Ferguson Enterprises Inc (FERG) 2016 Q2 法說會逐字稿

Well, good morning, ladies and gentlemen. As you know, it's quite unusual for me to speak from the lectern on these occasions. But today I am roused to do so.

Ian will be retiring in the summer after seven years as our Chief Executive. And so this will likely be his final results presentation to us all. Now Ian's an immensely modest person and I've no doubt he will hate the fact that I'm doing this. But sod it, and here goes.

Ian became Chief Executive of Wolseley on July 13, 2009. And the share price that day was GBP11.34. As you know, it's now over GBP38 today, a rise of around 250%, outperforming the FTSE by around 200%.

He's refocused the Group on market-leading positions in attractive markets so that today 83% of our revenue is generated through number-one and number-two market share positions. Now whilst selling more than 30 non-core businesses for more than GBP1b, he's also brought a real focus on customer service and people development to drive profitable organic growth.

Under Ian's leadership, Group trading margins have been restored. And profit over his tenure has increased by over 90%. And whilst reducing debt from GBP2.5b to approximately GBP1b, the Group has also returned GBP2.1b to shareholders via dividends, special dividends and buybacks.

Now Ian would never classify himself as one of the new breed of digital CEOs. But he's also led the business into e-commerce in all geographies. And this now accounts for over GBP2b of Group revenues and growing fast.

And yes, he also recruited John Martin, who will succeed Ian. And I know he will be as strong and decisive a leader as Ian has been.

Now, ladies and gentlemen, I'm sure this will not be the last we will see or hear of Ian, as although he's retiring, he's still got so much to offer the world of industry and commerce. It's been an absolute pleasure to work with Ian and to see his outstanding talents at first hand. And on behalf of the Wolseley Board and the audience here today, Ian, we wish you and [Serri] every good fortune and best wish for the future, for your health and happiness, and to say a huge thank you for your considerable achievements for Wolseley. Thank you.

Blimey. A round of applause from this audience is tough going, isn't it? Gareth, thanks for the comments. But let's get back to business. Okay?

So in terms of our performance overall, I think it's been resilient in tougher markets. We've gained or held share in most of our larger businesses, with the exception of pipe and climate in the UK, and we'll come back and talk about that. There have been continued improvements in our service metrics. Our gross margins were pretty reasonable overall. And we've been very careful on cost management.

The US results have improved significantly and in recent months, which is great to see. But we're still facing some pretty strong headwinds of deflation and also the industrial business. However, the rest of the business in residential, commercial and infrastructure continues to perform very well in pretty robust markets from what we can see.

Clearly, the UK results were disappointing. The market was much tougher than expected, especially in the key RMI market and the new commercial market. And we are taking appropriate action so right-size our cost base. We know that we can significantly improve our core service processes, which is critical to getting back to profitable growth.

The Nordics delivered decent profitable growth. We continued to execute our strategy and have maintained our investment in proven programs across the Group. The cash generation was strong and we increased the dividend by 10%.

Let me hand it over to John to go through the financials.

Thank you, Ian, and good morning, everybody. Overall sales growth in the first half was 5.9%, and we'll come back in a moment as to how that is comprised. We put in another really good performance on gross margins, which were ahead by 40 basis points in the period.

Given the slowdown at the top line, we were careful to control the growth in our cost base whilst maintaining investment in the business improvement initiatives that we've talked about for a number of years. And additionally we've committed another GBp15m in the second half towards further restructuring in the UK.

Overall reported trading profit of GBP410m was GBP20m up on last year, of which GBP11m came from better foreign exchange rates. But trading profit was hit by GBP6m through one fewer day. Headline earnings per share were up 6.4%. And net debt, which is usually at a seasonal high in January, was at GBP1.25b, in line with our expectations after final dividend and after the GBP160m of share buybacks.

So overall growth in the period of 5.9%. That's come from like-for-like growth net of deflation of 2.7%. Acquisitions contributed another 2.1% and new branches added 0.4%. The trading day knocked 0.6% off, so total constant currency growth was 4.6%.

The impact of translating overseas earnings into sterling added 1.3% to the reported growth rate, taking it to the 5.9% overall.

Our like-for-like growth rate came off in the second quarter to 2.3%, with the weakest growth coming in November. Since then, growth has recovered. And between December and January growth overall was 3.2%.

Why has the growth rate come down from that long run average of over 5%? Well firstly, you can see from the chart that the comparative figures in 2015 were very strong. Actually in Q2 last year growth rate was more than 8%.

Secondly, as we told you at the results -- the final results last year, industrial end markets in North America have been very weak.

And thirdly, we have been subject to some pretty challenging product price deflation, which has had quite a drag on the numbers.

Let me just come back to each of those in turn. Industrial customers last year accounted for 15% of our US sales and 10% of Canadian sales. Look, industrial is a good profitable business. It generates attractive returns and very good returns -- very good cash returns.

In the first half last year, industrial grew at 16%. But in common with many other businesses servicing North American industrial customers, our sales have been significantly weaker this year. That's partly due to oil prices. It's partly due to weakness in other sectors impacting US manufacturing, such as demand from China, the strength of the US dollar, and anecdotally also destocking of US manufacturers.

You can see from the chart that weak demand from industrial customers depressed the growth rate in the US by 1.5%. So now industrial represents just 13% of US sales.

The impact in Canada was more severe. Whilst our industrial business there is quite small, we do predominantly service the oil and gas sector and sales in that business were down 29% year on year. That's wiped nearly 3% off the Canadian growth rate.

Overall, slower industrial markets knocked 1.2% off the Group's growth rate, though slightly higher, of course, compared to the higher growth rates last year. The rate of sales decline in US industrial in Q2 was about 8%. And that compared to a 14% decline in the first quarter.

Let me just touch on deflation. We've seen significant deflation in the period. And that's been most keenly felt in the US, the UK pipe business and in Switzerland. The principal driver has been sharp falls in copper, steel and plastic commodity prices. There will also have been some FX impact in Switzerland.

Customers buying goods with high commodity content, they tend to be pretty sensitive to falling spot prices. And they negotiate pretty promptly with us lower selling prices. And our margins then can get squeezed just by virtue of being a stockholder.

In the US, copper, plastic and steel-rich products fell, as you can see in the chart, with other prices also falling slightly on average. Commodity deflation across the Group cost GBP90m in reported sales and GBP15m at the bottom line.

If commodity prices stabilize where they currently are, we will continue to see an adverse impact, certainly going into the summer, possibly even as far as the autumn this year.

Another external factor that had a significant impact on the numbers this time is foreign exchange. Actually within regions, foreign exchange has done no favors. But to put that into context, in Canada and Switzerland it's probably only cost a couple of million pounds. The strengthening of the US dollar on the retranslation of overseas earnings, of course, has had a significant favorable impact, and that's been worth a net GBP11m net of a GBP5m reduction in Nordics and Canada. At current exchange rates, second-half earnings, just through retranslation, will be GBP22m higher.

Just touch on the impact on net debt. Net debt we hold broadly in proportion to EBITDA. So, net debt at the halfway mark is GBP62m higher as a result principally of the strengthening of the US dollar.

Let me just touch on the review by regions. Ferguson grew at 4.3% on a like-for-like basis overall, with acquisitions contributing another 2.1%. That result is against very strong comparatives of over 11% like-for-like growth this time last year. After weak growth in November, over the last three months the average like-for-like growth rate has been 5.7%.

We've seen continued good activity levels in residential and commercial markets. And those account for 70% of our US revenue. So far, there's been no signs of industrial weakness spreading to residential and commercial markets.

Our gross margin performance was very good as a result of ongoing work on price in compliance, the careful selection of vendor partners, excellent category management and also moving our business mix towards higher-margin channels. We'll come back to cost and investment in just a minute. But overall trading profit of GBP345m was GBP34m higher than last year, of which GBP16m is attributable to FX.

Despite the headwind from commodities, blended branches, which is 60% of the US business, continued to grow well in most regions. And that's from a combination of both growing markets but also good market share gains. There was some weakness, as you can see from the chart, in the North Central region. And that's because 19% of sales in the North Central region are to industrial customers. That's all within that current 13% number that we've given you.

Waterworks grew more modestly. Municipal demand was a bit lower. But residential demand was good. And importantly, the business consolidated its position after very strong growth, 13% growth this time last year.

B2C e-commerce grew very strongly in the period, as did fire and fabrication and our HVAC business. As Ian said, we gained market share in all major businesses in the first half.

Let me just touch on US investment and cost control. We've stayed really close to the cost base to make sure that, as far as possible, cost growth is commensurate with growth in our gross profits. That's been tough. In the first quarter our growth rate came down and it's been tough not least become volume growth exceeded revenue growth. We have used associate turnover to really carefully control employee costs. But it's also a balance; we don't want to choke off that growth and we also want to continue to make the strategic investments that are important to build a consistently better business.

Overall gross profit growth in the first half was 7.9%. Cost growth was 8.7%, as you can see from that chart. In the last three months though, gross profit growth has exceeded cost growth, and we expect that now to continue into the second half.

You can see from the chart some of the increased investment that we're making and the impact of that investment in the cost base. Notably further investment in branches and refurbishment are $29m. Enhancement of our IT capabilities and other strategic initiatives are $13m, and increases in brand building and Internet advertising of another $10m.

In the UK it was a tough first half. Revenues were 2% lower, and that includes 1.4% price deflation. Acquisitions added 4% to growth.

In plumbing and heating, we sharpened our focus on independent trade customers, and we got really good growth from that segment. But this was offset by weakness in the larger contracting market. Revenue overall was slightly lower. Pipe Center was impacted more severely, with both sales and margins lower in a very weak market. And our infrastructure business did okay.

Trading profit was GBP9m lower overall. GBP4m of that was in Pipe Center. Nearly GBP2m was due to the lost work day and GBP3m was due to increased investment in infrastructure and technology projects.

Ian's going to cover the work that we're doing to drive service and availability. Driving those fundamentals forward is important for the future of the business. I'll cover what we're just doing on cost and investment on the next chart.

The majority of the OpEx investment in the first half came from acquisitions made last year, most notably Bath Empire. And we're continuing to invest substantial marketing funds in that business. Other investment in branch refurbishment, in new showrooms and technology programs increased by GBP3.2b.

Cost saving initiatives reduced the number of associates by 106 and total cost by GBP3.8m, offset partly by wage inflation.

The outlook for the UK heating market in the short term remains challenging. We will do at least GBP15m of restructuring in the second half to improve the cost base going forward.

Nordic sales were 4.2% ahead on a like-for-like basis. And the building materials market in Denmark improved steadily. Actually Sweden grew strongly. Norway remained okay. Finland recovered a little after a long period of weakness. Gross margins broadly consistent with last year and cost in line with our plans. Again, we've used associate turnover here to make sure we carefully control headcount, which is 1.6% better than last year.

Reported trading profit in the seasonally weaker first half was 14% ahead at constant currency, but FX movements cost us GBP2m.

In Canada, as we expected, market conditions in our western heartland remained very challenging. We faced weak demand from industrial oil and gas customers and also a knock-on to new housing. Demand for plumbing, heating and HVAC products in our blended branches business though remained pretty resilient, particularly in metropolitan areas.

Gross margins were slightly lower. We trimmed the estate. We are continuing to invest selectively in branch refurbishments and openings. Costs were well controlled and headcount was 2.5% lower.

Underlying trading profit was GBP2m lower. We incurred GBP1m of restructuring cost and lost GBP3m in FX on retranslation. I would say in the short term the outlook in Canada remains challenging.

In Central Europe, like-for-like sales were 3% lower than last year, including price deflation of 2.5%. Switzerland continued to face tough markets, with significant product deflation and weak construction volumes. Our business in Holland continued to perform very well.

Across the region, gross margins were ahead. Operating expenses were 2% lower and trading profit was broadly flat in constant currency. So trading margin remains 6.4%.

This chart summarizes the major moving parts in the trading profit movement in the first half. And just shows you on the left-hand side the normal flow through of like-for-like growth to trading profit of GBP32m there has been pared back by that commodity deflation of GBP15m. The impact of acquisitions, net of integration costs and the investment that we make at the time of acquisition, was just GBP1m.

Gross margin expansion you can see was a very valuable GBP22m. And that's helped fund the incremental investment that we just talked about in branches and technology of GBP31m. Restructuring and the lost sales day cost us GBP5m and GBP6m respectively and FX contributed GBP11m.

The reported flow through of incremental revenue to incremental trading profit was disappointing. But it is impacted by the factors on this chart. On a like-for-like basis before deflation, the flow through was 10%. And, importantly, we continued to invest in those projects that are strategically important for the future of the business.

Central costs are in line with plan. We flagged at the final results last year changes to finance charges. Those are higher as a result of the long-term refinancing that we did last summer, which we left at fixed rates. The effective rate of tax on trading profits less interest is still around the 28% mark.

We continue to be very cash-generative. And cash overall is in line with our plans. The seasonal working capital outflow is pretty consistent with last year. Disposals netted another GBP35m and we invested GBP62m in acquisitions and a further GBP109m in capital expenditure.

We returned GBP316m to shareholders via dividends of just over GBP150m and share buybacks so far this year of just over GBP160m.

We made some really good progress this year on our capital investment plans. Significant technology investments include the re-platforming of Ferguson's e-commerce business, significant investment in new master data management solution, and continued investment in our future state architecture system strategy.

We've got two major DC projects underway. We're adding more capacity to the DC in Celina, Ohio, which was a new investment three years ago. It's now full. It's made its investment returns. We're really pleased with that to be adding capacity.

In Holland we're building a new facility at Twello, which consolidates three existing facilities. And also we'll rehouse our profitable parts business in Holland.

We opened 41 new branches and we extended or refurbished many more.

In Ferguson we're investing heavily to refresh our counters to ensure that we can appropriate support our growth initiatives going forward.

Our Branch of the Future initiative, which includes the technology infrastructure that our associates need to support our customers and their relationships with our customers is also a major investment.

Acquisitions added a useful 2.1% to revenue in the period, and I'll just pick out a couple of the more notable ones. Living Direct is a really nice add-on to our B2C business in the US. It extends our range of products to things like chillers, water coolers, air conditioners and some small appliances.

The acquisition of Atlantic American further strengthens our market position in the fire and fabrication business. That adds six branches in the mid-Atlantic region.

PCS strengthens our MRO business with a better health and safety offering.

And Underground Specialties, is a waterworks business, which moves us to a leadership position in the London, Ontario market.

The pipeline of new opportunities principally comprises smaller businesses. We do look at anything larger that comes up in our space and fits with our strategy. But those opportunities are less frequent. The significant advantage, of course, of the smaller acquisitions is that they can be integrated quickly to release the synergies that we plan.

Our approach to capital structure remains the same. January is usually a seasonal high for our borrowings. And this year we had net debt of GBP1.25b, broadly in line with last year at 1.3 times EBITDA. Towards the end of the year that should come back towards 1 times EBITDA, towards the bottom end of our target range, though that will be partly dependent on M&A.

The net pension deficit on an IAS 19 basis is GBP35m, slightly higher than July due to lower equity prices at the half year end. In April we will do our triennial valuation of the UK scheme. And that will take into account falls in bond prices over the last three years. After that we'll agree what additional funding is required over the next three years with the trustees.

We have committed facilities of GBP2.2b. And that provides substantial headroom if the -- if any larger acquisitions come along.

We continue to generate strong cash flows. And that's enabled us to buy back just over GBP160m of our own shares in the first half. We'll press on now with the other GBP140m in the second half.

Our cash flow also supports the interim dividend, which is up 10% at 33.28p per share. Using full-year consensus earnings, that's covered 2.5 times by headline earnings.

So onto the outlook. Like-for-like revenue growth from December to January -- February, I beg your pardon, was 3.2%, with the US better at 5.7%. In light of market conditions, we will stay cautious with the cost base. Across most of the Group, that's going to mean managing associate turnover carefully holding back on some of the normal seasonal requirement. But in the UK we will bring the cost base down further with that restructuring that we've talked about. And we may decide to do more.

We were a trading day short in the first half. Unfortunately we don't get that back in the second half. But at a US dollar exchange rate of $1.45, last year's profits in the second half would have been GBP22m higher.

The effective tax rate should be around 28%. And there are no other changes to our capital investment or working capital expectations.

Overall, at current exchange rates, we expect Group trading profit for the ongoing business for the full year to be in line with the current consensus of analyst expectations.

Thank you, ladies and gentlemen. I pass you back to Ian.

Great. Thanks, John. Look, today, given the more uncertain nature of the markets, rather than updating you on the strategy, we thought it'd be better to focus on what is happening in our markets and what actions we have and are trying to take to respond accordingly. Further, we've been very consistent in our strategy and we're currently very focused on accelerating the execution of that strategy. So what I will do is take the three main clusters in turn and run through what is happening in the markets, our performance and our KPIs and then the plans that we've already taken and plan to take for the future.

Looking at the US first, if we look briefly at some key stats that we believe are important, firstly consumer confidence is pretty consistent around the 100 mark, although still well below the 2007 peak. But overall it remains robust. Existing home sales have been pretty constant around the 5m mark, with overall growth in the last six months.

The commercial market has held up pretty well, with good overall growth in H1. And the architectural billings index has maintained a score at above 50 in the recent past, indicating reasonable growth. However, as is very clear from the data, the industrial markets had a very tough time in 2015. So despite continued weaknesses in industrial, the residential, commercial and infrastructure markets are still in good shape.

Now turning to our performance. It was encouraging to get back to some good growth in the last three months after a poor November, as John highlighted. In the civils infrastructure market, we grew by 3% in a market which grew by 1%, which is lower than previous periods. We had a tough October/November. But since then the business has recovered well and the market looks stronger.

In industrial, which now represents about 13% of our business, we declined by 9%, which is in line with our markets. As John has said, the quarterly declines have improved but we believe the industrial market will continue to decline over the coming quarters. We're working hard to get the right balance between holding share and gross margin. In fact, our gross margins were up 100 basis points in H1 as we held prices, but also sold a higher percentage of maintenance projects.

We've also taken out costs in poorly performing areas. And although our profitability is below last year, our industrial business is still showing healthy profit and good return on capital employed.

In both residential and commercial we continued to perform very well. In commercial we were well ahead of the market, and in residential we outperformed by 5%. At the moment, both these end markets look robust. As well as the published stats, we are also constantly surveying our customers in terms of their sentiment and their order book. And we've seen no sign in slowdown in residential and commercial. And when we look at our order book, it is still growing.

However, as you all know, we do not have much visibility looking forward. Our order book runs out in three to six months so we do not have data to support longer-term forecasts.

Looking now at our KPIs, we continue to perform at a high level. Our constant focus is to gradually keep moving all these measures forward over the coming years. In terms of overall service we continue to make slow progress. You can see we performed consistently well across all our businesses. But as we have highlighted last time, even though we have some branches with a Net Promoter Score in excess of 80 or over, we still have a number of branches with a score of below 50. So there's still plenty of room for improvement even in our very strong US business.

Our core product availability has again nudged up. And our employee engagement scores have stayed at extremely high levels, which again is part of our advantage versus competition. Over the past couple of years we've stepped up our performance in service, availability and engagement. And it is this performance that really does separate us now from the competition. This fundamental service advantage versus competition allows us to continue to gain share profitably across our US business.

If we look at each of our core business units, we gained or held share in all of them over the last six months. We managed to improve gross margins by a further 40 basis points as a result of better execution of several initiatives. The only part of our performance which was disappointing was the reversal of leverage in terms of costs as a percent of gross margin. And John has explained the reasons for this reversal.

Now we've used this chart before to explain the main profit levers that we use to improve our performance. We've progressively converged the plans and activities we are executing in each cluster and as we have become clearer on what really works. So you will see significant commonality between the actions and plans in each of our clusters. We've made the point consistently that our business does not yield to grand gestures. But profitable growth can be delivered based on small improvements in these profit levers.

I won't go through all these areas but just pick out a few to highlight. Firstly, we're continuing to marginally increase our service levels alongside product availability and also the on-time-in-full delivery to our customers.

Secondly, we've improved our organizational structure so we can develop and deliver more targeted plans deep into the geography. We've moved to 19 districts. And in each district we have dedicated directors focused against each of the core segments of residential, builder and showroom, residential trade, commercial, industrial, FM and MRO. These leaders are accountable to develop plans and measure execution against the branch and sales network rather than rely on general managers being expert in all segments.

Thirdly, we're continuing to invest to maintain the growth of our profitable B2C e-commerce business, which has now reached a revenue of $450m in H1.

Fourthly, our HVAC business has performed very well in the past year and gained good share. To maintain that growth we're putting in place dedicated resources in the blended branches business so we can deliver national programs for our key vendors across the whole of our branch network.

Fifthly, we are continuing to invest in growing our FM MRO business, both organically by a more targeted regional focus, which will allow us to achieve scale in terms of people and vendors, and also continued bolt-on M&A.

And to improve our gross margins, we will continue to execute against the programs that I've mentioned before.

In terms of cost management and improving our productivity, firstly, we will continue to manage the number of associates tightly in H2.

Secondly, we're putting more resources in to drive e-commerce conversion. In H1 we managed to get the total e-commerce business over 18% in the US and we're investing $12m in re-platforming our e-commerce business to remain competitive.

Thirdly, we plan to continue to expand the capacity of our national sales center. This has nearly 250 people in it now, handling in total about $100m of our business in H1. Clearly, this does give us benefit of scale and also better utilization of technical and experienced associates.

Finally, we have now started the slow process of gradually taking our finance processes off the legacy system and moving them on to the PeopleSoft platform. We're going to do this process by process and avoid large-scale risky ERP replacement programs.

So overall in the US, our core markets of residential, commercial and infrastructure look pretty robust at the moment. Industrial still declining, albeit at a lower rate. Our revenue growth has returned to about the 6%, which, with deflation, means our volumetric growth is similar to the past couple of years. Our flow-through has not been as strong in H1. But we are controlling our cost growth tightly and believe we can get better leverage in H2.

Our strategy is working. And we're totally focused on execution and staying well ahead of competition.

Turning now to the UK, and looking briefly at the market conditions, then our performance and again our plans for the future. Just picking a few key stats that we know are important. Firstly, consumer confidence is reasonable at the moment, although it has declined from its peak six months ago. Secondly, housing transactions have continued steadily. However, in the last six months they've declined slightly versus the same period the year before.

The RMI market, where we generate the majority of our profits for both plumb and parts and our Pipe Center business has been very tough. The RMI market over the last two years has had limited growth. And in the last six months there's been decline in the housing market and significant decline in the non-housing market.

Looking at our performance in H1 in terms of financial results, they were disappointing. John has explained the delta of the GBP9m trading profit decline. In terms of market share, we've been very clear with our teams that we do not want to chase very low gross-margin business, where we cannot recover our cost to serve.

So in our infrastructure business that performed okay, we lost a little share in H1 as we decided not to compete on certain large projects with very high percentage of direct sales.

In our pipe business, the market declined significantly by about 6%. Because of the poor market, we again decided not to compete in some large projects, where we believed we would not make an acceptable return. But with top-line decline of 8% and gross margin compression, we suffered significant trading profit decline. I will come back later to the actions we have taken and are planning to restore profitability.

In our plumbing and heating business, we held share in H1 and have stabilized the gross margin by improving our service delivery. But the decline in housing RMI market led to a small decline in like-for-like and a small decline in profitability.

In terms of our key performance indicators, we have made progress. We still have much more to do though. We've continued to increase our service and have achieved decent increases in Net Promoter Score, availability and on-time-in-full delivery. However, with scores of between 45 and 50, we are only as good as or marginally better than good competitors. We do not yet -- we have not yet managed to get a clear competitive service advantage in the UK, unlike in Ferguson, where our scores of 65 do really set us apart.

Our availability on the top SKUs has improved to 98.3%. Our people's engagement has improved gradually. But again, this score puts us in top quartile and doesn't differentiate us. But where we have made good progress is in gaining share in the small customer segment. This now represents about 30% of our total business in plumb and parts and is growing at 8% and has a gross margin that is significantly higher than the rest of our business.

Our ongoing gross margins were down 30 basis points, caused primarily by the decline in our pipe and climate business. Our cash performance was very good.

So if we look specifically at pipe and climate business, which was 12% of our UK business, but it caused half our profit decline in H1. As I explained earlier, the market was down significantly by about 6%, caused by a slowdown in both the new build commercial market and the non-housing RMI market, combined with some significant price deflation.

However, we managed to significantly improve our service score to 52%. We improved availability across the whole business and have now rolled out a common core product range. We've also started daily deliveries to all our branches from our new DC to improve service. We've taken out costs and reduced capacity by closing five branches so far. And we anticipate more branch consolidation over the next 6 to 12 months.

We've set up three regional support centers to provide expertise on job quotes, pricing management rather than each branch being self sufficient. We will continue to fine tune our core range and availability, improve our pricing management based on the experience from plumb and parts and Ferguson, and invest to grow our own label business. But despite better KPI performance, this could not offset the substantial market decline. And although the profit decline in H1 was disappointing, this business still generates 6% return on sales, with good return on capital and cash generation.

In terms of plans and actions for the plumb and parts business, which is over 70% of our UK, we are using the same set of profit levers as the US and the other clusters. I won't go through all the profit levers but just focus on a few.

We're continuing to improve our service proposition using all the tools that we know work so that we do get an advantage position versus competition. We continue to expand our showrooms, opening 23 in H1 and another 25 planned for H2. Using our CRM platform we are making sure we are gradually improving the conversion rate of our bids on projects.

And we're continuing to drive e-commerce, both B2B and B2C, where we are now up to over 5% of the revenue. And this is growing by 30%. Having developed clear category plans, we know we still have more potential with own label and exclusive offerings from branded suppliers.

We're growing well in terms of penetrating the small customer segment, as described earlier, so increasing our focus on growing this customer base, and especially the customers with the higher, more profitable plumbing product mix.

Also we are adjusting our pricing strategy on some key value items to be more competitive.

In terms of costs and productivity, the team have been very focused on reducing associate numbers and redeploying them where appropriate. Our associate numbers are down 130 on a comparable basis versus last year. And any new associates are very tightly focused on where we see future growth potential.

The UK team have been through a thorough review of the organization and are implementing plans to simplify and delayer and move progressively to a more functional model rather than a brand basis. This will be a more productive model going forward.

As John described, in total across the UK, we have already committed GBP15m to restructuring our business for the future. The team are also making sure that we do execute our plans to a high standard deep into the organization, just like Ferguson. We are monitoring compliance with our core processes and ensuring we do get the execution we want.

Lastly, we have with our UK team started a process to stand back and take a fresh look at how we can significantly improve our current operating model. We are not satisfied with our results and we know we have to execute our current plans better; however, we also need to evaluate alternative models that will better meet our customers' needs and also be more productive.

We want to make sure our model is fit for purpose going forward and can deliver growth. This may involve further one-off costs. We will update you on progress at the full year.

Now looking to the Nordics. In terms of the key stats, consumer confidence in Denmark has come off a little bit in 2015 but is still in positive territory and total housing transactions have held up reasonably well during 2015. There's a similar pattern in Sweden with confidence coming down a little over the year but the total housing market has been reasonably robust, although still well behind the peak back in 2007, and also the last six months have been a bit more difficult.

Finland has again had a tough market with consumer confidence coming only just into the positive and the total housing market has been in decline. We have however begun to see some signs of recovery in our top line performance. In Norway we've seen strong growth in the major cities of Oslo and Bergen but because of the fall in oil and gas prices we've seen a drop of confidence and reduced activity in the oil and gas exploration centers. But net the Nordics markets, although not buoyant, have held up reasonably well in H1.

In terms of our KPIs, it was good to see the Nordics returning to profitable growth of 14.5%. We were able to stabilize the gross margin and by getting reasonable top line and by managing our cost base tightly we did deliver decent growth. We would expect this trend to continue into H2 and assuming reasonable market conditions deliver profitable growth across the year.

We delivered trading profit growth in all countries except Finland and particularly good growth from Sweden. In terms of our customer scores, we managed to improve them marginally and also managed to get small uplifts in availability as well. The employee engagement scores remained healthy and closer to the very high Ferguson levels.

In market share we have managed to grow or hold share in all our businesses except the DIY business in Denmark. Where other competitors have been opening more stores than we have, we are far more focused on delivering like-for-like growth using e-commerce.

In gross margin in total we are about flat but saw some declines where there was an increase in direct sales from supplier to customer, which tends to happen when new build picks up. This is especially true in Sweden. But by controlling the cost growth we have managed to get good leverage in H1.

Again using the same profit levers as in the US and the UK and again just picking out a few key initiatives, firstly we are planning to keep the service improvement momentum going. We have made progress but our performance is not yet sufficient to give us a clear competitive advantage. We are rolling out CRM platforms to ensure, like in the UK and the US, that we can track and follow all our outstanding project quotations and make sure we gradually improve our conversion rate.

Given the seasonal nature of the Nordics business we continue to improve the mix of part-time associates and also gradually improve the seasonal flexibility of our full-time associates.

In terms of pricing, we are adopting all the processes and platforms that we have developed with the other clusters that we know work well. In productivity terms, we have kept a tight control on labor cost and we now have 92 fewer associates on a comparable basis with January last year.

We are also investing in building better e-commerce platforms. We're beginning to find customers are starting to adopt e-commerce and even though it's only 1% of our sales, it is growing very rapidly, like in the rest of the Group. But the fundamental driver of efficiency, like in the US and the UK, will be complying with our core processes. Our businesses in the Nordics have historically been very decentralized and we're now gradually centralizing some of these processes in each country.

Like in the US we are now beginning the process of replacing our old legacy systems. We will over time migrate the business gradually onto the best of breed systems and platforms. And this architecture is common across all of our clusters.

Overall then, the performance of the Group has been resilient in tougher market conditions, driven by lower demand in certain segments, obviously US industrial and obviously in UK in the pipe business, but also significant price deflation.

The US has come back to good growth in the last three months. The UK has been disappointing and we will, as well as execute our core process better, take a hard look at developing better operating models. It was good to see the Nordics back to decent profitable growth. Canada and CE are still facing though some market headwinds.

We've managed our cost base tightly and we're making sure that where we can we are reallocating resources towards the growth areas. And where we believe we can get decent return we are continuing to invest in better execution of our processes and also improving the efficiency of our business models. We do now know what works well; the challenge is being able to get that execution consistently across the entire network. And overall we do expect the Group's trading profit for the ongoing business to be in line with expectations.

On that, we are happy to take any questions.

If you can just wait for the microphone and say who you are, that would be very helpful. We'll start here. Yes, there you go.

Thank you very much for the presentation. Arnaud Lehmann from Bank of America Merrill Lynch. Firstly on US growth, obviously you had the numbers for November to January and you gave us an update for December to February which was higher growth.

Yes.

Is it more related to removing a weak November or are you saying that February saw an acceleration compared to what you saw in December and January if that makes sense? So that's my first question.

My second question is regarding the UK. You're hinting into some change of strategy; you're putting things back on the drawing board. Could you maybe give us a bit of an outlook of what may happen here? Would you consider maybe disposing of some of the businesses there?

Okay sure. Look, in terms of the US growth, we had a poor November; December, January, February have been very consistent. So, as you know, our numbers jump up or down a bit a half a percentage point each month. December, January, February were consistent, November was the tough one.

In terms of the UK, we're not signaling a change in the UK strategy but we are signaling that we are going to have a hard look at the operating model in the UK. Our UK business is a good profitable business, makes a good return on capital employed and good cash flow. This half obviously we had a very disappointing performance in the pipe and center business - pipe and climate business, sorry, which is only 12% of our total business. Actually plumbing and heating didn't do well but it was only down a little bit, again in pretty tough market conditions. Our infrastructure business actually did okay.

But we are conscious that market conditions may remain dull for the next couple of years and therefore we do have to have a challenge to ourselves in terms of the business model and really see if we can find ways to better meet our customers' needs but do that more productively as well. And we highlighted we've already started the action of taking some capacity and cost out of the UK market so we can get it back to profitable growth.

What sort of payback do you expect from your restructuring?

Something under two years in terms of the payback. It depends again -- some are branch closures, some are obviously associate layoffs. Those are far faster. Okay, good.

Thank you. Gregor Kuglitsch from UBS. I've got three -- two and a half questions I think. So firstly I'll start with the US. I think in the first half you had something like 10% flow-through, if I correctly calculate. Can you just give us a sense where you see that picking up to? I think you hinted that you think it's going to start picking up from here.

And in that context can you give us -- I think you've flagged industrial continues to be negative but can you give us a sense when you feel you're starting to lap the comparison basis that would allow perhaps a greater decline to head towards the zero mark? And similarly on deflation, I think that obviously started to happen in the second half of last year. If you can just give us a sense where you think, as best as you can see it given commodity pricing, how that will trend?

And then this is the second question which is on the UK.

That was your first question.

That was my first one and a half questions, sorry. On the UK, can you just give us a sense the profit outlook that you're talking about, is that net of the GBP15m of restructuring? Are you taking that through the line or is that booked as an exceptional item? Thank you.

I think the US flow-through, could it be a little bit better in the second half? Yes, possibly if we get -- if we continue at that 5% or 6% growth rate, because we will stay careful on headcount. Just to reiterate, we are going to continue with those strategic investment plans; they are important for the long-term growth of that business and it's important that we stick to that. So I don't think that flow-through will be dramatically different in the second half, Gregor, but certainly it's fair to expect it to be a little bit better.

US industrial. Interestingly last year overall in the second half industrial was flat. It was plus 6% in Q3 and minus 6% in Q4 if I recall. So we ought to be lapping weaker comparatives by Q4. I wouldn't call the end of the industrial challenges just yet because we haven't seen a dramatic pick-up in industrial so far.

The deflationary flow-through, actually if you look at the curves -- and I'm happy to show them to you afterwards -- on each of those commodities the curves have continued to decline to where we are. So actually we're going to see a drag on deflation from commodities for quite some time yet, possibly for the whole of this year, calendar. Now of course it depends whether those commodities pick up because if they do pick up in price again we'll see that flattening out.

And the profit outlook, yes, it's within our expectations. We have factored in the GBP15m of restructuring in the UK in the second half. That's what we factored in. As Ian said, we may do more; we haven't factored more in, we don't have those plans specifically yet. It will depend on the outcome partly of the review that Ian was talking about.

Good.

Yes, good morning. Yassine Touahri from Exane BNP Paribas. A couple of questions. First a question on strategy which clearly has changed dramatically over the past seven years. You've substantially improved your portfolio of assets; leverage is now much lower than it was seven years ago. How do you look at -- how will you consider looking at the next seven years? Will you consider another strategic review?

And my two question actually would be on capital allocation. How do you think -- will you think about it? Will you think about more M&A, more investment in branches and IT?

I think you better answer that one, John, because I certainly won't be here in seven years, let alone seven bloody months. Sorry.

No, it's all right. I'm just the CFO.

You better get cracking, John.

Perhaps also on e-commerce. It's been growing quite quickly so it could be quite transformative over the next few years so how do you think about that?

And then another very question a bit more on numbers. Could you quantify your bill for plastic, steel and copper, just for some sensitivity for how prices are moving?

Yes, okay, we'll do all of those. Look, on the strategy side, if you want me to answer. I would prefer to -- how do they say it in America -- take the fifth until I've got my feet under the table. But no, I think if you look at the disciplines which Ian has brought to the table over the last six years, the resource allocation process is exactly what we should continue to do. There is nothing wrong with that as a process. It absolutely identified, if you recall all those years back -- what were your words -- performance builders and growth engines. What was the third one? Synergy drivers.

Synergy drivers, yes.

But actually behind that was a series of really relevant questions about market share, our position, are we equipped to win, margins, the market, the competitive landscape, all of those things, the working capital and asset requirements of each business. We'll continue to apply those; we still do. That's not going to go away. It's an internal process. We should continue with that all the time. So I hope that gives you a sense of that.

You mentioned e-commerce. I think, yes, you can see now this year we should get to GBP2b worth of orders taken online B2C and B2B. It's fairly clear that there is good demand for that in the market. We've been very consistent. We want to be the best B2B e-commerce provider in our market, and of course within our categories we also want to have great B2C offerings too. And certainly there is going to be no de-emphasizing of that in the future.

And then finally the bill, I've got all of the amounts here. Shall we take that offline at the end on the -- to save me scrabbling around in paper on plastic, copper and steel.

Thank you very much.

Howard Seymour at Numis. Can I ask a question actually on the UK competitive environment? Because you alluded to the market share losses that you've seen in a couple of areas i.e. potentially stood back from the market. The question I suppose is what's driving the market share movements? I note you mention the possibility of being more competitive you said in product price areas. Is this -- am I reading too much into that, that you're now saying market share gains -- losses are no longer going to be acceptable?

Now look, I think if you look at the market overall, we are not happy with our results, and if we look at the results of the other major merchants, I think we've all had a pretty tough time in the last couple of years. Point one.

Point two, absolutely not. We're going to be very consistent now. We have got, particularly in plumbing and heating, our gross margin is stabilizing, which is what we've been working hard at in the past couple of years. I absolutely do not want to give that up. Therefore we will continue down the path -- we lost a very small amount of market share so let's keep it in perspective but it is far more important for us to build the business profitably now than to go chasing market share. So we are going to remain very, very disciplined in terms of where we are on pricing in the marketplace.

And I think in terms of where the growth can come from, I highlighted all of the profit levers that we know we haven't executed brilliantly yet. I am disappointed in our execution, absolutely, that's my accountability. So we know we can do a lot better on execution.

And secondly I think in terms of the segments of the market, small customers and plumbing customers have done well over the past couple of years and some independent distributors who service that segment have proportionately done better than us.

Where the market has been particularly tough is in the large and the regional contractors and I think in the last six months particularly tough because relatively little eco business and government social housing spending has been lower as well. So no, to come all the way back to your question, we are not signaling a change in our approach. We want to remain very disciplined and make sure that we do continue to gradually rebuild the profitability of the business.

Can I just follow up on that then, Ian? You did specifically mention some areas of more competitive. Are these just the commodity areas then? Are there any specific areas that you would target in that respect?

No, not so much commodities. Commodities, as John's highlighted, is bloody tough anyway, but I think in some of our key value items, things like mastic and couplings and joints, we were not as competitive as we should have been compared to some of the other entrants that have come into the market and compared to some independents.

So again -- we've made this point many times before -- this business doesn't yield to grand gestures. It is down in the absolute micro detail of how are these 500 or 50 SKUs priced versus competition, and I don't think we were sharp enough on some of those key value items.

Great. Thank you.

Okay. Yes? Let's go back over here.

Thanks. Aynsley Lammin from Canaccord. Just two, one more just following up on the UK. I wondered if you could comment on January and February. Some of your peers have said underlying market had a good start to the year, particularly plumbing and heating side.

Then just obviously you're showing a bit more discipline on the cost front. I just wondered what your view was on acquisitions going forward, what the pipeline looked like, and are you likely to start reining the acquisition spend in for the next six months? Thanks.

John, do you want to do the first one?

Yes. January and February, it's been interesting. You know we hate talking about the weather but December was horrible so January and February were a little bit better than December. There's no doubt December was mild and mild is miserable in the heating business. So January and February were a little bit better than that but I wouldn't say it's -- it isn't a robust growth just at the moment.

I think in terms of M&A, I think across the Group we still push on in the same -- absolutely in the areas that we've been talking about for the past five or six years. John's already made the point; if a major opportunity came along I think it would be right to have a look at it, but we're going to stay very, very disciplined on where we are at the moment and keep pushing on with the bolt-on M&A and make sure we get the integration benefits and the synergies out very quickly. I think we're showing we can do that well and get good return on shareholder money that we're deploying there.

Thanks. Clyde Lewis at Peel Hunt. Three if I may, all on Ferguson. Ian, I'm just wondering if you can update us as to the competitive position in the US and what your competitors are up to in response to Ferguson's continued success?

The e-commerce platform, where would you rank it relative to best in class and what sort of changes and investments have you got to make on that front?

And the third one was on price transparency in that marketplace. It's obviously sort of a journey and you're on it but how is that journey evolving and is it what you expected to see and how is that impacting your thoughts going forward?

Sure. Clyde, on competitive position, I don't think there's been any significant shift from where we have been in the past couple of years. You know we quantify the second-largest competitor as Home Depot Retail, what they sell to professional tradesmen. We have a market share in our blended business of about 17%; they're at around about 8%, so we're just over twice their size. And then you drop down to Lowe's and then to regional -- quasi-regional distributor in [Hydroka]. So the competitive position in our core business I think has remained pretty much the same. Clearly we've done well. Again, go back to driving the service has given us the ability to gain share and to do that profitably.

We've talked I think a lot in the past about Amazon. They're still obviously doing very well across many segments. We have not seen any material impact or any impact on our business at all and I think that does come down to various things. One, we have 1,500 branches out there deep in the communities; we have 5,000 outside sales people going out dealing with our customers' technical problems; and then also helped by the depth and knowledge that we have in our plumbing and heating category. And 5% of our business is actually product being returned to us. That is a process that we do very well so we credit back our customers. So we do give the full service and therefore we have not seen any impact. We keep a very close eye on it because clearly an Amazon type creature could have a serious impact.

In terms of the e-commerce platform, we absolutely do benchmark ourselves against what we consider to be the best e-commerce providers in the States, therefore absolutely Amazon, Grainger, Fastenal. They have worked long and hard at their e-commerce businesses. We described this morning we're up to over 18% in the States now; Grainger is up into the high 30s, Fastenal the same. So those are the people we benchmark against.

Bluntly, I don't think in our traditional competition anyone is in our league in terms of e-commerce. We now have good mobile apps out there which have been launched in the past couple of months and the re-platforming that we're doing is to put even more product, data and information and to have an even broader range of SKUs. What is fundamental in terms of e-commerce business, you have to have that core data, in our instance 200,000 SKUs has to be accurate and up to date with all the specifications.

And the third one on pricing transparency, I think again, as you know in our business, in the B2B world there is still not a high degree of pricing transparency. Each of our customers has a set of discounts that we've agreed with them. We're working hard in two areas there. One making sure those discounts are logical and defensible as opposed to just what Joe managed to negotiate with Sarah. So actually we're putting in more of a structure around that.

And then secondly, making sure that we have a more consistent pricing for our B2B customers across our branches. I think we've described in the past because we have 185 different instances of Trilogy, our legacy system, actually it's quite tough to track a contractor as he trades across our branches. We've put in place processes and data to give a consistent pricing so when a customer comes into one branch or another branch or another, he gets exactly the same pricing.

In the B2C side of our business, Build.com, we're out there competing with everybody else, with Amazon, Home Depot Retail, everyone else who is selling plumbing and heating kit into that market. So that is completely transparent. Does that give you a sense?

Okay. We'll come down here and then we'll go across to John.

Morning. It's Paul Checketts from Barclays Capital. I've got three as well please. The first is on the improvement in growth, if that's the right way to phrase it, from 4% to 5.7% in the US. Can I just clarify a couple of things? I'm trying to get a sense of how much of that is volume. So can you just confirm that it's nothing to do with the trading days? I think the answer is it's not but could you just confirm that? And how much of it, if any, was due to deflation easing, which again you can't suggest it's not but maybe you'd confirm that?

And then the second is on the comps for the US. You've given us some more detail in the presentation on the like-for-likes by business unit and you've commented on the industrial progress and the comps there easing. But if you looked at blended branches and waterworks and other, is there anything we should bear in mind as we go into the remainder of the year? Do the comps get a lot easier there as well? Was it uniform?

And then the last point is coming back to the M&A. You've been busy in terms of number of deals but overall spending has been less than the GBP200m you've talked about in the past. Is that because there have been transactions and someone else has bought them? Is it because vendors aren't selling? And when you think about the pipeline going forward, can you give us a bit more detail on size and what might get us back up to those levels that you've talked about in the past?

Yes. The improvement in growth rate is like for like, so it is same day. Deflation, actually slightly strangely deflation ticked up slightly but not -- nothing material. In respect of the US comps, the rest of the US comps get easier too. Actually slightly they get -- comparably they came off further because industrial was flat in the second half last year. So blended branches and waterworks also had very strong comparatives in Q1 and Q2 going into Q3 but later in the year all of those comparatives ease Paul as the growth rate last year did come off by the Q4.

M&A investment, no, we haven't lost anything that we've had in the pipeline that we wanted to complete on. There just hasn't been transactions that we wanted to conclude. In terms of possibilities in the pipeline at the moment, there are two that are more medium sized. There's a couple of things which are groups of branches, which would be nice. That's the sort of, if you want the sweet spot. And then there remains quite a few pretty small acquisitions similar to those you saw on the board. But we haven't lost anything. I can't remember how long ago it is that we lost something. It's just not like that. The large majority of these transactions are negotiated. In fact I don't think any of those on the board were auctioned at all.

So these are really -- because for the vendor the most important thing very often for the family businesses is what's going to happen to the vendor, what's going to happen to the vendor's family, what's going to happen to the associates that people rightly care about because it's a relationship business and we are usually buying businesses when they're the bolt-ons essentially for those relationships.

Thank you.

Good. John?

Thank you. John Messenger from Redburn. Three if I could please. The first one was just on -- and it should be pretty simple -- but the finalization of the French disposal. Does that have any impact for cash, for write-offs just on obviously the agreed deal when we think of the second half?

The second one was just on the acquisitions impact in the half-year. Was that GBP136m of top line, GBP1m on the bottom, you mentioned there obviously some investment going on, particularly John, but can you just flesh out, was that actually -- clearly IFRS baloney tends to have an impact here as well in the writing off stored up profitability on stock. Is there anything in here that is abnormal? Because I would have thought there should have been a better rate of profit coming through on the acquisition spend, particularly BathEmpire from last year.

And then the final one was just -- and thank you for the detail on the UK and the US in terms of cost structures. But when we just look at those slides that broke out labor and other costs, I just wanted to check, from the point of view of how the UK can be turned around in that obviously you've disclosed a gross of GBP23.7m, labor is 11% of sales and all those other costs are about 9.3%. If I contrast that with the US, the best in class, that's GBP30m on gross, 14.3% on labor and down at 7.8% on all those other costs that run through it. The critical thing I look at there and think is actually the labor absorption of gross profit is broadly similar, about 46% of the gross. The issue is all the other costs. When you look at the UK, and I'm just thinking here it's 2006 when that DC opened, I would have hoped that after 10 years there might be quite a lot of depreciation dropping out next year, maybe not, thay would have at least just started to create a bit more EBIT momentum. When we just look at that structurally, do you not need to go out and find revenues to put through the cost structure or are there enough areas through the restructuring you're talking about that you can really realign to a better margin business and a better return business there? Sorry, a bit of a big one.

Right, okay. So the French disposal, there is GBP18m of loan notes. There's no cash due. They would be longer dated. We have GBP50m of residual property in France which we will get on with and dispose. Timing, we just need to work through those, John, and then those should be the last cash flows from France.

Acquisitions, the accounting -- the stock accounting and receivables accounting is always brought into line with our accounting on day one, but the delta there goes through goodwill. Those goodwill adjustments are tiny. They are totally immaterial. The real issue is alignment of the operating expenses. So for example we bring people in. If you look at most of those acquisitions we've done in Ferguson, we bring people in; we bring them straight into the Ferguson career structure and Ferguson salary structures so that they are culturally Ferguson associates as soon as we can.

Secondly, with the smaller acquisitions we bring them onto our systems on day one. So we've done all the pre-training before then, typically in the weeks beforehand. We're putting the systems -- we're putting excess management in. That's the investment cost.

Specifically with respect to BathEmpire, BathEmpire, we bought it in to generate a market position in that space. We have continued to invest in it. It isn't very profitable today, as you can see from those numbers; however, we are very happy with its progress. Strategically there were more issues than just -- sorry there were more opportunities from that acquisition than just generating profit in the first six months.

The UK/US comparison is interesting. There are many more small sites in the UK driving the other costs. We reach far, far, far further. You can see if you just divide revenue by the average number of branches, you can see the average branch size in the UK is quite a lot smaller than the US. And that's been done clearly purposefully in order to have a very local presence with our customers.

The point about should we put more volume through DCs, that's a fair point. Just I think just from a commercial perspective I bristle a little bit at just buying volume to put through something. I see that as the wrong way around. The logistics facilities should be right-sized to service our business. And that's something that we should always look at, we do always look at in all of our businesses anyway. So that's a fair comment.

The depreciation is not -- there's no depreciation cliff I'm afraid. So there's nothing -- there are no nicies to wait for there, John. We will just get it right-sized. But the difference between the UK and the US models, that doesn't mean that the UK reach into local areas is wrong. If you look at the contribution of lots of our small branches, typically turning over between GBP1m and GBP2m, the contribution of those branches individually is usually very good. We don't persevere with loss-making branches. Clearly we either turn them around or you would reconfigure them or eventually if you couldn't do anything, shut them down.

But that whole configuration is absolutely part of the work which Ian referred to on the review of our business model.

Good. Okay. Any more? No. All right, very good. Thank you very much for coming along. Thank you.

Thank you all.