Travis Perkins plc

Tony Buffin – Chief Operating Officer John Carter – Chief Executive Officer Alan Williams – Group Chief Financial Officer, Executive Director

Robert Eason – Goodbody Investment Banking Emily Biddulph – JPMorgan Howard Seymour – Numis Priyal Mulji – Deutsche Bank Andy Murphy – Bank of America. Paul Checketts – Barclays Capital Aynsley Lammin – Canaccord Clyde Lewis – Peel Hunt Ami Galla – Citi Alastair Stewart – Stockdale Securities

Thanks, John. Morning, everyone.

Firstly, I’d also like to welcome Alan. I’ve had the benefit of working with Alan for the last couple of months since Christmas.

The good news is I think we see things in a fairly similar way, uncannily similar in some ways; but I also think Alan will bring more new thinking to the business and an even more disciplined thinking to finance, and I’m sure, in fact I’m absolutely confident will make a really positive contribution to the business in the future. So I’m delighted that Alan’s on board.

I’ m doubly delighted because all of your really, really hard questions in the future could be pointed at Alan and not towards me, so welcome, Alan. So the first thing I think it’s important to note is give you some context on our 2016 results.

Clearly, it was a tale of two halves, really. We had a very strong performance in the first half of the year, followed by the well-documented weakness in our market s in the second half, instigated in part, but only in part, by the uncertainty around the EU referendum.

We should, however, be very clear that despite the referendum, we were very pleased with the performance of our three largest divisions. Plumbing and heating division, however, did not perform as well as we had planned, and we did see a significant step down in performance in the second half of the year.

Now we’ve laid out on this page, as we’ve done before, the key financial highlights of the Group. It’s on page 5, or slide 5, for those listening.

Headline sales grew by 4.6% and like-for-like sales were up by 2.7% for the year as a whole. Whilst adjusted EBITA declined very slightly to £900 million, underlying EBITA, excluding our property profits, increased to £392 million, up just under 1%.

Due to a slightly higher tax charge, adjusted earnings per share declined by 3% to 220.4p per share. That said, we were very, very pleased with the free cash flow generation of £436 million.

This represents a profit to cash con version rate of 170%. As strong cash generation more than funded our investment program, the higher dividends, our prior-year tax charges, and the costs related to the exceptional items that we called out in October last year.

And it also enabled us to reduce on balance sheet net debt by £70 million despite the £40 million one-off tax payment. Reflecting this strong cash generation and the confidence of the Board in our market positions and our principal businesses, the dividend was increased to 45p per share, up just over 2%.

Lease-adjusted returns, however, did decrease by 70 basis points to 10.9%, and that’s predominantly the result of the capital investments we’ve been making in our structurally advantaged businesses. And that’s to ensure that those businesses can continue to perform and improve returns over the medium term.

And so just turning to those exceptional impairment charges we called out in 2016. In the third quarter, at our interim announcement, we indicated that we did have weaker markets, and we took the early decision to restructure some of our supply chain, and also shut underperforming branches.

This has resulted in recognizing £57 million of exceptional charges, slightly higher than the £40 million to £50 million we called out previously. £30 million of these costs related to rationalization in supply chain.

We closed six cross docking sites in F&P, two distribution centers in Wickes which means we now operate from one national distribution center, and one timber supply center and one CCF fabrication center were also shut. £17 million of the £57 million of costs were incurred closing 51 branches.

28 of these were in the plumbing and heating division, and we also closed 12 Travis Perkins branches. We incurred cash payments of £9 million in respect of the closures, and we expect there to be further cash outflows of £16 million in 2017 and beyond.

These cash payments are expected to be recouped from reduced operating losses and improved working capital management within two to three years from the commencement of the closures. I indicated earlier that our plumbing and heating business has continued to perform below our expectations.

As a result, we recognize a fully non-cash impairment charge of £235 million on acquired intangibles during the year, the majority of which related to PTS, F&P, and our City Plumbing businesses. I’ve given a fuller explanation on slide 7 of our sales performance.

Our headline sales growth was good at 4.6%. As you can see from the bar chart in the top of the page, our volumes grew by 3.3% on a like-for-like basis.

We experienced significantly less price deflation and mix effects than in recent years of a negative 0.6%, and new space continued to contribute, with 1.6% of the headline growth coming from that new space. Our new space additions remain an important part of our growth.

12 TP and 18 Benchmarx branches were opened in the year, along with seven new Wickes, and 43 Toolstation shops in the UK and Netherlands, and which we believe will underpin further improvements in earnings as they mature. However, as you can see from the table below, our rate of like-for- like sales growth was slower in the second half given the weaker markets we experienced.

Our two-year like-for-like reduced from over 9% in the first half to just over 4% in the second half. Part of the volume slowdown in the second half was a result of the first signs of currency and commodity lead inflation returning after a very long period of deflation.

I am, however, pleased to report that our online sales grew by a further 30% to almost £215 million and are now contributing meaningfully to our like-for-like performance. So turning to the four divisions.

Travis Perkins and Benchmarx had another good year, with headline revenue growth of more than 5%. New space contributed 3.4 percentage points to sales growth, made up of new TP and Benchmarx openings, as well as 13 Keyline branches which were transferred to the green and gold format in January 2016.

We made solid progress in improving price consistency to customers, whilst at the same time ensuring that cost price inflation, which we could not mitigate, was passed through. Operationally, we improved utilization of our heavyside range centers, and made good progress in developing our transactional online capability, underpinned by our distribution infrastructure investments over the last couple of years.

As a result, underlying EBITA, excluding property profits, grew by 6% ahead of sales, with our margins holding firm. Benchmarx had another very strong year with impressive growth in both sales and in profits.

Lease-adjusted returns, however, for the division as a whole, were 1 percentage point lower due to our investments in new space in the supply chain, and in our multichannel capability. All of these investments are in the very early stages of maturing, and we fully anticipate that they will extend our structural advantage and ensure returns are both sustainable and can grow well into the future.

The plumbing and heating market has been well trailed, but it continued to be challenging in 2016, particularly in the traditional merchanting channels. Headline sales declined by around 1%, and 1.6% on a like-for-like basis.

The traditional contract heating market continued to be the most challenging segment, and whilst the branches we converted in 2014 and 2015 from the PTS to CPS format continued to grow, they grew below our expectations and were not sufficient to offset the declines elsewhere. Adjusted EBITA, excluding property profits, fell by more than 20% to £36 million.

I explained earlier that we took a significant non-cash impairment charge. This has reduced our capital employed in the division as a whole by over £200 million, and we’ve restated our returns accordingly.

Despite the 20% fall in EBITA, our returns reduced by a similar by a smaller amount to 10%, down from 11%. This was largely owing to our discipline in withdrawing capital where it does not achieve an acceptable return, and as a result, as I said before, we closed 27 branches in the year.

As many of you are aware, I’ll be starting work in the business after we finish here today. I’ve already met a number of our branch teams, and my overriding impression is that we have loyal, capable and committed people who are always wanting to do better.

In the support center, however, we much work harder to provide the ranges, the value, the branch network, online capability, and selling tools that our branches need to better serve our customers. John will take you through some of the challenges of the market and the scope of the review that we’ll be undertaking shortly, but you should be rest assured that this review will be comprehensive, and we will not avoid asking or answering the difficult questions.

Turning to Frank Elkins business, our contracts businesses, we had another very strong year of growth, with two year like-for-like sales growth of around 14%. In many ways, our reported results did not really fully reflect the excellent progress we made during the year.

We have very strong momentum and made significant share gains in both CCF and in Keyline, and I’ll try and explain those underlying results a bit more fully in a moment. Our BSS business, however, did experience continued tougher market conditions, but performance has stabilized, and we continue to deliver double-digit returns on capital employed.

We transferred 13 mature Keyline branches to TP at the start of the year. This reduced our contracts division profit by around £2 million, and also diluted our headline sales growth and lease-adjusted returns.

Similarly in CCF, we added almost 25% new space to the business in December 2015. This dramatic growth in capacity added costs into the business which were not fully offset by sales growth in the year.

I am, however, extremely pleased to report that by the end of the year, all of the new branches were performing exceptionally well, and CCF was achieving the highest like-for-like growth of anywhere in the Group. The transfer of mature, high-returning branches in Keyline to TP, and the new assets we opened in CCF, reduced our lease-adjusted returns to 12%.

However, we expect improvement in returns in the near term as we fill out the capacity that we’ve created. And then finally our consumer business.

Clearly, our consumer business has been the standout performer in the last three years. The new Wickes management team have improved value, enhanced ranges, renewed the in-store experience, and re-energized the store teams to deliver an outstanding result in a difficult DIY market.

There are now over 50 stores trading in the Wickes new format which have been well received by customers, and giving us very good returns on capital. Seven new shops were opened in the year, and we see scope for further openings in 2017 and beyond.

Toolstation growth continued at pace, with another 36 stores opened in the UK. Online ranges were extended for the first time, and click & collect times were reduced to 20 minutes, with many orders available for immediate collection.

Our Toolstation network in The Netherlands was more than doubled with seven store openings, bringing the estate to 12 in the year. All are now contributing to overheads and profit, and this gives us encouragement to accelerate the rollout in 2017 and beyond.

In terms of financial results, we achieved sales growth of almost 10%. Like-for-like growth did well over 6%, and EBITA growth of almost 9%.

EBITA margins remained flat at 6.7%, demonstrating our continued focus on growing volumes and market share by offering better value whilst fractionizing our cost base. As a result of the strong progress in both Wickes and Toolstation, our lease-adjusted returns increased by 5 percentage point to 8%, and are now up by over 200 basis points since we started the plan in 2013.

In terms of my outgoing statement as CFO, I’m obviously very pleased to report we made very good progress in cash generation during the year. Our underlying free cash flow was £436 million, resulting as I said before, in a cash flow conversion rate of 107%.

This was principally down to good management of both stock and debtors as we start to see the benefits of those supply chain investments and improved systems and capabilities in our credit teams. Despite the continued growth in credit sales and the store and branch network, we delivered a £13 million net inflow of working capital.

As I’ve outlined in the table, free cash flow funded our growth CapEx, our higher dividend, our freehold investments, as well as our exceptional closure costs, and the one-off tax payment of £42 million. In addition, we were able to reduce on balance sheet net debt by £69 million despite the £P42 million one-off tax payment, and expect further strong improvements in cash generation in 2017.

I’ll just give you a brief reprise of our property investments because a number of people ask this question. Clearly, we’ve made a number of investments in freehold property and construction in recent years, and I thought it worth appraising you of the detail of those investments.

We had a property day in 2015 which many of you will have attended, and this laid out our approach to freeholds, and it’s worth reiterating what that approach is. Firstly and foremost, our property team is there really to create the best operating sites for our business.

They’re there to access sites that our business could otherwise not access, and do so at lower cost, add value from developing those sites, realize cash through selective disposal to reinvest, and in doing so create a sustainable profit stream as a by- product. Over the last three years, we’ve invested on a gross basis over £200 million in developing our freehold stake.

We have brought around £130 million, or two- thirds of these assets into use, and we’ve yet to commission around £70 million, or one-third of the assets. Our operating branches at these sites that we have commissioned are still immature, and they should as they mature underpin strong earnings growth over the next four to five years.

Our net investment in freeholds has been a lot less than £200 million. It’s been around £80 million, as you can see from the table.

This is because we’ve sold down over £120 million of properties where we do not expect further upside from either capital appreciation or further development potential. Our investments have also strengthened our balance sheet, with an increase in net book value of over £160 million, and our open market valuations significantly exceed the total net book value of £450 million.

We’ve also delivered profits of nearly £70 million over the last three years from all of our freehold management, and we expect these to be sustainable into the foreseeable future. Our businesses and our shareholders alike are benefiting from the work in freehold development, and we expect this to remain a feature of our plan.

I’ve used this slide on, slide 14, to consistently explain our financial position and our debt metrics. Then given the free cash flow, I’m really pleased to report a significant reduction in our balance sheet net debt, contributing to a modest reduction in our overall lease- adjusted net debt.

This was achieved despite our sale and leaseback program and continued network expansion. We made further progress towards our financial targets despite the weaker market backdrop.

Our lease-adjusted gearing reduced to 45%. Our fixed charges remained covered by 3.3 times, and our lease-adjusted debt to EBITDA ratio reduced to 3.7 times.

We added further long-term committed funds during the year following the renegotiation of our revolving credit facility and the issuance of a £300 million seven-year tenor public market bond. Our strong financial position and significant funding headroom give us the capacity to invest for the long-term benefit of our shareholders, irrespective of the market conditions we might face.

So what do those market conditions look like? As you can see from this chart, owing to the changes in stamp duty in April last year, we saw a significant spike in housing transactions in March, followed by a period of year-on-year declines.

This has made it particularly difficult to assess the underlying strength of the housing market, and notably the secondary housing transactions, but this is because both the spike in transactions – sorry; because of the spike in transactions, but also because of the nature of the purchases that incurred in that spike, with many of those transactions being for buy-to-let properties or second homes. At this stage, our working assumption is a decline of around 10% to 1.1 million secondary transactions in 2017, albeit we do recognize that some of the recent data issued yesterday is a little more encouraging.

Consumer confidence has also been volatile, and although it is above the long-run average, we do expect it to worsen as inflation takes hold for the consumer through the year. As it stands today, we have not seen anything overly concerning.

However. we are mindful that the signals are mixed and, therefore, we’ve taken a cautious stance.

And then finally turning to the outlook. As I’ve said, the outlook remains mixed.

Housing transactions and consumer confidence did not look overly positive, although the signs for commercial and infrastructure activity are potentially more encouraging. We are seeing industry- wide inflation coming through, but given our view on housing transactions, we expect this to be offset by volume shortfalls of a similar magnitude.

We do though expect our plumbing and heating performance to worsen in the year as we complete our review and undertake work to improve our propositions. That said, through the investments we’ve made in our three largest divisions, we believe all of those divisions are well-placed to outperform their respective markets.

And finally, I should say a thank you to you all. At times, the last couple of years have been challenging, you’ve given us some really challenging questions.

You’ve done it generally in good humor, you’ve done it patiently, and often I value your insights. And in many cases you’ve supported us, so I appreciate that.

It’s nearly four years since I stood up in front of you, and I do have John Messenger’s thoughts ringing in my ear. He said to me after that, he said I bet you’re glad the first one’s out the way, aren’t you?

But it’s nearly four years ago, and how time flies when you’re having fun, so I appreciate your support.

Thanks, Tony. If we just cast a little bit back over the last three years, we always positioned this program, this five-year program, based on improving our customer propositions, optimizing and growing our network, using our scale advantage, being the largest distributor of building materials in the UK, and how we were going to manage the business through the portfolio management.

And I think the key area for me has been in and around the customer propositions. We’re really developing, through Wickes and through Toolstation in overlapping channels, a real value proposition against our respective competition.

We’ve extended obviously the TP business during this period, and invested heavily in supply chain, and the range centers in particular which offer a wider product offering faster to our customers than our competition. A lot of investment has gone into Wickes, growing both the network and refurbing the new format into the older stores.

Click & collect on the digital front is really important to us. It’s the most productive or profitable side of digital trading.

And we are enjoying good growth, both in Toolstation and Wickes. And just to know, we’re now pretty much from a standing start now completing around £250 million sales a year on our online business.

A lot has gone on in the network in terms of growth, but I would highlight particularly we’ve been targeting the businesses where we’ve been our best returns: 115 Toolstations in that period, growing the CCF network by 55% in terms of the footprint and the square footage it operates on, 87 Benchmarx, and the development of our trade parks which we’ve got a number in the pipeline. The scale advantage was very much in the supply chain terms, as I say, about the widest product offering at the most – in the fastest time so we serve our customers better and can beat our competition.

We’ve enjoyed in the three years a very positive performance in our kitchen businesses, both through Wickes and Benchmarx where we actually worked together on the product supply and the range and development of that. So in all scales, we’ve really tried to leverage.

We’re calling out £250 million of own brands. If we overlay the Wickes element of their own label, that number is in excess of £500 million.

And much of that, or a lot of that, is actually direct source where we’re collaborating and working together. In terms of the portfolio management, we continue to strengthen our teams.

I genuinely believe in the last three years that’s been one of the strongest features of our management teams across all of our business units and divisions. And just on the bottom, as Tony has gone into more detail, our property strategy has got an ongoing value to return returns to our shareholders.

If we look at the three-year period on a sales CAGR basis, we’ve enjoyed a 7% sales growth and a 6% profit growth. This slide clearly determines the three divisions of general merchanting contracts and consumer that have moved forward and moved forward substantially, and we’ve clearly been held back by our performance within plumbing and heating.

We’ve been disciplined in terms of our focus on investment, but we’ve invested £330 million in CapEx growth over the last three years, and I’m going to run through some of the areas where we’ve actually invested that money. And we are clearly prepared to withdraw capital for underperforming businesses where we have them in the Group.

So if we look at the plumbing and heating market. We undertook early in 2014 quite a large restructuring project where we moved capital from a low-performing PTS business to City Plumbing.

We were expecting the markets to be a lot stronger after that initiative. We’ve clearly got different levels of challenges.

And we’re looking really at that traditional plumbing and heating market where the government has withdrawn a number of their incentive schemes and controlling their investment in social housing. In the contract end, the plumbing and heating market remains ultra-competitive.

We’ve seen a high propensity of business moving online, in particular in the bathroom area, but also in the heating segment of the category. And because we actually own Toolstation, we’ve seen the growth of plumbing and heating through the likes of Toolstation and Screwfix.

I think when we look back, and this is a slight insight to where we’re looking as we go forward, the traditional plumber’s merchant has not innovated and kept pace with the customer demand and changing in how they actually want to buy that product range. We’re clearly not satisfied with our performance.

We have obviously signaled Tony’s move across to the division, and we’ve already started to strengthen the commercial supply chain and digital areas in preparation for restructuring the business. We’ll clearly outline those changes at the half year.

We want them to be effective and, therefore, we do need the time to think through what is the best approach for this challenging category. But ultimately, it will be the customers’ decision on how they spend and how they actually go to market with the different channels, and that – which will influence us.

And as Tony said earlier, we aren’t going to duck those decisions and avoid the difficult decisions as we move forward. If we take general merchanting, the bullet points are taking the division as a whole, but what we’ve actually done for the first time is break out some detail of some of the businesses that sit within our divisions.

If I could just take the Benchmarx first because it’s the first time we’ve really actually given any detail on Benchmarx. 10 days ago, sadly, the managing director of Benchmarx lost his fight with cancer.

He’s been out of the business since July, and I’ve been amazed at the support he’s had from the management team. Chris Larkin has been a fantastic individual in this business in driving it forward, but the great thing what Chris has actually left us is a great management team that’s going to take the business forward, and we’ve got good succession in place.

But over the last three years, we’ve actually invested £70 million as growth CapEx into this business. It started in 2006 from zero.

We are enjoying really good returns and good growth in the business. And this is a business, just to remind you, that utilizes about one-third of its branches, its space within the Travis Perkins merchant network, to its advantage, and it’s given us we estimate an 19% lease-adjusted return.

Equally, the general merchanting side is large, it’s great performance, it’s sector- leading performance, but we still feel it’s got a lot of areas to grow, both in new catchments and re-siting a number of our businesses that are underweight within existing catchments. The market continues to be fragmented, but we clearly view it with small, medium and large customers, and it’s in the area of small customers that we’re focusing on improving our customer proposition.

We’ve introduced during 2016 a new pricing tool. Internally, we call it Spinnaker.

The aim of the tool is to provide to the trade counter and the telephones better, consistent, and market-relevant pricing, and we’ll have that rolled out during the first half of 2017. This is a fundamental change in the trading of the TP brand.

As you know, we’ve been investing in best-in-class distribution capability, both on the what we call PDHs, the national distribution centers, and the range centers that are more local for the big and bulky goods. This is offering extended range to our customers with a next-day delivery.

And we’ve commenced over 2016 a very big project to upgrade all of our core systems across our merchanting businesses which we can use to our advantage with the different businesses within the Group. If we take contracts, and I’ve just noticed we have Frank Elkins in the room that heads this division up very successfully for us.

Again, if I just take the overall contract merchant division, we have three businesses, as we’ve said of Keyline, which effectively sells products that goes in the ground targeting civil and underground work, and infrastructure. BSS, which has been with the Group as you know since 2010, sells pipes, valves and fittings, and products you never see in the building for this sort of thing that moves all the fluids around behind the walls.

And CCF, which is almost the opposite, where it actually does the partitions, doors, ceilings and insulation for commercial and new residential. So they cover different aspects of projects, but they work focused on big projects, and typical thing like Terminal 2 where all three businesses were involved.

So they share data on projects. We’ve invested primarily in CCF, which Tony highlighted, over the last three years in expanding its network to be able to deliver the service that their customers expect.

And as you can see, over the last three years, we’ve grown the business by GBP195 million. We’ve invested GBP31 million, and although the return at the moment is GBP8 million, this is very immature in terms of most of it was actually laid down in Q4 of 2015.

Keyline has also gone through a lot of restructuring. As Tony alluded to, it’s nearly 30 branches over the last three years that we’ve transferred from Keyline into the Travis Perkins brand, and we’re investing in larger low-cost sites to focus on their groundwork and civil products.

But as you can see, the overall lease- adjusted returns in Keyline is very close to that of the Travis Perkins brand. And then BSS, which has always been a good deliverer for returns for us, has found it quite difficult because it has high market share to grow its sales.

But contained in there, we’ve developed a very successful hire business which is primarily the capital employed, but we have had to restructure the business to slim down its cost base and focus on growth over the coming period. But overall, this is one of our hidden gems as a division and doesn’t get a lot of the attention that I think it deserves.

And consumer, which Tony covered, has been a real success story for us, both in terms of Toolstation growth, and what we would argue is the turnaround of Wickes. We haven’t been shy in terms of the investment in CapEx within Wickes which we’ve invested nearly GBP100 million in that period, but we are getting exciting and very positive returns from that investment of new stores, investing in online, and investing in the store refits.

Toolstation is very much a rollout initiative, and as Tony indicated, we will continue to expand that network during 2017. I think more so for our trade businesses, but we will continue to invest in online and digital for our more consumer-facing businesses, but we’ve invested in – and which I think is – we think is absolutely key, is the infrastructure and the distribution capabilities to be able to fulfill the orders that our customers are looking to place online.

It gives us an opportunity to have much more conformed product offering across the merchant businesses, which are varied in size and shape, and it also gives us this opportunity to extend the widest possible product offering to our customers with a next-day delivery. And as you’ve seen, the early stages of this work is actually starting to deliver extra efficiency in our stock management, offering a wider range from less capital employed.

As we move forward, our legacy systems just do not allow us to be able to give customers real-time stock information, which is an absolute requirement if we are to develop digital in the trade businesses. We’re working to deliver account- specific pricing, which we negotiate on a customer/customer basis, and one of the big areas that we’re seeing from customers in terms of wanting to deal with us digitally, is product information and availability.

It’s not just about having a web and being able to deliver, it is being able to fulfill a full offering online, 24/7, to each customer’s requirement. As we move forward, this agnostic sort of future customer determination I’d put it, being able to offer customers what they want, when they want, how they want.

And to enable us to do that, we’ve clearly got to change our legacy systems. Hence we’ve embarked on what is a major IT project that actually then becomes a sales enabler rather than back office.

We have over 2,000 collection points across all of our brands, and they can be utilized as we go forward for click & collect. And this whole for me area of digital communication with our customers we need to extend to the merchant trade, and in particular, the small and younger generation of builders as they come through.

Frank’s investment will be primarily in contracts, will be on an EDI basis, and we have good plans as we move forward to enhance our capability on that. So really for us, it’s very much about our self-help investment program and investing in the businesses that we get our best returns.

The fundamentals for the UK market in terms of needing more houses has not gone away. In fact, it’s intensifying.

And, therefore, there is more strain on our existing homes. And as we know, there is an underlying challenge to improve the quality of those existing homes.

And markets are very fragmented with nearly 50% of the business held in independent or regional hands. Most of our brands hold a number 1 or number 2 position, often with a lower market share than is expected.

It is very much for us about continuing to use our scale and structural advantage as a group. We have the 2,000 outlets which we need to bring into our advantage.

Around sourcing and supply chain there is ongoing collaboration across the different businesses. And it all really is focused on being able to deliver the best customer proposition in each brand in each market catchment, for us to enable the best returns from our investment.

If we step all the way back, if there is three messages that really from myself and the team today, it’s despite the near-term uncertainty, and if anyone in the room actually knows what the trends are going to be in 2017, we’ll always be listening, our positioning to deliver medium and longer-term superior and sustainable returns remains very high. We’re completely aware of our underperformance within the plumbing and heating sector, but actually contained within plumbing and heating, we’ve got some actually good performance.

So it’s important that we protect that. But as Tony has said, we will not duck the difficult decisions as we go forward.

The Group is in a very strong financial position with good cash generation, so we can be selective where to invest to get our best returns. Thank you for that, and we’ll open up for questions.

Robert Eason, Goodbody Investment Banking. A few questions around the gross margin area.

Firstly, if you just look at the gross margin changes from H1/H2, there was a marked shift in general merchanting. I think the figures were down 1.1% H1, and the full year up 0.2%; so implying, I don’t know, 1.5% up in H2.

So what’s behind that shift? Is this a strategic change in how you are operating the market?

How you’re dealing with the underlying costs inflation and COGS. Some just general comment on that.

And on a related topic, as you stand here today, can you just go through the different moving parts of the COGS inflation, whether at a divisional level, ideally, or at a Group level in terms of the degree in which you can pass it on in absolute money terms? Or is there ability to get a margin on any price inflation as well?

So just discussions around the gross margin in general.

Okay. I’m not going to let Tony off the hook.

He can do the moving parts. But if we take GM, and I think I alluded in the presentation, we have a new pricing tool that we’re installing in general merchanting, and primarily into TP.

One of our challenges has really been control and consistency, and what Spinnaker gives us is much better visibility of what’s going on at a transaction by transaction level. But more importantly, Robert, it’s giving market prices based on good information and good controls.

So there is definitely an influence of Spinnaker coming through in H2, and I think you’ll see that influence in H1 of this year as we completely roll it through the 680 branches.

Just taking general merchanting, I think there was a couple of moving parts, really. The price [indiscernible] as John mentioned, Spinnaker pricing tool and our ability to guide the branch teams to market pricing, and so on, has really helped us in the second half of the year.

That’s enabling us to where we can offset cost inflation coming through. On cost inflation we are being able to pass that through to customers with a greater degree of control, and we’re able to do it on products by individual team member, by customer, and so on, so that is giving us a greater degree of control which is really helping us.

That’s not in the plumbing and heating businesses yet but we should be looking to put that in through the course of 2015. Clearly, our focus continues to be on direct sourcing.

I think we’ve redoubled our efforts in direct sourcing in the second half of the year with the new team in China, with an added impetus I guess from the events in the middle of the summer last year. And we are, of course, working very hard with Andrew Harrison and the central commercial team to mitigate cost inflation that’s coming through.

So I think what you’ve seen is more control over pricing, and push through and pass through, and better control over cost price inflation coming through as well. So, of course, we’ve seen that cost price inflation coming through but we’re able to pass that more through in the second half of the year in general merchanting.

And across the businesses, I think the general trend would be I think our ability to pass through in merchanting is pretty good. In contracts it’s pretty good.

In consumer, it does depend on what happens in market pricing, but I think we’re in pretty good order. Plumbing and heating is likely to be a bit more difficult, I think.

But, of course, you knew I’d say that.

Good morning, everyone. Emily Biddulph from JPMorgan.

I’ve got two questions, one sort of following on from the same pricing in the second half of the year. Do you have any sense of how much it impacted your –?

The extent to which you outperformed in the market, is the increase focused on pricing? Did it have any impact on – real impact on volume?

And then secondly, on your broad guidance for this year that you expect any declining volumes to be offset by price inflation, if we’re talking about – ignoring the effective gross margin here, but if we’re talking about volume decline, should we be expecting some negative operating leverage, or are there costs that you can chip away out there and…?

Okay. Again, I’m going to let – the broad impacts from Tony or Alan.

But in terms of GM, we will have definitely come off an outperformance to more around the market as we introduce Spinnaker. What it’s actually doing is identifying some of the work that we probably shouldn’t have been doing in the first place.

So it’s given us much more control, better visibility, and ultimately will be a useful tool in what is a difficult market to get pricing in, because as everyone will appreciate, there is an equation between putting pass through at 100% and how it affects volume. It’s a dynamic market and, therefore, our trading stance at the moment is to ensure that we get a good margin.

Now that could well change, but at the moment, the focus is very much about making sure we get the right returns.

Yes. And I think it’s worth thinking about the divisions because I think the dynamics are different for each.

Consumer had roughly 10% like-for-like growth in the first half and the same again in the second half, so no material change there in terms of VAR, volume growth really. Contract actually stepped up from 3% like for like to 7% in the second half, so certainly no impact there.

And I think the team are doing a fantastic job. John has already commented on GM, and particularly TP.

Plumbing and heating was more difficult. We achieved broadly flat like for likes in the first half and we stepped down to about minus 3% in the second half, so it was clearly more difficult.

I don’t think that was really around our trading stance, but that was just a very tough market.

Yes. The trading stance was specifically about the TP brand.

Howard Seymour from Numis. Two from me, if I may.

Firstly John, I’m trying to get some sort of feel for – apologies – from the market. You referred to this lag situation.

When we look at the game of two halves, this year was half 1 good, half 2 bad. Does that affect half 1, half 2 split in the current year?

Because you assume this year the comparators are better in the second half, but there’s obviously that lag effect. But do you see it could actually change the trading profile of the year this year?

Apologies, because I know it’s…

Yes. As I think Tony alluded to, we’ve built our plans around broadly a 10% reduction in housing transactions.

We saw in H1 around an 8.5% reduction year over year. We think it’s a weaker market as we move through Q1 into Q2.

But, Howard, we’ve positioned ourselves with a stance that we think we can deliver. We’ve got inflation coming through, volumes are potentially weaker in the more general smaller customer group, but Frank’s business will be determined on infrastructure and commercial spend.

And it is really – we’ve got to – we’ve made internal assumptions, but it’s difficult for me to want to share those given it is competitive, sensitive to our competition. I think we’ve given a bit of indication.

We normally say it lags around six to nine months and it’s broadly one-third. It is an art, not a science, but that’s really how we’re looking at volumes.

Thanks, John. And then secondly, and again it’s a bit short-term apologies, but in the context of the branch rollouts, etc., are you getting good returns back?

Is there any field that you’d stand back from in these expansion plans on the premise of just the uncertainties as opposed to what you see in the short-term?

So I’d probably couch that that we’ve always had quite high hurdle rates in terms of investment. And we stress tested those hurdle rates, and we will continue to invest in Toolstation, Benchmarx and Wickes, because even if things do get quite difficult, we can still get good returns.

So it’s one of those that we’ve tightened the knot, but we are still investing where we know we’re not going to regret investing.

Thanks John, thank you.

Priyal Mulji in Deutsche Bank. I’ve got a couple of questions.

So firstly, just on cost inflation, presumably there’s a bit of a lag between the time that your suppliers announce price increases and when they come through. Do you think you’ll be forward buying and maybe building up your inventory around H1, around that sort of time?

And linked to that, do you think, if you are doing that, that it gives you a relative advantage first than maybe some of the smaller players in terms of your cost inflation because you have more space to store that inventory? And then the second point was just on the non-cash impairment charge.

I know most of it was into plumbing and heating, but I noticed Tile Giant was in there as well. I just wondered if you could add more color on that and if there is any read-across for the more consumer businesses.

So if I take the stock levels and the inventory, we’ve always tried to take advantage of inflation gains and buy in advance, but we do a quick calculation in terms of whether it’s worth it. I think the inflation levels that are coming through on certain products, we will use that capital very positively and we will take, obviously, stock in in advance.

And that does give us a slight advantage, although the independents in particular are quite smart as well. So it’s marginal, the advantage, but what is important for us is there’s continuity of supply and making sure that if financially it’s worth our while, then we will build our stock on the back of price increases.

Tony, did you want to pick up on –?

Yes. So I think just on the stock buys as well, just to add in perhaps, our year-end stock numbers do include some investment buys in there as well, so buying ahead in 2016 in the prior year.

So that’s why we were so pleased with the cash generation in a sense because we were making sure we had some forward buys in to mitigate some of those cost price inflation issues coming through. So again, going back to the working capital management in the year, I think underlying was even further improved, so we’re pleased with that.

In Tile Giant, we’ve made a number of changes in the business over the last 18 months or so. We’ve given it its own distribution center.

We’ve done some restructuring in the multichannel presence that we’ve got in terms of consolidating to one effectively, two fascias online. The tile market is not easy.

There is more work for us to do, but with all these things, it’s an accounting adjustment in terms of impairment. It’s about the carrying value of the goodwill required, and we think it’s prudent and right to recognize an charge against that carrying value.

It has no impact on obviously the trading of the operation. It is a non-cash impairment.

But we look – of course, we look to improve the business. Unfortunately, with these technical accounting standards on impairments, you cannot take any credit for the work you plan to do in the forward cash flow forecast.

So even though we’ve got plans to improve the business, we can’t include those, the benefits of those projections in the business and, therefore – on the cash flow projections and, therefore, we have to take an impairment charge.

Andy Murphy, Bank of America. Just three quick questions.

First of all, on the consumer division, within Wickes and Toolstation, could you give us a flavor, either over the half years or through the quarters, how the growth rates of those businesses performed, if you can? Secondly, again within consumer, can you give us your thoughts on Bunnings and how their action is playing out, and what you might do to defend against that?

And then finally on the range centers, I noticed you’ve been active in this statement talking about optimization of the existing network and deferring the fourth center. So I was just wondering whether that perhaps implies that you’re working out that maybe you don’t need the fourth and that might free up some capital or some investment.

Our resident expert on Bunnings is Tony, and I’m not sure you want to give quarter on quarter at this stage.

No

But anyway, I’ll leave it to you, but I’ll pick up the range center.

Sorry. Shall I start?

Just with consumer, what we have disclosed, obviously, over 6% like-for-like growth in the first half and second half. We have not seen huge differences across the year, frankly, across the consumer bit; across Wickes or Toolstation.

It’s been pretty consistent throughout, so that’s encouraging that we have that underlying level of footfall coming in and customers are really buying into our – both our Toolstation and our Wickes propositions. So I don’t want to give the quarter-on-quarter numbers.

If you go back, you can see the quarter-on-quarters numbers from the press releases in the sense of the consumer division itself, but it’s been pretty consistent. And it’s been actually now pretty consistent, about 5 or 6 like for like, pretty much for the last three years.

So it’s been a constant growth. And actually, part of that comes from the fact that in Toolstation we’ve been opening broadly the same number of branches year on year and you get the same sort of maturity effects coming through.

But as we’ve said, and John said in the slideopened up 115 Toolstation outlets in the last three years. Of course, when you open them they create a drag on profitability, but on average, they’re only about 18 months mature, and the maturity curve looks like four or five years.

So there’s plenty of like-for- like sales growth, headline sales growth and profit generation to come through from those openings, but given the returns are so good, we think we should carry on.

Do you want to say anything about Bunnings?

They’ve got a site in St. Albans.

We anticipate they’re likely to open another couple of sites around St. Albans, Luton, that North London area.

They’re a very good operator. They put lots of stock in, as you know.

The stores look very similar to what they do in Australia. They have a different proposition to what we do.

They are very good operators, as I’ve said before. We know they will be now listening as well.

John Gillam, theoretically, has left Westfarmers but he’s still around and he’s in the UK at the moment, the guy that really drove Bunnings’ growth over the last 10 or 12 years in Australia. He’s a good guy.

So is PJ. So are the team.

And they’re tried to pinch one or two of our people, as you expect, which is giving us some more confidence we’ve got the right team, we’re doing the right things. But they’re a really good business.

They’re good operators. We like them.

But we’re not really modifying our trading stance, and I think that bears out to some extent in the continued like-for-like performance at the same sort of levels through the last three quarters when they’ve come into the market, or four quarters since they’ve been in the market. They’re good operators.

We won’t underestimate them, as I’ve said to you before, but we’ve got a clear plan and it’s our plan, and we’ll continue to execute. And if we carry on like we are, we’ll be in good shape.

And we aren’t complacent, but actually, two weeks ago, our number 1 store in Wickes was St. Albans, so we’ll see.

On the range center, and it’s probably worth just refreshing, we put these range centers down in Tilbury, Warrington and Cardiff, and we’re the first merchant to do this. We always said there would be a degree of learning, and the two principal things that the range centers do is they actually can feed, which we call replenishment, of small quantities into our small branches that can’t take the large.

But the actual gem that we’re really chasing is the extended range to the customer. So we do a replenishment, but the real focus is on extended range.

What we’ve learnt in the last 18 months is we can go further with Warrington, Tilbury and Cardiff. And the plans at the moment are to cover England and Wales with those three outlets and spend our money on OpEx, not CapEx.

And if we can get the range and the service, then we feel at the moment we can grow the business with those three centers and not open up Coventry. So it’s very much we’re still learning, but we’ve got 11% return from our range center project, and we’re heading for north of 20% as we – during 2017.

Paul Checketts from Barclays Capital. I’ve got three questions, please.

The first is a broader question. On the plumbing and heating side we’ve seen this real great disruption from online.

When you look at the rest of the portfolio, how do you feel? What is the potential for something similar to happen there.

What sort of speed could we see it happen, and how well positioned are you guys? I appreciate that’s a broad question, but interested in your thoughts on that.

And when you talk, John, about being channel agnostic, you’ve highlighted you need to invest in the systems. If you look forward a few years, do you feel that the physical footprint in terms of DCs and branches is future proof for this, or will that need some re-engineering?

And then the last question relates to the cash flow. The working capital was flat year on year despite sales being up 5%.

Is that the maturity of some of the supply chain and DCs, and how much further is there to go, please?

Go on, Paul. What was your second one?

It was about the physical footprint.

Yes. Okay.

Well, I’m going to let Alan actually do the working capital, so I’ll give him a bit of notice. On the physical footprint, I think what we anticipate, and really difficult to think through eight years to 10 years out, but we think our branches will be smaller, we think they can offer a wide range and be fed from our primary distribution and our range centers in a more effective way, offering more product, a wider range, a faster service, but tend to be thinner in terms of stock but wider at the branch.

So we think we can actually get an advantage of having smaller footprints, but those pickup points we feel are going to be even more important for both click & collect and the collecting customer. We see that in high concentration areas like London, and we still feel that that’s going to be a feature as we go forward.

I wrote P&H versus heavy. What was?

[Indiscernible]

I think we’ve all been impressed with the growth of the bathrooms online, and in particular the Plumb – the Victoria Plumb and – Victoria Plumb. And we have our own heavyside plumbing and heating, online heating side.

So the propensity has really been very strong, and combine that with fixed price operators like Toolstation and Screwfix, and you’ve got quite a lot of pressure coming in. I think it’s a lot harder to ship a pallet of paving slabs than it is a bathroom, just a weight situation.

So I think there are some natural barriers, but I don’t think we can afford to be complacent. One of the longer-term plans of our range centers is why wouldn’t we put them online and they deliver more local.

So I think what we’re trying to do is cover off those eventualities as they evolve. I don’t think at the moment we’re seeing the same trend with the more heavyside, or an 18 foot, a 4 by 2, is quite difficult to move around.

But we think we’ve got the capability to be able to enter that as we get better systems and better visibility. Working capital?

Yes. So on the working capital, Paul, as Tony alluded to, we took just over two days of sales out of working capital overall in 2016.

That’s despite, going back to one of the earlier questions, some forward buying of inventory during the fourth quarter. I think you are seeing benefits from the rationalization that was done in areas likes the Wickes supply chain.

I think you are seeing benefits from the range centers and the primary distribution hubs as well to reduce inventory. We saw benefits from creditors, again partly linked to forward buy, but also by managing the way that we pay to terms.

We also saw the benefit of that on trade credit where a lot of work has been done to improve the trade credit area within the business with a new platform that’s coming on place – coming into place this year. So looking forwards, I think there is more we can do around inventory, so my early impressions are there is a lot of inventory around in the business.

That will be aided by the course of some of ERP implementation in particular, which will give us much better visibility of where stock sits. And I think we will see benefits on an from trade credit management.

Now it could be that trade debtors continue to increase, but that may be because we’re using that competitor advantage we have in being able to extend credit to our customers to drive volume within the business, within an appropriately risk-managed environment.

Just I know you don’t usually like to give specifics, but wonder if you can give us any clues on what you saw in January and February in terms terms of like-for-like sales. Would it be reasonable to assume sales were flat with price offsetting volume as you’ve given for the guidance for the full year?

And then secondly, just as you look for the full year in terms of expansion, I think you had 1.6% benefit to sales in 2016. With your current macro view, is that where you’d expect to end up for 2017 as well?

I think we’re broadly in line with new space. On the like-for- likes, Aynsley, you are right.

We’re doing all right in January and February. I think January and February are two very difficult months to read, but we’re comfortable where we are.

The Three questions, if I can, John. Firstly, can you just update us a little bit in terms of your new housing sales?

Obviously, we can get a pretty good idea out of the contract side or a reasonable idea from there, but maybe for the whole Group you’d give us a percentage there, and also how it’s performed relative to housing stance last year. The second one was on employees.

Maybe there is some detail that I’ve missed in the results, but I’m not sure if there is. But if you can update us as to what happened to numbers of employees and how you see that moving in 2017.

And the third one was, I suppose, coming back to competitors. I’m mainly interested in hearing about what the local guys are doing in the general merchanting side.

Have you seen any changes in their behavior in the last six months or so? John Carter.

As we expect from the new housing for the I have not seen the date so.

I think the only thing we’d say, you picked up on the point, Clyde, which is CCF and Keyline performance have been particularly. There was a funny period in the middle of last year where there’s some delayed, but that seems to have come back, and you will see some house builders there I think in fine form.

And you’ve seen our growth in CCF on a like-for- like basis where we’re taking share, and also it’s not a poor market. So I think that’s really difficult, I would say.

Difficult to be precise because most of the new build is sub-contracted, so you’ve got to collect it from each house builder from the sub- contractors. So it’s always a guess.

I don’t think there’s a material change; maybe slightly up in line with the output of the big 10, but nothing material. In terms of our employee numbers, I’m not seeing specifically the numbers, but we did announce in the third quarter, obviously, the branch closures.

We try and re-deploy where we can, but I would say the numbers probably are level from where they were this time last year where there’s some out, some in. Have you got them?

Yes, I’ve got them. I won’t give you the exact numbers, but obviously, we announced around 600 redundancies.

A lot of those have happened, but not all of them. And obviously, we had a gross 82 new branches in the year, so our headcount is -- on a people basis is up just over 1%.

But it’s not a huge number and obviously there will be -- the timing of those redundancies will come through in the first quarter of this year as well. So certainly not materially growing headcount, that’s for sure.

And I think on the independent builders, I’ve always looked at them as, I suppose, a group in the really good performers and those who are a bit weaker. I think the weaker will struggle a little bit more this year, but I think the good will continue to do well.

They are our benchmark in terms of how we measure ourselves. The best independent in each town is normally the best operator.

So there’s nothing material that we’ve seen that’s different.

Just a couple of questions from me, please. My first one is on kitchens.

If you could -- you flagged that you had a robust fourth quarter for benchmarks. Can you give us your like-for-like trend in that if you can versus what the market has been doing?

It was good, and it was better than the sector leader

And the second one is on disposals. In terms of the options that you have in turning around your underperforming business, specifically pointing to the plumbing and heating, would you consider partnerships or disposals?

If you can give us any color on what are you there?

We will be very thoughtful about investing, disposing closing and joint ventures. We want to get the best return from our capital, and at the moment, it’s not delivering what we want.

So working with Tony, we’ll be very thoughtful and try and come up with a solution that gives us the right return.

Just two questions around the consumer area. Firstly, quite interested by the slides of the three years, and there’s a notably increased the lease-adjusted returns in consumer from 3% to 2%.

That so when you talk about the key areas of reinvesting, or sorry, key areas of investing in the future, two specifically of the three were obviously Wickes and Toolstation. On the basis that they give you the best returns, how do we measure that?

Because if you look at the straight numbers, as it were, as we see them, it isn’t on a lease-adjusted basis, it isn’t on the margin. So how do we know or how do we judge that that is a good area for you to be investing in?

If I start, and I’ll leave the more technical to Tony who will tell you the answer. We’ve increased the lease- adjusted returns in consumer from 6% to 5%.

That’s a pretty decent basis point improvement in our three years. It has a big drag of goodwill from obviously the purchase in 2004.

So if you strip the goodwill out and overlay the profit, the returns are really good. And guess what.

When we actually invest in the business, with the capital we’re deploying, we’re getting really good returns. But you can’t obviously -- we have to report it as goodwill.

Okay. And the second question I had was just on Toolstation.

There seems to be an amazing race for the finish line on Screwfix and yourselves, unbelievable rate of expansion in outlets, etc. Can you just give us some confidence of how much longer that can go on?

And when we get near to any form of saturation which may well be beyond my lifetime, I don’t know, but --.

Or ours...

What does the business actually, what do you think it actually settles down as a returns business?

So just coming off your earlier point as well, perhaps just to try and give you a bit more flavor, the -- excluding the rental adjustment for leases in Wickes and Toolstation which is on an eight times basis around GBP900 million, so about GBP900 million of lease-adjusted capital in there. The goodwill number in Wickes and Toolstation is about GBP950 million.

We have about GBP200 million of fixed assets, so we’re now generating GBP100 million of profits off GBP100 million of fixed assets. We can’t do anything about -- clearly, we don’t want to do anything about that goodwill, that GBP50 million, of which it’s roughly GBP50 million for Wickes and GBP500 million for Toolstation when we acquired the business.

So that’s the asset base. So I think the best way to look at it is the growth in absolute profits in pound notes relative to the capital we’re spending.

And as John mentioned, we’ve spent reasonable chunks of capital but we’ve grown our profits by nearly GBP40 million over the last couple of years. So that relative profit growth to capital deployment to absolute cash capital deployment I think is the best measure, and that is what we describe our margin return on capital employed.

So that’s definitely the best way to look at the busines s. We think we can for very, very good returns.

That drives the profit growth, but it doesn’t materially move over GBP2 billion of assets that we’re carrying in terms of lease-adjusted capital. So unfortunately, we’re carrying the lease-adjusted capital because we need trading sites, and we’re carrying the best part of GBP50 million of goodwill.

So that’s I think the overall picture. In terms of this unbelievable race, it’s interesting that -- we admire Screwfix.

You know that we’ve Mark Goddard-Watts in the business who founded the business with his family. He’s still with us after nine years of being with us.

He’s in the Netherlands building our business across Europe. And the team that we’ve got in Toolstation and who has been very stable over the last three or four years.

But we’ve been growing the business well, but we are starting from about 20 years behind Screwfix but we’re working hard to catch up, I guess. And we admire the Screwfix business though.

My guess is a profits because of sales of 1.3 for the probably GBP140 million of profit. We are actually delighted that a guy called James Mackenzie, who was the Commercial Director in Screwfix, is joining us in April of this year, so he’ll be joining us next month.

They are good businesses and they’re growing rapidly. I think Screwfix have said they’ve got an ambition to get GBP700 million, but their stated ambition, I suspect, is more than GBP700 million.

So if you look across the market, I think the best way to look at the business is probably Bristol is the most mature catchment. There will be at the end of this year 11 Toolstation and Screwfix branches in Bristol for a population of about 100 million , so one for less than 50,000 head of population.

If you extrapolate that across the country, you’d be in the context of 1,200 branches, 1,300 branches, maybe 1,400 branches. There are currently between ourselves currently between ourselves and Screwfix approaching 800, so I think there’s more room for growth.

We will not slow down our pace of opening this year. In fact, we’ll certainly attempt to accelerate it, and I think Screwfix will be doing the same.

So they are a high-returning businesses. They stock wide ranges of products.

They’re very attractive to customers. They’re very low capital intensity, as you can see in the returns.

John mentioned 50% margin returns that the investments were making, so we should keep going. It doesn’t feel to me as if there's going to be a slowdown for the next two or three years

Else don’t this is enough finished to.

I looks to be curious from [Indiscernible] Stockdale. A couple of questions.

First of all, today the purchasing managers’ construction survey came out referring to a number of contracts being delayed as cost inflation had to be reconsidered. It's a question for the contract side.

Are you seeing any evidence of that coming through? That's the first.

And the second is on plumbing and heating. We had probably the coldest January I can remember in ages.

My boiler conked out and so did my next to neighbors has travel like close standing and heating engineer, took two days to come to see us because he said he's run off his feet. Did you see any temporary evidence of a pickup in trading conditions in January?

January was good for us at a local level. We never talk about the weather unless it's absolutely essential, but the sunnier it is, the colder it is, the more plumbing than anything is for sale, and less bricks by the way , because lay a brick under minus 3.

I’ve got Frank with us but -- I'm not going to take about 15 minutes and give you breakdown by county, but I think we definitely saw a little bit of a lag after June, and I think we're anticipating, we re trying to highlight that our contracts business is great, but it is open to the vagrants of whether contracts are awarded, start – or infrastructure projects start or delayed. I don't think we are seeing, Frank, anything extraordinary, but it is a mixed picture, isn't it?

Contract Merchanting Division But Frank's year will be dependent on those sort of projects, and if they do slow up, then ultimately we can still keep our market share, but we'll be affected by volume Look the very, very…

Charlie Campbell, Liberum. Just two questions from me.

I just wonder if you could give us, perhaps without numbers , but just some details around London in 2016, because that 's obviously an area happened in London in 2016. And then the second question, again a macro where housing transactions have already adjusted; so just to get an idea of what happened in London in 2016.

And then the second question, again a macro question around remortgaging activity. So that's been dormant for a long time, but a lot of activity November, December and January .

Clearly, we've got very used to thinking about housing transactions as the only driver, but clearly, if people are remortgaging and widening their principal, then there is maybe a bit more money around for RMI than there has been. So just was wondering if that remortgaging trend is something that we ought to consider, whether it's something that you're considering.

So on the remortgaging, Charlie, I absolutely agree. I think one of the things we underestimated during the late 1990s and the early 2000s, up to really the crash, was how much of remortgaging was actually going into extensions and other.

So I think it's something that we would definitely watch, and I think we over that period definitely benefited. It's difficult to track, but I think you're absolutely right.

It's not just housing transactions if the remortgaging comes into play. I think London remains buoyant.

I think if you -- any building like this any building like this, and count the cranes, there's still a lot of activity in London. I think on the domestic house side of things, it's definitely slower, and I think we would have seen a little bit of turnover come off across the TP network.

But Frank's is really reliant on the bigger buildings. So overall , it would have reflected what's happened with the housing transactions.

John

John Messenger, Redburn. I think it's two questions, or two-and -a-half, if I could.

First is, it was mentioned earlier ERP , and how important that's going to be. Can I just understand the timing of that?

And with that also it's cost in terms of really the wider question on CapEx. I think that you're guiding to GBP170 million to GBP190 of that range being

Is GBP50 million genuine maintenance CapEx and, therefore, there is GBP120 million as we look forward? And what is in that GBP120 million, just to have a bit more flavor?

And how much of that could be discretionary if the world is tougher or actually gets to surprise on the upside? And the only other one was just when we look at the Group's cost base, so everything below gross down to underlying trading profit, that grew about 6.5%, 6.4% last year just headline.

Clearly, there were things like CCF, the extra costs; there was the annualized costs of the HRCs. When you look at the business and your modeling of the top line view for where we are now, what is the ways goes have people got baked in?

Or what have you decided to pay people annually? And what are there any of the one-off pressures in that cost base?

Just to have a think about where that ends up as headline growth rate for 2017.

Well, you're not going to be surprised Alan and Tony burnt the midnight oil waiting for that question, so I'm really pleased they didn’t waste their time. In terms of the ERP system, this is a big step for us, so actually doing it right is more important than doing it quickly.

So we have a very big team, primarily operators of the business rather than IT. It's a management change project rather than an IT project.

We would hope to be in a position that during Q4 we've taken a small business and installing it in 2018. And then depending on how that goes, we've got a progressive rollout over a two-and-a-half year, maybe three-year period.

We may be able to close that, John, but this is very extensive. And ultimately, it's about getting it right.

There are many a business has been screwed up with change of systems. In terms of the CapEx, and I'm going to let the guys talk about it because this is probably one of the first projects that's going to go into the cloud.

So this isn't about buying big processors. This is more around licensing.

And we are giving the accountants a bit of a challenge in terms of how we present it. Alan, did you want to

At this stage, it's included within the CapEx, the project, John, for the year. From an accounting point of view, some of that may not appear as an intangible capital investment.

It may appear as a prepayment in the balance sheet just because it’s a cloud-based system. So the accounting practice is evolving currently on that.

To the second part of the question on how much is discretionary, there is some discretionary CapEx in there, but bear in mind things like Wickes store refits, new stores investing in online, and investing in the store refits. Toolstation opening for included within that I will ready to commit above there is no regrets as I look at this from the fact that they're committed because we demonstrated in the past and we've shown you today the returns we can generate from those.

And I think Tony dealt with that earlier with the question around Toolstation as well. Tony Buffin

Yes. And just perhaps on the cost growth to finish off, we do expect it to be lower in 2017.

As you'd expect us taking a cautious stance to the volume and sales in the marketplace, you'd expect us to be focused on costs. Of course, and again back to Alan's point, there will be a full -year effect of some of the investments we've made in 2016 rolling into 2017, and there will be a part-year effect of some of those investments we continue to make in 2017 So again, back to Wickes, Toolstation, Benchmarx, and a couple of other branch openings as well.

If you take the divisions, I certainly think, not trying to put Frank on the hook, but the cost growth this year was higher in contracts because of that increase in capacity. Of course, that will annualize.

Well, it's annualized now, so we'd expect the cost growth in percentage terms to be lower next year. We’re very focused on cost in general merchanting.

Consumer, I suspect costs will be back to the points about part-year and full-year effects and branch openings, and P&H we'll be taking a look at. Actually, Paul Tallentire I think has done a really good job on costs in the last couple of years, as you'd expect with very modest sales growth, but he will not be leaving our plumbing and heating alone, of course.

But there is more work for us to do and we'll explain more about that in the summer.

Probably an appropriate moment to go back to Emily's question as well on operating leverage in 2017. So if we start with what we're trying to say about the volume piece and let's be clear on that, what we're saying is if you take the assumption of housing, secondary housing market transactions declining in the – 8 to 10% was the sort of range that we're talking, 1.2 to 1.1, you would expect to see some knock-on volume impact within the business.

We also have the cost inflation on the other side. So put those two together, the underlying feels like they're plus or minus a couple but they're netting each other out.

There is an anticipation that because of new space there will be some headline revenue growth still within the mix. So when we look at that from an operating leverage impact because volumes are down because we've got some underlying volume growth in the absolute sales number that's still going on.

On the topic of costs, we're acutely conscious of that, and I think the restructuring that was announced in Q3 2016, and that we've talked about today again, that was to get ahead of the curve to make sure we're in the right place on costs. We also know internally where we would look to take out more costs should that be required during the year.

So it is an area of management focus, particularly for me as I come into the business to know with the management team where those levers are should we need to take them during the year.

I'm just keen – Is there any questions on the phones? They've waited very patiently.

Okay. That's good.

So, one last question from the floor? If not, thank you very, very much for your time.