Mark Fearon - Director of Corporate Communications & IR John Martin - Group Chief Executive and Executive Director.

Arnaud Lehmann - Bank of America Merrill Lynch Aynsley Lammin - Canaccord Genuity Gregor Kuglitsch - UBS Investment Bank Paul Checketts - Barclays PLC Robert Eason - Goodbody Stockbrokers Emily Biddulph - JPMorgan Chase Charlie Campbell - Liberum Capital Limited John Messenger - Redburn Howard Seymour - Numis Securities Limited Yves Bromehead - Exane BNP Paribas Olivia Peters - Berenberg.

Good day, and welcome to the Wolseley FY '17 Q3 IMS Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. John Martin. Please go ahead, sir..

Many thanks, operator. Good morning, everybody, and welcome to the Wolseley conference call this morning covering our third quarter results. You've got me, that's John Martin here. I've got Mark Fearon and Nick Hopkins with me from the IR team.

Firstly, I should say I'm absolutely delighted that Mike Powell has now joined the company as our new Group CFO. He's starting to hand over from Dave Keltner, who will retire in the autumn. Mike is not taking part in the call today. He is busy on his induction, visiting lots of branches, customers, vendors throughout the business.

So we'll give you some highlights for the quarter today and then just turn it over to questions. Firstly, we grew like-for-likes at a good rate of 6.6% in the quarter. Residential and commercial markets across the U.S. continue to grow really well, and industrial market improved and returned to growth.

There was no significant impact from price inflation or deflation in the period, and that's pretty welcome after the deflation that we saw last year. The reported growth was favorably impacted by FX rates. They added 12% to the top line.

We had 2 fewer trading days there which went in the other direction, and they reduced revenue by 3.4% and trading profit overall by £17 million. Just to remind you, we do get 1 trading day back in the fourth quarter compared with last year. We are pleased with our gross margin performance.

Again, we continue to make progress, recovering the value that we add to our customers, gross margins ahead by 10 basis points. Operating costs were up by 7.2% in constant currency, that includes 2.4% from acquisitions. And net debt at the end of the quarter, at £1.1 billion, was in line with our expectations after the interim dividend.

Our acquisition investment was pretty modest. Since the end of the quarter, we received a further £186 million from the disposal of Endries, which was a small fastenings business in the U.S. We've done one small acquisition since we talked at interim. The pipeline now is a bit stronger.

Now I'll move on to talk to the operations, and all the comments on operations will be at constant currency. Ferguson generated strong like-for-like revenue growth, up 8.5% in the quarter, with negligible price inflation.

And if you look at the sales there across all of our end markets, residential, which is our biggest market, residential was about 9%, [exceeded] [ph] our growth to those end markets; commercial, we grew about 7%; municipal, about 8%; and industrial grew at nearly 10%.

The gross margin is broadly consistent with last year, and operating costs were 12.3% higher, including 3.6% from acquisitions. At the start of the year, you might recall we talked about some of the investments we were making in Ferguson, in technology, in B2C marketing and in our new MRO business.

We also talked about some unplanned headcount growth in the U.S. back at interim. And we said we'd restrict our cost growth in the third quarter, which we've done, and I'm pleased by this. Actually, by the end of the quarter, we were back in line with our plans, and we do expect better flow-through now in the final quarter. So U.S.

trading profit of £227 million was £23 million ahead of last year. There's £29 million of FX in there, plus £12 million adverse impact from 2 fewer trading days. Moving to the U.K. Like-for-like sales were just slightly lower than last year. The U.K.

heating market, that remains pretty challenging, but our smaller Infrastructure and Pipe and Climate businesses continue to grow very nicely. Our gross margin was better as well ahead of last year. Trading profit of £23 million was broadly in line after adjusting for fewer days this year.

We continued to focus on driving customer service and availability, and we're making good progress with the implementation of our transformation plans, but it is still early days with those plans. In the Nordics, like-for-like revenue was up 4.3%. Gross margins are a bit weaker, but costs were in line.

Overall trading profit of £5 million was £2 million lower than last year, half of which came from the fewer trading days. Moving to Canada and Central Europe, their revenues of 5.1%, ahead like-for-like, gross margins in line, operating costs under good control, trading profit of £9 million was £2 million ahead of last year.

And Central costs were £2 million lower. We're just continuing to focus there on good cost control. Just turning to the outlook. Since the end of the quarter, revenue growth has been broadly in line actually with those third quarter growth rates. Gross margins and cost control has been good.

So we do expect trading profit for the full year to be in line with the consensus of analysts' expectations. And then finally, just before I hand it over to questions, it's worth reminding you, this will be the last reporting results for Wolseley plc.

We're pleased that shareholders approved the change to our new name of Ferguson plc, and that will take effect in 6 weeks' time. In addition, the full year results this year will be presented on an ongoing basis, net of businesses that have been sold, merged, discontinued. And I think Mark separated those assets in the IMS.

And finally, we will move the U.S. dollar reporting next year. The first results that you'll see in U.S. dollars will be the Q1 IMS on the 5th of December. The full year result will remain in sterling. So that's all for opening remarks. Operator, many thanks. I hand it back to you now for any questions that people have got..

[Operator Instructions]. We will take our first question from the line of Arnaud Lehmann from Bank of America..

I guess a couple of questions from me related to the U.S. You said your gross margin is stable. I believe that your costs are slightly down, so I just want to be clear on this.

Could you comment on the competitive environment in the U.S.? Are you seeing any more aggressive behavior from some of your peers? And are you experiencing any pricing pressure or risk of pricing pressure? And I guess the second part of my question is related to some of your listed peers.

We've seen gross margin pressure for the likes of HD Supply or Grainger in the last few weeks.

Do you believe there is any read across to Ferguson?.

Arnaud, thank you very much indeed. Look, on the pricing environment in the U.S., it's always reasonably competitive. Most of our competitors remain pretty local-focused, good competitors, but they are mainly local competition in what remains a pretty fragmented market for plumbing, heating, waterworks, HVAC, the stuff that we do day in, day out.

So I would absolutely not reference any change really in the pricing or competitive landscape throughout our competitive universe, Arnaud. And look, on the 2 that you mentioned, clearly, we see those headlines as well from HDS and from Grainger. I think there are 2 or 3 sort of fairly fundamental differences.

Firstly, if you look back even -- I'm speaking from memory here, but if you look back at the Q1 results for the FM business in HDS or for Grainger's business, they didn't have good growth. So I think HDS were up about 1%; Grainger was down a little bit. And they both had margin pressure as well. The first point.

I think second point, they operate with some very high gross margins. I think Grainger, over 52%, now it's almost double our gross margin. They are in quite difference spaces, although we touch at the edges. Grainger sells some plumbing and heating products as well. The large majority of our businesses are not really that overlapping.

And certainly, that's the case too for HDS. So I think they've seen it fit to take their strategy and direction of reducing those gross margins. Fine, that's their business. That's up to them.

As you know, our business, which is historically run on, on lower gross margins, we have been very disciplined over a long period of time to make sure that we are selling products to our customers that our customers want. We sell them in a way that they value and that we very professionally recover that value from the customers.

So that would not be our strategy when it comes to gross margins. So Arnaud, I’m afraid I don’t see a lot of read across between where Ferguson is today and where Grainger or HD's FM business is today. But thank you very much for the question..

Sure. So coming back to Ferguson, your message today is that you believe that you could still improve your gross margin going forward..

It's certainly what the budget is going to say, Arnaud, and that will be similar to what we've said for the last 7 years, and the team have stepped up to the plate every year in delivering that. So that didn't change..

And maybe just to finish.

Could you be a bit more specific about the incremental operating costs in the quarter?.

Yes, thank you. Yes, look, just I referenced to a couple of things. One is those investments. We said at the start of the year, we have been steadfast in making those investments because it is very easy to get knocked off track, and I don't want us to do that. So that's the first thing we have, continue to make those investments that we set out.

The second is, when we spoke 8 to 10 weeks ago, I said we were disappointed in the cost base in the second quarter. It would take a number of months for that to be addressed properly.

I am very pleased, actually, the team has taken good, very clear action and just essentially holding hands and [nothing there] [ph] and making sure that we can get the benefits of the growth. So actually, overall headcount at the end of Q3 in Ferguson was slightly lower than the headcount at the end of Q2. And that's exactly as it should be.

And therefore, we do expect to see better flow-through now coming through in the fourth quarter and a better run rate going into the start of next year..

We will take our next question from the line of Aynsley Lammin from Canaccord..

Just two from me. Coming back on the U.S., firstly, just wondered if you could give a bit more color around the strong like-for-like sales growth performance. I think it was running kind of around 6-ish percent, so I presume you had a very good April.

And just wondered, have you chased a bit more market share there? Or is it just the strength of the market? What's kind of changed? And then secondly, just to do the kind of operation leverage for Q4.

Would you expect, therefore, given the comments you made about the kind of cost base, to see you back to double-digit drop-through in Q4 in the U.S.? And is there also an issue, a bit of kind of a wage inflationary pressure's coming through or just numbers got a bit [indiscernible] in sales in terms of absolute employees?.

Thanks, Aynsley. Yes, on the like-for-like, I mean, this isn't just 1 month. We have seen a progressively stronger performance throughout the year. And I know you're right, April was a fairly decent month. It has been pretty weak. Last year April, May were pretty weak. This time last year, the like-for-likes were somewhat easier.

I think if you looked across the piece, actually, the performance has been pretty strong across the regions and also across the disciplines. If you look in those Q3 numbers, all of the disciplines and all of the regions growing at good single-digit growth rates, so no real significant areas of weakness.

What's the difference? I think, firstly, there is that comparable. Secondly, it's the dissolution of the deflation, if you want. And thirdly, industrial has improved somewhat, and you can see that most notably from a regional perspective in the improvement in the North Central growth rate, which is a good news after the weakness last year.

So I do feel, at the moment, that U.S. like-for-likes are pretty broadly based. In terms of chasing market share, no, I mean, there's no difference here in behavior.

We always want to take market -- we always want to grow above the market, but we have to do that in a profitable way, whilst maintaining our margins and selling our value, and that's what we've continued to do. So if you look at the drop-through, your second question, I mean, it wasn't really rates earlier in the year.

We brought in about 400, I would say, heads, too many. I know that sounds like a huge amount. I said this before, it's about 1 for every 3 or 4 branches. So -- and when you are growing and investing and, in any case, you get associated turnover, in some instances, it is -- it sounds easy; it isn't easy.

And our team did a good job of balancing all those things. You mentioned sort of the cost inflation. We haven't seen excessive labor cost inflation, but nevertheless, you'll see from the stats that U.S. -- the U.S. labor market is getting tighter.

And I would expect now this year for settlements to be a little bit higher than they were in the last couple of years. We have to just deal with that. But last year, we were at 2-point-something percent.

I think we'll be nearer 3% in terms of general sort of wage inflation this year [indiscernible] But it's not -- it's actually something that we'll deal with..

Yes.

And you're confident of getting up to kind of double-digit drop-through in Q4 given the comments you've made?.

I think it's -- from where we are today, I think probably in the forecast, we got fairly high single digit flow-through. And the growth rates are actually better to get this to the -- in the range of the consensus forecast..

[Operator Instructions]. Our next question comes from the line of Gregor Kuglitsch from UBS..

I've got 3 questions. The first one, can I just go back on the U.S.

and maybe go a bit beyond Q4? I just want to understand, as the business stands today with the kind of growth, I don't know, 5%, 6%, 7%, are you still comfortable, say, into -- if you sort of look out into next year, if you can achieve double-digit gross rates? Or do you think anything has changed that would lead you to think it's more perhaps below the 10% mark? That's the first question.

Second question is on balance sheet and M&A. So obviously, maybe my numbers aren't quite what you're thinking, but I've got around £600 million -- a little bit over £600 million of debt at end of the financial year. And obviously, you tend to sell to Nordics, which I guess will get you to basically, as far as I can tell, zero-ish debt.

Can you give us a sense what your plans are with regards to either M&A or more significant capital returns through either buyback, special dividends, that obviously would sort out what looks like a pretty under-leveraged balance sheet? And then thirdly, and this is a technical question, you helpfully gave us the discontinued ops.

Can you give us any sense in the £1.1 billion trading profit that you're guiding for the full year, how much of that in combination do you think the 3 assets that you sold would account for? If you can give us a broad guide, that would be helpful..

Gregor, thank you very much. The first point, on the drop-through, I think I have been sort of boring in my approach to drop-throughs over a number of years. I've always said I think double-digit flow-through is a good performance and is an achievable performance, and that's what we should be aiming for. And I'd only update on that today.

Haven't finalized the purchase [indiscernible] on the phone. That's fine. That's what we should expect of ourselves. It will depend on, I mean, how much we decide to invest. It will depend on all sorts of those things. But double-digit flow-through is good performance, and that's where we should be aiming.

I think the second point, on the balance sheet, I think your year-end net debt is certainly in the range of probability. Look, I don't want to say anything today about things like capital returns. Let me just make a comment, though, on M&A. The M&A pipeline is actually at play at the moment.

There are 3 or 4 decent transactions in there, nothing huge, but nevertheless, it would be great to be able to land 1 or 2 of those transactions that we are either in negotiations on or, in other terms, which is bidding on. So we'd like to do that, but nothing huge there. So let's address the balance sheet issue, if we may, back in September.

On the discontinued ops, Mark, are you and Nick going to cover those offline, the actual numbers on here?.

Yes, Gregor, we're happy to give you a ring..

Yes [indiscernible] the papers here, yes. Mark can talk to you about those, Gregor, if that's okay..

Our next question comes from the line of Paul Checketts from Barclays..

I've got two questions, please. The first -- they're both on the U.S. John, can you -- you talked about the pool of customer retentions that you do and the commercial order book on both of those offerings, some visibility for growth in the U.S.

Can you give us an update on what they're showing at the moment? And then to circle back on the drop-through, so you led the point.

But conceptually, with regards to some of the investments related to things like e-commerce, how should we think about that over the medium term in terms of, is there going to be ongoing requirements or does it step down? If you just help us with that..

Yes. Thank you, Paul. Our pools of customer retentions are pretty consistent. If you look at the balance of our customers, which expect -- you expect to grow versus those who don't, and also if you look at their expectation of the numerical growth rates are very consistent.

Just to take you back over a number of years, there's a little bit of volatility, but they are very volatile. The -- our customers have generally predicted market growth of about 4% or 5% over several years, and that continues to be the case. Firstly, so that would -- and we do think that's what the market growth in retrospect has been.

So if you look at the charts long term of customers' expectations of growth rates, and then you look back historically at what the market growth rates we achieved, we think there's very good alignment between those things. Now will it be forever or at some point, [indiscernible] visibility up there, that's a different question.

And the second is the balance of customers who expect us to grow is still strongly, strongly, strongly in favor of most customers that expect their own business to grow. So those indicators are good.

If you look at the order book, the order books are growing commensurate with or consistent with this good single-digit growth of 6%, 7%, 8% or whatever, and that's not now. We have got about $1.4 billion, $1.5 billion at any point in time. So if you look at that compared with our monthly sales, we haven't got that much visibility.

But nevertheless, I am always more confident when the order books are growing. And I'm honest enough to say those few things look today to be reasonably well set.

Paul, on the second point, drop-through from e-commerce, I don't see any relaxation materially in the investments that we're going to be making in modernizing the business model and making available more diverse and attractive channels for our customers to shop in.

Going forward, over time, we're going to have to get our minds around how to make sure that we don't just offer more channels and offer more service to that, recovering that in price, and that also, we make sure that we use the lowest cost to serve channels to take control of our cost base. I'm not sure we've always been entirely focused on that.

But strategically, we set up many years ago to have the best e-commerce in our industry. We've got that. It's a very good e-commerce offering. There are some complexities far beyond the complexities of what you see in most consumer sites on the web for B2B e-commerce.

And those things are somewhat expensive, in particular, things like the master data management, but some of the functionality as well. Our customers have got to be able to see product availability by sites, and we have a lot of sites. And we got to be able to see customer-specific pricing. They've got to be able to see warranty data.

They've got to be able to see a lot of technical data about the product. So I don't see that reducing in magnitude. What I would say, therefore, the numbers are not sort of eye-watering telephone bot numbers. This is investment that is fairly prudently made, I think.

So although I do see the numbers going up, it isn't going to affect our overall -- it isn't going to adversely impact our overall performance, if that makes sense..

It does.

On the first point with regards to the outlook for gas, the Industrial segment, the sharp recovery, what's your data telling you has driven that? Is it possible that they've had a catch-up on maintenance projects and that will drift out? Or do you think it's something more sustainable?.

I think the -- to me, the dislocation was probably when industrial was declining over the last sort of 24 months ago versus over the last 3 or 4 months, really. So I think during that period, we saw some oil and gas-related industrial weakness.

But we did see more weakness broadly in other industrial sectors, and I think this is just seeing an end to that. And that's my take on it, so I think the environment now is much more at a normal industrial environment in the States than it was over the last 24 months..

Our next question comes from the line of Robert Eason from Goodbody..

Sorry, another question on the U.S. And in terms of -- like you split the kind of the cost investment into 2 elements, kind of the ongoing investment in terms of improving the business; and second element was on planned growth.

Would you be able to just give us a kind of -- or able to quantify the latter, like how much of the headwind was based on planned growth? And in the last number of quarters, so we can just understand the actual impact that it did have on profitability in the U.S.

and potentially better understand how it could -- how things, going forward into the next few quarters, given that you seemed to have put the brakes on that element of the cost growth? That's question number one. Question number two, just in relation to the U.K.

A bit surprised at the extent of price deflation still present in the markets, given what we've seen from or hearing from other merchants, such as a bit of commentary around that. And my third question, don't know how much you can say, wasn't going to ask it anyway.

Now can you just give us an update on the Nordics disposal process and where we are, expectations in terms of time line and et cetera?.

Thanks, Robert. No, actually, I don't mind as many questions you want from the U.S. It's definitely a good way to invest your time, so thank you for that.

Look, the headcount, the excess headcount investment, if you want, or the early headcount uptake on this year, it's probably in the range of $12 million to $15 million in the quarter, okay, just to give you a sort of a sense of that. The second question, U.K., we've had price inflation of between 3% and 4% overall.

Now that sits in a wider range because there are some suppliers bringing product in from Europe and clearly has far more significant inflation than us. And there are others, I guess, principally U.K.-based manufacturers where the inflation has remained fairly low. But our estimate overall this year is that we'll all be 3% to 4% price inflation.

So that's the inflation environment in the U.K. Look, on the Nordics disposal, we have appointed advisers. We are on with all of the preparation work. The -- for those of you who are familiar with the processes, then the due diligence is under way.

It takes a bit of time preparing data for potential acquirers and information and memorandum, that type of stuff. So that's where we are, and we will launch the auction process later on in the summer. No update sort of beyond that really, I'm afraid, Robert. And it will be sort of somewhat binary. Now these things, they happen or they don't.

I'm not even sure we'll have a lot to say in September, but we are getting on with it. So just because we're not saying very much doesn't mean to say we aren't working very, very hard, and the local team is working very hard on that transaction..

Sorry, I would mind just coming back to the U.K. Just in terms of the competitive market backdrop, you seem to kind of move on gross margins a touch in the quarter.

Is that you conceding market share because you're just not chasing anymore? Or how's the whole competitiveness in the market, just kind of dive down a notch or 2?.

No, good question, Robert. I don't think -- look, the competitive landscape has not changed. It remains a fairly tough competitive landscape. I think the gross margin is really a consequence of our team having introduced a little bit more -- better processes, better controls into that. It is very important.

It was as part of our transformation strategy, getting improved processes over pricing, both on the buy side and on the sell side. And I do feel positive now to see we're getting on with that and doing a good job. So -- but I don't think you should see that as being any change in the competitive landscape at all.

And it's certainly not us seeking market share. I will be surprised if you looked at the merchant sector as a whole if these results weren't in the mix from the merchant sector..

Our next question comes from the line of Emily Biddulph from JPMorgan..

Just one question, please, on price inflation. I know you said that like-for-like rate in the fourth quarter looks relatively similar to Q3.

But are we still thinking that price inflation component in there is negligible? And sort of on top of that, should we be thinking sort of into next year, presumably we should start seeing inflation come through at some point in the sort of 1% to 2% range, and should we be thinking that, that actually helps you cover sort of any inflation in your cost base and get back to that double-digit sort of drop-through rate?.

Emily, thank you. I think we've seen that now, the -- we've seen the market turn from the deflation that we saw in the first half through into our Q3 sort of getting back to modest inflation. I would expect inflation next year to be in the range that you talked about.

I think the price is much higher than that, partly because for import report, the dollar now is relatively stronger, and also because our measured inflation for our products has, for some time, been lower, I think, than general industrial inflation. But I would expect us to get back to inflation in at least the 1% or 2% range.

And hopefully, that will help us to offset some of the import price inflation, yes..

We will now take a question from Charlie Campbell from Liberum..

I have two questions. I think the first is quite quick probably.

The first, on the U.S., and just wondering whether the showroom side of the business took advantage of sort of the structural changes going on, on that side, perhaps those competitors are not direct competitors, but if they are, it'd be good to know that perhaps you benefited, and I presume that process might be ongoing.

And then secondly, on the U.K., just wondering on the public side of activity, whether the big sort of drop-offs in budgets and things are now annualizing out and whether you think public side spending is maybe a bit more stable than it was..

Thanks, Charlie. Look, on the U.S. showroom business, our showroom business, we have deliberately grown it slightly north of the Ferguson overall growth rate over a number of years. And it is the most fragmented market, you could imagine.

And you'll see occasionally, we -- really, principally, in order to acquire sites and possibly a customer book, we'll buy some of these smaller showrooms. But usually, it's for those two things. And we'd sometimes bought supply showrooms, lighting showrooms, whatever, very, very small, but nevertheless, just to continue to expand that business.

It's a huge and fragmented business. I wouldn't expect to see any major structural changes in that market in the -- over any short period of time. I think the changes will take a long time to really come through just because we see a fragmentation of the market.

Second, on the U.K., at the public side of spending, we have -- we would love to see a return to a firmer public sector. But I'm afraid it remains the case that our largest scale customers have still seen declines relative to our small customers. There's been substantial declines.

Now the good news is that small customers, which absolutely need our service and value our service and like the local nature of the service, growth has remained strong in that small customer segment.

But the large contractual segment, which is generally servicing more the large commercial and particularly public sector, perhaps that has been -- it is substantially smaller today than it was last year. And last year, it was essentially small the year before. There hasn't been any refi in that yet, Charlie, I'm afraid.

We would love to, but we haven't..

Our next question comes from the line of John Messenger from Redburn..

John, if I could ask two as well, please. First one was just when we think forward, particularly into next year, on the gross margin, obviously, there's always been a relatively sort of 0.1, 0.2 tweak coming through in the U.S. That improved, obviously, as the commodity and the product range shrank with its lower gross margin.

That kind of contribute 3 positive factor. If we think forward into FY '18, are there any drag effect? And obviously, that commodity steel pipe, those volumes going up. If industrial flows through, then obviously, the absence of deflation into that frame.

But will that be dilutive to gross margins? Do we need to think of that [indiscernible] relatively immaterial when you think of the other actions around sharing and everything else in the U.S.? And then the second question was just on the world of MRO and water in the mix.

Can you just give us a view as to where you are now in terms of the MRO content of Ferguson, stripping out Endries, so what you'd call your core MRO going forward? And in the world of Waterworks, just a brief comment how has that performed within the period because obviously, we've seen HDS with very strong growth.

And is Waterworks for you a margin kind of significantly above the blended branch margin of the group because that would appear it takes for HDS, is that true at Ferguson too?.

Thank you, John. Firstly, on the gross margin, look, I think your observations about what's the individual impact in the mix next year are well made. We may well see some drag in those particular areas. I know we talked about this when we experienced some commodity price deflation.

Does that have a favorable impact on gross margins, but then after, it impacts on gross profit? Yes, it did at the time. And they were sort of be true now. But I do think that will be in the round in the mix of these things. So I would still expect the team to make modest headway on gross margin expansion.

Your second question, on the MRO, we didn't classify -- in our $450 million of, if you want, commercial facilities made into MRO, commercial MRO, we haven't classified Endries within that $450 million, but that doesn't change. And that's where we are at the moment. So we've got, I would say, it's a fledgling business.

We have established, put together about 2/3 organically, 1/3 via acquisition over the last sort of couple of years. And we need to continue to meld up as a business and prove it out. It seems to be -- we are pretty early, early days in that market. With Waterworks, you've seen the CDNR buying back the HD Waterworks business. That's fine with us.

That seems like a clear and sensible independent home, fine. On the margin side, the gross margins in Waterworks are not as high as [indiscernible] and neither are they in HD. Their gross margins in their facilities maintenance business are huge compared to their Waterworks gross margin. And their net margins are also huge in their FM business.

In fact, there was -- if you look at our business, firstly to say, yes, we have had good growth from Waterworks. This is a good business, second largest business in our group. We stack up very well. We have over time hit the way in taking share in this space. And I think if you compare, you see [indiscernible] in Waterworks in there as well.

If you compare those over a long period of time, you'll see that our team has done a really good job in that space. I think you should assume that our gross margins are probably similar because -- just because of the competitive position that we obviously find in the market.

All right? And in terms of net margins, we're using slightly different networks. So you should assume our net margins are similar to the net margins in the rest of our business..

Our next question comes from the line of Howard Seymour from Numis..

Just one from me, really, because a lot of it has been answered, and it's actually on the U.K. Really, John, just to ask you, so as expected, similar questions to the U.S. but in a different way, on the cost profile, because obviously, the business has gone through transformation, et cetera, have gone through that at the moment.

As you come after that, will you see a very different cost profile? And similarly, would that be sort of progressing or a quite dramatic movement in costs?.

Howard, no, I don't think about it. If you look at what -- if you look at the sort of the cost profile in Ferguson, actually, it hasn't really moved that much. We have kind of stated assets which hasn't moved that much.

We continue to invest in other states, continue to ascertain to take both market growth and do it whilst maintaining our gross margins and incrementally growing our gross margins where we can.

Sorry, your question was with respect to the U.S., was it, Howard?.

No, I was just -- sorry, John, I would say in the context of the U.K., you're obviously transforming the business. Therefore, as you come out of that, how should we look at the cost profile of the U.K.

business? Does it move radically from where it is at the moment?.

Apologies, Howard. Sorry, I was talking to the U.S. Sorry. So with respect to the U.K., we said last year, if you recall, we expected to close 80 branches and a distribution center. That will have an impact on the cost base over the next 2 or 3 years.

Will that be radical? It will depend partly on maintenance of the top line of those 80 -- with those branches. But at the moment, and certainly, what we've encouraged the team to do is to make sure that we look after customers and we can service customers from the remaining branches, from the remaining branch network.

That's absolutely key to the whole transformation plan. And I think the team is doing a good job on that. I think you can see that from the numbers. At least we have arrested the declines in profitability that we saw last year. I do think now, over time, if you look at that transformation plan, there are 3 parts to it.

The first is making sure that we deliver reliable service so we can get back to profitable growth in the business. So growth is part of that plan. The second is making sure that we can look after margins and incrementally improve those margins because U.K. margins have come down quite a lot over the previous 5 to 6 years.

And the third is to make sure that we can get the benefit of those closures and the other changes to the business model to make sure that we stay efficient. So that's the overall plan. I think we said that we expected to cut costs by £25 million to £30 million a year.

Now that happens over the projects, and that gives you a sense of how substantial those savings are. That's on a cost base of, when we started off, £380 million.

Does it give you a sense?.

Yes, that's great..

Our next question comes from the line of Yves Bromehead from Exane..

A lot of questions have been already answered, but maybe a few others. And the first one is on your M&A pipeline, you have a strong M&A pipeline. Could you maybe give us some detail as to where you're looking to make acquisition, and would that be again maybe on your core market U.S.

and U.K.? And then my second question would be on whether or not you would be looking forward to pursue a U.S.

listing now that Ferguson accounts for more than 80% of EBIT?.

Yves, thank you very much indeed. Look, on the M&A pipeline, we have always said we would like to look at M&A where we can generate visibilities and also when the team is in a great shape to able to drive those abilities and accommodate them. I think the U.K. today needs to focus absolutely on transformation.

So I don't want -- I won't want to distract the U.K. team from executing that transformation strategy. So overwhelmingly, at the moment, we are looking at M&A in the North American markets where we have good bandwidth to be able to accommodate those acquisitions. Look, on the U.S.

listing point, I know this is a trading update, we shouldn't really sort of straighten that territory, I don't think. But just to remind you, moving the listing is not in our gate, okay? That is a matter for shareholders, would require a substantial shareholder majority.

One thing I would say, and we talked about this at interim, there are plenty of other things that we can do to improve the liquidity in our registry in the States, not least of which we could look, for example, at listing our ADRs in the States. That is something that we're giving some consideration to, but not listing today, Yves, I'm afraid..

Okay, great. And just maybe a follow-up on your assets. So you're disposing the Nordics business.

How core is your European and Canadian businesses today?.

Sorry, I didn't quite pick that up then?.

Yes, sorry.

No, I was asking whether or not you see your Canadian and Central European assets as being core, or would you be also looking at probably disposing those assets in the medium term?.

Now look, the -- there is a -- the Canadian and Central European assets, you could obviously see those as core. The Canadian business has performed very well, as you can see. Our business at home has performed very well. You can see that in the numbers. Actually, those businesses have performed well over quite a number of years.

And particularly, in Canada, when you see how the business accommodated the impact of the oil and gas weakness in the West, I'm very proud of the team. Very proud of the team in Holland for all of their doing as well, bringing a new distribution center on board this year, launching B2C, very pleased with both of those businesses.

So no, we're not announcing any of the disposals today, Yves, I'm afraid..

Our last question comes from the line of Olivia Peters from Berenberg..

I think I just have one question. With the development of Amazon B2B, which is said to be growing pretty aggressively, I was wondering what extent you think that, in particular the U.S.

business, is sort of Amazon-proof as it were? Could you comment on that?.

Olivia, thank you very much, indeed. Look, I think we constantly look out for Amazon and other competitors, and it would be stupidly blasé about a threat. They dish the products today, and some of those products are competitive with Amazon. And I think there is quite a different service element here.

If you look at the proportion of our business, for example, which is bed fall, it's quite a large proportion. If you look at the proportion of our business which is special, so essentially items that we don't stock, that's quite a large proportion of that in our business.

If you look, we always have customers, a bit of pricing, we service the customers outside sales resources and the entire sales resources to help them to do work and to understand and interpret the specification on a lot of work. So I do think we've got a very good service proposition in all of our businesses.

And it isn't just as simple as buying products, something that I do say and I talked to people about this. Since the beginning of time, any of our customers can go to any of our suppliers and get products, and they can get these cheaper than we can sell to them.

We have to recover our costs, and we will only be able to recover our costs if we add value to those products in getting them close to the customers, give them the right mix of products, give them the right availability of product.

Are we going to be outserved by somebody? Look, and this always comes as a surprise to somebody, we do and have done for a long, long, long time, quite a lot of same-day deliveries. I was in a branch recently further down in the Southern State, over half of all sales in that branch were [indiscernible] in terms of local, which is a 1-hour service.

Yes? You call your order or you go online and place your order, where you pick it, pack it and it's there on the outbound delivery platform for you, ready for you to pick up. And I watched what customers are doing, and many of them were coming around. And when can I get [indiscernible].

We were putting stuff in the basket, people comes, and they have time for sort of just [indiscernible] throw it through the window. These are great services. It's everything that we do, 100% Amazon-proof, that will be arrogance. So we are competitive.

On our B2C business, by the way, we would say, Amazon, Home Depot, Lowe's, they are our 3 biggest competitors. We are already competitive with Amazon. Our platform was better many, many years after Amazon started business.

So I don't think we should be blasé, and we need to make sure that we're adding great value to customers and the pricing is consistent and fair. Those are some of our strategies to make sure that we stay relevant to all of our customers..

That's all the time we have for questions. Mr. Martin, at this time, I will turn the conference back to you for any additional or closing remarks..

Operator, thank you very much indeed. Thank you, everybody, for dialing in today. And please, if you got further questions, Mark and Nick are here. I'm happy to take any calls as well, and so do feel free to ring in. And sorry about the stuff that we promised you, we'll get back to you as well. So thank you all very much.

And operator, thank you very much for taking the call..

That concludes today's conference. Thank you, everyone, for your participation. You may now disconnect..