Good morning, everybody. I think we might be a little bit thin this morning because of the trains. So and he'll give more time for all of your questions at the end. There won't be as much competition for them. Look, thank you very much indeed for coming and welcome to the Ferguson interim results.
He 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 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 percent, including organic growth of 7.4%. The growth strategies that we're using across, the USA and Canada have clearly delivered the expected result and we continue to gain a profitable market share across the whole of North America. The team has really continued to drive gross margins at this period.
Those are another 40 basis points ahead. That's worth 40 $1,000,000 and we're combined with good cost control that's delivered 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 6 months of good working capital management. And we'll touch on the UK later. The UK 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 $1,000,000,000 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,
morning,
everybody.
I'm 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 700000000 dollars, up 14.4% in constant currency, giving an improved trading margin for the group 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 $1,000,000,000. 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 a full year for 2017 and their for 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 our supported markets You can see the comps get slightly harder as we move into the second half of the year. In the UK, 2nd 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've bridged the 10.3 percent revenue growth.
That's from the 909010000 in half one last year to the 10 027 in the first half of this year. After adjusting for the foreign exchange, which increased revenue by 108,000,000, you can see the constant currency growth of 9% and that's split into the two areas good organic growth of nearly 7.5 percent 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 1,000,000 to the $698,000,000. Foreign exchange small, we report in dollars now, as you know, that's added 3,000,000 to take us to 600 and 10.
Acquisitions added 6, an organic flow through very pleasing, adding 82,000,000 of trading profit. Now a little more detail into each of the regions and first our biggest region, the USA, 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 good disciplined pricing.
Operating expense is well controlled, and that was despite as anticipated wage inflation in the U. S. Of some 3% to 4% And also, as you would 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 $647,000,000, 15.7 percent 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 stronger, 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 Looking at our major markets, recent trends continued through the first half, our largest end market that's residential, continue to be strong and sales continue to outperform.
Commercial markets have slowed a touch, but remain in great good shape as we continue to grow 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. 2 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 a 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 $38,000,000 $8,000,000 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 in 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 margins ahead costs controlled well, leading to good trading profit, $41,000,000 now in Canada and Central Europe, 9,000,000 ahead of last year on a constant currency basis. So that's a quick whiz through the 3 regions, onto other items, exceptional items were in line, with guidance and totaled $46,000,000 in the first half As part of the U. K.
Restructuring program, we've incurred $37,000,000 of investment costs, 23 of which were cash, And the financing charges, financing and tax also came in as expected. And as we've previously announced earlier in the year, the recent US tax legislative changes have reduced the group tax rate. The ongoing rate was as anticipated just over 25 percent, the half year rates being as usual, the rates that will apply to the full financial year. And as a reminder, going forward, from FY19 onwards, we expect the ongoing effective tax rate for the group to be somewhere between 21% 22%. Cash generation continues to be a key strength of the Ferguson business.
You can see from the slide trading profit at the top, the 698,000,000, adding back depreciation and amortization, you can see the EBITDA generated 782, had our usual seasonal working capital outflow and generated cash from operations of $390,000,000. 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 120,000,000 in acquisitions, 175,000,000 in capital investments as our capital investments picked up back to normal levels as I indicated they would the last full year results. So after $248,000,000 of dividend payments, $335,000,000 of share buybacks, net debt increased by $695,000,000, leaving us with the 1,400,000,000 equivalent to the 0.8 times levered. On to acquisitions, in the first half, we made 6 acquisitions for a total consideration.
Of $116,000,000, 3 in the U S, 2 in Canada, and 1 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 a 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 3rd or 4th quarter, which always makes the analysis somewhat easier.
And as I said earlier, the effective tax rate, I'd expect to be about 25 percent for the full year. All other items remain largely unchanged. Since I last saw you. And finally from me, 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 Starke Group Disposal, we'll continue to share buyback announced in October.
We're about halfway through that and we've announced today subject to completion of the start group disposal later this week, a proposed special dividend and associated share consolidation of approximately $1,000,000,000. The special dividend and share consolidation requires shareholder approval and there'll be a general meeting on the 23rd 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
Good job. Mike, thank you very much. Now 18 years 18 months ago I should say we set out 3 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 those 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 US.
And last time around, we set out some of the drivers of profitable business growth that you can see there on that chart. We also talked about going beyond satisfying customers' basic needs. To 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 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 excuse me, 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 basic 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 side 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 and during 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 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 omnichannel. This chart shows the US 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 3 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 3rd bar in. The stats 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 are 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 stocks. 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 demands there arises from customers who have limited visibility of their projects.
Some customers use the channel to access advice to consider alternative products or perhaps to return surplus goods they've bought before on a range of other needs require a face to face service. 3rd 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 2nd largest business.
In our group. It serves the needs of residential, commercial, and also municipal customers in clean water, wastewater, and stormwater applications. It does share some sites, some supply chain, some technology solutions, and some suppliers with with our other businesses. You can see on the chart from pretty modest origins there in 2001. We started it 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 habits of focusing on customer needs. To grow the business. Of the business. We'll share with you some of the drivers of that growth. There are 3 initiatives here summarized on the chart, meter and automation, lural 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 onto Meters and automation, the installation and replacement of water measurements and control equipment. It's a niche market, but it is a big market. Now, we've made a lot of progress in this market This technology is 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 US, 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 our 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 fields across the country to make sure that refurbished assets and renovated assets are properly specified and to buy provide project management support to those customers, which might otherwise struggle with it. We also want to take 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 development project. We still do an absolutely class job at this. But we're also focusing resources to service this treatment plan market.
All the quotations that we prepare are furnished with plan swift highlighted drawings. We've got a team of cat drawers providing 3 d 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 adjacent to our traditional plumbing and heating uh-uh residential and commercial businesses to which leverage our people our our 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 current availability, delivery options, and of course, price. I hope that's given you a flavor of the types of investment 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 UK 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 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.
We have made some changes to speed things up and improve focus and accountability. We've also appointed Mark Higson to lead the UK business. He joined earlier this month. Mark's an experienced operator who's 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 a further 60 branch closures and we implemented a redundancy program which will lower the cost base from February by $30,000,000 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 UK head office. Some of those actions have cost us money in the short term, not least a move from opportunistic deal based procurements to more systematic inventory planning and also the moving to ignite replenishment. That's painful to the P and 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 percent up. Like in our other businesses, we've allocated more resources to development of own brand product and we've also implemented a new B2Becommerce platform which continues to drive really good rates of penetration there. We bought a major new distribution center on stream in Montreal 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 pulled our buying power with the Oktobine group and that's also yielding gross margin benefits. 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 and process in materials present and how should we leverage those? As the market leader, we've got an opportunity.
We could simply get an obligation to find new technologies or business models that can disrupt our value chain and where appropriate we're going to find them and we'll invest, we'll partner, we'll venture, we will find a root to collaborate with them. We've put together a team of smart people both from inside and outside of our business along with some specialist help see what we find. In December, I visited supply.com. It's a company we bought last year down in Atlanta. Photo and the screenshot here 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. They're 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 that Nordics make the key priorities list. We got clearance for the transaction at last and we expect to complete in a few days' time. And 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.
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 $1,200,000,000 We've also separated 180,000,000 of surplus property which we're now selling. Finally, what's do our markets look and feel like at the moment? Well, look across the US 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 is challenging. 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 remained 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 are very happy to take any questions. Gregor was first with his handover.
I saw that.
Good morning, Greg of Kuglitsch from UBS. I've 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 that's happening? And then looking forward, do you expect to be able to sustain? I think I calculated kind of 11%, 12% was a 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, I want to understand if there's anything else other than just pointing to a comparable issue, obviously 2nd half growth last year was stronger as to why we should see that kind of slowdown in profit growth. Thank you.
Thanks, Gregor. Let me start with those. I'm sure John will jump in as he sees fit. Yeah, no, the the comment about the flow through, was just to stave somebody off, calling me conservative at the beginning of the Q and because if you remember, I guided to high single digits 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, 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 haven't implied sort of any profit issues for the 2nd half.
I think what I was saying is the 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 maths on maths.
Who knows what that will be, but you know, 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 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 maths isn't actually huge. On a business that's this big, so we can get lost in the math sometimes, but I'd expect it to be around a double digit perhaps. Thanks Gregor.
Thanks.
Aynsley Lemo from Canaccord. Just two please. Wondered if you've obviously given the special dividend out today, what does that say about the acquisition opportunities in the U S? Maybe a bit more color there. Is it pricings to high or just lack of opportunity to acquire in the U.
S? And then secondly, just on the margins in the U. S, you're willing to give a bit more kind of color or, account of where you think margins can get to on a 2 to 3 year view?
Yeah. Thanks, Hendi. Look, I I think in in terms of acquisitions, no, it's not it's not price. I mean, it's 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. You know, it's it's very seductive to believe that if we just power me up another turn of you know on the multiple and and and all of a sudden we could sort of compile, you know, 1,000,000,000 of dollars of extra revenue. We can't remember that they will choose when they exit their business from the mentally. A lot of them are family owned businesses. And there really haven't been that many larger, opportunities for acquisitions in the US.
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 then, you know, forcing the pace on them, I, you know, I visited one just before Christmas we just took it to the board, you know, it's it's it's 4 months. We haven't been sat on a, you know, we haven't been sat on our hands during that time. The team's been working hard at it.
They just quite a while to bring to to fruition and because the the people who own those businesses it's a once in their lifetime it's the only it's the only transaction they'll ever do and they they really care about it. We care about it because we're diligent. Fine. That's not that doesn't put off vendors. 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 acquisition?
I think,
again, it'll always be wrong it'll depend whether the transactions. I think, you know, could we see, I think we guided at the year end, John, about 300,000,000? I mean, could that push up to 400 if 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, you know, somewhere between those two numbers would be my best guess today.
And then, Andrew, your second question on margins in sort of a couple of years, Tom, I think the The market backdrop is important here. The markets today across the US, this is a good market environment. We shouldn't we shouldn't be under any mistake there. Residential markets, the growth is very broadly based. If you look, for example, at Kay Shiller, the top 20 cities, are all ahead.
None of them, it's not hot, does it feel hot to me as an observer, but it is good growth in the residential side. In, 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 in net margins, Ainsley.
It's Paul Checketts from Barclays. Probably got to, I guess, it's on 2 broader areas. Can I ask about the commercial markets in the please? It looks like growth slowed in the second quarter. Perhaps you'd explain what was behind that and us a feel for what your data is suggesting growth will look like in the second half.
And then the second is looking at the Waterworks business, John, much did 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 US business? And lastly, has the change in ownership of HDS? Have you seen any change in how that competitor is behaving? Thanks.
No, look, I mean, the Q2 commercial eye, commercial can be a little bit more lumpy just because the sheer scale of the projects and we don't think there's anything in this. The indicator there, Paul, is really the, the order book. And the order books today are very good and absolutely commensurate with continued growth. It's interesting, Mike, we look back on the stacked chart through this there's also some there's also a little bit of just you know which if you look through on a 2 year basis is not quite as you know, not not not quite as sort of lumpy. So, no, we we remain pretty positive on commercial.
Look, Waterworks returns are good and growth has been has been very good actually growth slightly better than the the rest of the rest of folks at enterprises and returns are returns are good, yeah, very similar to the returns in the business. I think that's because that's how we set out our store, actually, as much as anything. That's sort of our expectation because most of our businesses have got similar returns in, you know, throughout the Ferguson Enterprises empire. Change in ownership to Cora Maine. No, look, that's had no noticeable.
It 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 1 three shoulders before anyway, so they were familiar with the familiar with the asset. I think that's that's probably good news for us.
Howard Seymour from Numis. A couple from me. First one is just probably factual. Jon, you outlined the sales channels on that Slide 24 of the different businesses. Is that commensurate with the breakdown of the revenue had before in the context of waterworks, etcetera.
So you can sort of take that and matrix it with the businesses before. That's a simple question.
Not quite. So I think John said the first three bars are very close to the blended brunches. 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. And some of it splits into the others.
And then secondly, just on the UK, but obviously the restructuring 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.
Yeah. Howard, I think the UK at the moment, pricing still remains difficult. Margins are still under pressure, our margins were slightly lower in the in the period and we have to address that issue. So I'm not happy about margins bluntly. And some of that's market and some of that's us, there is certainly plenty 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 with anything inflation was in the UK 3?
That's 3. 3 in
a bit. So, you know, volumes have been under pressure out here.
Just related to that, do you say that that's just the wider market or is that competitive actions market share moves, etcetera? Repeatable.
That's difficult to that's difficult really. There are 2 or 3 other things that are going on in the market. We talked before about the end of eco and the the reduction in turnover from the larger customers, although the small trade space is still pretty healthy. So without a doubt that's one of them. We've talked before about the trends to the fixed price and online operators who are still making good progress in the market.
So I think it is broadly based across the merchant universe as far as we can tell. But we, you know, we have to, 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 break down 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. And 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 wonder 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 greater room for improvement.
Yes. Okay, let me, in terms of the margin, Carl, I think we're seeing pricing price inflation of around 1% to 2% in the US and therefore the balance is clearly a volume John will touch on commodities and your last question as well.
Yeah on commodities, we did in the half about 800,000,000 dollars of sales of copper pipe steel pipe and some 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 $60,000,000 boost to the top line. Actually going forward, if you look at those prices now going forward over the last 6 months prices have been actually pretty consistent, pretty stable. So I see that now as sort of coming to an end later within this within this within the second half.
Although of course the slightly curve ball now is there are some steel imports that will be subject to tariffs that's that has had an immediate sort of impact on pricing in the market even actually for domestically sourced product slightly strangely. 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 little bit more inflation on that at mild steel pipe which end of the year is about 350,000,000 of purchases dollars. The last question on the on what are what are we good at and what are the peers good at? I think you need to split the peers really into into 2. Because, there's, there's there's the huge people, the Amazons, you know, Lowe's in Home Depot, and then there and and and Wayfair if you want on the beta c side.
And then there are the other the other trade or the other merchants businesses. I think the other merchant businesses, there are relatively few with with really good, you know, 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 that move. So really the the the the places where we look for really sort of best in class If for example, I mentioned the Amazon word which I which I don't like to, but but I will if I mentioned Amazon, you know, they are good at search they are 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 debt 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 lists, 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 that type of functionality that we need to continue to invest in and continue to drive but, I think there are plenty of learnings for us in the area of search and, and and, data.
Jared Moore from Investec. Just one extra question for me, please. In terms of the 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? Thanks.
Yes, look, we've got just just as a reminder, we still own the business in Holland, Wazquez and, we own 40% an associate in, of Maya Topla in Switzerland. Firstly to Holland, this business has done well and continues to do well. It's 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 but it's a nice business with a good management team Interestingly, if I look back over the last, you know, 8 eight and a half years that have been with the company, we've never had any issues out of 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, is is still thin. You have to work hard. You have to be good in Holland. Switzerland's 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 wall to Meyer and the old Tableau businesses. And, and, you know, I expect long term that will be a very good quality business.
Good morning. Andy Murphy from Bank of America Merrill Lynch. Just one question for me. Did I detect this correctly that you're thinking that pricing in the US is likely to be less strong, less than the 1% to 2% 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 bit of pressure in the second half of the year? Pressure thoughts on it. Thank you.
No, thanks for your question. I certainly didn't intend to give any indication around where concerned about pricing will 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 to the customer I think, you know, 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 2 months of the second half already. So, certainly very much, we'd expect that to carry on forward.
And in terms of wage inflation and we were we're already coping I think I talked to you 6 months ago that we'd expect wage inflation of 3 to 4 been near a fall. 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. Thank you
very much.
Yvonne from Exane, My first question is on the Ferguson outperformance in the U. S, which you mentioned was about 300 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 would 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?
Yeah, look, is the outperformance sustainable? If we look back over time, that outperformance, you know, which is about 3% in this period. That is pretty consistent. You know, we have outperformed by, you know, 2%, 3%, 4% very typically over the 7 or 8 years. I don't think we should take that for granted.
We do have to work hard at that, you know, that outperformance is created by a lot of our associates absolutely every day going the extra mile for our for our customers and but is it sustainable? I do believe it's sustainable. I do I think I think systemically is 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 they like that, development prospect with the company. They stay with the business and and that gets great momentum in the business. I absolutely believe it's, it's sustainable. At Waterworks, our market share is more than 12% in Waterworks.
It's about 20, 20 something percent in, in Waterworks. It's a it's a good market. And you can see one of the reasons for showing some of the opportunities there today is you have to go and find these opportunities I've been in businesses before where people say, oh, you know, our market shares too much and if we go any more, it can be reflecting. Actually, that's just not that's just not true here. You've got to go find the opportunities, sell the opportunities, and short, if we add to our range of products with, meters and automation, yes, we are you 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 a different size and shape the pipeline might be longer fine, fine fine. You've got to go there and find those niches, work hard at those niches, find the places to grow the business. You know, can can this business be over time double the size it is today? Yes, something that absolutely it can. There is no reason.
The markets the markets got decent growth, you know, and we should continue to expect to take market share as well.
John Messenger from Redburn. 3, if I could, John, First one was just on on that slide on e commerce and sort of sales channels. The one that stands out is industrial, where there's kind of 50% is e commerce sourced. I guess sitting on our side of the fence, you can go away with the wrong impression of what e commerce means there and that would you describe that as kind of stock 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 as a very commodity kind of business, which I don't think is kind of the impression you'd want to get across. 2nd question was just on Canada, Buying joining a buying group there, given that you're kind of number 2, is Okta very specific to some market segments where you are very underrepresented?
Yeah, to understand why the logic of joining a buying group because you are effectively it would appear going to subsidize those smaller guys. Is this about getting relationships to make bolt ons, you know, 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 flush 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 $250,000,000, will all of that go through the organic line? Or is kind of a BCG, is that a closure that we'll see treated differently just so we can think about how this will look through the numbers?
And did BCG make any money?
Yeah. Thank you. Thank you, John. The industrial, those are less spot customers and more ongoing customers where where the e commerce has very often replaced what was in Old Money EDI when we were children, John. So that's the that's the reason for industrial being being higher than than average.
Look, Canada, the Octologic October have got about 4,000,000,000 of purchases. We had about a 1,000,000,000 of purchases. It was 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 uh-uh the due diligence worked very well. And clearly there was some there was some purchasing that we were doing better and there's some purchasing that they were doing better. Are we subsidizing the small?
You you you could argue but you could argue, well, no, they were buying as a 4,000,000,000. They got four times how we're 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 but there have been advantages.
The way in which it works is if you essentially the buying group sets the base. So if you do a better independent deal, then that's fine. Alright. So that's the 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, you know, so all of our buying is done at the better off essentially opto terms or the terms that we can, that we can negotiate. But it's very interesting, your point about does it introduce you to other members of Okta? I think that's a very, a very interesting idea and certainly one or 2 of the acquisitions that we've talked 2 have also been members of that of that group. The UK Mike, that was probably one for you on the organic versus.
Yeah. So on organic, we will clearly try to show the decline that we have deliberately taken separately so that you can understand what's going on in the ongoing business. We won't separate it out you know, is 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 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 has won 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 UK, before the last announcement around downsizing, certainly there wasn't an expectation that Lemington spar the whole portfolio in terms of the DC and the land and assets. We're gonna be effectively surplus to requirements. Clearly, they are now. Is there a can you dimension in some way either?
Is the DC? Is that something that you will find an alternative yeah, player will take that on as a DC or is that gonna be flattened? And how much acreage have you got in Leventon Spy in terms of a potential development value because obviously you've kept 180,000,000 out of Nordics. Is there a sizable number reflecting lemons and Spa either on the DC divestment and the rest being developed or the whole lot being developed by a another house builder?
The when we announced the strategy, we were clear. I was very clear that there was surplus supply chain capacity in the UK and that that would lead to the closure of a distribution center. We have essentially 4 distribution centers in the UK. There's actually a sort of 5th but it's relatively small. And and those 3 are based in you know the north, the southeast, the Southwest and there's lemmings stuck in the middle, it seemed to me to be pretty clear that, Leamington was definitely a question mark over it.
So that's that's why Leamington, the head office is a slightly UK head office is slightly different reason. It's 60,000 square foot. It's just 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.
Good
morning. Tom Seitz from Deutsche Bank. Just going back to the gross margins, could you maybe just give a view your expectations for gross margin, but we have a range of improvement in the second half will be given that you did have quite a good 2nd quarter? And would you pick out anything that you think is sort of 1 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 at like for like same products, same channel, are you you 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 and there's no way that supply is on the same IT infrastructure that the rest 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 take 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 to try to progress that forward.
You know, top line profitable growth is actually what we're about. It's it's important to get that growth with good gross margin, slow and small progression. So I think you'll 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 2 and 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.
And your question on sort of like for like, Tom, it's it's a great question that there is no one driver of margin but it is you mentioned working the mix. It is really important, Mike and I were talking about this yesterday evening. The most important of driving margin is actually really great category managements. 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 what does that what does that make sense in the context of supplier strategy? So that's the single biggest driver of gross margins over time is really good you know, really good, category management, but there is quite a lot of mix and and I'm absolutely unashamed on this.
You know, we sell a lot less. I looked recently at a curve of how much 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, it's a pretty low margin sell, you know, if you if you can if you can get sort of speed fittings and push fittings and those types of things, there are a lot better margin, a lot better margin 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, you know, massive scale commodity.
Cell. The IT infrastructure, let me just touch on that for a second. We at the at the moment, the majority of our business in the US and certainly the counter based system, the ERP if you want is is a 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 file maintenance, customer file maintenance, supplier file maintenance into best of breed.
So for example, supplier file maintenance that will go into PeopleSoft. Off or it is going now off of Trilogy and into PeopleSoft. So that at the end, you'll be left with less domination if you want by a 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 about 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 businesses, half of our business is picked 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 2 other areas, and sorry, by the way, any traditional acquisition that we do is integrated with Trilogy pretty pretty much straight away. Half of all acquisitions over the last 5 years have converted by the day that we bought the assets. So we've trained them before we've closed the completion. Just to give you a sense.
So we do take integration, importantly, seriously. 2 other scenarios of business, facilities supply will have will have a separate platform from a front end perspective. Alright. 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 we use ATG now around the business as a standard as a standard piece of infrastructure, but there's so much other infrastructure that goes around that, that core, you know, 8 ATG infrastructure, but I do think there will be slightly difference, that 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 1, there'll be more than 1 system problem. Don't take away that we have now a an ever expanding list of technology platforms we use it because that's not that's not the case.
There will be a a handful.
Is it possible to say just what your IT CapEx and OpEx hasn't will be just either a percentage of sales or some benchmark, please.
Oh, definitely one for you, Mike. That's a toughie. We might have to come back and we can act back to you on that one.
Amigala from Citi. Just two for me. The first one, the U. S. Industrial demand pickup that you'd seen in Q2.
Were there, 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 in the commercial end markets. If you could give us some color of which subsegments do you see growth stronger and which are relatively weaker elements in the commercial market? Thank you.
Yes, sure. Look, I think on the industrial, is it sustainable? Think you've got to split industrial in our space into 2 things as the oil and gas which has its own sort of cycle. We're not really we don't we don't play significantly in that. And then there's the rest of the rest of industrial.
I think if you look at the rest of industrial, it it seems to be growing now today quite nicely. I think our growth we still have got a little bit of oil and gas if you looked at MRC or NOW and those types of people, they've got fantastic growth rates because they're still on recovery in in in oil and gas territory. If you look at the if you look at the billings, indices and you look at the, construction put in place data, actually you can see it by subsegment there. Interestingly 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 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 that there's certainly some compensation for weakness that was occurring a couple of years ago.
I think if you look then into commercial at the moment, if you look back over the last year at the PIP data, in our office and commercial, which 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 gained backwards, power and and highways and those types of things. The good news compared to where we're sort of 6, 12 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, you know, at a reasonable 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.