John Martin - Chief Executive Officer Mike Powell - Chief Financial Officer

Gregor Kuglitsch - UBS Aynsley Lammin - Canaccord Paul Checketts - Barclays Howard Seymour - Numis Karl Green - Credit Suisse Gerard Moore - Investec Andy Murphy - Bank of America Merrill Lynch Yves Bromehead - Exane John Messenger - Redburn Tom Sykes - Deutsche Bank Ami Galla - Citi

Good morning, everybody. I think we might be a little bit thin this morning because of the trains.

So we'll get more time for all of your questions at the end. There won't be as much competition for them.

Thank you very much indeed for coming, and welcome to the Ferguson interim results. You've got Mike and I presenting this morning.

We have got Alan Murray somewhere here with us this morning. Alan is our Senior Independent Director.

It's clearly a bit too warm for Alan in Florida. But, Alan, thank you very much for making the trip over, and welcome.

Look, I'll give you the highlights first and then Mike will do the finance and operations review and I'll go on to the strategy. We have plenty of time at the end for your questions.

So to the highlights. This time last year, revenue growth stepped up and it's been consistently good actually ever since.

The total growth in this half of 10.3%, including organic growth of 7.4%. The growth strategies that we're using across the U.S.A.

and Canada have clearly delivered the expected results, and we continue to gain profitable market share across the whole of North America. The team has really continued to drive gross margins at this period.

Those were around 40 basis points ahead. That's worth $40 million.

And when combined with good cost control, that's delivered to trading profits up 14.4% on last year. And you know that we care a lot about cash, so Mike will tell you in a few minutes about another six months of good working capital management.

And we'll touch on the U.K. later.

The U.K. has not been easy, but I am very pleased the team has stepped up the pace of restructuring in the second quarter.

And after receiving competition clearance a few weeks ago, we expect to complete the sale of Nordics later on this week. That's provided the funds for a $1 billion special dividend, which Mike will talk about, in addition to the ongoing share buyback, which we're now halfway through.

Okay, so that's the summary. Now, Mike, over to you for the finance and operating review.

Thanks, John. Good morning, everybody.

Pleased to present the group's half year results. We show we have made a good start to the year, and we're in good shape as we enter the second half of the year.

Revenue for the group driven by strong growth in our U.S. and Canadian businesses, and we're pleased with the gross margin progression of 40 basis points and also our cost control.

You can see ongoing trading profit of nearly $700 million, up 14.4% in constant currency, giving an improved trading margin for the group of 7%. Headline EPS, up 15.8%.

Net debt at $1.4 billion means that we exit the half year at 0.8 times levered. We've increased the interim dividend by 10%.

We'd also expect the Nordics transaction to close later this week, and subject to that closing, we're announcing today a special dividend with a share consolidation of $4 a share. That's approximately $1 billion.

Now let me take you into a little more detail, and please do remember as I go through these next few slides that the Nordic region is classified as discontinued as it was at the full year for 2017 and therefore those comparators have been restated to be comparable to the 2018 results. U.S., Canada and Central Europe continued their good growth momentum from last year as they continue to outperform what are supported markets.

You can see the comps get slightly harder as we move into the second half of the year. In the U.K., second quarter decline reflects our actions to exit low-margin, unsustainable business particularly towards the end of the second quarter.

Moving to the revenue and trading profit growth. And as normal, I've put up two graphs here.

On the left is the revenue and on the right is the profit. Firstly, on the left, I bridged the 10.3% revenue growth.

That's from the $9,090 million in half one last year to the $10,027 million in the first half of this year. After adjusting for the foreign exchange, which increased revenue by $108 million, you can see the constant-currency growth of 9%, and that's split into the two areas, good organic growth of nearly 7.5% and acquisitions, which added just over 1.5%.

And there was no impact from trading days at all in the half. On the right-hand side, similar format, you can see the trading profit bridge from the $607 million to the $698 million.

Foreign exchange, small. We report in dollars now, as that's added $3 million to take us to $610 million.

Acquisitions added $6 million, and organic flow through very pleasing, adding $82 million of trading profit. Now a little more detail into each of the regions.

And first, our biggest region, the U.S.A, delivered a really good performance overall. Revenue growth was strong.

We outperformed markets in all of our businesses. Gross margin improved due to more effective purchasing, improved product mix and a good disciplined pricing.

Operating expenses well controlled and that was despite, as anticipated, wage inflation in the U.S. of some 3% to 4% and also, as you'd expect, we continue to invest in our business there, particularly into technology platforms to support profitable growth in the future.

All of this meant that the flow-through to profit to the bottom line was stronger than I anticipated at the start of the year. Trading profit came in at $647 million, 15.7% ahead of last year.

Trading margin of 8.2% is 40 basis points up on prior year. In terms of that organic growth in the U.S., it was broadly based across all of our businesses and geographies.

Blended Branches growth across the regions was strong, as you can see the chart on the right-hand side, with the industrial markets in the North Central continuing to recover, the West grew particularly well and in the East was a good, solid performance against some harder comps from the prior year. Waterworks business on its own, the standalone business of Waterworks, continued to grow very strongly.

And John, a little later on, will give you a little more color around that business and some of the opportunities that we have there. Looking at our major markets.

Recent trends continued through the first half. Our largest end market, that's residential, continued to be strong, and sales continue to outperform.

Commercial markets have slowed a touch, but remained in very good shape as we continue to grow well in that market also. Infrastructure markets are back to growth, and we continue to significantly outperform here.

And industrial markets recovered well after a slow couple of years. Overall, you can see at the bottom that adds up to a good performance -- good outperformance against the market, some 300 to 400 basis points, consistent with prior years.

The UK continues to be challenging. We continue to execute our restructuring plan.

Two businesses performing well. Infrastructure business performs well and soak.com, our B2C business, both performed well and both grew in the first half.

The UK Blended Business declined on last year with the reduction in revenue due to closed branches and the exit of low-margin business towards the end of the half. I'd expect those actions to continue to reduce revenue as we move forward by approximately 10%.

Gross margins were lower in competitive markets, partly as a result of our decision to stop opportunistic forward buys. Operating costs increased slightly as we move to our in-night replenishment of our branches to improve our customer service.

And that left trading profit at $38 million, $8 million lower on a constant-currency basis. John will again update a little more on our UK restructuring activities later.

Canada and Central Europe performed very well in the first half. New management team in there doing a good job, delivered strong growth, supplemented by investments and acquisitions.

Organic revenue growth was nearly 8% with all businesses generating good growth. And particularly again, the Industrial business came back strongly after a tough couple of years.

Gross margin's ahead, costs controlled well leading to good trading profit, $41 million now in Canada and Central Europe, $9 million ahead of last year on a constant-currency basis. So that's a quick whiz through the three regions.

On to other items. Exceptional items were in line with guidance and totaled $46 million in the first half.

As part of the UK restructuring program, we've incurred $37 million of investment costs, $23 million of which were cash. And the financing charges, financing and tax, also came in as expected.

And as we previously announced earlier in the year, the recent U.S. tax legislative changes have reduced the group tax rate.

The ongoing tax rate was as anticipated, just over 25%. The half year rate being as usual the rate that we'll apply to the full financial year.

And as a reminder, going forward, from FY '19 onwards, we expect the ongoing effective tax rate for the group to be somewhere between 21% and 22%. Cash generation continues to be a key strength of the Ferguson business.

You can see from the slide trading profits at the top, the $698 million. Adding back depreciation, amortization, you can see the EBITDA generated, $782 million.

Had our usual seasonal working capital outflow and generated cash from operations of $390 million. Interest and tax outflows were materially lower year-on-year.

Part of this is due to timing of payments on tax, but also reflects the reduction in cash tax as a result of the legislative changes. We invested $120 million in acquisitions, $175 million in capital investments as our capital investments picked up back to normal levels as I indicated they would at the last full year results.

So after $248 million of dividend payments, $335 million of share buybacks, net debt increased by $695 million leaving us with the $1.4 billion equivalent to the 0.8 times levered. On to acquisitions.

In the first half, we made six acquisitions for a total consideration of $116 million: three in the U.S., two in Canada and one in the Netherlands. The one acquisition we've made since we last spoke to you at the end of the first quarter is Duhig, a Californian-based business supplying products and services to the North American industrial markets.

The acquisition pipeline remains reasonable at the moment, mostly modest in size and across a good range of businesses. Always try to include the technical guidance in terms of other items as we look forward to the end of the financial year, and here, you can see my full year guidance.

There's no trading day impact in either the third or fourth quarter, which always makes the analysis somewhat easier. And as I said earlier, the effective tax rate I'd expect to be about 25% for the full year.

All other items remain largely unchanged since I last saw you. And finally, from myself at the moment, I just wanted to remind you of our capital allocation priorities, which you can see on the top half of the slide there, which I've covered in previous sessions.

And given those priorities and the current strong balance sheet position with the expected proceeds from Stark Group disposal, we'll continue the share buyback announced in October, we're about halfway through that. And we've announced today subject to completion of the Stark Group disposal later this week, a proposed special dividend and associated share consolidation of approximately $1 billion.

The special dividend and share consolidation require shareholder approval, and there'll be a general meeting on the 23rd of May this year. So that's it from me: a good set of numbers, continued return to shareholders and I'm pleased with the position we're in as we move deeper into our second half of the year.

Thank you very much.

Mike, thank you very much. Now 18 months ago, I should say, we set our three priorities for the group.

And since then, we've added 2 more. One of those is to capitalize on the Canadian growth opportunity and the second is to accelerate innovation in our businesses.

We'll touch on each of these priorities here today. By far, the most important priority, of course, in the group now is to generate and support the best rate of profitable growth in the U.S.

And last time around, we set out some of the drivers of profitable business growth you can see there on that chart. We also talked about going beyond satisfying customers' basic needs.

So fulfilling their wants. And you might remember this spider chart showing some of the factors that motivate customers, to give us their business to keep on coming back to us day after day and year after year.

Rather than going to more specifics on this chart today, I did want to plant with you a couple of ideas, which I think are fundamental to understanding the Ferguson business. The concept behind our business is very simple we buy things, we move them close to the customer and we sell them.

We have to have the right product range, we have to have great availability and we have to price fairly. We have to process those transactions quickly and efficiently, and we need to be good at selling.

These are basics, and they're important. They're very important.

It's very important to get them right. In our space, good businesses get most of these things right most of the time.

And great businesses get them right almost all of the time. But here's the thing getting the basics right in our business is not sufficient to build a sustainable competitive advantage.

We don't just sell products, we deliver service to our customers. Our business is not just a series of transactions.

We help our customers to deliver their projects. We find out what they want by visiting them and by listening to them.

We support them when they're pitching for work. And we work hard throughout both the construction and the renovation cycle to stay close to their projects and to help them manage them.

Our consultants are not just looking to maximize profit on a single transaction or a series of transactions. They're supporting our customers over numerous projects over many years, and they develop enduring relationships based on trust.

It's similar to our proposition to our associates. When an associate joins our company, we're not just providing a secure job with an attractive salary.

We're providing a challenging career opportunity, and we're providing the opportunity for associates to develop a career and to maximize their asset with the market leader. If you take anything away from this session today, please take this we're not just a transaction business selling product.

We're a service business, helping customers to manage their projects. That's the closest you're going to come to the essence of what Ferguson is about and what we're trying to build.

Over the years, we've talked a lot about multichannel and increasingly recently about omni-channel. This chart shows the U.S.

sales for our strategic business groups across the country. The first three bars here on the left are the principal constituents of what you know as the Blended Branches business.

Actually, there are three major constituents. There's the residential trade business, which is principally the counter-based business, that's the first bar.

There's the residential showroom business. And there's also the commercial business, which is the third bar in.

The stacks on each of those bars show the proportion of orders that are placed via each part of the sales channel. It's not perfect.

There is some crossover between some of these charts, but it is a decent approximation. First point.

Inside, outside sales and sales consultants, they drive the majority of our business. It's an expensive channel.

We don't force sales consultants on a customer unless that customer values it. But you can see from the chart, it is the majority.

It's those dark-blue stacks. It is the majority of our business.

Second point. Counter sales are very important across our business.

That's the green stacks on those charts. Some of the demand there arises from customers who have limited visibility of their projects.

Some customers use the channel to access advice and to consider alternative products or perhaps to return surplus goods they bought before or a range of other needs that require a face-to-face service. Third point, and we've said this before, e-commerce is emerging as a very important channel.

In fact, it's more important than the yellow bars that you see on that chart because those figures are just the numbers used to place an order. That doesn't show the other services that a customer might access online.

The majority of customers, in fact, interfacing with us online are also using other order channels at other times depending on the individual needs of their projects. Now Mike mentioned today we wanted to give you a flavor of some of the great organic growth opportunities in our business.

We took the board down a few weeks ago to Miami for a deep dive into the Waterworks business. These are some of the opportunities that we shared with them there.

And just a reminder, Waterworks is the second-largest business in our group. It serves the needs of residential, commercial and also municipal customers in clean water, wastewater and storm water applications.

It does share some sites, some supply chain, some technology solutions and some suppliers with our other businesses. And you can see on the chart from pretty modest origins there in 2001, it started slightly before that, but 20 years ago, from that position, we have grown a market-leading position across the United States.

That includes organic growth and about a third of that growth has come from some carefully selected acquisitions. But mostly, we got into the habit of focusing on customer needs to grow the business.

Today, we're more ambitious than ever for the future growth and development of the business. We'll share with you some of the drivers of that growth.

And there are three initiatives here summarized on that chart: meter and automation, rural water and process equipment that goes into water treatment facilities. We're excited about these prospects because each of them leverages off of our existing asset base.

Now on to meters and automation, the installation and replacement of water measurements and control equipment. It's a niche market, but it is a big market.

We've made a lot of progress in this market. This technology it's being rolled out to make sure that water isn't wasted and to make sure that our customers accurately charge for it and they can do that in the cheapest possible way.

The market is characterized by exclusive supplier relationships in each territory, and we've worked hard to make sure that we represent the top tier manufacturers in each geography, in each state. Across the U.S., there are over 50,000 water systems across the country.

Many of the municipalities serving those water systems are significantly underserved. Partly that's because they're difficult to get to or they're small.

But we and with our network are absolutely advantaged to reach and support them. In many regions, water infrastructure is under a lot of pressure.

That's because installations are very often coming to end of life, it's because populations are growing and also water resources are dwindling. We're investing substantial resources today to train and develop our associates to put them into the field across the country to make sure that refurbished assets and renovated assets are properly specified and to provide project management support to those customers which might have otherwise struggle with it.

We also want to take a much larger share in the market for treatment plants. And before the last downturn, our business was predominantly focused actually on the new residential market preparing development sites for fresh, waste and storm water for those facilities needed in the early stages of the developments project.

We still do an absolutely class job at this. We're also focusing resources to service this treatment plant market.

All the quotations that we prepare are furnished with planned swift, highlighted drawings. We've got a team of CAD drawers providing 3D layouts.

We provide a detailed analysis of all of the materials that are needed on a project. And of course, customers can rely both on the best inventory availability and also the best delivery options available in the industry.

There are significant other development opportunities adjacent to our traditional Plumbing and Heating residential and commercial businesses, which leverage our people, our branch network, our technology, our know-how and all the other assets on behalf of customers in HVAC, in industrial, in fire suppression and also in facilities supply. The other driver, though, of profitable growth is to continue to develop our operating model.

Let me just touch on two areas. We're now allocating considerably more resources to the development of own brand products as well as expanding the range of products that are available to our customers.

We're able to capture a greater share of the value in that value chain and that's reflected in better margins. But we're also better able to control pricing and that will make sure that we are not diluted by low-service Internet-based suppliers.

The images on the chart here are from Signature Hardware, which we bought last year. That's continued to grow really impressive rate, including via Ferguson showrooms.

Our own brand penetration is growing, it's now at 6.8%. But you know the bottom line impact of that growth is much more because of the margin accretion.

And own brand development today, those initiatives across the business are getting good traction throughout the group. It's also been a period of considerable progress in the development of e-commerce across the group with the migration to new platforms in every region and also the continuing development of mobile-optimized sites.

The basic transactional capabilities, though, here are not enough to encourage customers to switch online. Trades people and contractors demand much more sophisticated functionality to add value to their business.

Search functionality, inventory availability and lists are important as is the conversion of quotations into orders. We are actively, of course, actively reviewing the sites that competitors have to compare functionality, to compare product availability, delivery options and of course price.

I have now given you a flavor of the types of investments we're making in growth and how we're deploying more than 800 new associates who've joined us since July. Now the execution of our restructuring plan that we set out for the U.K.

also remains a priority. An important part of that strategy was to invest in more disciplined category management and to define a clear range of products to drive availability, which our customers can rely on.

We made good progress in that range definition, and we're now cleansing some of the inventory which fell outside of that new range. That's going to take a little bit of time.

Implementation of the technology solutions needed to support new -- the new customer proposition, that's been very good. But as with many technology products, of course, the investment precedes the return.

The reconfiguration of our logistics and supply chain Infrastructure is underway, including a move to in night replenishment of our branches. That's going to support a much better service proposition for our customers.

We started the transport consolidation project, and just to give you a flavor of the metrics of that, we've reduced the truck fleet so far this year by 70 trucks. In the autumn, we did say we're not entirely happy with the pace of execution and we have made some changes to speed things up and improve focus and accountability.

We've also appointed Mark Higson to lead the U.K. business.

He joined early this month. Mark's an experienced operator.

He was previously COO of Royal Mail and also British Plasterboard prior to that. Towards the end of the half, we closed the BCG wholesale business.

That was done at unsustainably low margins. We also announced further 60 branch closures.

And we implemented a redundancy program, which will lower the cost base from February by $30 million a year. We completed the supply chain study and announced our intention to close the national distribution center in Leamington and also to downsize and relocate the U.K.

head office. Some of those actions have cost us money in the short term, not least our move from opportunistic, deal-based procurements to more systematic inventory planning and also the moving to -- move to in-night replenishment.

That's painful to the P&L, but those moves are going to help us to build a better business. Moving to Canada.

Look, we've got a good market position in Canada and a newly appointed management team that Mike touched on. From a trading perspective, we gained market share in the first half of the year, generating good organic growth 8.4% ahead and also improving gross margins.

At the same time, we made some significant investments in the development of our business model, flow-through notwithstanding that was good, and trading profits were 31% up. Like in our other businesses, we've allocated more resources to the development of own brand -- product and we've also implemented a new B2B ecommerce platform, which continues to drive really good rates of penetration there.

We bought a major new distribution center on-stream in Montréal without any disruption to the customers. The team did a great job.

And our distribution facilities in Toronto have been consolidated to give customers access to inventory from the distribution center in Milton. We've also implemented new demand planning technology and that will drive availability for our customers.

During the year, we pooled our buying power with the Octo buying group and that's also yielding gross margin benefits. So Mike touched on we've done a couple of small acquisitions, and there are some other attractive opportunities in the pipeline.

I mentioned we added innovation to our strategic priorities. Internally, we're looking for opportunities to develop our service for the benefit of our customers and also to drive profitability.

But what if inspiration to drive value in our value chain comes from outside of our business? What do we do then?

What opportunities will developments in technology, in process, in materials present and how should we leverage those? As the market leader, we've got an opportunity.

We could say we got an obligation to find new technologies or business models that can disrupt our value chain. Where appropriate, we're going to find them and we'll invest, we'll partner, we'll venture, we will find a route to collaborate with.

We put together a team of smart people, both from inside and outside of our business, along with some specialist help to see what we find. In December, I visited supply.com.

It's a company we bought last year down in Atlanta, photo and a screenshot here. And from there, look, this is an innovative business.

It's got no branches and no outside sales associates. But it does have individual account managers based in a call center and needs at the moment are fulfilled from central distribution points.

We're supporting the business by adding many more fulfillment points and also providing the best availability in the industry. We're going to encourage this business to develop to its full potential.

This is the last time there that Nordics is going to make the key priorities list. We got clearance for the transaction at last and we expect to complete in a few days' time.

Look, the favorable outcome from this transaction has really been underpinned by excellent trading over the last 15 months. That's a huge credit to the focus and tenacity of the management team.

And just an indicator in the first half of this year, revenues were up 6% and trading profits up 48%. In addition to the net proceeds of about $1.2 billion, we've also separated $180 million of surplus property, which we're now selling.

Finally, what do our markets look and feel like at the moment. Look, across the U.S., residential markets are growing well.

Growth in commercial markets, slightly lower but it's still good. And industrial markets have continued to recover since that correction a couple of years ago.

Across Canada, markets are pretty healthy. In the UK though, the market's challenging, and demand is weak in the UK, we don't see any change in that in the short term.

Since the end of the first half, overall revenue growth has been pretty similar to our second quarter. Outstanding orders remain strong.

In the second half, comparators are a bit more demanding as we progress through the rest of the year. That's all we had prepared today.

But Mike and I will be very happy to take any questions. Gregor was first with his hand up there.

I saw that.

Gregor Kuglitsch from UBS. Got a couple of questions.

So the first one is just on the drop-through in the U.S. I think you mentioned it was ahead of your expectations at the beginning of the year.

Can you elaborate why that is? Is it better top line growth?

Is there something on the cost base happening? And then looking forward, do you expect to be able to sustain, I think, I calculated kind of 11%, 12% was the drop-through rather than perhaps, I think, you were perhaps guiding closer to 10% or slightly below.

And in that vein, if I look at your guidance or the consensus that you're pointing to, obviously the profit growth in the second half implied is a lot lower than what you just delivered. So want to understand is just anything else other than just pointing to a comparable issue?

Obviously, second half growth last year was stronger as to why we should see that kind of slowdown in profit growth?

Thanks, Gregor. And let me start with those, I'm sure John will jump in as he sees fit.

Yes -- no, the comment about the flow-through was just to stave somebody off calling me conservative at the beginning of the Q&A because, if you remember, I guided to high single digits at the full year. So it is better than I thought.

Why is that? Because we have got very good gross margin performance.

We've had a touch better on the top line, but actually a lot of it is due to the gross margin performance that we've delivered through, again, good disciplined approaches both around our category management, around working with our suppliers. John's touched on private label, but also around our continued discipline on pricing and working with our customers.

So it's mainly around that, Gregor. In terms of sustainability, I think linking your sort of second and third questions, hopefully I haven't implied sort of any profit issues for the second half.

I think what I was saying is that comps will get slightly tougher certainly on the volume. You can see that from the quarter-on-quarter.

Q3 and Q4 last year 2017 were quite strong on the volume. We're clearly coming up against those tougher comps.

So it's really a [math or math’s]. Who knows what that will be, but it could be in the sort of 1% to 2% if you look at the numbers and the current volumes continue.

The natural comp is a sort of 1% to 2% effect on volume. That's not a slowing down of our business, but of course, the year-on-year comp just gets tougher.

In terms of the flow-through that's linked to that, I'd probably expect it to be close to double digit. Again, I think I've said in the past the difference between a sort of 9% flow-through and an 11% flow-through if you do the math it isn't actually huge on a business that's this big, so we can get lost in the moths sometimes.

But I'd expect it to be around double digits, if that helps. Thanks, Gregor.

Aynsley Lammin from Canaccord. Just two, please.

Wondered if, you've obviously given the special dividend out today, what does that say about acquisition opportunities in the U.S.? Maybe a bit more color there.

Is it priced then is too high or just lack of opportunity to acquire in the U.S.? And then, secondly, just on the margins in the U.S., are you willing to give a bit more kind of color or account of where you think margin's going to get, one, two, to three year’s view?

Yes, thanks, Aynsley. I think in terms of acquisitions, no, it's not price.

I mean, it's always been about availability. I know we've said this before, it happens to be true.

There just hasn't been wholesale consolidation here. It's very seductive to believe that if we just pony up on the turn of -- on the multiples and all of a sudden we could sort of compile of billions of dollars of extra revenue, we can't remember what they will choose when they exit their business from family-owned businesses.

And there really haven't been that many larger opportunities for acquisitions in the U.S. Now we do have some.

We have some in the pipeline and we have some we expect to convert and they're very attractive. But even there neither forcing the pace on them.

I visited one just before Christmas. We just took it to the board.

It's four months. We haven't been sat on our hands during that time.

The team's been working hard at it. They just take quite a while to bring to fruition because the people around those businesses, it's once in their lifetime.

It's the only transaction they'll ever do and they really care about it. We care about it because we're diligent.

Fine, that's not -- that doesn't put off then, does it. Just means to say that the number of transactions and the scale of those transactions remains relatively modest.

What's your guidance this year now, Mike, for the acquisitions?

I think, again, it'll always be wrong because it'll depend what are the transactions. I think could we see -- I think we guided at the year-end, John, about $300 million.

I mean, could that push up to $400 million if some of the transactions we're looking at came off? Yes, it could.

But equally, it could have no further fuel in the tank also. But I mean, it'll be somewhere between those two numbers will be my best guess today.

And then, Aynsley, to your second question on margins in sort of a couple of years' time. I think the market backdrop is important here.

The markets today across the U.S., this is a good market environment. We shouldn't -- be any mistake there.

Residential markets, the growth is very broadly based. If you look, for example, at Case-Shiller, the top 20 cities are all ahead.

It's not hot. Does it feel hot to me as an observer?

But it is good growth in the residential side. Like I said, commercial slightly lesser.

But if those market conditions continue, I don't see why we shouldn't press on and see incremental improvements in net margins, Aynsley.

It's Paul Checketts from Barclays. I've probably got two, I guess.

It's on two broader areas. Can I ask about the commercial markets in the U.S., please.

It looks like growth slowed in the second quarter. Perhaps you'd explain what was behind that and give us a feel for what your data are suggesting growth will look like in the second half?

And then the second is looking at the Waterworks business, John. How much of that actually grow in the first half?

And could you give us a feel for the returns in that business compared to the rest of the U.S. business?

And lastly, has the change in ownership of HDS, have you seen any change in how that competitor is behaving?

No, look. I mean, the Q2 commercial, commercial can be a little bit more lumpy just because of the sheer scale of the projects and we don't think there's anything in this.

The indicator there, Paul, is really the order books. And the order books today are very good and absolutely commensurate with the continued growth.

It's interesting, we look back on the stack chart through this, there's also some -- there's also little bit of just -- which if you look through on a two year basis is not quite as -- not quite as sort of lumpy. So no, we remain pretty positive on commercial.

Look, Waterworks' returns are good and growth has been very good. Actually, growth is slightly better than the rest of the folks in Enterprises.

And returns are good, very similar to the returns in the business. I think that's because that's how we set out our stall actually as much as anything.

That's sort of our expectation because most of our businesses have got some similar returns throughout the Ferguson Enterprises and plan. Change in ownership decorum.

Look, that's had no noticeable -- they certainly had no adverse impact on the market. I think you've got the same management team, the same sales team, the same sort of market activity.

And of course, the shareholder was one of the three shareholders before anyway so they were familiar with the asset. I think that's probably good news for us.

Howard Seymour from Numis. A couple for me.

First one is just probably factual. John, you've outlined the sales channels on Slide 24 of the different businesses.

Is that commensurate with the breakdown of the revenue before in the context of Waterworks, et cetera, so we can sort of take that and metrics it with their businesses before this simple question.

Not quite. So I think john said the first three bars are very close to the Blended Branches.

The reason the Blended Branches are called as such, they do contain some elements of the other bars, too. They're fairly small.

So the main part of Blended Branches is in the first three bars then some of its split into the others.

And then, secondly, just on the UK. Obviously, the restructure going on.

Really just your thoughts on the underlying UK market in the context of how you see the pricing and the volume outlook in that part of the market.

Yes, Howard. I think the UK at the moment, pricing still remains difficult.

Margins are still under pressure. Our margins are slightly lower in the period and we have to address that issue.

So I'm not happy about margins currently. And some of that's market and some of that's -- there are certainly plenty of things that we can do to improve our pricing discipline in that environment.

I think the underlying market, if you strip out inflation, volumetrically the heating market's down because it's been pretty flat even with the inflation was in the UK three?

Three, three.

So volumes have been under pressure out here.

Just related to that, do you say that's just a wider market? Or is that competitive actions, market share moves, et cetera, or a bit of both?

That's difficult to -- that's difficult really. There are two or three other things that are going on in the market.

We talked before about the end of ECO and the reduction in turnover from the larger customers, although the small trades space is still pretty healthy. So without a doubt, that's one of them.

And we talked before about the trends to the fixed price and online operators who are still making good progress at the market. So I think it is broadly based across the merchant universe as far as we can tell.

But we have to respond to that and we will.

It's Karl Green from Credit Suisse. I've got a couple of questions, please.

Just firstly on the U.S., could you breakdown volume and pricing in the second quarter. And accepting your comments about the tougher comps on volume going into the second half, could you perhaps outline your expectations for pricing given commodity mark-to-market at the moment?

That's my first question. The second question just on technology.

You mentioned you've been benchmarking your platform against peers. Some of the peers have been looking to up their tech platform investments recently.

And I just wondered could you elaborate on which areas you see Ferguson as being by far and away best-in-class and other areas where there's perhaps great room for improvement?

Okay. In terms of the margin, Karl, I think we're seeing price inflation of around 1% to 2% in the U.S.

and therefore the balance is clearly volume. John will touch on commodities and your last question as well.

Yes, on commodities, we did in the half about $800 million of sales of copper pipes, steel pipes and plastic pipe. The inflation, looking back on that year-on-year, was about 8%.

So you can work that through, that's been a sort of $60 million boost to the top line. Actually, going forward, if you look at those prices now going forward, over the last six months, prices have been actually pretty consistent, pretty stable.

So I see that now as sort of coming to an end later within this second half although, of course, a slightly curveball now is there are some steel imports that will be subject to tariffs. That has had an immediate sort of impact on pricing in the market even actually for domestically sourced product strategy.

It's not sufficiently -- it's not big enough for us to talk about or get worried about, but it will just -- it will present a bit more inflation on that mild steel pipe, which end of the year is about $350 million of purchases. The last question on what are we good at and what are the peers good at, I think you need to split the peers really into two because there's the huge people, the Amazons, Lowe's and Home Depot and Wayfair, if you want, on the B2C side and then there are the other trade or the other merchant businesses.

I think the other merchant businesses, there are relatively few with really good, that's not who you would benchmark against, let's put it that way. There are relatively few that have been able to afford to make the investment or have made that move.

So really, the places where we look for really sort of best-in-class, if, for example, I mentioned the Amazon word, which I don't like to, but I will. If I mentioned Amazon, they are good at search.

They are clearly good at search. They're good at the whole product file maintenance, they're good at that.

And clearly, they are very consistent with pricing. The things -- the areas where we excel, we excel in depth of inventory.

We excel in the range of branded inventory because it's not all available. We excel in the fact that you can consolidate an order on our site very easily and it can all come to you at the same time rather than from several manufacturers on several days.

And we excel in the other tools that trades people use. So for example, you can get your order history from us, your whole order history, okay?

That's useful sometimes. You can see your list.

You can convert your quotes that you made to your customer to a purchase order to us and to a bill of materials that you can use on the job. So it's those types -- it's that type of functionality that we need to continue to invest in and continue to drive.

But I think there are plenty of learning’s for us in the area of search and data.

Gerard Moore from Investec. Just one extra question for me, please.

In terms of your Central European business, can you talk a little bit about how that is performing at the moment and also your long-term ambitions for that business?

Yes, look. We've got -- just as a reminder, we still own the business in Holland, Wasco.

And we own 40% an associate in -- of Meier-Tobler in Switzerland. Firstly, to Holland.

This business has done well continues to do well. It's a fairly low-margin business, but it's got a very good, very focused management team.

And they execute, they execute really well. They're actually also quite innovative.

It's a small business, which is why we don't touch on it very often, but it's a nice business with a good management team. Interestingly, if I look back over the last 8 to 8.5 years I've been with the company, we've never had any issues out to the business.

They just do what they say they do. They produce sensible budgets.

They meet them, they grow. The real issue is in Holland, the value in the market is still thin.

You have to work hard. You have to be good in Holland.

Switzerland, Switzerland's a fairly tough market at the moment. The heating market is flat to down.

But I think the business is getting on well with the integration of the old Walter Meier and the old Tobler businesses and I expect long term that will be a very good quality business.

Andy Murphy from Bank of America Merrill Lynch. Just one question from me.

Did I detect this correctly that you're thinking that pricing in the U.S. is likely to be less strong, less than the 1% to 2% that you've seen?

And how does that play out versus sort of the wage inflation issue that we're hearing quite a lot about at the moment. Does that worry you?

Does that mean that the drop-through rate might get kind of a little bit of pressure in the second half of the year, pressure thoughts on that?

I certainly didn't intend to give any indication around we're concerned about pricing. We'll continue to work that.

It's a daily issue that all of our associates work very hard on in terms of that disciplined pricing and that service with customers. I think we never have any crystal ball on pricing.

I'd expect pricing to be pretty similar in the second half as it was to the first half. Those are certainly the indications because, of course, we've had two months of the second half already.

So certainly, very much -- we'd expect that to carry on forward. And in terms of wage inflation, we're already coping.

I think I talked to you six months ago that we'd expect wage inflation of three to four, it's been nearer four. Of course, with the top line growth, our job is to continue to generate those efficiencies and those savings and you've seen that having been delivered in the first half.

We'd absolutely continue to expect to deliver that through the second half as well.

Yves Bromehead from Exane. My first question is on the Ferguson outperformance in the U.S., which you mentioned was about 300 basis points to 400 basis points.

How sustainable is that level of outperformance? And does it require any extra OpEx in the medium term?

And my second question will be on the Waterworks, which seems to be approximately 15% of your U.S. sales.

In your slides, we could assume that you have approximately 12% market share. What level of size would you be happy with, with that business going forward?

Yes, look, is the outperformance sustainable? If we look back over time, that outperformance, which is about 3% in this period, that is pretty consistent.

We have outperformed by 2%, 3%, 4% very typically over the last seven or eight years. I don't think we should take that for granted.

We do have to work hard at that. That outperformance is created by a lot of our associates, absolutely every day going the extra mile for our customers.

But is it sustainable, I do believe it's sustainable. I do.

I think systemically, it's a business with great values, with a great culture. The business has got very good momentum.

We hire a lot of our own graduates, we bring them through, we develop them. They like that development prospect with the company.

They stay with the business. And that gets great momentum in the business.

I absolutely believe it's sustainable. On Waterworks, our market share is more than 12% in Waterworks.

It's about 20, 20-something percent in Waterworks. It's a good market, and you can see one of the reasons for showing some of the opportunities there today is that you have to go and find these opportunities.

I've been in businesses before where people say, oh, our market share is too much. And if we grow anymore, it'll be reflecting.

Actually, that's just not true. You've got to go find the opportunities, sell the opportunities, and sure, did we add to our range of products with meters and automation.

Yes, we absolutely did. We added to our associates, we added to their specific skill sets because they have to be trained specifically in meters.

The pipeline is in different size and shape because pipeline might be longer. Fine, fine, fine.

You've got to go there and find those niches, work hard at those niches, find the pieces to grow the business. Can this business be, over time, double the size it is today?

Yes, I mean, absolutely it can. There is no reason.

The market's got decent growth, and we should continue to expect to take market share as well.

John Messenger from Redburn. Three if I could, John.

First one was just on that slide on e-commerce and sort of sales channels, the one that stands out is Industrial where kind of 50% is e-commerce sourced. I guess sitting on outside of the fence, you can go away with a wrong impression of what e-commerce means there in that would you describe that as kind of spot purchases?

Or is that your existing customer base, people in pipes, valves and fittings who are drawing down orders, just have a little bit of a flavor as to what is in there because you could look at it and think of it is a very commodity kind of business, which I don't think is kind of the impression you'd want to get across. Second question was just on Canada.

Buying -- joining a buying group there, given that you're kind of number two, is Octo very specific to some market segments where you are very underrepresented? Yes, to understand why the logic of joining a buying group because you're effectively, it would appear, are going to subsidize the smaller guys.

Is this about getting relationships to make bolt-ons as another -- are you trying to do different things here because the logic wouldn't look sensible sitting outside. And then third one, on the UK, could you just flesh out where we are in terms of we're down to 590 branches, where will that end up?

And just on the 10% sales drop, sort of $250 million, will all of that go through the organic line? Or is that kind of a BCG?

Is that a closure that we'll see treated differently? Just sort of so we can think about how this will look through the numbers.

And did BCG make any money?

Yes, look, the Industrial, those are less spot customers and more ongoing customers where the e-commerce is very often replaced what was an old money EDI when we were children, John. So that's the reason for Industrial being higher than an average.

And look, Canada, the Octo logic. Octo have got about $4 billion of purchases.

We had about $1 billion of purchases. It's actually very interesting.

When we did the -- we had to put all this into blinds rooms and get independent consultants to do all of the due diligence. Worked very well.

And clearly, there were some purchasing that we were doing better and there are some purchasing that they were doing better. Always subsidizing the small, you could argue that, but you could argue, well, no, they were buying us.

It's a $4 billion company. They've got four times our buying power.

Actually in one sense, it was good to see that we weren't totally off the money in terms of our buying, okay? But there are -- there have been advantages.

The way in which it works is if you -- essentially, the buying groups sets the base. So if you do a better independent deal, then that's fine, all right?

So that's the way it works. And none of our deals are shared with anybody else.

If we do an independent deal, you're getting -- so all of our buying is done better off of essentially Octo terms or the terms that we can negotiate. But it's very interesting your point about does it introduce you to other members of Octo?

I think that's a very interesting idea and certainly one or two of the acquisitions that we talked to have also been members of that group. The U.K.

Mike, that's probably one for you on the organic versus...

Yes, on organic, we will clearly try to show the decline that we have deliberately taken separately, so that you can see what's going on in the ongoing business. We won't separate it out as discontinued or I think it doesn't qualify for that.

But we'll certainly show the data absolutely separately so you can understand what's happening with the underlying business that we're taking forward.

And you asked was it profitable? No, the gross margins were 8.5%.

So I hope somebody else want it at lower prices, John.

Sorry, just -- it's a low-quality question, but it's been raised by a few investors. When you look at the U.K., before the last announcement around downsizing, certainly there wasn't an expectation that Leamington Spa or the whole portfolio in terms of the DC and the landed assets were going to be effectively surplus requirements.

Clearly, they are now. Is there a -- can you dimension in some way or other is the DC, is that something that you will find an alternative player who will take that on as a DC?

Or is that can be flattened? And how much acreage have you got in Leamington Spa in terms of potential development value because obviously you've kept $180 million out of Nordics.

Is there a sizable number reflecting Leamington Spa either on the DC divestment and the rest being developed or the whole lot being developed by the out-of-the-house builder?

The -- when we announced the strategy, we were clear -- I was very clear that there was surplus supply chain capacity in the U.K. and that would lead to the closure of a distribution center.

We have essentially four distribution centers in the U.K. There's actually a sort of fifth, but it's relatively small.

And those three are based in the North, the Southeast, the Southwest and there's Leamington stuck in the middle. It'd seem to me to be pretty clear that Leamington was definitely a question mark over it, so that's why Leamington -- the head office is a slight -- the U.K.

head office is a slightly different reason, it's 60,000 square foot, which is too big. So we will exit that site in its entirety.

It's 30-something acres and we have no idea of what the use will be. It will be sold.

Tom Sykes from Deutsche Bank. Just going back to the gross margins.

Could you just maybe give a view of what your expectations for gross margin, the range of improvement in the second half will be given that you did have quite a good second quarter? And would you pick out anything that you'd think is sort of one-off or opportunistic about particularly the last quarter on the gross margin?

Slightly longer term on the gross margin is just if you look back like-for-like same product, same channel, are you actually getting higher gross margins now than you did a few years ago? Or has it always been about channel shift and always been about mix shift of product anyway rather than sort of like-for-like price increases, please?

And maybe just, finally, adjunct to Karl's question is just how actually do you organize your IT Infrastructure, please? And you've obviously taken on a lot of acquisitions.

There's no way that suppliers on the same IT infrastructure that the rest of the group is on, so how are you managing that proliferation of IT systems as you're making acquisitions, please?

Sure. Thanks for the questions.

I'll certainly try the first one. So in terms of gross margin into the second half, I think John has already said that it's about grinding that out day on -- day in, day out.

We'll continue to try to progress that forward. Top line profitable growth is actually what we're about.

It is important to get that growth with good growth gross margin slow and small progressions. So I think you'll continue to see our progress through the second half.

And I think you asked was there anything sort of odd or funny in quarter two. No.

I mean, it's a good continued progression of the work of the associates and the work with our customers to deliver that proposition that John's talked about today.

Your question on to the like-for-like, Tom. It's a great question.

There is no one driver of margin. But it is -- I mean, you mentioned working the mix.

It is really important. Mike and I were talking about this yesterday evening.

The most important piece of driving margin is actually really great category management and that really means knowing what products you're selecting, why you're selecting them, why does this make sense in the context of what we're offering to our customers and why does that make sense in the context of supplier strategies? So that's the single biggest driver of gross margins overtime, is really good category management.

But there is quite a lot of mix. And I'm absolutely unashamed on this.

We sell -- I looked recently at the curve of how much copper pipe we sell, half-inch copper pipe that you use in domestic. It goes down every year.

Good, because it's a pretty low-margin sell. If you can get sort of speed fittings and push fittings and those types of things, they're a lot of better-margins products and it's important that we carry on recognizing that.

That's why we don't just go down the line of doing ever more and more massive-scale commodity. The IT Infrastructure, let me just touch on that for a second.

We -- at the moment, the majority of our business in the U.S. and certainly the counter-based system, the ERP, if you want, is Trilogy.

But over time, I don't think we should just look at the ERP as being the main core backbone of the business. We are stripping away, for example, product fire maintenance, customer fire maintenance, supplier fire maintenance into best-of-breed.

So for example, supplier fire maintenance, that will go into PeopleSoft off -- or it is going off Trilogy and into PeopleSoft. So that at the end, you'll be left with less domination, if you want, by core ERP.

And I don't see that there will ever be another huge ERP implementation where you turn one off on a Friday night and turn the other one off, heaven forbid, on the Monday morning. And in fact, even for the core business, there may be more than one technology strategy even at the front end.

Because if you think our business, we've got a counter-based business where speed, speed is important, speed, accuracy and the simplicity to use that system. Actually, behind the scenes for the majority of our business is half of our business is pitched.

And speed is less important to actually how can I construct the 350 lines that I need for this quotation and then convert it into an order? So it isn't clear that there will be a single technology strategy for those going forward, Tom.

Just to mention sort of two other areas -- and sorry, by the way, and the traditional acquisition that we do is integrated with Trilogy pretty much straightaway. Half of all acquisitions over the last five years have converted by the day that we bought the asset.

So we've trained them before we've closed the completion just to give you a sense. So we do take integration important -- seriously.

Two other similarities of the business. The Facilities Supply will have a separate platform from a front-end perspective, all right?

That's the case today and that will continue. But all Facilities Supply assets will be integrated onto that platform.

And the second is I do think that B2C -- the elements of B2C infrastructure may well be different. We use ATG now around the business as a standard piece of infrastructure.

But there's so much other infrastructure that goes around that core ATG infrastructure. But I do think there that there will be slightly different -- there will be a different infrastructure because for example, the data analysis of marketing, that needs its own infrastructure.

You wouldn't put that into Trilogy. That makes sense?

So I do see there will be more than one system probably. Don't take away that we have now an ever-expanding list of technology platforms we're using because that's not -- that's not the case.

There will be a handful.

Is it possible to say just what your IT CapEx and OpEx has and will be? Just either as a percentage of sales or some benchmark, please?

Definitely one for you, Mike. That's a toughie.

Yes.

We might have to come back to you on that one.

Yes.

Ami Galla from Citi, just two for me. The first one on the U.S.

industrial demand pickup that you've seen in Q2, what are -- I mean, how sustainable is that demand base? And were there any pull forward of demand that you would have experienced in the quarter?

My second one is really on the commercial end market, if you could give us some color of which sub-segments do you see growth stronger and which are relatively weaker elements in the commercial market?

Look, I think on the industrial, is it sustainable? I mean I think you've got to split industrial in our space into two things.

It's the oil and gas, which has its own sort of cycle. We're not really -- we don't play significantly in that.

And then there's the rest of industrial. I think if you look at the rest of industrial, it seems to be growing now today but quite nicely.

I think our growth, we still have a got a little bit of oil and gas. So if you look to the MRC or NOW, those types of people, they've got fantastic growth there because they're still on recovery in oil and gas territory.

If you look at the Billings indices and you look at the construction put in place data, actually, you can see it by sub-segment there. Interesting there when you look at industrial, industrial doesn't seem to be -- just core industrial doesn't seem to be any -- growing any faster than most of the commercial sectors.

So I don't see why it can't be sustainable, although 7% is quite high, but it's -- there's certainly some compensation for weakness that was going a couple of years ago. I think if you look then into commercial at the moment, if you look back over the last year, that's at the PIP data, office and commercial, which is quite a big sector for us has been growing at a couple of percent.

There are some sectors that we don't play in that have been going backwards, power and highways and those type of things. The good news compared to where we were sort of six, twelve months ago is water now has started to come back a little bit.

You might recall water was actually down this time last year. The market was negative.

We weren't, but the market was. Now we think that market -- that water market is growing at a reasonable tick.

Does that give you some color? Okay.

Any others before we wrap up? No, in that case, thank you all very much, indeed.

Do catch up with Mike and Mark if you've got any other follow-ups.

Thanks.

Thank you very much.