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Edited Transcript of WOS.L earnings conference call or presentation 1-Oct-19 7:30am GMT

Full Year 2019 Ferguson PLC Earnings Presentation

London Oct 3, 2019 (Thomson StreetEvents) -- Edited Transcript of Ferguson Holdings Ltd earnings conference call or presentation Tuesday, October 1, 2019 at 7:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Gareth Davis

Ferguson plc - Chairman

* John W. Martin

Ferguson plc - Group Chief Executive & Executive Director

* Michael Powell

Ferguson plc - Group CFO & Executive Director

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Conference Call Participants

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* Ami Galla

Citigroup Inc, Research Division - Senior Associate

* Arnaud Lehmann

BofA Merrill Lynch, Research Division - Head of the European Construction & Building Materials and Director

* Aynsley Lammin

Canaccord Genuity Corp., Research Division - Analyst

* Clyde Lewis

Peel Hunt LLP, Research Division - Analyst

* Elodie Rall

JP Morgan Chase & Co, Research Division - Research Analyst

* Gregor Kuglitsch

UBS Investment Bank, Research Division - Executive Director, Head of European Building & Construction Research and Equity Research Analyst

* John Messenger

Redburn (Europe) Limited, Research Division - Partner of Construction & Building Materials Research

* Paul Daniel Alasdair Checketts

Barclays Bank PLC, Research Division - Director

* Robert Eason

Goodbody Stockbrokers, Research Division - Head of Research

* Suhasini Varanasi

Goldman Sachs Group Inc., Research Division - Equity Analyst

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Presentation

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Gareth Davis, Ferguson plc - Chairman [1]

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(inaudible) gentlemen, and welcome to Ferguson's full year results presentation for 2019.

As you know, it's rare for me to be accorded a speaking part on these occasions, but the executive management have decided to risk it on this occasion. Firstly, I'd like to extend a very warm welcome to Geoff Drabble, who's in the audience today. Geoff will take over the reins from me in November as Chairman. I'm sure Geoff needs no introduction, and he joins Ferguson following 12 years as the Chief Executive of Ashtead. He's been one of the most successful CEOs in the FTSE in recent years, and his record of value creation has been simply outstanding. He brings a wealth of experience in the distribution, technology and manufacturing sectors, particularly in the United States. And I have no doubt he'll be a wise counsel for our executive team and will lead the Board with great skill and personality. For those who don't know: Geoff is a Newcastle supporter, but despite that, he's well known for his cheery disposition.

Secondly, as we announced in September, this will also be John Martin's final set of results at Ferguson. John joined the Board as Chief Financial Officer in 2010, before being appointed Group Chief Executive in 2016. Now during his time with us, the group has been significantly simplified, exiting less-attractive markets and focusing resources on those markets where the company is best equipped to win. John has brought great strategic clarity to Ferguson and he leaves the business in very good shape. John's numbers for his tenure at the company are particularly impressive. He's turned in 37 quarters of revenue growth and 9 consecutive years of trading profit growth for the group. Total shareholder return during his time at Ferguson has been a very impressive 436%, and we have returned GBP 3.8 billion to shareholders in the last 10 years. Now that's not bad for a Stoke City fan. Away from the numbers: John has been a great ambassador for the company. And John, thank you for your service. And on behalf of the Board, we wish you the very best for the future, which I'm sure will be exciting.

I'm also delighted to say that Kevin Murphy will succeed John as Chief Executive in November. Kevin is a very experienced executive operating in the plumbing and heating industry in the United States. He was appointed CEO of Ferguson Enterprises, and he joined the Board 2 years ago. He's got a strong track record of delivery, having previously served as Ferguson's Chief Operating Officer for 10 years. Under Kevin's leadership, Ferguson has continued to gain market share and generate profitable growth, and we continue to execute our highly effective strategy. Now Kevin will be joining John and Mike Powell on the road show over the next couple of weeks. And I know many of you have met Kevin at previous Investor Days and road shows.

Mike Powell, of course, will be particularly delighted both today and on the road show to talk to any Australians who might be foolish enough to get into his presence.

And finally, they always say end on a high, and I'm delighted to sign off as Chairman with another strong set of results. I just wanted to say that it's been a huge privilege for me to have served this great company. And I am very confident that you're in safe hands with Kevin, Geoff and Mike at the helm.

Thanks very much.

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John W. Martin, Ferguson plc - Group Chief Executive & Executive Director [2]

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Gareth, thank you very much indeed for those very kind words.

And good morning, everybody. Welcome to the presentation of our results for the year to 31st of July. You've got Mike and I presenting this morning. We're also joined, as Gareth mentioned, by Geoff, who is taking over from Gareth at the AGM as Chairman. Now as you know, I'm handing over to Kevin Murphy in November. Kevin is joining Mike and I for the road show. He couldn't be here today because of prior commitments, but he is joining us on the whole of the road show, so shareholders will have plenty of opportunity to hear from the whole of our team about why we're so enthusiastic about the opportunities for Ferguson in the years ahead.

2019 has been an extraordinary year for the company, and I'd like to share some of the highlights. Firstly, as you can see on the chart, it is our ninth consecutive year of growth, with sales up nearly 8%. And it's also the ninth consecutive year of gross margin expansion, up another 10 basis points. It's worth reflecting that, if our gross margins today were at the same level that they were back 10 years ago, our profits would be $500 million less than they are. It's also the ninth year of trading profit growth, perhaps surprising when you think of all the businesses that we sold over that period, up another 7.5%; and also the ninth year of EPS growth, up 16%.

The markets weakened over this year, but I'm very proud that we continued to take market share. We took prompt and decisive action to control our costs, and I'm very proud about how Kevin and the team got about this. The cost base today is in very good shape as we go into the new year. We invested over $600 million of the cash that we generated on some great acquisition, helping to improve further our market positions. Own brand, which we'll come to a little bit later, has also been a strategic focus. That now represents 8.6% of group sales in the second half, but the economics are about twice as important due to stronger gross margins. And we've also concluded on the future of Wolseley in the U.K., which will be demerged as an independent company listed in London.

It was another great year of cash generation, with a record $1.6 billion of cash from operations contributing to further expansion, as you can see from the chart, in our return on capital employed. We returned another $600 million to shareholders via dividends and buybacks. And that strong cash position has enabled us to increase the dividend by a further 10% this year.

So those are the highlights. And now over to Mike for the financials.

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Michael Powell, Ferguson plc - Group CFO & Executive Director [3]

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Good morning.

I'm pleased obviously to present the group's full year results, which show we've had a strong finish to the financial year: revenue growth for the group clearly driven by our U.S. organic business but a good, decent contribution from bolt-on acquisitions through the year; ongoing trading profit $1.6 billion, over $100 million or 7.5% in constant currency, with headline EPS up 16.4%. As you'll see later, cash generation has been excellent again this year, and the balance sheet is in great shape at 0.7x levered at the end of the year. And we've recommended a final dividend to be increased by 10%, which reflects our ongoing confidence in the business.

Moving on to the revenue and trading profit growth. What I've done here for the overall group is I've expanded the first chart to expand the revenue growth of the 7.1% and the profit growth of 7.2%. You can see the organic profit growth of 5.3% exceeding the top line revenue growth, and that's due to good gross margin performance and tight cost control. There was also significant contribution from acquisitions. And it's pleasing to see the effort put in by the teams to bring these businesses into the Ferguson family. The profit from the acquisitions shown here is after $14 million of integration costs.

Organic revenue growth in the U.S. did moderate in the second half, albeit against some tough comparators. We continued to take market share, something John will come back to later. Inflation has been running about 2% to 3% across all of our businesses through the year. In the U.K., on a like-for-like basis, broadly flat. And Canada showed some declines into the second half of the year.

So moving on to the business results.

And first and foremost, our largest region, the U.S., delivered a strong performance, and we continued to outgrow the wider market and deliver good revenue growth. Gross margin is well controlled through good pricing discipline, particularly in light of the market environment. Around the half year, we took decisive action on costs to control our cost growth, particularly around labor which as you know comprises around 60% of the operating cost base. And this has ensured we had a good finish to the financial year. In July, we've also initiated a voluntary early retirement program and made some selective closures of underperforming branches. These actions allow us to ensure we have the correct cost base going into this new financial year whilst also allowing us to invest, where appropriate, in the growth elements of the business whilst protecting the income statement. Trading profit, therefore, for the year of $1,508,000,000, over $100 million ahead, with trading margins at 8.2%.

Not only am I very pleased with the incremental absolute dollars, of course, but also by the manner in which the team got after this result. And the shape of the result in the latter half particularly pleasing, as it shows our ability to deliver in a low growth environment. You can see that, that revenue growth in the U.S. was pretty broadly based. We've shown our Blended Branches on the map, roughly 6% across all of the geographies. Elsewhere, Waterworks continued to grow well, and the HVAC and Industrial businesses both generated strong performance during the year. Revenue growth in eBusiness was lower, as we continued to consolidate our pay-per-click advertising spend across fewer websites.

On to the U.K. And as you know, during early September, we announced the demerger -- the intention to demerge the U.K. operations. John will come back to that one as well in a little while. Like-for-like revenue in the U.K. broadly flat; difficult repairs, maintenance, improvement market. Gross margins, though, were slightly ahead due to the improved product mix. And trading profit was ahead of last year in local currency. And the team has worked very hard to get this business back onto a much firmer footing. And it's pleasing for us to see the turn of the tide here and deliver a modest increase in profit in which is a pretty -- in a pretty lackluster market environment.

Canada faced some pretty challenging market environment this year. We saw markets go X growth in the second half. And you can see therefore overall organic growth 1.1% lower for the year, acquisitions contributing 5% to revenue growth. Residential markets, which represent about 60% of our mix of business in Canada, weakened through the year as a result of the government measures to restrict mortgage credit, the impact of foreign buyer taxes and rising interest rates, but despite those tougher market conditions through the year, we worked hard defending gross margins which were ahead of last year. And we also implemented here again decisive cost control measures as the markets weakened, particularly into the second half. And therefore pleasing to see underlying profit growth in the year overall.

Moving on to exceptional items. These were $94 million in the year. As I've already commented on, we offered a voluntary retirement program in the U.S. and did some small branch-based restructuring that totaled $60 million at the top line. The U.K. restructuring costs remained in line with what we booked at the half year, so no change there. And whilst I've described the impact on the income statement, please do remember that the cash effect is very different, as we worked on disposals of both the Dutch business and sale of a U.K. distribution center. Those combined generated about $150 million of cash, and therefore the cash position during the year on these exceptionals is near a $100 million inflow.

Finance and tax charges. As expected, the increase in finance charges were principally due to the prior year debt levels being artificially low as we had the proceeds of the Nordics in the prior year debt numbers. And the effective tax rate for this year was lower than 2018, as we benefited from U.S. tax reform.

On to cash. Strong cash generation and the disciplines around it continue to be an important priority and quality of our business. Cash flow from operations $1,609,000,000, after a slightly better working capital performance than I expected.

As we guided, capital investment was a little higher in 2019 mainly due to additional investments in the new Perris distribution center which is now up and running in Southern California. We completed a number of attractive bolt-on acquisitions, mainly in the U.S.A., and you can see that cash outflow of $657 million. We also worked hard on disposing off noncore assets. The $303 million cash inflow represents that. That's our Dutch plumbing and heating business, some surplus Nordic properties and the disposal of the distribution center in the U.K. And then towards the bottom, repatriation to shareholders of nearly $600 million in the year.

The profit and cash that I've just described, that delivery, means that we finished the period with a strong balance sheet, net debt-to-EBITDA 0.7x. At the balance sheet date, we'd completed $150 million of the $500 million share buyback that we announced in June. Since then, as I stand here today, we've done another $160 million and expect to complete that buyback in the next couple of months. And with that in mind, as I think about the pro forma debt that we ended the year, if you add the buyback in fully, that 0.7x on a pro forma basis I don't think of as ending the year at around 0.9x, if you add all that buyback in.

And as is normal, I'd clearly expect, as we go into our peak months for working capital which is generally around the Christmas time, for us to leverage a little bit more, 0.3x or 0.4x, which is our normal seasonal working capital.

So moving on to technical guidance.

We have 1 additional trading day this year. That's about $12 million of profit. I've included the impact of the completed acquisitions that we've done for the full year effect into FY '20. And as previously guided, we'd expect the tax rate to move up to 25% to 26% for FY '20 and onwards after the change in the Swiss tax reform that was announced earlier this year. CapEx will be at more normal levels in the year. I'd expect those to be around the $300 million to $350 million mark, and that still has some ability for us to expand capacity within that number.

Finally, we wanted to remind you the capital allocation priorities, which you can see on the top of the slide and are certainly covered in previous sessions. These have not changed. The strong cash characteristics of the business allow us to invest organically and be self-sufficient. The Board remains committed to a progressive dividend policy, and we expect to grow dividends through the cycle and in line with long-term earnings. We'll continue to invest in selective bolt-on M&A opportunities and return any surplus capital to shareholders in a reasonably prompt manner.

So let me wrap up. I'm pleased with 2019. We've delivered a good set of numbers, good earnings. We've got continued excellent cash generation. We've got a strong balance sheet, and therefore we're in a great position as we head into the new financial year 2020.

With that, I'll hand back to John for the last time.

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John W. Martin, Ferguson plc - Group Chief Executive & Executive Director [4]

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Thank you very much, Mike.

I'll start today with a couple of comments about how the markets have developed during the year. The growth of the markets is most clear from the supplier data that we've referred to in our press releases this year, which show that overall U.S. growth slowed from about 6% in the first half that you can see there on the chart through to about 1% in the second half. As we've done for several years, we grew faster than the markets and continued to gain market share, again as you can see on the chart, in each sector, outperforming the markets by just over 3%. This chart from Zelman shows how the market for all building products, that's building products going into new resi, into home improvement and also commercial construction, has moved over time. Our markets, of course, represent a subset of that market, but this data also suggests that the market for overall building materials has been growing over the last 6 months by about 1% or 2%. And that's the backdrop of the markets that we've been operating in.

I think as Mike said, the results that we've produced in this environment really confirm the strength both of the operational management in our business and also the attractions of our service-driven business model. Now one of the key strategies of the group is to ensure that we constantly maintain and improve the efficiency of our operating model. That's important for 2 fundamental reasons. Firstly, we need to make sure that both the services and the product availability that we provide to our customers is the very best in the industry and that we provide our associates with the tools to fulfill that promise to our customers. And secondly, we want to maintain and improve the financial returns in the business. On the chart here, the dark blue columns to the left represent the organic revenue growth that we achieved in each quarter of the year, and the pale blue lines represent the growth in head count at the end of each of those quarters. You can see during the year how we balanced and brought down head count in line with the lower growth rates in each quarter. And that strong control over costs has enabled us to continue to invest in our strategic initiatives and also to protect the P&L.

In the fourth quarter, just before the end of the year, as Mike mentioned, we also offered a voluntary early retirement program to selective associates in the U.S. That's an efficient and associate-friendly way of both reducing head count and also freeing positions to be filled by the next generation of managements.

I mentioned own brand. Our product portfolio includes 22 brands, some of them you see up there on the screen, applied to thousands of products in categories such as referent finished plumbing, appliances, vanities, lighting. These products offer greater choice and value to our customers with excellent quality and excellent reliability but also with nationwide availability supported by the strength in post-sales support of Ferguson. They also drive profitability, accounting for more than 17% of our U.S. gross profit in the final quarter. And for our associates, selling these brands represents the best way for them to maximize their commissions. Now our organic growth of own brands during the year was more than double the organic revenue growth rate of the business as a whole; and that was boosted by acquisitions of Safe Step, James Martin and Jones Stephens during the year.

We've talked before about the reconfiguration of our distribution centers. Now just to touch on Southern California: Southern California and the adjoining southwestern states, this is a fantastic market for us. It's a $6 billion market in which we have a 21% market share. That's grown at double-digit rates now for several years. Perris that you see on the screen, this is the site of our newest distribution center serving 130 branches across California, Arizona, Nevada and Utah across all business units. It's also going to house a consolidation center for imports into the West Coast of the U.S. At over 1 million square feet, it's replaced the leasehold facility at nearby Mira Loma which was half the size but beyond full capacity so we were having to lease out short-term capacity in the area. In the first full year of operation, throughput at the site will be more than $700 million, and the investment will enable further throughput over time of another $400 million of product. Cash operating costs at the site are $1.3 million a year, lower than the costs of renewing the lease at the previous site. This site has been brought into operation during the year with no disruption whatsoever to customer service. One final thing on Perris: To improve the efficiency, safety and sustainability, we're incorporating fully reusable totes. And we're installing a solar power system which will generate more than 3.5 million kilowatt hours of electricity per year.

As Mike mentioned, it's been a very busy year on the acquisition front. Our largest acquisition was Blackman. Blackman is the market leader for residential and commercial plumbing in Long Island. Long Island is a great market. It's got a population of 8 million people, many of whom are quite affluent, but they all need water and wastewater supplies. We did have a number of branches on Long Island, but we were significantly underrepresented. We'd been trying to acquire Blackman now for several years. Gareth, we brought it to the Board about 5 years ago. First time we had, it didn't quite get there. The transaction was the culmination of a huge amount of hard work and patience on behalf of the acquisitions team. But for our technology and supply chain teams, of course, the hard work only really began when we concluded the deal. A combination of former Blackman associates and Ferguson associates have worked tirelessly to integrate Blackman into the Ferguson family, including switching the operational systems to Trilogy, combining the supply chain networks to ensure access to our distribution centers in Coxsackie and Secaucus. We had up to 100 Ferguson associates working full time on the integration during the year, and we invested $8 million in the integration project. Now historically, Blackman didn't generate the net margins that we come to expect of ourselves in Ferguson. But given Blackman's market position in Long Island, we knew we could generate very significant synergies, leverage our scale to provide the best product availability and service so that, over the long term, we do expect this to generate very good returns for shareholders.

Now our vision for Ferguson is to be the trusted business partner and to provide the very best service to our customers available in this industry. By focusing relentlessly on customers, they come back to us day after day, year after year. We then put ourselves in pole position to make great returns for shareholders. One of our values is innovation that you see over there on the right. We are an innovative business. Just to give you an example: Our innovation team has invested in a number of exciting opportunities this year, bringing new technology and process to the build environment. One of our investments is in a field service management company called [Paysa]. This has developed an innovative package of solutions helping residential plumbing and HVAC contractors with scheduling, with work flow management and payment processing.

Now increasingly, our shareholders and stakeholders are interested, quite rightly, not just in the financial results that we produce but in how our business is run, how we achieve those results. And I wanted to share with you today just a couple of examples of our own values in action.

The safety of our associates is our prime responsibility. It's the first item on the agenda of management meetings and the first item in management reports. This year, we improved our total recordable injury rate by 22% with a range of initiatives supporting our associates to focus on the right safety equipment and the right way to handle materials. And Ferguson has also been included -- just been included, in the Dow Jones Sustainability Index, achieving a perfect score in the environmental reporting category and a 35% improvement on our score last year.

Now I thought it would be a good idea today to reflect on the excellent market positions that we have in the U.S. You might remember this chart. It's the chart of our key customer groups and the estimated market share that we have in servicing each of them. The first 3 of those groups, on the left-hand side, have very strong market positions serving both residential and commercial tradespeople and contractors in RMI and new build markets. The infrastructure is principally the Blended Branches network and showrooms which service both contractors and unconnected customers. Now Waterworks, HVAC and Industrial customers are served both by Blended Branches and also, where appropriate, by stand-alone branches. And then Facilities Supply and the standalone eBusiness at the end, those businesses do leverage the asset base of the group to serve new customer groups but with significant product overlap in the maintenance and decorative plumbing projects markets. It's worth reflecting each of these groups has excellent growth characteristics and generates similarly attractive net margins and returns on capital.

Now this chart shows the degree to which those customer groups are served by leveraging our core infrastructure. Along the bottom there, along the bottom of the chart, is an indication of the customer strategies adopted by the largest competitors. That's WinWholesale, F.W. Webb, Hajoca and Morrison. They are very similar in their strategic breadth to Ferguson, though of course far smaller.

Now moving on to the U.K. We announced last month we are going to demerge the U.K. business. That will become a stand-alone, independent listed company in London. Wolseley has the largest network of branches in the U.K. serving the plumbing and heating needs of both residential, commercial and infrastructure tradespeople and contractors. We have a good market position in each of those segments, particularly focused on repair and maintenance markets. The focus of the business and the new management over the last 18 months has been on industry-leading availability, in-night branch fulfillment and driving customer service. And the team are now applying operational excellence in our supply chain and are driving demonstrable improvements in the business.

There are some good opportunities for the U.K. to leverage its assets, including own brand which accounts for over 8% of sales, and very effective e-commerce functionality. In addition to the high availability of the core range in branch, overnight fulfillment from distribution centers enables a further 30,000 products to be available in store at 7:00 a.m. the next day. There's a good opportunity in the business to drive better pricing discipline, including central guidance over contract pricing and consistent great value pricing for spot sales to local tradespeople. The closure of the Leamington distribution center, as Mike mentioned, during the year, that released more than GBP 40 million of cash without disrupting service. And there are further opportunities to improve the capital efficiency of the business.

It's also worth a reminder of the underlying financials of the business. You can see, last year, whilst market growth here was low, on an underlying basis, trading profits were slightly ahead. We made a small acquisition after the end of the year, adding to some of the momentum of that business that Mike talked about.

Listing. The Board has kept listing structure of the group under review over several years. And following the demerger of the U.K. business, 100% of our profits will come from North America. And about 40% of the company's shareholders are based in the U.S. A number of shareholders have asked us to assess the listing structure again; and we announced last month, as you know, that we've started to do that. As we've talked to shareholders over summer, we've heard a number of messages very clearly. Shareholders wants to hear from the company. They want the company to set out our analysis of the benefits and costs of each option. And they've encouraged us to do the right thing for the company for the long term. That's great guidance for the company to follow, and that's what we're going to do.

A number of you have asked about the factors that we need to take into account during that assessment. Some of those are shown on the chart. Some of these are complex, all right? We have an absolute duty to shareholders to address them diligently and in detail. We'll work promptly on this, but we will work properly and thoroughly, and we'll continue to consult with shareholders along the way.

So in terms of outlook. Look, the markets are broadly flat right now. We have continued to grow our order books, which stands a little over $2 billion, suggesting continued modest growth in the months ahead. We do expect to continue to outperform the market and to make further progress this year.

Thank you.

Look, just before we open the floor to questions, this is my last set of Ferguson numbers. I'd love to make a couple of closing remarks; and get back on the Chairman, which has never happened before. It has been a huge honor to serve Ferguson, Gareth, and Wolseley for nearly 10 years. I've enjoyed every minute of it -- well, nearly every minute of it. The Ferguson story, I think, is a great example of the value of strategic clarity and simplicity combined with great operational execution and a relentless focus on serving customers, all brought about by the best associates, the best associates, the best colleagues and the best Board that I've had the privilege to work with. Our shareholders have been patient, and the Board has been very supportive. In particular, we have been supremely well served by our Chairman, by Gareth, to whom I owe a huge debt of gratitude. And thank you, Gareth, for your guidance and wise counsel.

I'm absolutely delighted that the company is going to continue to be managed by strong and capable leaders such as Kevin Murphy, such as Mike Powell; and that they will be supported in the next stage of our development by Geoff Drabble. And Gareth mentioned Geoff's track record, and the generation of shareholder value is absolutely fantastic. I'm quite confident that this company faces a very bright future under this leadership team.

And thank you all too for your unbiased coverage. I've enjoyed nearly every buy note, and I've ignored nearly every sell note.

Thank you very much.

Have we got a mic, Mark, Mike? Mike with a mic.

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Questions and Answers

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Elodie Rall, JP Morgan Chase & Co, Research Division - Research Analyst [1]

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Elodie Rall from JPMorgan. I have a couple of questions, if I may. First of all, can you come back on the Slide 25, on the cost flexibility, and give us a bit of color of how much additional cost flexibility you see in the business? Should we see a little bit more pressure on the top line in the U.S. in particular? And second, how is the acquisition pipeline shaping up? Is it still as strong as usual? Or are we seeing any headwinds from, I don't know, higher valuation or anything? And lastly, I know you've touched a bit on that, but if you could give us a bit more color about the feedback that you got from shareholders on the listing options.

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Michael Powell, Ferguson plc - Group CFO & Executive Director [2]

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Okay. Thank you. Well, given it's -- that cost is a forward statement, I'll not let John commit us to anything forward...

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John W. Martin, Ferguson plc - Group Chief Executive & Executive Director [3]

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But there's lots more to do.

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Michael Powell, Ferguson plc - Group CFO & Executive Director [4]

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No. So I think you've seen from what we have done -- let me just roll back. I'm very pleased with what we've delivered in the second half. It is very easy to sit here when the business has been growing at 10% a year. And so when tough times come, you're going to reduce your cost base. That's what this guy used to do, okay? I'm very pleased that actually we've at least shown that we got after that in a quarter, okay? It is only a quarter, and we need to keep on that case. That's why we've just launched the voluntary early retirement program to keep making sure that we get the cost base right for the top line but also provide succession for our future management so we can get the real growth characteristics of the business locked in for the future. So I think we will always stay cognizant of it. I'm very pleased we've actually shown we can do it because actually it's the first test of the business, in truth, in a low growth environment for years, okay? So we thought we could do it. We've actually just shown we can do it. We need to keep on doing it.

Labor is 60% of our cost base, so it is actually about labor, but it's also about protecting the opportunity for the upside when the upside comes. So I come from a manufacturing background. We're all about costs. The great strength of Ferguson is taking those growth opportunities when they come, so it is a balancing act, okay? So we will get after the cost base. There are clearly opportunities, but it is in labor. And it is labor that get you the growth when the growth comes. So Kevin and the team are very close to that as I am. And there's always a bit of yin and yang around cost out versus future growth. That will continue. And I think that's a healthy tension for us to continue, but we'll keep absolutely on top of the cost base. Now we've got to a good place, we'll keep on top of that cost base, okay?

In terms of acquisition pipeline, absolutely normal. That means nothing because, of course, acquisitions come and go. We look at a number of acquisitions. I'd say most of the acquisitions we're looking at would fall into the normal pipeline. That guidance will -- over the years, John, that's normally averaged around 200 million, 250 million, but -- if you wanted a number. It's not a bad number, but it's likely to be wrong because, of course, I'll either look it'll likely be not a lot or a little bit more. But it's mostly normal at the moment. There's nothing abnormal about our pipeline. We continue to work it hard.

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John W. Martin, Ferguson plc - Group Chief Executive & Executive Director [5]

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Yes. And Elodie, look, on the shareholders question: We've talked to about 2/3 of the shareholders representing about 2/3 of the shares in the company, which is about 35 shareholders. I would say there's been a wide range of view. So far, we've posted sort of 3 or 4 questions, carefully scripted questions, same questions, to that group of shareholders and heard back from them. And I think now we need to reflect on that but -- and be informed in that in our work. Because I think, next time that we go and do a sort of a little more -- a more sort of structured consultation with shareholders, shareholders have said they would like the company to set out the costs and benefits. One thing that is clear is not all shareholders have got a very clear view of actually what the options are, what they would mean, what they mean for the company vis-à-vis what they mean to shareholders. And then the other point that I would say, there isn't a single, there isn't going to be a single shareholder view of what the right way forward is for the company. There's a wide range of views and some of them are not going to be reconcilable, but the Board need to -- and I think the encouragement, Mike, when we've spoken to shareholders is pretty much everybody has said, "Do the right thing." I think that's great guidance for the company and for the Board.

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Arnaud Lehmann, BofA Merrill Lynch, Research Division - Head of the European Construction & Building Materials and Director [6]

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I've got the mic, so I'll go for it. Arnaud Lehmann, Bank of America. A couple of questions. Firstly, for you, John, I guess. We knew that the direction of travel for Ferguson would be to have you as -- sitting as CEO in the medium term, but I guess everybody was slightly surprised that the move came probably faster than expected, so could you maybe give us a bit of color around what happened at Board level or at shareholder level that accelerated the change considering you are still extremely young? And he's done a -- as you relate, you've done a great job.

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John W. Martin, Ferguson plc - Group Chief Executive & Executive Director [7]

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And good looking. And good looking. So thank you, Arnaud.

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Arnaud Lehmann, BofA Merrill Lynch, Research Division - Head of the European Construction & Building Materials and Director [8]

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That too, absolutely. My second question is on the decision to demerge U.K. Again, can you give us a bit of color? Is it -- was it a business that maybe you wanted to sell and you couldn't find the right buyer? And I guess, related to that, do you believe it has critical size to be a stand-alone entity? And would you consider a combination with another U.K. player, either in merchanting or heating and plumbing, in order to make it more visible assets once it's demerged?

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John W. Martin, Ferguson plc - Group Chief Executive & Executive Director [9]

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Let me take the first one -- let me take the second one, first, on the demerger, Arnaud, if I may. Look, the business has -- we haven't had the business for sale. We said we're going to demerge it. That's what we intend to do. It's to follow through on the demerger. And we absolutely think it's got critical size. It's a GBP 1.7 billion business and have made GBP 54 million trading profit last year. So clearly the EBITDA number is sort of north of that. And so yes, we do think it's got the -- it's got critical size. It's a cash-generative business. It's got a good -- it's got decent assets. There's no reason that the business shouldn't do well as a stand-alone business, in our view. The combination, I've got to say we have looked over the years at almost every possible, every conceivable combination of the business with another; and that hasn't worked so fine. It has a good future as an independent business. Slightly strangely, this summer, we did find one small acquisition. It's a nice little transaction, but it's small. It didn't really change the structure of the industry. It just strengthens our business. So that's the background on the demerger.

And look, with regards to -- with regard to me sort of moving on to Kevin, I don't see -- I see the timing as being absolutely logical. I saw that. The Board saw that. This was the most mutual of mutual agreements. It was just to us the obvious thing and the obvious step, when we are a 100% -- when we're 100% North American. So I'm delighted to be handing over -- truly delighted to be handing over to Kevin. I sponsored him and appointed him 2 years ago to the position that he's currently in. He's done a great job. He's a strong, smart, energetic leader of the business. That felt entirely appropriate. What wouldn't have felt appropriate is for me to have relocated to the U.S. That would clearly have left sort of 2 people with CEO on their cards. That just wouldn't have felt right. So now it felt like a good time, from my perspective, and I think that was something with which the Board entirely agreed, all right?

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Arnaud Lehmann, BofA Merrill Lynch, Research Division - Head of the European Construction & Building Materials and Director [10]

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Will Kevin be based in the U.K.? [Or if he's moving too]?

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John W. Martin, Ferguson plc - Group Chief Executive & Executive Director [11]

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No. He's in Virginia. Yes.

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Suhasini Varanasi, Goldman Sachs Group Inc., Research Division - Equity Analyst [12]

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Suhasini from Goldman Sachs. Just a couple of questions, please. Can you please clarify how the trading has been, post full year close, August, September? Has it been consistent with the trends that you've seen in second half of the year? And second one, by when can we get an update on the potential new listing structure? Will it be by year-end, in a month's time?

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John W. Martin, Ferguson plc - Group Chief Executive & Executive Director [13]

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Thanks. I think trading since year-end, nothing unusual. So I think, if you look, we haven't given specific monthly data. That doesn't really help. But if I said to you it is bang in line with our budget -- so no dramatic trends there. Look, on the listing, we just need -- you saw the things on those charts. One of the things that's been interesting, Mike, as we've dug into this, there isn't whole heaps of precedents. There was Invesco in...

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Michael Powell, Ferguson plc - Group CFO & Executive Director [14]

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2007.

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John W. Martin, Ferguson plc - Group Chief Executive & Executive Director [15]

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2007 that's delisted and relisted, fine. We need to sort of work through that, but there's just a lot of detailed work to do. And I think we've been surprised as we've dug in. There aren't thousands of professionals who know exactly how to do this assessment and what the options are, and so it just needs to be worked through. So it is going to take, I'll say, a number of months to work through that work, okay?

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Suhasini Varanasi, Goldman Sachs Group Inc., Research Division - Equity Analyst [16]

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Okay.

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Aynsley Lammin, Canaccord Genuity Corp., Research Division - Analyst [17]

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Aynsley Lammin from Canaccord. Just three, please. First of all, I just wonder if you could comment on the kind of market backdrop in the U.S. Is it still -- not easy, but is it still achievable from the market share gains, with decent gross margins? Or is it a bit more competitive given flat markets? Secondly, just on the end markets, maybe a bit more color if you break down the kind of private non-res side, any change in trends within those categories? And similarly, if you could just comment on resi. And then thirdly, just on the U.K. comments you just made. You remain on track with your budgets, but have you seen any further deterioration, a bit more fragility in the U.K. market given the kind of political backdrop?

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Michael Powell, Ferguson plc - Group CFO & Executive Director [18]

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Let me take the U.K. first, and I'll let John pick up on the U.S. No. I think, listen, it's pretty early in the year still, so I don't think we've seen dramatic shift in the U.K. It's clearly not gotten any easier and -- but Mark and the team there are doing a good job around making sure we've got the right product set and the right offering to customer, and that right service capability, as John has touched on, making sure that we're absolutely attractive to the customers. But no, the market remains pretty challenging in the U.K., but I don't think we've seen a significant shift in the last couple of months any different than we've seen in the last sort of 12 probably.

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John W. Martin, Ferguson plc - Group Chief Executive & Executive Director [19]

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Yes. Look. I mean the end markets, the competition. I wouldn't say there's a step change or even a very clear trend in the competitivity of the market. And it is interesting. If you went back over several years, competitive intensity, it can become more intensive on a local basis at some point. That's usually, it's usually a sort of a pinpointed reason, specific competitors in a specific local market. And as you know, we don't have any national competition in the core, for example, residential builder market. We don't have national players. We're competing against local players. So no. I don't think we've seen anything sort of more intense on competition. And it is interesting, looking through the cycle, even if you went all the way back to the last downturn: Our strategy was to hold our gross margin. And I think that's served us well because it's quite difficult to rebuild gross margin if you let it go, particularly when you've got distributed a responsibility for pricing. So I think that's very important for us culturally to maintain the gross margins, as we touched on in the presentation.

In terms of end markets. If you look at new -- I'll go through new resi, improvements, existing and then sort of commercial just very quickly. The new resi market actually over the summer months has been a little bit more positive news there, permits and starts up a little bit over summer and completions. And new home prices are up about 2%. New residential revenue, if you go to sort of Zelman or something, that's also up about 2% over the last sort of 2 or 3 months. Home improvements, again revenues look flat to low growth. I think the Zelman data is sort of -- is about 1% over the last 3 and 6 months. JCHS LIRA has come off a little bit and therefore causing a flattening of the market next year. If you look at the existing home sales, which of course might be an indicator, actually existing home sales have popped back up again. So they had come down from 5.5 million to about 5 million. They're back up now at about 5.5 million. And Case-Shiller, the August reading was 3.2%, actually plus or minus 3%, depending on where you are in the 20 metropolitan areas. There was only one negative, and that was minus 0.6%, which was Seattle, I think. And so the existing -- the sale of existing properties seems to be okay. Inventories are still tight. Delinquency rate is still very low. Delinquency rate is -- the 90-day delinquency late (sic) [rate] is -- it dropped to 1.1% last year, which was historically at very low levels.

I think, commercial. You saw Dodge was down a little bit in August, 1.3%. But actually if you look at the movement in Dodge this calendar year, it's remained pretty stable. The billings index again was slightly lower in August but -- and that's been low for a couple of months. So you can say that resi is probably looking slightly more optimistic, commercial perhaps slightly south of where it's been. But overall, the overall market looks -- it looks to be reasonably stable.

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Ami Galla, Citigroup Inc, Research Division - Senior Associate [20]

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Ami Galla from Citi. Just a couple of questions from me. The first one, on trading in the U.S. again. I was wondering if you could give us some color. What sort of visibility do you have from the order book? And is there any differential trends that you're seeing in large contract work over the last 6 months? My second question is on the own brand and as you progress on this journey. I was wondering if you could talk a bit about the sort of experience or the feedback that you've had from customers. Are there any product categories where you would have an intention of significantly increasing your penetration of own brand? Is that a possibility? And my third question really was on e-commerce penetration, just wondering if you could give us some color as to how has that progressed and across your submarkets -- subsegments to an extent.

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John W. Martin, Ferguson plc - Group Chief Executive & Executive Director [21]

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Yes. Thank you. Look, the order book is just over $2 billion, so it's not that significant given -- it's not that significant, but it does give us some sort of directional feel for what's happening. And directional movements in it, they do correlate reasonably well to growth or slowing growth or even when we have contraction. There are no significant trends in large contract work particularly over recent months, with one exception. In Industrial, there is less large project work in Industrial now. It's not that big for us. It's sort of 7% or 8%, 8% or 9% of the business. There's a bit less large -- and Industrial tends to be, particularly if they're building new facilities. That can tend to be larger-scale work. There's been a bit less of that. And you saw, I think, in our Industrial growth rates, Industrial grew in the first half at 30%. In the second half, it was down at single digits, low single-digit growth. Now that's fine. We make good margins in both of those places, but that really strong growth back at the end of '18 and into the first half of last year was boosted by a couple of large contracts. That's the only area it's made a difference.

Own brand. Look. I mean now we are -- we've got a really good, dedicated team on own brand looking consistently at what are the next categories that we should be looking at. Firstly, customer feedback is excellent. It just gives more choice. We really care about going all the way back through the supply chain, which we own. We own the design. We own the procurement. So we've got QA people out in low-cost countries making sure that these products are properly manufactured in proper facilities and that the quality is there. And we position them well. I think the most important thing is not just thinking, "Here's an own-brand product. We'll put it in our branches and it will sell." Because all of our vendors have got salespeople out in our branches, we also have to go out to our branches and convince them that these are great products. They should stock them. They should sell them. This is where they fit in to the whole product architecture which you'll be familiar with from retail, sort of good, better, best or that type of pyramid architecture. So we do have to put a lot of support behind own brand.

Regarding where we go next, it is absolutely incremental on each category. So I wouldn't like to give anything away because to some extent you have to do a lot of work with the vendors that are currently there in the space to make sure that they're not threatened by our own brand offerings during that time. And hence if you looked at the early products to be adopted for own brand, it was things like decorative plumbing, where there are already dozens and dozens of players and you're not going to be displacing one. And if you were to go into another category where there's 2 players with 90% of the market, that might be a bit more challenging, if that makes sense. But I would say, in terms of progression and the reason that I mentioned it, we grew at double the organic growth rate. That is broadly what we've been targeting. Can we grow not just good double-digit growth rates in own brand by the addition of new lines but also by the -- by additional penetration in own brand?

E-commerce. The important thing on e-commerce has not been just to grow a percentage. We've realized this over the last sort of a couple of years that the important thing is that customers really use it and like the experience. And so we spend a huge amount of time building functionality for the customers who are already using e-commerce rather than this just be we want to present that we'll continue to increase. I think the other thing to say is the most important functionality is things like -- search functionality is important but also having really good product data. And we set out over the last 18 months to have the best product data in the industry. And we run that program by integrating our systems to take vendors' product data lock, stock and barrel into our system and building that link so that we never have to update it again. As soon as the vendor makes a change to their product specification, it flows through to our product files. And we're putting more of those -- those products were traditionally what we would call behind the wall. So you have to get to log on to see and buy those products. Now we're opening that wall up so that it's more publicly available. There's risk in that because we're making our data available. And our data is valuable, but we're pretty sure we want to be the leader in the management of vendor data because that's going to be important over the next generation. So those have been key themes in the movement on e-commerce over the last year or so.

And then one other, in B2C. We are using the B2C assets now more integrated with the showrooms so that there is -- historically, if you look at the stand-alone eBusiness, it was stand-alone eBusiness. And I think, more and more, that's going to be merged into our other customer-facing -- the other customer-facing parts of the business, which is most obviously showrooms. So we are now using that functionality in the showrooms far better. Did it give you a sense? John?

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John Messenger, Redburn (Europe) Limited, Research Division - Partner of Construction & Building Materials Research [22]

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John Messenger from Redburn. And it's two to Mike and two to John, please. Mike, can I just ask on the U.K.? The -- to give us an idea of what we should think about and the shape going forward, the annual leasing cost that sits in the U.K., if we can get a rough idea of what that is relative to the GBP 54 million of EBIT. And your view on the cash or that you got to move across what will likely to be required in terms of the financing structure for the U.K. business? Second one was just on -- and this is playing a bit devil's advocate, but $62 million as a redundancy charge figure is like 4% of last year's EBIT. What is the justification for treating it as an exceptional? In that I could argue that is next year's operational gearing kind of being neutralized and you're taking it early. So just to understand why that should be treated as exceptional in investors' eyes.

Third one was for John: You mentioned Blackman didn't happen 5 years ago. And it's sort of probably the only chance we'll have to ask yourself and Gareth to understand what changed over that 5-year period. Was it your confidence about what you could get out of it? Was it the price? Was it the change of ownership at Blackman? Because they obviously went into a kind of trust structure. And what was the kind of change in dynamic there? And final one, just coming back to this whole shape of the U.K. like-for-like -- sorry, the U.S. like-for-likes? Obviously, you flagged 13% was the Industrial kind of boost first half of last year, down to 0 in the second half. Is that one of the biggest ingredients? So when we are thinking about the shape of 2020, is it a first half no Industrial that annualizes in the second half? And I guess what I'm getting to is, is it 2% half 1, 4% half 2? You hope to get 3% for the year as a broad kind of feel as to what you'll be looking for this year in the U.S.?

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Michael Powell, Ferguson plc - Group CFO & Executive Director [23]

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Excellent. Well, thank you for allocating the questions too. So our job's somewhat easy. So on the U.K., we'll -- we're going -- I'm going to duck that question totally because we're working through all the details on the U.K. with all the advisers. So we'll give all the details on the U.K. at the appropriate time, in terms of we need to obviously define the exact parameters of the demerger. It's easy for us to sit here in -- [on the] U.K. This is clearly we need to make sure that we understand the parameter and give the right financial information out at the right time. So we'll do that in due course.

Loved your accounting question on why is it exceptional. The very simple answer is we have accounting policies which are stated and clear. It is by size and by nature defined in our accounting policies. That's -- those are the rules we follow. Those are the rules we set out. And under those rules, a $62 million charge, by size and actually by nature, falls into the exceptional category. I think the good news is at least we've disclosed it very clearly so investors can quite rightly form their own view and they can put it where they like. That's not meant to sound rude. The -- I was trying to think of a better phrase. But listen, it's clearly disclosed. It is a big number, but I think it's absolutely right. I think you used the word, operational leverage, John. Absolutely. It is to get our cost base in the right space and grow that young talent to come through the Ferguson organization. So it is absolutely in my view a great investment of that holder funds, albeit separately disclosed. I'll grant you that.

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John W. Martin, Ferguson plc - Group Chief Executive & Executive Director [24]

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Yes. Just on that exceptional. Did you know? It's an interesting thing. It's the first exceptional item in Ferguson Enterprises for 10 years. Every other exceptional that I had the misfortune to have prepped prior to Mike when I did his job, every other one was somewhere else in the group. And I think, to Mike's point, we absolutely encourage the team, and I think Kevin and the team are doing a great job on this, to look at is there anything that we should do now to position the business well. And I think, to Mike's point, where it goes -- fine, it's cash, all right? We all agree. It's cash and it's -- and it goes through. It can't be distributed to shareholders. It's cash. But it was an important thing for us because I think the net head count reduction as a result is 500 people. So it's absolutely worth doing.

Blackman. What changed? The owner died. U.S. like-for-likes: The -- I wouldn't get carried away with the Industrial. The Industrial bit doesn't make that much difference. I think the shape of the year, it's easy to look back and think, well, last year, we had sort of 9%-plus growth in the first half and 3%-ish in the second. And therefore, the comps will get easier. The comps will mathematically get easier, but I still don't know what's going to happen to the growth rate. So I think our budgets are more balanced than that, and so yes. I mean it would be lovely to think there is going to be better growth in the second half, but it is too early in the year for us to get visibility on that at the moment, John.

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Robert Eason, Goodbody Stockbrokers, Research Division - Head of Research [25]

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Robert Eason from Goodbody's. It's kind of more follow-up questions. And just in terms of what you're thinking about the cost base in the U.S., just to help us. If we can see the chart, I think, at the presentation where you benchmark it against like-for-like growth, clearly all the work is coming through in Q4. That annualizes. So how should we think of the quantum of that annualization? And is it just -- or simply people on the sales side? Is it simply that you're just trying to offset underlying cost inflation in this slower growth environment? How are you thinking about it? Or is it more the natural one to take out in terms of that cost base? So just a bit more thinking around that. And as the growth has slowed in the U.S. and with the challenging markets in the U.K., are you seeing any change in behavior either by yourselves or your competitors in the use of working capital in terms of getting that volume in? And how more watchful -- or well, I'm sure you always are watchful, but how much is bad debts changing or materializing in the business? Is it materializing in one area? Large contractors versus small contractors? Just a general kind of conversation around bad debts.

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Michael Powell, Ferguson plc - Group CFO & Executive Director [26]

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Sure. So a little more on the cost base. The cost base, as I say, it's easy to sit here to do the financial modeling. We will get the cost base. We've talked about the bottom line growth being at least as good as the top line growth, okay? We do need to be careful because we're getting into small numbers. So that maths starts to work against you, and therefore don't come at me in any quarter. As I've always said, we don't run the business by quarter or by year-end periods. But what is important philosophically is in a very low growth environment you can deliver a better bottom line growth than your top line. That is really, really important. There aren't actually any -- back to our -- simple folk like me and, you said, yourself. There's only a couple of ways of doing that. One is gross margin, and the other one is costs, okay? So we must get our cost base aligned for the market environment that we exist in. Sounds obvious, okay. But you've seen most of the coverage this morning has got growth 2.5%, 3% for our top line. And therefore, we need to make sure our cost base is managed accordingly. That's what we've set out to do. Clearly, back to your earlier question, if the markets continue to come off as they did in the rather large recession, we'll act accordingly. And are we planning to do that today? We've got a plan, but we're not executing that plan. We expect our markets to grow as we've set out today, and therefore we've set out our path to grow in that.

I think the other thing to grow, as they'll always balance, is if we -- I generally, as the FD, never get beaten up when we miss out on growth opportunities because you don't know we've missed them, but internally it's really, really important to us and our customers to make sure we service our customers when that upturn and that growth comes, okay? So it is always a balance, and it is definitely important to invest in the future of the organization. So you heard us talk about some of the investments in technology. We will invest in technology still. We will continue to invest in training. We will continue to invest in health and safety. Those are fundamentals of our business. So again, back into our mind on costs: Those are investment costs that are really important for the longevity of this business, and those are just as important to us to continue to invest in.

In terms of the U.K. market, again John can comment as well. We have seen a little bit more bad debt. It's quite unpredictable. I would say the last couple of months has been a bit slower, so slightly odd. Back to your earlier question, you might have expected it to pick up. But it is quite unpredictable. We are seeing businesses that -- particularly the sort of small-, medium-size businesses that have been around for years and years and years, with little [funds] actually going quite quickly. Don't get me on to prepack deals, but there are a number that go quite quickly and a number going into prepack deals. So it's one for us to certainly watch, as the economy certainly is difficult in the U.K.

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John W. Martin, Ferguson plc - Group Chief Executive & Executive Director [27]

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Yes. And then with regard to the U.S. in working capital position, there's no change at all in our vigilance or the customer's behavior or competitors' behavior in the market. I mean just to give a sense of -- and we are very good at managing credit, very good, if you think about the million customers that we have to manage for trade credit. Our total charge in the U.S. last year was $10 million on $18 billion. So our total credit losses were $10 million on $18 billion in the U.S., with no change from the year before when it was also $10 million on a slightly lower top line number, okay? Go on, Paul.

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Paul Daniel Alasdair Checketts, Barclays Bank PLC, Research Division - Director [28]

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It's Paul Checketts from Barclays Capital. Two questions, please. The first, you've got that slide on reconfiguration of distribution centers. And in the past, you've talked about ship hubs market, DCs. What's the latest with that, please? And then the second is you've also got a new slide on shared infrastructure. Conceptually, how significant would the dissynergies be if you were to separate out any of your verticals?

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John W. Martin, Ferguson plc - Group Chief Executive & Executive Director [29]

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Yes. Distribution centers, we set out a few years ago that we got sort of 11 distribution centers which are therefore replenishment of branches across the U.S. We have no plans for more distribution centers. The market distribution centers are there for final mile fulfillments as -- and then may also be used for replenishment of local branches. That's the area where we will see investment over time. The strategy is to move to those. Most of those will be consolidation of facilities in specific markets. I think, last year, we talked about Denver, for example, which was the consolidation of 4 sites. There's another one at the moment which is Phoenix, which is the consolidation of 3 sites, but they are more in the normal -- they will be in the normal course of business. If we got growth, then we'll absolutely be adding capacity, but it will be proportionate to that growth, Paul. So it doesn't -- and all the numbers are within Mike's CapEx guidance. So that's -- and that will just happen now, I think, over, quite frankly, many years on an incremental basis.

The shared infrastructure. Look, I think -- with regard to Blended Branches, I think, the phrase "blended branches," it's sort of -- it does what it says in the tin. If you are an HVAC customer, you can come into a blended branch and get a range of products. And so to me the issue isn't a question of separation. The issue is really this: If you have a contractor who does some plumbing and some HVAC and you want to go into a branch and get all your products, can you come to Ferguson? So we're never going to stop, never. It doesn't matter any [management] change, any board change. We're never going to stop selling HVAC products in America. You have to get that about Ferguson. We sell plumbing. We sell heating. It's in the name, heating, ventilation and air conditioning. We will never stop selling those products because if a customer comes in, you want to sell them what they have. So should you separate out -- out of those 8 to 9 customer groups, should you separate out HVAC customers? No, because it would be bonkers. You will never stop doing it. Does that make sense? So we're not going to separate out HVAC. We're going to carry on selling HVAC. Because why would you stop? "Oh, we'll stop selling taps, faucets," all right? You're not in plumbing supplies if you stop selling faucets. "Oh, well, we don't like pipe because MRC or somebody sell pipe, and we don't like pipe." No. We're going to sell pipe because we're a plumbing, heating, ventilation, air conditioning. We're there to service those customers and those contractors. So I think that's how I see our business.

Now then you can say, "Well, actually, why would you have a stand-alone branch?" The reason for a stand-alone branch is because there is sufficient scale in that area. Let's say you are in Houston. And you've just got a massive industrial and not much residential in this particular area of Houston, which if you know Houston well, it's a whole chunk of it. Then actually having a stand-alone Industrial branch makes a lot of sense. Why would you put a whole load of residential faucets into a branch which is in an industrial area selling to industrial customers? There isn't much point. Do you see what I mean? But whether or not we put those industrial products or what we -- whether we let industrial customers into our Blended Branches or into a stand-alone branch, we're always going to be selling. We are always going to be selling plumbing, heating fixtures, to industrial customers, valves, fittings, fixings, the whole works, gaskets, pumps. We're always going to be selling those to industrial customers. We're always going to sell them to commercial customers. We're always going to sell them to residential customers because that's what Ferguson is and that's what we do. So we're not going to separate those customers out, if that makes sense. And I think we might have misled people on the chart. That's how we look at the customer needs, the strategic customer needs. They're not really separate businesses. Or some of them do have stand-alone branches. Does that make sense?

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Paul Daniel Alasdair Checketts, Barclays Bank PLC, Research Division - Director [30]

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Yes, [absolutely].

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Gregor Kuglitsch, UBS Investment Bank, Research Division - Executive Director, Head of European Building & Construction Research and Equity Research Analyst [31]

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Greg Kuglitsch from UBS. Three questions, with many things answered already. But just on the head count reduction on the U.S., can I just be clear? All of that happened in the fourth quarter. There's nothing kind of still coming into the first. Because I see on the slide that, I think, your head count on a sort of year-over-year basis organic was down 250 or something like that. That's question number one.

Question two, on the U.K. and again on the fourth quarter, it looks like you had a pretty -- I'm not radioactive or anything like that -- but there was a pretty significant kick-up in operating margin, so I want to understand what happened there and whether you think that's a sustainable performance.

And then maybe wrapping up, your guidance. I think in your statement this morning you were talking about good progress on, I guess, operating profit or trading profit. Is your thinking that, that is a similar -- was last year good? Or was last year better than good, I guess?

And then finally, on the U.S. listing. Obviously, this has been something that you've considered. And we've talked about this in this kind of forum, I think, for certainly a number of years. Historically, what has been the sort of key area of that kind of box chart that you gave us in the presentation that held you back from doing this? So what was kind of -- if you had or maybe if you pick out sort of 1 to 3 items that you really thought were net negative and therefore you stayed with the status quo. What were those? All right, I'm going to give this back now.

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Michael Powell, Ferguson plc - Group CFO & Executive Director [32]

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Yes. Well, can I just get your first question again? But whilst I'm doing that. Just so I'm clear on your head count question.

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Gregor Kuglitsch, UBS Investment Bank, Research Division - Executive Director, Head of European Building & Construction Research and Equity Research Analyst [33]

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[Yes. If it was] all done in the fourth...

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Michael Powell, Ferguson plc - Group CFO & Executive Director [34]

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Okay. I think the question on head count was, was it all done in the fourth quarter? The actions that we took at the half year were completed. The voluntary early retirement program that we've talked about was initiated in July. That'll work through by the end of Q1. So no for the second one, yes for the first one. Your question on guidance was did we think this year was a good year. And further progress into this year. Just help me clarify the question.

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John W. Martin, Ferguson plc - Group Chief Executive & Executive Director [35]

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I think it was for the U.K. market...

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Gregor Kuglitsch, UBS Investment Bank, Research Division - Executive Director, Head of European Building & Construction Research and Equity Research Analyst [36]

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So the -- it's fine now. You changed the mic. The -- I think in your text, you're talking about another year of good progress. I think consensus is like 2%. In my mind, that's not particularly good. Last year, you did 7%. I guess the question is to get a little bit more a sense what the level of growth you think you can achieve. I guess there's a few technical items, and maybe you want to go through those that are a tailwind on operating profit.

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John W. Martin, Ferguson plc - Group Chief Executive & Executive Director [37]

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Yes. Well, look, I mean I think, if you look at consensus, at the moment, there's 3% or 4%...

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Michael Powell, Ferguson plc - Group CFO & Executive Director [38]

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Revenue growth from consensus...

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John W. Martin, Ferguson plc - Group Chief Executive & Executive Director [39]

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Yes. I think it's important for us if we get 3% or 4% revenue growth, and Mike touched on our ability to be able to generate profit growth in a lower growth environment. I think that's important and that's what we should expect of ourselves. If we get top line growth, then we should -- and I know we're talking about smaller numbers, but we should still be making progress at the bottom line. And if the markets are relatively flat, we should be taking market share. That's what we expect of ourselves. We've been doing that for some time. We should carry on doing it. So that's, I think, our sort of view of making progress. If we got a market at the moment which is 1% or 2%, flat to 1% to 2%, depending on whether it's resi, whether it's commercial, whatever and we can take a little bit of share, we can do a little bit better than that and make sure that we get that down to the bottom line. That is what is reflected today in our budgets, in our plans.

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Michael Powell, Ferguson plc - Group CFO & Executive Director [40]

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On the U.K. I think your question on the U.K. was does the quarterly performance sort of -- do you roll that forward? I've always said we should look at the -- all businesses sort of over a period of time. I think we've said for the U.K., as you think next year versus this year, the markets are flat, probably at best, in the U.K. I think some competitors would say they're getting worse today. Mark and the team clearly are continuing to take internal actions, but I wouldn't expect heroics out of the U.K. business. We have got a small acquisition. So I think we'll see some progress in the U.K., but it wouldn't be a market I would be too overexcited about in terms of your numbers getting ahead of themselves right now. We've been through pretty tough years, pretty tough market, good management team, good progress, all right, so sort of more slow and steady rather than revolutionary in the U.K.

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John W. Martin, Ferguson plc - Group Chief Executive & Executive Director [41]

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Greg, your question on listing and how we looked at this historically. I think there were a couple of things historically, and of course, we were busy back then as well. I think, at the time we looked at listing, we were absolutely -- we were pretty clear and it was certainly pretty strongly advised that any change to the listing structure in any case was not achievable. That's the first thing historically, okay? And also there have been changes to the technology that changed the question about, for example, dual listing. Now of course, over time, our -- the proportion of our income coming from North America has just inexorably risen. And actually as it happens, because Mark has worn out a lot of shoe leather in North America, we become more U.S. owned as well. So I think those are the things that have sort of moved over time, Gregor.

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Clyde Lewis, Peel Hunt LLP, Research Division - Analyst [42]

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Clyde Lewis at Peel Hunt. I've got two, if I may. Maybe I've missed it, but have you mentioned anywhere how you performed in the MRO business in the U.S.? I mean obviously it's tucked away in various of those divisions, but we didn't seem to get an update as to how Ferguson is performing in that end market. And the second one I had was on share gains, John, you referred to it just then. But Ferguson is very consistently, for as long as I can remember, growing share in virtually all of its markets very consistently, but the reasons for those share gains, I'm sure, have evolved and will continue to evolve. But as you're leaving now and as you're looking forward and obviously Mike and Kevin and Geoff's challenge going forward, how, I suppose, do you think that share sort of story is going to evolve? What are the big challenges there for the biggest group? Is it still service? Is it still product availability? Is it still the geographical infill that has completed the map? I mean you're not there yet. There are still opportunities there. But just to sort of hear your, I suppose, views as you sort of step out the door, what really are the challenges on that front in particular.

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John W. Martin, Ferguson plc - Group Chief Executive & Executive Director [43]

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Yes. Look, MRO. So the Facilities Supply business actually did pretty well last year but -- pleased. And grown certainly towards the -- in the second half of the year grew well. And I think the focus on that business -- we decided. Sort of Kevin, Mike and I decided 1.5 years ago, we won't be doing any more acquisitions until we got the organic growth of that business going really well. We talked some time ago about the College of Ferguson bringing our own associates through, training them really well, getting them on the road. I think that's worked now very well, and the business has performed really well in -- particularly in the second half of last year. I would say it's still a relatively new business and by far the smallest of the customer groups on there. And by the way, just why does it make sense? About -- between 40% and 50% of the products that we want to sell to those customers are core Ferguson products, yes. So getting that right mix of products was absolutely fundamental to the profitability and the margin of that Facilities Supply business, yes. And that's been fundamental because that's one of the reasons why we decided we were going to take a pause on M&A for Facilities Supply in that time. So I think steady -- good, steady progress, but it's still a -- we've been at it, what, for 5 years now, 2 little acquisitions. It's a nice little business, but I still want to see, we would still want to see years and years and years of really good growth to make that business or to make that customer group really very profitable.

And look, the reasons for the share gains. I'm afraid they are a little bit what you touched on. I think availability is absolutely fundamental. And over many years, having the distribution centers, that has been a competitive advantage, distribution centers replenishing branches constantly. That's given an advantage to our vendors as well because it's just giving better availability of products throughout the network. And of course, having that service, the combination of outside sales with inside sales who can really source product as well as price that project, that's been important. I do think, going forward now, technology will become more important and in particular the tools that we provide to our associates, particularly on that inside sales space because historically inside sales have -- they've got a fantastic work ethic and a fantastic service ethic. I think now, if we can bring more technology to that, we can really get good productivity and drive up service levels in terms of the speed it takes us to respond to customers and the access to both our own product and the vendor's product. I think that's -- there's definitely gold in those hills on the technology side. But certainly, I don't think the business model is going to need comprehensive change, but I do see more evolution on the technology side.

All right, you must be exhausting Mike, and -- I'm all right. I can carry on, but -- Thank you all very much indeed. Thanks very much for coming.

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Michael Powell, Ferguson plc - Group CFO & Executive Director [44]

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Thanks, all. Thanks.