Operator: Good day, and welcome to the Wolseley PLC Third Quarter Interim Management Statement Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. John Martin, Chief Financial Officer. Please go ahead.
John Martin - CFO: Marina, thank you very much, and good morning, everybody. Welcome to our third quarter results conference call. I'll just make a few introductory remarks this morning about trading and then Mark and I will be happy to take any questions that you've got.
So you all have seen this like-for-like revenue growth for the ongoing business was 2.4% in the quarter, in line with the rate we saw in the first half. Growth came substantially from the U.S. but it's also great to see some signs of life in the U.K. towards the end of the quarter. That growth was partly offset by challenging conditions in the rest of Europe and I’ll come back to the regional trends in just a minute.
The gross margin for the Group was held at 27.9%. That's in line with last year. And as you know, this is a major focus for us, particularly in the current market environment. We’re also staying very close to the cost base and operating costs and headcount continue to be very tightly controlled.
Given the uncertain economic outlook in Europe, we will continue that in the fourth quarter and also into next year.
Trading profit of GBP150 million was 7.9% ahead of last year, giving a trading margin of 4.7% in that third quarter. That's 20 basis points ahead of last year.
Our balance sheet remains strong. Net debt at the end of the quarter was GBP694 million and that's before the interim dividend of GBP60 million, which was paid out on the June 1. That's GBP170 million better than at the half year.
Let me just cover a couple of other things as well. We had one fewer trading day in the quarter and that cost us about GBP6 million of trading profits. In the final quarter, the number of days is the same as it was last year.
FX in the quarter, though, was favorable, principally due to the U.S. dollar rate and that was worth GBP90 million of revenue and GBP5 million of trading profit, so the days and FX essentially compensating for each other.
Just moving on to operations, the U.S. grew at 8.3% and the growth continued to be pretty broadly based coast-to-coast really in the U.S. The growth rate improved slightly in Blended Branches and in HVAC, but Waterworks, B2C and Fire and Fabrication all continued to grow strongly. In Industrial, PVF performed well. The only weak spot in Industrial was the HDPE business.
Overall in the U.S., despite pricing pressure, gross margins were defended and we improved our gross margins across most of those businesses. We stayed cautious on new hires and operating costs are well under control. Trading profit was GBP20 million ahead of last year and we continued to make some pretty valuable gains in market share.
In Canada, revenue was pretty flat. New residential construction volumes were weaker. Though, that was offset by continued decent demand in Industrial as infrastructure investments has carried on. So our Industrial business continue to grow. There was not a lot of growth anywhere else. Gross margin is slightly ahead of last year and the business held operating costs flat, so we edged trading profits up to GBP7 million.
The U.K. did well to make 5.2% like-for-like growth in the period; that was driven overwhelmingly by Plumb and Parts Center, which increased market share, though, gross margins were lower. In Industrial, weaker industrial markets held Pipe and Climate Center back, but gross margins were better in Pipe and Climate and tight control over operating costs led to a slightly better operating results.
We also made excellent progress integrating Burdens. We've completed the headcount reductions and site consolidation as we planned to do in the period. We also made really good progress with the new B2C ecommerce business. Those investments and the shorter trading period was a bit of a drag on trading profit in the quarter, which was GBP2 million lower at GBP24 million.
In the Nordics, like-for-like revenue fell by 7.3%. There had been weak demand for building products in Denmark, Sweden and Finland, which are our biggest areas of operation. But again, our management team did a great job improving gross margins and really (controlled) the cost base, which was 5% lower than last year. So, the trading profit shortfall was held at GBP1 million.
In France, our building materials business declined by 9.2%. About 40% of our business is serving new residential markets and housing starts are currently down 17%. Gross margins were also slightly below last year. But again, I think our team did a really good job to reduce operating costs in the quarter by 10%, trading profit of GBP4 million which is GBP1 million below last year. But the outlook in France remains very challenging. We are, of course, executing the plans that we set out in the strategic review.
In Central Europe, overall revenue was 4.6% lower. We have modest growth in Switzerland, which is the most important region for us. But that was offset by lower revenues elsewhere, including now Wood Solutions in those numbers. The gross margin was also slightly lower. Trading profit of GBP3 million was GBP6 million below last year, but the largest part of that related to lower activity levels in Wood Solutions.
Turning to the outlook, overall revenue growth in May has been similar to the growth rates in Q3. Just adding a little bit of color to that, Canada did a little better and Central Europe a little weaker, but overall the growth rates have been similar to the third quarter.
So, we're a month into the fourth quarter now. Our focus in this final quarter remains winning market share, maintaining gross margins, staying firmly in control of the cost base and, of course, we're executing those restructuring plans that we already set out and told you about in Europe.
Marina, I would now like to hand back over to all the questions, please.
Operator: (Ian Osburn), Cantor Fitzgerald.
Ian Osburn - Cantor Fitzgerald: Thanks for those results; all are looking quite good. Could you give us just a little bit more what you're seeing in North America? You mentioned the Blended Branches and the RMI as well. Are you seeing a better housing market? Is that coming through in your numbers? I mean, it's the obvious one out there. And just how positive are you on continued growth in the underlying markets in the USA, as well as your chances of taking market share? The second question is more looking at Europe. Any light at the end of the tunnel in France and the Nordics that you see. Just the view here is that France can continue down for a little bit longer, but the Nordics should start to see some flattening. And just from the move of Wood Solutions from France to Central and Eastern Europe, am I correct that that's a loss-making business losing about GBP3 million in the quarter, that seems rather high, so I'm not sure that that calculation is correct. I mean, if you could just give us a bit more on the effect on profits of that move?
John Martin - CFO: Sure. So, I think just starting on North America, I think there's sort of two – two particular sort of positive trends. The first thing is, just looking at how broadly based geographically the performance is. So, if you look in Blended Branches, if you look in sort of the top markets, clearly if you go West Coast, it's nice, it's sort of low-double-digit growth. Down in Florida, Texas, that's the same, but actually also in some of the northern areas. So, it's pretty broadly based. So, I'll be – today if you look at the lead indicators, the only ones that are even vaguely sort of weak, I think, the Architecture Billings Index has been somewhat weak, but it's trended around sort of weak level at the sort of 50-mark for some time. Pretty much all the other trends I think are set reasonably fair. Just in terms of the new housing market, we aren't highly geared to new residential and we're certainly not chasing that market. So, whilst it's got to be – the overall warmth in the housing market has got to be good for our business, I don't think you should expect us to really chase and skew our business. We are really now more focused on RMI markets. Just on commercial and industrial in the states; without a doubt commercial has been a little – it seems to have lagged a little the residential markets. But again, I don't see that as sort of trending downwards. That to me seems to be fairly consistent. Industrial, as I referenced before, the PVF business is doing actually pretty well. So commercial growth rates for us have been slightly lower; but nevertheless, I still think they look okay and certainly, the budgeting assumptions for next year are for us to continue to have decent market growth. Light at the end of the tunnel in Europe. Well, I'm pleased that we're about – I believe that we're about to see an upswing in Northern Europe. Let me just make a comment as well, because I'm sure…
Ian Osburn - Cantor Fitzgerald: There is flattening rather than upswing (for sure).
John Martin - CFO: So, clearly, we're coming into the sort of the important time of the year for Nordics, so it would be great to see some improvements. We're looking every month for some improvement. We will be lapping weaker comparatives shortly, which just numerically might give some comfort; it doesn't give me a lot of comfort because I really want to see the profit coming through. I do think we've got some very good businesses in Northern Europe and our team is doing really well in pretty tough market conditions. I think you can see that from their ability to sell our value and to maintain and grow gross margins across the piece. Just to give a little bit more color there, actually if you look at Denmark, for example, we run a builders' merchant and a DIY business in Denmark. DIY is actually stronger than the building materials business, and very often these two can dislocate somewhat. So, DIY has done better, but it's still relatively flat. Norway is okay and it tends to have an economy that sort of slightly decouple from the other (it seems), but we are strong in Sweden, Finland and Denmark in building materials and those three have continued to trend sort of relatively weakly. But I would be positive longer-term. I think these are economies that seem to be sort of pretty well-managed. We've got some good businesses. We will be in good shape for the upturn when it arrives. I think elsewhere in Europe, I would not wish to call dawn too soon I'm afraid. I think that we could well see weakness continuing in France for some period and certainly, we expect the new-build to be off and our budgeting assumption is going to be for continued declines in top line next year. And, of course, when you sat where I'm sat, you want the managers to plan really for rainy days because planning for sunshine is easy. We need our managers to be absolutely on the ball in Europe on a continuing basis. Wood Solutions, Q3 it made a profit, a very small profit, about GBP1 million. And whilst that was down on last year, it isn't loss-making, but it's just not going to be very profitable for some time is my expectation.
Ian Osburn - Cantor Fitzgerald: I'll have to recalculate that one. Just a follow-on question and I guess the standard one. The outlook for M&A going forwards, both selling any small businesses you've got lying around and also just an increased investment?
John Martin - CFO: Yeah, I mean, I think on the cleanup side, we are down to some pretty small stuff now. So, are there one or two things still to address, yes, but I mean they are tiny. On the acquisitions side, the pipeline – it's interesting, actually over the last quarter, we've seen a number of distressed assets coming to market. And the problem with distressed assets is they usually come to market late. And I think also with sort of slightly hot equity markets at the moment, some of the expectations, the growth expectations has still been a bit high. And I think we are also pretty – we are pretty focused. We have a preference for buying good quality assets. It takes a long time in a business like ours to turnaround struggling or failing assets; and quite frankly, if you can take the market share organically, that's a great deal for shareholders. So, I don't think the pipeline is much stronger than it was in the first half. And I think our guidance from before, I think, we would keep at the moment. We can't see much beyond that; sort of $100 million, $200 million a year market at the moment.
Operator: Yuri Serov, Morgan Stanley.
Yuri Serov - Morgan Stanley: Two questions. In the U.S., so assuming that I am doing my numbers right, if I look at your growth in trading profit by quarter, in the quarter just passed, the growth appears to be the lowest since the beginning of your last fiscal year and quite visibly lower than the previous quarters once you adjust for any one-offs and foreign exchange. Could you give us some color as to why that might be; the revenue growth is still continuing, but the profit growth seems to be decelerating? The second question is on the arguably tiny market of yours, but it appears to be underperforming quite severely in Central Europe. So, once I strip out the Wood Solutions numbers, the incumbent business seems to have underperformed very drastically and the margin that I calculate for the past quarter, that trading profit level is only 1.2%, which is very low. Could you please explain as to what's going on? I mean, you already said that Switzerland seems to be performing well, can we get some more comments on the business overall; other markets and what is driving that?
John Martin - CFO: Yuri, thank you. So I think in the U.S. I wouldn't read too much into the flow through in any one quarter, and certainly the U.S. is remaining very focused on the same things that I talked about before; taking market share, and growing gross margins, and controlling the cost base, and we are confident that we're doing those three things. Proportionately, the area – so in the – if you look at the total cost base for the business, clearly, there is a little bit of FX coming in here now. The principal area of investment that we talked about at the half year was in B2C. We have been investing a little more in B2C, but it's pretty proportionate. If you look in the quarter, it's about GBP4 million more than last year. And frankly, I think in the U.S., with their ongoing performance, they deserve our confidence in pursuing that investments, and we're absolutely going to make it. So, if you look at the flow-through in the U.S., the flow-through was still double-digit flow-through and if the investment level was slightly higher than fine, but we are talking about a 12-week period here, we remain confident – very confident in how we are managing the business in the U.S. I think just moving on Central Europe, I mean, look, it is very difficult in Central Europe, so -- and don't get much of the comment about Switzerland wrong, it's been very difficult in Switzerland too. So, we are in Switzerland, Austria, Holland, Luxemburg and the Wood business in France, none of those business have had any easy time. It is very tough at the movement in – throughout that region. Holland in triple dip; Austria is in sort of clearly is struggling from a market perspective, but the single biggest issue is, RWS. So – and hence my comment about caution going into next year in Europe generally, including Central Europe. We are continuing to do the actions that we set out at the half year, that includes restructuring where that's appropriate and we are getting on with it. So, it's certainly not easy or straightforward in Central Europe. I'm confident that we are getting at the cost base appropriately, given the market conditions.
Operator: Paul Roger, Exane BNP Paribas.
Paul Roger - Exane BNP Paribas: Just to make sure a bit further on the U.S. operating leveraging, I mean obviously it was a positive surprise in the second quarter with a 35% drop-through. You've commented about the GBP4 million. But even if we sort of exclude that the drop-through was significantly lower and I think if you look at consensus, the implied drop-through of next year is sort of 15% in the U.S. I wondered if you could talk a bit more about how we should think about the incremental margin going forward. Is it a case that if you do have more costs to go in the (mid) we anticipated and therefore a little too optimistic? So, that's the first question. The second question on the U.K. Obviously, the like-for-like for very good, but the margin was a little bit weaker than we expected. You've commented about going for share. I wonder if you can talk about whether that will be the strategy going forward and what impact that could have on margins as looking to the fourth quarter in 2014? Then just a factual question. Is it possible to split the top line growth in the U.S. of 8% between underlying market share and price?
John Martin - CFO: So, on the flow-through, I think the Q2 flow-through was strong – you get strong flow-through when you get good results on gross margin and also the cost basis is held. The quarters – Q2 is generally a weak quarter for us across the business, whereas Q3 is a slightly sort of larger quarter. These are things that I would say in Q3 this year we have a day less that makes a difference in our business that profits shortfall on today across the Group is worth GBP6 million, four point something of that's in the U.S. So, that's why we are absolutely not concerned about the U.S. drop-through at the moment. But just sort of going forward and thinking about that, I said consistently that I think double-digit flow-through is achievable and sensible with good market conditions, and that's still what I expect. 15% is absolutely the top end of that range. So, 12% or 13% is more likely, quite simply because if you take the gross margin and then you deduct the truly variable costs of sales, commissions, outbound freight; those types of things, it's pretty difficult even without any addition at all to fixed cost to get to those sort of more heavy numbers. But I do think that double-digit flow-through is quite feasible. Are now we going to invest more? I mean, yes, bluntly. We are. I think you'd expect us to step-up the investments in the U.S. now that we've had, I think, sort of 10 or 12 quarters of growth. We absolutely want to press on and continue to grow that business and to take share in the business. I think we would be failing our shareholders not to. But at the same time, we absolutely know we want to dig out the results every quarter and every year as well. Just in the U.K., I mean, we're not going for share. I mean, there are a couple of reasons why the trading margin is slightly lower in Q3. We lost a day. We had the starting losses for Burdens, which we have pretty promptly addressed, as we said we would. We had additional investment in B2C. But the ongoing business is absolutely not going to share the expensive margins. That's not our mindset. There are some mix factors in there in Q3 and in particular I think our share of boiler sales was slightly higher in the period. We have to watch that. I want to drag the whole mix with the boiler sales as well. So, we are working hard to make sure that we get our gross margin in the place that it should be. U.S. sales, what's the third...
Paul Roger - Exane BNP Paribas: The split of the 8% like-for-like between (underlying) market share gains and price?
John Martin - CFO: Yes. I think the market share gains we measure are between 3% and 4%. There has not been a lot of the product price inflation around even in the U.S. product price inflation and that's partly because commodities have come off as you would have seen. So, price inflation is sort of no more than sort of 1.5%-ish. The market is delivering sort of 3% to 4% and we're delivering the rest in market share gains of sort of 3% to 4%.
Operator: Aynsley Lammin, Citigroup.
Aynsley Lammin - Citigroup: Just maybe if we could push a bit more on the U.K. obviously, the comp has got better given last year's poor trade and the weather, etcetera. Just wondering if you've been disappointed by kind of recent trading in the U.K. and if you comment a bit more on (May) in terms of volume being up a bit? Secondly, just net debt, could you provide any guidance for the full year? Would you – I think consensus is around kind of GBP400 million. Are you still comfortable with that level? Then thirdly, just on the kind of pricing trend, would you expect still, as you get into fourth quarter, to see 1%, 1.5% or would you actually see that slowing further as you go into your next kind of financial year?
John Martin - CFO: Thanks Aynsley. You know, disappointed in the U.K., absolutely not, no. I think we are all very positive about the performance of our U.K. team and...
Aynsley Lammin - Citigroup: So I was thinking more of the kind of underlying market.
John Martin - CFO: No, I think the market – if you look at the major merchant survey, the light side section of the major merchant survey, the market has remained disappointing. And I'll now touch on sort of Green Deal and the Eco obligations in a second, but – so if you look, I think the major merchant survey on the light side has only spiked the zero line for two months in last sort of 18 months pretty much. So, clearly, the market remains very tough. If you look at the government's projections on what's going to be added in by the new Eco commitments, I think they talked about sort of 90,000 installations a year and that would add sort of 3% or 4% and get potentially light side back to zero or even modest growth. Whilst it's early days for those things, any – and so you can't really say are they going to be successful or not, they've certainly put a lot of efforts in and anything they've done to stimulate the market is good. So the market in the U.K. remains pretty tough and you've got to find the ways to get some share gains and to get some growth in that market, which I think our team has done admirably well. Net debt, I think at GBP400 million is low. My expectations are that probably we'll be somewhere in the GBP500 million reaching by the end of the year. Pricing trends, I think I've been surprised really in terms of pricing that on the purchase side that we haven't seen more price inflation, and I don't know whether in the last year that is primarily because of – just because of commodities being weak, or whether manufacturers are just nervous about passing on price increases in a market that's sort of at least in Europe is slightly is in decline. But even in the U.S. definitely not much price inflation, input price inflation. So actually I would expect price inflation at some point to come back. Every quarter when I keep seeing these reads on inflation, I am surprised that it remains so low. I would think it's – in the U.S. to me it's a (GUA) tick-up in the reasonably foreseeable future. But I'd even expect Europe to come back at some point.
Operator: Howard Seymour, Numis Securities.
Howard Seymour - Numis Securities: A question actually on weather, which is notable by its absence in terms of the IMS. Obviously, everybody else has talked about the bad weather having an impact. I wonder if you could talk us through that, firstly whether it had an impact on you; and secondly, whether that similarly might help the competitors going forward not expecting you to be a weatherman, of course?
John Martin - CFO: Thanks Howard. Look, if I was weatherman, we'd talk about weather for this call, but unfortunately, I am clueless when it comes to the weather. It's not really the weather. It's the comparative weather that I'm totally clueless about, because you'd have to have some pretty good mechanisms to measure it. Has it had an impact, you can see in any – very short trading period, for example, if you've got a DIY business, you can see you have a really, really lousy weekend and people don't come out, you can see it at sale of seasonal products, (operating) margin because it pushes over into stock obsolescence, all that type of stuff. But the important thing from where I’ll start is that you don't allow managers to get off the hook with the weather. They have got to manage the business whatever the weather is. So that's the most important thing is that we don't allow managers to sort of constantly sidetrack the discussion about performance management with discussions about the weather. Second point, we are pretty broadly based geographically. If I talk to you about the weather, I mean, clearly, this week in Austria we are going to be struggling. It has been a very cold spring in parts of Central Europe and we could - but there will be another part of the U.S. which is a good weather and of course the U.S. itself has got good weather and a lousy weather at the same time because it’s just so big. So bringing it all back to has it had a big impact on the numbers, no, I don't think it has really here. I think the last observation I would make, managers talk more about the weather when the numbers are poor where they could. So definitely, keep me off the weather, because you'll get me thinking about something else.
Howard Seymour - Numis Securities: Secondly, I suppose related to that, is therefore from what you say in the European markets are clearly worse than you would have expected. You have discussed costs to some degree, but does that sort of necessitate another round of cost restructuring in these businesses over and above what you have already looked at?
John Martin - CFO: We are certainly continuing to address the cost base in any areas where the business is or where the markets are really tough, because that's what we should do, and it invites you to continue to look at, in particular, any branches which have just underperformed for a long time, with which you otherwise might want to (pursue then). I think if you look at the actions that we set out in the half year, those actions particularly in France now needed to be implemented, and of the conclusion of the implementation, we need to get there. And that's going to be – that's the biggest sort of piece. We talked about the work that we were doing up in Nordics. There is a little bit of ongoing work there. And also elsewhere around Central Europe and even a little bit in Canada. So, the restructuring costs remain today in line with what we anticipated at the half year, which is about GBP20 million cash outflow in the second half from GBP70 million to GBP80 million of total exceptionals. The difference there being, of course, that some of those are just asset write-offs, principally related to France. So, I think the restructuring at the moment is as we anticipated it at the half year, but we will need to carry on looking very carefully at the cost base.
Operator: Andy Murphy, Merrill Lynch.
Andy Murphy - Merrill Lynch: Just wondered if you could talk a little bit about the U.K. I was interested in the sort of relative performance that was positive in Plumb and Parts that perhaps is weaker in Climate. Can you give us a feel for the growth rates of those two and the relative sizes in terms of revenue? Secondly, could you give us a feel for what the growth initiatives are in the major regions that you've alluded to? Finally, just to clarify on that restructuring point. Are you saying in total for this year GBP70 million to GBP80 million and is there anything into next year?
John Martin - CFO: Yes. Andy, Plumb and Parts is by far the largest part of the U.K., sort of it's more than two-thirds of the U.K. business. Pipe and Climate is the second largest business. So that's sort of 15% of the U.K. business. So, Plumb and Parts absolutely drives the overall shape of the numbers, so you can imagine the growth rate there is slightly higher than the U.K. Pipe and Climate has done very well, and it's done very well for a number of years, certainly throughout the downturn. We've got a really good, strong management team there who have been absolutely in control of that business. So, (it's both) industrial, the Climate that is sort of slightly lower, so there is lot of sort of Industrial Pipe that goes in there and it's just been weaker. So that's my sort of observation about the U.K. Sorry, just on growth initiatives. So I'll just touch on the growth initiative in the U.S. There is a huge amount of work. The team really is now thinking carefully. A lot of you have said, well, why are you not just planting off to new branches everywhere? There is a lot of work going into how we reach new customers and markets which we have underserved, if you will, where we are underrepresented. And that's being pretty thoughtful. So, we are putting sales teams in in advance of a lot of infrastructure in the U.S. and that's a huge push. Second thing that's worth mentioning, we are rather keen on looking at some segments or sub-segments, which we've underserved. So, I think we've talked last year about hospitality, government, we talked about facilities maintenance. Those are sub-sectors that we've identified that we are now identifying or we have identified pretty substantial sales resources and other resources to put against really thinking about how to address customer needs in those markets really well and really professionally and really comprehensively, because I think we sort of batted below our weight in some of those areas historically. So, there are a series of initiatives in the U.S. Now, clearly, we're also driving B2B ecommerce and we're driving B2C very hard – both of those very hard. And that's the thrust of some of our real big growth initiatives in the U.S. Does that help? If I just touch on the U.S. because I can go on forever on this if you don't stop me.
Andy Murphy - Merrill Lynch: And then last was on the restructuring.
John Martin - CFO: And restructuring. Sorry, what did you want to know about restructuring, Andy?
Andy Murphy - Merrill Lynch: Well, just wanted to confirm the figures for this year and next. I think you just mentioned the figure of (70 to 80), is that the total for the…
John Martin - CFO: Yeah, that's for the second half. So, at the moment, I think we wouldn't expect restructuring to be separated out in exceptionals next year, because if we thought the need doing, we'd be getting on with them and doing them now. It would be great to get away from the red ink of exceptionals. And as you know, the ongoing difficult market conditions in Europe have just meant, get on with it, and so we've got about it. But as we sit here today, I'm not expecting restructuring costs to go through next year. That means they'll actually just get charged to P&L because there will still be, I'm afraid, some reorganization, some redundancies, some sort of small-scale restructuring. But is it likely – from where we sit today, is it likely to be material to the numbers next year, material would be sort of 30 million plus. Actually it is, so it is more likely next year that any of those restructuring charges will be charged to P&L.
Andy Murphy - Merrill Lynch: And just to clarify, going back to the U.K., Pipe and Climate, can you – is that so growing or is that sort of flat area?
John Martin - CFO: No, in the quarter, Pipe and Climate went backward slightly, Andy. But we are pretty sure we're not losing market share by the way in that sector.
Operator: Harry Goad, Credit Suisse.
Harry Goad - Credit Suisse: Another question on the U.S. margin, I'm afraid. You made reference in the text to this improvement in the U.S. gross margin, but obviously, you've also mentioned the fact that you haven't seen much price inflation coming through even in that market. So, is it right to infer from that that the bulk of that gross margin gain is actually gross margin-specific initiatives? And I guess more broadly on that point is what is still the further opportunity in the terms of gross margin enhancement from those initiatives as opposed to just price cost mix?
John Martin - CFO: Yes, it is. I mean, it's the consequence of just a bundle of hard work and it's all planned, it's all upfront. There are a series of initiatives and you've heard most of them before, but I'll chalk them out again. We continue to work, even though it's fairly incremental now around the edges, we continue to work on own label. We continue to work on growing our mix of high-margin products and actually some of the new initiatives that we talked about in terms of the growth initiatives should help on that front as well. If you look at the growth in showrooms, the growth through showrooms tends to be higher margin as well and the growth in showrooms has exceeded our overall growth. So, there are many ways in which we could, should and do plan on expanding our gross margin. I think if you look back historically at the ability of our business in the U.S. to carry on developing gross margin, it's been pretty good, and very good if you look back the long run chart. The team have managed to incrementally improve gross margins for a long time and it's also clear that if you look at our competitors, the thing that differentiates the good ones from the poor ones, the good ones they constantly work this and that's what we do and aspire to do as well. So, we absolutely are trying to continue to grow gross margins. And the only thing that I would say, it's a big shift. If they grow incrementally, we are positive. And they don't grow in every branch in every business in every month, but just overall, we want to see them incrementally edging forward. So, does that answer the question, Harry?
Harry Goad - Credit Suisse: Yeah, that does. Thank you.
Operator: Charlie Campbell, Liberum Capital.
Charlie Campbell - Liberum Capital: A couple of questions for me on the U.K. really. Just thinking about the 5% in Q3, I'm just wondering whether there is any benefit in there from the Burdens situation and you've benefited at all from the closure of branches that you didn't end up buying, (if you should remain). And then also on the U.K., just wondering what sort of driver you think housing transactions are for that group of businesses?
John Martin - CFO: Sorry, Charlie, the second was?
Charlie Campbell - Liberum Capital: For the U.K. again, just wondering the extent to which U.K. housing transactions drive demand across that group of businesses.
John Martin - CFO: So, Burdens benefit? No. We exclude – the like-for-like excludes Burdens, and if you look at the distribution of the branch network for the Burdens branches, there aren't enough and they aren't sufficiently close to the Drain branches for it to have any impact. It could not have 0.1% impact on our underlying numbers. U.K. housing transactions, yeah, I mean I think absolutely, anything that's good for just the general warmth of the economic environment, I think is a good thing, and even though we're not servicing a lot of new residential, all these things have a knock-on impact if people move homes, they refurb them, they refurb the bathrooms, the kitchens, the heating systems whatever. That's all positive. But clearly the indicators in the U.K. remain pretty mixed today, pretty mixed. There isn't a sort of – there isn't a consistent direction as I think there is in the U.S. So, it would be great to see some warmth back in the housing market, and so far if there's been any, I'm sure it's been positive. But if you look at the housing – for example, if you look at housing starts, the chart for housing starts over time is sort of not moving anywhere fast. Certainly, not moving north anywhere fast. And seems to me ditto on house prices and transaction as well. It's pretty slow growth. So, we still see the U.K. economic environment in pretty flat terms at the moment.
Charlie Campbell - Liberum Capital: And just a quick follow-up, if I may. Just on the U.K. on new housing starts, I mean do you do manage business with the majors, or they mainly buy direct?
John Martin - CFO: No, I mean most of the volume there is going direct, but when you think of it, it is a $100,000 new housing starts and there is 1.5 million boilers in the market. In any case, it would only be a few percent of the market overall anyway. So, a 10% increase in housing starts would give you 10,000 new boilers. Well, that's irrelevant to the – that's irrelevant to the heating market in U.K.
Operator: Robert Eason, Goodbody.
Robert Eason - Goodbody: Just in relation to U.K., can you just give us a bit of direction in terms of the extent of the losses you have to carry with Burdens in the quarter and how you see that process evolving over the next few quarters, because I think you used the words you promptly addressed the issue in the quarter? Also, maybe just give us an indication of the investment in terms of the scale in your B2C operations in the U.K.? Just one other questions, there was a question earlier on M&A. I'm just assuming given that there was no mention of it in the statements, there was no further acquisitions in the third quarter?
John Martin - CFO: So, Burdens' losses in the quarter were between GBP1 million and GBP2 million. But we would expect to – we now expect having addressed the cost base for those losses to be, sort of, were either very low or extinguished in the final quarter. The B2C investment in the U.K., the incremental investment over last year was about GBP1 million. The M&A, yes, I am afraid you are right, they were none in the quarter.
Operator: Gregor Kuglitsch, UBS Warburg.
Gregor Kuglitsch - UBS Warburg: Two questions. The first one is just on – maybe it's a little bit early, but looking at you sort of mentioned GBP500 million of debt by the year end. Obviously, last year you levered up the balance sheet to the trailing 12 months one-times to determine the dividend. Is that the way you are thinking about the life? Clearly, it will depend a little bit on prospective M&A, things like that, but just sort of to get a feel around that? Second one is maybe (indiscernible), but I am sort of looking – I'm sort of trying to read into your comments, particularly around Europe, but it sounds as if you are suggesting FY '14 will continue to be difficult, particularly in France and the Central European business. Are you, therefore, trying to nudge down the consensus, which seems to be at 855 of trading profit or is it premature to think about it that way?
John Martin - CFO: So, the debt, yes I mean, I think sort of one-times EBITDAR is a pretty sort of sensible and comfortable place. We talked about this at a maximum of two-times, but that would be sort of, if you want probably post an event if we did M&A at any point in time, and we said that we want to operate consistent with investment grade credit metrics as well, which we believe we're doing. And we think that's up to sort of 1.5 times. So, yes, we are reasonably comfortable at that level of debt. Just in respect to next year, I mean look on the face of it next year looks pretty punchy given we've got 2% growth at the moment and given that Continental Europe and Northern Europe is difficult, U.K. and Canada are reasonably flat. So I think built into those numbers, when I look at them and I think that assumes that there is an immediate and sustained upturn in Europe, the whole of it. The U.S. strengthened and the U.S. dollar strengthens and as it happens just on the sort of technical points, people have got France returning to profitability, well, we are going to spend the whole of this year doing the things that we talked about at the half year. I said, I thought it would take until next spring; that's most of next year gone, so that's quite optimistic. Look, none of those individual lines is impossible, but nevertheless we need some very strong tailwinds and we need tailwinds to start blowing in our direction pretty, pretty darn fast, particularly in Europe to get to some of those numbers. So I do expect for '14 for people to just have a think about what exit rate do we need this year to get to those types of numbers.
Gregor Kuglitsch - UBS Warburg: Just to be clear, you were sort of suggesting a sub GBP30 million restructuring charge that you are probably going to be booking through the line next year, sort of…?
John Martin - CFO: Yes, I would certainly think so today. I mean, look, it's been pretty horrible (indiscernible) quite frankly for the last sort of three years having to constantly take write-offs and do restructuring. The only thing that I can offer is it's a better company for every single piece of that restructuring that we did it than if we hadn't done it. But frankly, I absolutely detest red ink and certainly from where I sit today, I'm planning that there isn't going to be any next year.
Operator: Kevin Cammack, Cenkos.
Kevin Cammack - Cenkos Securities plc: My question is around the U.S. incremental margin. I think you've pretty much addressed all of those, but one thing I did find interesting in your response or your commentary about the U.S. was you were quite categoric about the business not seeking to attempt any greater penetration of the resi market, despite the fact that clearly it's one of the highest-growth segments at the moment. And I just would be interested to know what sort of still deters you from wishing to have a bigger slice of that residential market?
John Martin - CFO: It's great question, Kevin. We have to debate it at some length every time I go over every month or so to Virginia. I think there are probably a couple of things. The first is, that market tends to be fairly low margin, low gross margin at least. That's the first thing. I think second thing is, quite a number of my colleagues – I've still got scars (indiscernible) to 2.25 million starts to four hundred and something thousand. So, I think part of that scarring, there's definitely a big sort of psychological drag on that. I think the other thing, I think our team – look, I mean, we've got a fantastic team over there and they really are thinking about this very, very carefully. If you go specifically to (Europe) and you target the new – the volume house builders, you've got to take sales people from somewhere and put them on that market. We've got so many, so many opportunities to pursue in the U.S. The question really is, well, should we be pursuing sort of low-margin new res or actually are we better off pursuing, for example, the (FM) space or just going more thoroughly into the RMI space or going more thoroughly into some of the new geographies where we have been deploying specific sales resource. So, that's really been a question of should we focus sales resources, take them out of RMI into the new market. Where we've got trades customers, where we've got builders, or installers of heating or plumbing or kitchen, where they're doing new homes, of course, we are going to supply them, there is no doubt about that. So, we will see some benefit from the total numbers of new starts. But it's just a question of diverting resources, making the decision to divert resources from our current activities into those large house builders, and that's really what we're not pursuing with any aggression.
Kevin Cammack - Cenkos Securities plc: I take it the sort of whole e-commerce push is essentially – the vast majority of that would be geared to RMI markets, would it?
John Martin - CFO: Well, the B2C push, I would have thought is overwhelmingly RMI. The B2B, we're servicing our customers. We're letting our customers choose essentially what the B2B e-commerce is doing. Is it just giving our customers another service, and it's opening up that channel between our customers and ourselves. So, you could imagine some new builders using it, but I don't think you would see it as proportionately as strong as the RMI is my immediate take on that.
Operator: Paul Checketts, Barclays Capital.
Paul Checketts - Barclays Capital: A couple of quick ones. On the U.S. residential work, John, what sort of margins are you getting on that? And the second question, how much of profit historically has been from gains made from holding inventory, if that's the number you can give us a feel for?
John Martin - CFO: Paul, I think you probably asked me the two questions I can't answer. Not because I won't but because I don't think I have that data. If you look at the U.S. residential, U.S. residential RMI and new is a big chunk of our business. If you look at Blended Branches overall, that's where we are servicing the majority of that business from and the Blended Branches margins are pretty consistent with our overall U.S. margins, but that's not servicing new residential, that's – I mean it is but not disproportionately. So, is your question about new residential?
Paul Checketts - Barclays Capital: Yeah, on the background of you explaining before about the logic of where to put your focus on?
John Martin - CFO: I think you should assume that new residential margins are quite a lot lower than our average margins, quite a lot lower. Just looking I think you would expect teens not 20s let's put it that way, okay. In terms of holding gains, well, all you're doing is selling through inventory. So, essentially if you don't revalue inventory that you hold upwards, but all that happens of course is, if commodity prices rise it is easier to sell through at a higher margin. Now in this period, of course commodity prices generally have been pretty weak. So, you can certainly say in a period like this that there should be no holding gains going through the P&L as a result of this period's trading. Does that make sense?
Paul Checketts - Barclays Capital: It does, thanks very much.
Operator: John Messenger, Redburn Partners.
John Messenger - Redburn: Sorry, I've got three, if I could, John. First one was just on – coming back on the U.K., when we look at that sort of sales performance and the point about – I guess the question I've got is, is it very much a trading stunts that you're taking in the U.K. of Steve and the team are in terms of driving for that top line with some sacrifice of growth just because you've got a lot of spare capacity given Leamington Spa and everything else in the kind of U.K. business structure? So is it something that you'd say is a market phenomenon or is this a very deliberate trading (standpoint)? Second question was just on the U.S., you were quite clear earlier in terms of when we think about gross margin and then the eventual drop-through and you talked about obviously outbound freight and I think sales commissions. Can we just be clear, when you think of sales commissions, is that effective – are you thinking there of bonuses for staff in branches in terms of their performance or is there some other form of payment that we need to just think around in terms of what drop-through is the bottom line? Finally, another question from me. You mentioned earlier HDPE. Is that High Density Polyethylene?
John Martin - CFO: Correct.
John Messenger - Redburn: And if it is, is that very much a shale gas kind of products in terms of what's used there. Just you obviously mentioned as an area that was weaker in the U.S., just those...
John Martin - CFO: So, first, in the U.K., no it's not a – we're not doing something different in the U.K. to what we're doing elsewhere. The share gains, we believe, are made by us constantly having attention to our service and constantly trying to improve our service, you know just all the time. If you look at our growth on a monthly basis against the major merchant light side sight survey, you know, you see a gap between those two lines every single month now going back for quite some time and that is driven I think by relentless focus for us to constantly try and just improve our offering to our customers, but through all of the things we've talked about before, product availability, through multi-channel offering, through just having a really good final (indiscernible) delivery, all the stuff that you would expect. So, no, we're not taking a stance and we definitely not taking a stance to gain top line at the expense of gross margin that's not our thought. I mean how we got capacity in the network, how we got say a thousand branches in the U.K. can we put a lot more volume through those branches and the DC infrastructure before we got to make step change investment in physical assets, yes, we can, we know that we can, we want to and that's precisely what we intend to do, but we don't intend to do that at the expense of gross margins that's not in anybody's plans. The U.S., yes, I mean sales commissions are a big part of remuneration structure in the U.S. So they're absolutely variable and typically with sales most sales have got a name on and that name is going to claim commission on the sales. So the variable element can be sort of about 3% off sales for those incremental sales in the U.S. Finally, yes, sorry HDPE, I shouldn't use a jargon. Yes, it's these larger pipes for shale gas that we installed are fusion welded, it's a great product, but as you know, shale gas prices have come right down and there has been a fairly substantially dip in volumes going through that. I mean, at some point, it will be back. Perhaps they ought to ship over to the U.K., over to (Blackburn) or something and (indiscernible). And look, it is only – if you look at our overall oil and gas exposure in the U.S., it is only a few percent of the U.S. business. So it is not a huge set of observation, but it is the only business in the U.S. which really struggled this year.
John Messenger - Redburn: Sorry, John, just you're very helpful there with the sales commission point, but if I think of outbound freight of between 6% and 7% of sales, is that a reasonable stab? Obviously it has to be delivered sales to incur that, but is that a broad sensible number in terms of the way you think …?
John Martin - CFO: Yes, it depends. But for the delivered portion of our business, that’s a fair number. Marina, shall we take another question and then wrap up.
Operator: (Mark Olsen, Oriel).
Mark Olsen - Oriel: Can you just give us a feel for – obviously, we are looking at Europe and I think the market is in the process of readjusting its expectations for growth, given where you exiting from the current year. Can you just give us a feel for what are the organic growth initiatives going the other way against that (indiscernible) your own individual markets; but obviously, we see you're reducing the size of your branch network in France or have been (indiscernible) deal, but what organic initiatives have you've got coming through the other way?
John Martin - CFO: Yes, I think that's – it's a great question, because in our business we're not going to cut our rate to greatness, that's not the objective. Our organic initiatives in France, clearly, would they need to be very detailed under local branch level and the best way of describing those in France is, we are moving to the most consistent product offering. So we are going to really focus up for that offering and again, focus on those core values. You've heard us talk about them over the last few years of just getting eight product range in France is broadly speaking what you need to build the house. Getting that core product range with very high availability in each of those individual branches and that is going to mean some consolidation if you want to be (indiscernible), because in some places at the moment. For example, in some branches we've got some fairly peripheral products and we don't think we should focus on those. We should focus really on a very high availability of the core products. Let me just touch on the Nordics, because that's probably the most sort of interesting area for this and the teams up there in Nordics has spent huge amount of time this spring, as have all the businesses around the Group on envisaging what our branches will look like in the future and how we should think about growth in the future. So we're not just thinking about infrastructure. If I took you to, for example, Stockholm and I have raised this example before. We had about eight branches in Stockholm and they were pretty much (all of) capacity. So what we've done is, rather than doing outbound distribution from all eight branches, we've built a new small DC just outside Stockholm to do all outbound deliveries from Stockholm and that relieves volume in all of the other eight branches, very important. Just looking throughout the region, we are looking at some new formats, so in Silvan for example, which is a DIY business in Denmark. We are trialing smaller formats. We have a retail chain in Sweden, Cheapy. We are rolling out now quite a lot – I think, this year there will be about eight new branches and that is just a cookie-cutter. Keep the branches essentially the same, so the footprints and actually earlier this year I went to two or three of these branches and they were all exactly the same, you could be in the same town. I hope they didn't built three in the same town, but just a cookie-cutter approach of going, because we know that these branches make sense. We are putting them on greenfield sites and they are pretty small branches, they cost about GBP1.5 million a pop. So, really a lot of different initiatives, very much business-dependent, very much business-dependent, but we are certainly not forgetting growth for when the spring finally arrives. Does that help you, Mark?
Mark Olsen - Oriel: Really, (indiscernible), but is there some sort of overall figure that you can say, well, this will help deliver 0.5% on the top line as a result of this or – and the full year you could deliver that or is it something (indiscernible)?
John Martin - CFO: If you look at the overall infrastructure expansion, the expansion of our network, I think in our strategic plans, it is about 0.5% a year for new branch growth. Now, I don't think that should come as a surprise and you might say well, that's not very swashbuckling. But nevertheless, that reflects the fact that we are trying to reach customers, in some instances, using both B2C and B2B more effectively without just going for expensive infrastructure. Marina, do you have any others lined up or shall we touch it there?
Operator: We have no more questions.
John Martin - CFO: Thank you very much everybody for joining us on the call this morning. Mark, myself, Julia, all are available today. So, please, give us a call if you've got any other things that you want to catch upon. But thank you very much for joining the call this morning and Marina, thank you for hosting.
Operator: That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.