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Executives

Ian Meakins - Group Chief Executive

John Martin - Chief Financial Officer

Analysts

Howard Seymour - Numis Securities

Olivia Peters - RBC Capital Markets

Aynsley Lammin - Citi

Charlie Campbell - Liberum Capital

Paul Checketts - Barclays Capital

Yuri Serov - Morgan Stanley

Kevin Cammack - Cenkos Securities Plc

Gregor Kuglitsch - UBS

Andy Murphy - Merrill Lynch

Wolseley Plc Ord (OTCPK:WOSCF) Q4 2013 Earnings Conference Call October 1, 2013 4:30 AM ET

Unidentified Speaker

Good morning from all of us here yet again. We have Chairman, Mr. Gareth Davis and our new Senior Independent Director, Alan Murray sitting at the back. Alan, if you want to wave.

Ian Meakins

Thanks Alan. That’s it. In terms of highlights of the year, overall we made decent progress again in the last six months. Driven by very strong performance in the U.S. and better growth in the U.K. However, this was offset by continued weak markets in Continental Europe and we see no signs yet of any real recovery.

At a Group level, we achieved decent like-for-like growth in our key markets. We held or gained market share and we managed to improve margins again. Our gross margins edged up by better management of pricing, sourcing, product and customer mix and by careful cost control, we delivered decent flow-through.

It was great to see our U.S. business reach its best ever return on sales of 7.3% in a steadily growing market. We continue to be very disciplined in terms of cost management and have reduced our cost base in Europe to reflect the top market conditions. We continue to generate good cash flow and pay growing dividends.

During the year, six more bolt-on acquisitions were completed and the pipeline looks a bit more interesting. In France, we are successfully executing the changes we announced at the half year despite very difficult market conditions. We have across the group continued to drive a better performance down to all of our business units and branches. At the same time, we continue to invest in developing more efficient and productive business models that will over the coming years deliver better leverage from our strong market share positions.

With that brief summary, let me hand over to John who will take you through the financials and then I will come back and update you on our strategic progress.

John Martin

Thank you, very much Ian, and good morning, everybody. 2013, we achieved good sales growth and flow-through from a decent market in the U.S., but we had to dig pretty deep, deep in the U.K. and Canada to push the business forward in generally weak conditions.

In Continental Europe, we took strong actions to take out cost and to protect our margins. Overall, we grew like-for-like revenue by nearly 3% in trading profit by just under 11%. We worked really hard to maintain and just grow gross margins and we also worked really hard on productivity. Underlying gross margins were up 10 basis points. Tax charges are little higher this year, but headline EPS was still up 8%.

Our focus on cash is relentless. We ended the year with net debt of just over £400 million. Two fewer trading days in the year cost us about £10 million of trading profit compared with 2012, but we gained £5 million of that back on FX movements.

And the ongoing strength both of earnings and of cash flow has allowed us to grow full year dividends by 10% and we also plan to pay a special dividend this year of £300 million.

Like-for-like growth in the year improved a little in the final quarter, but market conditions remained pretty mixed. U.S. growth was just shy of 8% and has been pretty consistent now for the last 2.5 years. Growth was broadly based across the regions and across our businesses and came from a combination of good market and valuable market share gains.

Canada finished the year better with 3% like-for-like growth in the final quarter and the improvement in the U.K. continued. Market conditions improved a little in parts of Europe, but overall remained pretty tough throughout the Nordics, throughout France and Central Europe. Inflation overall remained pretty low about 1% overall and that’s partly as a result of subdued commodity prices.

In the U.S., Blended Branches, Waterworks, HVAC, Fire Protection, all grew really nicely and B2C continued to grow very strongly. We made impressive gains in market share in all of those businesses. Industrial, pretty flat overall and that’s due to low demand for our shale gas piping products, but otherwise PBS did very well and again inflation in the U.S. restricted to about 1%.

Gross margin gains were impressive across most businesses. We were very restrained on headcount, but we are investing new resources in selected areas, particularly where we are underrepresented. Like-for-like operating expenses were 6% higher including 2.3% of additional heads.

Healthcare costs in the U.S. grew sharply up £9 million and we continue to invest heavily in marketing to develop our B2C brand. Marketing expenses were up £11 million. The acquisitions we made in the year did well contributing £8 million of profit and we also opened 50 new branches.

As Ian mentioned, the previous peak trading margin was back in 2007 that’s been broken this year, which is a record now and we also believe that we can continue to make further improvements going forward.

In Canada, the market gave us very little. 2% like-for-like growth that was pretty hard fought with inflation contributing about half of that as were gains in gross margins. Overall our market share in Canada pretty consistent with last year and in light of those market conditions we were very disciplined on headcount. We reduced headcount by nearly a 100. That cost us about £3 million and that was to preserve the trading margin and position the business better for the years ahead.

[In the U.K.] after a flat first half of the heating market decline, we got some good growth in the second half about 5% principally from market share gains and the pricing environment was challenging. Gross margins were lower and that’s partly due to the mix of the bonus business that we acquired, but partly due to ongoing trading. Inflation in the U.K. was negligible.

Costs were tightly controlled, 2% better on a like-for-like basis and trading profit was slightly ahead of last year. That includes about £3 million of losses from burdens in the early months following the acquisition, mitigated by one-off property profits in the U.K.

Plumbing and Heating contributed most of the topline and trading profit growth and we managed to increase our market share. Pipe and Climate also held its own, but some of the smaller specialist seems dipped in fairly fragile markets. The trading margin dipped slightly as a result of the acquisition.

It's been a tough year in the Nordics. The like-for-like declines in all of our businesses in the first half only really narrowing by the final quarter. You can see from the GDP charts that confidence has been pretty low across the region with both Finland and Denmark having been in recession during the year and again inflation restricted to about 1%.

How did our team respond? Well firstly, they protected and grew the gross margins that we had in all the major businesses, really great results. Secondly, they brought the cost base down over the year by 3% and that included very active management of headcount and also addressing underperforming branches across the region.

Just to give you an example of that and the results of that, Stock, which is our biggest business in the region in Denmark had a headline -- a topline decline of nearly 8% and still managed to grow profitability. In Sweden and Finland, we carried on generating good margins and good profitability and our Danish DIY business showed characteristic resilience.

What you can see in the slide for France is the result of a slims down building materials business and that excludes the branches held for sale and the result still include 14 branches which are year marked for closure and those 14 branches lost about £2 million in the year.

Like-for-like sales continued to be pretty poor. The results are now of course starting to lap weaker comparatives and those declines are principally caused by weakness in the new residential market. We have a highest exposure to new residential in France. New housing starts fell by 13% over the year as a whole. There was no noticeable inflation at all in France.

Gross margins were lower and that included the impact of lower rebates, but operating costs were very well controlled, 10% better for the year as a whole and the business also benefitted from changes to employer taxes in France, which contributed £2 million in the second half and also a low depreciation charge worth £6 million due to the impaired assets.

In the year ahead, we expect to see either a small loss or breakeven in France before concluding the restructuring in the second half of the year to rebuild the profitability in that business.

It's frustrating to see Central European profitability declining because we made good progress over the last three years. The majority of this decline is in IWS in France. Like-for-like revenue was down 2.5% but gross margins were also weaker.

Switzerland continued to grow modestly despite quite a lot of price deflation continuing there. In Austria and IWS, both businesses saw revenue declines but they made excellent progress in controlling their cost base down 11% and 6% respectively and that will just give us better flexibility and better base in the businesses going forward.

Last year we told you about a £4 million insurance credit in central costs. This year we had a £3 million excess charge and we also incurred acquisition and development cost of another £4 million. Group cost remained very tightly controlled and the largest part of the increase this year is investment in finance systems development.

You can see from the Revenue and Growth profit chart that like-for-like growth ringed here is by far the most important contributor to profit growth in the year with gross margin also showing an important progression and acquisitions chipping in a little.

On the OpEx chart, outside the U.S., all of our businesses face the challenge of lowering their cost base in either static or declining markets, but again we manage to take out sufficient costs to offset pay rises and inflationary cost increases and that enables us to get the benefit of the incremental flow through of sales to the bottom line.

The income statement there just to complete this and I will move on the mark to the financing and tax. Overall financing costs were better and the increased cost of debt in the year was more than offset by an improvement in pension scheme charges and that’s principally due to strong asset returns.

The effective tax rate of 28.6% is higher than last year primarily due to the mix of profits coming from the U.S., but the corporate tax rate is 39%. We’ve charged £174 million of impairments and exceptional in the year pretty much in line I think with what we said at interim, a £100 million of those relate to the French strategy that we announced in March and that strategy implementation is going pretty much according to plan.

£37 million arose from restructuring and impairments in Central Europe and £27 million in Nordics, where we closed or relocated a number of poor branches and lower headcount to protect profitability. And the net £6 million in the U.K. arose primarily from the Burdens acquisition and also reorganization of our drainage offering following that acquisition.

Trading in Europe remains tough. We’re going to carry on managing the cost base. We'll manage it down particularly one of the top line is declining. At the moment in the year ahead, we expect to invest about ₤20 million in restructuring, ₤8 million of that is committed already. Out of that level those restructuring charges will be charged to trading profits.

Working capital well under control with -- throughout the whole year with a further incremental improvement in average cash-to-cash days. The special pension contribution was made in the first half, you can see also at the bottom of the table the impact of some of the exceptional charges during the year.

Continued strong cash generation helped to fund acquisitions which cost to £111 million and capital investment of ₤140 million. We paid out £520 million in dividends and just over a £100 million to hedge employee share scheme rules.

So net debt at the end of the year was £411 million, the underlying position was £160 million higher. Net pension liabilities are looking more favorable and that’s as a result both of the money that we put into the pension schemes and also good asset returns. We concluded employee consultation on the U.K. scheme in May and that scheme will close to future accrual at the end of this year, this calendar year.

In the year ahead, we planned a step up in capital investments. We’re planning a new DC facility in New York State and a new pipe facility in the U.K. We’re also looking to buy in couple of leasehold type to give us better flexibility going forward.

Ian’s going to talk to you in a few minutes a little bit more about our new channels and updating our business models. We’re investing £15 million in the year ahead in network infrastructure and over £50 million in Middleware in Master Data Management, in e-commerce and a range of technology products to help us both improve the service, develop new services, drive the top line and also to help us to become more productive.

Just let me summarize our guidance for the year ahead in this chart. We talked about the capital investment. And the associated incremental costs to implement will be about ₤20 million, that’s about two-thirds of 1% of our overall OpEx base.

FX, the rate, I’m afraid would be £13 million adverse. Now is it [£39]. So trading days are about the same; the effective tax rate should be similar to last year. Working capital should be in line with previous guidance about 12% or 13% of incremental sales. We will keep a conservative balance sheet. We plan on being investment grade credit metrics and net debt of no more than one to two times EBITDA.

The adoption of IAS 19 revised, which we’ll adopt next year and that will have an adverse impact on financing charges if these FY ’13 results which will be restated, that’s ₤13 million. We also expect losses on the discontinuing branches to be in the region of ₤5 million.

Just let me take a moment to show you how the progress that we made on strategy over the last few years has come through in the numbers. Looking back over the last five years you can see from the balance sheet, the balance sheet reflect how refocusing on our best and most productive assets whilst keeping tight control of the working capital.

At the same time we converted gross profit more efficiently to trading profit, that’s over 20% now in the ongoing business dating back towards a respectable performance. And all the time we’ve maintained our focus on converting profits promptly and properly into cash.

The combination of those actions along with some market share gains and little market growth has been to grow profits over time and also to improve our returns on capital, while it’s also de-leveraging and reducing the risk in the balance sheets.

So what does this means for shareholders? We are proposing a final dividend of 44 pence, that’s 10% ahead of last year and that’s covered 2.8 times by headline EPS. We also intend to pay a special dividend out of surplus cash of ₤300 million along with a share consolidation very similar to last year. And after that, net debt will be close to the bottom end of that range at about one times EBITDA.

Let me just touch on the outlook. Growth rates in the last eight weeks have been similar to those in Q4. The U.S. has continued to grow steadily and the U.K. continue to be encourage, but Continental Europe remains very challenging. We will continue to take the action that we need to reduce the cost base there.

Many thanks. I’ll pass it back to the Ian for the strategy and business review.

Ian Meakins

Good. Thanks, John. This slide is to remind you of the six key building blocks of our strategy. We've continued to focus our resources as John outlined where we have strong strategic positions, where we can invest in and grow and now nearly 90% of our revenues in the number one or number two positions in their marketplace. We’re driving the principles of allocating resources down into the business units on a local geographic basis, for example we’ve upped our resources significantly in the U.S. and particularly in key metro areas like New York, Houston and Ohio region.

We have during several results meetings given you a lot of information on how we are working to drive performance on a daily, weekly and monthly basis. So today, I really want to focus on the two topics of how we’re trying to accelerate profitable growth longer term and also how we’re investing and developing more efficient and productive business models that will give us better leverage going forward.

In terms of group synergies, we’re continuing to make steady progress by making sure we do source jointly. We share costs and drive best practices, so the benefits significantly outweigh the costs of the group. And John has already covered point six, our balance sheet thinking pretty comprehensively.

Turning then to the first topic on how we’re looking to drive profitable growth across the Group. We’ve used this chart several times to give you a better understanding of the full menu of profit levers we work through and execute against. Clearly, in the U.S. given the continued market growth, we will continue to invest to maintain our share gains, look to expand our gross margins and by good cost control improve productivity.

In Continental Europe, we’re still very much into protecting our share and gross margins and by reducing our cost base, try to maintain our trading margins. I’d love to be calling on market recovery in Europe, but at the moment all we can say is that the rates of decline have slowed, but we are not back to growth yet, in the last few month, but no better than the quarter four of last year.

We hope the markets will turn soon, but until we see some real signs of progress, we’re going to remain – we’ll maintained our cautious approach. The key point to reinforce again is that our business does not yield to grand gestures, but it does respond well to working very hard on a full menu of the profit levers.

So taking that theme and looking briefly in the U.S., U.K. and Denmark, we’ve continued to make decent improvements in our largest business units in the State, the Blended Branches business. The market has continued to grow steadily at about 5%. We have again improved customer service by better product availability, faster service at the counters and better e-commerce offerings.

We’ve maintained our share gains and continue to outperform the market by just over 4%. Our facilities maintenance business has continued its rapid growth. At the same time, we’ve pushed up gross margins by a series of actions, better pricing, metrics compliance, better own label sourcing and growth, faster growth in our profitable counter business and again good progress in the higher margin showroom business.

What was also pleasing to see was better productivity from accelerating our e-commerce business as well as the number of self service events to better utilization of our distribution centers, we’re now at over 85% utilization in Blended Branches. We’re also getting better use of our national sales center. All these actions have driven a significant improvement in our labor as a percent of gross profit ratio. At the same time better receivable processes have generated improved cash performance and also improved our return on capital.

In the U.K., we’ve made reasonable progress in most areas. The market is recovering from the recession and is now growing slowly. We have improved our service by working with core suppliers and improving our supply chain to give better availability from our branches. We are gaining share consistently during the year by about 3% and our e-commerce business continues to grow albeit from a low base.

Disappointingly though our gross margins declined driven by growth in our larger customers who have a higher mix of low margin boiler sales and a lack of really tight control on detail discount management. We’ve worked hard in the second half of the year to arrest the decline and ensure we do have all the data and controls we need.

We believe that we will see an increase in our gross margin during this year. We do not want to gain share by reducing prices. We fundamentally believe that better service will lead to share gains and customers do value and will pay for better service.

We’ve also reduced significantly the amount of manual pricing and have managed to improve our sourcing performance, which will help to improve our gross margins this year. We’ve improved productivity by employing more part time people to reflect our customer’s daily buying behavior. We didn’t manage to push more through our DC network, which is an opportunity for the future, but we did overall improve our key productivity ratio.

Good management of the balance sheet particularly inventory that too marginally better cash to cash days and better returns overall. In Denmark, we've continued to protect our business in very tough market conditions. House building activity is still 70% below peak.

We decided not to compete at very low price points for some large customer contracts, so we did lose a little share in the Copenhagen area. By better labor scheduling , we managed to take our costs and improve service and also gain wallet share of our core loyal customers. This helped us to improve our overall gross margins despite having to overcome a decline in the profitable market segment of direct consumer sales.

The actions that gave us margin expansion were focused around improving our mix of label products driving e-sourcing and e-auctions harder and getting better compliance in our pricing matrices. Sadly the poor market conditions led us to reduce our headcount on average by about 5%, but this reduced cost base and gave us better labor productivity than last year by about two points.

And staying disciplined on our balance sheet enabled the stock team to dig out good cash delivery with cash to cash days down by 1.3 days and increase our trading margin and return on capital.

In summary then, on accelerating profitable growth, we need to keep driving all of the incremental initiatives outlined. We don’t see any real let up in margin pressure from consumers, customers, competitors and suppliers especially in Continental European markets.

We do believe we can continue to make further margin progress and get the group back to at least peak margins by continuing to drive the performance management processes we have in place and also continue to invest in more efficient productive business models. To get back to peak margins, Europe will require reasonable market recovery, but given our position in the U.S. we believe we can push on from our record highs of last year.

Turning now to the development of more efficient and productive business models, just firstly why is this important to us? Currently we face constant margin pressures on our businesses and we’ve managed to more than offset these by cranking up the performance.

These pressures come from four main sources. Firstly consumers, by having more influence in the decision making process of what heating or plumbing products they want to buy. The data and the brands are readily available and now prices are more transparent on the internet.

Secondly, our trade customers are consistently under margin pressure from contractors and end consumers and almost all work now is being tendered out. Thirdly, over the past few years, new competitors have entered our space, be they the larger players like Amazon trade offering or small e-commerce competitors. They are using the e-commerce channel to challenge the traditional distributors.

To-date our high levels, our product availability and service, better trained, dedicated employees and better sourcing of own brand and own label have limited their progress. But we’re not at all complacent hence our £10 million increased investment last year and continuing to build great e-commerce capability across our business.

Fourthly suppliers have also fought hard to maintain their margins by passing on price increases and trying to maintain distributor discounts. These margin pressures have been consistent over the past few years and we don’t see them easing. That’s why we are focused so hard on performance management to more than offset these pressures.

Looking to the future, we see the same margin pressures, even when the European markets do recover that is why we have been developing more efficient productive business models and why we plan to step up our investment as John outlined, we believe that this will allow us to continue to expand our margins over time.

At the interim results, we explained why we wanted to progressively move our business from effectively a loose confederation or branches to a more systematically managed network of branches. This will allow us to gain the benefits of scale that smaller local players could not access. This is at the heart of our business model work.

The benefits of this approach are to enable us to continue to improve service by having the largest product range and better availability in the industry. It will also allow us to achieve our lower cost position than smaller competitors, as well as to gain higher share of our existing customer spend. We know they reward better service from distributors. Better data and processes will mean we can gradually increase our gross margins, we will be able to source our products more efficiently, where prosper increase own label and manage our pricing more accurately.

This will ensure we can drive a better mix of products and customers. And currently given our legacy systems and process, we do not for example know the true net profitability of our products or our customers and by having better people processes, we will be able to retain our best people, attract others and train them more effectively and improved platform would also allow us to integrate more efficiently, bolt-on acquisitions which will allow us to extract synergies faster.

Again, an improved platform would also accelerate growth into our adjacent businesses and Water Works utilities, Pipeline Fitting, HVAC, Climate Control and the Industrial Sector and developing better business models will over time allow us to gain share and margin simultaneously.

Now to give you a sense though of specifically what we mean by a more efficient or productive business model and the performance opportunity it's best to look at the major initiatives we’re working on and also how we currently perform. There are four key processes that make up our business model managing customers, suppliers, our supply chain and our branch network.

Taking each in turn and managing the customer, we’re now beginning to use customer segmentation based on needs and behavior and not just on size. Clearly even within the contracting customers some are focused on service and repairs, whilst others are emphasizing contracted new build. One will pay for service. The other will focus on price. We’re getting better at pricing management, but our processes are very manual and not real time, which means we struggle to flex rapidly to incoming cost variances and to be competitive and to a competitive pricing environment.

As we have said before, we are poor at sales force management and only now we are beginning to install modern sales management process and system, capturing profitability of the customer, call efficiency and the pipeline of opportunities.

In terms of supply management, we’ve been implementing category management practices over the past couple of years, but we’re still learning how to make sure, we’re getting the best mix of products and supplies and ensuring we are supporting the strategically important ones.

We are now pretty good at rebate management, but we still have a very manual process. We are increasing our exposure to low cost agent sourcing, but we still have more to do. And in terms of ensuring we are getting the best economic consistently given our scale, we know we have a way to go.

From a supply chain perspective, we can still improve availability given it is the critical differentiator and our legacy platforms are very difficult to interface with for external providers and we still have opportunities to improve our fleet management productivity and cost.

Within the branches, the current transactional processes are fast and reliable, but our ability to support incoming dropped or redirected calls and develop shared resourcing between branches is poor. This is why there is still so much opportunity for us to develop more efficient productive business models.

Now despite there still being much to do, we are making good progress in executing our plans and gaining from our scale and just looking at the U.S. quickly where we’ve been running some of these programs, we have been running now national programs, national promotional campaigns across the 540 blended branch network.

This is the first time we’ve run programs nationally with great results and excellent support from key vendors. In terms of branch of the future, we've began to roll out a successful pilot to pull telesales and external sales resources across our region rather have dedicated people in each branch. The test results are much better as well as a rep productivity improving. The enabling telephony technology is the right determining step unless this will be installed over the next 12 months.

Our national sales center is up and running and beginning to deliver better service with real experts shared across the network, also more productive reps. This is the platform we need to develop our FM facilities maintenance business, where many customers are either regional or national and require reliable support to match their geographic footprint.

We’ve only really started using e-commerce and e-auctions in the last 12 months. Early results across combined buyers, for example between the U.S. and U.K. teams are very encouraging. This program has been supported for the group by a dedicated team in the Nordics.

These are few examples in the U.S., but we are also making decent progress across Europe and we’ll give you more details of those in the future. But to achieve these improvements in our business model, we have – we have been and will continue to invest more in better processes and supporting systems as John flagged earlier.

Our current platforms based on our legacy systems are okay for transacting and serving a customer with his or her products quickly. But behind the scene there is much that we can do to improve. There are many manual processes. We do not have high speed internet access in many branches. The data management is not great. We struggled to get one comprehensive view of a customer or a supplier.

In Ferguson, we have 185 instances of our legacy trilogy system. So we are getting all the data in consistent format requires significant work and is not always accurate for national suppliers and also for customers with a geographic footprint across several regions, okay. The systems -- legacy systems are costly to run and difficult to interface with.

For these reasons we have invested aggressively more last year in improving our processes and IT platforms and this year we will step this investment up again. Clearly at the same time though, we will begin to reduce the investment in our old legacy systems. The benefits will be better processes to enable us to manage the detailed execution and at the same time get to a lower cost platform in the industry.

Over time we will reduce our dependency on legacy systems and be able to move to modern lower cost platforms. Now the implementation program is evolutionary and relatively low risk. It is absolutely not a repeat of the SAP, BCP program we had in the past.

We will ensure we deliver early benefits, which is beginning to happen already. We will keep the cost down and also ensure we do not risk the business with a big bank ERP migration.

Additionally, if our markets do not recover as we anticipate, we will be able to flex the spend to match the external environment. The incremental investment this year in this program is about £35 million of CapEx with about £20 million of OpEx. We expect this profile to continue for another couple of years. Although we will concurrently reduce legacy spend to begin to reduce progressively the spend thereafter.

The investments in processes and technology will be targeted at supporting the major initiatives we outlined earlier. In terms of customer management, we’re investing in the same CRM platform across the group. To better manage our suppliers, we need better management of our data to get consistent across the businesses. This will give us better margin management and overcome the problems of the legacy systems and trilogy in the U.S. and also in the U.K.

In our supply chain, we have successfully piloted investments over the past few years in several areas. We are deploying high jump to support warehouse management and fleet wise to support transportation management across the group. This joint approach has saved at least ₤5 million in development costs.

Enhanced warehouse management will allow us to take orders later in the day up to 10 PM for next day delivery and also support direct shipping from DCs and Click and Collect from the branches. We still at the early stages of rolling out demand planning processes and platform.

At the front end of the business, we again will step up investment behind improved transactional processes, better telephony that will allow us to pull resources above branch level and also fast internet connectivity.

Early tests have shown as much as a 15% increase in sales force productivity and to underpin the program, we’ve now established two data centers in the U.S. and Europe to support the business. This investment will reduce our OpEx versus each country having its own data center on a going basis by about ₤10 million.

So we still have much to do, but we are already making progress and will continue to roll out successful platforms from one geography to another. Here’s five quick examples to give you a sense of what we’ve been up to. We now have well functioning mobile applications in all our major businesses. Although uptake is low at the moment, we believe our customers will quickly catch on. Again this will distance us from smaller capital constrained competitors.

Our focus on Blended Branch business is already up to nearly 10% of revenue taken by our e-commerce. And in the U.K. we are now live with a comprehensive plumb and parts offering, which is currently well ahead of competition. The parts proposition is best in the market in terms of product range, search facility and matching facility to original specifications.

You can imagine loading up 104,000 products and 65,000 photos is not trivial, but once done gives us a hell of a competitive advantage. In the U.S. we are now live with electronic proof of delivery. This allows for better customer service, electronic matching of invoices and payments. It speeds up the invoicing process and also reduces the quantity of discounts -- of disputes. We are soon to go live with point-of-sale transactions as well.

Another example is integrating modern platforms with our legacy systems. Often customers want to know the product specifications before they buy. Historically we've had to go to different screen and we’ll often go and look up in a paper catalog. Now in the U.S. and over the next year in the U.K. we can go from the legacy transactional screen directly to the electronic product catalogs that have been built to support the e-commerce businesses. This ensures accuracy at the point of sale and make sure our customers do not have to waste their valuable time.

We’re now in the process of rolling our salesforce management processes and data management that will allow salesman to drill into the profitability by product and customer. It will flag if a customer has slipped from their usual buying patterns. It shows how the results compare to other sales people with a similar account mix and how the product mix of the customers is under represented compared to best in class.

The sales data will significantly improve our targeting of customers toward the best opportunity exist plus to increase the productivity of our salesforce. So just then to recap on business models, it's important that we do now push on and continue to invest more in developing more efficient and productive business models, so that we can achieve the lowest cost platform and continue to incrementally build our margins over time.

We’ve already had some successes, but we know there’s still a huge amount to do in course -- and of course the opportunity we see for the business in the longer term. We deliver better leverage from our scale which will allow us to do this and really distance ourselves from the smaller local or regional players who are still often our key competitors.

In summary then, I hope you got a clear sense from John and myself that we are still making good progress in terms of driving the performance month in and month out. We are clear on how we can develop our business to become more efficient and productive. We started this process already, but we now need to step up our investment this year in a controlled and proportionate way such that we do deliver benefits both short and long term.

We don’t run unnecessary risks and if needs be, we can flex up or down the investment to match the cyclical nature of our markets. The investments are beginning to deliver and will over time give us the lowest cost platform and the benefits of scale our strategically strong positions deserve.

On that, we are happy to take questions. Two in the front row.

Question-and-Answer-Session

Howard Seymour

Howard Seymour from Numis. Can I ask a question for you each please? Firstly to you Ian, you mentioned before the market in the U.S. was running at five and you outperformed it four, just to give sort of thoughts on how you see the market developing in terms of its growth and your ability to maintain performance against that please?

Ian Meakins

Yeah. I think that -- the market numbers that we were giving you were for the Blended Branches okay. We don’t think that’s two-thirds of our business. So it's a big chunk of the work. I think what we’re seeing at the moment is a good steady U.S. market growth of around about five percentage points mark and it's been steady for going back over nearly 10 sort of quarters, so there’s a really good track here, point one.

Point two, in terms of what we also do as well we monitor and measure and survey our customers and ask them how did they see the market? What’s their order book looking like? And that again is being pretty steady IES sort of 4%, 5% growth over time. And thirdly, only about 10% of our business is contracted looking forward and again that looks pretty healthy at the moment and again supporting good steady growth.

I think our outperformance to the market and again I mean, bluntly we’re pleased. It’s now being outperformed -- we’ve been outperforming the market for nearly three years steadily. It absolutely is driven by the same factors we talk so often in these sorts of meetings, product availability, customer service having the right people in the branches at the right time. And I think we’re finding that our e-commerce platforms in the states are better than our local competitors and that I think is beginning to give us a bit of an advantage as well. So, look at the moment, you know the market looks good and steady at about 5% and we believe we can continue to outperform it.

Howard Seymour

Great. Thank you very much. And the second question, John, just on tax, because obviously you mentioned the tax charge you are going to -- because of mix from everything you said it looked like the U.S. profits go up again as a percentage of profits this year relative to Europe. So, why would the tax charge not go up again as an increment?

John Martin

Well I think our guidance overall is 28.5 to 29 and that takes into account all the mix that is under the smaller factors around the group.

Howard Seymour

Okay. Thank you.

Olivia Peters

Good morning. It’s Olivia Peters from RBC. And just two questions, please. Firstly on your dividend policy I was wondering if you would reconsider -- have you rebased your dividend it's now the second special dividend we’ve had in a row and although I understand that you want to be able to pay a dividend throughout the cycle, if a market is largely expecting a special dividend every year, then [of course] you’re not paying a special dividend that’s equivalent to cutting a dividend. So I just wondering if you would reconsider that policy?

John Martin

Thank you, Olivia. Firstly, because we have a few of our fellow directors here as well today and they’ve heard that and thank you, we have considered it very carefully. When we re-based it, I came back to our priorities, the first one is funding organic growth and we said today we’re going to sort of step up into it a little bit more. The second is the sustainable ongoing dividends with a sustainable growth rate.

Just on that point, I think it's very easy to take a point when you are somewhere in the cycle and none of us know where we are in the cycle so, if that science, is there a bit of judgment in it, well, there is a bit of both.

And the third priority was -- is bolt-on M&A where we can add value to it, truly. I think we've stayed the course and been very disciplined on that. We’re not going to do -- we’re setting in and are trying to avoid doing any deals in which it's just poor for shareholders, but possibly we will see more of those transactions and that’s the big sort of swing factor in all of that and thereafter we said, we’re not going to stock pile cash for some rainy day. There’s no purpose to do that. So we’ve got the surplus cash back to shareholders.

I don’t think it’s appropriate in setting up the way that the Board was thinking about this to think of the special dividend are they recurring every year. It will really depend on that M&A, so we've said, we’re not having M&A targets. We might have a couple 100 million a year and if we've done another sort of £150 million in the year just gone, that’s probably wouldn’t have been a special dividend.

So that’s the sort of thinking and thinking behind it. So I think from our perspective the most important thing is the final bet. We’re going to sit there, stop piling cash and having an inefficient balance sheet. We will get surplus cash back to shareholders reasonably promptly, but we would like to maintain that flexibility to pursue those other priorities when the right things come up.

Olivia Peters

Okay. Thank you. And just on my next question. I mean, the U.S. and the U.K. are now growing quite nicely obviously Europe is a bit of a drag. Just on the pricing environment do you expect an improvement there this year given that those markets have returned to growth? Thank you.

John Martin

No, I don’t think we will see much uptick in the pricing environment. Ever since I joined the business just over four years ago, it is being very, very competitive. I think it will remain that way. I think several factors in there, one clearly as people begin to see a bit of hope in the longer term, they are bound to get a little bit more competitive.

Secondly, as new build comes back a little bit, that is all contracted out work, so it’s not emergency repairs, which sometimes does not get tendered. So the mix of business being -- will be proportionally high contracted versus non-contracted and I think thirdly, there’s no doubt in the last three, four years, we've seen the transparency of pricing via the internet everybody knows pricing now that’s well and truly there. So I don’t think there’s going to be a lot that will help the pricing environment.

Clearly it's been absolutely up to us to continue to work all the various menu of profit levers that we've talked about in the past in terms of the customer mix, product mix own label. So I think we can still see ways in which we will be able to just gradually eek-up our gross margin over time, but I don’t think it's going to be coming from pricing.

Olivia Peters

Thank you very much.

John Martin

Just pass the microphone behind and then we’ll come across here.

Charlie Campbell - Liberum Capital

Thank you. It's Charlie Campbell from Liberum. I think couple of questions really. Just wondered if you could talk about slide 25 where you talked about the conversion from gross profit to operating profit. I think you sort of the time that 20% was moving towards a respectable level, I was just wondering what you might class a respectable level and what might be good level?

Also sort of where that level is in some of the best businesses? And then also sort of second question turning to the U.S., non-residential particularly sort of my understanding is it not really seen now start to pick up recently yet. Just wondering when you might expect that cycle to start picking up and contributing to this growth rates? You can do the quarterly mantra. You know specialty subject, thanks.

John Martin

So thank you Charlie. The -- well our best business is do quite a lot better than 20% first thing, saying have we got a lot to aim for. Yes our best business is we've got some businesses north of 25% conversion. And I think that is pretty good given the state of the business and the stake of our market at the moment. I think the peak or the peak for the group was between 22% and 23%.

And so absolutely to end point about is getting back to former peak trading margins actually, we will have to get back to better conversion of gross profit into trading profit in order to get back to those levels. We will need I think 22%, 22.5% to get back to former peak trading margins overall. So -- and there is -- there is a strong expectation around the business that we can get back to former peak margins.

It's not on everybody’s lips in Europe at the moment, but would like to get back to last year’s margin, last year’s balance sheet is first. So I hope that give you -- I hope that gives you a sense. There’s nothing here that’s changed that we can see since when the Group managed to do nearly 23% on that conversion rate because nothing fundamental that’s poor about the markets in which we are competing.

Ian Meakins

No, I think John is absolutely right. What we do need though is a little bit of wind in the sales from Europe. We're going to need at least sort of two or three years now of European growth to get back to those peak margins.

In terms of U.S. residential, look you guys see all the stats as well. Housing starts actually just when they peak to just over a million and now they’ve stepped back a little bit in the past couple of months, sales prices continue to increase. All of the other stats are still looking positive but be very rapid percentage changes we were seeing, six months, 12 months ago clearly are beginning to level-off a little bit now. And I think for our business you just remember in the states new residential is only 14% of our total business.

So we need the RMI market to be -- continue to pickup and that is continuing to do well. But I think what we're seeing at the moment is a good steady growth of sort of 5%. We're not seeing an acceleration in the U.S. market growth at the moment.

Charlie Campbell - Liberum Capital

And sorry, just to be clear the question was on the non-residential side and when that might start to pickup to contribute to the demand across…

Ian Meakins

Sorry, Yes, on the non-res, well we’re seeing now certainly a pickup in the commercial sector in the states. We have a small business of Fire and Fabrication business that serves all of the fire systems for new build and that is actually beginning to pickup quite nicely in sort of good single-digit top line growth so there is some growth coming back in that sector now.

John Martin

Sorry come over here because the microphone and then we will come back.

Unidentified Analyst

Yes, good morning. (inaudible) from Exane BNP Paribas, so a couple of question on the U.K. France and gross margin. First on the United Kingdom, could you give us a bit more color about the evolution of like-for-like growth, it has accelerated a bit versus the last quarter, do you think that any growth will continue to accelerate and could you give us a bit more color on the different market? Is that coming from housing, residential, new innovation?

My second question would be on France. So you perceived a £10 million trading profit this year, are you expecting a smaller loss next year. What would you expect next year excluding both restructuring charges, if we look at the underlying business excluding those restructuring would you expect an improvement or stability.

And my last question is on gross margin. You -- could you give us a bit more of an outlook market by market in Europe in terms of what you expect for 2014? You mentioned that in the U.K. you hope to improve gross margin. Is it the same in some of other country in Europe?

Ian Meakins

Sure, okay, well if I had to do the first analyses, John you can do France. In terms of the U.K. again we've seen a bit of a pickup in terms of consumer confidence. It's still negative about negative 10, but it was negative 30 going back about nine, twelve months ago.

Housing transactions have picked up again in the last sort of six months about 5% and you can see a recovery in house pricing as well. And housing starts again have picked up a little bit back to a sort of more, more I guess a more historic level about a 120,000 starts a year. So yeah we think the U.K. market is definitely coming back a little bit now.

In our business we think the market is growing between 0% and 1% and we're gaining about three points above that in terms of market share. Clearly there are two other areas that are helping our market specifically potentially longer term the Green Deal that’s being 58,000 assessments done so for, but only 419 actual green deals have been struck. So clearly it's not having much effect on the U.K. market at the moment.

I think as we talked last time, the financing for a consumer for the green deal is pretty complex. Whereas we're seeing some pickup those in the Eco spend particularly in the affordable warmth market. There are 115 installations and 30,000 of those were boilers.

And we look forward over the next sort of two, three years we anticipate about 250.000 boilers going through this scheme, which will deliver about 3%, 4% additional growth to our market. So from a sort of like-for-like market to growth point of view the U.K. now is looking more positive, but I mean we're outperforming the market by about three points. Okay France?

Ian Meakins

Yeah so when we've done the restructuring, the whole sort of strategic review in France that we talked about back at interim, we will be left in the BM business in France, which is what you see in the French segment here with about 600 million of turnover. And clearly after all the work that we've done, we’re expected to be profitable.

I think it will take some time to rebuild profitability in that business. If you look now there was a article in [Lozeko] last week, sales of new single family homes allowed is for 20, clearly a tough environment. New housing starts on a 12-month basis is down some 25% from peaks and that’s a big part of our business in France.

I think the other thing is going to France relatively frequently, I just sense there is still a drag on sort of confidence in France. So I think that’s what needs to come back into play there. But we're going to spend this year completing the transfers of the businesses that we're selling, closing the ones that we are closing and rightsizing the central costs to make sure the business is in a great shape going forward. I’m sure in FY15 we certainly don’t expect to be still generating losses in France.

Unidentified Analyst

Do you still [expect to still see losses].

John Martin

No we would not expect to see losses in FY15. We would expect today to make a profit in FY15.

Unidentified Analyst

And excluding also joint charges in 2014, would you expect the business to be profitable -- slightly profitable.

John Martin

It maybe but there are -- we are still declining fairly sharply in France, even the July numbers were down and if you look at the July market numbers, individual new builds 16% down. It’s a tough market. And in terms of gross margins if I just pick up sort of the three big plus, I guess in the states we had a -- you can see, we had a good year on gross margin in the year just finished.

I think the guys and the team -- Frank and the team they’ve done a very good job really managing the mix of their business better. They did a good job on sourcing. They got faster growth in the showroom business. Faster growth in the counter business, which is higher margin business for us.

And actually I think they did a good job as well in terms of managing pricing. There was a greater compliance with the pricing matrices that we've talked about in the past whereby we do less manual intervention in the branch. We know whenever we get into a negotiation with someone clearly we lose margin.

And I think again there’s more we can go out in the States, so again we’d expect 5, 10, 15 basis points of improvement across the Group. I think in the states, we can probably do a little bit better than that, but that’s the sort of order of magnitude at a group level.

Look the U.K. gross margin last year it was disappointing driven really by firstly a change in the mix or an increased mix of boiler sales, we gained share of some of our major customers who are big boiler sales customers, boilers are significantly lower margin for our business okay. But it was disappointing to see that and I don’t think we did a fantastic job at managing the detail of discount management with our customers as well as we could have done okay.

Now we worked hard and as I said hard in the second half of the year. We've already turned around the boiler margin that is getting better and we have all the data and controls we now need to manage absolutely down to a customer product level our discount management and we are seeing a better performance. Its early days, but we would expect that to improve back to sort of levels we achieved historical, okay.

I would point out that actually our levels of last year were still well ahead of ‘09, ’10 and ’11. So we have made progress over last four years, but I don’t want to disguise it. U.K. performance was disappointing on a gross margin basis, good on a market share basis.

I think in the Nordics, we guys did a good job last year, really protecting the business. John made the point about taking the costs out. And I think they got better at managing again sourcing and the pricing matrices we drove own label a bit harder in the Nordics and made good progress. So again we would expect to see 5, 10, 15 basis points progress there as well. So again at the moment, we don’t see any reason why we can’t continue to make incremental progress on a group basis. Does that answer your question?

John Martin

Go backwards, sorry go straight behind you and then.

Yuri Serov - Morgan Stanley

Hi, good morning. Hello. Yuri Serov from Morgan Stanley. Ian when you were talking about the business, you were talking about sales management, it was quite curious to hear from you the words that you were using which were poor, inefficient, inadequate and so on, for a newcomer coming into this room that may have come across as you’re talking about a business in complete disarray and you have totally mismanaged. We all know that’s not the case.

The question is, is it possible for you to give us like a pintsized description of the road travel so far where you were, how you got to the business which you still describe as poor. And give us an assessment as to how much more you need to travel in the future and how that compares to what you have already done.

Ian Meakins

Yeah, I think that’s fair. Look I mean bluntly we set very high standards, so when I describe this as being poor, I’m comparing us to some great companies that I’ve seen in the past, that worked with or consulted to, so I think I do know what really great looks like and we are not really great.

We're good at taking care of our customers. So there’s an enormous amount of time spent talking, understanding, looking after the customer from a relationship point of view. But in terms of the hardcore I would describe negotiation in terms of pricing by SKU, pricing by job, really understanding the net profitability of our customers and how their discount structure should reflect their business.

Yeah I think we still have a long way to go. It's always difficult to say just how bad we were. It doesn’t really matter other than say I think there’s a lot we can do and hence what we're doing is now rolling out I think good -- really good quality CRM systems and processes using modern techniques that can get us there. So does that give you a sense? Yeah.

Yuri Serov - Morgan Stanley

And can I ask a second question which is a bit simpler. Canada the like-for-like performance is reasonably good and the market from what I was expecting and from what people have seen is -- should be fairly poor. The housing sales or housing production is falling and generally the climate is not really positive. So, could you tell us whether you’re outperforming the market? I mean the comments that John made were -- the promise was hard faugh, but on the other hand the market share has been consistent. How do we reconcile that?

Ian Meakins

Well, I think towards the end of the year we did stock a bit of market share. I think you can see that in the Q3, Q4 numbers. So, the market has been declining at sort of overall 1% to 2% in that period and we've taken a little bit of share. You have to really look down by regions in Canada to see where we’re strong. We’ve got some huge opportunities to grow both in the East and the West.

We are very strong already in the sort of Calgary, Edmonton type of region. We’re quite strong in Quebec. So, you have to see where the – and that’s been more – I think the market in Quebec has been very challenging, particularly there is all sorts of governmental problems there that some of you are aware of. So, we’ve taken bits of share. There’s a huge opportunity there in Canada. There’s a lots to go – lot to go at and lot to go for. And it’s also quite a good margin opportunity, but I don’t think the market is going to give us a lot in the short term.

Yuri Serov - Morgan Stanley

And you’re saying that the market is declining 1% or 2%, are you seeing that continuing? Your description was that you expect the trends at the start of this year to mimic what you saw in Q4? So the conclusion is that the market is likely to carry on at that pace?

Ian Meakins

Well, I think if you look at month by month in the market stats, the decline has been very similar. It's been sort of broadly anywhere between sort of minus one, minus two back to sort of flat by month, month and month is good market data available in Canada. And we had just very, very small amount of growth. We haven’t submitted a forward-looking comment the eight weeks since the year-end our business has been very similar to Q4.

Yuri Serov - Morgan Stanley

Okay. Good.

Ian Meakins

Aynsley.

Aynsley Lammin - Citi

Aynsley Lammin from Citi. Just wondered on the U.S., the cost base particularly for example, wage inflation, if you’re seeing any kind of change in the trends as you’re going to this financial year versus last couple of years. And then secondly, just following on from Yuri’s question, I wonder if you can give us a bit of an insight of where you see kind of the margins in U.S. Ferguson business potentially able to get to a bit of volume recovery some of these kind of improvements you’re making, would a double digit margin be reasonable.

Ian Meakins

Pretty reasonable and you could promise the margin. There’s been a little bit more salary inflation in the U.S. for actually the last sort of couple of years than there has been elsewhere around a bit, but it’s not been runaway. I think there is a reality, unemployment is still very high in U.S. by historical standards and I think there is a reality in that market, that if you’ve got a great job now a great and well paying job, you should keep it.

And of course the other thing is with us having put in 2% additional headcount, a lot of our staff are getting better bonuses and commissions as a result of the strong performance and good, that’s where we would like to put the money. So I don’t think we -- we’re certainly not seeing now any more inflation, wage inflation that we’ve seen over the last 12 to 18 months. The only sort of frustrating cost shock thing in the U.S. continues to be healthcare cost, proportionately it’s not that much of the cost base but nevertheless it's something that we manage pretty actively.

John Martin

I think in terms of the margin potential, it’s a great question in blending. We don’t spend a lot of time trying to analytically work out what could be the final end game because we don’t know. What we absolutely are committed to is we continue to drive all of the key profit levers that we’ve talked about here in terms of the mix of the business. I’ve just answered the question already about is there more gross margin potentially in the U.S.

Yes, I think there is. We’re making I think good progress there. I would say, and again to the earlier point there will be a better way of pricing push back on us, because we will get increasingly into more new built, which is contracted and contracted work is genuinely, generally about two points lower than non-contractive work, so you can see a switch in that mix of business would be damaging to us.

We’re doing a lot around e-commerce which is improving the productivity in the business and we've highlighted earlier today all the work that we’re doing around the new business model work, which again longer term absolutely can take us further forward.

So what might it get to over the next five years, obviously we don’t know. We’re just going to keep on pushing forward and certainly 8%, 9%. We don’t see any reason why over time we can’t see that happening.

At some stage you know, the recession will occur. That will happen, God knows when, but that will undoubtedly have a downward impact I suspect on our margins. I guess that within in the short-term because of the external investment that we’re making and John’s already described some of the cost pressures, we had a very good flow through this in the year just finished. I wouldn’t expect us to be able to replicate that flow-through in the States in the year that we’re now in given the external investment that we’re putting in place.

Aynsley Lammin - Citi

Okay.

John Martin

Sir, behind you.

Unidentified Analyst

Clyde Lewis at [Citi]. I think following to with, I think three questions are on the U.S. as well if I may. Firstly it's in the branches I am just wondering if you can give us a little bit of an update as to how many new stores you’re looking to open this year?

Secondly, I think it was 12 or 18 months ago, you flagged up some sort of key target markets, I think it was MRO, hotels and government areas, you have not said anything about that today, I’m just wondering if you can refresh where you are in terms of sort of achieving the extra growth in those areas.

And then finally, could you just say a little bit about your capacity and how they are reacting to your performance and your market share gains and the threats particularly now you’ve flagged up Amazon earlier on in terms of sort of what they are doing and also some other work-based competitors as well?

Ian Meakins

We are not allowed to talk about competitors. Yeah looking at the branches, I think we opened up just over 15 in the year gone by. That’s sort of number would make sense for us going forward as well. I think we closed about 15 or 20 as well. So, expect us around the edges net increments of 30, 40 that will make sense.

I think as we’ve said in the past, we have the right geographic footprint now. So there are going to be 100, 200 openings in a year. Probably 1.2, we’re very, very committed to driving the whole e-commerce business clearly, that doesn’t ignore branches, it doesn’t need points of delivery locally and we have that with our branch network, so I think from a branch point of view gradual increase would be – what would be sort of signaling.

I think in terms of the other target markets we talked about that is effectively captured now within our facilities maintenance business, which is basically the ledger and the hotels industry that is capturing facilities maintenance. That’s up now to revenue of about $300 million in total, okay? It's growing at around about 17% a year, so that segment-- those segments of the market are doing well.

We now have 65 dedicated sales people now organized on a national basis and it is the national sales center that we’re using to service these customers. These are predominantly regional or national hotel chains or ledger chains, okay to give to that sense.

In terms of competitors, yeah, I don’t think there’s anything particularly new at the moment. In many of our markets still the small local competitor is often the best alongside us, they would be their best competitor. They will be good service providers. We think the sort of actions we’re taking will continue to distance ourselves from them.

To John’s earlier point I think a part of the reason why the pipeline on M&A looks a bit more interesting is because I think we are driving the performance hard in some of these areas now and I think some of the smaller players are thinking, do they really want to continue to compete with us. But there hasn’t been a massive change in that area.

On the big guys, the new competitors, Amazon trade launched in April 15, 16 months ago. Their traffic on the site has been pretty static, it was high for the first month or two then dropped off enormously. They still got it as a bitter site, so we’re not seeing any big impact on our business yet, because of that, but we are not at all complacent.

I think we’ve talked about that in the past. And small e-commerce, competitors again nibbling away round the edges, but again I think with the e-commerce offerings, we now have in place in the States, in the U.K. and in Continental Europe, we are not at all disadvantaged. Three or four years ago we were. I mean, clearly our platforms were not as good. We not benchmarked our performance against [Grinders] against Amazon its screw fixed people like who are clearly very good operators in this space and that’s where we want to compare ourselves to.

John Martin

You just stole the microphone there.

Paul Checketts - Barclays Capital

It’s Paul Checketts from Barclays Capital. I’ll keep it to one. It's on the acquisition pipeline please. Could you give us a quick update on geographically what’s on the target list and maybe a sense of the size, how many are of any larger value and the second part of that is I guess you probably bid on a transaction that’s happened in Canada recently. Can you maybe comment on why you weren’t successful?

John Martin

I’ll take the second one for me. I think from a shareholder perspective we were, we were quite successful. I’ve never seen such a multiple, such a price paid for a loss making business. I think you would have given us a pretty hard time if we had succeeded on that one. It was just a huge amount of money for a business that was -- that was a loss making business. I think it will take -- it was going to take a huge amount of integration.

Put simply I -- the day it was -- the day it was announced, I told to a few shareholders and I said look actually I’d rather take the money and invest it in organic growth in that space. Even if we're more -- even if we're more aggressive, I think our shareholders would understand that. And I think that’s what we should be absolutely prepared to do. You have to be prepared to -- that’s my priority, you have to be prepared to walk away. So that’s what we -- that’s what we did.

Ian Meakins

We did make sure the window paid a full price. So we were an interested participant in that game and I think John is absolutely right. We want to be there at the end but fundamentally it was -- it was quite a bit above what we were prepared to pay. So good luck, John.

John Martin

So I mean I think on the overall pipeline as Ian said it's your words, looking a bit more interested, I like that. There’s nothing huge or eminent in there at the moment, so -- but there a number of small to -- they are relatively small acquisitions. I think the couple of sort of -- one of things that we are asking the team to work hard to think what are the businesses that we would like to buy. What are the areas that we would like to be stronger? What are the markets that we’d like to consolidate in making sure that we're working hard at that?

Just to reiterate now over the last sort of three or four years we haven’t -- we haven’t had transactions that we've regretted not buying okay genuinely and there is often a bit of -- there is often a bit of format for these. There was one transaction earlier in the year where -- where we weren’t as you had put it, successful and one of our competitors was successful, we picked up 15 sales staff from that particular business.

They’re probably regretting being quite as successful as we were though. So sometimes transactions you’ve got to be sensitive to how you’re going to integrate it and whether or not people are going to be successful in your business, there’s that cultural fit and you’re going to be able to integrated or imported.

So there are more -- there are more targets there in the pipeline at the moment. And I think we would be sort of quietly confident that we will convert slightly more of those just because there are some more quality businesses in there that we might convert some more of those this year than we did say last year fine. Yes. Alright okay. Alright.

Kevin Cammack - Cenkos Securities Plc

Thank you. Kevin Cammack at Cenkos. Just two very quick ones. Firstly in relation to the -- well both should be in investment, but in relation to the IT investment that you’ve identified today, is there any significant ongoing OpEx cost that comes with that permanently into the future.

And secondly just following the acquisition line you obviously made a point of stressing the conservatives you need in the balance sheet, the ratios you need to keep. But presuming deciding the level of special dividend you must have made yourself a budget of spend on acquisition this year. Is there any broadly speaking any sort of figures you can give around that?

John Martin

So on the IT, on the IT investment, I think what we will see over time now, if you recalled historically, we invested quite a lot in physical infrastructure and probably with the exception of SAP and we invested less than we should have done in the processing technology infrastructure of the business and I think as Ian set out today we are absolutely at addressing that I think imbalance.

I think the second thing is with the development of some of our business model, we are pretty cautious about just putting new real estate and plunking it down everywhere. We've got a great footprint. We can service our customers in most countries, most regions from the existing footprint that we got.

So there will be some churn of branches, relocations, there’ll be some consolidations and there’ll be some new branches. But I suspect that the mix of our capital investment going forward will be a little bit more technology rich and a little bit less branch based. So the flow through of that to the cost base I think will be very similar to what it's been historically.

If you look at the additional £35 million this year and look now all these projects need to have a payback as well, we’re not doing this for sort of a grant business or charitable purposes. Everyone of those projects is going to have a proper return.

So sure there’ll be some drag through of cost into future years, but there also need to be a relevant sales or margin or cost reductions to accommodate that. But I do think if you look at that £20 million additional cost, incremental cost this year, I think that is likely in a sense we're not going to stop doing these technology projects, it's not a one year project. This is an ongoing, this is an ongoing thing. We think it's pretty proportional to our cost base overall. So it's not going to crush on us. But I do think you should see that to sort of reasonably ongoing.

And then genuinely to the second question on the sort of acquisitions, we don’t have -- I think we've said before £200 million a year might be a normal sort of rate of acquisition spend, who knows it might get slightly north of that this year. But we genuinely don’t have a budget for acquisitions. I think we are rather reluctant to have a target because you can just incentivize or promote or motivate the wrong behavior and there is nobody -- there is nobody that thinks that we should be doing that in the company.

So we've absolutely got the results just to do those acquisitions if they arise and if the opportunities are there, then we will continue to be disciplined with the cash.

Kevin Cammack - Cenkos Securities Plc

Okay. Good.

John Martin

Come forward here.

Gregor Kuglitsch - UBS

I am Gregor Kuglitsch from UBS. We have three questions sort of the transformation side of thing. So first, if you could just us maybe I don’t know if you can, but some numbers perhaps on sort of pricing compliance, I don’t know because obviously you mentioned that specifically, can you give us an idea when you speak about pricing components, do you actually track business by business? How much is complaint and what you feel I’m not sure how much this is possible but growth margin difference is.

So we can sort of just quantify where we are and similar on sourcing because I think you’ve given us some date in the past in the U.S. where we are in terms of our own label where you think it can -- it can go. And then sort of as a third question maybe that summarizes that really is on the IT spend and sort of the incremental investment you’re putting into the business in general. What kind of paybacks are we talking about? Are you sort of in two, three years or is it much longer date to get a feel in terms of what this additional cost brings, thanks?

John Martin

Look in terms of pricing compliance, in our core business units across all of the group now, we are -- we are measuring -- beginning to measure it. The range in terms of compliance is between 30% to sort of 70%, 80% okay in terms of the performance of the business unit. I think once you get up to the 70%, 80% mark, that’s about as high as you’re going to be able to take it because there will always be either a big contract or special deal or something like that.

So I’d be very happy if we were running at 50% or 60% across the Group that would be great. It’s very difficult to put a number on it in terms of what it's worth because clearly you don’t know what it might have been had you not had pricing compliance other than we do know that in the market in the States in the U.K. where we're getting compliance, we're getting gross margin improvements. So I think its part of the overall program of looking to get 5, 10, 15 basis points pickup.

Ian Meakins

In terms of own label, actually own label we are running now at about just under 7%, remember bulk store was predominantly own label and that has left us. So actually our percentage of own label has come down a little bit this year. And again I’m not that fussed about the percentage of own label we have. What I’m very fussed about is the gross margin.

So for example in the U.K. we've been sort of processed with some of our supplies where basically we are saying look unless you are prepared to give us a secondary brand, we will go own label. Some of the suppliers have given us a secondary brand at a better margin. I am fine with that, okay.

So again in certain categories we are not going to be driving own label in copper tubing and things like that effectively their commodities anyway. So I would expect own label to pick up gradually through time, but for us the most important thing is as a lever, in terms of gross margin, gross margin development and in terms of the IT spend any of the finance programs that John is running, I would expect about a two month payback, but for most IT projects, we look at about a two or three year payback. I mean that’s a sort of sensible timeframe when you can get to sort of the returns, okay.

Gregor Kuglitsch – UBS

Thank you.

John Martin

Behind you and then we will come across through John and there was one behind as well.

Unidentified Analyst

[Julia] from Credit Suisse. Two top down questions if I may. The first one is just on the U.S. now that you are talking about putting out new distribution centers in the U.S., could you give us an update on the accessible market in the U.S. how you are thinking of it and may be the other way around of asking the same question what would be your estimate of the market share of independent more players in the U.S.

And then the other one just again on the U.S. RMI activity you’ve mentioned that obviously in lieu of business in the U.S. is it relatively small portion of your business. At the same time, you are expecting some push back because of the new build proportion increase and so could you give us an update on the RMI activity in the U.S. what you are seeing and what you would have a trend now that the new bill has been recovering very few quarters now?

Ian Meakins

Sure in terms of the addressable market, in our blended branch business, we have a 17.5% market share nationally. Therefore we have an enormous amount of market share potential. In certain parts of the states, we have market shares locally in excess of 30%, 35%. So why wouldn’t be looking to sort of double our market share over the long term.

In terms of the other competitors, actually we define at the moment our number two competitors being what Home Depot would sell to trades people and the number three competitor would actually be a Joker, okay. So they are about four times smaller than us. So they are around about 4% market share, okay, nationally.

And then you go down to a lot of -- a lot smaller regional and local players. So the fragmentation in the U.S. is still roughly half the market is very, very small local players to give you a sense and I think in terms of the growth in RMI, we've seen good expenditure there. The sort of measures we look out which is the Harvard Joint [Study], there is growth there.

We have good growth in the architecture index as well, which is a reasonable measure of RMI activity and also just consumer confidence is now back up to the levels that we saw sort of getting to the prerecession levels of consumer confidence, not there yet, but certainly getting back that way. So again we see good growth opportunity in the RMI.

Time for probably just two more I think, unless you got 10 questions Joe?

Unidentified Analyst

I’ve got eight actually, I am kidding. Sorry it is three. First one was sort of elaborate, but just coming back given the U.S. is kind of the clear growth engine and that’s going to the same position for the next 12 months, I think back at the Q3 call, John I think you gave the kind of ceiling on operational gearing where you mentioned $0.15, obviously today these numbers you are floating again, look it would be difficult to beat what you did in the full year, but when we look at the numbers are you thinking of the drop through being kind of 20% or 23% because actually there is an 11 million kind of inventory last year, so if we think about 81 on 409, is that the number you are thinking obviously a 20% drop through was what you did last year, are you thinking of a higher number 91, 92?

John Martin

Sorry, just because it's some one-off, so when we think about what actually you delivered that drop through gearing that was just delivered in the numbers we sold, it was like 23% drop through if I take the headline number.

Unidentified Analyst

Yes, I think…

John Martin

I mean I think in a sense in the U.S. particularly in the fourth quarter, we had a bit of a perfect store, nothing went wrong which is good. Gross margins were excellent and all the way through that quarter and our cost base is absolutely tied down. The things that always just perceive like that.

Unidentified Analyst

Barring kind of gross margin, means that 15 drop 3 is probably that number that you think actually looks a sensible metric for people to think about?

John Martin

Well, I think, if you look at the overall metric of our business, I’ve already said on the flow through, X gross margin expansion which you know 10 bps – everyone of our business is 10 bps next year. Actually that will be a great result. And we just want to keep on making sure that compound it. X that this year that we have about 11% variable cost, 11% of sales.

So working on an overall margin of 28, you down at a maximum of 17, if nothing happens to be fixed cost base. Well unfortunately inflation happens and actually we do want to expand the business. So, I had always thought in our business that long-term double-digit flow through is a good performance in our business. I know some of you have different ideas.

I just think that double-digit flow-through for us is a good performance in our business. What I’d like to do is deliver double-digit flow-through, low double-digit flow through consistently. And sure, if we go into a downturn it will be lower than you’d expect it to improve coming out of the downturn, but just in normal condition double-digit growth should be a very good performance.

I think this year, we said on the guidance, we just need to be careful, because we have got those restructuring charges. Now we got another that one sort of headwinds and we are putting in this incremental – invest incremental investments and because we think that right thing to the business.

Unidentified Analyst

And just on U.S. Can you give us an update where is Build.com in terms of broad revenues today and is it the right thing for the U.K. e-commerce to be managed over the U.S. in that I can understand the craziest technology and these guys know what they are doing. But if I look at your U.K. business needs a bigger customer presence. You got Victoria Plumb, TV advertising from a number of players, if you want to actually mass that business up, you got to spend a bit more money and you need guys here saying, look this is what we need to do. I just wondered is that something…

Ian Meakins

I mean Build is now to $0.5 billion in terms of sales and growing at a round about 15%. So it’s still performing well. Gross margins have come off a little bit and Build net margin has held up well. So it’s still – and again the gross margins are sort of two points lower than our average in the state. And the net margin though is only slightly lower than our total net margin.

So it’s a good business for us. And I think John, it’s a fair question. John, its right, absolutely right, so let the US team manage that, because A, that the sharing as you know, we took the platform from the U.S. absolutely below sort of cut and paste into the U.K., all of the transactions are occurring on the U.S. platform, okay? So what we have in the U.K. is effectively a sales team, a telesales operation and that’s about it.

Okay. Now clearly all of the marketing, all the activity is being driven by a team in the U.K., but rather than reporting to the U.K. team, I want them reporting to the U.S. team. I think really thought for two reasons, one, if you have them reporting to the U.K. team there’s a natural reluctance to drive e-commerce as hard as you can do, because is it going to cannibalize by core business.

And that’s exactly what we had in the States by the way, going back before I joined the Company effectively we split off Build.com and had it reporting directly in to Frank rather than historically reported even low in the organization. I think that was a very good thing for us to have done, because it stopped all the internecine warfare about cannibalization.

And secondly, let us be clear, when we have the marketing expertise in the States, I mean, we are well hooked into Google, all of those sorts of algorithm, understanding how that works, we don’t have that degree of expertise in our U.K. marketing department. They are more B2B than B2C. It is as know, John, quite a different business. But I think you made a fair point while we are doing things together sourcing in the U.K., absolutely we’re going and then talking to our major suppliers together -- together and/or separately we think we can get better deals.

Unidentified Analyst

Make sense. Yes. And just very finally from me, in the U.K., plumb and parts, the merger of counters is that simply just a book thing in the back of our packs here or has there being something more fundament in the way, if I walk into a plumb center now, I’ll be dealt with – I’m going there for replacement parts versus the rest of the business?

Ian Meakins

Well, I know and you will, so anything good. No, there is something, I mean it is different. We are making sure now that our staff can service customers who want to actually buy and plumb or parts. We run separate counters and I think there was a good reason for doing that in building the business and also frankly in protecting margins because as you know parts -- just because of the stockholding period, you have to command a better margin on those products.

So I think now we are -- if you weren’t those counters, so that any staff member can service either plump or parts and that’s required a lot of training, it's required some systems changes and those types of things, lot of organizational changes and that’s the reason for doing it. It's clearly more efficient that way and we are reasonably confident that we are not going to lose out sales line in that--.

John Martin

There is one more at the back, so there is time for one more and then we should call it a day.

Andy Murphy - Merrill Lynch

Andy Murphy at Merrill. So just a quick one. On that £20 million restructuring, can you just give us a flavor of the geographic location that’s going to be spend and this is a follow-up, what risk is there if any that could be expanded as the year progresses to other actions that you might be considering?

John Martin

Andy thanks. So -- and I will answer one other question, which is why couldn’t we take it last year? The reason for that is just an accounting issue. If you haven’t actually notified the staff by 31 July, you can’t take it. The geographic locations are frankly throughout front and Central Europe, Nordics. There are certainly two projects at the moment, clearly for France we need to complete and there is one part of Nordics where we are still where we are still going to take some more -- take some more decisive action.

So those are the two projects ongoing at the moment, which is the £8 million. I think could it be higher, well if we continue to decline at current rates, yes it could. So I think there is an expectation at some point that actually the markets will at least stabilize and we will get back to growth rather than declines and if that happens by the end of the first half, then that should be okay.

I think the second thing is there is this sort of two factors here in what actions do we take now, do we take going forward? If you look for example in Finland, I think Ian mentioned before, we've negotiated with some of our workforce to go home for three months over Christmas which is over winter I should say, which is partly funded by the government in order to just cut costs over that period. We are doing that again now this year already just well in advance because we know that trading remains very tough.

We didn’t think last year that we were going to be able to do that. We said, we though it's going to be a one-off, but actually the team absolutely active. So there are plenty of things that we can do still to manage our cost base and very actively outside of just the restructuring.

So at the moment, our best view is £20 million, it's £12 million that’s not committed where will it be and I am not 100% sure today, but the £80 million is in Nordics and France.

Andy Murphy - Merrill Lynch

Thank you very much. Good. Thanks John. Thank you.

Ian Meakins

Okay. Thank you very much for coming along today. Thank you.

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