David Keltner - Interim Group CFO and Director Gareth Davis - Chairman John Martin - Group Chief Executive and Executive Director Mark Fearon - Director of Corporate Communications & IR.

Ami Galla - Citigroup Inc Arnaud Lehmann - Bank of America Merrill Lynch Aynsley Lammin - Canaccord Genuity Clyde Ashley Lewis - Peel Hunt Emily Biddulph - J. P. Morgan Gregor Kuglitsch - UBS John Messenger - Redburn Paul Checketts - Barclays Paul Roger - Exane BNP Paribas Thomas Sykes - Deutsche Bank.

Good morning, everybody, and welcome to our Interim Results Presentation this morning. Really pleased this morning. We've got Tessa Bamford, one of our Nonexec Directors here with us today, Dave, to keep an eye on us; and also our Chairman, Gareth Davis.

Before we kick off this morning, I know that Gareth would like to say a few words about the board changes that we announced this morning.

So, Gareth?.

Well, good morning, ladies and gentlemen. Unaccustomed, as I am these days, to public speaking, I'll to string a few words together. But it's fairly important stuff. I'd like to tell you about some board changes. Firstly, about the Chief Executive of Ferguson Enterprises.

And after 40 years of service at Ferguson, Frank Roach has decided to retire; and Kevin Murphy will succeed Frank as the new U.S. CEO on the 1st of August this year. And we're very fortunate to have an executive of Kevin's caliber and experience to take over the reins.

And Kevin and Frank will work closely together to ensure an orderly handover of responsibilities. Frank has a considerable list of achievements. He's been absolutely fantastic for this business.

He guided the business through the recession in 2007/'08, and he's grown revenue above market rate throughout, at the same time as delivering record trading margins. He's also invested very wisely in adding, in the last 6 years, 40 companies, bolt-on acquisitions with $1.3 billion of revenue.

He's put service and people at the center of the organization. We have an enviable career structure in Ferguson, and the business has the best Net Promoter Scores in the industry, and it benchmarks strongly with some of the USA's best businesses.

And Frank also saw the potential of e-commerce very early and has grown our business to a $3 billion channel over the last few years. Overall, Frank has done a fantastic job for us, and we're, we'll be eternally grateful for his massive contribution.

Now Kevin's been appointed CEO, because he's a key member of Frank's team that's reinvigorated Ferguson and delivered excellent shareholder value. And he was a standout candidate and, as you know, has been COO for the last 10 years.

He understands the business very well indeed, and he's a strong and decisive leader in our business and has been a key architect of Ferguson's successful strategy. And he's also done a pretty nice job in delivering monthly consecutive like-for-like revenue growth for the last 83 months, since April 2010.

He's also been a key architect of the growth agenda. And the business today is a disciplined, cash-generative, diversified specialist distribution business, less tied today to new residential construction.

And we've diversified into in natural adjacencies like MRO, Waterworks, B2C and B2B e-commerce, which will drive the growth agenda for many years to come. So congratulations to Kevin, and we wish him all the very best for a long and successful future as CEO of the U.S. And obviously, we wish Frank and his family the very best in retirement.

Now turning to this Group CFO. As we announced at the start of the month, Dave Keltner will retire shortly as Interim Group CFO, and we're really pleased to have Mike Powell joining us as Group CFO on the 1st of June. Mike, again, was the standout candidate during the interview process.

He has extensive international and the PLC experience, both at BBA, AZ Electronics and Nippon Sheet Glass. He's got relevant experience of running a PLC finance function at BBA, where 85% of its income is generated from the United States.

He's got an excellent record of delivery, with strong operational experience in a multisite businesses; and a great track record of driving performance and results, which will stand him in very good stead. And I'm confident he'll make an excellent contribution to the future growth of the company. Turning to Dave's achievements.

Dave joined the Wolseley Group in 1993, as Vice President of Construction Lending for one of the lumber subsidiaries of Stock Building Supply. In 1999, he was promoted to Vice President of Construction Lending for Stock; and then was appointed CFO of Ferguson in November 2006.

Dave has done a fantastic job in leading the finance function in North America for over 10 years. The business has gone from strength to strength, and he leaves it in great shape. He struck a great balance between investment and driving results and has been a strong supporter and developer of our people.

And he's left the Ferguson finance function in terrific shape. And our congratulations also go to Bill Brundage, who'll be taking over as CFO in the U.S. So Dave, all the very best to you. A long and happy retirement for you and your family, and thank you so much for your outstanding contribution..

Thank you, Gareth..

Thank you. I'll now hand you over to John..

You just about nicked my notes then. Gareth, very well said. Thank you very much indeed. Now, look, to the results. I'm going to summarize the highlights; Dave will then do the financial review; and I'll return to go through the strategy and the priorities. Firstly, the highlights.

Look, the like for like growth improved in the second quarter to 4.8%, so growth over the 6 months as a whole was 3.2%. Some of the conditions that held back growth last year have improved, and Dave will talk you through that. Gross margin discipline was really good. Feel good about this.

We held on to the improvements that we made in both mix and input pricing. Trading profit overall was up 5%. We invested in some of those areas that we talked about back in the autumn. We were a bit disappointed with the flow through, and we are going to target some cost reductions in the second half. Cash flow was very strong.

We are on target with all of our working capital measures. The most important priority of the group relates to the growth, obviously, of Ferguson. And we are very positive about the progress that we've made with those growth initiatives during the first half. The U.K.

transformation strategy that we talked about in the autumn is being implemented now, in line with that plan. And in the Nordics, our team has worked really hard on identifying the right operating strategy.

But you'll see that we have taken the decision we're going to exit the business in the Nordics, and we'll cover those 2 in a little bit more detail later on. We've announced this morning that we are going to change the name of the group to Ferguson plc, and we're also going to report our results in U.S. dollars going forward.

Before I go into the details of the strategy, I'll hand over to Dave to take you through the financials..

Thank you, John, and good morning, everyone. As John mentioned, we had a solid trading performance in our first half, with like-for-like revenue growth of about 3.2%. Total revenue growth at constant currency was 6.7%. We made good progress on gross margins, which were up 30 basis points, and we are very pleased with that.

Trading profit of £ 515 million benefited from a £78 million increase from foreign exchange movements, and was 5% ahead in terms of constant currency. Headline earnings per share were up 26.7%, reflecting the profit growth in the year, the effects of the foreign exchange movement and the share buybacks we completed last year.

Working capital, as John mentioned, was well managed. And net debt was in line with our expectations for the end of January, at £1.3 billion. The interim dividend has been increased again this year by 10%. Like-for-like growth improved in the second quarter for all regions, which was very encouraging, with Q2 like-for-like growth of 4.8% for the group.

The U.S. like-for-like performance benefited from commodity deflation easing in the second quarter, and all regions received a boost in Q2 from the timing of the holidays when compared to last year, which allowed for more work to be done in December. Turning to the breakdown of revenue and profit growth.

Total revenue grew 24.5% in the period, with growth at constant currency of 6.7%. This was comprised of like-for-like growth of 3.2%, which was 4.4% volume minus 1.2% deflation. Acquisitions contributed 1.7%, new branches added 0.2% and 2 extra trading days added 1.6%.

The impact of translating overseas revenue into sterling added 17.8% to the reported growth rate. Organic trading profit was good at 21 million, with further 8 million for organic gross margin expansion, acquisitions added a further 17 million and the 2 extra days added about 12 million.

As we indicated earlier in the year, we invested a further incremental 16 million in our business, and the U.S. commodity deflation reduced our trading profit by £17 million. Movements in foreign exchange rates added 78 million to trading profit. As we reported in the interim statement, commodity price deflation in the U.S.

continued to impact us in the first half of 2017. Commodity deflation in the U.S. was 2.4% in the first quarter, decreasing to 1.2% in the second quarter. The effect of the, on the U.S. was a reduction in revenue of 1.8%, about £ 96 million, and loss trading profit of £17 million.

I'm pleased to report that since the end of the second quarter, there have been negligible price deflation in the U.S. The other significant headwinds that we have faced is in our Industrial business. In the U.S, the industrial market is steady, but growth remains elusive.

Revenue declined by 2% in the first half, and we expect the market to remain at similar levels for the remainder of the year. Due to the growth in our other end markets, Industrial now only represents 10% of our sales in the U.S. Moving to results by region.

Ferguson had a good first half, with like-for-like growth of 5.4% despite price inflation -- deflation of 1.8%. Gross margins were 30 basis points ahead of last year due to improved selling, purchasing and improvements in our mix of products and channels.

Operating costs were slightly disappointing in the first half with a few more heads than planned, but we will reduce operating costs growth in the remainder of the year. Trading profit was £105 million ahead of last year, including 68 million from the strengthening of the dollar.

Growth in trading profit at constant currency was 37 million, despite commodity deflation knocking 17 million off the trading profit line. After the incremental investments in the business and the impact of deflation, flow-through at constant currency was a reasonable 7.3%. However, the trading margin of 7.8% was slightly behind last year.

Like-for-like growth was fairly evenly spread across the business within the U.S., with all business units growing like-for-like sales. Blended Branches achieved good growth with the East, West and South Central regions all growing well.

The North Central region, which contains a much higher proportion of Industrial customers, impacted its performance. The Waterworks market has been fairly flat and we have done well to outgrow that market. HVAC performed well as did Fire and Fabrication and B2C. Our MRO business also grew well.

From an end market perspective, we achieved good growth in all areas with the exception of Industrial, where the market remains negative. Residential continues to grow well at 7% to 8% in good markets, and now represents 47% of our revenue. Commercial markets remained buoyant and municipal markets flat and we achieved good growth in both.

Including the Industrial customers served by Blended Branches, the total Industrial end market decreased but at a slower rate than in 2016 as the market has improved slightly.

In line with our priorities of investing in areas where we can generate the best returns, we have completed acquisitions in the residential, commercial and Waterworks markets in the last year. Turning to the U.K, the U.K.

recorded improved like-for-like growth of 0.3% in the first half with growth in Pipe and Climate, Infrastructure, but offset by a small decline in Plumbing and Heating. Some really good work in tough competitive markets resulted in gross margins improving 20 basis points over last year and we are really pleased again with that result.

Operating costs were slightly higher, and trading profit was 1 million behind last year at £35 million. These results are before exceptional costs of £15 million relating to ongoing transformation project and 14 million of credits, predominantly related to the pension accounting.

The Nordic markets continued to be quite challenging in the first half and revenue declined 2.3% on a like-for-like basis. Gross margins were disappointing and declined overall. Operating costs were well-controlled.

Trading profit was £16 million and within the Nordics, we took 21 million of exceptional costs in the first half that are not included in these numbers, related to the strategic review and the short-term actions taken to date to improve the business.

Revenue in Canada and Central Europe declined by 1.4% on a like-for-like basis in the first half, with growth in The Netherlands offset by declines in Canada and Switzerland due to the challenging markets. Gross margins were lower due to competitive pressures in Switzerland, but operating costs were well controlled there.

Trading profit of £35 million was £5 million ahead of last year, including £6 million from foreign exchange movements. As John mentioned, we have announced that we are in the process of disposing two businesses and have one merger progressing as well. To remind you, the disposals are the Nordics business, a small noncore U.S.

business; and we are merging Tobler with Walter Meier in Switzerland. In our future reporting, these businesses will not be included within the ongoing revenue and trading profit numbers, and this chart certainly lays out the results of those businesses in 2016. As I mentioned earlier, we have taken exceptional costs in the first half in both the U.K.

and the Nordics as part of the U.K. transformation program and the Nordic strategic review. These totaled £36 million. We have had credits totaling £14 million within the U.K., which predominantly relate to pension accounting.

As required by accounting standards, we regularly review the carrying value of goodwill and acquired intangibles for impairments. Due to the disappointing performance of our Swedish business there, we have recorded an impairment of a £102 million in the period.

The financing charges came in as expected, with a year-on-year increase due to movements in the foreign exchange rates, as the majority of our debt is held in U.S. dollars. The effective tax rate was consistent with last year at 27.8%. Cash flow performance continued to be very good.

We have worked hard at maintaining working capital levels and generated cash from operations of £324 million. We invested £230 million in acquisitions in the period, £73 million in capital investment and we expect capital investment to pick up in the second half. And the full year figure will be in the range, we believe £180 million to £200 million.

We also returned £167 million to shareholders through the final dividend. The seasonal working capital flow was as expected. We had net debt of just under £1.3 billion at 31 January. And the net pension liability on an IAS 19 basis has decreased due to a small increase in the discount rates in the period.

The net-debt-to-EBITDA ratio of 1.1 is consistent with last year on a rolling 12-month basis, and we have increased the interim dividend by 10% again. As highlighted in September, we’ve been more successful with acquisitions this year.

We have completed eight acquisitions in the first half, with annualized revenues of £214 million for total consideration of £271 million. Since the 31 January, we have completed two further acquisitions with annualized revenues of £33 million, and these bring the total year-to-date consideration to £291 million.

Turning to guidance for the rest of the year. We will have a one less day in the second half compared to the second half last year, which will reduce our trading profit by £6 million. If current exchange rates prevail for the remainder of the year, they will add £60 million to trading profit in the second half.

Acquisitions completed in the year-to-date will add £14 million of trading profit. Our effective tax rate for the full year is expected to be consistent with last year at around 28%. And we will continue to invest in capital, and expect this to pick up again in the second half.

Total for the full year should be between £180 million and £200 million, and we expect working capital investments to be between 12% and 13% of incremental revenue. And with that, I'll hand it back to John..

do the right thing. That is the Ferguson way. Frank has been very supportive for me personally, and I'm hugely indebted to him for that. Gareth touched on it, Frank's recipe for success has been based on one overarching principle, that of developing and coaching the very best talent.

Whilst we'll miss Frank greatly, he leaves a wealth of talented executives, managers and associates that will lead Ferguson ahead in the years to come. I am absolutely delighted that Kevin Murphy is going to be the next leader of Ferguson Enterprises. As COO for the last 10 years, he's played a really key role in the development of the company.

He'll be a great leader for the business, and I'm really looking forward to working even more closely with him in the next stage of our development. As Gareth said, we're really pleased that Mike Powell, our new CFO, will join us in June. Dave's going to hand over to Mike in the summer before heading off into the Michigan sunset.

Dave, look, I am hugely indebted to you, both for standing in as CFO over the last year. Dave, you've done a great job. You've been a huge support to me, personally, thank you, but also, all that you've done for both Ferguson and Wolseley over your career. So thank you very much. We should conclude on the outlook.

What have we been seeing in the markets over the last couple of months? Look, U.S. residential and commercial markets have remained good. The headwinds from commodity deflation and weaker industrial demand have eased now. And as of today, commodities are not falling anymore, as Dave touched on. Industrial sales are now at similar levels to last year.

Importantly, we've continued to grow about 2% faster than the market. Elsewhere in the group, the heating market in the U.K. remains pretty weak. Canada, it's mixed, declines in the oil-affected West, but actually very good growth in Ontario and Quebec.

Group-wide, like-for-like growth in the last seven months has been 4.5% across the group, including 5.5% in the U.S; and the growth in our order books suggest that we should continue to make progress throughout the rest of the financial year. Many thanks. I'll now pass it over to you for questions for Dave and I. That's quick..

Thank you. Good presentation. Arnaud Lehmann from Bank of America Merrill Lynch. A couple of questions for me, please. So you're announcing a few disposals, including the upcoming Nordics. You've got the move in Switzerland, also noncore assets in the U.S.

So if everything goes to plan, you're going to get some cash proceeds, your net debt is likely to go down, your financial leverage is going to be pretty low.

Would you -- what would be your priority in terms of the use of the cash? Or would you like to reduce the debt? Or can we hope for cash returns or more M&A? And I guess, my second question is related to M&A. I think you mentioned only small and mid-sized acquisitions in the pipeline. We are aware of a U.S.

company selling potentially big Waterworks business. Could that be of interest to you? I mean, it's obviously pretty large, so I guess, there would be some competition issues..

fund organic growth, fund ordinary dividends, fund our M&A -- in accordance with our M&A strategy, and then return it to shareholders. And I think we've got a decent record of doing that. There's no reason to change the shape of the capital structure that Dave set out earlier, and our net debt range, in particular.

Look, on the M&A and the competitor in the U.S. in Waterworks, I think that would be quite challenging for us from a number of perspectives. It's easy to just think, it's just a competition issue. There certainly would be competition considerations.

And -- but actually, it goes further than that, which is to think about the impact on vendors, the impact on the customers and the impact on associates. So I think that will be something which, if we were to look at that, there would be a lot of hurdles on it..

It's Paul Roger from Exane BNP. So I'll have 3 questions on the U.S., please. The first one is on the recent run rate, the 5.5% like-for-like growth. I guess, a little bit surprised that, that's lower than Q2.

Maybe would've assumed, given that deflation headwinds are going down and presumably the base in Industrial is easier, that, that like-for-like would have accelerated. So maybe if you could comment a bit about that. The second one is on the drop-through in Q2. You obviously mentioned deflation and, I think, a bit of investment as well.

But even if we strip that out, it looks like the drop-through is about 10%. I wonder what your expectations are for the second half. And then finally, getting rid of the Nordics, changing their name, is this a step to a U.S.

listing?.

Do you want to?.

Yes, I'll take the first one. When you look at our second quarter like-for-like versus what we've run since, our second quarter was really helped a little bit by the way Christmas fell this year versus last year, so that gave us a bit of a bump. Likewise, we had a bit of snow in March, which dampened our sales a little bit in that period.

There's nothing that we've seen that's changed in the market or our performance to lead us to think anything differently..

Drop-through?.

Yes. The drop-through piece. Our drop-through, I think, last September when we laid out our plans for the year, we indicated that we would have single-digit drop-through for this year, because we did do incremental investment in Ferguson.

We said we were going to do about 32 million in investment in our MRO, our e-commerce and our technology, IT areas, and we're well on with that. To your point, we did have the deflation impact of 17 million. But despite that, we have still produced, in the U.S. anyway, a 7.3% flow-through.

I think it's likely that we'll continue to be single digit in the second half. We won't get back to double digit in the second half for the reasons we just talked about. But going forward, we certainly believe, provided we have reasonable growth, that we can and should deliver low double-digit flow-through on incremental revenue..

Yes. And Paul, on the issue of listing, look, we have a really strong, supportive, stable shareholder base and have had for a considerable period of time. We're very happy with the U.K. listing. About 1/3 of our register is in the U.S., which is sort of international money from the U.S. anyway.

We spend a lot of time there talking to shareholders, going on roadshows. So we try to look after all shareholders to make sure that they can meet us, but there are no plans to date to change that. And I certainly wouldn't link that with the, either the disposal or the name change. I think we see that as an independent issue. Gregor..

A couple of questions from my side. Can we just go back on this sort of relisting point? I mean, is there, have you considered any sort of other alternatives, perhaps a dual listing or some kind of more sort of U.S.

GAAP reporting, something perhaps that would allow investors to compare your company more with the listed peers in the U.S.? The second question is on the Nordics. Could you give us what the carrying value is today of the Nordic business? Obviously, you've changed a bit. I think you're selling part of it or separately, I believe.

So if you could just tell us what it's carried at as we stand here today..

Yes. Look, the carrying value of the Nordics business is about £ 600 million at any time, at the moment, and that includes both businesses. Look, I mean, I think, again, on the listing issue, to some extent, it ain't broke, don't fix it. We have a very supportive shareholder base. We go to our shareholders, both in the U.K., U.S.

and wherever else, and we go to see our shareholders. Can they compare us to other listed companies in the U.S.? I mean, you bet they do. They compare us to other international businesses as well. So I don't think we're disadvantaged in the comparison states at all. We are happy with our U.K. listing and being in the U.K. index..

Emily Biddulph from JPMorgan. I've got 2 questions, please. Previously, you'd said that you thought the price would go back to flat at the end of the third quarter. You're obviously there already.

And can you give us any price guidance for the second half of the year? And then secondly, you're talking about sort of the difficulty in being able to sort of generate synergies between the rest of the group and the Nordics.

I appreciate that the other businesses are sort of Plumbing and Heating and therefore are sort of inherently slightly more similar. But can you give us a sense of is it really that different in the sense that they are distribution businesses in similar sort of end markets? So what kind of synergies can you generate between the U.S.

and the rest of the group that you couldn't between sort of the Nordics?.

Could you answer the first one?.

Could you repeat the first question? I'm sorry..

The price -- the like-for-like price guidance in the U.S. for the second half, please..

Yes. Like-for-like, we anticipate it being fairly comparable with where we are trading today in the second quarter, in that range. We do expect deflation has eased since the second quarter, so we don't believe we'll have deflation headwinds, provided commodities stay where they are now or higher..

Okay. Look, I mean, on the synergies question around the rest of the group. The rest of the group is going to be focused after we exit Nordics. The rest of the group is going to be focused on Plumbing and Heating. There are some synergies beyond the area of operations. There are some synergies on the systems side.

And there are some synergies in terms of just know-how, how we go about exiting that business. An example of that would be on the e-commerce side. But I don't want to overplay the synergies. The group owns the assets that it owns.

Our most important -- the most important priority of our management teams in the U.K., the U.S., Canada is to, themselves to optimize those markets they know. They've got friends they can go and see, so we just recruited two new senior executives in the U.K.

They both went straight out to see how Ferguson does it, to talk to their counterparts in the U.S. And that is a privileged position to be in. But it's important for those teams in the various businesses to make sure that they optimize in those markets.

We do make better returns in the U.K., quite a lot better returns than we make in DT, better returns on capital and better net margins as well..

Aynsley Lammin from Canaccord, just two, please. On the U.K., wonder if you could just comment a bit more on kind of recent trading you've seen and what the competitive backdrop looks like.

Is there any pressure on gross margins, particularly the kind of cost inflation coming through? And then secondly, just going back to the U.S., if you could comment a bit more color around kind of cost inflation there, such as labor, are you seeing any acceleration on the cost front in the U.S.

business?.

Yes, look, U.K. trading, I think the market is pretty tough. It's pretty tough. We are in a fairly low-growth market at the moment. I think that's been well documented as well by some of the competition. Just with respect to cost inflation, we do expect now to see more cost inflation. We had less than 1%, actually in the first half.

But in the rounds this year, the spring -- a lot of prices are reset by our vendors in the spring and we are seeing quite a range. I mean, the top end of that range sort of passed mid single digits.

We think, overall, that cost inflation throughout the rest of this year on cost of goods sold is likely to be in the range of 3% to 4% across the whole of our purchases. So we are seeing some cost inflation there. The impact on margins? Look, that's our job. It's our job to make sure that we are not the people suffering in between.

We are providing a service, we need to make sure that we can maintain our value proposition to our -- our service to our customers, and that we recover that properly in our pricing, that's important. I think, in the U.S., if you look at sort of what’s happening, I do think some more cost inflation, this is on the OpEx side.

I think some more cost inflation will creep in, because the labor market is tightening. And I think we – so last week, Dave, we examined this JOLTS index, if any of you follow that, which is the job – the amount of attrition in jobs, the movement of jobs around the U.S., and that has absolutely – that’s just gone up and up and up.

And I think that reflects the fact that associates are just becoming more confident, not just in our company, but across the U.S. because unemployment is at quite low levels now. So I do think that we will see a little bit more – look, I think it’ll be a degree. Last year, we got – we were 2.5% on merits....

2%..

So 2% on merit increases. I think it will be higher this year a little bit..

And just on the U.K., how the competitors reacting to sort of kind of price increase? Do you expect the whole industry to be quite disciplined pushing those through?.

Well, each – actually each competitor will have a different mix of imports versus U.K. sourced products, and so there will be differences. But I don’t think there’s enough – there isn’t enough margin in the industry for us not to be reasonably disciplined at passing that on. So that’s just something that we will have to do..

It’s Paul Checketts from Barclays Capital. I’ve got three as well, please.

On the U.S., when I’m thinking about the investment that’s gone in, John, on the operating expenses and CapEx, too, for that matter, how much should we think of it as upfront investment now that you can ultimately get leverage on? And how much really do you need to be continually investing to drive your market share gains when we think into the medium term? That’s number one.

The second is, can you give us a quick reminder on where you are in the logistics and supply chain in the U.S. and what’s left to be done? And the last one is with regard to the Nordics. When you reflect on the business over the last few years, what do you think went wrong there that we’re now in the position you’re in? Thanks..

Yes. The U.S. investment, I think if you look at the – there is – over a number of years, we have had an emerging trend to invest more in technology. And our overall technology spend today is $200-and-something million, so this is a big number. Is that going to reduce? I strongly doubt it.

But of course, the point of that investment is to become more productive and to generate a better service proposition for our customers and to become more productive. I think that’s going to go up over time. I think the sort of – the other answer to the question is what do we expect in terms of flow-through going forward.

I think where we see good single-digit growth, like over the last sort of three or four years, we should expect to be getting double-digit flow-through. Now throughout the rest of this year, that’s going to be – that is already challenged.

But fine, we should be expecting – we should expect double-digit flow-through over the medium term on good single-digit growth, okay? Does that answer your first question, Paul?.

Yes, but I think, I don’t want to put words in your mouth, but flow-through looking out is probably at the low end of double digits rather than….

I think that’s fair. I mean, we’ve always said, without substantial increases in gross margin, and the gross margin increases that we’ve – improvements that we made have all been incremental without substantial increase in gross margin or that utilization of capacity after the last downturn. I think that's right, okay? That was the first one.

Logistics and supply chain in the U.S. On the one hand, have we got sort of lots of surplus capacity now? No. But there are opportunities still to continue to optimize on the whole logistics and supply chain piece. That's why we're putting in a new pipe yard, for example, in Ohio.

The economics of that are it pays for itself in lower distribution costs, which is actually similar to the first Celina DC..

Right..

So I don't see that as being a drag. And it is interesting, if you look at our capital investment, I think our capital investment is at a sensible level for the, at the moment for the size of the business. So I do think there are more opportunities. I wouldn't see them as a drag and I wouldn't see them sort of boosting margins massively.

I just see it as an ongoing thing with the development of our business, Paul. Does that answer that one? Nordics, what went wrong? Look, I mean, firstly, we don't feel good about this. We don't feel good. We haven't got good enough growth, and there are areas in which we haven't managed to get the right investment or returns on that investment.

But look, let me, so I'm not positive about the growth that we've achieved or the flow-through that we've achieved. I think, Paul, though, today, the most important thing for us, we are going to look for an exit of this business. We are going to now pass that on to another owner in the fullness of time, and call that a day.

So I don't want to pick the bones of that one in a very public way. I just don't think it would be appropriate at this point..

Thanks. Good morning. I’m Tom Sykes from Deutsche Bank. Just on the margin on the product price deflation, looks like it's about 17%.

So just wondering about the inflection of commodities, do you expect the operating margin on product price inflation to be similar, do you get a reverse of that? And was that disproportionate, that minus 17%, in the first quarter, please? And then when you look at the D&A, rather dry question, but your depreciation, amortization went up more quickly than your sales, you obviously spent some money on CapEx, historically, but is that all coming through the D&A line now? Is that something that we should see that rising as a proportion of sales in the second half as well, because that seemed to affect your incremental drop-through? And then just finally, on the technology argument, you said you spent about $200 million, but your CapEx on software looks like it was only about $13 million, which is an incredibly small amount for a business which is obviously growing its e-commerce quite substantially.

So could you just outline where exactly your technology spend is? Your CapEx seemed low, but you're pointing out technology equipment that you're buying.

So where actually is your technology edge and spend, please?.

Okay..

On the first one, if I understood your question correctly, the commodity deflation has now eased, and we're back to where we're seeing a little bit of inflation there. We don't necessarily expect to see a big rebound in those commodities. I think it's hard to project.

So we have roughly in the U.S., we have roughly 12% of our sales are in what we consider the real commodity pipe, and we have another 8% that are kind of fittings and what have you. So in total which are a little bit more manufactured, they have a little less commodity influence, but still commodity products.

So we have a total of about 20% of our products are commodity based. And again, we would expect the commodity prices roughly stay where they are today would be our assumption, but I think that's hard to call..

The margin impact was very high on the product price deflation, 17 on, effectively, 96 million of lost sales.

So just wondering why the margin impact was so high? Is that just timing?.

I think a combination of timing and some of that product does have pretty good backend on it as well. So, I think it's a combination of those 2 things..

The depreciation, amortization was the second one I think that's amortization..

Yes, I think the we have invested more. And clearly, in the U.S., we've invested pretty heavily in the last several years; some clearly forward looking investments and some catch up from, I think, still in some of our branches to bring them up to the speed we want. So the depreciation has increased.

It's still well lower than it was before the early in the decade. But I think that level of CapEx is really is relatively normal now, and so I would expect it to stay in that range..

I think, Tom, on the third one, the investment in technology. Firstly, there's software and software license, but that's not the biggest part. There's obviously the associated hardware. But the biggest investment is the investment in the people, the reengineering, the process side.

Very often, there's quite a time lag between when you sign a license and when you actually get the implementation done and then rolled out. That can be 1 or 2 years, typically, for a larger system. You look something like the Agility or even the Oracle, the new Oracle platform for the ecommerce in the U.S.

I mean, those you sign the license, you develop them, you implement and there can be sometime delay. But there's massive investment here that just goes through the P&L.

If you look at build.com, for example, the whole and we got 80 odd developers, I think, there? They're expensed, okay? So they're just going through that, what you would call, SG&A expenses. Is it investment, should it be on the balance sheet? Fine, doesn't matter. It's expensed. They're constantly working on that system.

And that's I think that's becoming more and more prevalent, okay? Does that did we answer your questions there, Tom?.

Yes, you did, but is there any of that SG&A spend, as related to Paul's question, that sort of rolls off a little or comes down? Or are you expecting that to still be a similar proportion of your SG&A, if not even rising a little going forward, because of the nature of how the industry is going?.

I think the whole technology space, those numbers will go up, and it's incumbent on us to make sure that we really drive the efficiency from those platforms..

John Messenger from Redburn. Three if I could, please, John. First one is, you mentioned earlier there that whole issue of inflation coming through on cost of goods, 3% to 4%.

Can I just check if, effectively, that you're almost indicating, when we think about next year, particularly the timing issue, obviously, [invent] return, but actually that 3% to 4% would be indicative on your comments about pushing for holding the gross margin that next year across the group, 3% to 4%, if you're successful will be the price inflation kind of dynamic that the group will be experiencing? That was question one.

Second was just on the Nordics.

Can I just check, from the point of view of an exit, I know it's early days and it will depend on who the buyer is, but actually, are you agnostic about whether it's a clean one-value transfer to you or whether you stay with a shareholding in something if it's a private equity player or just in terms of the permutations that might arise? And am I right in thinking there will be absolutely no tax bill and that what you receive as proceeds will be net-net, one and the same number? I think that will be the case.

And then finally was just, when we think about the proceeds from that and the U.S. business, you mentioned earlier, 1982, when Ferguson was bought, and obviously one of the critical points was the huge buildup of bolt-ons and big and small, because actually some of them were pretty big relative to the original base business.

When we look at where Ferguson sits now with HVAC, with MRO, with Industrial, with Fire and Fab, particularly MRO, because you mentioned 450 million of sales, broadly 2/3 has been acquired, 1/3 is organic, so 150 million is the base business.

Do you need to do a lot more there? And should that be a focus for capital deployment in that there's a necessary need to bulk up because, to be relevant, you need to be just a scale level bigger to make that business really start to motor? So those are the 3..

Okay. Look, the 3% to 4% was a U.K observation, the U.K. COGS, okay? That is our best view for calendar '17 U.K. cost of goods inflation. Clearly, OpEx inflation needs to be kept down at lower levels.

The second one about sort of are we agnostic and do we want to [clean this but], I think, today, this is very recent, John, so I think we would be open to all considerations, and it really depends what is useful, practicable, valuable. If there is something that we could continue to bring to the business, fine, I'll absolutely be entertained.

We would entertain talking to potential acquirers about that. If there was a strong feeling for that or if there was some other reason. But you've seen from the last 34 disposals that we've done, we have, we've retained stakes in relatively few of them, okay? Tax, I don't think it's going to be a problem here.

MRO, sorry, the 2/3, 1/3, it's 2/3 organic and 1/3 acquired, so far. Do we need to do a lot more to scale? I think we need to prove out the business model. The gross margins today are similar to the rest of the business. They should be higher. We're in an investment phase, so the net margins are somewhat lower than the rest of the business.

But clearly, the purpose of entering the market is because we think this is a very good opportunity. And I wouldn't just buy scale as the reason for doing an acquisition. I think it's a terrible reason for doing any acquisitions.

We have a strong preference for buying quality businesses, and we have a strong preference for integration, so that we generate a platform that is expandable. I think that is a very clear learning point from the development over many years of Ferguson.

If you get a platform and you do it well, it's scalable and you can get into a really good organic growth momentum. So I wouldn't just want to scale for scale's sake. I think that would be the wrong way to think about it..

Just going back -- that was probably too simplistic in that I agree totally. Things like HP Products, that brought a whole part of new product lines.

Is there something that actually -- where you're sitting with the 450 million of sales now, is there not more you need either in terms of product lines that maybe needs to come through, yes, a bulk bolt-on deal that gives you that accessibility, not simply just adding top line, I guess, or just field sales access, just to make you ultimately far more relevant and appreciated by the customer base that's out there that you are kind of on the ground and you should be taken more seriously?.

stationery. There are probably 1 or 2 others -- there are 1 or 2 others. So there are some categories that we don't want to play in.

But I think if you looked at that as a lens through which we did the M&A, actually you could make small acquisitions to get the capability, because what you really want is access to the vendors and the ranging capability, which we talked about with respect to some of the other businesses.

So they wouldn't necessarily need to be of huge scale, John, I think.

Does that make sense?.

Thank you. Clyde Lewis at Peel Hunt. A couple for me, John. Again, probably following on a little bit from John's there in terms of sort of MRO opportunities, but thinking about the other businesses in the U.S.

So I'm just looking -- can you update us as to where your market shares are in sort of Blended Branches, Waterworks, HVAC, Fire and Fab, etcetera? Just give us an idea also as to where, I suppose, the pipeline of acquisitions might be sort of biased in terms of opportunities on that side.

And the other one, I suppose, coming back a little bit on the sort of listing issue, but more of the, probably, the corporate HQ issue.

Does it still make sense to have that Swiss corporate base anymore? Or is that something again that may well get changed?.

Yes. Look, our larger business by market share, Blended Branches across the U.S. and you saw the chart before, it's in the old packs, but across the U.S., we think our market share is 17%. It clearly varies somewhat by state, and our market position there is as market leader. Waterworks, we have a higher market share than that in the 20s.

And we are market leader with the other ones; somebody mentioned earlier, a close second. But Industrial, we are tiny, because we are really focused -- we got a very focused strategy on Industrial where to make money. You know that there are some operators in that space today that aren't making money.

The largest two players are not making money at the moment and haven't done for a couple of years, so we have to be very careful. And I think very focused to make sure that we continue to make good margins there. Fire and Fab, actually, this is a huge focus and success story.

We got market share north of 20%, and a very, very, very good market position. HVAC we remain quite small, but we have a very good growth, good margin, good profitable business, and we’re pleased with it. It would be lovely to be much bigger. It’s still a very, very fragmented market in HVAC.

And B2C, I think, here, it’s sort of reversed on Blended Branches. We have lower market share. This is in our categories. We have slightly lower market share than the big behemoths of DIY in the U.S. there, but nevertheless, we’re growing well. Does that give you a sense on market shares? Paul, is that okay? Yeah..

And then in terms of sort of opportunities, presumably HVAC, Fire and Fab, maybe a bit of B2C would rank above Blended Branches or sort of Waterworks in terms of sort of acquisitions?.

No. Well, I think there will be opportunities in each of those. And certainly, looking back over the last sort of, what did we say, 40 acquisitions, how do they split, over half of them have been in Blended Branches. They’ve been relatively small, but it is nice and we did the one up in – yes, so we’ve done some nice acquisitions even recently there.

So just because of the scale of Blended Branches, it would be great to add to that. Our Waterworks is just a smaller market, so there are fewer opportunities available.

And the others, yeah, I mean, with B2C, if we can fill in those aisles, those categories that we’re – that we’d still like to be in, then we’ll do that either organically or via acquisition. Okay? Your second question, look, the corporate HQ sort of Bijou office in Switzerland, I mean, it works perfectly well.

It works perfectly well today, so no change there unless the circumstances were to change in due course..

Ami Galla from Citi. Just two for me.

The first one, on the U.S., if you can give us some color on your sourcing agreement there, how much do you currently source from outside the U.S? And how flexible that is if tariffs go up? My second one is if you could give us some color on e-commerce in U.K., what does that current footprint stand and how has that moved over the last one year?.

Okay..

Sure. On the first one, in the U.S., currently, our sourcing group sources roughly $300 million to $400 million from countries outside of the U.S. So it’s relatively modest compared to the rest of our products.

And our sourcing group, similar to the rest of the group, is currently in progress of negotiating at this time of year, typically in the first quarter..

E-commerce in the U.K – look, we feel really good about this. We’ve got a good team, really good team making really good progress. And we’re only just in double digits on the B2B side, but that represents very good growth. And what’s the scale of that? It will certainly, this year, exceed £200 million on the B2B side.

B2C side is growing more strongly than that, strong double-digit growth in the B2C side, which is the Soak business, which is doing very well. So we feel very positive about e-commerce, both on the B2B and the B2C side. We're investing appropriately, I think, in that. But there's a mass, a mass of distance to run on that one yet..

Any more questions?.

Good. Well, thank you all very much, indeed. Thank you all for coming. If you got anymore catch-ups, Mark is around, Dave and I are around, Nick is around. Catch us. Thank you..

Thank you very much..