a lot over the last couple of years, some of our customers are quite sensitized. If you're buying copper pipe, a lot of those customers know what the copper input is. That's not reflected in our pricing strategy. Our pricing strategy, in a sense, is independent because we're trying to edge our margins up.

So we're not trying to use price or deflation as a way of gaining share and reducing our margins. That's not in our toolkit, really.

And, if I may, just one last question. On the branches, are you starting to add more branches to your network? You're showing 33 additions in the US. Some of that will be acquisitions. I don't know, maybe you published the number, how much of that acquisitions is. I just didn't notice. Could you talk about that a bit?

Yes, it's in the appendix, so you'll see the branch movements in the appendix. But just overall, there is some branch expansion I touched on.

For example, Canada we have some very specific opportunities and we have not been able over time to find the acquisition opportunities and, therefore, we're absolutely pursuing a greenfield strategy. We will also continue to look at M&A.

If you look, for example, in the US, something slightly different is happening where we're looking at the network and seeing is that the best network to reach and service the customers?

So, in some instances, we're still doing some modest consolidation work. It's not a lot but I think you'll see the network remaining fairly stable in terms of numbers.

Of course, over time we'll need a bit more volume to put more volume through in some areas but I don't think you'll see the whole shape of the network changing very substantially, except in -- where we've got areas like New York you talked about, where we are absolutely trying to expand our footprint substantially.

But your revenue growth is continuing. How much more capacity do you have in your branches? At some point to continue growing you probably will need to start adding branches, even if you don't want to capture new areas but simply just to service the business in the existing footprint.

If you go back five years, we had a lot of questions about how much surplus capacity was there in the business. That's not how we think about our business. What we really think about is you've got order channels and you've got fulfillment channels.

Those fulfillment channels include supplier direct. They include DC direct. They will include now hub direct, to Ian's point about, for example, the Secaucus ship hub, branch pickup and branch delivered. It's only really the branch pickup that needs you to have lots more branch space.

So we need to see how important that fulfillment channel becomes as a part of the overall revenue growth, Yuri. In some areas, yes, we will need larger branches. You need a larger marshaling area. You'll need to carry more local inventory. But for those other fulfillment channels you don't necessarily need more space close to the customer.

Does that make sense? So it will vary a little bit. But I don't think we'll see -- if you look now, we've had 40-something-% growth over the last four years in the States and we haven't added very much capacity at all into the US and that's partly because of really trying to optimize the use of those fulfillment channels.

Okay, good.

Aynsley Lammin, Citi. Just given your comments on the run rate, your likely run rate for acquisitions (inaudible) out of France, should we reasonably expect more capital returns?

And, given the share price, where it's now, since you had to announce a share buyback, should that be -- should we expect that to be more in the form of special dividends? And if you'd just comment on what we should be expecting at 12 months in terms of scale as well.

And then, secondly, just on the -- if you could confirm the -- what you think consensus trading profit for the full year is. Thanks.

I'm not allowed to make any comments about consensus because John will smack me. But just, I think, in terms of the balance sheet, we're very clear we want to fund organic growth, dividend, bolt-on M&A and then, if we have spare cash, we will return to shareholders.

So we do that process at every half year and every full year. It depends, to earlier conversations around the M&A pipeline, exactly where we'll be at the full year and then 12 months from now.

So I don't think we've changed our view on that at all. It depends very much on where we are and I think we're agnostic in terms of which way we get it back to shareholders; whatever is the best route at the time.

On consensus, I think yesterday night consensus was GBP855 million for ongoing trading profit. I'm getting some nods from Mark. GBP855 million.

Thanks.

Clyde Lewis, Peel Hunt. Two, if I may. Just one on the e-commerce in the US and your competitors there. You flagged up Grainger and Amazon as being best in class. Can you maybe just run through how you think you're faring compared to them. And I obviously understand the differences versus Amazon but Grainger, obviously, there's a little bit more of a similarity.

So I just wanted to go through that and whether you think you're out or underperforming those two peers, in particular.

And the second one I had was on the UK. Obviously there's a change in management there. Does that actually knock on and have any other impacts in terms of how the structure, I suppose, within the UK and within the European business will alter post that management change?

In terms of Amazon and Grainger, if you take Grainger first, actually Grainger's results seem to have slowed down a little bit on the top line in the last six, nine months. They're still a great business. So they're still very good and, certainly from an e-commerce perspective, they have a penetration way up into the mid-30%s, getting close on to 40% of their business.

So we look at them as a very valid analogy for us. We don't compete directly; probably about 10% of our business is in overlap with them.

And what we do is we benchmark our performance in all the functionality of our e-commerce offering; website availability, product availability, lists, all the way through it.

Two, three years ago we'd have said we would have been scoring versus Grainger, I don't know, six or seven out of 10. We're now up at about nine out of 10. So I think we have done well to catch up. Still a lot more to do and, again, they keep moving forward.

But I think we feel okay now about where we are in terms of our e-commerce offering versus Grainger. Clearly, versus virtually all of our local smaller competitors in the States, we are a long way ahead.

We've invested a lot over the past five years. It would be, CapEx-wise, upwards of $30 million, $40 million to put a really good e-commerce platform in place. Compared to the local competition, I think we're in very good shape.

Versus Amazon. Two years ago they announced the launch of Amazon trade offering. It doesn't seem to have gone that well for them and, if we look at their latest set of announcements, they look to have been, as our American colleagues would say, sunsetting at this offering. I think that means they're not going to do it any more but I'm not sure. I maybe need an interpreter for that one.

But we followed the electronic traffic on it and it never really picked up. It's a tough market to come in with just the straightforward big range SKU offering.

You do need sales people. You do need advice. You do need relationships with our people. If you go into our branches, which I know you've done, you see a lot of conversation going on.

It's not always easy just to order the SKU you want. You've got an old pump, you need a spare part, all these sorts of things. And I think that's what Amazon have found difficult and, therefore, I think they've got better fish to fry.

Now we're not complacent. We'll keep a close look on it but, so far, Amazon hasn't had a material impact on our business at all.

In terms of the UK management, it was the right time for a change. Steve was keen to do something else. I think we all agreed it was the right time to move on.

Patrick's done a very good job in Central Europe. It hasn't been easy for him but he's a smart guy. He actually has a good e-commerce background as well and I think he'll drive the UK business further forward. Would we expect massive management changes in there? No I wouldn't. We've got to get that gross margin moving forward and he absolutely understands that.

John Messenger, Redburn. Maybe if I could stick with that last question, Ian, just to carry on for a moment. When you look at the UK, obviously earlier we saw the 60%/40% split in terms of sales-driven revenues. Can you give us a bit of a shape on what the UK actually looks like today?

Because I suppose behind this I'm thinking, with Steve leaving is there not a more fundamental issue for the UK going forward in that you've got 762 branches, a big DC up in Leamington? When we look at what one of your key competitors is doing, the argument is: Look, the cost to serve needs to be incredibly low for that high-volume contract market and we need a slimmed down network with DCs to deliver to that.

Is there not actually a challenge for Peter coming in that actually the UK needs a pretty dramatic overhaul to make it fit for purpose? Or is there a sales mix differential you would say: It means we still need the branches. We still need -- for our service offering we have to have that?

The second question was just on the guidance for UK and Nordic making progress in the second half. Can I just be clear whether that's on a like for like or including acquisitions, because obviously Fusion Provida and Puukeskus were in the second half benefit, or should be an accrual coming through there? So are you thinking like for like? Or is that with the benefit of the tailwind from acquisitions that you expect UK and Nordic progress?

The third was just BathEmpire. Can you give us an idea of what it means as in how much you've bought in terms of the equity stake, because obviously we've got a minority going forward? And was that the company you mentioned in your speech, Ian, about a B2B offering? Are you defining it as B2B or do you think of it as B2C because you mentioned something around the GBP25 million in your speech?

And the final one was just again in terms of -- actually no, I'll stop there.

I'll take the first one, if you can take two and three. John, it's a fair challenge. It's about the UK market. When we benchmark our overall supply chain costs and look at it, it's very competitive. We think it's a good network to have, as you rightly point out, over 750 branches, which gives us good deep coverage to where we want to in terms of the plumbing and heating business and the pipe and climate business.

And the DC network, because it's not just one DC, we have several across the country and we've just opened up a new one to support the pipe and climate business in (inaudible).

So I think, from a supply chain point of view, I wouldn't anticipate that we need to do radical changes there. We know it's a good infrastructure. I think, fundamentally, we have got to get more volume through it, but more volume through it at the right margin.

And, to the earlier conversation, there's still a hell of a lot more that we can do. I think Steve has done a good job getting us to where we've got to. We got out of some very unattractive businesses. He and the team did that very well. I think, moving forward, it very much is about, though, driving that mix of business.

Relative to our US business, we are significantly underpenetrated in the plumbing business. We have 40 showrooms. If you do the math we should, and we absolutely plan to have 100 showrooms, okay, over a period of time. That is a better mix, high gross margin business for us.

Similarly, our other businesses, the pipe and climate business is a high gross margin as well.

And thirdly, I think the discipline that we have in some of our other businesses in terms of pricing management, again we've made good strides in the UK. I think again there's more we can go at.

We're just putting in now in place a very good price guidance system that, basically, for every single item in the branch it drags out the last six months' worth of transactions across the whole of the branch network and says: These are the ranges of pricing you ought to be pricing this unit at. So you don't need guess it any more. This is the price you ought to be going in at and this is the price that people are buying at.

So it is robust and our people are really trusting it. So we've got that in 69 branches now. We're planning to roll that out.

So I think it is very much around managing more profitable volume through the existing network rather than re-engineering the whole network.

John, do you want to --?

The UK and Nordics, the comments are really made on an absolute basis, just reported versus reported. We expect reported profits to be higher in the UK and Nordics in the second half than reported profits last year, John.

Just in terms of BathEmpire, we've acquired a majority stake. It turned over last year GBP26 million. We are being very respectful to our joint venture partners in this. They still own a significant minority stake, so we're not disclosing profitability and those types of things. It's not material, actually, to the Group so we're not going to disclose too much on that.

What we're going to do is support the business to carry on growing in the way that it has and try and get the best possible growth out of that business.

But, John, that was the B2C business. If I said B2B, apologies, it's B2C.

And sorry, there was one final one, just France. Just looking at the numbers, because the GBP63 million, can I just be clear that that, when you think of building materials France, that is international wood solutions and PBM is that total working capital number that you mentioned there? (multiple speakers) Is that correct?

No. The wood business accounting has been done. That's what's given rise to the exceptional item in the first half. The BM business, that accounting could not be done at the half year because you're not allowed to anticipate, essentially, a loss on disposal under IFRS 5.

So when we look at the net assets of GBP129 million in terms of what's carried forward as discontinued, you're basically saying: Look, we should get property back at GBP70 million and the other balance, effectively, we may get at zero.

Spot on.

Just on that, though, is that -- because you're talking working capital here. I guess it's a dowry issue in terms of what you have to basically get gone with the business to get somebody to buy it. But is there not an argument that actually you should just run the thing down brutally? Or is there -- does the property valuation rely on the ongoing business, effectively, as a rent role?

I think it's more the latter, John, because we've got 2,500 staff there as well. So we need to be suitably careful with that. The business lost GBP4 million in the first half. Actually, in the second half, of course, it's seasonably stronger so we should get to breakeven in the second half.

But the market is in a very challenging place at the moment in France. (inaudible) seeing new starts have come off very substantially and 50% of that business is serving the new-build market, so it's a tough old market.

Hopefully we're being glum. It would be nice to stand up here in six months or 12 months, however long it takes us, and say: We've been glum and we got something for it. It's our best view at the moment, John.

Thank you.

Time for one more, I think, if we take the last one here.

I've just got two questions to come back on, basically, answers that you have given. Firstly, I'm slightly struggling to understand the basis on which you took the goodwill impairment in Nordic, if you're still saying it's perfectly achievable medium term to retrace the margin profitability levels that you've had in the past.

And secondly, in respect of your 6% like for like second half, in view of what was achieved in the first half, again going back to your commentary through the divisions, I'm struggling to see which area you think's going to be growing slower than the first half.

So I think on the goodwill, if you look back, what you have with goodwill, and I'll give the accountant's answer because Ian can give the positive stuff, the reality is if you look back two, three years ago, over time we have not achieved our expectations as a combination of the market and, fine, other factors as well, but we haven't achieved it.

And, therefore, we have to look pretty coldly at that as a bunch of accountants and that's what we've done.

Clearly, with our other hat on, we're absolutely going to fight like hell to make that business as good as we possibly can. The accounting for it, I think, is just a reality of where the business is trading compared with where we expected it to be trading two or three years ago. Is that --?

Yes, I suppose the underlying question is, there's no hint in what you're doing here that you're in any sense preparing to market the business or any of the businesses?

No, that's not the purpose of the accounting. The accounting is just done very coldly and very analytically; completely separate of any commercial considerations. Now, clearly, if we were going to market it you wouldn't -- if we were going to market it, the last thing you'd do is want to take an impairment. But the impairment review just stands alone as a cold, harsh, analytical accounting exercise.

Do we regret having to take? Yes, of course, we do. It arose a long time ago. We absolutely bitterly regret having to take an impairment charge. What we really bitterly regret is that we haven't managed to achieve a better performance in the business. Does that make sense?

Yes.

Just on the like for likes in the second half, I think if you look at the Q2 like for likes they were clearly pretty good compared with weaker comparatives this time last year. If you remember this time last year, Q1 going into Q2, we'd had some lousy weather in the US and the like for likes were quite a lot lower as a consequence.

So today the Q1, Q2 like for likes, particularly in Ferguson, have been comparatively stronger because they were against weaker comparatives. Now we are coming up against some pretty tough comparatives in Ferguson. The first point.

And I think and then second, if you look around Europe from Finland, Switzerland and Canada as well, those three in particular have still got some headwinds. So we wouldn't expect those necessarily to improve in the short term. So that's the reason for our overall view on the 6% in the second half.

Thank you.

Just going back, absolutely we've got no plans to market the Nordic business, just so we're crystal clear on that.

Good, I think that's it in terms of time. Thank you very much for coming.

Thank you.