Ferguson Annual Report 2017

Plain-text annual report

Welcome to Ferguson plc Annual Report and Accounts 2017 Contents In this year’s report 02–11 What makes Ferguson a great business 1 2 3 4 5 We operate in attractive, fragmented markets We work in an industry with compelling growth opportunities We offer our customers unrivalled scale We recruit and retain the best people, with a passion for customer service We use technology to give customers choice and ﬂexibility 13 Well positioned for future growth Gareth Davis Chairman 12 16 Another good year Ongoing revenue** Revenue Ongoing gross margin** Ongoing trading proﬁt** Proﬁt before tax Headline earnings per share*** 2017 Change £14,878m +22.5% £15,224m +21.3% 28.9% +0.4% £1,032m +24.8% £1,180m +74.8% 288.9p +23.1% Continued strategic development John Martin Group Chief Executive Fulﬁlling customer wants Attractive growth opportunities Excellent execution IFC*–49 Strategic report 50–84 Governance 85–137 Financials 138–146 Other information Governance overview 86 Group income statement 138 Five-year summary 87 Group statement of comprehensive income 87 Group statement of changes in equity 88 Group balance sheet 140 Group companies 142 Shareholder information 145 Group information 146 Forward-looking statements IFC Contents 01 Welcome to Ferguson plc 51 52 Board of Directors Highlights 54 How the Board operates Chairman’s statement 56 Ferguson’s governance structure Ferguson at a glance 57 What the Board has done 12 13 14 16 Group Chief Executive’s review 19 Marketplace overview 20 Our business model 22 26 28 34 38 42 Key resources and relationships Key performance indicators Regional performance Sustainability Financial and operating review Principal risks and their management during the year 89 Group cash ﬂow statement 58 Evaluating the performance of the Board of Directors 90 Notes to the consolidated ﬁnancial statements 59 Relations with shareholders 128 Independent auditor’s report 60 Audit Committee 64 Nominations Committee 66 Directors’ Report – other disclosures 69 Directors’ Remuneration Report to the members of Ferguson plc 134 Company proﬁt and loss account 134 Company statement of changes in equity 135 Company balance sheet 136 Notes to the Company ﬁnancial statements * IFC – Inside front cover. ** These are reported on an ongoing basis and represent Alternative Performance Measures (“APMs”), see page 12 and note 2 on pages 91 and 92 for further information. *** Headline earnings per share is an APM, see page 12 and note 2 on pages 91 and 92 for further information. Strategic report Governance Financials Other information Welcome to Ferguson plc What’s in a name? Our new name recognises the size and importance of Ferguson in the USA which today generates nearly 90 per cent of the Group’s trading proﬁt. It’s also about the Ferguson culture that puts people and customers ﬁrst, resulting in the highest levels of quality, service and efficiency for over sixty years. Our customers rely on us every day and our specialist products and services are used in almost every stage of commercial, residential, industrial and municipal development. We help them ﬁnd the best combination of services and solutions to save them time and money. Whatever the challenge, we work closely with our customers to help them run their businesses more effectively and save them time and money. Over the following pages we celebrate our new name by focusing on the strengths and opportunities inherent in our US business which we believe will generate sustainable proﬁtable growth and strong returns for our shareholders. Welcome to Ferguson plc. Ferguson plc Annual Report and Accounts 2017 01 1 What makes Ferguson a great business We operate in attractive, fragmented markets As the largest distributor of plumbing and heating products in the USA, we hold leading market positions in the majority of our businesses. These markets are typically highly fragmented with few large competitors and we compete with many small local distributors. Consequently, there continues to be excellent opportunities to grow our business geographically, particularly in large metropolitan areas across the USA. Page 19 02 Case study Blended Branches is the Number 1 distributor of plumbing and heating products in the USA with an estimated market share of 17 per cent. There are only three national competitors with a market share above 5 per cent with the majority of supply houses being small local distributors. Market share varies across the USA from low single digit in some states to high twenties in others. There are numerous opportunities in highly populated regions in the USA for us to grow our business. For example in the north east Ferguson has relatively low market share with many huge metro markets still relatively unpenetrated. These include New York and Boston which are some of the largest metro markets in the USA. We are now targeting accelerated growth plans in these regions and many others across the USA. For information on the USA business units and our international operations see pages 14 and 15. 3There are only three national competitors with a market share above 5 per cent 03 2 What makes Ferguson a great business We work in an industry with compelling growth opportunities Our strong service ethic combined with scale advantages in logistics, supply chain and technology, means we have consistently gained market share to generate strong proﬁtable growth. Acquiring regional or local competitors where we can rapidly integrate them into our supply chain makes bolt-on acquisitions highly attractive. Other growth opportunities lie in developing new adjacent businesses such as Facilities Supply and B2C e-commerce where we can utilise our existing skills, capabilities and infrastructure. Pages 17, 19 and 40 04 Case study Our Facilities Supply business provides our customers with products and services used in the repair, maintenance, replacement and renovation of their facilities with key product categories including janitorial supplies, hardware, heating ventilation and air conditioning (“HVAC”), lighting, plumbing, paint and safety equipment. The newest business group in the USA operates in a c. $90 billion addressable market that was historically served by a highly fragmented, localised base of competitors. Our aim is to become the market leader and we are well positioned to capture market share through our product mix, national network, technology, supplier relationships and talent development programme. Growth will continue to be enhanced through both organic business development and targeted acquisitions that add to our geographical capabilities, expand our customer base and bring talented associates into the business. We strongly believe we will gain market share and grow proﬁtably in this attractive market. $90bn The Facilities Supply market in the USA is highly fragmented and estimated to be worth circa $90 billion 05 3 What makes Ferguson a great business We offer our customers unrivalled scale Our highly efficient national logistics and distribution network enables us to achieve volume discounts from suppliers and the highest levels of availability for our customers on a broad range of products. We continue to invest in the latest technology solutions to make us an even more efficient business and to save time and resources for our customers. Pages 20 to 25 06 281,000 The new 281,000 square foot facility will support the high growth rate in the region Case study Our Texas distribution hub based in Euless, near Dallas, was at capacity due to increasing growth in the region over the last two years. The logistics operation was being run from two separate buildings, with more than 20 storage containers, and an appliance warehouse in the Dallas Fort Worth region. A solution was found in a new Market Distribution Centre (“MDC”) which centralises the “ﬁnal mile” logistics to customers for the whole region from one large location. The new 281,000 square foot facility will support the high growth rate in the region with more capacity and better operating efficiencies. Ideally situated in the heart of the market, the MDC drives scale and also enables local branches to concentrate on sales and service to customers. This is Ferguson’s third MDC installation in 18 months with two others now fully operational in the New York and San Francisco metro regions. 07 4 What makes Ferguson a great business We recruit and retain the best people, with a passion for customer service The knowledge and service our associates provide is what our customers value. Our dedication to provide unrivalled service is the key Ferguson differentiator and it will continue to be our focus by providing the best trained workforce in the industry. Employee engagement is key to delivering outstanding service and our highly-structured career development programmes, together with specialist training for our associates, is a primary driver behind achieving industry leading net promoter scores. Pages 22 to 24 08 +3,000 Over 3,000 current Ferguson “University” Graduates in the USA Case study In the USA, our Industrial Group welcomed their ﬁrst cohort of trainees at a newly designed, state-of-the-art training facility in Richmond, Virginia. The Industrial Group University is a ﬁve month, concentrated training programme designed to provide trainees with knowledge and hands- on experience, allowing them to successfully integrate into our sales force. Centralising the training programme allows trainees to focus on the learning process, while improving the speed to efficacy. Trainees follow a speciﬁed curriculum which aims to accelerate their knowledge of products, business systems, sales processes, industry standards and safety regulations while learning about our culture. Upon completion of the programme, trainees are well positioned to contribute as highly functional sales associates and deliver the excellent customer service expected as a sales associate. For more information on talent development see page 22. 09 5 What makes Ferguson a great business We use technology to give customers choice and ﬂexibility E-commerce has grown rapidly with 22 per cent of revenue in the USA now generated online. Our omni-channel approach gives our customers the choice of how they want to do business with us; through traditional bricks and mortar, for consultations and to interact with products, or through the latest e-business platforms where we offer virtual help and advice and access to our product range 24/7. We are continually developing and improving technology to make it quicker and easier for our customers to do business with us. Pages 17, 24 and 25 10 Case study Like the rest of Ferguson, the HVAC business is making rapid progress converting customers and integrating our online channels into their business. 27 per cent of HVAC revenue is already generated from online channels and this grew 20 per cent last year. This included an increase in system-to-system integration that creates many efficiencies for our customers including placing orders and managing their accounts online. Many HVAC contractors have installed order processing systems which are integrated with their general ledgers. We are able to integrate them with our own order processing system to save our customers time and money. E-commerce makes us more efficient with fewer manual processes and customers order more when they purchase their products online. 11 27%HVAC is generating 27 per cent of its revenue from online orders Highlights Another good year for the Group In 2016/17 Ferguson delivered good revenue and trading proﬁt growth supporting our commitment to improve shareholder returns. £14,878m Revenue* +22.5% £15,224m Revenue +21.3% 353.4p Continuing basic earnings per share +92.8% Ongoing operations* 28.9% Gross margin* +0.4% Continuing operations 29.0% Gross margin* +0.4% 288.9p Headline earnings per share* +23.1% £1,032m Trading proﬁt* +24.8% £1,180m Proﬁt before tax +74.8% 110p Ordinary dividend +10.0% * The Group uses Alternative Performance Measures (“APMs”), which are not deﬁned or speciﬁed under International Financial Reporting Standards (“IFRS”), to provide additional helpful information. These measures are not considered to be a substitute for IFRS measures and are consistent with how business performance is planned, reported and assessed internally by management and the Board. Unless otherwise stated, all ﬁnancial information on the inside front cover to page 49 of the Strategic report are reported on an ongoing basis. Ongoing is an APM and excludes businesses that have been closed, disposed of or held for sale. For further information on APMs, including a description of our policy, purpose, deﬁnitions and reconciliations to equivalent IFRS statutory measures see note 2 on pages 91 and 92. 12 Ferguson plc Annual Report and Accounts 2017 Strategic report Governance Financials Other information Chairman’s statement Well positioned for future growth 2016/17 has been a year of substantial progress under the stewardship of John Martin in his ﬁrst year as Group Chief Executive. The Group has again delivered a good set of ﬁnancial results and John has provided fresh impetus to the rapid execution of our strategy, in particular prioritising investment and focus on our largest growth opportunity in the USA, commencing the transformation plan in the UK and the Nordics disposals. Gareth Davis Chairman Key highlights Good trading performance Orderly succession completed of Group CFO and USA CEO Increased total ordinary dividend to 110.0 pence (2015/16: 100.0 pence) and share buyback of £500 million Name change Let me start out by welcoming shareholders to this the ﬁrst Annual Report of Ferguson plc. We changed our name from Wolseley plc to the name of our business in the USA on 31 July 2017. We strongly believe that the Ferguson name is much more reﬂective of the Group today with 89 per cent of our trading proﬁt generated in the USA. Board changes Mike Powell joined the Group as Chief Financial Officer (“CFO”) on 1 June 2017 and he brings a wealth of experience having worked in a variety of senior ﬁnance positions. He has spent many years running large businesses in North America which will stand him in good stead in his career at Ferguson. Dave Keltner’s appointment as Interim CFO last year, after 10 years as CFO of the USA, enabled us to conduct a thorough search for a suitable long-term CFO and execute an orderly handover of responsibilities to Mike. Frank Roach, formerly Chief Executive of the USA, also retired this year. Frank had a remarkable career with Ferguson, joining the business 41 years ago. In particular, his tenure as Chief Executive for the last eight years has been outstanding, achieving sustained rapid growth and record trading margins. On behalf of the Board I’d like to thank both Frank and Dave for their signiﬁcant contributions to the Group’s success and wish them both long and happy retirements. Kevin Murphy succeeded Frank on 1 August 2017. Kevin joined the business in 1999 and spent the last 10 years as the Chief Operating Officer of the USA. He has a great track record of driving proﬁtable growth and a deep understanding of the business which makes him the ideal Executive to drive our future growth and development. While the Group has made excellent progress in developing our e-commerce platforms, the Board is aware of the need to stay vigilant to future potential threats and opportunities in the digital space. Nadia Shouraboura was appointed as a Non Executive Director on 1 July 2017 and has spent her entire career working in and running large international e-commerce businesses including eight years at Amazon.com Inc. Nadia will provide support, challenge management and assist in capitalising on the signiﬁcant opportunities in the years ahead. Governance The Company remains UK-listed and meets the requirements of the regulations published by the UK Government concerning narrative and directors’ remuneration reporting. We continue to meet these disclosure requirements, monitor developments and adopt best practice in corporate governance. We describe how we have applied the UK Corporate Governance Code’s main principles in the Governance section of this report on pages 50 to 84. The Board places great emphasis on providing clear and transparent reporting and believes this Annual Report is fair, balanced and understandable. Shareholder returns The Board is committed to maximising long-term shareholder value. We are recommending a ﬁnal dividend of 73.33 pence per share (2015/16: 66.72 pence per share), to be paid on 1 December 2017 to shareholders on the register at 27 October 2017. This will bring the total dividend for the year to 110.0 pence per share (2015/16: 100.0 pence per share) representing a year-on- year increase of 10.0 per cent. Our investment priorities remain focused on achieving organic growth, funding the ordinary dividend through the cycle and investing in bolt-on acquisitions that meet our stringent investment criteria. The Board has a progressive dividend policy for future payouts, with the aim of increasing dividends in line with the long-term underlying growth in earnings. Any surplus cash after meeting these investment needs will be returned to shareholders. Reﬂecting management’s conﬁdence in the business and the continuing strong cash generation of the Group, the Board considers that the Group has surplus cash resources available. The Group will now commence a £500 million share buyback programme with the intention to complete this within the next 12 months. Our balance sheet remains strong and the Group will continue to target net debt in the range of 1x to 2x EBITDA, consistent with investment grade credit metrics. People On behalf of the Board, I would like to thank all our associates for their hard work, enthusiasm and dedication throughout the year. It is the service they provide that delivers continually improving results for the Group and creates value for customers, suppliers and shareholders every year. Gareth Davis Chairman Ferguson plc Annual Report and Accounts 2017 13 Ferguson at a glance The shape of our business today Ferguson plc is the world’s largest specialist distributor of plumbing and heating products. Today the business is primarily located in the USA serving mainly repairs, maintenance and improvement markets. We are in the process of disposing of our Nordics business which has been classiﬁed as discontinued (see note 8, page 98). Revenue £11,824m 8.0% Trading margin* 23,986 Associates 1,423 Branches Key brands USA Business units 5 4 3 2 Revenue by business unit 1 Blended Branches 2 Waterworks standalone 3 B2C e-commerce 4 HVAC standalone 5 Other (Industrial standalone, Fire and Fabrication and Facilities Supply) Blended Branches Provides plumbing and heating solutions to customers across the residential and commercial sectors for Repairs, Maintenance and Improvement (“RMI”) and new construction. HVAC standalone Distributes heating, ventilation, air conditioning and refrigeration equipment to specialist contractors, predominantly in the residential and commercial markets for repair and replacement. 1 60% 16% 7% 7% 10% Waterworks standalone Distributing pipe, valves and ﬁttings (“PVF”), hydrants, meters and related water management products alongside related services including water line tapping and pipe fusion. B2C e-commerce Sells directly to consumers via websites predominantly using the product range and distribution network of the Blended Branches business. The majority of our B2C business is conducted through www.build.com. Industrial standalone Distributes PVF products to industrial customers. Fire and Fabrication Fabricates and supplies ﬁre protection systems primarily to commercial contractors for new construction projects. Facilities Supply Provides products, services and solutions to enable reliable maintenance of facilities across multiple RMI markets. * Trading margin is an APM, see note 2 on pages 91 and 92 for further information. 14 Ferguson plc Annual Report and Accounts 2017 Strategic report Governance Financials Other information Canada and Central Europe 7% UK 14% Group revenue Canada and Central Europe 4% UK 7% Group trading proﬁt USA 79% USA 89% 4 3 Our end markets 2 6 1 5 7 1 Our customer mix 2 4 3 1 Residential 2 Commercial 3 Civil/Infrastructure 4 Industrial ~50% ~35% ~7.5% ~7.5% 13% 1 Building contractors 2 Plumbing and heating engineers 22% 3 Utilities 16% 4 Heating, ventilation and air conditioning 5 Industrial 6 Mechanical contractors 7 End-users 8% 11% 22% 8% UK £2,012m 3.8% Revenue Trading margin* Canada and Canada and Central Europe Central Europe £1,042m 4.3% Revenue Trading margin* 5,900 Associates 642 Branches 2,862 Associates 245 Branches Key brands Key brands Ferguson plc Annual Report and Accounts 2017 15 Group Chief Executive’s review Continued strategic development I am pleased to report a good ﬁnancial performance in 2016/17 with all of our ongoing businesses ahead of last year and a particularly pleasing result in the USA where we achieved good trading proﬁt growth. We also made rapid progress with our strategic development focusing more of our resources on the USA to accelerate proﬁtable growth. We’re continuing to work hard to improve returns in the international businesses, particularly in the UK, and to complete the previously announced disposal of our Nordic business. John Martin Group Chief Executive Group revenue was 6.0 per cent ahead of last year on a like-for-like basis at £14,878 million What’s been the highlight of the year? I began my ﬁrst year as CEO with two months visiting our operations across the Group and listening to our associates. Their enthusiasm for serving our customers to the highest standards and furthering our strategic objectives is extremely motivating. Their passion for our business and relentless focus to improve it makes the Group what it is today: the largest and most successful distributor of plumbing and heating products in the world. These results are a testament to their commitment. How did the Group perform this year? Ongoing revenue of £14,878 million was 22.5 per cent ahead of last year (2015/16: £12,146 million) and 6.0 per cent ahead on a like-for-like basis*. Our gross margins were 40 basis points ahead of last year as we continue to focus on a better mix of higher value-added products and services and improving our purchasing terms. The Group’s operating expenses were 10.1 per cent higher at constant exchange rates* which included 2.6 per cent from acquisitions. Ongoing trading proﬁt was 24.8 per cent ahead of last year at £1,032 million (2015/16: £827 million) which included a £122 million beneﬁt from foreign exchange movements. Statutory proﬁt before tax of £1,180 million (2015/16: £675 million) is after exceptional gains from disposals and losses from impairments and restructuring costs. To read more about our ﬁnancial performance see pages 26 to 33 and 38 to 41. Our ﬁrst priority is to ensure that we capitalise on this opportunity. However, that doesn’t mean our international businesses are not important. Whilst they are smaller, they make an important contribution to the Group. They do not detract from our focus and we will continue to develop and invest in them too. Why did you change the name of the Group to Ferguson? The majority of our associates work in the USA, which also serves nearly 800,000 customers so it made sense to change and align the name of the Group with our largest operation. The name change will help us continue to raise our proﬁle in the USA and establish the strongest connection possible between our stakeholders and our market leading brand there. Will the Group eventually operate exclusively in the USA? The allocation of capital and other resources to those businesses capable of generating the best returns for shareholders is an important principle. Funding growth and investment in the USA will continue to be our highest priority because we generate the best returns for shareholders in this market. The plumbing and heating market in the USA is a huge opportunity for us: it is a large, attractive and fragmented market with excellent growth prospects. The Group will present its 2017/18 ﬁnancial statements in US dollars. How will shareholders beneﬁt from this? The vast majority of our mix of trading proﬁt is generated in the USA so it makes sense to report our ﬁnancial results in US dollars. Doing so will reduce volatility in our results in terms of the translational impact of foreign exchange and our results will better reﬂect the underlying performance of our business. We will also give shareholders a choice between receiving ordinary dividends in US dollars or in pounds sterling which they will be able to do from April next year. Turning to strategy, last year you set out three priorities. How would you summarise your progress on each? Priority one – generate the best proﬁtable growth in the USA. The business in the USA had a good year especially when you consider the headwinds we faced in the ﬁrst half of the year from commodity price deﬂation and weak industrial markets. * Like-for-like revenue growth and growth at constant exchange rates are APMs, see note 2 on pages 91 and 92 for further information. 16 Ferguson plc Annual Report and Accounts 2017 Strategic report Governance Financials Other information Drivers of proﬁtable growth Fulﬁlling customer wants Attractive growth opportunities Excellent execution Our associates responded positively and we generated stronger growth in the second half with the return of modest price inﬂation and a recovery in industrial end-markets. As we start the new ﬁnancial year we’re generating good growth in all of our end-markets and the regional picture of growth across the USA is encouraging. At the same time as accelerating revenue growth we’re continuing to expand our gross margins through driving beneﬁts of scale in areas such as sourcing, increasing own label sales and better pricing discipline. We’re also continuing to invest in future growth by developing more efficient operating models including world-class e-commerce platforms, building our brands and investing in adjacent businesses such as Facilities Supply. So overall, we feel that we have made good progress in driving proﬁtable growth. Priority two – execute UK turnaround and repositioning plan. We’re about a year into the implementation of our transformation plan in the UK and we expect that it will take a further two years to complete so it’s still early days. We’ve made good progress this year and we are carefully implementing the key initiatives to ensure we minimise disruption to our customers while continuing to execute at pace. Milestones next year include continuing the reconﬁguration of the branch network, logistics and supply chain, simpliﬁcation of the product range and the roll out of sign on glass technology. Engaged associates Organic expansion Well trained, highly engaged associates deliver excellent customer service. A relentless focus in this area drives customer loyalty. We want to accelerate proﬁtable growth through above market revenue growth and targeted branch expansion. Excellent service ethic Bolt-on acquisitions We complement our organic growth strategy with bolt-on acquisitions which are rapidly integrated into our network to deliver attractive returns. Adjacent opportunities We will utilise our existing knowledge, skills and infrastructure to capitalise on new market opportunities. For example Facilities Supply and our B2C e-commerce businesses. Our aim is to provide the best customer service in the industry, consistently across branches and regions. Strong sales culture We will continue to drive a strong sales culture. When our associates are proud and conﬁdent about our services, and have the best tools, knowledge and data to support them, we will achieve the strongest results. They engage with existing and new customers to make sure we are front of mind when it comes to bids for work. Related to the above drivers of proﬁtable growth Key performance indicators: Principal risks: Pages 26 and 27 Pages 42 to 49 Operating model and e-commerce development We need to ensure that our operating model is agile and ﬂexible so it can adapt to changing customer needs and that we are able to ﬂex our cost base when required. Increasingly our customers want to deal with us online and we must ensure we have the leading e-commerce platform in each market in our industry. Pricing discipline We will work constantly to understand our customers’ needs more accurately and structure our pricing to be fair, consistent and transparent. Own label penetration We will systematically build upon and extend our portfolio of private label brands which in 2016/17 represented 6.7 per cent of Group revenue. We have an opportunity to offer a wider range of own label products to our customers, some of which attract higher gross margins. Ferguson plc Annual Report and Accounts 2017 17 Group Chief Executive’s review continued Once we’ve delivered the plan we are conﬁdent we will have built a better, more proﬁtable business by simplifying our customer propositions, lowering the cost base and optimising the supply chain and branch network. You can read in more detail about the transformation plan in the UK operating review on page 32. Priority three – review Nordic operational strategy and restore the business to proﬁtable growth. We concluded the review of Nordic operating strategy in March 2017, identifying a clear and executable plan to return the business to proﬁtable growth. However, there are few synergies with the rest of the Group’s plumbing and heating activities and we have initiated a process to exit our building materials business in the region which is on track. In August 2017 we completed the sale of Silvan, the Danish DIY chain. Thinking about the strategy in more detail you also talked last year about the importance of achieving excellent execution in some key areas. How are you making progress here? This year we have further reﬁned our drivers of proﬁtable growth (see page 17) which set out how we will win in our local markets, outperform our competitors and drive strong ﬁnancial results. Our businesses are not homogeneous and they require customised strategies and each of our business units are prioritising them appropriately, depending on their local market and competitive environment. Highlights this year include excellent growth in our e-commerce businesses which now generates 20 per cent of Group revenue. We continue to see e-commerce as an efficient way to meet the needs of our customers using the current branch and logistics network without adding extra branch capacity. We are gaining momentum in the acceleration of own label in our businesses and in the USA it now represents 6.9 per cent of overall revenues (2015/16: 5.8 per cent). We are continuing to invest in our operating model, including further investment in our customer relationship management (“CRM”) platforms, master data and order management systems this year. On the logistics and supply chain side we added new market distribution centres in Euless, Texas and San Francisco, California this year and we have plans for three more in 2018. We are continuing to roll out our university training courses in the USA to ensure we have the best trained associates in the industry which we believe is key to delivering world class customer service (see page 22 for more information). Throughout this Annual Report we have also outlined how our strategy drives our thinking in all aspects of how we do business from how the Board operates and corporate governance to KPIs, principal risks and sustainability. What changes have you made in your senior team this year? I’d like to express my own thanks (in addition to the Chairman’s comments) in recognising the signiﬁcant contributions of Frank Roach and Dave Keltner who retired this year. Both were fundamental to the strong growth and excellent returns shareholders have enjoyed from the business in the USA over many years. I’d like to wish them both well in their retirement. It’s great to have Mike Powell on board as our Group CFO and Kevin Murphy as the CEO of the USA. They are already making a considerable impact. Elsewhere in the senior team in the USA we have promoted Bill Brundage to CFO and Alex Hutcherson to COO. Kevin Fancey has recently joined the business as President of Canada. I’m delighted that a majority of these positions have been ﬁlled through internal succession, recognising the strong pipeline of talent developed over many years within our core operations. What about sustainability? How are you building a better business? We established our “Better Business” sustainability programme (see pages 34 and 35) following consultation with shareholders two years ago and we strive to make these issues an integral part of how we do business. 18 Ferguson plc Annual Report and Accounts 2017 20% E-commerce now accounts for 20 per cent of Group revenue at £3 billion This year we have made steady progress on our sustainability programme and further detail can be seen in the Resource and Relationships section (pages 22 to 25) and in the Sustainability section (pages 34 to 37). However, I am disappointed with the deterioration in our injury and lost workday rates. I am personally engaged with health and safety specialists from our businesses to ensure that we consider and act on their views for best practices and opportunities for improvement. There is also regular review of health and safety performance with our business leaders. We have put in place actions to address this deterioration and all businesses are committed to improving our performance in this area. What is your outlook for 2017/18? US markets continue to be favourable, in particular residential and commercial markets where we generate the majority of our revenue. Group organic revenue growth* in the new ﬁnancial year has been about 6 per cent. Our business is performing well, we have a strong balance sheet to support our plans and the Board continues to look to the medium-term with conﬁdence. We remain excited about the signiﬁcant structural growth opportunities in our markets and the potential for revenue growth, margin improvement, and attractive returns. What is your message to Ferguson associates? It is our associates who make the difference for our customers and ultimately deliver value to our shareholders. The strong performance of the Group this year is attributable to them. I would like to thank each and every one of our associates for their dedication, enthusiasm and hard work that are the key reasons for our continued success. John Martin Group Chief Executive * The increase or decrease in revenue excluding the effect of currency exchange, acquisitions and disposals and trading days. Strategic report Governance Financials Other information Marketplace overview We operate in large fragmented markets with strong growth characteristics The USA continues to be our largest market with the greatest opportunities for growth. The market for plumbing and heating distribution has strong growth characteristics and is highly fragmented with no market dominated by any single distributor. In each market we operate with leading market positions and signiﬁcant scale. Market characteristics and opportunities Customers require a basket of goods Ferguson serves approximately one million customers across the Group and customers typically require a basket of goods. In the USA the average basket size is ﬁve products valued at circa $600. Customers’ needs are local The customer base is fragmented. Professional contractors typically operate within about 20 miles of a local branch and may visit it several times per week. In addition to visiting branches, they are now using digital channels which complement their working patterns. Large supplier base Ferguson distributes the products of approximately 44,000 suppliers across the world. Clear need for distributors in the supply chain Distributors including Ferguson bridge the gap between a fragmented supplier base and the large and geographically dispersed professional customer base. Highly fragmented industry with no market dominated by a single player Our markets are typically highly fragmented, with few large players in the industry. Beneﬁts of scale Due to scale beneﬁts, market leaders can perform better through the economic cycle and customers have quicker access to products. Strong organic growth opportunities Market characteristics support long-term organic growth opportunities. Bolt-on M&A opportunities Ferguson has a large acquisition target database to support continued M&A growth. What is driving market growth? Population growth Population growth of more than 6 per cent is expected in the USA in the next decade. Source: United Nations Department of Economic and Social Affairs. Housing transactions Existing single family home sales continue to grow while remaining signiﬁcantly below the previous peak. Source: National Association of Realtors. ﬁd Consumer conﬁdence In the USA, consumer conﬁdence in July 2017 hit a 16 year high. There is a strong correlation between consumer conﬁdence and levels of activities in our markets. Source: The Conference Board. Ageing housing stock Increased comfort levels in homes Disposable income 41 years The median age of homes in the USA is 41 years. There is high demand for repairs, maintenance and improvement in the large installed base of existing homes. Source: US Department of Housing and Urban Development. 80% of new homes in the USA have two or more bathrooms. There is a trend towards increasing levels of comfort in homes. Source: US Department of Housing and Urban Development. No. 1 The USA has the highest levels of disposable income per household in the OECD. Source: Organisation for Economic Co-operation and Development (“OECD”). Ferguson plc Annual Report and Accounts 2017 19 Our business model How we create value We are a specialist distributor adding value through our scale, bespoke logistics network, use of technology and the expertise of our people. We bridge the gap between 44,000 suppliers and 1 million customers offering the widest range of products and solutions. Resources and relationships Our people Our people are dedicated to serving our customers Our customers Sole traders to large construction companies Our suppliers Responsible supply base manufacturing over one million products worldwide Channels to market Branches, e-commerce, showrooms and call centres Technology Continually investing in technology to improve our business Distribution network Distribution centres, branches, and specialist vehicle ﬂeets Capital A strong balance sheet to enable ongoing investment 20 Ferguson plc Annual Report and Accounts 2017 Distribute Source 44,000 We have a diverse supplier base sourcing over one million products from 44,000 suppliers around the world, which gives us access to a broad range of products. Suppliers 1 million Our suppliers deliver over 1 million products in bulk to our network of 22 distribution centres, to branches or directly to our customers. Distribution centres Branches 2,310 In total, our business units operate 2,310 branches. This means our customers typically travel fewer than 20 miles to buy from us. Our strategy underpins our For detail on the structure of our business and the markets in which we operate, For see pages 14 and 15, 19 to 25 and 28 to 33. see Strategic report Governance Financials Other information Sell How we deliver to customers How our customers buy 12% Direct from suppliers 7% Direct from distribution centres 26% Collected from branches 55% Delivered from branches 66% Sales through our branches 10% Sales through showrooms How our 1 million customers buy Customers 20% Sales through e-commerce 4% Sales through central account management Online 24/7 E-commerce offers an extension of our world class service to make sure customers can buy from the industry’s largest selection of online products 24/7. ability to create value Page 17 Outcomes of what we do Great returns for our shareholders Pages 12 and 13 Engaged and well-trained workforce Pages 22 to 24 Loyal, satisﬁed customers Page 24 Efficient branch and logistics network Pages 24 and 25 Reduced carbon emissions and waste Pages 34 to 37 Increased adoption of “eco” products Pages 34 to 37 Ferguson plc Annual Report and Accounts 2017 21 Key resources and relationships How we serve our customers Ferguson is a specialist distributor adding value through its scale, bespoke logistics network and its people’s expertise. We bridge the gap between our suppliers and our customers, providing our suppliers a cost effective route to market and customers specialist advice and a wide range of products where and when they are required. The goal of the programme is to increase the speed of impact for new hires. Various metrics will be used to measure the participant’s added value to the business including sales, their potential and retention prospects. Whilst we are committed to recruiting and growing early career talent, we also acquire talent with speciﬁc skills mid- career to enhance our ability to bring new services to the market and improve our capabilities. Great examples of hiring people with capabilities developed outside our sector have enabled us to accelerate the growth of our business. For example, our new National Sales Centre Director in the USA, Josh Smith, brings expertise from over 20 years in professional customer service centre management. Rewarding performance We celebrate success and our reward programmes are important in reinforcing the way we do business. Over the past year new incentive programmes have been re-developed in each business for branch and sales associates to ensure that high performance is well rewarded. We adjust measures to the type of role or team, but typically incentivise based on combinations of trading proﬁt, gross margin, gross proﬁt, average cash-to- cash days and net promoter score. Talent development This year we will welcome 400 college graduates to our business in the USA. Our investment in targeted talent management and development is a key feature of our business and we are adopting an internal university approach to train associates. Sharing success and best practice is a staple of our thriving culture. Four years ago, the HVAC business unit in the USA implemented a centralised “university” training model where associates relocate to a speciﬁc branch and follow a set curriculum combining instructor-led classroom, virtual instruction and on-the- job training. Its success prompted the Industrial and Facilities Supply business units to launch individual universities where graduates are trained in the speciﬁcs of that business unit. You can read more about the Industrial Group’s university on page 9. Today, this training model is being used throughout the USA with the recent addition of The College of Ferguson. In July 2017, the ﬁve-month programme was launched in seven Blended Branches nationwide and 88 recent college graduates participated, learning the skills needed to prepare them for an inside sales position. Our people 33,000 associates Our associates are fundamental to our success. They deliver excellent customer service, develop strong relationships, maximise operational efficiencies and accelerate the adoption of new operating models. One of our core values relates to our people and six of our material sustainability issues are focused on our talented teams. Page 36 Leadership Reshaping and focusing our strategy to create an even more successful business is dependent on the effectiveness of our leaders and their teams. This year has been a year of signiﬁcant change in the Executive leadership of the Group, please see the Board changes in the Chairman’s statement. Additionally, we have seen a number of internal succession appointments within the USA to leadership positions. These appointments have been enhanced by the use of rigorous assessment techniques, structured transition and personal development processes – the same processes that now apply to all senior level hiring across the Group. Pages 13 and 18 22 Ferguson plc Annual Report and Accounts 2017 7,000 current associates have higher education degrees, about 28 per cent of the workforce in the USA Strategic report Governance Financials Other information Case study Kate’s journey Kate Bailey, Director of Showrooms USA, is a great testament of how hard work and dedication, combined with the opportunities Ferguson provides, makes for an award- winning career. In 12 years, Kate worked her way up from trainee at a branch to a highly visible role in the USA headquarters, where she oversees the strategic direction for Ferguson’s 275 showrooms nationwide. Kate was recently recognised by Supply House Times as one of the top women in Industry for her achievements. Signature recognition programmes in our business in the USA include President’s Club, recognising the performance of top outside sales associates; President’s Circle, recognising sales associates and sales managers who are top performers in the marketplace; and President’s Gallery, honouring showroom sales associates who meet key corporate showroom initiatives and demonstrate exceptional leadership. The pinnacle sales award, the Bob Wells Leadership Award, is presented to a remarkable sales associate who consistently demonstrates exceptional sales leadership and performance. New innovative long-term incentive programmes have been introduced to each business to reward sustained or improved trading proﬁt performance in our different businesses. For example, over a three-year cycle critical staff in the USA can see their initial grants multiply by ﬁve times for exceptional performance. Our investment in this programme is overseen by the Remuneration Committee. Associate engagement Our teams in sales, branches, contact, logistics and distribution centres are the local face of our business. Their relationships with both large and small customers are critical to our success and their expert knowledge means they are a key part of our customers’ workday. It is important that our associates feel they have a voice and that their views and opinions are listened to. All businesses in the Group measure engagement and take action to identify improvements locally, regionally and nationally. Our winning teams depend on it. In the USA we continue to measure engagement regularly and the team is proud of the degree to which current associates would recommend Ferguson as a place to work to a good friend. Over the past ﬁve years our scores have consistently exceeded 75 per cent which is well above industry averages. Our levels of associate engagement in the USA remain strong although lower than last year. Our present recruitment practices factor in under-represented groups and we insist on balanced candidate lists when using executive search ﬁrms. In the UK, the government requires certain businesses to declare their gender pay gap. The UK business has a 2.38 per cent gap in base pay compared to the UK average 18.1 per cent. Nevertheless, during 2017/18 we will put in place a diversity plan in each business, building on our present practices where, like many businesses, we continue to identify and remove any potential for unconscious bias in our employment and promotion practices. Much external research in improving diversity highlights the importance of role models, who inspire others and create a different level of expectation of the type of career that is possible. Health and safety Caring for our people’s safety and wellbeing is at the heart of the Group’s values. Board and Executive Committee meetings of the Group always start with our Health and Safety report because we want to ensure that our people return home safely each day and thrive in the workplace. The main causes of injury within our business are manual handling (leading to sprains and strains), slips, trips and falls, the use of mechanical handling equipment such as forklift trucks and being struck by unsecured products and vehicle collisions. Our health and safety management framework and controls are structured to address all health and safety risks and compliance requirements. We are disappointed to report a deterioration of our Group injury rate and Group lost workday rate in 2016/17 primarily as a result of a deterioration in the rates in the USA. Each of our businesses has plans in place to reverse these trends. The Group collision rate improved in 2016/17 following an in-depth driver risk assessment and control improvements. One initiative which demonstrates practical care for our associates is Ferguson Fit. Ferguson Fit was originally set up to focus on physical health given rising medical insurance costs in the USA and to promote the beneﬁts of a healthy workforce. The concept has grown to encompass an all-around approach to healthy living. We provide 24/7 online and telephone medical, health and lifestyle advice and guidance for all associates. Across the Group, our associate assistance programmes provide support, counselling and advice on a range of issues for associates and their families to help our people with a positive work-life balance. In our UK business, where signiﬁcant change is underway, associate engagement survey scores have remained constant whilst participation has risen to over 70 per cent. A new associate forum has been established to help drive the transformation process across the branch network and to help shape parts of the programme itself. Formal consultation processes have run in parallel, ensuring all our affected associates can be reassured that when changes affect them they will be managed openly and fairly. Our new Canadian President, Kevin Fancey, is taking a ground up approach to his introduction to the Company and in his ﬁrst two months in the role he ran engagement sessions at 25 sites with 500 associates. Diversity and inclusion We want access to the best talent irrespective of gender, race, orientation or background. The Board is now a 50:50 balance of male and females in our Non Executive Directors and, whilst our sector remains male dominated, we are starting to see greater female participation at each level in our business. Our diversity policy statement can be seen on page 65. In the UK business, where we have made some signiﬁcant changes in the Leadership team, four (40 per cent) executive positions are occupied by women. So whilst we have work to do there are some promising signs of progress. Pages 36 and 65 Ferguson plc Annual Report and Accounts 2017 23 Key resources and relationships continued 22 Distribution centres Leadership of Health and Safety is key and the CEO chaired calls with a group of highly skilled ﬁeld-based health and safety specialists from each of our businesses in May and July 2017 to discuss the health and safety development across the Group and to understand how we can improve. Whilst we benchmark as average for our industry sector we intend to become leaders. The observations made over recent months are being worked on by all leadership teams across the Group to ensure we leverage the expertise of our associates in this area. One immediate action has been to increase the number of Health and Safety professionals and we have begun the process to appoint a specialist leader in the USA to drive our improvement agenda. Pages 25 and 36 Ethical behaviour and human rights We are committed to comply with the law and to operate under high ethical standards. This is simply the right thing to do and it protects us from business disruption; it also strengthens our reputation with customers, suppliers and other stakeholders. Our Code of Conduct is dedicated to helping each of our associates to live our values on a daily basis in all decisions and interactions. Our Code of Conduct in the USA was renewed during 2016/17 and features Q&A sections to provide real life examples of our values in action. All of our businesses provide training for relevant associates on anti-corruption, anti-trust and modern slavery matters. This is typically provided through online training material and face-to-face training is also provided. Training is provided for new associates on induction. Our Human Rights policy statement can be seen on page 36. For information on ethical behaviour in our supply chain, please refer to page 36. Page 36 24 Ferguson plc Annual Report and Accounts 2017 Our customers 1 million customers Our suppliers 44,000 suppliers To be successful, our customers depend on us for high levels of availability on a broad range of products, ready for collection or delivery on the same or next day or an agreed time. We know our customers also value high quality and efficient service from our knowledgeable people, local relationships, competitive pricing and billing and order accuracy. They also want ﬂexibility in choosing the most convenient way to do business with us, whether in a branch, by phone or online. We aim to deliver all of these things through a “best-in-industry” service offering across all channels so our customers keep coming back. We operate our business responsibly so that our customers can feel conﬁdent that we are looking after our associates, providing safe and high-quality products, operating efficiently and actively contributing to the communities in which we operate. We consult with key customers each year to understand their business needs and their sustainability priorities so that we can continually evolve our business to meet their expectations. Where the market demand exists, we promote sustainable products and provide training and advice to customers to support growth in these new product categories. Customers of Build.com in the USA can ﬁlter their product search to view products with recognised national environmental labels. Our Dutch and UK businesses have built large dedicated sustainable buildings or energy-efficiency centres that act as showrooms for the latest products and serve as training facilities for our customers. The UK business provides a series of innovative customer services that support the UK-wide campaign to establish a ﬂourishing renewables market including a free system design service and dedicated regional sales professionals. Page 37 We have 44,000 reputable suppliers manufacturing over one million products around the world. This gives us access to a diverse and broad range of quality products. Our leading market positions enable our central sourcing teams in each region to leverage our scale and negotiate competitive prices in return for access to our one million customers. We work with our suppliers to ensure that they are reliable and ethical and that their products are fully compliant with the laws and regulations of the countries in which they and we operate. Each business assesses its suppliers against set criteria to provide protection to both us and our customers in the event of a product failure or breach of regulation in the supply chain. On the rare occasion that a product is faulty, customers have the conﬁdence of knowing that we will support them. We conduct third party background checks on our suppliers for unethical or illegal behaviour (see case study “Working with responsible suppliers” on page 36). Pages 36 and 37 Channels to market 2,310 branches Our customers increasingly expect a 24/7 multi-channel approach dealing with us through a combination of branches, showrooms, online, call centres and an outside sales force. The majority of our business is still conducted through our branches and our extensive branch network means our customers typically travel fewer than 20 miles to buy from us and visit several times a week. Our multi- channel approach allows our customers to access products and advice 24 hours a day, seven days a week, whenever it is required. Strategic report Governance Financials Other information Our estate is carefully managed to ensure the health and safety of our associates, customers, suppliers and any other visitors. Regular health and safety risk assessments and branch audits ensure that we maintain our equipment and product racking, safely store and move products and provide for any potential emergency incident. Our insurers also support these efforts, undertaking their own safety assessments at selected key sites each year. 45 per cent of the Group carbon footprint is generated in our buildings. This includes electricity and fuels consumed for heating or cooling. Each of our businesses has targets to reduce carbon and the associated costs from buildings, relative to revenue. Building improvements during 2016/17 include the installation of LEDs and heat curtains in some of our sites. We have partnered with energy brokers in the USA and UK and are developing consumption dashboards to allow us to better target our efforts on energy efficiency from 2017/18. Our online sales channels, available through any device, allow our customers to reduce their environmental impact as travel to our branches for product advice or product collection is reduced. For information about our environmental efficiency efforts see page 37. Page 37 For information about our health and safety programme see pages 23 and 36. Pages 23 and 36 Technology £3 billion revenue from e-commerce activities We are continually investing in technology to improve our business, win new customers and retain existing customers. E-commerce accounts for £3 billion (20 per cent) of the Group’s revenue and our customer facing channels to market are mentioned on page 24. Additional technology investments are aimed at improving execution and efficiency in all areas of our business from warehousing, ﬂeet, inventory and customer relationship management to back-office human resources and ﬁnancial management and reporting systems. As many of our competitors are small local distributors this is a major source of competitive advantage. We are focused on staying ahead of the competition by looking at every opportunity in this space while defending against any new threats that may enter the market. Distribution network 6,100 ﬂeet vehicles Our extensive distribution network and large ﬂeet enable us to ensure same or next day availability of a wide basket of products to our customers. Our customers rely upon us for prompt and ﬂexible delivery options to meet their own needs. Suppliers deliver in bulk to our distribution centres, our branches or directly to our customers. We predominantly distribute from distribution centres, ship hubs and branches to customers. The safety of our drivers is taken very seriously and during 2016/17 an in- depth risk assessment was conducted into driver safety by our health and safety experts. The assessment took into account vehicle condition, road hazards, loading and unloading risks, physical health risks and driver training. Existing controls have been strengthened and new controls introduced to best protect our drivers. We monitor our collision rate monthly for both our goods ﬂeet and company car ﬂeet. Each business has targets to reduce their collision rate and performance is reported to the Executive Committee each month and to the Board every other month. Approximately 55 per cent of our carbon footprint is generated by transport (including commercial vehicles, company cars and business travel by road, rail or air) and 43 per cent of this is from commercial vehicles, whether our own or that of third party hauliers that we partner with. To keep our distribution network running efficiently with minimal impact on the environment, each of our businesses has targets to reduce carbon and the associated costs for transport, relative to revenue. Distribution network improvements in 2016/17 which have positively impacted our environmental performance include ﬂeet upgrades and the installation of a telematics system in the commercial ﬂeet in the USA (see case study below). Our branches also use the distribution network to support their waste management efforts, sending recyclable packaging waste back to the distribution centres for sorting, baling and recycling. Where possible, we work with our suppliers to reduce their environmental impacts. For example, we help our suppliers to avoid unnecessary travel by “backhauling” product from their factories when our trucks are returning empty to our distribution centres. In 2016/17, we saved our suppliers in the USA and UK from travelling 4.2 million miles. This equates to 5,946 tonnes of avoided carbon emissions (the equivalent of taking 1,256 passenger vehicles off the road for a year*). *www.epa.gov For information about our environmental efficiency efforts see page 37. Page 37 For information about our health and safety programme see pages 23 and 36. Pages 23 and 36 Case study Improving driver behaviours A new telematics system has been installed in the goods ﬂeet of our business in the USA. The system allows for monitoring of driver behaviours to mitigate speeding, excessive idling and harsh acceleration or braking. Besides supporting more efficient driving behaviours and optimising fuel consumption this also serves to increase the safety of our driver population. Ferguson plc Annual Report and Accounts 2017 25 Key performance indicators Measuring our progress As stated in last year’s report, we have aligned our KPIs to our strategic drivers set out in detail on page 17. Engaged associates Excellent service ethic Strong sales culture Organic expansion Bolt-on acquisitions Adjacent opportunities Operating model and e-commerce development Pricing discipline Own label penetration Key performance indicator and deﬁnition Performance Like-for-like revenue growth The percentage increase or decrease in revenue year-on-year excluding the effect of currency exchange, acquisitions and disposals, trading days and branch openings and closures. 7.8% 6.1% 5.4% +6.0% 6.0% 2.9% Like-for-like revenue growth was 6.0 per cent in 2016/17. The improved growth rate from 2015/16 was due to a strong outperformance of the market in the USA and the headwinds of commodity deﬂation and weak industrial markets easing. Gross margin The ratio of gross proﬁt, excluding exceptional items, to revenue. Trading margin The ratio of trading proﬁt, excluding exceptional items, to revenue. 2013 2014 2015 2016 2017 28.0% 28.2% 27.7% 28.9% 28.5% +0.4% Gross margin improved by 40 basis points compared to 2015/16 principally as a result of the USA and UK improving their mix of business towards higher margin channels and product categories. 2013 2014 2015 2016 2017 6.9% 6.8% 6.9% 6.6% 6.3% 2013 2014 2015 2016 2017 +0.1% The trading margin improved and returned to a high of 6.9 per cent. Growth was driven by all regions performing well and the mix of business improving. Average cash-to-cash days The 12-month average number of days from payment for items of inventory to receipt of cash from customers. 57 57 56 56 54 2 days improvement Average cash-to-cash days improved year- on-year to 54 days. All regions improved their working capital with reductions in both inventory and receivable days. 26 Ferguson plc Annual Report and Accounts 2017 2013 2014 2015 2016 2017 Strategic report Governance Financials Other information Key performance indicator and deﬁnition Performance Return on gross capital employed* The ratio of trading proﬁt to the average year-end aggregate of shareholders’ funds, adjusted net debt and cumulative goodwill and other acquired intangible assets written off. This is for continuing and discontinued operations. * Return on gross capital employed is an APM, see note 2 on pages 91 and 92 for further information. 14.3% 14.8% 19.5% 16.9% 17.2% +2.3% Return on gross capital employed improved from 17.2 per cent to 19.5 per cent. This is in line with our investment case and long-term objective of generating attractive returns on capital. 2013 2014 2015 2016 2017 Associate engagement, USA Engaged associates deliver excellent customer service, consequently we measure associate engagement in every region. Engagement surveys are periodically sent to associates at all levels asking: “Would you recommend Ferguson as a place to work to a good friend?”. 84.5% 77.4% Customer service, USA There is a good correlation in our business between high customer loyalty scores in a branch and better ﬁnancial performance. The net promoter score is a means of measuring customer service. The survey asks: “How likely is it that you would recommend Ferguson to a friend or colleague?” and customers respond with a score between zero (bad) and 10 (exceptional). We look at the 12-month average of the proportion of customers who scored nine or more, less those customers scoring six or less. The methodology was changed in 2017 and prior years restated to weight the responses by business unit revenue. 20161 2017 1. A new methodology using an annual associate wide survey rather than more frequent pulse surveys, was launched in 2016. 65.2% 63.0% 61.7% 63.8% 61.8% 2013 2014 2015 2016 2017 -7.1% The process of tracking and reporting engagement differs by region, therefore an example is given for the USA. Average engagement was 77.4 per cent in 2016/17, a decline compared to 2015/16 but it remains a very high score, well above industry averages. Management believes the lower score achieved in 2016/17 was due to reorganisation and leadership changes which included Business Model Improvement, a complex nationwide change management programme, which is now complete. +2.0% The process of tracking and reporting customer service differs by region, therefore an example is given for the USA. The average net promoter score increased in 2016/17 to 63.8. This score is among the highest levels in the industry. Injury rate Total number of injuries per 100,000 hours worked. The numbers are based on injuries requiring an associate to leave the workplace for medical treatment. The hours worked are calculated using full-time equivalent associate numbers and average work days by business and assume an eight-hour working day. This is for continuing and discontinued operations. 1.67 1.57 1.51 1.52 1.63 2013 2014 2015 20161 2017 1. Prior year data has been restated to reﬂect improved historic data. 7.2% deterioration Injuries requiring medical treatment per 100,000 hours worked deteriorated by 7.2 per cent compared to the previous year. This is primarily as a result of a deterioration of the injury rate in the USA. All businesses have plans in place to improve the injury rate. See the Sustainability section for more information on pages 34 to 37. Ferguson plc Annual Report and Accounts 2017 27 Regional performance A more focused geographic footprint We are progressively focusing more resources on our business in the USA where we generate the most attractive returns for our shareholders. Our international operations are also important and make a signiﬁcant contribution to the Group. USA Key highlights Like-for-like revenue growth of 7.1 per cent Trading margin of 8.0 per cent Good growth in residential and commercial markets Nine bolt-on acquisitions completed in the year Five-year performance £m 5 11,824 4 6,615 6,898 481 530 9,288 8,176 673 761 950 2013 Revenue 2014 2015 Trading proﬁt 2016 2017 3 1 Revenue by market sector Quarterly like-for-like revenue growth % 4.7 4.1 5.0 3.2 4.3 6.7 8.6 8.8 2 1 Residential RMI 2 Non-residential RMI 3 Residential new construction 4 Non-residential new construction 5 Civil/Infrastructure 34% 25% 18% 16% 7% Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2016 2017 28 Ferguson plc Annual Report and Accounts 2017 Business proﬁle The business is the market leading distributor of plumbing and heating products in the USA. It operates nationally serving the residential, commercial, civil and industrial markets. Residential end markets represent about 50 per cent of sales within the USA and commercial about 35 per cent, with the remainder split between civil/infrastructure and industrial equally. We predominantly serve the Repair, Maintenance and Improvement (“RMI”) markets, with relatively low exposure to the new construction market. We operate seven business units in the USA offering different categories of plumbing and heating products and solutions to ﬁt the customers’ needs. Six of the business units predominantly serve trade customers with one serving mainly consumers. There are no direct competitors that operate across all of our markets. Each business unit has its own competitors which range from large national companies, including trade sales by large home improvement chains, to small, privately owned distributors. The business in the USA constantly aims to strengthen its positions in existing and adjacent markets through bolt-on acquisitions. During the year we completed nine bolt-on acquisitions with acquisitions in the majority of our business units. At the end of the year we operated 1,423 branches serving all 50 states with 23,986 associates. The branches are served by 13 distribution centres, providing same day and next day product availability, a key competitive advantage. Strategic report Governance Financials Other information Market trends Macroeconomic trends Demand in the USA business is impacted by changes in activity in the economy in the USA. The following macroeconomic trends have an impact on all of our business units. The Gross Domestic Product (“GDP”) is one of the primary indicators used to gauge the health of a country’s economy. It is equal to the total expenditure for all ﬁnal goods and services produced within the country in a speciﬁc period of time. GDP growth1 % Calendar year 100 95 90 85 80 75 3.8 3.3 2.4 2.0 1.4 1.2 1.5 1.8 2.0 2.1 Consumer conﬁdence2 Q1 Q2 Q3 Q4 Q1 2015 Q2 Q3 2016 Q4 Q1 Q2 2017 1. GDP: % change compared to the same quarter of the previous calendar year. Source: OECD. 2. Conﬁdence: Index of results from a consumer conﬁdence survey that measures the level of optimism consumers have about the performance of the economy in the next 12 months. Source: Surveys of consumers, University of Michigan. GDP growth in the USA has been positive for the last 12 months, indicating continued expansion in the economy. The rate of growth has sequentially increased quarter on quarter throughout the last year showing an increasing rate of growth. Consumer conﬁdence has increased over the last 12 months to levels consistent with Q1 2015. The unemployment rate continues to fall, it has sequentially decreased quarter on quarter for over 24 months. Speciﬁc market trends The four end markets that Ferguson serves have different characteristics and as such certain market data is more relevant to speciﬁc end markets. Residential markets (Approximately 50 per cent of revenue) The Leading Indicator of Remodelling Activity (“LIRA”) provides a short-term outlook of national home improvement and repair spending to owner-occupied homes. It is designed to project the annual rate of change in spending for the current quarter and subsequent four quarters. The LIRA projections have continued to increase over the last 12 months, indicating growth in the market in 2017/18. Leading Indicator of Remodelling Activity (“LIRA”)1 $bn Calendar year 280 285 291 296 299 305 311 316 317 324 10 8 6 4 2 0 % change Q1 Q2 Q3 Q4 Q1 2016 Q2 Q32 2017 Q42 Q12 Q22 2018 1. $bn remodelling spend and % change compared to the same quarter of the previous calendar year. The LIRA underwent a re- benchmarking in April 2016. Source: The Joint Center for Housing Studies. 2. Projection. In addition, existing single-family home sales is a good indicator for the strength of the market and tends to be a driver of remodelling spend. The number of sales has shown steady growth over the last 12 months. 52% of revenue generated from residential markets in the USA Commercial (Approximately 35 per cent of revenue) The American Institute of Architects (“AIA”) Billings Index – Commercial/ Industrial is a leading economic indicator of construction activity and reﬂects, with an approximate nine to 12-month lag time, construction spending. Any score below 50 indicates a decline in business activity across the architecture profession, whereas an index score above 50 indicates growth. The index has been above 50 for the last three quarters of 2016/17 after dipping to 49.9 in the ﬁrst quarter of 2016/17. Civil/Infrastructure (Approximately 7.5 per cent of revenue) The AIA Billings Index – Commercial/ Industrial is also a good indicator for the civils market. The non-residential construction Put In Place survey is a further indicator of the strength of the market, reﬂecting the value spent each month on structures in the sector. The value of spend was rising year-on-year for the ﬁrst three quarters of 2016/17 but declined in the ﬁnal quarter of 2016/17. Industrial (Approximately 7.5 per cent of revenue) A good indicator of the strength of our industrial market is the Institute of Supply Chain Management Purchase Managers Index. Any reading above 50 indicates that the manufacturing economy is generally expanding, below 50 indicates that it is generally declining. The index has been above 50 throughout 2016/17 and sequentially growing through the year. Developing e-commerce This year we launched the new Ferguson.com website which is the foundation for future e-commerce and omni-channel customer engagement. It provides new functionality and solutions that will help customers run their businesses more effectively. This latest iteration provides our customers with signiﬁcant improvements to functionality, such as identifying the accessories a customer needs to install equipment. There are improved product lists and a quotation centre where customers can store their quotes, with improvements in quote-to-order functionality. Messaging and text updates on the status of customer deliveries are also available. E-commerce sales are growing rapidly in the USA and in 2016/17 amounted to £2.6 billion accounting for 22 per cent of USA sales, growth of 25 per cent. Our customers have undertaken 18.5 million “Self Service Events” during the year, providing them with signiﬁcant “Our strategy is to provide our customers with the most comprehensive set of e-commerce tools in the industry and continue to extend our overall capabilities.” Mike Brooks Chief Marketing Officer, USA service beneﬁts, and helping us to lower the cost to serve. We aim to have the best transactional e-commerce capability in our industry which is increasingly becoming a competitive advantage over smaller regional competitors. We have a competitive advantage in the deployment of technology, partly as a result of our scale, and we will aim to maintain and enhance it as we continue to invest in our technology platforms. Ferguson plc Annual Report and Accounts 2017 29 Regional performance continued USA continued Business units and brands The size and market positions of the main businesses are below: 1st Blended Branches is the number one distributor of plumbing and heating products in the USA Market position* Blended Branches Waterworks standalone B2C e-commerce 1st 1st 1st HVAC * Management’s estimate of market position. 3rd 5 Revenue by business unit 4 3 2 1 Blended Branches 2 Waterworks standalone 3 B2C e-commerce 4 HVAC standalone 5 Other (Industrial, Fire and 1 60% 16% 7% 7% Fabrication and Facilities Supply) 10% Blended Branches like-for-like revenue growth by region VT NH ME MA RI CT NJ DE MD DC WA OR ID MT WY NV CA UT CO ND SD NE MN IA KS MO AZ NM OK AK TX HI AR LA WI MI OH IL IN NY PA KY TN VAWV NC SC MS AL GA FL Key West +6.9% South Central +7.2% North Central +3.8% East +7.1% 30 Ferguson plc Annual Report and Accounts 2017 Blended Branches Blended Branches is the largest business unit serving customers across the residential and commercial sectors for RMI and new construction. Blended Branches mainly provides plumbing and sanitary products as well as heating solutions to trade customers through a combination of branch counters, inside and outside sales associates and our fast growing e-commerce channel which enables customers to be served 24/7 through their online account. The business also operates 275 showrooms, serving trade customers and consumers, which showcase bathroom, kitchen and lighting products and assist customers in designing their home improvement projects. The showroom channel generated revenue of over £1.3 billion in 2016/17. In certain markets where it is more efficient and effective we will serve our customers through a Blended Branches location rather than standalone Heating, Ventilation and Air Conditioning (“HVAC”), Waterworks or Industrial business. Blended Branches is the number one distributor of plumbing and heating products in the USA, with an estimated market share of 17 per cent. There are only three national competitors with a market share above 5 per cent. The estimated combined market share of the top four companies is 40 per cent with the remainder of the market consisting of mid-size regional distributors and small, local distributors. Blended Branches’ market share varies signiﬁcantly across the USA from low single digit market share in some states to high-twenties in others. There continues to be excellent opportunities to expand the business geographically, particularly in large metropolitan areas across the country. Waterworks standalone The Waterworks business is the largest waterworks distributor in the USA. It distributes PVF, hydrants, meters and related water management products alongside related services including water line tapping and pipe fusion. Waterworks sales tend to be part of large planned projects to public and private water sewer authorities, utility contractors, public works/line contractors and heavy highway contractors on residential, commercial and municipal projects across the water, sanitary sewer and storm water management markets. The Waterworks market has two large competitors holding around 45 per cent market share, we estimate our market share to be 24 per cent. No other company holds greater than 5 per cent market share. B2C e-commerce The B2C e-commerce business sells home improvement products directly to consumers via a network of online stores, the primary brand is Build.com. The business is supported by a call centre of product experts to provide product advice and to assist customers with orders. The business uses the same distribution network as the trade businesses. We estimate our B2C e-commerce business to be the largest online supplier of plumbing and heating products direct to consumers, and the largest competitor is a similar size. HVAC standalone The HVAC business is an industry leader in wholesale heating and cooling distribution offering heating, ventilation, air conditioning and refrigeration equipment, parts and supplies to specialist contractors. The business predominantly serves the residential and commercial markets for repair and replacement in addition to heating and air conditioning projects. Branded Branches selling high quality products are an important feature for this market. Strategic report Governance Financials Other information +8.2% Improvement in trading proﬁt at constant exchange rates in the USA Operating performance Our business in the USA grew revenue 7.1 per cent on a like-for-like basis which included price deﬂation of 0.5 per cent principally due to falling commodity prices in the ﬁrst half. In the second half commodity deﬂation has subsided and overall there were low levels of inﬂation in the market. The organic revenue growth by customer end market was as follows: % of USA revenue1 Organic revenue growth Residential Commercial Civil/Infrastructure Industrial ~50% +9 – 10% +7 – 8% ~35% ~7.5% ~7.5% +4 – 5% Flat 1. Previously reported Municipal has now been more accurately analysed between Residential, Commercial and Civil/Infrastructure. Blended Branches, Waterworks, HVAC, Fire and Fabrication and Facilities Supply generated good growth and gained market share. Industrial revenues recovered after a weak ﬁrst half which was impacted by a slowdown in end markets. Build.com, our B2C e-commerce business, continued to grow strongly throughout the year. Acquisitions contributed 2.7 per cent of additional revenue in the year. E-commerce accounted for over £2.6 billion (22 per cent) of revenue in the USA and we have continued to prioritise investment in both our B2B and B2C platforms. Online ordering is a valuable sales order channel for our customers, giving them greater ﬂexibility. During the year we upgraded our technology platforms including the delivery of a new Ferguson.com website and a dedicated showroom website to enable customers to prepare for consultations. These new platforms have added new time-saving features and greater functionality to enhance the customer experience. We improved our gross margins and operating expenses grew with investments in technology, marketing and ﬂeet along with increased associate numbers, wage inﬂation and expense growth from acquisitions. Trading proﬁt of £950 million (2016: £761 million) was 8.2 per cent ahead of last year at constant exchange rates and exchange rate movements increased trading proﬁt by £116 million. The US trading margin was 8.0 per cent (2016: 8.2 per cent). Nine acquisitions were completed during the year with total annualised revenue of £267 million. Since the year end we have acquired two more B2C businesses, AC Wholesalers and Supply.com which generate £86 million of annualised revenue. During the year we disposed of Endries, a small fasteners business, for £186 million. The business generated revenue of £170 million and trading proﬁt of £16 million in the 10 months to disposal in June 2017. Ferguson plc Annual Report and Accounts 2017 31 We estimate our HVAC business to be the third largest distributor of HVAC equipment in a highly fragmented market with the market leader about twice the size with an estimated 10 per cent market share. Industrial standalone The Industrial business is a supplier of PVF and industrial maintenance, repair and operations (“IMRO”) specialising in delivering automation, instrumentation, engineered products and turn-key solutions. We also provide supply chain management solutions for a full range of PVF and IMRO supplies focusing on providing cost savings across the entire supply chain. The Industrial business distributes products to industrial customers across all sectors including oil and gas, mining, chemical and power. The industrial market is fragmented, we estimate the market leader to hold 10 per cent market share and our market share to be 7 per cent. Fire and Fabrication The Fire and Fabrication business caters to ﬁre protection contractors and engineers offering ﬁre protection products, ﬁre protection systems and bespoke fabrication services to commercial contractors for new construction projects. We estimate our market share to be 20 per cent and the two largest competitors holding an estimated 30 per cent market share between them. Facilities Supply The Facilities Supply business provides products, services and solutions to enable reliable maintenance of facilities across multiple RMI markets including multi-family properties, government agencies, hospitality, education and healthcare. The Facilities Supply market is highly fragmented with no competitors holding more than 5 per cent market share. Regional performance continued Key highlights Five-year performance £m Like-for-like revenue growth of 1.0 per cent Trading margin of 3.8 per cent Markets remain challenging Transformation plan continuing 1,769 1,853 1,987 1,996 2,012 95 96 90 74 76 2013 Revenue 2014 2015 2016 2017 Trading proﬁt Quarterly like-for-like revenue growth % (1.1) (2.9) (0.4) (2.1) (2.9) 3.6 (0.4) 4.2 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2016 2017 5 Revenue by market sector 4 3 2 1 Residential RMI 2 Non-residential RMI 3 Residential new construction 4 Non-residential new construction 5 Civil infrastructure 1 50% 12% 11% 17% 10% 32 Ferguson plc Annual Report and Accounts 2017 UK Business proﬁle The UK operates three businesses under the Wolseley brand predominantly in the trade market through 642 branches covering the whole country. These branches are served by six distribution centres providing same and next day product availability, a key service offering to our customers. The UK business mainly serves RMI markets, and has relatively low exposure to the new residential construction market. At 31 July 2017, Wolseley UK had 5,900 associates. The UK business is currently in the ﬁrst year of a major transformation programme to improve service to customers, performance and proﬁtability. Business units and market position The size and market positions of the main businesses are: Percentage of revenue Market position1 Plumbing and Heating Pipe and Climate Infrastructure 70% 16% 14% =1 2 =1 1. Management’s estimate of market position. Plumbing and Heating is the largest business within the UK, representing 70 per cent revenue. It operates under the Wolseley brand with a number of smaller brands including William Wilson and soak.com. These businesses provide plumbing and heating products primarily to trade customers in the residential and commercial sectors, for RMI purposes. The Plumbing and Heating business also provides specialist above ground drainage products. The Pipe and Climate business distributes pipes, valves and ﬁttings as well as air conditioning and refrigeration products to B2B customers in the commercial sector, mainly for non-residential new construction. Infrastructure is a specialist in below ground drainage. Operating under the Burdens and Fusion brands, it serves the civil infrastructure and utilities markets. Market trends The quarterly GDP growth rate has been relatively ﬂat for the last 12 months averaging just under 2 per cent. Consumer conﬁdence has been negative and declining for the last 12 months indicating an expected decline in the economy over the next 12 months. GDP growth1 % Calendar year 2.8 2.4 1.8 1.7 1.6 1.7 2.0 1.9 2.0 1.7 10 5 0 -5 -10 Consumer conﬁdence2 Q1 Q2 Q3 Q4 Q1 2015 Q2 Q3 2016 Q4 Q1 Q2 2017 1. GDP: % change compared to the same quarter of the previous calendar year. Source: OECD. 2. Conﬁdence: Index of results from a consumer conﬁdence survey that measures the level of optimism consumers have about the performance of the economy in the next 12 months. Source: Gfk Consumer Conﬁdence Index. Operating performance Like-for-like revenue was 1.0% ahead including price inﬂation of 2.2 per cent. Whilst new residential construction markets grew, repairs, maintenance and improvement markets, where we generate the majority of our trading proﬁt, were ﬂat. We continued to achieve good growth in the small customer segment which was offset by declining revenue in the large customer segments. The Pipe and Climate and Infrastructure businesses traded well and gained market share, though Plumbing and Heating markets remained challenging. We continue to invest in our B2C business, soak.com, which traded well and achieved good growth. Gross margins were ahead of last year and headcount was 2.8 per cent lower. Trading proﬁt of £76 million was £2 million ahead of last year. The trading margin grew by 10 basis points to 3.8 per cent. During the year we remained ﬁrmly focused on implementing the strategy we announced in September last year. The transformation programme is continuing and we made progress in simplifying our customer propositions and optimising the supply chain and branch network to deliver a more efficient business. The programme remains in the early stages. Exceptional restructuring charges of £40 million were partly offset by £11 million one-off credits relating to a pension curtailment gain. Strategic report Governance Financials Other information Canada and Central Europe Key highlights Five-year performance £m Like-for-like revenue growth of 3.6 per cent Trading margin of 4.3 per cent Canada markets improving 986 905 871 862 1,042 51 45 37 37 45 2013 Revenue 2014 2015 2016 2017 Trading proﬁt Quarterly like-for-like revenue growth % (1.3) (1.0) 0.7 1.4 (1.5) 1.2 7.3 7.9 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2016 2017 5 4 Revenue by market sector 3 2 1 Residential RMI 2 Non-residential RMI 3 Residential new construction 4 Non-residential new construction 5 Civil infrastructure 1 44% 17% 21% 16% 2% Business proﬁle Canada and Central Europe operates across two countries, Canada and the Netherlands. Wolseley Canada operates in the trade market serving the residential, commercial and industrial sectors in both RMI and new construction. Wasco in the Netherlands predominantly serves trade customers operating in residential RMI and residential new-construction markets. The businesses operate 245 branches with three distribution centres. At the year-end Canada and Central Europe had 2,862 associates. Business units and market position The size and market positions of the main businesses are: Percentage of revenue Market position1 Wolseley Canada Wasco (Netherlands) 80% 20% 2 3 1. Management’s estimate of market position. Wolseley Canada (80 per cent of revenue) supplies plumbing, heating, ventilation, air conditioning and refrigeration products to residential and commercial contractors. It also supplies specialist water and waste water treatment systems to residential, commercial and municipal contractors, and supply PVF solutions to oil and gas customers. Wasco (20 per cent of revenue) is a distributor of heating, plumbing and related spare parts across the Netherlands. Market trends Canadian GDP growth has been increasing steadily from a low in the ﬁnal quarter of calendar 2014 to a recent high of 2.3 per cent. Consumer conﬁdence has been growing with GDP and is currently at a peak of 110.8. GDP growth in the Netherlands has been increasing over the last 12 months to 2.5 per cent. Canada GDP growth1 % Calendar year 1.9 0.7 0.8 0.4 1.3 1.1 1.5 2.0 2.3 3.7 115 110 105 100 95 90 85 Consumer conﬁdence2 Q1 Q2 Q3 Q4 Q1 2015 Q2 Q3 2016 Q4 Q1 Q2 2017 1. GDP: % change compared to the same quarter of the previous calendar year. Source: OECD. 2. Conﬁdence: Index of results from a consumer conﬁdence survey that measures the level of optimism consumers have about the performance of the economy in the next 12 months. Source: The Conference Board of Canada. Operating performance In Canada and Central Europe like- for-like revenue grew by 3.6 per cent including price inﬂation of 1.7 per cent. Acquisitions contributed 0.9 per cent of additional growth. Canada grew well and the Netherlands also made very good progress. Gross margins were broadly ﬂat, mainly due to competitive conditions in Western Canada. Operating expenses were well controlled with headcount up 1.2 per cent. Exchange rate movements were favourable and increased trading proﬁt by £6 million. Reported trading proﬁt of £45 million was £8 million ahead of last year. The trading margin was maintained at 4.3 per cent. As previously announced the merger of our Tobler business with Walter Meier in Switzerland was completed on 6 April 2017 and we now own 39.2 per cent of the combined business. For the 8 months prior to the transaction Tobler generated £176 million of revenue and £11 million of trading proﬁt. Since the year end we have acquired three more businesses, Aircovent in the Netherlands and Plomberium Pierrefonds and Tackaberry in Canada, combined they generate £23 million of annualised revenue. Ferguson plc Annual Report and Accounts 2017 33 Sustainability Building a better business Ferguson’s “Better Business” framework comprises 13 material issues which actively support our growth, improve associate engagement, address our top risks and compliance requirements or are important to our shareholders, customers and suppliers. We strive to make these issues an integral part of how we do business, which is reﬂected in this report. Many of the issues are described within the key resources and relationships section on pages 22 to 25. Stakeholder engagement The framework was established following consultation with our stakeholders. A comprehensive review of our sustainability strategy is conducted each year and takes into account feedback from our investors, suppliers, customers, associates and third parties. Our values Our material issues Our principles Our people Talent management and development We are committed to people development at every level of All the organisation. Competitive pay and reward All We offer competitive remuneration to our people. Associate engagement All Diversity and inclusion All Health and safety All We value our associates and actively work to improve associate engagement. We understand, respect and value personal and cultural differences. We will not compromise the health or safety of any individual. Ethical behaviour and human rights All We adhere to strict Human Resources policies and comply with our own Code of Conduct. We act with integrity We conduct all our activities with fairness, honesty and integrity. Our products Product quality and integrity Responsible sourcing Promoting “eco” products We work with our suppliers to maintain excellent standards of product quality and safety. We expect our suppliers, contractors and agents to adhere to our Code of Conduct and to adopt similar standards. We are a positive link in the sustainable construction supply chain. We drive for results and improvements We listen and respond to the needs of our customers, then exceed their expectations. We are not happy with the status quo, and constantly strive to improve. We value our people We understand, respect and value personal and cultural differences; we are open and honest in all our dealings with our people. 34 Ferguson plc Annual Report and Accounts 2017 Our operations Environmental efficiency We run efficient operations that consume less energy and produce less waste. Compliance with the law We are committed to observing both the spirit and the letter of the law. Protecting information We protect both digital and physical information on behalf of our stakeholders. Our communities Active corporate citizen We voluntarily contribute our time and our ﬁnancial support to the communities in which we work. Strategic report Governance Financials Other information Key to drivers of proﬁtable growth Engaged associates Organic expansion Operating model and e-commerce development All All nine of our drivers of proﬁtable growth Excellent service ethic Bolt-on acquisitions Pricing discipline Strong sales culture Adjacent opportunities Own label penetration Opportunities Risks A multi-skilled and well trained workforce will help us to deliver against our objectives and adapt to changing customer needs. Changing operating models require us to constantly up-skill our people. A competitive marketplace puts greater emphasis on excellent career development to attract talent. Well structured remuneration and incentive programmes align associate and company objectives in order to maximise results. An uncompetitive remuneration programme could impact our ability to attract and retain the best people. Motivated and engaged people deliver excellent customer service, develop strong supplier relationships and maximise operational efficiencies. A diverse workforce brings with it the widest range of knowledge, skills and experience and promotes innovation. An inclusive environment allows our people to feel at ease in the workplace. A robust health and safety programme protects our people, customers and suppliers. It also improves productivity by reducing the number of days lost to injury. Low associate engagement can lead to sub-optimal business results and poor retention of our people. In an ever-changing market a lack of diversity can limit business progression. Our principal risks relate to manual handling, working at height, the use of motorised equipment and vehicle collisions. If not mitigated, these risks can harm our associates, impact our productivity and incur costs. See page 47, Health and safety. A commitment to high ethical standards strengthens our reputation with customers, suppliers and other stakeholders. The business is exposed to risks of bribery and fraud, which can damage our reputation. Compliance programmes are in place to mitigate these risks. See page 48, Government regulations. Sourcing and supplying safe, quality products improves our margins, enhances customer satisfaction and enables our people in branch to devote more time to service. Product-related litigation is recognised as one of our principal risks. For more detail on how we are managing the risk, see page 47. Working with reputable suppliers gives our stakeholders conﬁdence in the integrity of our supply chain, including standards around ethical labour, modern slavery, conﬂict minerals and anti-bribery and corruption. There is increasing focus on supply chain transparency due to the risk of business interruption or reputational harm. Where the opportunity exists, we can gain market share by supplying eco products and offering training and advice to our customers. Building regulations increasingly focus on sustainable construction. Growth opportunities can be missed if we do not adapt to our customers’ changing product needs. Better energy and waste management decreases costs and improves operational efficiencies. Compliance with legal regulations gives us a licence to operate. Robust systems and processes together with an informed workforce allow us to protect our sensitive or commercial data. Engagement with the communities in which we operate promotes our business and enhances people skills and engagement. Energy costs and increasing “green” taxes can reduce Ferguson’s proﬁt margins. We have reduction targets in place to minimise these costs. Mitigating the risk of non-compliance with increasing levels of governmental regulations is a priority (see page 48). Without certain licences the Company cannot operate. Information security is one of our principal risks. For more detail, see page 46. Ferguson has many locally established competitors who are active in the community. A lack of engagement with our communities can weaken our reputation with both customers and employees. Sustainability and drivers of proﬁtable growth The symbols above are displayed in the table to the left to indicate which of our strategic drivers are most directly supported by each of the “Better Business” programme components. The strategic drivers are summarised on page 17. Governance The overall “Better Business” framework is reviewed annually to test the ongoing materiality of the issues identiﬁed. The Group’s General Counsel is responsible to the Board for the overall programme. Objectives and, where appropriate, quantiﬁed targets are set for each material issue. Group-wide KPIs have not been set for all issues as it is not always practical to bring distinct local methods under one uniﬁed metric. Improved performance is the primary goal. Business units monitor performance throughout the year and performance reports are submitted to the Executive Committee and the Board at regular intervals. “Better Business” – progress in 2017 The following two pages provide an overview of our progress in the year under review. It is referenced when further information on these topics can be found elsewhere in this report. A greater level of detail is available on the Ferguson plc website www.fergusonplc.com. Ferguson plc Annual Report and Accounts 2017 35 Sustainability continued Our people Our progress on the six people issues is described on pages 22 to 24. Diversity and health and safety statistics and our human rights statement are provided below. All material issues relating to our people directly affect all of our strategic drivers on page 17. The effectiveness and level of engagement of our people is crucial in delivering on our strategy and maintaining the sustainability of the business. Talent management and development Page 22 Health and safety Ferguson had set a 2 per cent reduction target for each of the three health and safety metrics during the year under review. Injury rate 7.2% deterioration (1.63 per 100,000 hours worked) Lost workday rate 8.9% deterioration (53.75 per 100 employees) Fleet third party collision rate 6.0% improvement (14.45 per 100 vehicles) The deterioration in our injury and lost workday rates is disappointing and is primarily as a result of deteriorating rates in the USA. Further information on our key health and safety risks and the mitigating actions being taken is provided in the key resources and relationship section. Competitive pay and reward Pages 23 to 25 Pages 22 and 23 Associate engagement Page 23 Diversity and inclusion Total men Total women % women Directors (Board) Senior leadership1 7 78 4 16 Total associates2 31,434 9,631 36% 17% 23% 1. The Senior leadership group at Ferguson consists of managers drawn from business units and central functions with responsibility for planning, directing or controlling the activities of the Company. 2. Total associate numbers of 41,065 are reported above (total men plus total women) including all continuing businesses. The lower number of 33,000 reported on page 22 is the number of Full Time Equivalent associates for the ongoing businesses only. Our diversity policy statement can be seen on page 65. Page 23 Ethical behaviour and human rights Page 24 Human rights Both the United Nations Global Compact and Universal Declaration of Human Rights have been considered in determining the human rights issues that are material to Ferguson. These topics include associate policies (covering topics such as anti-discrimination), health and safety and ethics and conduct. All of these issues are managed through policies and programmes of work and are regularly monitored for compliance. Business partners and suppliers are expected to conform to Ferguson’s Code of Conduct. The Code of Conduct is detailed on the Ferguson plc website www.fergusonplc.com. Case study Working with responsible suppliers One of the steps taken by the Company to assess the ethical behaviours of suppliers is to screen their company names through a third-party risk assessment portal. This allows for identiﬁcation of any issues such as adverse media relating to regulatory breaches or employment practices, sanctions, criminal activity or links to senior ranking public officials. Tens of thousands of our suppliers have been assessed over the last two years. No high risk issues were identiﬁed. Ethical screening continues on higher risk entities. 36 Ferguson plc Annual Report and Accounts 2017 Our products Product quality and integrity During 2016/17, we continued to embed our quality control procedures for sourcing from the Far East. Quality teams in our Asian sourcing entities continue to visit and assess our suppliers. The overall framework for product integrity was reviewed and strengthened and additional resource was added to the quality team in the UK business. Responsible sourcing Each business assesses its suppliers against set criteria to provide protection to both us and our customers in the event of a product failure or breach of regulation in the supply chain. Page 24 Modern Slavery Act The UK Modern Slavery Act 2015 (“the Act”) requires Ferguson plc and its group of companies (“the Group”) to make an annual statement outlining the steps the business is taking to identify and prevent modern slavery within our organisation and its supply chain. Through its various business divisions, the Group sources, distributes and sells products in mature markets in North America and Western Europe. A small percentage of the Group’s own label products are sourced from other regions, principally in Asia. It is recognised that there could be a small risk of human trafficking or slavery in the manufacturing, distribution and logistics activities that are connected with our business. Ferguson plc has zero tolerance for such activities. The Group is undertaking a number of steps to minimise the risks of slavery occurring in our business or our supply chain. – We built upon our existing processes for background screening of suppliers so that now we have screened tens of thousands of our suppliers (see case study to the left). No slavery risks were identiﬁed in the process. The businesses continue to screen their highest risk entities (based on spend value, geographical location and business type). Strategic report Governance Financials Other information “I am personally engaged with health and safety specialists from our businesses to ensure that we consider and act on their views for best practices and opportunities for improvement.” John Martin Group Chief Executive (page 18) – Training on combating modern slavery was delivered in local language to associates in the Group’s sourcing operations in China in 2016. Similar training is planned for the Group’s Taiwanese operations in September 2017. – Audits and site visits of suppliers in low cost countries are undertaken on their appointment and periodically thereafter. Procedures are in place for on-boarding and evaluating such suppliers. – The Group has maintained a Code of Conduct and a conﬁdential whistleblowing line, applicable to all Ferguson businesses, which allow people to “speak up” in conﬁdence and without the fear of any negative consequences. This statement is made on behalf of all subsidiaries of Ferguson plc (www.fergusonplc.com) and is made pursuant to section 54(1) of the Act and constitutes our Group’s slavery and human trafficking statement for the ﬁnancial year ending 31 July 2017. Further information on the steps taken by the Group’s UK subsidiary can be found at www.wolseley.co.uk. Promotion of “eco” products Our businesses continue to monitor the market for “eco” products and promote these products where there is customer demand. For example, customers of our online business Build.com can ﬁlter their product search to view products with recognised national environmental labels. The UK and Dutch businesses each have a dedicated showroom to promote renewable technologies and publish targeted marketing material on these products. Page 24 Our operations Environmental efficiency Ferguson plc set ﬁve-year targets to reduce carbon (-10 per cent) and waste (-15 per cent) per £m revenue and to increase the percentage of waste that is recycled to 40 per cent. Each business has set its own targets for carbon and waste to support the achievement of the Group goals. Performance at the end of 2016/17, one year into the target period, is positive across all three performance measures. Carbon Total waste 3.0% improvement (26.3 tCO2e per £m revenue) 3.9% improvement (4.4 tonnes per £m revenue) % of total waste recycled 1.6% improvement from 30.1% to 31.7% Total revenue of £17,324 million (including discontinued businesses) is used when calculating the relative carbon and waste performance. The lower number of £14,878 million reported on page 12 is the revenue for the ongoing businesses. Total carbon emissions Tonnes of CO2 equivalent 468,322 448,966 455,144 116,234 137,815 110,697 116,257 144,190 139,472 214,273 194,079 199,416 2014/15 Scope 1 2015/16 2016/17 Scope 2 Scope 3 Total waste Tonnes 76,201 75,026 75,397 18,902 8,573 48,726 22,611 7,313 23,865 8,657 45,102 42,876 All Scope 1 and 2 emissions and selected Scope 3 emissions are reported. Further detail on the data provided can be found in the “Basis of Reporting” document on the Ferguson plc website www.fergusonplc.com. Page 25 Compliance with the law Legal and compliance teams across the Group work with the businesses to adhere to all legal and regulatory requirements. Protecting information As our channels to market develop so too does the technology that we employ and the data that we hold. We are committed to protecting the security of our systems and information so that customers can transact with us safe in the knowledge that we have the appropriate safeguards in place. The Group operates an IT governance framework, including a full set of dedicated IT policies, aligned to known security and operational risks. A broader Group information security policy determines how we protect all information wherever it exists and in whatever form (electronic or hard-copy). 2014/15 Landﬁlled 2015/16 Incinerated 2016/17 Recycled Pages 46 and 60 Due to rounding of the ﬁgures in the bar charts and tables there is not always a precise correlation with the sub-total and total performance ﬁgures. Inaccuracies identiﬁed in prior year numbers resulted in immaterial adjustments to the absolute carbon and waste totals in the charts above. tCO2e/£m revenue Carbon emissions Scope 1 and 2 emissions Scope 3 emissions Total emissions 2014/15* 2015/16* 2016/17 One- year variance 21.6 20.4 19.6 -4% 7.1 6.7 6.7 0% 28.7 27.1 26.3 -3% * Constant currency revenues are used in order to remove the impact of currency ﬂuctuations from our performance. This has reduced the relative carbon ﬁgures for prior years. Our approach to measuring carbon was developed in accordance with the Greenhouse Gas Protocol (“GHG Protocol”). Emissions are calculated using DEFRA and IEA carbon factors and are reported as tonnes of CO2 equivalent (abbreviated as tCO2e), based on the Global Warming Potential (“GWP”) of each of the “basket of six” greenhouse gases, as deﬁned by the Kyoto Protocol. Our communities Active corporate citizen Our businesses seek to be contributing members to the communities in which they operate. The Group supports a number of charitable organisations both at a Group and a business unit level. In 2016/17, Ferguson plc’s businesses contributed to a range of charities, including support for the homeless, scholarships for young apprentices and provision of care for sufferers of cancer and other illnesses. Our people engaged in numerous community and charity events during the year. Further information and case studies of the events our associates and businesses have supported over the last year can be found at www.fergusonplc.com. Ferguson plc Annual Report and Accounts 2017 37 Financial and operating review A good trading performance The Group delivered a good set of results in 2016/17, primarily driven by a strong performance in the USA. During the year, Ferguson continued to generate excellent cash ﬂow which enabled us to invest in organic growth and bolt-on acquisitions, while returning surplus cash to shareholders. Mike Powell Chief Financial Officer Key highlights of the ongoing business Group ongoing revenue growth at constant exchange rates of 8.6 per cent Revenue growth in the USA of 10.4 per cent at constant exchange rates Gross margin expansion of 0.4 per cent, trading proﬁt margins up 0.1 per cent Investment of £256 million in 11 acquisitions In addition to a good set of results, we have also made rapid progress on executing our strategy. Actions in the year included the business disposals in Central Europe and the USA and restructuring activities in the UK. In addition, the Group decided to divest all its businesses in the Nordic region. These changes, whilst beneﬁcial for the Group, do cause some complexity in the ﬁnancial statements. In order to monitor performance on a consistent basis the Group uses certain alternative performance measures which enable it to assess the underlying performance of its businesses. The Group’s key ﬁnancial performance metric is “Trading Proﬁt” which is operating proﬁt before exceptional items and the amortisation and impairment of acquired intangible assets. The Group’s deﬁnition of exceptional items includes costs incurred on major restructuring programmes, gains or losses on disposal of businesses and other signiﬁcant one-off items. In accordance with IFRS 5 “Non-current Assets Held for Sale and Discontinued Operations”, the Group’s results for its Nordic businesses have been included as discontinued operations in the current and prior year and are excluded from continuing operations. In addition, the Group has disposed of a number of businesses which do not satisfy the criteria of IFRS 5 and are therefore included in the Group’s results from continuing operations. The results from disposed businesses included in the Group’s continuing operations are excluded from the Group’s alternative performance measure of “ongoing results”. Any reference to “ongoing operations” excludes the performance of the Group’s discontinued and disposed businesses. See note 2 on pages 91 and 92 for further information, deﬁnitions and reconciliations of alternative performance measures. 38 Ferguson plc Annual Report and Accounts 2017 Performance of the ongoing business 2017 £m 14,878 4,301 (3,269) 1,032 28.9% 6.9% Restated 2016 £m 12,146 3,463 (2,636) 827 28.5% 6.8% Growth at constant exchange rates % +8.6% +9.8% +10.1% +8.7% Growth % +22.5% +24.2% +24.0% +24.8% +0.4% +0.1% Revenue Gross proﬁt Operating expenses Trading proﬁt Gross margin Trading margin Ferguson plc delivered a good set of results driven by the USA and some recovery in the UK and Canada. Residential and commercial markets in the US remained strong throughout the year and Industrial markets improved in the second half. The UK heating market remained weak and the market in Canada improved progressively through the year. Revenue in the ongoing business of £14,878 million (2015/16: £12,146 million) was 6.0 per cent ahead on a like-for-like basis with a further 2.1 per cent of growth from acquisitions, 0.4 per cent from one additional trading day and 0.1 per cent from new branches. Gross margins were 40 basis points ahead as we continued to focus on a better mix of higher value-added products and services and improving our purchasing terms. Trading proﬁt in the ongoing business was £1,032 million (2015/16: £827 million), 8.7 per cent ahead of last year at constant exchange rates. The trading margin in the ongoing business was 10 basis points ahead of last year at 6.9 per cent. Favourable foreign exchange rate movements added £122 million and an additional trading day increased trading proﬁt by approximately £9 million. Reconciliation between ongoing trading proﬁt and statutory operating proﬁt Ongoing trading proﬁt is reconciled to total statutory operating proﬁt as shown in the table below: Ongoing trading proﬁt Non-ongoing trading proﬁt Continuing trading proﬁt Amortisation of acquired intangible assets Impairment of acquired intangible assets Exceptional items Statutory operating proﬁt 2017 £m 1,032 27 1,059 (64) – 229 1,224 Restated 2016 £m 827 30 857 (48) (94) (4) 711 Strategic report Governance Financials Other information Non-ongoing trading proﬁt During the year, the Group disposed of a small non-core Industrial business, Endries, in the USA and its Swiss business, Tobler. These non-ongoing businesses generated revenue of £346 million (2015/16: £403 million) and trading proﬁt of £27 million (2015/16: £30 million). Discontinued operations Discontinued operations include the results of the Nordic region and France. The balance sheet relating to the Nordic region has been transferred to assets and liabilities held for sale. The result from discontinued operations is comprised as follows: Amortisation and impairment of acquired intangible assets Amortisation of £64 million (2015/16: £48 million) represents the normal recurring charge of the Group’s acquired intangible assets. The Group reviews the carrying value of its goodwill and acquired intangible assets annually and when there is an indicator of impairment during the year. No impairment of the continuing operations was identiﬁed as part of the annual impairment review. Goodwill, with a carrying value of £888 million (2015/16: £902 million), remains on the balance sheet and is supported by the value in use calculations. Exceptional items Net exceptional credits totalled £229 million (2015/16: £4 million charge) in the year, comprising £266 million gain on disposal of businesses, £40 million restructuring charges and £3 million of other exceptional credits. The gain on disposal of businesses was generated from the disposal of Tobler, Endries and a property company in Austria. The gain includes £49 million from the recycling of deferred foreign exchange translation differences, which are included in a translation reserve until disposal, in accordance with IAS 21 “The Effects of Changes in Foreign Exchange Rates”. Restructuring charges were primarily in relation to the UK turnaround strategy and principally comprised property closure and redundancy costs. Other exceptional items include an £11 million curtailment gain relating to the UK deﬁned beneﬁt pension plan. Statutory results The ﬁnancial statements have been prepared under IFRS and the Group’s accounting policies are set out on page 90. Discontinued trading proﬁt Amortisation of acquired intangible assets Impairment of acquired intangible assets Finance costs Exceptional items after tax Tax (Loss)/proﬁt from discontinued operations 2017 £m 63 (4) (102) (4) (58) – (105) Restated 2016 £m 59 (5) – (2) 154 (21) 185 The impairment charge of £102 million was in relation to the Group’s Swedish building materials business, Beijer. This resulted from the performance of Beijer deteriorating sharply in the ﬁrst half of the year, with trading proﬁt signiﬁcantly lower than the prior year and below management’s expectations. Discontinued exceptional items relate to the property exit and redundancy costs from the closure of branches across the Nordic region. Tax Ferguson plc is tax resident in Switzerland. The Group’s operations are international with 89 per cent of the Group’s ongoing trading proﬁt generated in the USA, 7 per cent generated in the UK and 4 per cent in other overseas territories before central costs. The Group’s proﬁts are therefore subject to different overseas tax rates and tax laws. Continuing operations Revenue Operating proﬁt Finance costs Share of result of associate Proﬁt before tax Tax Proﬁt from continuing operations (Loss)/proﬁt from discontinued operations Proﬁt for the year 2017 £m 15,224 1,224 (43) (1) 1,180 (292) 888 (105) 783 Proﬁt before tax increased 74.8 per cent primarily due to the gain on disposal of businesses of £266 million. Finance costs Finance costs before exceptional items were £43 million (2015/16: £36 million). The increase is due to foreign exchange rate movements, as the majority of the Group’s debt is held in US dollars, and a small increase in the pension interest expense. Restated 2016 £m 12,549 The pre intra-group ﬁnancing ongoing expected weighted average tax rate is 37.2 per cent (2015/16: 37.6 per cent) and this is reduced to a post intra- group ﬁnancing ongoing expected weighted average tax rate of 24.4 per cent (2015/16: 25.5 per cent) as detailed in note 7. 711 (36) – 675 (210) 465 185 650 Other than intra-group ﬁnancing and the recharging of shared administration costs, the Group currently has no signiﬁcant transfer pricing arrangements. The Group’s Tax Strategy is to maintain the highest standards of tax compliance. We support the execution of the Ferguson business strategy by managing our tax affairs in full compliance with local laws and international guidelines while seeking to maximise shareholder value and serving the interest of all our stakeholders. The Group Tax Strategy can be found at www.fergusonplc.com. The Group incurred a tax charge of £292 million (2015/16: £210 million) on proﬁt before tax of £1,180 million (2015/16: £675 million) resulting in an effective tax rate of 24.7 per cent (2015/16: 31.1 per cent). This tax charge includes an ongoing tax charge from ongoing operations before exceptional items, the amortisation and impairment of acquired intangible assets and non-recurring tax items of £277 million (2015/16: £217 million). This equates to an ongoing effective tax rate of 28.0 per cent (2015/16: 27.4 per cent) on the ongoing proﬁt before tax, exceptional items and the amortisation and impairment of intangible assets of £989 million (2015/16: £792 million). Although the ongoing effective tax rate has remained stable over the last few years, it is sensitive to the Group’s mix of geographical proﬁts, its internal ﬁnancing arrangements, international tax law and rate changes and the impact of acquisitions, disposals and restructurings. Ferguson plc Annual Report and Accounts 2017 39 Financial and operating review continued The ongoing effective tax rate is expected to remain at approximately 28 per cent next year although this could increase or decrease signiﬁcantly depending on the ﬁnal outcome of US tax reform changes. No reliable estimate can be made of the impact of these changes at this stage given the lack of detail currently available, although potential changes may decrease the ongoing effective tax rate and restrict interest deductibility. In the medium term, potential tax reform in Switzerland could also signiﬁcantly vary the rate but, as with the US tax reform above, there is insufficient detail currently available of the exact tax law changes to enable management to make a reliable estimate of their impact. The Group does not expect the ongoing effective tax rate to be inﬂuenced signiﬁcantly by international tax law changes arising from the OECD’s Base Erosion and Proﬁt Shifting Action Plan nor the outcome of Brexit over the next few years. The Group will continue to keep all external developments on the above issues under review. The Group paid £310 million (2015/16: £193 million) in corporation tax in the year. The corporation tax paid in the year will typically differ to the total tax charge in the income statement as a result of: – non-cash deferred tax expense or income arising from accounting requirements in IAS 12 “Income Taxes” to recognise tax which may become payable or recoverable in future periods; – adjustments to the current year’s tax charge in respect of the under or over provision of tax for prior years; and – timing differences between when tax is reﬂected as a charge in the accounts and when it is paid to the tax authority as typically tax payments relating to a particular year’s proﬁts are paid partly in the year and partly in the following year. Earnings per share Headline earnings per share increased by 23.1 per cent from 234.7 pence to 288.9 pence. Basic earnings per share from continuing operations were 353.4 pence and diluted earnings per share were 350.8 pence. Total basic earnings per share, including discontinued operations, were 311.6 pence and total diluted earnings per share were 309.4 pence. A signiﬁcant proportion of these increases were due to favourable foreign exchange translation. Impact of foreign exchange rates The Group reports its results in sterling. The main currency exposure arises on the translation of overseas earnings into sterling. The Group does not hedge this exposure as any earnings hedges have only a temporary effect. The Group’s policy is broadly to match the currencies in which its debt is denominated to the currencies in which its trading proﬁt is generated. The exchange rates used for the consolidated income statement and balance sheet are set out on page 139. The impact of foreign exchange rate movements on the ﬁnancial statements is shown in the table below. US dollar Other currencies Total Ongoing revenue £m Ongoing trading proﬁt £m Net assets £m +1,419 +131 +1,550 +116 +6 +122 (16) +36 +20 As previously announced, from 2017/18 the Group will present its consolidated ﬁnancial statements in US dollars and, as the majority of revenue and trading proﬁt is generated in US dollars, the impact of foreign exchange rate movements will be reduced. 40 Ferguson plc Annual Report and Accounts 2017 Cash ﬂow The Group has continued to generate strong cash ﬂows during the year with cash generated from operations of £1,115 million (2015/16: £1,019 million) and an excellent cash conversion ratio of cash generated from operations/ EBITDA (£1,289 million including £90 million EBITDA from discontinued operations) of 87 per cent (2015/16: 96 per cent). Cash generated from operations Interest and tax Acquisitions and capital expenditure Disposal proceeds Dividends Net purchase of shares by EBT Net proceeds from/(purchase of) Treasury shares Foreign exchange and other items Movement in net debt 2017 £m 1,115 (363) (434) 267 (259) (6) 21 61 402 2016 £m 1,019 (232) (331) 65 (238) (13) (286) (115) (131) Acquisitions and capital expenditure Acquisitions are an important part of our growth model and during the year we invested £256 million in 11 bolt-on acquisitions, principally in the USA. The strategy of investing in the development of the Group’s business models is supported by capital expenditure of £178 million (2015/16: £218 million). This investment was primarily for strategic projects to support future growth such as new distribution centres, distribution hubs, technology, processes and network infrastructure. As at 31 July 2017, the Group had total operating lease commitments of £854 million (2015/16: £853 million). Management believes there is substantial capacity for revenue growth utilising the existing branch infrastructure and will remain cautious when considering new lease commitments for the foreseeable future. Additional information can be found in note 34 on page 118. Returns to shareholders The Group is highly cash generative and the Board has established clear priorities for the utilisation of cash. In order of priority these are: to re-invest in organic growth opportunities; (i) (ii) to fund the ordinary dividend to grow in line with the Group’s expectations of long-term earnings growth; (iii) to fund bolt-on acquisitions to existing businesses where we have momentum and management bandwidth; and (iv) if there is excess cash after these priorities, return it to shareholders promptly. The Group paid an interim dividend of 36.67 pence per share (2015/16: 33.28 pence per share) amounting to £92 million. A ﬁnal dividend of 73.33 pence per share (2015/16: 66.72 pence per share), equivalent to £185 million is proposed. This brings the total dividend for 2016/17 to 110.00 pence per share, an increase of 10 per cent. Reﬂecting management’s conﬁdence in the business and the continuing strong cash generation of the Group, and after taking into account the excellent opportunities to invest in organic growth and acquisitions, the Board considers that the Group has surplus cash resources available. The Group will now commence a £500 million share buyback programme with the intention to complete this within the next 12 months. Strategic report Governance Financials Other information Net debt Net debt decreased during the year by £402 million to £534 million at 31 July 2017. The reduction is due to strong operating cash ﬂow generation of £1,115 million and disposal proceeds of £267 million partially offset by acquisition and capital investment of £434 million, dividends of £259 million and interest and tax payments of £363 million. Net debt was 0.45 times EBITDA before exceptional items at the end of the year (2015/16: 0.96 times). Liquidity The Group maintains sufficient borrowing facilities to ﬁnance all investment and capital expenditure included in its strategic plan with an additional margin for contingencies. The Group aims to have a range of borrowings from different ﬁnancial institutions to ensure continuity of ﬁnancing. At 31 July 2017, the Group had total committed facilities of £2,337 million (2015/16: £2,320 million). Of the Group’s committed facilities at 31 July 2017, £1,398 million (2015/16: £1,159 million) was undrawn and £606 million of the total facilities mature after more than ﬁve years. Pensions At 31 July 2017, the Group’s net pension liability of £21 million (2015/16: £147 million) comprised assets of £1,501 million (2015/16: £1,558 million) and liabilities of £1,522 million (2015/16: £1,705 million). IAS 19 (Revised) “Employee Beneﬁts” requires the Group to make assumptions including, but not limited to, rates of inﬂation, discount rates and current and future life expectancy. The value of the liabilities and assets could change materially if different assumptions were used. To help understand the impact of changes in these assumptions we have included key sensitivities as part of our pension disclosure in note 26 (iv) on page 112. In June 2017, the UK pension plan entered into a buy-in annuity insurance policy with a major insurance company to cover all existing pensioner liabilities. Measured against the long-term funding objective agreed between Ferguson and the Trustee, entering into the annuity represented a small funding improvement. On an IAS 19 accounting basis the annuity policy is recorded as a plan asset amounting to £497 million as at 31 July 2017. The UK pension plan was subject to a triennial valuation in April 2016 which has now been ﬁnalised. As a result, the Group will fund additional employer pension contributions of £25 million over the next two years. Other ﬁnancial matters Supplier rebates Supplier rebates, typically in the form of a volume-based reduction to a supplier’s list price, are commonly used by suppliers in our industry. Ferguson has agreements with a large number of its suppliers covering volume-based rebates, marketing support and other discounts receivable in connection with the purchase of goods for resale from those suppliers. More detail about the Group’s supplier rebates is disclosed in note 37 on page 120. The following amounts are included in the balance sheet at the year-end in relation to supplier rebates: Trade receivables Inventories Trade payables Net balance sheet position 2017 £m 177 (204) – (27) 2016 £m 182 (214) 15 (17) Capital structure The Group’s sources of funding currently comprise operating cash ﬂow, access to substantial committed bank facilities from a range of banks and access to capital markets in the USA. The Group maintains a capital structure appropriate for current and prospective trading and aims to operate with investment grade credit metrics and within a through-cycle range of net debt of 1 to 2 times EBITDA. Interest rates The Group’s weighted average cost of debt is 3.9 per cent. The largest part of this is the Group’s private placement bonds, which have an outstanding par value of £937 million and a weighted average ﬁxed interest rate of 3.3 per cent. Financial risk management The Group is exposed to risks arising from the international nature of its operations and the ﬁnancial instruments which fund them. These instruments include cash, liquid investments and borrowing and items such as trade receivables and trade payables which arise directly from operations. The Group also enters into selective derivative transactions, principally interest rate swaps and forward foreign exchange contracts, to reduce uncertainty about the amount of future committed or forecast cash ﬂows. The policies to manage these risks have been applied consistently throughout the year. It is Group policy not to undertake trading in ﬁnancial instruments or speculative transactions. Other ﬁnancial risks The nature of the Group’s business exposes it to risks which are partly ﬁnancial in nature including counterparty and commodity risk. Counterparty risk is the risk that banks and other ﬁnancial institutions which are contractually committed to make payments to the Group may fail to do so. Commodity risk is the risk that the Group may have purchased commodities which subsequently fall in value. The Group manages counterparty risk by setting credit and settlement limits for a panel of approved counterparties, which are approved by the Group’s Treasury Committee and are monitored regularly. The management of customer trade credit and commodity risk is considered to be the responsibility of operational management and, in respect of these risks, the Group does not prescribe a uniform approach across the Group. The Group’s principal risks (including strategic, operational, legal and other risks) are shown on pages 42 to 49. Going concern The Group’s principal objective when managing cash and debt is to safeguard the Group’s ability to continue as a going concern for the foreseeable future. The Group retains sufficient resources to remain in compliance with the ﬁnancial covenant of its bank facilities with substantial headroom. The Directors consider it appropriate to continue to adopt the going concern basis in preparing the ﬁnancial statements. The Directors have also assessed the Group’s prospects and viability over a three-year period. The viability statement can be found on page 43. Mike Powell Chief Financial Officer Ferguson plc Annual Report and Accounts 2017 41 Principal risks and their management Risk management at Ferguson Monitoring risk throughout the Group The Board is ultimately accountable for the system of risk management at Ferguson. The Board, Audit Committee and Executive Committee review risks and controls in the context of the Group’s strategic plan and objectives. Throughout the year, information is provided directly from front line operations, via corporate functions and independent audits. Board, Audit Committee and Executive Committee Fourth level Principal risks formally reviewed every six months by the Board and Executive. Thresholds for principal risks agreed. Overall system of risk management reviewed by the Audit Committee on behalf of the Board. Associate whistleblowing line Performance reports Risk reports in March and September Audit reports throughout the year 1. Front line business operations and line management e.g. branches and distribution centres First level Business operations implement policies. Associates act in line with Ferguson’s Code of Conduct and Group policies. Corporate functions analyse risk and control data, set policies and procedures Operations report on risk and control status and submit performance reports, e.g. injury statistics 2. Corporate functions Group and subsidiary level, e.g. risk, treasury, ﬁnance, legal and IT Second level Set policies and procedures. Monitor risks and controls. Collate and submit risk reports. Audit ﬁndings inform assessments of control effectiveness by Group Risk team Reports from Group Risk inform audit priorities and plans for the coming year 3. Independent assurance Internal audit, external auditors and other independent experts Third level Test the design and effectiveness of procedures and controls. 42 Ferguson plc Annual Report and Accounts 2017 Strategic report Governance Financials Other information Risk analysis during the year 2016/17 risk and control assessments Ferguson formally reviews its principal Group and business unit risks every six months – at the half-year and at the year-end. In January and July 2017, the Board provided its perspective on risks relating to the Group’s strategy for 2017/18 and beyond. The Board’s assessment was then combined with bottom-up risk reports received from business units in February and August 2017 to produce an overall risk proﬁle and report for the Group. This risk report, listing principal and “emerging” risks and how they have changed, was reviewed, amended and ﬁnalised with the Executive Committee in March and September 2017. The mitigation in place for each principal risk was then reported to and reviewed by the Audit Committee. Throughout the year, members of the Board, Audit Committee and Executive Committee have received updates on the Group’s principal risks, as follows: Risk Updates provided A B C D New competitors and technology Market conditions Pressure on margins Information security E Litigation F Health and safety G Strategic change H Regulations I Talent management and retention Formal analysis and update provided to the Board in September 2016. Related risks considered by the Board in January and July 2017 and by the Executive team in March and September 2017. Monthly performance reviews with CEO and CFO. CEO update to the Board at each Board meeting. Reports on the status of the Group’s information security programme were provided to the Executive Committee and the Board and the Audit Committee throughout the year. The Group General Counsel regularly provides updates to the Executive Committee and the Board on changes in legislation and any material litigation or exposures. Reports were provided on how the Group mitigates the risk of product integrity and related exposure. Performance updates were provided at every Executive Committee and Board meeting during the year. Monthly performance reviews with CEO and CFO. CEO update to the Board at each Board meeting. The status of the Group’s anti-bribery programme was reported to the Audit Committee in January 2017. The Board, supported by the Nominations and Audit Committees, has received detailed updates throughout the year from leadership teams around the Group. Longer-term viability of the Group Building on this risk analysis, the Directors have assessed the Group’s prospects and viability in light of its current ﬁnancial position, strategic plan and principal risks. The Board believes that a three-year viability assessment period to July 2020 is appropriate as this timeframe aligns with the Group’s planning horizon. Furthermore, the Group’s principal risks are ongoing in nature and could materialise at any time. None are triggered by a speciﬁc, known event that will happen beyond that three- year timeframe. Forecasting beyond the three-year timeframe does not therefore provide additional accuracy or risk insight. Strategic plans have been prepared by all business units and ﬁnancial forecasts and budgets have been reviewed by the Board. The principal risks to the Group’s strategy were formally reviewed by the Board in January and July 2017. Consideration has also been given to the strength of the Group’s balance sheet and its credit facilities. Financial forecasts have been tested against an unlikely, but realistic, worst-case scenario. This incorporates a material downturn occurring in the Group’s major markets. The material assumptions used in this analysis were based on a hypothetical market downturn resulting in a 20 per cent shortfall in forecast Group revenue in 2018, lasting for one year, followed by annual growth rate of 5 per cent thereafter. The impacts of the revenue fall have been ﬂowed through the cash ﬂow statement on a line by line basis using management assumptions which have then been tested against the historical trends experienced by the Group in the last economic downturn of FY08 – FY10. The testing took account of a number of mitigating cash ﬂow actions available to the business to respond to the market downturn – for example, a reduction in working capital, capital expenditure and tax alongside the elimination of acquisitions. Based on these assumptions, and considering the Group’s ﬁnancial position, strategic plans and principal risks, the Directors have a reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they fall due over the three-year period of their assessment. The Directors’ statement regarding the adoption of the going concern basis for the preparation of the ﬁnancial statements can be found on page 41. UK referendum result – June 2016 The UK referendum result of a vote to leave the European Union continues to produce some market uncertainties including a material weakening of sterling against the Group’s principal trading currencies, of which the most signiﬁcant is the US dollar. The weakening of sterling has had a translation impact on the Group’s ﬁnancial statements with a beneﬁcial impact on results. In future years, the Company will report in US Dollars. Since the large majority of the Group’s proﬁt is derived from activities outside of the UK and Europe, the Group does not, at this point in time, envisage a material adverse impact in the future. The Group will continue to monitor developments. Ferguson plc Annual Report and Accounts 2017 43 Principal risks and their management continued Heat map (before mitigating controls and actions) The heat map below illustrates the relative positioning of our principal risks by severity and likelihood. Severity scales are different to those used in previous annual reports and are not directly comparable. Principal risks A New competitors and technology B Market conditions C Pressure on margins D Information security E F Litigation Health and safety G Strategic change H Regulations I Talent management and retention Before mitigating controls or actions H B C G A D E F h g H i i m u d e M y t i r e v e S w o L Less likely Likelihood I More likely The materialisation of these risks could have an adverse effect on the Group’s results or ﬁnancial condition. If more than one of these risks occur, the combined overall effect of such events may be compounded. The chart shows management’s assessment of material risks before mitigating controls and actions. Various strategies are employed to reduce these inherent risks to an acceptable level. These are summarised in the tables on the following pages. The effectiveness of these mitigation strategies can change over time, for example with the acquisition or disposal of businesses. Some of these risks remain beyond the direct control of management. The risk management programme, including risk assessments, can therefore only provide reasonable but not absolute assurance that risks are managed to an acceptable level. The Group faces many other risks which, although important and subject to regular review, have been assessed as less signiﬁcant and are not listed here. These include, for example, natural catastrophe and business interruption risks and certain ﬁnancial risks. A summary of ﬁnancial risks and their management is provided on pages 41 , 107 and 108. Risks to the drivers of proﬁtable growth The symbols shown at the bottom of page 45 are displayed alongside each risk on the following pages to indicate which of the strategic drivers of growth are most threatened by that risk. These strategic drivers are described on page 17. A New competitors and technology Inherent risk level High Trend Increased Deﬁnition and impact Wholesale and distribution businesses in other industry sectors have been disrupted by the arrival of new competitors with lower-cost business models or new technologies to aggregate demand away from incumbents. The Board is attuned to both the risks and opportunities presented by these changes and is actively engaged as the Group takes action to respond. Changes during the year Increased resources were allocated to the exploration and incubation of new business models and new technologies. The Group made a number of acquisitions of online businesses during the year. A new Non Executive Director, Nadia Shouraboura, joined the Board, bringing experience of large international e-commerce businesses. Mitigation The Group develops and invests in new business models, including e-commerce, to respond to changing customer and consumer needs. One example, online channels in our HVAC business, is set out on page 11. The Company remains vigilant to the threats and opportunities in this space. The development of new business models in our market place is closely evaluated – both for investment potential and threats. Key to risks Risk has increased Risk has decreased Risk is unchanged Risk has been added to the list of top Group risks this year 44 Ferguson plc Annual Report and Accounts 2017 Strategic report Governance Financials Other information B Market conditions Inherent risk level High Trend No change Deﬁnition and impact This risk relates to the Group’s exposure to short-term macroeconomic conditions and market cycles in our sector (i.e. periodic market downturns). Some of the factors driving market growth are beyond the Group’s control and are difficult to forecast. Further information on the trends in each of our regions can be found on pages 28 to 33. Changes this year The downturn seen in industrial markets in 2015/16 has stabilised. The UK’s vote to leave the European Union continues to create a level of uncertainty affecting the UK economy, although this is not expected to have a material impact on the Group. The Group has maintained a strong balance sheet throughout the year and other measures have been taken to manage the cost base in line with forecast growth. The Group has again tested its ﬁnancial forecasts, including cash ﬂow projections, against the impact of a severe market downturn. Mitigation The Group cannot control market conditions but believes it has effective measures in place to respond to changes. Ferguson continues to reinforce existing measures in place, including: – the development of our business model; – cost control, pricing and gross margin management initiatives, including a focus on customer service and productivity improvement; – resource allocation processes; and – capital expenditure controls and procedures. C Pressure on margins Inherent risk level High Trend No change Deﬁnition and impact Ferguson’s ability to maintain attractive proﬁt margins can be affected by a range of factors. These include levels of demand and competition in our markets, the arrival of new competitors with new business models, the ﬂexibility of the Group’s cost base, changes in the cost of commodities or goods purchased, customer or supplier consolidation or manufacturers shipping directly to customers. There is a risk that the Group may not identify or respond effectively to changes in these factors. If it fails to do so, the amount of proﬁt generated by the Group could be signiﬁcantly reduced. Changes during the year Pressure on margins remained high during the period under review, primarily due to levels of competition. Commodity price deﬂation eased during the year. In response, the Group has continued to manage its cost base in line with changes in expected growth rates. Business unit performance, including margins achieved, were monitored monthly throughout the year. Gross margins were 40 basis points ahead of last year. This was achieved by driving the beneﬁts of scale in sourcing, growing own label sales and through good pricing discipline. Mitigation The Group’s strategy for tackling this issue remains unchanged. This includes continuous improvements in customer service, product availability and inventory management. Revenues from e-commerce and other growth sectors continue to expand and the Group has made acquisitions in these areas during 2016/17. The performance of each business unit is closely monitored and corrective action taken when appropriate. Resource allocation processes invest capital in those businesses capable of generating the best returns. Key to drivers of proﬁtable growth Engaged associates Organic expansion Operating model and e-commerce development All All nine of our drivers of proﬁtable growth Excellent service ethic Bolt-on acquisitions Pricing discipline Strong sales culture Adjacent opportunities Own label penetration Ferguson plc Annual Report and Accounts 2017 45 Principal risks and their management continued D Information security Inherent risk level High/medium Trend No change Deﬁnition and impact Technology systems and data are fundamental to the future growth and success of the Group. These digital assets are threatened by sophisticated security threats, including hacking, viruses, “phishing” or inadvertent errors. The Group is reliant on a number of different legacy technology systems, some of which have been in place for many years or have been subject to in-house development. Data breaches in our industry sector and others indicate that such events are highly likely and difficult to prevent. Sensitive employee, customer or other data may be stolen and distributed or used illegally, leading to increased operating costs, litigation and ﬁnes or penalties. These technology systems, on which our branches, distribution centres and e-commerce businesses rely, may be disrupted for several hours or days. As a result, Ferguson could forego revenue or proﬁt margins if we are unable to trade. Changes during the year This risk has remained material, as a greater proportion of the Group’s revenue is derived from e-commerce. The level and sophistication of IT security threats is constantly developing. Like all large corporations, the Group continues to experience sustained and frequent attempts to gain unauthorised access to its technology systems, primarily from automated, non-directed malware. During the year, the Group engaged a specialist security consultancy to benchmark its information security capabilities. The ﬁndings, along with improvement actions, have been shared with the Audit Committee. Further penetration tests have been conducted, using both digital and physical means, e.g. phone calls. Improvements have been made where necessary. Technical IT projects continue to deliver enhancements to the Group’s digital security systems and infrastructure. The Group reviewed the adequacy of its “cyber” insurance arrangements. Using a database of 50,000 historical data breaches, the Group conducted a statistical analysis to estimate its exposure to certain types of cyber risks. Brieﬁngs on the status of the Group’s information security programme were provided to the Board, the Audit Committee and the Executive Committee throughout the year. Mitigation The Group operates an IT governance framework including a set of dedicated IT policies, procedures and standards aligned to known security and operational risks. These include behavioural procedures for associates and technical controls for IT systems. These are reviewed annually and are subject to continuous improvement. The Group periodically reviews the nature of the sensitive data it holds, its location and the controls in place to protect it. The Group reviewed its approach to obtaining assurance over the correct operation of IT systems and controls, some of which relate to cyber risks. Certain of these controls are tested by business units and the Group IT and internal audit functions. External specialists are also employed as appropriate to test the security of our technology systems, e.g. penetration tests. Core IT systems and data centres for the Group’s material businesses, including the Group’s principal e-commerce businesses, have documented disaster recovery plans which are tested annually. Crisis management and communications plans are regularly updated. Insurance coverage is in place, including coverage for “cyber” risks. Key to risks Risk has increased Risk has decreased Risk is unchanged Risk has been added to the list of top Group risks this year 46 Ferguson plc Annual Report and Accounts 2017 Strategic report Governance Financials Other information E Litigation Inherent risk level Medium Trend No change Deﬁnition and impact The international nature of the Group’s operations exposes it to the potential for litigation from third parties and such exposure is considered to be greater in the USA than in Europe. Material levels of litigation may arise from many of the Group’s activities. Signiﬁcant levels of litigation in our industry sector have in the past related to products, associates or major contracts. Acquisitions and disposals and the restructuring of under-performing businesses may also give rise to litigation. For more information on litigation affecting the Group and related provisions, see pages 109 and 119. Changes this year During the year, there has been no material change in the level of litigation to which the Group is exposed. An improved management information system was introduced to improve the reporting and analysis of actual and potential litigation. Reviews of policies and procedures relating to product liability were undertaken during the year and the ﬁndings were reported to the Board. Particular focus is being placed on quality control and assurance procedures to support the successful growth of own label sales. The level of contractual protection afforded to the Group under product and employee-related contracts has improved during the year. Contracting procedures continue to be improved in all businesses. The Group’s liability insurance programme was restructured to provide enhanced cover. Mitigation Levels of litigation are monitored by individual operating companies. A monthly report of potential exposures and current litigation is submitted by all businesses and reviewed by the Group General Counsel. Contracting procedures are continuously reviewed and improved against a “good practice” framework used by all Ferguson businesses. The Group periodically re-assesses the level of product-related risk in all business units. Due diligence is conducted on products and suppliers considered to be high risk. Product testing is carried out in certain businesses supplying product to industrial customers. KPIs are used to measure the level of contractual and other protection. In the case of claims related to exposure to asbestos, Ferguson continues to employ independent professional advisers to actuarially determine its potential gross liability. F Health and safety Inherent risk level Medium Trend Increased Deﬁnition and impact The Group does not operate in a high risk industry with regard to health and safety. The nature of Ferguson’s operations can nevertheless expose its employees, contractors, customers, suppliers and other individuals to health and safety risks. Health and safety incidents can lead to loss of life or severe injuries. Changes this year The risk has been elevated this year following the deterioration in injury and lost workday rates. The Company is recruiting a senior leader for health and safety in the USA. The Group conducted in-depth driver risk assessments and implemented control improvements. The Group vehicle collision rate has improved. Page 23 provides further information. Mitigation Leadership of health and safety is key. Health and safety performance is reported to and discussed at all Group Executive Committee meetings and Board meetings. The Group maintains a health and safety policy and detailed minimum standard, which sets out requirements which all Ferguson businesses are expected to meet. Branches are audited against this standard. Key to drivers of proﬁtable growth Engaged associates Organic expansion Operating model and e-commerce development All All nine of our drivers of proﬁtable growth Excellent service ethic Bolt-on acquisitions Pricing discipline Strong sales culture Adjacent opportunities Own label penetration Ferguson plc Annual Report and Accounts 2017 47 Principal risks and their management continued G Strategic change Inherent risk level Medium Trend Decreased Deﬁnition and impact To respond to changing customer needs the Group is changing traditional ways of working in its established businesses. H Regulations Inherent risk level Medium Trend No change These changes are underway in all of our key markets, especially the UK, and will continue for several years. The Group must successfully implement these changes without disrupting existing operations. The Group’s ability to successfully execute these changes will affect its ability to grow proﬁtably in the future. Deﬁnition and impact The Group’s operations are affected by various statutes, regulations and standards in the countries and markets in which it operates. The amount of such regulation and the penalties can vary. While the Group is not engaged in a highly regulated industry, it is subject to the laws governing businesses generally, including laws relating to competition, product safety, timber sourcing, data protection, labour and employment practices, accounting and tax standards, international trade, fraud, bribery and corruption, land usage, the environment, health and safety, transportation, payment terms and other matters. Breach of any legal or regulatory requirement could result in signiﬁcant ﬁnes and penalties and damage to the Group’s reputation. Changes during the year During the year, we announced our intention to dispose of our operations in the Nordics. In the UK, the transformation plan is underway and we expect that it will take a further two years to complete. To support faster execution, greater focus has been paid to a smaller number of initiatives capable of delivering the greatest value. Mitigation Each business unit has a clear strategy for continuously developing its business model and a deﬁned programme of work to execute the strategy. The Group Chief Executive and Chief Financial Officer discuss progress with each business unit during regular performance reviews. The Board reviews progress during regular updates from the Group Chief Executive and as part of its six-monthly review of principal risks. Changes during the year There has been no major change in the level of regulation applying to the Group. Anti-bribery and anti-corruption practices in all businesses were reviewed during the year and the ﬁndings reported to the Executive Committee and to the Audit Committee. Improvements are being implemented. The Group reviewed its Code of Conduct. Further information on the Group’s ethics and compliance programme can be found on pages 24 and 36. Mitigation The Group monitors the law across its markets to ensure the effects of changes are minimised and the Group complies with all applicable laws. The Group’s Code of Conduct sets out the behaviours expected of Ferguson associates. This includes clear statements that the Group does not permit bribery or the giving or receiving of improper gifts, that it does not tolerate fraud and that associates must comply with anti-trust laws. The Group aligns Company-wide policies and procedures with its key compliance requirements and monitors their implementation. Brieﬁngs and training on legal and regulatory topics and compliance requirements, including anti-trust, anti-fraud and anti-corruption, are undertaken. Where appropriate, tests are conducted to ensure that the Group would respond appropriately to a regulatory investigation. Key to risks Risk has increased Risk has decreased Risk is unchanged Risk has been added to the list of top Group risks this year 48 Ferguson plc Annual Report and Accounts 2017 Strategic report Governance Financials Other information I Talent management and retention Inherent risk level Medium Trend New addition All Deﬁnition and impact As the Group develops new business models and new ways of working, it needs to develop suitable skill-sets within the organisation. Furthermore, as the Group continues to execute a number of strategic change programmes, it is important that existing skill-sets and talent is retained. Failure to do so could delay the execution of strategic change programmes, result in a loss of “corporate memory” and reduce the Group’s supply of future leaders. Changes during the year There has been no material change in the level of employee turnover during the year; however a number of senior management changes have occurred throughout the Group. These have included the retirement of the Group CEO and the CEO in the USA, the appointment of their successors and the appointment of a new Group Chief Financial Officer. Talent management procedures were reviewed during the year. Page 22 provides further information. Mitigation All of the Group’s businesses have established performance management and succession planning procedures. Reward packages for associates are designed to attract and retain the best talent. Organisational and talent reviews are conducted quarterly by the Group HR Director with each business. The Group continues to invest in associate development, an example of which – our Industrial Group University – is highlighted on page 9. Key to drivers of proﬁtable growth Engaged associates Organic expansion Operating model and e-commerce development All All nine of our drivers of proﬁtable growth Excellent service ethic Bolt-on acquisitions Pricing discipline Strong sales culture Adjacent opportunities Own label penetration The Strategic report has been approved by the Board and signed on its behalf by: John Martin Group Chief Executive Ferguson plc Annual Report and Accounts 2017 49 Governance 51 52 Governance overview Board of Directors 54 How the Board operates 56 Ferguson’s governance structure 57 What the Board has done during the year 58 59 Evaluating the performance of the Board of Directors Relations with shareholders 60 Audit Committee 64 Nominations Committee 66 Directors’ Report – other disclosures 69 Directors’ Remuneration Report Drivers of proﬁtable growth On the following pages the symbols below indicate where the activity of the Board and its Committees related to the drivers for proﬁtable growth set out in the Group Chief Executive’s review on page 17. Engaged associates Operating model and e-commerce development Excellent service ethic Pricing discipline Strong sales culture Own label penetration All All nine of our drivers of proﬁtable growth Organic expansion Bolt-on acquisitions Adjacent opportunities Compliance with the Code Throughout the ﬁnancial year ended 31 July 2017, the Company has been in compliance with the Code provisions set out in the 2016 UK Corporate Governance Code (the “Code”). The Company’s auditors, Deloitte LLP, are required to review whether the above statement reﬂects the Company’s compliance with the provisions of the Code speciﬁed for their review by the Listing Rules of the UK Listing Authority and to report if it does not reﬂect such compliance. No such report has been made. A copy of the Code can be found on the Financial Reporting Council website www.frc.org.uk. 50 Ferguson plc Annual Report and Accounts 2017 Strategic report Governance Financials Other information Governance overview A strong governance culture Gareth Davis Gareth Davis Chairman Chairman Committed to achieving high standards of corporate governance in the boardroom and throughout the Group. Dear Shareholder I am pleased to present the Company’s Corporate Governance Report for the ﬁnancial year ended 31 July 2017. This report explains how the Board operates and how our governance structure contributes to the achievement of the Group’s long-term strategic objectives. This section, together with the reports from the Audit, Nominations and Remuneration Committees beginning on pages 60, 64 and 69 respectively, provide a description of how the Group has applied the main principles and complied with the relevant provisions of UK Corporate Governance Code (the “Code”). We remain committed to full compliance with the Code and to achieving high standards of corporate governance both in the boardroom and throughout the Group. We have used the core principles of the Code as the framework within which we explain our governance practices in this report – please see the boxes below, which direct you to further detail. I also note with interest the UK Government’s proposals for corporate governance reform published in August 2017. Your Board will continue to monitor these proposed reforms as they develop to ensure that we remain fully compliant and that our high standards of corporate governance are maintained. The Board remains committed to presenting a clear assessment of the Company’s position and prospects through the information provided in this report, through interim ﬁnancial statements and other narrative and ﬁnancial reports and statements as required. In addition to our usual programme of business, set out on page 57, the Board has this year placed particular emphasis on succession planning and the delivery of the Group’s three strategic priorities as set out in last year’s report – to generate the best proﬁtable growth in the USA, to execute the UK turnaround and repositioning plan and to review the Nordics operational strategy and restore the business to proﬁtable growth. Detail of how your Board has supported delivery of the Group’s strategic priorities is provided in my Chairman’s statement on page 13, and later in this section on page 57. It has also been a particularly active year for the Board in terms of succession planning and Board appointments, more detail is provided in the Nominations Committee report on pages 64 and 65. The Board is responsible for determining the nature and extent of the principal risks it is willing to take in achieving its strategic objectives and for maintaining sound risk management and internal control systems. The effectiveness of these systems is reviewed through the work of the Audit Committee described on pages 60 to 63. During the year, the Board and its Committees carried out a robust assessment of the risks facing the business and the principal risks which the Board has focused on are set out in the Principal risks and their management section on pages 42 to 49. In the coming year your Board will continue to work to support the implementation and excellent execution of the Group’s strategy. Your Board continues to strive for improvement and the areas for further development identiﬁed in the annual effectiveness review have been noted as priority areas for 2017/18. Details of the effectiveness review and the Board’s priorities for the coming year are set out on page 58. As usual, during the year the Non Executive Directors, led by the Senior Independent Director, conducted their annual evaluation of my performance. I also chair two other listed companies and this is speciﬁcally taken into account in the evaluation. The Board believes that I continue to perform effectively and to devote sufficient time and attention to my role as Chairman of the Company. A process to identify my successor as Chairman of William Hill PLC is underway and I envisage that I will stand down from that role by May 2018, once my successor has been appointed. Ferguson’s Group-wide policies and procedures provide a framework for governance and are underpinned by the Group’s core values and its Code of Conduct. The Group’s core values set the expectation that all employees, at all levels, will: place value on our people by encouraging development; act with integrity; and drive for results and improvement. Culture and good governance are inherently linked and your Board recognises the fundamental importance of a corporate culture that is aligned with and supportive of the Group’s long-term strategic objectives. However, culture is, ultimately, an output resulting from the individual and collective actions of the Group’s associates. The Board has oversight of the Group’s “Better Business” framework, described in detail on pages 34 and 35, which sets out the 13 material issues we consider essential to how we do business. Objectives and, where appropriate, quantiﬁed targets are set for each of these material issues and regular performance updates are submitted to the Board. I would like to take this opportunity to thank our shareholders for their continuing support. The Board and I will be available to respond to any questions on this report or any of the Committee’s activities at our 2017 AGM in November and I look forward to welcoming those shareholders able to attend. Gareth Davis Chairman Leadership Continued close focus on strategy and its execution. Effectiveness A strong, open and effective Board. Accountability Close scrutiny of risks and controls. Remuneration Prudent oversight of executive remuneration. Relations with shareholders Open engagement with shareholders. Pages 52 to 58, 64 and 65 Pages 52 to 58, 64 and 65 Pages 60 to 63 Pages 69 to 84 Page 59 Core principles Ferguson plc Annual Report and Accounts 2017 51 Board of Directors Leadership and effectiveness A diverse and effective leadership team The primary role of the Board is to provide effective and entrepreneurial leadership necessary to enable the Group’s business objectives to be met and to review the overall strategic development of the Group as a whole. 6 10 4 11 1 2 7 3 9 5 8 Appointments and other Board and Committee members Each Board member listed here served throughout the ﬁnancial year ended 31 July 2017 with the exceptions of Mike Powell, Kevin Murphy and Nadia Shouraboura. Mr Powell was appointed Group Chief Financial Officer with effect from 1 June 2017 and Ms Shouraboura was appointed Non Executive Director with effect from 1 July 2017. Mr Murphy succeeded Frank Roach as Chief Executive Officer, USA and was appointed on 1 August 2017. Frank Roach was a Director and a member of the Executive Committee throughout the ﬁnancial year ended 31 July 2017. Mr Roach retired on 31 July 2017. Ian Meakins served as Group Chief Executive, Chair of the Executive Committee and a member of the Disclosure, Major Announcements and Treasury Committees for one month during the ﬁnancial year ended 31 July 2017, from the beginning of the year until his retirement on 31 August 2016. Gareth Davis 1 Chairman NM John Martin 2 Group Chief Executive D E M T Year of appointment 2011 (appointed Chairman) 2003 (appointed to the Board as a Non Executive Director) Key strengths and experience Extensive international board and general management experience, having served on various company boards for many years. Mr Davis spent 38 years in the tobacco industry and was Chief Executive of Imperial Tobacco Group plc from its incorporation in 1996 until May 2010. Other principal appointments Chairman of William Hill PLC and DS Smith Plc. Year of appointment 2016 (appointed Group Chief Executive) 2010 (appointed to the Board as Group Chief Financial Officer) Key strengths and experience Extensive operational and ﬁnancial management experience of running large international businesses. Mr Martin has strong leadership capabilities and signiﬁcant experience in strategic development and driving improvements in operational performance. He joined the Company as Chief Financial Officer and assumed management responsibility for the Group’s Canadian business between 2013 and 2016. Previously he was a partner at Alchemy Partners, the private equity group, and prior to that was Chief Financial Officer of Travelex Group, the international payments business and Hays Plc. Other principal appointments None. 52 Ferguson plc Annual Report and Accounts 2017 Throughout the ﬁnancial year ended 31 July 2017, Dave Keltner served as Interim Group Chief Financial Officer and as a member of the Disclosure, Executive, Major Announcements and Treasury Committees. During the year, Mr Keltner also served as Chairman of the Disclosure and Treasury Committees until the appointment of Mr Powell on 1 June 2017. Mr Keltner was not a Director but attended all Board meetings in his capacity as Interim Chief Financial Officer. In addition to the members of the Major Announcements Committee identiﬁed on pages 52 and 53, Richard Shoylekov, Group General Counsel, and Mark Fearon, Group Director of Communications and Investor Relations, are members of that Committee. Mike Powell 3 Group Chief Financial Officer D E M T Year of Appointment 2017 Key strengths and experience Considerable ﬁnancial management and operational experience. Experience of running multi-national businesses with signiﬁcant USA operations. Mr Powell, a chartered management accountant, joined the Company on 1 June 2017 as Group Chief Financial Officer. From July 2014 until his appointment at Ferguson Mr Powell was Group Finance Director of BBA Aviation plc, one of the world’s leading providers of aviation support services. Before joining BBA he served as CFO of AZ Electronic Materials plc and CFO of Nippon Sheet Glass, based in Tokyo. Prior to that he spent 15 years at Pilkington plc in a variety of operational and ﬁnance roles. Other principal appointments Non Executive Director of Low & Bonar plc. Strategic report Governance Financials Other information Kevin Murphy 4 Chief Executive Officer, USA Pilar López 7 Independent Non Executive Director Nadia Shouraboura 10 Independent Non Executive Director E M Year of Appointment 2017 A N R Year of Appointment 2013 A N R Year of Appointment 2017 Key strengths and experience Strong leadership skills and deep industry knowledge. Mr Murphy has a strong track record of driving sustainable proﬁtable growth. In our business he is responsible for all of the Group’s businesses based in the USA. From 2007 until his appointment as Chief Executive of Ferguson Enterprises on 1 August 2017, Mr Murphy was Chief Operating Officer of Ferguson Enterprises and a member of its senior leadership team. He joined Ferguson Enterprises as an Operations Manager in 1999 and subsequently held several leadership positions including three years as Vice President of the USA Waterworks division. Other principal appointments None. Key strengths and experience Strong ﬁnancial and international experience within global businesses. Ms López was Chief Financial Officer for Telefónica Europe from 2007 to 2014 and Global Simpliﬁcation Director for Telefónica S.A from 2014 until taking up her current position at Microsoft Spain in March 2015. She was also Supervisory Board member of Telefónica Czech Republic AS and Vice Chair of Telefónica Deutschland Holding AG. She joined Telefónica in 1999, working in a number of ﬁnance and strategy positions across the European and Latin American businesses. Prior to this she worked in a variety of roles at J. P. Morgan, in Madrid, London and New York where she became a Vice President. Other principal appointments Country Manager for Microsoft Spain. Tessa Bamford 5 Independent Non Executive Director Alan Murray 8 Independent Non Executive Director A N R Year of Appointment 2011 A M N R S Year of Appointment 2013 Key strengths and experience Extensive boardroom and City experience. Ms Bamford has broad business experience having held senior advisory roles in both the UK and USA across a range of sectors. She was formerly a founder and Director of Cantos Communications, an online corporate communications service provider (2001 to 2011). Previously, she was a Director of J Henry Schroder & Co, where she worked for 12 years in a number of roles and, prior to that, worked in corporate ﬁnance for Barclays de Zoete Wedd. Other principal appointments Consultant at Spencer Stuart and a Non Executive Director of Barratt Developments plc. Key strengths and experience Considerable international operational experience and extensive executive management experience within global businesses. Mr Murray was, from 2010 until August 2017, a Member of the Supervisory Board of HeidelbergCement AG and was previously a Non Executive Director of International Power plc (2007 to 2011). Prior to that, he spent 19 years at Hanson plc and was Group Chief Executive between 2002 and 2007. From 2007 until 2008, he was a member of the Management Board of HeidelbergCement AG. Mr Murray is a qualiﬁed chartered management accountant. Other principal appointments Non Executive Director of Owens-Illinois, Inc. John Daly 6 Independent Non Executive Director Darren Shapland 9 Independent Non Executive Director A N R Year of Appointment 2014 A N R Year of Appointment 2014 Key strengths and experience Considerable international business and executive management experience in a variety of senior leadership roles within major international public companies. Mr Daly undertook various executive leadership positions during a 20-year career at British American Tobacco Plc (“BAT”), running large international businesses. Mr Daly recently stepped down as a Non Executive Director of Reynolds American Inc., a BAT associate company in the USA. Prior to his time with BAT, Mr Daly was Managing Director of Rothmans International’s Japan and South Korea businesses. Other principal appointments Chairman of Britvic plc and a Non Executive Director of G4S plc. Key strengths and experience Considerable commercial, operational, ﬁnancial management and broad public company experience in major retail businesses. Until September 2016 Mr Shapland was Chairman of Poundland Group plc. He was a Non Executive Director of Ladbrokes plc and was Chairman of its Audit Committee until 2015. Between 2012 and 2013, he was Chief Executive Officer of Carpetright plc. From 2005 to 2010, Mr Shapland was Chief Financial Officer of J Sainsbury plc and from 2010 to 2011, Group Development Director. He was also Chairman of Sainsbury’s Bank. Prior to that, Mr Shapland held a variety of senior ﬁnance and operational positions at Carpetright plc, Superdrug Stores plc, the Burton Group and Arcadia. Other principal appointments Chairman of Maplin Electronics Limited, MOO Print Limited, Notonthehighstreet.com and Topps Tiles Plc. Key strengths and experience Considerable expertise in running complex logistics and supply chain activities, with insight in cutting edge technology and deep knowledge of e-commerce. Ms Shouraboura was a Vice President at Amazon.com, Inc. where she served on the senior leadership team. After eight years at Amazon, she founded Hointer Inc., a consultancy that helps retailers create innovative in-store experiences. Prior to her time at Amazon Ms Shouraboura was Head of System Development for Trading at Exelon Power Team, Senior Principal at Diamond Management and Technology and Co-founder and Vice President, IT at Starlight Multimedia Inc. in addition to other technology and multimedia roles. Other principal appointments Founder and Chief Executive Officer of Hointer Inc. and a Non Executive Director of Cimpress NV. Jacky Simmonds 11 Independent Non Executive Director A N R Year of Appointment 2014 Key strengths and experience Extensive executive remuneration and human resources experience within large international businesses. Ms Simmonds was Group HR Director of TUI Travel plc from 2010 until 2015. She was also a member of the Supervisory Board of TUI Deutschland, GmbH and a Director of PEAK Adventure Travel Group Limited. She was previously a divisional HR Director of First Choice Holidays PLC until the business was merged with Tui AG in 2007 to form TUI Travel PLC. From 2007 to 2010, she was HR Director for TUI UK. Other principal appointments Group People Director of easyJet plc. Graham Middlemiss Company Secretary Graham was appointed Company Secretary of Ferguson plc on 1 August 2015. He is Secretary to the Board and all of the Committees of the Board. Graham, a solicitor, joined the Group in August 2004 as the General Counsel of its UK business and was Group Deputy Company Secretary from November 2012 to July 2015. Key to Board and Committee Membership S Senior Independent Director Committee Chairman A Audit D Disclosure E Executive N Nominations M Major Announcements R Remuneration T Treasury Ferguson plc Annual Report and Accounts 2017 53 Board decision-making The Board has a strong culture of open debate. All Directors are actively encouraged to challenge existing assumptions and to raise challenging questions. Certain strategic decisions and authorities of the Company are reserved as matters for the Board with other matters, responsibilities and authorities delegated to its Committees as detailed in the Ferguson governance structure on page 56. A formal schedule of matters reserved for the Board is reviewed annually in July, a summary of which can be found at www.fergusonplc.com together with the terms of reference of each of the Audit, Remuneration and Nominations Committees. Individual roles The effective working of the Board is crucial to the long-term prospects and strategic aims of the Company. This is achieved through strong and open working relationships between the Directors and, in particular, the Chairman, Group Chief Executive and Senior Independent Director, whose roles are agreed and set out in writing. A short summary of their roles and division of responsibilities is set out below. Chairman Gareth Davis Overall leadership and governance of the Board (including induction, development and performance evaluation) Group Chief Executive John Martin Senior Independent Director Alan Murray Provides the Board with insight into the views of the Company’s major shareholders Promotes a culture of challenge and debate at Board and Committee meetings Effective leadership of the Company, implementing strategy and objectives agreed by the Board Management and development of the Group’s operations and business models Working closely with the Group Chief Financial Officer to ensure prudent ﬁnancial controls Developing and implementing policies integral to improving the business, including in relation to health and safety and sustainability Available to investors and shareholders, where communications through the Chairman or Executive Directors may not seem appropriate A sounding board for the Chairman and an intermediary for the other Directors when necessary Chairs the Board in the absence of the Chairman Holds informal discussion with the Non Executive Directors, with and without the presence of the Chairman Leadership and effectiveness Scheduled Board and Committee meetings 2016/17 attendance (eligibility) Chairman Gareth Davis2 Executive Directors3 John Martin4 Frank Roach5 Mike Powell6 Non Executive Directors Tessa Bamford John Daly Pilar López7 Alan Murray8 Darren Shapland9 Nadia Shouraboura10 Jacky Simmonds11 Board1 Committees Audit Rem Nom 6 (6) 6 (6) 6 (6) 1 (1) 6 (6) 6 (6) 6 (6) 6 (6) 6 (6) 1 (1) 6 (6) 4 (4) 4 (4) 4 (4) 3 (4) 4 (4) 4 (4) 1 (1) 4 (4) 4 (4) 4 (4) 4 (4) 4 (4) 4 (4) 1 (1) 4 (4) 6 (6) 6 (6) 5 (6) 6 (6) 6 (6) 1 (1) 6 (6) The Major Announcements Committee meets as required and was not required to meet during the year. The members of that Committee are detailed on pages 52 and 53. 1. In addition to the scheduled meetings two unscheduled Board meetings were convened at short notice to deal with matters that needed to be considered before the next scheduled meeting. These unscheduled meetings were held in February and March 2017. The February meeting was attended by John Martin and Frank Roach and the March meeting was attended by Alan Murray, John Martin and Frank Roach. 2. Chair of the Nominations Committee. 3. During the year, Ian Meakins served as Group Chief Executive and a member of the Board until his retirement on 31 August 2016. No Board or Committee meetings were held during this period. 4. Group Chief Financial Officer until 31 August 2016. Appointed as Group Chief Executive with effect from 1 September 2016. 5. Chief Executive Officer, USA until he retired from the Board on 31 July 2017. 6. Appointed as Group Chief Financial Officer with effect from 1 June 2017. 7. Ms López was unable to attend the July Remuneration and Nominations Committee meetings due to an unavoidable scheduling conﬂict. 8. Senior Independent Director. 9. Chair of the Audit Committee. 10. Appointed as a Non Executive Director on 1 July 2017. 11. Chair of the Remuneration Committee. How the Board operates Board and Committee meetings The Company is registered in Jersey and is tax resident in Switzerland. During the year, all meetings of the Board, Committees of the Board and all other meetings requiring decisions of a strategic or substantive nature were held outside the UK. Each Director is required to attend all meetings of the Board and Committees of which they are a member. In addition, senior management from across the Group and advisers attend some of the meetings for the discussion of speciﬁc items in greater depth. The Board met regularly during the year, with Board and Committee meetings scheduled over one or two-day periods. Details of Director attendance at Board and Committee meetings during the year is set out above. In order to provide the Board with greater visibility of the Group’s operations, to provide further opportunities to meet senior management and to gain a deeper understanding of local market dynamics, the Board aims to visit at least one of the Group’s business unit locations each year. Details of the Board’s visit to Boston, USA in July 2017 can be found on page 55. 54 Ferguson plc Annual Report and Accounts 2017 Strategic report Governance Financials Other information Board visit to the USA In July 2017, the Board and Committee meetings were held in Boston, Massachusetts, USA. This provided an opportunity for the Board to visit PV Sullivan, a blended distributor operating in Massachusetts acquired during the year, and its showroom in Burlington. During these visits the Board met with both senior executives and local management to discuss business strategy and operational performance, and received a presentation from local management on the performance and plans for the New England district as a whole. The Board visited the PV Sullivan warehouse in Boston, which allowed the Board to meet management and associates and gain a more detailed understanding of the business and how post-acquisition integration plans had been implemented ahead of schedule. At the Burlington showroom Board members met staff and customers and saw how product ranging was developing to meet the needs of customers. Development of the Board Upon appointment, all new Directors follow a comprehensive induction programme, further detail on which is provided below. All Directors are provided opportunities for further development and training following their induction and, during the year, the Chairman discusses a development plan with each Director. In addition to regular updates on governance, legal and regulatory matters, the Board also receives detailed brieﬁngs from advisers on a variety of topics that are relevant to the Group and its strategy. The annual formal review of governance provides the Directors with an opportunity to assess their effectiveness and that of the Board as a whole. New Director induction programme All new Directors appointed to the Board undertake an induction programme aimed at ensuring they develop an understanding and awareness of our businesses, people and processes, and of their roles and responsibilities as a director of a public company. The programme is structured to reﬂect what is regarded as best practice and includes: – Provision of relevant current and historical information about the Company and the Group; – Visits to operations around the Group; – Meetings with the Group Company Secretary and the Company’s advisers; – Induction brieﬁngs from Group functions; and, – One-to-one meetings with Directors and senior executives. During the year, Mike Powell and Nadia Shouraboura undertook induction programmes following their appointments as Group Chief Financial Officer and Non Executive Director respectively. The programmes were tailored to ensure that they could familiarise themselves with the business, and the markets in which it operates, from the ground up. Mr Powell spent signiﬁcant periods of time with the Group’s USA, UK and Canadian business. Mr Powell met with senior regional ﬁnance and operational executives, visited branch and showroom locations in the USA, UK and Canada. He spent time with senior executives at the Group’s consumer e-commerce business and time on the road with salespeople meeting customers. Ms Shouraboura’s induction spent several days immersed in the business including at a branch location, a showroom location and a distribution centre at our USA business, time with the consumer e-commerce business and time on the road with a salesperson meeting customers. Since the end of the 2016/17 ﬁnancial year, Kevin Murphy was appointed Chief Executive Officer, USA and a member of the Board. Given the wealth of experience in the business Mr Murphy already possesses, his induction was more focused on his new role and his responsibilities as a Director and Chief Executive Officer, USA. Information and support In advance of each set of meetings, papers and relevant information are delivered so that each Director is provided with the necessary resources to fulﬁl their duties. The information is published via a secure web portal, allowing remote access by Directors. Meeting support is provided by the Company Secretariat department. All Directors have access through a web portal to a library of relevant information about the Company, the Group and Board procedures. The Board has an established procedure for Directors, if necessary, to take independent professional advice at the Company’s expense in furtherance of their duties. This is in addition to the direct access that every Director has to the Group Company Secretary for his advice and services. Board composition As at the date of this report, the Board consists of 11 members including the Chairman, three Executive Directors and seven Non Executive Directors. The composition of the Board is kept under review by the Nominations Committee to ensure an appropriate balance of skills, experience, independence and knowledge are maintained. The biographies of the Directors (on pages 52 and 53) demonstrate the strong and diverse experience possessed by the members of the Board. The Non Executive Directors play an essential role bringing a range of skills and expertise and challenging the Board to help develop Group strategy. Each of the Non Executive Directors and the Chairman are considered by the Board to be independent and free of any relationship which could materially interfere with the exercise of their independent judgement. The Code suggests that length of tenure is a factor to consider when determining the independence of the Non Executive Directors. Each Non Executive Director has served for six years or less with the exception of Tessa Bamford. Ms Bamford was reappointed for a third three- year term from March 2017. As required by the Code, the reappointment was subject to a particularly rigorous review, including taking into account the need for progressive refreshing of the Board. The Board was satisﬁed that Ms Bamford continued to demonstrate the high level of independence expected of a Non Executive Director. The Board concluded that Ms Bamford would continue to be a highly effective member of the Board, recognising in particular her wide-ranging business experience across a range of sectors in the UK and the USA, her expertise in senior management succession and her deep knowledge of the Group’s businesses. The Board is satisﬁed each Non Executive Director continues to demonstrate independence of thought and expertise in meetings, and to support the senior management in an objective manner. Why you should vote to re-elect your Board The Board contains a broad range of experience and skills from a variety of industries and advisory roles, which fully complement each other. In accordance with the Code, all Directors will stand for election or re-election at the 2017 Annual General Meeting (“AGM”). The Directors’ biographies can be found on pages 52 and 53, and in the Notice of AGM. Further details on the AGM can be found on page 144 and at www.fergusonplc.com Ferguson plc Annual Report and Accounts 2017 55 Leadership and effectiveness Ferguson’s governance structure Ferguson plc has a premium listing on the London Stock Exchange, and is therefore subject to the Listing Rules of the UK Listing Authority. Although the Company (being Jersey incorporated) is not subject to the UK Companies Act, the Board retains its standards of governance and corporate responsibility as if it were subject to the Act. It continues to provide shareholder safeguards which are similar to those that apply to a UK registered company and complies with relevant institutional shareholder guidelines. The table below describes the Company’s governance structure, an overview of the key Committees of the Board and other administrative committees. Shareholders Board and Committees of the Board Committees of the Board support the Board in the fulﬁlment of its duties. These take strategic decisions of a substantive nature. The Board Collectively responsible for the long-term success of the Company Accountable to shareholders and responsible for the proper conduct of the business Reviewing the performance of the Board and its Committees and ensuring effective succession planning Ensuring effective ﬁnancial reporting Setting the overall strategic direction of the Company Approval of key strategic projects in the best interests of the Group Oversight of effective management of the Ferguson Group ensuring the appropriate leadership and resources are in place to meet its objectives Maintaining a sound system of risk management and internal controls Audit Committee Remuneration Committee Nominations Committee Oversees, monitors and makes recommendations as appropriate in relation to the Company’s ﬁnancial statements, accounting processes, audit (internal and external), risk management and internal controls and matters relating to fraud and whistleblowing The Audit Committee is the body responsible for the functions speciﬁed by DTR 7.1.3R Reviews and recommends to the Board the framework and policy for the remuneration of the Chairman, the Executive Directors and the Executive Committee Takes into account the business strategy of the Group and how the Remuneration policy reﬂects and supports that strategy Regularly reviews the structure, size and composition of the Board and its Committees Identiﬁes and nominates suitable candidates to be appointed to the Board (subject to Board approval) and considers succession generally Page 60 Page 69 Page 64 Other Committees Implementing strategic decisions and executive or administrative matters. Major Announcements Committee Meets as required in exceptional circumstances to consider disclosure obligations in relation to material information where the matter is unexpected and non-routine Executive Committee Treasury Committee Disclosure Committee Addresses operational business issues Responsible for implementing Group strategy and policies, day-to-day management and monitoring business performance Chaired by the Group Chief Executive, Committee membership comprises: – Chief Executive Officer, – Chief Executive Officer, USA – Group Chief Financial Officer – Group Chief Information Officer – Managing Director, UK Nordic region – CEO, Canada and Central Europe – Group HR Director – Group General Counsel Considers treasury policy including ﬁnancial structures and investments, tax and treasury strategy, policies and certain transactions of the Group Reviews performance and compliance of the tax and treasury function Makes recommendations to the Board in matters such as overall ﬁnancing and strategy, and currency exposure Meets as required to deal with all matters relating to public announcements of the Company and the Company’s obligations under the Listing and Disclosure and Transparency Rules of the UK Listing Authority and EU Market Abuse Regulation Assists in the design, implementation and periodic evaluation of the Company’s disclosure controls and procedures Biographical details for each member: www.fergusonplc.com Committee membership details: www.fergusonplc.com Committee membership details: www.fergusonplc.com 56 Ferguson plc Annual Report and Accounts 2017 Strategic report Governance Financials Other information All What the Board has done during the year The Board has a rolling agenda programme which ensures that items relating to strategy, ﬁnance, operations, health and safety, product integrity, corporate governance and compliance are covered in its meetings. The balance of time spent by the Board on strategic, performance related and governance issues is considered as part of the annual effectiveness review process and adjustments are made to the Board’s agenda for the following year. The Board receives copies of the minutes of each Board Highlights of Board activity during 2016/17 Committee meeting and key issues covered by each Committee are also reported to the subsequent meeting of the Board. Standing agenda items including reviews of health and safety performance, strategic initiatives such as acquisitions, investments and disposals and reports from the Group CEO and Group CFO are discussed at each Board meeting and other items are included on the agenda at relevant times throughout the year. A brief overview of some key areas of Board activity during the year are detailed below. Strategy Performance – Regular reviews and updates on, and approval of, the Group’s overall strategy and the strategy plans of the Group’s major businesses (for further information on overall Group strategy and USA, UK, Canada and Central Europe operations see pages 17 and 28 to 33) – Annual budget review – Reviewed 21 business acquisition and capital investment proposals, the size or nature of which required Board-level approval – Commencement of Nordic region disposal process approved (for further information see page 18) – Merger of Tobler, the Group’s Swiss business, with Walter Meier AG approved – Change of name from Wolseley plc to Ferguson plc approved by the Board (and by shareholders at a General Meeting on 23 May 2017) – Change of presentational currency to US dollars with effect from 1 August 2017 approved (for further information see page 16) – Received regular presentations from management on the performance of the Group’s major business units – Review and approval of full year and half year results, and other announcements – Regular reviews of feedback from shareholders Governance – Received reports from the Nominations Committee on succession planning and approved Board and Executive Committee appointments (for further information see page 64) – Regular reviews of: – the Group’s principal risks (for further information see pages 42 to 49); and – progress of the “Better Business” framework (for further information see pages 34 and 35) – Approval of Group insurance arrangements An overview of the Board’s 2016/17 objectives and how they have been achieved is set out below: 2016/17 objectives Strategy All Regularly review and monitor the Group’s progress against its strategy, including the priorities set out by the new Group Chief Executive in the 2016 Annual Report Ensure there is excellent execution of major operational initiatives People Support the new Group Chief Executive and the Interim Group Chief Financial Officer in their new roles Continue to focus on Board and senior executive succession planning, and on talent development in the regions Achievements For more information on our strategy please see pages 16 to 18 – Review of major strategic initiatives at Board meetings and the annual Board strategy day – Nine USA acquisitions completed, supporting the USA growth strategy. Further information on the acquisitions completed during the year is set out in note 30 to the consolidated ﬁnancial statements on page 116 – UK transformation plan approved – Nordic region’s operational strategy approved. Decision taken to commence disposal process for the Nordic region’s businesses – Approved the merger of Tobler, the Group’s Swiss business, with Walter Meier AG – The Board received regular reports from the Group CEO and Group CFO on operational initiatives – Post-investment reviews of acquired businesses conducted by the Board, including progress made with integration plans For more information on succession planning please see page 64 – The Chairman and other Non Executive Directors made themselves available to the Group CEO and Interim Group CFO as required – The Chairman met regularly with the Group CEO on a one-to-one basis – The Chairman of the Audit Committee met regularly with the Interim Group CFO on a one-to- one basis – New Group CFO and new CEO, USA appointed. Board skills and competencies reviewed and a new Non Executive Director with signiﬁcant experience of innovative business models and USA operations appointed. Further details are set out in the Nominations Committee report on page 64 – Review of people strategy and succession planning below Board level undertaken by the Nominations Committee and reported to the Board Ferguson plc Annual Report and Accounts 2017 57 Leadership and effectiveness Evaluating the performance of the Board of Directors The Board undertakes a formal review of its performance and that of its Committees each year, with an external evaluation every three years. Following the external evaluation conducted in 2015, in accordance with the Code, the next externally-facilitated effectiveness review will be conducted during the year ending 31 July 2018. Progress against the actions identiﬁed following the internal review undertaken in 2016, is outlined below: Action point Responsibility Outcome Keep under review the range of skills and experience required at Board level as the Group’s strategy is implemented and its businesses develop in the future Board and Nominations Committee During the year, the Board dealt with major succession issues with the appointment of a new Group CFO and a new CEO, USA. The opportunity was taken to supplement and complement the skills and experiences of the Board through the appointment of an additional Non Executive Director. Continue to focus on succession planning at Board and Executive level Board and Nominations Committee Board and Executive succession planning was reviewed in detail by the Board and Nominations Committee (further information is provided on page 64). Develop further opportunities for Board members to continue to deepen their understanding of and engagement with the Group’s businesses Board Management presentations made to the Board on regional business performance and progress with strategic initiatives. Board members met with, and received presentations from, local management during their visit to the USA for the July Board meeting. More detail on the Board’s visit to the USA is provided on page 55. Board and Committee effectiveness review This year, the Board and Committee effectiveness review was facilitated internally using an online survey. The survey included questions tailored to address the activities and particular concerns of the Board and the Audit, Remuneration and Nominations Committees. The questions encouraged comment and qualitative evaluation of the effectiveness of the Board and each Committee, the individual members and the support received from management and advisers. Questions used in the previous year were included, enabling the Board to monitor and evaluate progress. Feedback from the reviewers was reported to and discussed by the Board and by each relevant Committee. In addition, the Chairman spoke with each Non Executive Director to discuss the results of the reviews. All Directors, from the time of appointment, are aware of the time commitment expected in order to discharge their responsibilities effectively. The Chairman maintains frequent contact with all Directors and constantly monitors whether they are able to devote sufficient time to their respective roles, and he is satisﬁed that each Director has been able to do so. The Chairman also has regular meetings, outside of Board and Committee meetings, with the CEO and other executives to keep up to date with material developments in the business and discussed Board composition and succession planning at his meetings with shareholders. During the ﬁnancial year, each Director attended all scheduled Board meetings. The Board continues to consider each of the Directors to be effective and to demonstrate commitment to his or her role. During the year, the Non Executive Directors, led by the Senior Independent Director, undertook the performance evaluation of the Chairman. The evaluation concluded that the Chairman performed strongly and is highly effective in his role. Board meetings were considered to be well chaired. The Chairman continued to devote sufficient time and attention to his role and had made himself available to Directors whenever necessary outside of Board meetings. Key ﬁndings, improvement actions and priorities Overall, the key ﬁndings of the internal evaluation were positive. The review concluded that the Board was very effective and worked well together enabling the individual Directors to discharge their respective roles effectively. Although the composition of the Board was rated highly, the 58 Ferguson plc Annual Report and Accounts 2017 opportunity to enhance Board expertise with further digital expertise and USA operational experience was identiﬁed as an important aspect of Board development. The atmosphere at Board meetings was commented on favourably and seen as encouraging equal contribution, candid discussion and critical thinking. The support and challenge of management by Non Executive Directors was rated highly. The review concluded that the Board’s testing and development of strategy was strong and the Board’s oversight of the subsequent implementation of strategic objectives was rated highly. Performance of the Board Committees was rated very highly. Areas identiﬁed in order to improve overall effectiveness, are summarised below: Actions All Develop further opportunities for the Board to meet with USA management and further their understanding of the Group’s USA operations and market environment Continue to focus on succession planning at Board and Executive level As at the date of this report, the Board has already begun to incorporate these action points into its processes and procedures. An opportunity to further enhance the skills and expertise of the Board identiﬁed in the review has been taken with the appointment of an additional Non Executive Director. For further commentary please see page 64. In addition to the actions arising from the effectiveness review, the Board priorities for 2017/18 are set out in the table below Board priorities for 2017/18 All Regularly review and monitor the Group’s progress against the drivers of proﬁtable growth set out on page 17 Ensuring continued focus on matters of succession, diversity and talent development Support the new Group Chief Financial Officer and Chief Executive Officer, USA Strategic report Governance Financials Other information Relations with shareholders Engagement The Board is fully committed to engaging with shareholders. During the year, active dialogue was maintained with our shareholders through planned communications and annual investor relations programmes. The Group Director of Communications and Investor Relations (who reports to the Group Chief Financial Officer and Group Chief Executive) has day-to-day responsibility for all investor relations matters and for contact with all shareholders, ﬁnancial analysts and the media. In interactions with shareholders, the Company ensures: – a professional approach; – provision of accurate data; – timely disclosure of information to the market; and – accessibility to both current and potential shareholders. Communications programme Regular dialogue with institutional shareholders and ﬁnancial analysts based in Europe and North America is maintained through: – meetings and conversations involving the Group Chief Executive, Group Chief Financial Officer and Investor Relations team; – release of updates on the ﬁnancial performance of the Group incorporating revenue, proﬁtability by region, net debt and appropriate commentary on key business trends; and – the Chairman regularly engaging with larger institutional shareholders to discuss matters including the Board, strategy, remuneration and corporate governance. The Company engages with private shareholders in the following ways: – periodic meetings are held with the UK Shareholders’ Association; – responding to communications from individual shareholders; – all documents presented at investor events are available on www.fergusonplc.com; and – there is a Shareholder information section on www.fergusonplc.com and on pages 142 to 144 of this report. Investor relations programme The allocation of time spent in the UK, continental Europe and North America reﬂects the distribution of our shareholders. Shareholder meetings – during the year ended 31 July 2017, there were a total of 277 meetings. John Martin and Dave Keltner, Interim Group Chief Financial Officer (together with the Investor Relations team) attended 108 meetings, Gareth Davis (together with the Investor Relations team) attended ﬁve meetings, members of the USA senior management team (represented by various combinations of Frank Roach, Kevin Murphy and Bill Brundage, the USA business’ Chief Financial Officer) attended 10 meetings and the Investor Relations team met with institutions through a further 154 meetings, conferences and calls. The Chairman regularly meets with the larger institutional shareholders and ensures that the Board as a whole has an appropriate understanding of shareholder feedback. The Group Director of Communications and Investor Relations regularly provides the Board with details of feedback received from institutional shareholders and any key issues raised. AGM The AGM is held in Switzerland with an audio-visual link to London so that shareholders in London are able to participate and can question the Board during the meeting. All Directors attended the 2016 AGM. During the AGM, the Board answered a wide range of questions from shareholders. Details of the 2017 AGM are contained in the Notice of AGM and are available on www.fergusonplc.com. Additionally, in response to feedback from individual shareholders at last year’s AGM, the Group Chief Executive and Director of Communications and Investor Relations will make themselves available to answer questions from individual shareholders in advance of the AGM at a meeting hosted by the UK Shareholders’ Association at the offices of Bank of America Merrill Lynch, 2 King Edward St, London EC1A 1HQ on Thursday 23 November 2017. Plans for engagement in 2017/18 A similar investor relations programme will be run during the 2017/18 ﬁnancial year. Geographical breakdown of institutional shareholder base Investor concentration 37.4%North America 47.7%United Kingdom 10.8%Europe 17.5% Others 23.1% Top 5 investors 3.8%Asia Shareholders 21.0% Rest of top 100 investors 0.3%Rest of World 38.4% Rest of top 30 investors Ferguson plc Annual Report and Accounts 2017 59 Audit Committee Accountability Darren Shapland Audit Committee Chairman Dear Shareholder I am pleased to present the report of the Audit Committee for 2016/17. This report provides an insight into the activities of the Committee during the year and how the Committee plays a key oversight role for the Board. I will be available at the 2017 AGM, to respond to any questions shareholders have on this report or any of the Committee’s activities. As at 2 October 2017, the Committee was made up of seven Non Executive Directors as set out in the table on page 54. During the year, Nadia Shouraboura joined the Committee following her appointment as a Non Executive Director on 1 July 2017. relating to independence, ﬁnancial experience and sectoral competence. The key strengths and experience of each member of the Committee are summarised on pages 52 and 53. In addition to the members of the Committee, the Chairman, Group Chief Executive, Interim Group Chief Financial Officer and the Head of Internal Audit, together with senior representatives of Deloitte LLP (“Deloitte”), the Company’s external auditors, attended and received papers for each meeting. Following his appointment as Group Chief Financial Officer on 1 June 2017, Mike Powell also attended and received papers for the July Committee meeting. The Committee meets periodically with the Group Chief Financial Officer and also meets separately with Deloitte and the Head of Internal Audit without the presence of Executive Directors. The Committee has a programme where the Finance Directors of the Group’s major businesses attend and present updates on items such as regional ﬁnance team development, ﬁnance transformation and ﬁnancial systems architecture and the base ﬁnancial controls environment. Other senior executives are also invited to attend and provide updates to the Committee, for example the Chief Information Officer regularly attends meetings to report on the Group’s information security programme and IT controls. How the Committee operates The Audit Committee met on four occasions during the ﬁnancial year. Meetings are scheduled to coincide with key dates in the ﬁnancial reporting cycle. Attendance at these meetings is set out on page 54. The Board considers that several members of the Committee have recent and relevant ﬁnancial experience and that each member of the Committee is independent within the deﬁnition set out in the Code. Members of the Committee between them possess signiﬁcant international, commercial, retail, ﬁnancial and human resource skills and expertise which are relevant to an international specialist distribution company. In addition to me, Alan Murray and Pilar López have served as Chief Financial Officers of large businesses during their career. This provides the Board with assurance that the Audit Committee meets the relevant regulatory requirements Principal areas of focus During the year, the Committee has continued to focus on maintaining the quality and integrity of our ﬁnancial reporting, and monitoring and ensuring the appropriateness of the Company’s risk management systems and internal control environment. In line with the assessment of the Group’s principal risks (detailed on pages 42 to 49), and mindful of external events which have highlighted its importance, the Committee has increased its scrutiny of information security during the year and has reported on its activity to the Board. The Committee has also continued to monitor the interaction between the internal audit function and the external auditors, to monitor and review the effectiveness of the external audit process and to ensure that the Group’s governance standards are maintained. Further details of the Committee’s activities during the year are set out opposite. Audit Committee key achievements – 2016/17 An overview of the Committee’s 2016/17 objectives and how the Committee has achieved them is set out below: 2016/17 objectives Achievements The effective and efficient transition of responsibilities to the Company’s Interim Group Chief Financial Officer Continue to review and monitor the approach to risk management and the level of risk driven through changes to the operating model, industry changes and technological developments Continue to monitor and review the Group’s approach to information security Continue to monitor ﬁnance systems transformation Monitor and ensure that the external auditors and internal auditors continue to co-ordinate their activities effectively and that the internal audit effectiveness review actions are completed – Smooth handover of responsibilities to the Interim Group CFO – Reviews undertaken in March and September of key risks and their management – The Group’s principal risks and the adequacy of the mitigating controls in place were considered in detail – Feedback provided to management as part of this review process and any material changes highlighted – The Committee has continued to monitor information security, and has increased its focus in this area – Information security programme updates were presented to the Committee at six-monthly intervals and two external information security audits were conducted during the year – Monitored preparation for the implementation of the EU General Data Protection Regulation – Reports received from management and reviewed by the Committee as well as internal and external audit – The external and internal auditors reported to the Committee on the ways in which they had continued to co-ordinate their activities effectively – All the recommendations made in last year’s external effectiveness review have been implemented. In particular, Deloitte identiﬁed ways in which controls processes could be further improved and the internal audit team worked effectively to make appropriate improvements 60 Ferguson plc Annual Report and Accounts 2017 Strategic report Governance Financials Other information What the Committee has done during the year The Committee has a rolling programme of agenda items to ensure that relevant matters are properly considered. The list below summarises the key items considered by the Committee during the year. Control environment Governance – Internal audit report – Annual plan for internal audit – Fraud and whistleblowing reports – Risk management report – Anti-bribery and corruption compliance programme – Internal controls review – External audit plan – Effectiveness review of the Committee – External auditor effectiveness review – Internal audit effectiveness review – Consideration of non-audit engagements – Updates on accounting and corporate governance developments – Terms of reference review – Review of external auditor’s fees and engagement letter Financial results Review items – Full Year results and associated announcements – Auditor’s Full Year report to the Committee – Review of the Annual Report and Accounts – Half Year results and associated announcements – Auditor’s Half Year report to the Committee – Updates from regional Finance Directors – Finance team succession planning – Information security updates – IT controls reports Financial reporting and signiﬁcant ﬁnancial judgements The Committee considered the issues summarised below as signiﬁcant in the context of the 2016/17 ﬁnancial statements. These were discussed and reviewed with management and the external auditors and the Committee challenged judgements and sought clariﬁcation where necessary. The Committee received a report from the external auditors on the work they had performed to arrive at their conclusions and discussed in detail all material ﬁndings contained within the report. Carrying value of goodwill and intangible assets (recurring item) Completeness of supplier rebates (recurring item) Inventory valuation (recurring item) Audit Committee review The Committee reviewed the carrying value of goodwill and other intangible assets for impairment, including a detailed review of the assumptions underlying the value in use calculations for businesses identiﬁed as cash generating units. The key assumptions underlying the calculations are primarily the achievability of the long-term business plan, country speciﬁc discount rates, anticipated revenue growth in the short-term and long-term growth assumptions. For further information please see notes 12 and 13 of the consolidated ﬁnancial statements on pages 100 and 101. Conclusions The Committee agreed with management’s assessment that an impairment charge had arisen relating to the Swedish business, Beijer, due to signiﬁcantly reduced expectations of proﬁtability. Audit Committee review The Committee reviewed the recognition of supplier rebates which are signiﬁcant to the Group and are an area of inherent risk due to the number and complexity of the arrangements. In addition, the majority of the supplier rebate arrangements cover a calendar year and therefore do not end at the same time as the Group’s accounting year-end. Where the rebate arrangements are calculated at a ﬂat rate there is limited judgement. However, for tiered rebates, judgements are required to forecast the expected level of volumes purchased to determine the appropriate rate at which a rebate is earned. This review covered the processes and controls in place during the year and the level of adherence to the Group’s accounting policies and procedures. Conclusions As a result of the review process, which included consideration of the external audit ﬁndings, the Committee concluded that the level of rebate income and rebate receivable as at 31 July 2017 was properly reﬂected in the consolidated ﬁnancial statements. For further information please see note 1 of the consolidated ﬁnancial statements on page 90. Audit Committee review Judgement is applied in determining the appropriate values for slow-moving or obsolete inventory. The provisions are predominantly system-generated calculations, comparing inventory on hand against expected future sales using historic experience as the basis for provisioning, along with the results of physical stock-counts. The Committee considered the level of provisions and ensured the policy was consistently applied across the Group in the current and previous ﬁnancial periods. The Committee also sought the views of the auditors. For further information please see note 1 of the consolidated ﬁnancial statements on page 90. Conclusions Following their review, which included consideration of the external audit ﬁndings, the Committee concluded that provisions for obsolete and slow moving inventory are fairly stated in the consolidated ﬁnancial statements. Ferguson plc Annual Report and Accounts 2017 61 Audit Committee continued Accountability Audit Committee effectiveness review An internally facilitated review of the Committee’s effectiveness was carried out in July 2017. The review concluded that the Committee continued to be effective and well run and the composition of the Audit Committee was rated highly. The review found that the work of the internal and external auditors was well co-ordinated and that their work continued to be effectively reviewed and assessed by the Committee. The Committee’s monitoring and review of the status of IT controls and information security systems was identiﬁed as an evolving area which had seen improvements implemented during the year. The review also highlighted several areas for improvement and these either have been incorporated into our priorities for 2017/18, or for more minor areas will be addressed during the year. Audit Committee priorities for 2017/18 Continue to review and monitor the approach to risk management and the level of risk driven through changes to the operating model, industry changes and technological developments Continued increase in focus on the Group’s approach to information security Continue to monitor ﬁnance systems transformation to ensure that the associated projects are effectively completed Review and assess the continued effectiveness of the Group’s control framework and base ﬁnancial controls including their continued effective operation following the transfer of certain functions from the UK to the USA External audit Auditor reappointment Following an external tender process, Deloitte were ﬁrst appointed as the Company’s external auditor for the 2015/16 audit and have served as the Company’s auditor for two years. Deloitte’s reappointment was approved by shareholders at the 2016 Annual General Meeting. Ian Waller has served as lead audit partner since Deloitte’s appointment. In line with the Audit Practices Board Ethical Standard 3 the lead audit partner is due to be rotated following the 2019/20 audit. The Committee reviews the external auditor appointment and the need to tender the audit annually. The Company conﬁrms that it complied with the provisions of the Code and the Competition and Markets Authority Order for the ﬁnancial year under review. For the ﬁnancial year ending 31 July 2018, the Committee has recommended to the Board that Deloitte be reappointed as the external auditor and the Directors will be proposing the reappointment of Deloitte at the 2017 Annual General Meeting. The Committee conﬁrms that the Company complied with the provisions of the Statutory Audit Services Order 2014 during the ﬁnancial year ended 31 July 2017. External audit processes During the year, the Group audit partner, together with other relevant and appropriate Deloitte partners, attended all the Audit Committee meetings. They provided the Committee with information and advice including detailed reports on the ﬁnancial statements and internal controls. In January 2017, the Committee reviewed and approved the terms, areas of responsibility and scope of the 2016/17 audit. During the year, Deloitte provided external audit services for regulatory and statutory reporting. 62 Ferguson plc Annual Report and Accounts 2017 Deloitte are expected to report to the Committee any material departures from Group accounting policies and procedures that are identiﬁed during the course of their audit work. Deloitte’s 2016/17 external audit plan has been successfully completed at the date of this report. No material items were found or reported in the ﬁnancial year. Effectiveness of the audit process Following the issue of the Company’s Annual Report, the Committee conducts an annual review of the effectiveness of the external audit. A survey of all the Group’s ﬁnance teams is conducted. Each team is asked to rate the performance of the external auditor against a range of measures, including relating to the adequacy of planning, sufficiency of resource, thoroughness of review and testing, adequacy and application of knowledge of the Group, usefulness of feedback and the quality of reporting. The Committee was satisﬁed that Deloitte provided an effective audit service in 2015/16. A review of the effectiveness of the audit for the year ended 31 July 2017 will be conducted. Auditor independence and objectivity The Company has policies and procedures in place to ensure that the independence and objectivity of the external auditor are not impaired. These include restrictions on the types of services which the external auditor can provide, in line with the Audit Practices Board Ethical Standards on Auditing. Details of the services that the external auditors cannot be engaged to perform are provided at www.fergusonplc.com. Deloitte also provides speciﬁc assurance to the Committee on the arrangements and safeguards it has in place to maintain its independence and objectivity, including an internal process to preapprove provision of non-audit services and the use of separate teams where non-audit services are being provided to the Group. The Committee continues to be satisﬁed with the independence and objectivity of Deloitte. When considering the award of non-audit work to the external auditor, an assessment is made to consider if it is more effective for the work to be carried out by the external auditor who has existing knowledge of the Company and all appointments are made on a case-by-case basis. The prior consent of the Chairman of the Committee is required before the Company’s external auditor is appointed to undertake non-audit work. The external auditor will not be appointed to provide non-audit services where the Committee considers it might impair their independence or objectivity in carrying out the audit. At each meeting the Committee reviews any new non-audit engagement of the Company’s external auditor and reviews the level of fees for all non-audit work. During the year, Deloitte was appointed to undertake non-audit work, the details of which are provided below. Audit and non-audit fees Fees for non-audit work performed by Deloitte as a percentage of audit fees for the year ended 31 July 2017 were 24 per cent (2016: 7 per cent). Further disclosure of the non-audit fees incurred during the year ended 31 July 2017, can be found in note 4 to the consolidated ﬁnancial statements on page 95. Non-audit services related mainly to services provided to Tobler as part of the merger with Walter Meier AG and services related to the disposal of the Nordic businesses and the change of presentational currency for the Group in 2017/18. In each instance it was considered to be in the best interests of the Group to use Deloitte due to efficiencies gained from their existing knowledge of the Company. Their continued objectivity and independence was unaffected due to the nature and scale of the work undertaken. Strategic report Governance Financials Other information Internal audit The scope of activity of internal audit is monitored and reviewed at each Committee meeting. An annual plan was agreed by the Committee in July 2017 which covers the activities to July 2018. During the year, the Head of Internal Audit attended all Committee meetings and provided the Committee with a detailed report on internal audit activities which the Committee reviewed and discussed in detail. The Committee considered the matters raised and the adequacy of management’s response to them, including the time taken to resolve any such matters. In July 2017, the Committee conducted the annual review of the effectiveness of the Group’s Internal Audit function, including its terms of reference, audit planning process, general performance and relationship with the external auditors. The review identiﬁed opportunities to enhance the resourcing of the function through co-sourcing and maintaining the rigour of following up the implementation of audit recommendations. Steps have already been taken to implement these suggested improvements. The review was undertaken using guidance issued by the Chartered Institute of Internal Auditors. As part of this review the Committee was satisﬁed that all the opportunities for improvement in the function’s operations which had been identiﬁed by external consultants in last year’s effectiveness review had been implemented. Based on its review the Committee was satisﬁed with the effectiveness of the Group’s Internal Audit function. Risk Risk management Risk management reports prepared by the Group Head of Risk and Compliance were submitted to the Committee in March and September 2017. These reports summarise submissions from all areas of the business which the Executive Committee and senior management have reviewed. Risks relating to material joint ventures and associates are considered as part of this process. The six-monthly reports identify the signiﬁcant risks to the Group, the controls in place and highlight the tolerance levels that the Executive Committee and, ultimately, the Board are prepared to accept. The Audit Committee reviewed the effectiveness of the Company’s overall risk management framework, including the generic procedures for risk identiﬁcation, assessment, mitigation, monitoring and reporting and was satisﬁed with their effectiveness. Viability Statement The Committee also reviewed management’s work in conducting a robust assessment of those risks which would threaten the future performance or liquidity of the Company, including its resilience to the threats of viability posed by certain of those risks in severe but plausible scenarios. This assessment included the stress testing of cash ﬂow projections to evaluate the impact of an unlikely, but realistic, worst-case scenario. The Company’s Viability Statement can be found on page 43. Internal controls During the year, the Committee monitored and reviewed the effectiveness of the Group’s internal control systems, accounting policies and practices, standards of risk management and risk management procedures and compliance controls, as well as the Company’s statements on internal controls, before they were agreed by the Board for this Annual Report. The Group’s internal control systems are designed to manage rather than eliminate business risk. Such systems are necessary to safeguard shareholders’ investment and the Company’s assets and depend on regular evaluation of the extent of the risks to which the Company is exposed. The Committee receives regular reports throughout the year, including from the Finance Directors of the Group’s major businesses, to assure itself that the Company’s systems comply with the requirements of the Code. The Committee can conﬁrm that the Company’s systems have been in place for the full ﬁnancial year and up to the date on which the ﬁnancial statements were approved, that they are effective and that they are regularly reviewed by the Committee on behalf of the Board. The Committee is of the view that the Company has a well-designed system of internal control. These systems can only provide reasonable, but no absolute, assurance that risks are managed to an acceptable level. In relation to the ﬁnancial reporting process, at the business level, line management are required to implement base ﬁnancial and other controls in line with a clear set of detailed policies relating to ﬁnancial reporting and other accounting matters and act in accordance with the Group Code of Conduct. At Group level, the Group ﬁnance function oversees through setting the policies, requiring a self-certiﬁcation from the businesses and a bi-annual assessment of implementation by the businesses. At a further level, assurance functions (Internal and External Audits) test various aspects of the processes and report to the Committee. The Chairman of the Committee reports any matters arising from the Committee’s review to the Board following each meeting. This update covers the way in which the risk management and internal control processes are applied and any signiﬁcant failings or weaknesses in, or exceptions to, these processes. There were no signiﬁcant failings or weaknesses identiﬁed. These processes have been in place throughout the year ended 31 July 2017 and have continued to the date of this report. Further information on the Company’s risk management systems is set out in the section on Principal risks and their management on pages 42 to 49. Whistleblowing and fraud The Group’s whistleblowing policy, which supports the Group-wide Code of Conduct, is monitored by the Committee. A copy of the Group’s Code of Conduct is available at www.fergusonplc.com. The Committee received reports at each Committee meeting providing details of matters reported through the Group’s international conﬁdential telephone reporting lines and secure website reporting facility, which are operated on its behalf by an independent third party. All matters reported are investigated by the relevant operating company and reported to the Committee, together with details of any corrective action taken. The Committee also received reports at Committee meetings providing details of fraud losses on a half yearly basis. Fair, balanced and understandable assessment At the request of the Board, the Committee assessed whether the content of the 2016/17 Annual Report, taken as a whole, is fair, balanced and understandable. In order to make this declaration, a formal process is followed to ensure the Committee has access to all relevant information including a paper from management detailing the approach taken in the preparation of the Annual Report and Financial Statements and explaining why management believes the Annual Report is, taken as a whole, fair, balanced and understandable. The Committee and all Board members receive drafts of the Annual Report and Financial Statements in sufficient time to allow challenge of the disclosures where necessary. The Committee advised the Board it was satisﬁed that, taken as a whole, the 2016/17 Annual Report and Accounts is fair, balanced and understandable and provides the necessary information for shareholders to assess the Company’s position and performance, business model and strategy. The Directors’ responsibilities statement can be found on page 68. Darren Shapland on behalf of the Audit Committee Ferguson plc Annual Report and Accounts 2017 63 Nominations Committee Leadership and effectiveness Gareth Davis Nominations Committee Chairman Dear Shareholder Board and senior leadership succession planning is of paramount importance to Ferguson’s continued success. It continues to be a major priority for the Board and is something the Nominations Committee keeps under continuous review. As I mentioned in my Chairman’s statement on page 13, during the year, we announced three changes to the Board: Frank Roach’s retirement and the appointment of Kevin Murphy as our new Chief Executive Officer, USA (“CEO, USA”); the appointment of Mike Powell as our new Group Chief Financial Officer (“CFO”); and the appointment of Nadia Shouraboura as a Non Executive Director. Recruitment In accordance with our procedure for selecting and recruiting Directors, the Committee identiﬁed the key skills and experience required for the new appointments. The Committee retained external search advisers to assist in the process of identifying potential candidates for nomination to the Board. The Company does not use open advertising to search for suitable candidates for Director positions, as we believe that the optimal way of recruiting for these positions is to use targeted recruitment based on the skills and experience required. Both internal and external candidates were considered for Executive Director positions as part of a rigorous process involving interviews and assessments. Executive Director succession During the year, we undertook a process to identify a successor for the role of CFO. The criteria identiﬁed by the Committee for the CFO selection process included strategic development abilities, functional capabilities, relevant sector and international experience, and the ability to work effectively in and to build high performing teams. Following an extensive recruitment process the Committee agreed that Mike Powell was the strongest candidate for the CFO role and recommended his appointment to the Board. Mike’s international background, ﬁnancial skills, familiarity with the USA and operational experience of running multi-site businesses will be important attributes as we continue to develop the Ferguson business. At the same time as announcing Mike’s appointment the Company also announced that Dave Keltner, who has served as Interim Group CFO since September 2016 would step down from the role at the end of 2016/17 following an orderly transition. I would like to thank Dave for the invaluable support and leadership he has provided whilst standing in as Interim Group CFO, allowing the Board ample time to enable a smooth handover to a successor of the highest calibre. He has given outstanding service to the Group over 23 years and I wish him well in his retirement. In March 2017, the Company announced the retirement of Frank Roach as CEO, USA and the appointment of Kevin Murphy as his successor. 64 Ferguson plc Annual Report and Accounts 2017 As part of the Committee’s succession planning process for the role of CEO, USA external candidates were considered in addition to Kevin Murphy, who was then Chief Operating Officer of our USA business. The criteria for the selection of a successor to Frank Roach as CEO, USA included strategic development and execution capabilities, signiﬁcant executive experience in the relevant sector, core functional capabilities and a proven organisational leadership ability. After a careful and thorough review, the Committee agreed that Kevin Murphy was the most appropriate successor as CEO, USA and recommended his appointment to the Board. Kevin joined the USA business in 1999 and held several leadership positions before being appointed Chief Operating Officer in 2007. Kevin has played a vital part in our USA business’ success, and his skills, expertise and deep understanding of the business make him the ideal person to drive future growth in the USA. I am delighted that a candidate identiﬁed by the Board some time ago as having signiﬁcant potential, and subsequently developed by the Company as part of the succession planning process for senior leadership positions, has been selected to lead the Group’s largest operating segment. I’d like to take this opportunity to thank Frank Roach for his immense contribution to the business and for his distinguished service. Frank has been an outstanding Chief Executive of our USA business. Under his leadership, the business has developed into the leading specialist distribution business in the USA, whilst maintaining an enviable track record of delivering superior service to customers and creating signiﬁcant shareholder value. I wish Frank well in his retirement. Non Executive Director appointment During the Board and Committee effectiveness review process, an opportunity was identiﬁed to enhance the skill set of the Board through the recruitment of an additional Non Executive Director. The criteria identiﬁed by the Committee for the Non Executive Director recruitment process included a proven track record as a senior leader of a USA business, deep understanding of the evolving digital environment and ﬁrst-hand experience of disruptive business models. Following a thorough recruitment process the Committee agreed that Nadia Shouraboura was the most suitable candidate and recommended her appointment to the Board. I am delighted to welcome Nadia to the Board. Her considerable expertise in running complex logistics and supply chain activities will be invaluable to us. E-commerce remains a signiﬁcant opportunity for the Group with almost £3 billion of revenue generated from online activities last year and growing this channel remains an important part of our strategy. External search advisers External search advisers Russell Reynolds Associates and JCA Group assisted the Nominations Committee during the year with the CFO recruitment process. Russell Reynolds Associates also assisted the Nominations Committee with the CEO, USA succession process. Russell Reynolds Associates and JCA Group have no other connections to the Company. Korn Ferry, an external search adviser, assisted the Nominations Committee with the Non Executive Director recruitment process. Korn Ferry has no other connections with the Company except in relation to other senior executive search mandates. Strategic report Governance Financials Other information Board composition and succession planning As at 31 July 2017, the Board comprises the Chairman, three Executive Directors and seven Non Executive Directors. The biographies of all members of the Board, which outline the skills and experience they bring to their roles, are set out on pages 52 and 53. It has been a busy year for the Committee in terms of succession planning and during the year, in addition to the three appointments, the Committee considered the composition, skills and experience of, and the succession plans for, the Group’s senior leaders. Succession for the Board and senior executives will continue to be a crucial area of focus of the Committee in the coming year and beyond to ensure that, as the Group develops, the business has the appropriate mix of skills and experience at Board and senior levels. Ferguson takes diversity seriously. We met the gender diversity targets set out in Lord Davies’ report well ahead of schedule and the Committee has noted the recommendations made by the Hampton-Alexander Review on the gender diversity of FTSE 100 Executive Committee members and their direct reports as well as the Parker Review Report’s recommendations for increasing the ethnic diversity of boards. The Committee has also noted the recommendations made by the McGregor-Smith Review of race in the workplace and the government’s response to those recommendations. Ferguson remains absolutely committed to equality in our employment, promotion and pay practices and the Committee will continue to monitor and review the Company’s progress as it continues to deliver improvements in workforce diversity. Diversity One of the core values of Ferguson is that we value our people. We believe that well trained, highly engaged associates deliver better customer service. This is one of the Group’s drivers of proﬁtable growth, set out in the CEO’s review on page 17, and there are examples throughout the report of what the Company is doing in support of this. We aim to recruit, retain and develop a high quality, diverse workforce. To achieve our objectives we will always appoint or hire the best candidates available from the widest range of knowledge, skills and experience. The diversity of our people – whether in terms of gender, race and ethnicity, religious or political beliefs, marital status, sexual orientation, age, disability, culture, background or any other measure – strengthens our diversity of thought, which is vital to the growth and success of our business. We are committed to providing our employees with an inclusive work environment in which diversity is valued, discrimination in any form is not tolerated, and in which all our people feel empowered to reach their full potential. Details of our current gender diversity statistics are set out on page 36 and further information on diversity is detailed on page 23. We remain supportive of the voluntary approach as an effective way to encourage companies to improve gender diversity in boardrooms. For the last four years we have met the gender diversity recommendations set out in Lord Davies’ original report, “Women on Boards”, and this year 36 per cent of your Board are women. Effectiveness The annual review of the effectiveness of the Committee was carried out in July 2017. The review concluded that the Committee was well run and that, overall, Committee members were satisﬁed with the quality of the succession planning process for Board and Executive positions. The review also highlighted areas for continued improvement and we have incorporated these into our priorities for 2017/18 as set out in the table below. Nominations Committee priorities for 2017/18 Continue to monitor Board and senior leadership succession Continue to monitor progress on diversity at Board level and below Gareth Davis on behalf of the Nominations Committee Gender diversity Board tenure 36% Female Gender of Board 64% Male 2 6–9 years 1* 9+ years 3 0–3 years Board tenure 5 3–6 years * Gareth Davis was appointed to the Board on 1 July 2003. Mr Davis was appointed as Chairman on 20 January 2011 and was considered to be independent within the deﬁnition as set out in the Code on appointment. Ferguson plc Annual Report and Accounts 2017 65 Directors’ Report – other disclosures Accountability Articles of Association The Company’s Articles of Association may be amended by a special resolution of the shareholders. Appointment and removal of Directors The Board may exercise all powers of the Company, subject to the limitations of the law and the Company’s Articles of Association. The Board may appoint a person who is willing to act as a Director, either to ﬁll a vacancy or as an additional Director. Under the Articles of Association any such Director shall hold office only until the next Annual General Meeting (“AGM”) and shall then be eligible for election. In addition, the Articles require that at each AGM at least one-third of the current Directors must retire as Directors by rotation. All those Directors who have been in office for three years or more since their last appointment shall retire at that AGM. Any Director may at any AGM retire from office and stand for re-election. However, in accordance with the provisions of the Code, the Board has agreed that all continuing Directors will stand for annual election at the 2017 AGM. Authority to allot shares At the 2016 AGM, authority was given to the Directors to allot new ordinary shares up to a nominal value of £18,194,582. The Directors intend to propose at the 2017 AGM to seek authority to allot and grant rights to subscribe for or to convert securities into shares up to an aggregate nominal amount representing approximately two-thirds of the Company’s issued share capital (excluding Treasury shares), calculated at the latest practicable date prior to publication of the Notice of AGM, but of that amount only one-third of the Company’s issued share capital (excluding Treasury shares), calculated at the latest practicable date prior to publication of the Notice of AGM, may be allotted pursuant to a fully pre-emptive rights issue (“Allotment Authority”). If approved, the Allotment Authority will expire at the conclusion of the 2018 AGM. Subject to the terms of the authority noted above, the Directors will also recommend that they be empowered to allot equity securities for cash or to sell or transfer shares out of Treasury other than pro rata to existing shareholders, until the 2018 AGM (“Authority to Disapply Pre-Emption”). This authority shall be limited to the allotment of equity securities for cash up to an aggregate nominal amount of no more than approximately 5 per cent of the issued ordinary share capital calculated at the latest practicable date prior to publication of the Notice of AGM as well as an additional 5 per cent, which may only be used for an acquisition or speciﬁed capital investment which is announced contemporaneously with the issue or which has taken place in the preceding six-month period and is disclosed in the announcement of the issue (in accordance with the Pre-Emption Group’s Statement of Principles). Authority to purchase shares At the 2016 AGM, authority was given to the Directors to purchase up to 25,263,165 of the Company’s ordinary shares of 10 53⁄66 pence (with such purchase being subject to minimum and maximum price conditions). This authority to purchase the Company’s shares will expire at the 2017 AGM. In certain circumstances, it may be advantageous for the Company to purchase its own ordinary shares and the Company seeks authority on an annual basis to renew the Directors’ limited authority to purchase the Company’s ordinary shares in the market pursuant to Article 57 of the Companies (Jersey) Law 1991. As detailed in the Chairman’s statement on page 13, the Company intends to commence a £500 million share repurchase programme to be executed over the 12-month period to 66 Ferguson plc Annual Report and Accounts 2017 October 2018 (the “Buyback Programme”). It is intended that a special resolution will be proposed at the 2017 AGM to grant authority for the Company to purchase up to approximately 10 per cent of the Company’s issued share capital, calculated at the latest practicable date prior to the publication of the Notice of AGM. The special resolution will set the minimum and maximum prices which may be paid. The Directors intend to use this authority to make share repurchases pursuant to the Buyback Programme. The Directors will use this authority only after careful consideration, taking into account market conditions, other investment opportunities, appropriate gearing levels and the overall ﬁnancial position of the Company. The authority will enable the Directors to continue to be able to respond promptly should circumstances arise in which they consider that such a purchase would result in an increase in earnings per share and would be in the best interests of the Company. In accordance with the Company’s Articles of Association, the Company is allowed to hold shares purchased by it as Treasury shares that may be cancelled, sold for cash or used for the purpose of employee share schemes. The Allotment Authority and Authority to Disapply Pre-Emption apply equally to shares to be held by the Company as Treasury shares and to the sale of Treasury shares. The Directors consider it desirable for these general authorities to be available to provide ﬂexibility in the management of the Company’s capital resources. Details of shares held by the Company that were acquired in previous ﬁnancial years are provided in note 27 to the consolidated ﬁnancial statements on page 113. Capitalised interest The Group does not have capitalised interest of any signiﬁcance on its balance sheet. Change of control (signiﬁcant agreements) The Company is not party to any signiﬁcant agreements that take effect, alter or terminate upon a change of control following a takeover except for the US$800 million USA Private Placement Bonds issued on 1 September 2015, the £800 million multi-currency revolving credit facility agreement dated 3 June 2015, the amended US$600 million receivables facility agreement originally entered into on 31 July 2013 and the US$438 million USA private placement Bonds issued on 16 November 2005 which could become repayable following a relevant change of control. There are no agreements between the Company and any Director that would provide compensation for loss of office or employment resulting from a change of control following a takeover bid, except that provisions of the Company’s share schemes may cause options and awards granted under such schemes to vest in those circumstances. All of the Company’s share schemes contain provisions relating to a change of control. Outstanding options and awards would normally vest and become exercisable for a limited period of time upon a change of control following a takeover, reconstruction or winding up of the Company (not being an internal reorganisation), subject at that time to rules concerning the satisfaction of any performance conditions. Conﬂicts of interest Processes and procedures are in place which require the Directors to identify and declare actual or potential conﬂicts of interest, whether matter-speciﬁc or situational. These notiﬁcations are made by a Director prior to or at a Board meeting, or in writing. All Directors have a continuing duty to update any changes. The Board may authorise potential conﬂicts which can be limited in scope, in accordance with the Company’s Articles of Association. These authorisations are regularly reviewed. Strategic report Governance Financials Other information During the year, all conﬂict management procedures were adhered to and operated efficiently. Disclosures required by Listing Rule 9.8.4R The relevant disclosures concerning capitalised interest; the allotments of equity securities for cash; and dividend waiver can be found on pages 66, 126 and 84 of this Annual Report respectively. The remaining disclosures required by the above Listing Rule are not applicable to the Company. Employees The Group actively encourages employee involvement in driving our current and future success and places particular importance on keeping employees regularly informed about the Group’s activities and ﬁnancial performance and on matters affecting them individually and the business generally. This can be through informal bulletins, in-house publications and brieﬁngs, as well as via the Group’s intranet sites. A European Works Council (“EWC”) has been operating since 1996 to provide a forum for informing and consulting employees in Europe on such matters as signiﬁcant developments in the Group’s operations, management’s plans and organisational changes within the Group. There are currently 11 EWC representatives, of which six are employee representatives and ﬁve are management representatives. Employee representatives are appointed from each European country in which Ferguson operates. All employees are offered a range of beneﬁts depending on their local environment. Where possible, they are encouraged to build a stake in the Company through the ownership of shares through participation in the Company’s all-employee sharesave plans. Employment policies Our employment policies aim to attract the very best people and we believe that a diverse and inclusive culture is a key factor in being a successful business. For more information on this, see pages 23 and 36. The Group also has policies in place relating to the continuation of employment of, and appropriate retraining for, employees who become disabled, for giving full and fair consideration to applications for employment by disabled persons, having regard to their particular attributes and abilities, and for the training, career development and promotion of disabled employees. Indemnities and insurance The Company indemniﬁes the Directors in respect of liabilities incurred as a result of their office in accordance with its Articles of Association and to the maximum extent permitted by Jersey law. Qualifying third-party indemnity provisions (to the maximum extent permitted by English law) were granted to all Directors in office by the then holding company (now known as Wolseley Limited) and these remain in force as at the date of this report. When Ferguson plc (registered in Jersey) became the new holding company, additional third-party indemnity provisions were granted by the Company, and it has granted indemnities in accordance with Jersey law to all Directors and the Company Secretary appointed since November 2010. There is appropriate insurance coverage in respect of legal action against the Directors and officers. Neither the Company’s indemnities nor insurance would provide any coverage to the extent that a Director is proved to have acted fraudulently or dishonestly. Independent Auditors and audit information In respect of the consolidated ﬁnancial statements for the ﬁnancial year ended 31 July 2017, the Directors in office at the date of this report conﬁrm that, so far as they are each aware, there is no relevant audit information of which Deloitte LLP (“Deloitte”) are unaware and each Director has taken all the steps that ought to have been taken as a Director to be aware of any relevant audit information and to establish that Deloitte are aware of that information. Deloitte is willing to act as auditors of the Company, and resolutions concerning their appointment and the determination of their remuneration will be proposed at the 2017 Annual General Meeting. Political donations No political donations or contributions to political parties under the Companies Act 2006 have been made during the ﬁnancial year. The Group policy is that no political donations be made or political expenditure be incurred. Restrictions on transfer of shares There are no restrictions on the voting rights attached to the Company’s ordinary shares or on the transfer of securities in the Company. No person holds securities in the Company carrying special rights with regard to control of the Company. The Company is not aware of any agreements between holders of securities that may result in restrictions on the transfer of securities or on voting rights. Share capital and voting rights Details of the authorised and issued share capital, together with any movements in the issued share capital during the year, are shown in note 27 to the consolidated ﬁnancial statements on page 113. Subject to the provisions of the Companies (Jersey) Law 1991 and without prejudice to any rights attached to any existing shares or class of shares, any share may be issued with such rights and restrictions as the Company may by ordinary resolution determine or as the Board shall determine. Copies of the Company’s Articles of Association can be obtained from Companies Registry, Jersey, or by writing to the Group Company Secretary. The Company also has a Level 1 American Depositary Receipt (“ADR”) programme in the USA for which Deutsche Bank Trust Company Americas acts as Depositary. The American Depositary Shares (“ADS”) which are evidenced by ADRs are traded on the USA over-the-counter market, where each ADS represents one-tenth of a Ferguson plc ordinary share. Shareholder notiﬁcations No notiﬁcations were received by the Company pursuant to the Financial Conduct Authority’s (“FCA”) Disclosure Guidance and Transparency Rule 5 (“DTR5”) during the year ended 31 July 2017 or between then and the date of this report. The following notiﬁcations, representing signiﬁcant shareholdings, were received by the Company in previous ﬁnancial years. Name of holder BlackRock, Inc FIL Limited Standard Life Investments Limited Percentage of issued voting share capital1 9.64% 4.95% 3.85% 1. Since the disclosure date, the shareholders’ interests in the Company may have changed. Ferguson plc Annual Report and Accounts 2017 67 Directors’ Report – other disclosures continued Accountability Further disclosures Further disclosures required under the Companies Act 2006, Schedule 7 of the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 and the FCA’s Listing Rules and Disclosure and Transparency Rules can be found on the following pages of this Annual Report and are incorporated into the Directors’ Report by reference: – provide additional disclosures when compliance with the speciﬁc requirements in IFRSs is insufficient to enable users to understand the impact of particular transactions, other events and conditions on the entity’s ﬁnancial position and ﬁnancial performance; and – make an assessment of the Company’s ability to continue as a going concern. Details of the Company’s proposed ﬁnal dividend payment for the year ended 31 July 2017 Disclosures relating to exposure to price, credit, liquidity and cash ﬂow risks Disclosures relating to ﬁnancial risk management objectives and policies, including our policy for hedging Going concern statement Viability statement Disclosures concerning greenhouse gas emissions The management report for the year Information concerning post-balance sheet events Future developments within the Group Details of the Group’s proﬁt for the year ended 31 July 2017 Page 40 119 to 127 119 to 127 41 43 37 1 to 68 119 1 to 49 39 Shares issued during the year 113 and 126 Directors’ responsibilities statement The Directors are responsible for preparing the Annual Report and the ﬁnancial statements in accordance with applicable law and regulations. Company law requires the Directors to prepare ﬁnancial statements for each ﬁnancial year. Under that law the Directors are required to prepare the Group ﬁnancial statements in accordance with International Financial Reporting Standards (“IFRSs”) as adopted by the European Union and Article 4 of the IAS Regulation and have elected to prepare the parent company ﬁnancial statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards and applicable law), including FRS 101 “Reduced Disclosure Framework”. Under company law the Directors must not approve the accounts unless they are satisﬁed that they give a true and fair view of the state of affairs of the Company and of the proﬁt or loss of the Company for that period. In preparing the parent company ﬁnancial statements, the Directors are required to: – select suitable accounting policies and then apply them consistently; – make judgements and accounting estimates that are reasonable and prudent; – state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the ﬁnancial statements; and – prepare the ﬁnancial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business. The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company’s transactions and disclose with reasonable accuracy at any time the ﬁnancial position of the Company and enable them to ensure that the ﬁnancial statements comply with the Companies (Jersey) Law 1991. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. The Directors are responsible for the maintenance and integrity of the corporate and ﬁnancial information included on the Company’s website. Legislation in Jersey governing the preparation and dissemination of ﬁnancial statements may differ from legislation in other jurisdictions. The Directors of Ferguson plc as at the date of this Annual Report are as follows: Gareth Davis, Chairman John Martin, Group Chief Executive Michael Powell, Group Chief Financial Officer Kevin Murphy, Chief Executive Officer, USA Alan Murray, Senior Independent Director Tessa Bamford, Non Executive Director John Daly, Non Executive Director Pilar López, Non Executive Director Darren Shapland, Non Executive Director Nadia Shouraboura, Non Executive Director Jacqueline Simmonds, Non Executive Director Each Director conﬁrms that, to the best of their knowledge: – the ﬁnancial statements, prepared in accordance with the relevant ﬁnancial reporting framework, give a true and fair view of the assets, liabilities, ﬁnancial position and proﬁt or loss of the Company and the undertakings included in the consolidation taken as a whole; – the management report includes a fair review of the development and performance of the business and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face; and – the Annual Report and Financial Statements, taken as a whole, are fair, balanced and understandable and provide the information necessary for shareholders to assess the Company’s position and performance, business model and strategy. In preparing the Group ﬁnancial statements, International Accounting Standard 1 requires that Directors: The Directors’ Report, comprising pages 13 to 84 was approved by the Board and signed on its behalf by: – properly select and apply accounting policies; – present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information; Graham Middlemiss Group Company Secretary 2 October 2017 68 Ferguson plc Annual Report and Accounts 2017 Strategic report Governance Financials Other information Directors’ Remuneration Report Jacky Simmonds Remuneration Committee Chairman Dear Shareholder On behalf of the Board, I am pleased to present the Directors’ Remuneration Report for the year ended 31 July 2017. The current Remuneration Policy (“Policy”), was approved at the Annual General Meeting (AGM) in December 2015 and is due to be resubmitted for approval in December 2018. The Committee is satisﬁed that this Policy continues to be appropriate for the coming year and as such no changes to the Policy are proposed for 2017/18. Although the Company (being Jersey incorporated) is not subject to the Directors’ Remuneration Regulations 2008 (“Regulations”), the Committee recognises the importance of shareholder transparency and standards of governance. This Directors’ Remuneration Report complies with the Regulations as they would apply if we were a UK incorporated company. On page 71 there is a summary of the current Policy and the full Policy can be found on the Who We Are section of the Ferguson plc website at www.fergusonplc.com. In this statement I will share with you the major decisions taken by the Committee during the year, corporate performance and incentive outcomes for 2016/17 and our approach for 2017/18, which will continue to be based on the reward principles we have applied since 2015: – to provide remuneration packages that fairly reward Executive Directors and senior executives for the contribution they make to the business, having regard to the size and complexity of the Group’s business operations and the need to attract, retain and motivate executives of the highest quality; – to have remuneration packages which comprise salary, short-term bonuses, long-term incentives, beneﬁts-in-kind and pension provision; and – to aim to provide a total cash award of base salary and bonus around the median of the market, with the opportunity to earn a higher reward for sustained superior ﬁnancial and individual performance. Group Chief Financial Officer succession As announced on 1 March 2017, Mike Powell was appointed as Group Chief Financial Officer (“Group CFO”) with effect from 1 June 2017 in succession to John Martin who was appointed as Group Chief Executive Officer on 1 September 2016. Mike has extensive international experience having worked overseas in a variety of senior ﬁnance positions. The Committee made the decision to set his salary on appointment at £510,000, below the market median, to enable room for growth as he develops into the role. Therefore, it is the Committee’s intention to increase his salary by more than the average salary increase for the relevant general workforce (subject to his performance in the role) in both August 2018 and 2019 to move him closer to the market median, consistent with our Policy. The Company compensated Mike for a number of awards he forfeited from his previous employer BBA Aviation plc (“BBA”) as a result of joining Ferguson; the replacement awards replicated as far as practicable the structure, time horizon and fair value of the arrangements he forfeited, and are subject to the Company’s standard malus and clawback provisions. Further details on these buy-out awards are on pages 78 and 80. Chief Executive Officer, USA succession As we also announced in March 2017, Kevin Murphy was appointed as Chief Executive Officer, USA (“CEO, USA”) on 1 August 2017, in succession to Frank Roach who retired on 31 July 2017. Kevin has been Chief Operating Officer of the Group’s USA business for the past 10 years and an integral member of the senior leadership team. His appointment on a salary of $900,000 is below the market median (and below his predecessor’s salary) and as with the Group CFO, provides room to increase his salary by more than the average salary increase for the relevant general workforce, subject to his performance in the role, in both August 2018 and 2019 to move him closer to the market median, consistent with our Policy. The Committee agreed to exercise its discretion to treat Frank Roach as a “good leaver” for his unvested ESOP and LTIP awards, in view of his leaving Ferguson through retirement, and he will receive no severance payments. His long-term incentive awards will be time pro-rated on the basis of full years worked during the relevant performance period for each award. Therefore, the awards granted to him in 2015/16 and 2016/17 will be subject to a reduction of one-third and two-thirds respectively. Further details of the termination arrangements are set out on page 78 of the Annual Report on Remuneration. These are in line with our Policy. Performance in 2016/17 Company performance for the year ended 31 July 2017 saw strong trading performance, particularly in the USA. Canadian performance also improved in 2016/17, whilst the UK continues to progress with its transformation programme. During the year, the Company announced the merger of its Swiss business (Tobler) with Walter Meier AG which took place on 7 April 2017 and plans to exit from the Nordic region, as well as the change in name to Ferguson plc. The continued focus which the Company places on proﬁt growth and maintaining strong cash ﬂow has enabled it to increase both the interim dividend paid to shareholders in April, which was 10 per cent higher than in 2016, and the proposed ﬁnal dividend, which is 10 per cent higher at 73.33 pence per share. This strong trading performance and good cash ﬂow has resulted in the bonus payments to the Executive Directors averaging 93.1 per cent of their maximum levels. In the three years to 31 July 2017, annualised Total Shareholder Return (“TSR”) was 16.5 per cent, and as a result the Company achieved a TSR ranking of 24th against our FTSE 100 comparator group and therefore 71.6 per cent of the shares awarded under the 2012 LTIP in 2014 will vest. The Company’s consolidated ﬁnancial statements for the year ended 31 July 2017 have been restated to present the Nordic business as discontinued operations under IFRS 5. The performance of the Nordic business declined over the periods covered by long-term incentive awards made in 2014, 2015 and 2016. The Committee therefore decided that the EPS calculation used to measure performance under the Company’s long-term incentive plans should include the Nordic business to more accurately reﬂect management’s performance in relation to all of the businesses under its control throughout the relevant period for long- term incentive awards made in 2014, 2015 and 2016. Ferguson plc Annual Report and Accounts 2017 69 Directors’ Remuneration Report continued Remuneration At a glance 2016/17 performance summary Group gross proﬁt* Group trading proﬁt* £4,651.9m +8.0% £1,044.9m +7.5% Group cash-to-cash days* Adjusted headline EPS** 48.6 days 1.5 days improvement 270.5p EPS growth over UK inﬂation (3 years) +32.1% * Figures adjusted for exceptional items and include non-ongoing operations and the Nordic business. The calculations use Company budgeted foreign exchange rates. ** Adjusted to remove the beneﬁt to management of currency movements during 2016/17 and to include the Nordic business as detailed in the Committee Chair’s statement, opposite. Ferguson 3-year TSR performance vs the FTSE 100 150 140 130 120 110 100 90 July 2014 July 2015 July 2016 July 2017 Ferguson Return Index FTSE 100 Return Index Following the Brexit vote on 23 June 2016, foreign exchange rates moved rapidly and signiﬁcantly. This has had a signiﬁcant favourable impact on EPS growth in the year ended 31 July 2017. Given the scale of movement in foreign exchange rates during the ﬁnancial year the Committee has also adjusted the EPS calculation used to determine the extent to which the Group has met this performance condition downwards to remove any beneﬁt to management accruing as a result of factors beyond its control. Adjusted headline earnings per share (“EPS”) for the three years ended 31 July 2017 reﬂected strong trading proﬁt growth, contributing to a headline increase in EPS of 38.7 per cent to 270.5 pence. As a result, ESOP awards granted in 2014 will vest in full in November 2017. Looking ahead to the year ending 31 July 2018 For the ﬁnancial year ending 31 July 2018, the remuneration arrangements which were approved in December 2015 will continue to apply. It is intended that awards under the 2015 LTIP will be made to Executive Directors during 2017/18. The weighting of the performance measures for the share awards under the 2015 LTIP (TSR, EPS and Operating Cash Flow) will continue to be applied in equal proportions of one-third as they were in 2016/17. In line with our Policy, the Committee undertook an annual review of the Executive Directors’ base salaries. For the Group CFO and CEO, USA, as detailed above, their salaries will not be reviewed until 1 August 2018. For the Group Chief Executive Officer (“Group CEO”) his salary will be increased by 2.0 per cent from 1 August 2017 in line with the general level of increase awarded to other employees in the Group. As a Committee we continue to monitor developments in corporate governance and remuneration and, where we consider it appropriate to do so, based on the best interests of Ferguson and its shareholders, we would propose to adopt them. As announced on 28 March 2017 and detailed in the Chairman’s statement on page 13 the Company changed its presentational currency from sterling to US dollars with effect from 1 August 2017. To align with this change, the Committee has restated the base years for EPS and the targets for operating cash ﬂow for the LTIP awards granted in 2015/16 and 2016/17 from sterling to US dollars. The revised operating cash ﬂow targets are detailed on page 79. The performance targets for all future awards will be set, and performance measured, in US dollars. For LTIP awards to be granted in 2017/18, targets for real growth in EPS will be set in US dollars relative to US CPI, to align with our presentational currency going forward. The Committee is satisﬁed that achieving 3-year real growth in EPS of 9 per cent to 30 per cent is not materially more or less difficult in US dollars than sterling, and performance will be less susceptible to foreign exchange movements when measured in US dollars due to the high proportion of our business transacted in US dollars. In line with the Remuneration Report Regulations we have commenced our review of the Policy, which we will be sharing and discussing with our key shareholders over the coming months. On behalf of the Committee, I thank you for your continued support and trust that you ﬁnd the Directors’ Remuneration Report informative. I very much hope that we will receive your support at the 2017 AGM and I will be available at the meeting to respond to your questions on any aspect of this Report. Jacky Simmonds Chair of the Remuneration Committee 70 Ferguson plc Annual Report and Accounts 2017 Strategic report Governance Financials Other information Link to strategy Support recruitment and retention of high- calibre individuals. Linking pay to Ferguson’s strategic ﬁnancial and operational priorities. Incentivising long-term sustainable business growth. Base salary Annual bonus LTIP Alignment with shareholder interests. Shareholding guidelines Ferguson’s Remuneration Policy 8 1 0 2 9 1 0 2 0 2 0 2 1 2 0 2 2 2 0 2 * 3 2 0 2 Key features of the Policy How we implement the Policy Set at mid-market level against a comparator group. Any increases made are broadly in line with wider workforce. Maximum bonus opportunity allowed is 150% base salary, paid in cash. Malus and clawback provisions apply. Maximum award level allowed is 350% base salary. Awards granted annually, typically as nil cost options or conditional shares. Minimum three-year performance period. Malus and clawback provisions apply for ﬁve years after the grant date. Shares or awards must be retained for two years post vesting if shareholding target has not been met. New Group CFO and CEO, USA salaries set at below market median and predecessors’. 2% salary increase for Group CEO, in line with salary increases in the Group. At least 80% of bonus targets based on ﬁnancial performance (20% cash-to-cash days; 30% trading proﬁt; 30% gross proﬁt) and not more than 20% based on personal strategic objectives. Award levels for 2017/18 set at 300%, 240% and 250% of base salary for the Group CEO, Group CFO and CEO, USA respectively. Three key performance measures: TSR relative to FTSE 100 comparator group; EPS growth; and operating cash ﬂow (“OpCF”). Each element is equally weighted. Five years from appointment or promotion date to meet shareholding target. Shareholding targets set as a multiple of base salary. In 2016/17 all Directors have met their shareholding guideline targets. Targets for the new Group CFO, CEO, USA and NED were set on 1 August 2017. Performance period Holding period Malus/Clawback period * Please note that the years used by way of example only relate to awards made in the 2016/17 ﬁnancial year. Rewarding 2016/17 performance For 2016/17 Executive Directors received: – base salary which was set at the same level as his predecessor for the Group CEO, below market median for the new Group CFO and increased in line with average USA employee salary increase for the CEO, USA; – taxable beneﬁts and pension beneﬁts; – annual bonus awards which achieved between 84.6 and 97.8 per cent of the maximum opportunity; – LTIP awards vesting at 71.6 per cent of the awards after longer-term performance measured against its FTSE 100 comparator group; and – ESOP awards vesting at 100 per cent of the awards after longer-term performance measured against headline EPS growth. The graph opposite shows total remuneration for Executive Directors in post on 31 July 2017. Mike Powell was appointed Group CFO on 1 June 2017 and his remuneration reﬂects the two months served during the 2016/17 ﬁnancial year. The “single ﬁgure” of total remuneration for each Executive Director who served during the year is set out on page 76. Rewarding performance £000 1,894.1 3,458.2 N/A 200.8 2,600.6 3,675.3 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 0 2015/16 2016/17 John Martin Fixed pay Variable pay made up of: 2015/16 2016/17 Mike Powell 2015/16 2016/17 Frank Roach Bonus ESOP LTIP Ferguson plc Annual Report and Accounts 2017 71 Directors’ Remuneration Report continued Remuneration Information For the purposes of this Annual Report on Remuneration: 1 2 any payments made in US dollars have been converted to sterling. The calculations are made based on the average exchange rate for the year ended 31 July 2017 of $1.2667:£1 (for the year ended 31 July 2016 of $1.4603:£1); and any estimated share values are determined using a share price of 4,822 pence, being the average closing mid-market quotation for Ferguson plc shares for the three-month period ended 31 July 2017. Remuneration Policy The Policy was approved by shareholders at the AGM on 1 December 2015 and can be found on our website at www.fergusonplc.com. The Policy took effect from this date and may operate for up to three years. The Policy remains unchanged and all remuneration and all recruitment or loss of office payments are consistent with the Policy. For convenience we include Policy Extracts on pages 82 and 83. These extracts from the Policy provide the context within which individual remuneration decisions have been made during the year. Implementation of Policy for the year ending 31 July 2018 Executive Directors Base salary In line with the Policy, the Remuneration Committee undertook an annual review of the Executive Directors’ base salaries in July 2017. The Committee agreed to an increase to the base salary level of the Group CEO of 2.0 per cent with effect from 1 August 2017. Therefore, the Group CEO’s annualised base salary is £877,200 for the year ending 31 July 2018 (£860,000 for the year ended 31 July 2017). This is in line with the general level of increase awarded to other employees in the Group. The Committee agreed that the salaries of the Group CFO and CEO, USA, who took up their positions on 1 June 2017 and 1 August 2017 respectively, would not be reviewed until 1 August 2018. On appointment, the Group CFO and CEO, USA’s salaries were set below market median and below those of their predecessors. As detailed in the Remuneration Committee Chair’s statement on page 69 it is the Committee’s intention to increase both the Group CFO and CEO, USA’s salaries by more than the average salary increase for the relevant general workforce (subject to their performance in the respective roles) in both August 2018 and 2019 to bring them into line with the market median. This approach is consistent with the Policy. Pension and beneﬁts UK-based Executive Directors receive a salary supplement in lieu of membership of the Group pension scheme, being 30 per cent of base salary for John Martin and 25 per cent for Mike Powell. USA-based Executive Director Kevin Murphy participates in the Ferguson deﬁned contribution pension arrangement and receives a Company contribution of 16 per cent of base salary. Kevin Murphy’s current year pension beneﬁts include a 401k plan and Ferguson Executive Retirement Plan arrangements. These plans have normal retirement ages of 59 1⁄2 and 55 respectively. Bonus payments are not included in the calculation of the Company pension contributions. Beneﬁts provided to Executive Directors are detailed in the Remuneration table on page 76. Annual bonus When considering the objectives for the Executive Directors and other members of the Executive Committee, the Remuneration Committee takes into account whether speciﬁc attention should be given to environmental, social and governance matters. Directors take such matters into account when considering any investment proposal or operational matters and management is expected to meet performance targets which include compliance with any environmental, social or governance-related standards that have been set. The overall performance of the businesses and of management is reviewed at the end of the year when considering the award of bonuses and whether operational and personal objectives have been met. The threshold, target and maximum bonus opportunities for each of the Executive Directors are set out in the table below: J Martin (Group CEO) M Powell (Group CFO) K Murphy (CEO, USA)1 Threshold Target Maximum As % of salary 80% 70% 80% 100% 90% 100% 120% 110% 120%1 1. Award levels for Kevin Murphy as CEO, USA are lower than the award made to his predecessor in 2016/17. Performance targets are set as 80 per cent of bonus opportunity on ﬁnancial performance (20 per cent is based on cash-to-cash days, 30 per cent on trading proﬁt and 30 per cent on gross proﬁt) and 20 per cent of bonus opportunity on personal strategic objectives. Speciﬁc individual objectives were set at the beginning of the 2017/18 ﬁnancial year. For the 2017/18 ﬁnancial year, the threshold for bonus payments in relation to ongoing trading proﬁt will be set at or above the outturn trading proﬁt for the 2016/17 ﬁnancial year on a constant currency basis. The Board considers that the performance targets for 2017/18 are commercially sensitive and they are not included for this reason. The Committee intends to disclose the targets and performance against them in the Annual Report on Remuneration next year depending on considerations of commercial sensitivity at that time. 72 Ferguson plc Annual Report and Accounts 2017 Strategic report Governance Financials Other information Long-term incentives LTIP awards will be made during the 2017/18 ﬁnancial year at the levels set out in the table below: J Martin (Group CEO) M Powell (Group CFO) K Murphy (CEO, USA)1 LTIP (award value as % of salary) 300% 240% 250% 1. Award levels for Kevin Murphy as CEO, USA are lower than the award made to his predecessor in 2016/17. The extent to which the LTIP awards (proposed to be granted during 2017/18) vest will be dependent on the following performance targets each with a weighting of one-third of award opportunity: comparative TSR; EPS growth; and OpCF. Comparative TSR The TSR element of the award will vest as set out in the table below (comprising one-third of the total award opportunity): Ferguson’s TSR position in comparator group1 Upper quartile Between median and upper quartile At median Below median Percentage of award subject to TSR which will vest2 100% 25%-100% 25% 0% 1. Full constituent members of the FTSE 100 Index at the beginning of the performance period, with no additions or exclusions. 2. Awards will vest on a straight-line basis between 25 per cent and 100 per cent. The TSR measure is considered appropriate as it ensures that the interests of the Executive Directors are closely aligned with those of the Company’s shareholders over the long term and incentivises outperformance of the Company relative to its peers. The TSR performance condition supports the achievement of proﬁt growth, cash generation, maximising shareholder value and relative outperformance of its peer group. EPS growth The EPS1 element of the award will vest as set out in the table below (comprising one-third of the total award opportunity): 30% and above Between 9% and 30% 9% Below 9% 100% 25%-100% 25% 0% 1. Headline EPS as presented in the audited Ferguson plc Annual Report and Accounts (subject to such adjustments as the Committee deems appropriate to ensure it reﬂects underlying business performance). 2. Awards will vest on a straight-line basis between 25 per cent and 100 per cent. As set out in the introduction to this Report on page 70, EPS growth for LTIP awards to be granted in 2017/18 will be measured relative to US CPI. For EPS growth targets, the Committee sets the EPS growth range having due regard to the Group’s budget and strategic business plan every year as well as market expectations, the Group’s trading environment and the consensus of analysts’ forecast trading proﬁt. The EPS targets are considered appropriate as they require substantial improvement in the Group’s ﬁnancial performance and EPS is a key metric used by investors to assess the Group’s performance. Operating cash ﬂow (“OpCF”) In line with the Company’s change in presentational currency to US dollars OpCF targets for LTIP awards to be made in the year ending 31 July 2018 have been set in US dollars. The OpCF element of the award will vest as set out in the table below (comprising one-third of the total award opportunity): Operating cash ﬂow1,3 $4.90 billion Between $4.40 billion and $4.90 billion $4.40 billion Below $4.40 billion Percentage of award subject to operating cash ﬂow which will vest2 100% 25%-100% 25% 0% 1. Cash generated from operations (before interest and tax) as presented in the audited Group cash ﬂow statement in the Ferguson plc Annual Report and Accounts (subject to such adjustments as the Committee deems appropriate to ensure it reﬂects underlying business performance, and speciﬁcally would be adjusted downwards to reﬂect the impact on operating cash ﬂow following the expected disposal of the Nordic business). 2. Awards will vest on a straight-line basis between 25 per cent and 100 per cent. 3. The cumulative three-year ﬁgure for OpCF as taken from the Company’s Annual Report and Accounts translated at the average exchange rate for each applicable year for the last three years equals $4.36 billion. For OpCF generation, the Committee sets the cumulative OpCF target having due regard to the Group’s budget and strategic plan every year as well as market expectations and the Group’s trading environment. The OpCF measure is considered appropriate as it encourages long-term generation of cash to fund investment and returns to shareholders. Non Executive Directors and Chairman The Company’s policy on Non Executive Directors’ remuneration is set by the Board with account taken of the time and responsibility involved in each role, including where applicable the Chairmanship of Board Committees. A summary of current fees is as follows: Chairman’s fee Non Executive Director base fee1 Senior Independent Director Chairman of Audit Committee Chairman of Remuneration Committee 2017/18 (£000) 383.0 66.7 13.1 19.3 16.3 2016/17 (£000) 375.4 65.3 12.8 18.9 15.9 1. All increases to Non Executive Director/Chairman fees were broadly in line with Executive increases to base salary. Ferguson plc Annual Report and Accounts 2017 73 Total margin of EPS growth over US inﬂation (“CPI”) after three years Percentage of award subject to EPS which will vest2 Additional fees: Directors’ Remuneration Report continued Remuneration Report for the year ended 31 July 2017 Remuneration Committee The Committee met regularly during the year. There were six meetings in total and details of attendance are shown in the table on page 54. The activities of the Committee are governed by their terms of reference which were reviewed in May 2017 and can be found on the Ferguson plc website at www.fergusonplc.com. During the year, the members of the Remuneration Committee were Jacky Simmonds (Chair), Tessa Bamford, John Daly, Pilar López, Alan Murray, Darren Shapland and, from 1 July 2017, Nadia Shouraboura. The annual review of the effectiveness of the Committee was conducted during the year and considered at the May 2017 meeting. The review concluded that the Committee was working effectively and minor recommendations to improve effectiveness were acted upon. Allocation of time spent during the year During 2016/17, the Committee considered the items detailed below at its meetings, as well as other issues as required. Governance – Approval of Directors’ Remuneration Report 2015/16 – Annual governance and compliance review – Appointment of new remuneration advisers Salary and fees review – Review of executive pay – Remuneration proposals for new and existing Executive Directors and Executive Committee – Buy out award for new Group Chief Financial Officer – Review of Chairman’s fees – Approval of the remuneration package of a senior executive, below Board level, who was changing roles Annual bonus – Assessment of performance against 2015/16 targets and objectives for 2016/17 targets – Review of bonus structure for ﬁnancial year 2017/18 Discretionary share plans and all-employee plans – Agree discretionary share plan awards for 2016/17 – Conﬁrmation of vesting of discretionary share plan awards granted in 2013 – Agree process for 2016/17 grants under all-employee sharesave plans Annual reviews – Remuneration adviser performance – Share headroom in accordance with Investment Association guidelines – Committee effectiveness – Directors’ shareholding guidelines – Committee’s terms of reference 74 Ferguson plc Annual Report and Accounts 2017 Advisers to the Committee During the year, the Committee received advice and/or services from various parties. Details are set out below. In March 2017, Kepler (a brand of Mercer, which is part of the MMC group of companies) was appointed as the Committee’s independent remuneration consultant following a competitive tender process led by the Chair of the Committee. Kepler is a founding member and signatory to the UK Remuneration Consultants Group Code of Conduct which governs standards in the areas of transparency, integrity, objectivity, conﬁdentiality, competence and due care. Kepler adheres to this Code of Conduct. The Committee has established arrangements to ensure that the advice received from Kepler is independent of the advice provided to the Company. Kepler is appointed by the Committee and its performance will be reviewed on an annual basis. The Committee will review the performance of, and advice provided by, Kepler in November 2017. Kepler also provided remuneration consultancy services to the Company during the year. Fees are charged predominantly on a “time spent” basis and the total fees paid to Kepler for the advice provided to the Committee during the year was £41,400. Fees paid to Kepler for other pay-related services to the Company during the year were £28,800. From the beginning of the 2016/17 ﬁnancial year until the appointment of Kepler in March 2017, New Bridge Street (a trading name of Aon Hewitt Limited and part of Aon plc) (“NBS”) was the Committee’s independent remuneration consultant. NBS is a member of the Remuneration Consultants’ Group and also adheres to the Code of Conduct referred to above. Throughout the period the Committee operated arrangements to ensure that the advice received from NBS was independent of advice provided to the Company. NBS was appointed by the Committee and its performance reviewed on an annual basis. The Committee was satisﬁed that the advice received was objective and independent. NBS also provided remuneration consultancy services to the Company during the year. Fees are charged predominantly on a “time spent” basis and the total fees paid to NBS for the advice provided to the Committee during the year was £31,582. Fees paid to NBS for other pay-related services to the Company during the year were £11,500. Alithos Limited (“Alithos”) provided information to the Committee for the testing of the TSR performance conditions for the LTIP awards and also provided the TSR performance graphs for the Directors’ Remuneration Report. They received total ﬁxed fees of £10,500. Fees were charged as a ﬁxed annual rate. Alithos was appointed by the Company for both services as it was considered to have the relevant expertise and experience. Alithos did not provide any other advice or services during the year and so the Committee considers Alithos to be objective and independent. Freshﬁelds Bruckhaus Deringer LLP (“Freshﬁelds”) provided legal advice to the Committee during the year in connection with retirements from and appointments to the Board and the Company’s Remuneration Report. Fees are charged predominantly on a “time spent” basis and the total fees paid to Freshﬁelds for the advice provided to the Committee during the year were £42,073. Freshﬁelds was appointed by the Company and provided other services to the Company during the year. The Committee is satisﬁed that the services provided to it by Freshﬁelds are of a technical nature and did not create any conﬂict of interest and therefore the advice received from them was objective and independent. If a conﬂict of interest were to arise, the Committee would appoint separate legal advisers from those used by the Company. The Committee also seeks internal support from the Group HR Director and the Group Chief Executive together with other senior Group employees as necessary. Those who attend by invitation do not participate in discussions that relate to the details of their own remuneration. Strategic report Governance Financials Other information Statement of shareholder voting The following table shows the results of the full details of the voting outcomes for the Remuneration Report resolution at the AGM on 29 November 2016 and the Remuneration Policy at the AGM on 1 December 2015: Remuneration Report 29 November 2016 193,161,428 Remuneration Policy 1 December 2015 195,566,771 Date of vote Votes for For % 98.11 97.79 Votes against Against % Total Votes withheld (abstentions) 3,722,912 4,428,909 1.89 2.21 196,884,340 9,634,381 199,995,680 961,949 Board appointments and service agreements/letters of appointment All Executive Directors are appointed to the Board from the relevant effective date of appointment set out in their service agreements. Appointment dates for all of the Non Executive Directors are set out in their letters of appointment. Further details are shown in the table below. Board appointments Director1 Chairman G Davis Executive Directors2 J Martin M Powell K Murphy Non Executive Directors T Bamford J Daly P López A Murray D Shapland N Shouraboura J Simmonds Date of service agreement/ letter of appointment Effective date of appointment Expiry of current term 29 May 2003 1 July 2003 20 January 2011 (as Chairman) 20 January 2020 31 August 2016 1 April 2010 1 September 2016 (as Group CEO) 28 February 2017 17 July 2017 22 March 2011 21 May 2014 18 December 2012 11 December 2012 3 April 2014 7 June 2017 21 May 2014 1 June 2017 1 August 2017 22 March 2011 21 May 2014 1 January 2013 1 January 2013 3 April 2014 1 July 2017 21 May 2014 22 March 2020 21 May 2020 1 January 2019 1 January 2019 1 May 2020 1 July 2020 21 May 2020 1. Details of all Directors can be found on pages 52 and 53. It remains the Board’s policy that Non Executive Directors are appointed for an initial term of three years, which is then reviewed and, if appropriate, extended for a further three-year period. All Directors are proposed for re-election annually in accordance with the UK Corporate Governance Code (“the Code”). 2. During the year, Frank Roach served as CEO, USA and a Director. Mr Roach retired on 31 July 2017. Availability of documents Copies of service agreements and letters of appointment are available for review upon request at the Company’s registered office in Jersey. They are also available at the Corporate Head Office in Switzerland and the Group Services Office in the UK, and will be available for inspection at the 2017 AGM. Ferguson plc Annual Report and Accounts 2017 75 Directors’ Remuneration Report continued Remuneration Remuneration table (showing single total ﬁgure of pay for year) (Audited) The table below sets out in a single ﬁgure the total amount of remuneration, including each element, earned by each of the Executive Directors for the year ended 31 July 2017. Executive Directors J Martin1 M Powell2 F Roach Past Directors I Meakins3 Total Year 2016/17 2015/16 2016/17 2015/16 2016/17 2015/16 2016/17 2015/16 2016/17 2015/16 Salary (£000) 832.6 531.0 85.0 – 881.2 749.4 71.7 859.8 1,870.5 2,140.2 1. John Martin was promoted to Group CEO with effect from 1 September 2016 having previously served as Group CFO. During the year, Mr Martin received one month’s salary at an annualised level of £531,000 and pension contributions of 25 per cent base salary for his services as Group CFO and 11 months’ salary at an annualised level of £860,000 with pension contributions of 30 per cent base salary for his services as Group CEO. 2. Mike Powell was appointed as Group Chief Financial Officer on 1 June 2017. During 2016/17, Mr Powell received two months’ salary, taxable beneﬁts, pension beneﬁts and annual bonus payment. 3. Ian Meakins retired as Group Chief Executive on 31 August 2016. During 2016/17, Mr Meakins received one month’s salary, taxable beneﬁts and pension beneﬁts. The majority of Mr Meakins taxable beneﬁts for the period related to tax gross up arrangements. Mr Meakins did not receive an annual bonus payment in 2016/17. The value of Mr Meakins LTI award vesting in November 2017 is pro-rated on the basis of full ﬁnancial years served during the relevant performance condition testing period for each award as described in the section detailing the Committee’s exercise of discretion on page 66 of the Company’s 2016 Annual Report. The value of LTI vesting chart, opposite, reﬂects this pro-ration. 4. These are pre-tax ﬁgures. Beneﬁts comprise private health insurance, car beneﬁt (car allowance, car, driver), tax and ﬁnancial advice and tax gross up arrangements. The majority of Frank Roach’s beneﬁts relate to medical insurance and a car allowance. 5. The ESOP and LTIP grants were made in November 2014. The ESOP awards will vest at 100 per cent in November 2017 and the LTIP awards will vest at 71.6 per cent in November 2017. See page 78 for further information on the treatment of Frank Roach’s LTI awards. 6. The ﬁgure for total remuneration includes share price appreciation for the value of LTI vesting and the value of dividend equivalents on vested LTIP awards. As the ESOP and LTIP grants made in November 2014 will not vest until November 2017, the values of long-term incentive awards vesting in the graph opposite include share price appreciation determined using the share price of 4,822 pence noted on page 72 under the heading “Information”. Taxable beneﬁts4 (£000) 50.6 53.7 3.1 – 86.9 106.5 24.3 65.3 164.9 225.5 Bonuses (£000) 915.2 378.8 91.4 – 1,044.3 712.5 – 567.9 2,050.9 1,659.2 Value of LTI vesting5,6,7 (£000) Pension beneﬁts8 (£000) Total remuneration6 (£000) 1,412.2 797.9 – – 1,460.2 864.0 1,904.1 1,607.1 4,776.5 3,269.0 247.6 132.7 21.3 – 202.7 168.2 22.9 275.1 494.5 576.0 3,458.2 1,894.1 200.8 – 3,675.3 2,600.6 2,023.0 3,375.2 9,357.3 7,869.9 Value of LTI vesting (2017) £000 1,904.2 1,412.2 1,460.2 Ian Meakins John Martin Frank Roach LTIP original value LTIP share price gain ESOP share price gain 7. Value shown for 2016/17 represents estimated value of share awards granted in 2014 that are expected to vest in November 2017. The estimate assumes 100 per cent vesting of ESOP awards and 71.6 per cent vesting of LTIP awards using the three-month average share price for the period ended 31 July 2016 of 4,822 pence. Value shown for 2015/16 represents the actual vesting of the ESOP and LTIP awards which vested in November 2016, using the share price of 4,199 pence (7 November 2016). 8. Frank Roach participated in the deﬁned contribution pension arrangements of Ferguson Enterprises, Inc. receiving contributions of 23 per cent of base salary from Ferguson Enterprises Inc. The cost of employer’s contributions during the year was £202,687 ($256,744). For the year ended 31 July 2016, the cost was £168,200 ($245,571). During the year ended 31 July 2017, John Martin, Mike Powell and Ian Meakins received salary supplements in lieu of Group pension scheme membership. Mr Powell and Mr Meakins only received salary supplements for their periods of service during the year. The table below sets out in a single ﬁgure the total amount of remuneration received by each of the Chairman and the Non Executive Directors who served during the year ended 31 July 2017. Chairman and Non Executive Directors G Davis Non Executive Directors (current as at the date of this report) T Bamford J Daly P López A Murray D Shapland N Shouraboura J Simmonds Total remuneration 76 Ferguson plc Annual Report and Accounts 2017 Fees (£000) 2016/17 Fees (£000) 2015/16 375.4 368.0 65.3 65.3 65.3 78.1 84.2 5.4 81.2 820.2 64.0 64.0 64.0 76.5 82.5 – 79.5 798.5 Strategic report Governance Financials Other information Additional disclosures in respect of the Remuneration table (Audited) Annual bonus The annual bonuses awarded to Executive Directors for the year ended 31 July 2017 are shown in the Remuneration table on page 76 and the bonuses are calculated as follows: Director Measure Threshold Target Maximum Actual Performance1 Threshold Target Maximum Target Performance Actual performance (as % of salary) J Martin Group trading proﬁt £968.6m £1,009.0m £1,049.4m £1,044.9m Group gross proﬁt £4,456.0m £4,570.3m £4,684.5m £4,651.9m Group cash-to-cash days (average) Personal objectives2,6 51.5 1⁄20 51.0 – 50.5 20⁄20 48.6 19⁄20 Maximum opportunity (% of salary) 36.00% 36.00% 35.33% 34.29% 24.00% 24.00% 22.80% 24.00% Total Achieved: 116.42% 120.00% M Powell³ Group trading proﬁt £968.6m £1,009.0m £1,049.4m £1,044.9m Group gross proﬁt £4,456.0m £4,570.3m £4,684.5m £4,651.9m Group cash-to-cash days (average) Personal objectives4,6 51.5 1⁄20 51.0 – 50.5 20⁄20 48.6 20⁄20 32.33% 31.29% 33.00% 33.00% 22.00% 22.00% 22.00% 22.00% Total Achieved: 107.62% 110.00% F Roach Group trading proﬁt £968.6m £1,009.0m £1,049.4m £1,044.9m USA trading proﬁt Group gross proﬁt USA gross proﬁt Group cash-to-cash days (average) USA cash-to-cash days (average) Personal objectives5,6 £818.3m £884.6m £951.0m £889.3m £4,456.0m £4,570.3m £4,684.5m £4,651.9m £3,143.9m £3,257.9m £3,371.9m £3,353.2m 51.5 61.1 1⁄20 51.0 60.6 – 50.5 60.1 20⁄20 48.6 56.4 10⁄20 8.20% 28.00% 7.89% 8.40% 33.60% 8.40% 32.40% 33.60% 5.60% 5.60% 22.40% 22.40% 14.00% Total Achieved: 118.49% 28.00% 140.00% 1. Figures adjusted for exceptional items and include non-ongoing operations. Group ﬁgures also include the Nordic business. All calculations use Company budgeted foreign exchange rates. 2. John Martin’s personal objectives were based on growth in the USA business, the UK strategy review and the Nordic strategy review and implementation plan. 3. Mike Powell was appointed Group Chief Financial Officer on 1 June 2017 and received two months’ annual bonus for the year ended 31 July 2017. 4. Mike Powell’s personal objectives were based on the year-end audit clearance meetings, 2017/18 budget reviews and the completion of his induction programme. 5. Frank Roach’s personal objectives were based on improvements in the USA customer service measures and development of the USA CMRO business against agreed targets. 6. The speciﬁc targets set for personal objectives are considered to be commercially sensitive as they relate to internal operational and strategic measures which could be used by competitors to gain an advantage if disclosed. The Committee will consider disclosing the information if these sensitivities fall away in future periods. Following a review, the Committee considers that Executive Directors’ personal objectives for 2015/16 are no longer commercially sensitive and has approved their disclosure. Ian Meakins’ objectives were to: (a) accelerate proﬁtable top line growth and market share gains with speciﬁc focus on: improving customer service levels; implementing differentiated customer propositions; and improving execution by the sales force; and (b) deliver strategic and budget plans for increases in e-commerce revenues in Canada, DT Group and the UK business, and for USA operational expenditure growth to be lower than budget. Mr Meakins achieved an overall score of 14⁄20. John Martin’s objectives were to: (a) complete the development of Group ﬁnance systems; (b) implement Hyperion Financial Management at Group level; and (c) deliver strategic and budget plans in Canada for: an increase in e-commerce revenues; improvements in sales management against quarterly non-ﬁnancial milestones; and meeting quarterly milestones for the implementation of a new reporting system and opening a new distribution centre. Mr Martin achieved an overall score of 14⁄20. Frank Roach’s objectives were to: (a) improve proﬁtable top line growth and market share gains in the USA business with speciﬁc focus on: improving customer service levels; implementing differentiated customer propositions; and improving execution by the sales force; and (b) deliver strategic and budget plans for: the completion of the Business Model Improvement programme in the USA; USA operational expenditure growth to be lower than budget; and quarterly e-commerce, customer and operational targets. Mr Roach achieved an overall score of 14⁄20. The Committee also approved the disclosure of the 2014/15 objectives on the Company’s website at www.fergusonplc.com. Ferguson plc Annual Report and Accounts 2017 77 Directors’ Remuneration Report continued Remuneration Long-term incentives Long-term incentives awarded to Executive Directors under the ESOP and LTIP in November 2014 will vest in November 2017. The vesting of both awards is subject to the performance conditions shown in the tables that follow. The Committee decided to adjust the EPS measure used to calculate the level of awards made under the ESOP and 2012 LTIP that are due to vest in 2017/18 to neutralise the effect of currency movements during 2016/17 that would have rewarded management for factors beyond its control and to include the results of the Nordic business, the performance of which declined over the performance period. This adjustment is explained in more detail in the Committee Chair’s statement on pages 69 and 70. Executive Director changes Frank Roach Under the rules of the ESOP, 2012 LTIP and 2015 LTIP, when an employee ceases to be employed by the Group unvested awards will lapse unless the participant is treated as a “good leaver”. In the case of retirement, the Remuneration Committee has the discretion under the rules to treat a participant as a “good leaver” by determining that the employee left “for any other reason at the discretion of the Committee”. For “good leavers”, the rules provide that awards will vest on the original vesting date, subject to satisfaction of performance conditions, and will be pro-rated to the date of cessation of employment. Although the performance conditions for the awards are measured from 1 August in the year in which awards were granted, pro-ration under the rules is calculated using the three-year period commencing on the date of grant. The Remuneration Committee has discretion to base any pro-ration for a “good leaver” to reﬂect completed ﬁnancial years during a performance period. Frank Roach retired as Chief Executive, USA on 31 July 2017. In light of Mr Roach’s outstanding contribution to the Company’s success, the Remuneration Committee agreed to exercise its discretion: – to treat him as a “good leaver” for his unvested awards granted under the ESOP, 2012 LTIP and 2015 LTIP; – to allow awards to vest on the original vesting dates (subject to satisfaction of the performance conditions); and – to time pro-rate his awards granted in 2014/15, 2015/16 and 2016/17 on the basis of full ﬁnancial years worked by Mr Roach during the relevant performance period for each award. Therefore, the 2014/15 award will vest in full and the 2015/16 and 2016/17 awards will be subject to a reduction of one-third and two-thirds respectively. Mike Powell Mike Powell joined the Company as Group Chief Financial Officer on 1 June 2017. As a result of joining Ferguson, Mr Powell forfeited awards he held under the BBA Deferred Share Plan and the BBA LTIP. Due to these unusual circumstances and in line with the approved Remuneration Policy, the Committee agreed it was appropriate to broadly replicate the structure and fair value of unvested long-term incentive awards forfeited by Mr Powell as a result of joining Ferguson and approved the grant of three Restricted Share Buy Out Awards (RSBO) to replace awards forfeited under the BBA Deferred Share Plan and one Performance Based Buy Out Award (PBBO) to replace awards forfeited under the BBA LTIP. Mr Powell ﬁrst became eligible to participate in these arrangements on 1 June 2017. The RSBO and PBBO awards were granted to Mr Powell on 21 June 2017. The RSBO awards were granted as conditional share awards. No consideration is payable on grant or on vesting of these awards. 78 Ferguson plc Annual Report and Accounts 2017 These awards are not subject to performance conditions and will vest subject to continued employment. The PBBO award was granted as a conditional share award. The PBBO award will only vest if certain Company corporate performance conditions are satisﬁed. These performance conditions are measured over a three-year period and are the same as those applied to awards granted to Executive Directors on 1 November 2016 under the 2015 LTIP. The PBBO award will normally vest subject to continued employment and the satisfaction of the performance conditions. Further details of the RSBO and PBBO awards granted to Mr Powell on 21 June 2017, including the performance conditions applicable, are set out under the Scheme interests awarded during the ﬁnancial year heading on page 80. The number of shares awarded for each of the RSBO and PBBO awards detailed in the table under that heading are the maximum awards under the RSBO and PBBO. ESOP Vested awards The ESOP awards granted on 7 November 2014 are the last such awards to have been granted by the Company. Vesting of awards under the ESOP are subject to performance targets based on growth in the Company’s headline EPS above UK RPI over a three-year period. The ESOP plan rules set out the EPS performance conditions that apply to awards and are shown in the table below. The Committee has discretion to set more challenging EPS targets than those contained in the ESOP plan rules. Value of shares under option as a multiple of salary Performance conditions detailed in plan rules Total margin of EPS growth over UK inﬂation after three years (“RPI”) Performance conditions applied to awards granted in 2014/15 First 50% of salary Next 150% of salary Next 50% of salary 9% 12% 15% Greater than 250% of salary 15%-21% 9% 18% 30% N/A Adjusted headline EPS was 270.5 pence in 2016/17 (288.9 pence prior to adjustment). Adjusted headline EPS in 2013/14 was 195.0 pence (173.2 pence prior to adjustment), this represents growth of 38.7 per cent. Over the same three-year period, RPI growth was 6.6 per cent. The growth above RPI in the period was therefore 32.1 per cent and accordingly all performance targets have been achieved, as set out below: Performance level Value of shares under option as a multiple of salary First 50% of salary Next 150% of salary Next 50% of salary Total margin of EPS growth Over UK inﬂation after three years (“RPI”) Performance required Target achieved 9% 18% 30% Yes Yes Yes Accordingly, the total percentage of executive options vesting is set out below: Value of shares under option as a multiple of salary Total number of shares subject to option Percentage of award vesting Number of shares vesting Value of shares vesting (£000)2 J Martin F Roach I Meakins1 35,113 33,842 41,994 100% 100% 100% 35,113 33,842 41,994 512.6 494.1 613.1 1. As detailed on page 66 of the Company’s 2016 Annual Report, Ian Meakins’ awards reﬂect the completed ﬁnancial years served prior to his retirement on 31 August 2016, in line with the Committee’s exercise of discretion. His original award grant was 62,992 share options. 2. Value determined using the share price noted on page 72 under the heading “Information” less exercise price of 3,362 pence. Strategic report Governance Financials Other information LTIP Vested awards – 2012 LTIP The performance condition which applied to the awards made in November 2014 ended on 31 July 2017 and actual performance achieved is detailed below. 2016/17 award Operating cash ﬂow1 $4.495 billion Between $3.875 billion and $4.495 billion TSR relative to FTSE 100 at date of grant Performance required % of total award vesting $3.875 billion Below $3.875 billion Percentage of award subject to operating cash ﬂow which will vest2 100% 25%-100% 25% 0% Performance level Below threshold Threshold Between threshold and stretch Stretch or above Actual TSR rank achieved Below median Median Between median and top decile Top decile 24th 0% 25% 25%-100% 100% 71.6% Accordingly, the total percentage of shares vesting is set out below: Value of shares under option as a multiple of salary Total number of shares granted Percentage of award vesting J Martin F Roach I Meakins1 24,527 26,341 35,201 71.6% 71.6% 71.6% Number of shares vesting 17,561 18,860 25,204 Value of shares vesting (£000)2,3 899.6 966.1 1,291.1 Year of award 1. As detailed on page 66 of the Company’s 2016 Annual Report, Ian Meakins’ awards reﬂect the completed ﬁnancial years served prior to his retirement on 31 August 2016, in line with the Committee’s exercise of discretion. His original award was 52,802 nil cost options. 2. Value determined using the share price noted on page 72 under the heading “Information”. 3. Dividend equivalents have accrued on the 2014 share awards and will be paid out in cash 2015/16 2016/17 1. Cash generated from operations (before interest and tax) as presented in the audited annual Group cash ﬂow statement in the Company’s Annual Report and Accounts (subject to such adjustments as the Committee deems appropriate to ensure it reﬂects underlying business performance, and speciﬁcally would be adjusted downwards to reﬂect the impact on operating cash ﬂow following the expected disposal of the Nordic business). As described on page 70, these targets have been restated into US dollars. The exchange rate used for this calculation was £1:$1.55 being the average exchange rate for the three-year period preceding the grant of the 2016/17 award. 2. Awards will vest on a straight-line basis between 25 per cent and 100 per cent. Calculations for TSR are independently carried out and veriﬁed before being approved by the Committee. Calculations for EPS and OpCF are checked and veriﬁed internally. The following table sets out the indicative vesting percentage of the comparative TSR element of the awards based on performance as at 31 July 2017: Year of vesting Indicative vesting percentage based on performance as at 31 July 2017 2018/19 68.8 (Performance at 24 months) 2019/20 62.5 (Performance at 12 months) after vesting of the awards. The value above includes the cash payment. Unvested awards – 2015 LTIP The performance conditions for comparative TSR set out in the table on page 73 and the more challenging performance conditions for EPS set out in the table on page 78 apply for unvested share awards made under the 2015 LTIP. The following tables set out the performance conditions for OpCF which apply for unvested awards under the 2015 LTIP made in 2015/16 and 2016/17 respectively. 2015/16 award Operating cash ﬂow1 $4.213 billion Between $3.577 billion and $4.213 billion $3.577 billion Below $3.577 billion Percentage of award subject to operating cash ﬂow which will vest2 100% 25%-100% 25% 0% 1. Cash generated from operations (before interest and tax) as presented in the audited annual Group cash ﬂow statement in the Company’s Annual Report and Accounts (subject to such adjustments as the Committee deems appropriate to ensure it reﬂects underlying business performance, and speciﬁcally would be adjusted downwards to reﬂect the impact on operating cash ﬂow following the expected disposal of the Nordic business). As described on page 70, these targets have been restated into US dollars. The exchange rate used for this calculation was £1:$1.59 being the average exchange rate for the three-year period preceding the grant of the 2015/16 award. 2. Awards will vest on a straight-line basis between 25 per cent and 100 per cent. Share awards exercised during the year Details of the share awards exercised during the year are set out below: Director J Martin F Roach The following table sets out the indicative vesting percentage of the EPS growth element of the awards based on performance as at 31 July 2017: Year of award 2015/16 2016/17 Year of vesting Indicative vesting percentage based on performance as at 31 July 2017 2018/19 0.0 (Performance at 24 months) 2019/20 25.0 (Performance at 12 months) The following table sets out the indicative vesting percentage of the OpCF element of the awards based on performance as at 31 July 2017: Year of award 2015/16 2016/17 Year of vesting Indicative vesting percentage based on performance as at 31 July 2017 2018/19 100.0 (Performance at 24 months) 2019/20 100.0 (Performance at 12 months) Sharesave – 90 LTIP 11,000 12,403 ESOP 34,913 35,329 Total1,2 45,913 47,822 1. The aggregate gain made on the exercise of options during the year by John Martin and Frank Roach was £308,500 and £313,700 respectively. 2. The aggregate value of assets received or receivable by John Martin and Frank Roach under long-term incentive plans during the year was £461,900 and £520,800 respectively. Ferguson plc Annual Report and Accounts 2017 79 Directors’ Remuneration Report continued Remuneration Directors’ shareholdings (Audited) All Directors are required to hold shares equivalent in value to a minimum percentage of their salary or fees as set out in the table below. The Directors’ interests in the Company’s shares (both held individually and by their connected persons) as at 31 July 2017 are set out below and there has been no change in interests since that date and up to the date of this Report. Shares beneﬁcially owned as at 31 July 2017 Shareholding guideline (as a multiple of salary/fees)1,2 Vested (unexercised) share awards3,4 With performance conditions Without performance conditions LTIP5 ESOP5 PBBO5 RSBO5 Sharesave5 Unvested share awards Executive Directors J Martin F Roach M Powell Chairman and Non Executive Directors G Davis T Bamford J Daly P López A Murray D Shapland N Shouraboura J Simmonds 90,574 60,179 – 15,346 2,048 2,050 2,602 2,500 2,100 – 2,000 2.5 2 2 1 1 1 1 1 1 1 1 – 38,014 121,232 135,135 35,113 33,842 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 18,859 22,160 – – – – – – – – – – – – – – – – 957 – – – – – – – – – – 1. All Directors have a ﬁve-year time period from the date of appointment or promotion to meet the shareholding target. If not met within that timeframe the individual Director would discuss plans with the Committee to ensure that the target is met over an acceptable timeframe. Under the Policy, Executive Directors would defer amounts in excess of target bonus into shares under the Deferred Bonus Plan. Beneﬁcially owned shares count towards the guideline whilst unvested awards of shares or share options do not. Vested share awards do not count towards the guideline until exercised. 2. All Directors met their shareholding guideline targets set for 2016/17. Shareholding guideline targets for Mike Powell, Kevin Murphy and Nadia Shouraboura were set on 1 August 2017 and as such they had no targets to meet as at the end of the 2016/17 ﬁnancial year. Shareholding guideline targets are ﬁrst set by reference to the salary or fees of a Director as at 1 August in the ﬁnancial year following appointment to the Board and calculated using the average share price for the two months ended 31 July of the ﬁnancial year in which the appointment was made and are re-tested annually until met. Once met, the target is only increased annually in line with base salary or fee increases, if any. 3. There were no vested (unexercised) awards under the Sharesave. There was an award under the ESOP held by Frank Roach who had 38,014 conditional shares vested but unexercised. 4. Details of share awards exercised in the year are detailed in the Share awards exercised during the year table at the bottom of page 79. 5. LTIP, ESOP and PBBO awards are subject to performance conditions but RSBO and Sharesave awards are not. LTIP awards are awarded in the form of nil cost options to John Martin and in the form of conditional share awards to Frank Roach. PBBO and RSBO awards were awarded to Mike Powell in the form of conditional share awards. Further details of the performance conditions which apply to the LTIP and PBBO awards are set out on pages 78 and 79. Scheme interests awarded during the ﬁnancial year (Audited) Awards under the 2015 LTIP were made on 1 November 2016. Awards are based on a percentage of salary determined by the Committee. The Committee considers annually the size of each grant, determined by individual performance, the ability of each individual to contribute to the achievement of the performance conditions, and market levels of remuneration. The maximum vesting is 100 per cent of the award granted. Details of performance conditions for awards which were granted during the year are set out on pages 78 and 79. Further information on the buy-out awards granted to Mike Powell is provided on page 78. The scheme interests awarded during 2016/17 are summarised below: Director Award Type of award Number of shares1 Face value2,3 of award (£000) Performance criteria period Threshold performance Performance conditions J Martin F Roach LTIP LTIP Nil cost options 58,858 2,579.7 Conditional shares 51,493 2,256.9 1 August 2016 – 31 July 2019 M Powell PBBO Conditional shares M Powell RSBO Conditional shares M Powell RSBO Conditional shares M Powell RSBO Conditional shares 18,859 14,026 5,695 2,439 932.5 693.5 21 June 2017 – 28 March 2018 N/A 281.6 21 June 2017 – 27 March 2019 N/A 120.6 21 June 2017 – 1 April 2020 N/A N/A N/A N/A 25% of award vesting Growth in EPS above RPI target Comparator TSR target against FTSE100 Cumulative operating cash ﬂow growth 1. John Martin and Frank Roach’s awards during the ﬁnancial year were based on a percentage of salary as follows: John Martin (300 per cent); and Frank Roach (275 per cent). Following his appointment as Group Chief Financial Officer on 1 June 2017 buy out awards were granted to Mike Powell that broadly replicate the structure and fair value of unvested long-term incentive awards forfeited by Mr Powell as a result of joining Ferguson. 2. The share price used to calculate the face value of the LTIP share awards granted on 1 November 2016 was 4,383 pence which was the average share price over a 10-dealing day period immediately preceding the date of grant. The LTIP award made to John Martin was in the form of nil cost options. At vesting, the exercise price per share will be nil. The LTIP award made to Frank Roach was a conditional share award and there is no exercise price. The share price used to calculate the face value of the PBBO and RSBO share awards granted on 21 June 2017 was 4,944.6 pence which was the average share price over a ﬁve-dealing day period preceding 28 February 2017. The PBBO and RSBO awards made to Mike Powell were conditional share awards and there is no exercise price. Face value is calculated as required by the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 (“Regulations”) as the maximum number of shares at full vesting multiplied by either the share price at date of grant or the average share price used to determine the number of shares awarded. Dividend equivalents also accrue on the LTIP and PBBO awards and the amount which may be due to an Executive Director is not included in the calculation of face value. 3. The maximum dilution which may arise through issue of shares to satisfy the entitlement to these LTIP, PBBO and RSBO scheme interests would be 0.00057 per cent calculated as at 31 July 2017. 80 Ferguson plc Annual Report and Accounts 2017 Strategic report Governance Financials Other information Ferguson TSR performance and Group CEO remuneration comparison The graph opposite shows Ferguson’s TSR performance against the performance of the FTSE 100 Index from the creation of the new holding company (formerly known as Wolseley plc), which was created at the time of the redomiciliation to Switzerland in November 2010, to 31 July 2017. The FTSE 100 Index has been chosen as being a broad equity market index consisting of companies comparable in size and complexity to Ferguson. 200 300 250 150 The table below shows the total remuneration of the Group Chief Executive1 for the eight-year period from 1 August 2009 to 31 July 2017. 100 50 Nov 2010 July 2011 July 2012 July 2013 July 2014 July 2015 July 2016 July 2017 Ferguson return index FTSE 100 return index Single ﬁgure of total remuneration (£000)2 Annual bonus award rates against maximum opportunity Long-term incentive vesting rates against maximum opportunity Group CEO I Meakins J Martin I Meakins J Martin LTIP I Meakins ESOP LTIP J Martin ESOP 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17 1,943 – 96% – 0% 0% – – 2,011 5,603 5,109 5,890 3,901 3,3753 – 98% – 0% 0% – – – 85% – 76% 100% – – – 84% – 100% 100% – – – 97% – 88% 100% – – – 85% – 75% 100% – – – 55% – 47% 100% – – 2,023 3,458 – 97% 72% 100% 72% 100% 1. During the eight-year period, Ian Meakins was the Group Chief Executive until his retirement on 31 August 2016. Since 1 September 2016, John Martin has served as Group Chief Executive. The single ﬁgure total shown for Mr Martin in the 2016/17 ﬁnancial year includes one month’s pay as Group Chief Financial Officer. 2. The single ﬁgure for all eight years is calculated on the same basis as that used in the Remuneration table on page 76. 3. The single ﬁgure for the year ended 31 July 2016 has been adjusted from the value of £3,114 million estimated in that year’s report to reﬂect the actual value of LTI at the dates of vesting in November 2016. Payments for loss of office and to past Directors (Audited) No payments for loss of office were made during the ﬁnancial year. Ian Meakins served as Group Chief Executive Officer for one month during the year until his retirement on 31 August 2016. Payments made to Mr Meakins are set out in the Remuneration table on page 76. Additionally, detail on ESOP and LTIP awards granted to Mr Meakins that vested during the year are disclosed on pages 78 and 79. No other payments have been made to past Directors that have not already been included in the Remuneration table. Change in Group Chief Executive pay for the year compared to that of Ferguson employees The table below shows the percentage year-on-year change in base salary, beneﬁts and annual bonus between the year ended 31 July 2017 and the previous ﬁnancial year for the Group Chief Executive compared to the average for UK-based employees1. Chairman and Non Executive Directors Group Chief Executive3,4 Average for all UK-based employees % change in salary % change in beneﬁts % change in annual bonus2 0.0% +3.5% +56.4% +53.3% +9.7% +140.8% Relative importance of spend on pay The following table sets out the amounts and percentage change in total employee remuneration costs, dividends and returns of capital for the year ended 31 July 2017 compared to the year ended 31 July 2016. Total employee remuneration costs1 Ordinary dividends paid2 Share buyback3 Year ended 31 July 2017 £m Year ended 31 July 2016 £m Percentage change 2,140 259 – 1,766 238 300 +21.2% +8.8% – 1. Further details on employee remuneration can be found in note 11 of the consolidated ﬁnancial statements on page 99. 2. Further details of dividends paid can be found in note 9 of the consolidated ﬁnancial statements on page 98. 3. Further details of the share buyback programme can be found in note 27 of the consolidated ﬁnancial statements on page 113. Details of the share buyback programme to be commenced in 2017/18 are not included as no shares were purchased during 2016/17. 1. Although the Group Chief Executive has a global role and responsibilities, UK-based employees were chosen as a suitable comparator group as he is based in the UK (except to attend Board and Committee meetings in Switzerland or other worldwide locations outside of the UK). Also pay structures and changes to pay vary widely across the Group, depending on the local market conditions. 2. The Group Chief Executive’s bonus is determined by both his performance and the performance of the whole of the Ferguson Group, whereas employees’ bonuses are based on their performance and the performance of the businesses in the countries in which they work. The percentage change in annual bonus for UK-based employees is based on the best available estimates at time of publication. 3. During the year ended 31 July 2017, John Martin replaced Ian Meakins as Group CEO on 1 September 2016. Changes in Group Chief Executive pay have been calculated using the sum of Mr Meakins and Mr Martin’s salary, beneﬁts and bonus for their respective one and 11 months of service as Group CEO during 2016/17. Mr Meakins did not receive an annual bonus for the year ended 31 July 2017. 4. The change in beneﬁts for the Group Chief Executive, includes a tax gross up payment made to Ian Meakins in August that relates to the previous tax year and a tax gross up payment made to John Martin in September that relates to the previous tax year. The change in beneﬁts without this duplication would have been 9.0 per cent. Ferguson plc Annual Report and Accounts 2017 81 Directors’ Remuneration Report continued Remuneration Policy extracts Ferguson’s Remuneration Policy remains unchanged from that approved by shareholders at the AGM on 1 December 2015. For convenience, some extracts from the Policy are included below to provide the context within which individual remuneration decisions have been made during the year. The full Policy can be found on the Ferguson plc website at www.fergusonplc.com. In these extracts, the following deﬁnitions apply: DBP OSP Deferred Bonus Plan Ordinary Share Plan Recruitment policy Executive Directors As noted earlier, the Committee will consider the need to attract the best talent whilst aiming to pay no more than is appropriate or necessary in the circumstances. In determining each element of pay and the package as a whole upon recruitment, the Committee will take into account all relevant factors including, but not limited to, the skills and experience of the individual, the market rate for an individual of that experience, as well as the importance of securing the best person for the role. Fixed pay (base salary, beneﬁts, pension) A newly appointed Executive Director will be offered a base salary, beneﬁts and pension package in line with the Policy. The Committee retains the ﬂexibility to review and decide on a case-by-case basis whether it is appropriate to award increases to allow a newly appointed Executive Director whose base salary has been set below the mid-market level to progress quickly to or around that mid-market level once expertise and performance has been proven. This decision would take into account all relevant factors noted above. Variable pay (annual bonus and long-term incentive awards) A newly appointed Executive Director will be offered an annual bonus and long-term incentives in line with the Policy. The maximum level of variable remuneration (annual bonus and 2015 LTIP awards) which may be awarded to new Executive Directors is limited to 500 per cent of base salary excluding any buy out awards, the policy for which is set out below. The Committee retains the ﬂexibility to vary the weighting between annual bonus and 2015 LTIP up to the approved Policy maxima. Depending on the timing of the appointment, the Committee may set different annual bonus performance criteria for the ﬁrst year of appointment. Where an appointment is an internal promotion, any variable pay element awarded in respect of the individual’s previous role would continue on the original grant terms. In addition, any other ongoing remuneration (including pension) obligations existing prior to the appointment would be able to continue. One-off “buy out” cash or share award Where an Executive Director is appointed from outside the Group, the Committee may make a one-off award to the new Executive Director to “buy out” incentives and other remuneration opportunities forfeited on leaving his or her previous employer. The Committee retains the ﬂexibility to make such additional payments in the form of cash and/or shares. When making such an award, the Committee will, as far as practicable, replicate the structure of the arrangements being forfeited and in doing so will take into account relevant factors including the delivery mechanism, time horizons, attributed expected value and performance conditions of the forfeited award. The Committee will endeavour not to pay more than the value of the forfeited award. 82 Ferguson plc Annual Report and Accounts 2017 The Committee will, where possible, facilitate such awards through the Company’s current incentive plans, but it may be necessary to use the exemption permitted within the Listing Rules. Policy on loss of office All Directors In the event of termination of a service contract or letter of appointment of a Director, contractual obligations will be honoured in accordance with the service contract and terms of incentive plans or letter of appointment. The Committee will take into consideration the circumstances and reasons for departure, health, length of service, performance and the duty (where applicable) for Directors to mitigate their own loss. Under this Policy the Committee may make any statutory payments it is required to make and/ or settle claims brought against the Company in relation to a termination. In addition, the Committee may agree to payment of outplacement counselling costs and disbursements (such as legal costs) if considered to be appropriate and dependent on the circumstances of departure. It is the Company’s policy for the period of notice from the Company to the Executive Directors not to exceed 12 months and for Non Executive Directors to the Company not to exceed six months. There are no pre-determined contractual provisions for Directors regarding compensation in the event of loss of office except those listed in the table below: Chairman and Non Executive Directors Six months’ notice by either party. Fees and expenses accrued up to the termination date only. Details of provision Notice period Termination payment Executive Directors – 12 months’ notice from the Company. – Six months’ notice from the Executive. The Company may terminate an Executive Director’s service contract by making a payment in lieu of notice equal to: – 12 months’ base salary and beneﬁts; and – 12 months’ pension contributions or cash pension supplement. The Company would seek to ensure that any termination payment is mitigated in the event that the Executive Director starts alternative employment within the notice period. In the case of the UK-based Executive Directors, the Company may pay a lump sum in respect of six months and the remaining six months in monthly instalments subject to reductions if the Executive Director commences alternative employment with a base salary/fee of at least £20,000. No payment will be made to Executive Directors in the event of gross misconduct. Post- termination covenants Non-compete and non-solicitation covenants apply for a period of 12 months after the termination date. Not applicable. The policy on loss of office and contractual provisions above would be applied to any new Director’s service contract or letter of appointment. Strategic report Governance Financials Other information Discretion, ﬂexibility and judgement of the Committee The Committee operates the annual bonus plan, DBP, LTI plans and all- employee plans, according to their respective rules and in accordance with tax authorities’ rules where relevant. To ensure the efficient administration of those plans, the Committee may apply certain operational discretions. These include the following: – selecting the participants in the plans on an annual basis; – determining the timing of grants of awards and/or payment; – determining the quantum of awards and/or payments (within the limits set out in the Policy table above); – determining the extent of vesting based on the assessment of performance; – making the appropriate adjustments required in certain circumstances (e.g. change of control, changes to accounting rules, rights issues, corporate restructuring events, and special dividends); – determining “good leaver” status for the purposes of the LTI plans and applying the appropriate treatment; and – undertaking the annual review of performance measures and weighting between them (within the limits set out in the Policy table), and setting targets for the annual bonus plan and LTI plans from year to year. If an event occurs which results in the performance conditions and/or targets of the annual bonus plan or LTI plans being deemed no longer appropriate (e.g. a material acquisition or divestment), the Committee will have the ability to adjust appropriately the measures and/or targets and alter weightings, provided that the revised conditions or targets are not materially less difficult to satisfy. The use of the discretions referred to in the Future policy table and above will be explained as appropriate in the Annual report on remuneration and may, as appropriate, be the subject of consultation with major shareholders. Executive Directors On loss of office, there is no automatic entitlement to a bonus. Executive Directors may receive a bonus in respect of the year of cessation of employment based on, and subject to, performance conditions and pro-rated to reﬂect the actual period of service in the year of cessation (except pro-ration may not be applied in exceptional circumstances such as death in service or ill health). The Committee will take into account the reason for the Executive Director’s departure and any other relevant factors when considering a bonus payment of a departing Executive Director. The treatment of leavers under the 2012 LTIP and 2012 ESOP plans as approved under the 2014 Remuneration Policy and the 2015 LTIP (together the “LTI plans”), together with awards under all-employee plans and, if applicable the DBP, would be determined by the relevant leaver provisions in accordance with the plan rules. Under the LTI plans, any unvested awards will lapse at cessation unless the individual has “good leaver” status (namely for reasons of death, redundancy, injury, disability, ill-health, employing business or company sold out of the Group and any other reason at the discretion of the Committee). The Committee retains the discretion to determine when the awards should vest and performance conditions be tested, for example, at the date of cessation or at the usual vesting date. In the event of a change of control or takeover, all long-term incentive awards will vest subject to performance conditions being met. In relation to the LTI plans, awards would generally be pro-rated to reﬂect the period of service of the Executive Director; although, if the Committee considers it appropriate, the Committee has the discretion set out in the plan rules not to pro-rate. Under the all-employee plans, any unvested awards will lapse at cessation unless the individual has a “good leaver” status – for UK Executive Directors this will be speciﬁcally as prescribed by HMRC in the SAYE appendix of the relevant plan rules and for Executive Directors in other jurisdictions as set out in the relevant section of the applicable plan rules. Under the DBP, any unvested awards will be forfeited if an Executive Director ceases to be an employee of the Group by reason of misconduct or if the Company becomes aware, after termination, of facts or circumstances which would have entitled it to dismiss the Executive Director for misconduct. If an Executive Director ceases to be an employee for any other reason, an award shall vest in full at the end of the deferral period unless the reason for cessation is death or other circumstances which the Committee considers sufficiently exceptional, the award shall vest in full at the date of death or cessation of employment. Ferguson plc Annual Report and Accounts 2017 83 Directors’ Remuneration Report continued Remuneration Further information External Directorships Executive Directors are permitted to take on external Non Executive Directorships. In order to avoid any conﬂicts of interest, all such appointments are subject to the approval of the Nominations Committee. The Nominations Committee believes that taking up an external non executive appointment helps bring a wider perspective to the Company and also assists in the development of business skills and experience. During the year, and until his retirement as Group CEO on 31 August 2016, Ian Meakins was a Non Executive Director and Senior Independent Director of Centrica plc and received an annualised fee of £92,500 for his services (2015/16: £89,375). During the year, and until his retirement as Group CEO on 31 August 2016, Mr Meakins also served as a Non Executive Director of Rexel SA. The annualised fee for his service was set at €40,000 per annum (2015/16: €40,000). The Company allowed Mr Meakins to retain the fees paid to him during the year. During the year, and from the date of appointment as Group CFO of Ferguson plc on 1 June 2017, Mike Powell was a Non Executive Director and Audit Committee Chairman of Low & Bonar plc and received an annualised fee of £47,000 per annum for his services. The Company allowed Mr Powell to retain the fees paid to him during the year. Detail of Employee Beneﬁt Trusts The Ferguson plc 2011 Employee Beneﬁt Trust (“Jersey Trust”) and Ferguson plc US Trust (“US Trust”) (together, “the Trusts”) were established in connection with the obligation to satisfy historical and future share awards under the LTI plans and OSP and any other employee incentive schemes (“Share Awards”). The trustees of each of the Trusts have waived their rights to receive dividends on any shares held by them. As at 31 July 2017, the Jersey Trust held 379,154 ordinary shares of 1053⁄66 pence and £1,942 in cash; and the US Trust held 1,056,001 ordinary shares of 1053⁄66 pence. The number of shares held by the Trusts represented 0.54 per cent of the Company’s issued share capital at 31 July 2017. On 7 November 2016, shares were purchased by the US Trust to ensure that it continues to have sufficient shares to satisfy share awards. The US Trust purchased 142,000 ordinary shares of 1053⁄66 pence and paid £5.96 million. The Company provided funds to the US Trust to enable it to make the purchase. The number of shares purchased represented 0.05 per cent of the Company’s issued share capital at that date. Detail of all-employee sharesave plans The Company operates two all-employee sharesave plans which Executive Directors can participate in. In the USA and Canada, the Employee Share Purchase Plan (“ESPP”) operates as a one-year savings contract plan. In all other business units, employees may participate in the International Sharesave Plan (“ISP”) saving for a period of three or ﬁve years. Dilution Awards under the LTI plans and all-employee plans may be met by the issue of new shares when options are exercised, by the use of Treasury Shares or by market purchase. Awards under the OSP are met by market purchase of shares or from the Trusts. The Company monitors the number of shares issued under the Plans and any impact on dilution limits. Compared to the limits set by the Investment Association in respect of new share issues to satisfy options granted for all share plans (10 per cent in any rolling 10-year period) and executive share plans (5 per cent in any rolling 10-year period) as at 31 July 2017 the Company’s headroom was 5.02 per cent and 1.94 per cent respectively. Executive share plans Actual Limit All share plans Actual Limit 3.06% 5% 4.98% 10% This Report has been approved by the Board and is signed on its behalf by the Chair of the Remuneration Committee. On behalf of the Board Jacky Simmonds Chair of the Remuneration Committee 2 October 2017 This Report, approved by the Board, has been prepared in accordance with the requirements of the Listing Rules of the Financial Conduct Authority and the Remuneration Reporting Regulations. Furthermore, the Board has also applied the principles of good governance relating to Directors’ remuneration contained within the UK Corporate Governance Code updated in April 2016. The Remuneration Committee conﬁrms that throughout the ﬁnancial year the Company has complied with these governance rules and best practice provisions. 84 Ferguson plc Annual Report and Accounts 2017 Strategic report Governance Financials Other information Financials 86 Group income statement 87 Group statement of comprehensive income 87 Group statement of changes in equity 88 Group balance sheet 89 Group cash ﬂow statement 90 Notes to the consolidated ﬁnancial statements 128 Independent auditor’s report to the members of Ferguson plc 134 Company proﬁt and loss account 134 Company statement of changes in equity 135 Company balance sheet 136 Notes to the Company ﬁnancial statements Ferguson plc Annual Report and Accounts 2017 85 Group income statement Year ended 31 July 2017 Revenue Cost of sales Gross proﬁt Operating costs: amortisation of acquired intangible assets impairment of goodwill and acquired intangible assets other Operating costs Operating proﬁt Finance costs Share of result of associate Proﬁt before tax Tax Proﬁt from continuing operations (Loss)/proﬁt from discontinued operations Proﬁt for the year Attributable to: Shareholders of the Company Non-controlling interests Earnings per share Continuing operations and discontinued operations Basic earnings per share Diluted earnings per share Continuing operations only Basic earnings per share Diluted earnings per share Alternative performance measures Trading proﬁt from ongoing operations Trading proﬁt from non-ongoing operations Trading proﬁt from continuing operations EBITDA before exceptional items Headline earnings per share Restated* 2016 Total £m 12,549 (8,957) 3,592 (48) (94) (2,739) (2,881) 711 (36) – 675 (210) 465 185 650 659 (9) 650 256.4p 254.8p 183.4p 182.3p 2017 Total £m 15,224 (10,816) 4,408 (64) – (3,120) (3,184) 1,224 (43) (1) 1,180 (292) 888 (105) 783 783 – 783 311.6p 309.4p 353.4p 350.8p 2017 Exceptional items (note 5) £m – (2) (2) – – 231 231 229 – – 229 (22) 207 (58) 149 149 – 149 Notes 3 2017 Before exceptional items £m 15,224 (10,814) 4,410 (64) – (3,351) (3,415) 995 (43) (1) 951 (270) 681 (47) 634 634 – 634 3, 4 6 15 7 8 10 2, 3 2, 3 2, 3 2 2, 10 1,032 27 1,059 1,199 288.9p 2016 Before exceptional items £m 2016 Exceptional items (note 5) £m – (1) (1) – – (3) (3) (4) – – (4) 1 (3) 154 151 151 – 151 12,549 (8,956) 3,593 (48) (94) (2,736) (2,878) 715 (36) – 679 (211) 468 31 499 508 (9) 499 827 30 857 971 234.7p * Restated to present the Nordic businesses as discontinued operations in accordance with IFRS 5. 86 Ferguson plc Annual Report and Accounts 2017 Strategic report Governance Financials Other information Group statement of comprehensive income Year ended 31 July 2017 Proﬁt for the year Other comprehensive income: Items that may be reclassiﬁed subsequently to proﬁt or loss: Exchange gain on translation of overseas operations(a) Exchange loss on translation of borrowings and derivatives designated as hedges of overseas operations(a) Cumulative currency translation differences on disposals(a) Tax credit/(charge) on items that may be reclassiﬁed to proﬁt or loss(b) Items that will not be reclassiﬁed subsequently to proﬁt or loss: Actuarial loss on retirement beneﬁt plans(b) Tax (charge)/credit on items that will not be reclassiﬁed to proﬁt or loss(b) Other comprehensive (expense)/income for the year Total comprehensive income for the year Total comprehensive income/(expense) attributable to: Continuing operations Discontinued operations Total comprehensive income for the year (a) Impacting the translation reserve. (b) Impacting retained earnings. Group statement of changes in equity Notes 7 26 7, 26 2017 £m 783 26 (6) (49) 1 (1) (1) (30) 753 850 (97) 753 Restated 2016 £m 650 495 (107) (125) (7) (120) 25 161 811 744 67 811 At 1 August 2015 Proﬁt for the year Other comprehensive income/(expense) Total comprehensive income/(expense) Purchase of own shares by Employee Beneﬁt Trusts Issue of own shares by Employee Beneﬁt Trusts Credit to equity for share-based payments Purchase of Treasury shares Disposal of Treasury shares Dividends paid At 31 July 2016 Proﬁt for the year Other comprehensive expense Total comprehensive (expense)/income Purchase of own shares by Employee Beneﬁt Trusts Issue of own shares by Employee Beneﬁt Trusts Credit to equity for share-based payments Tax relating to share-based payments Disposal of Treasury shares Dividends paid At 31 July 2017 Share capital £m Share premium £m Translation reserve £m Treasury shares £m Own shares £m Retained earnings £m Notes Non- controlling interest £m Total equity £m 29 42 117 (240) (63) 2,715 7 2,607 Reserves – – – – – – – – – – – – – – – – – – – 263 263 – – – – – – – – – – – – (300) 24 – – – – (14) 20 – – – – 659 (102) 557 – (19) 20 – (10) (238) (9) – (9) – – – – – – 650 161 811 (14) 1 20 (300) 14 (238) 29 42 380 (516) (57) 3,025 (2) 2,901 – – – – – – – – – – – – – – – – – – – (29) (29) – – – – – – – – – – – – – 31 – – – – (6) 15 – – – – 783 (1) 782 – (15) 22 4 (10) (259) – – – – – – – – – 783 (30) 753 (6) – 22 4 21 (259) 29 42 351 (485) (48) 3,549 (2) 3,436 27 27 28 27 27 9 27 27 28 7 27 9 Ferguson plc Annual Report and Accounts 2017 87 Group balance sheet As at 31 July 2017 Assets Non-current assets Intangible assets: goodwill Intangible assets: other Property, plant and equipment Interests in associates Financial assets Retirement beneﬁt assets Deferred tax assets Trade and other receivables Derivative ﬁnancial assets Current assets Inventories Trade and other receivables Current tax receivable Derivative ﬁnancial assets Cash and cash equivalents Assets held for sale Total assets Liabilities Current liabilities Trade and other payables Current tax payable Bank loans and overdrafts Obligations under ﬁnance leases Provisions Retirement beneﬁt obligations Non-current liabilities Trade and other payables Bank loans Obligations under ﬁnance leases Deferred tax liabilities Provisions Retirement beneﬁt obligations Liabilities held for sale Total liabilities Net assets Equity Share capital Share premium Reserves Equity attributable to shareholders of the Company Non-controlling interest Total equity Notes 2017 £m 2016 £m 12 13 14 15 26 16 17 18 17 18 19 20 21 22 24 25 26 21 22 24 16 25 26 20 27 888 182 808 124 11 3 121 226 15 902 202 1,434 – 23 – 127 212 20 2,378 2,920 1,816 2,093 2 5 1,911 5,827 1,298 9,503 2,279 88 1,627 3 81 8 2,017 2,207 – 11 940 5,175 56 8,151 2,634 101 701 4 88 9 4,086 3,537 180 831 4 9 120 16 1,160 821 6,067 3,436 29 42 3,367 3,438 (2) 3,436 163 1,175 27 65 133 138 1,701 12 5,250 2,901 29 42 2,832 2,903 (2) 2,901 The accompanying notes are an integral part of these consolidated ﬁnancial statements. The consolidated ﬁnancial statements on pages 86 to 127 were approved and authorised for issue by the Board of Directors on 2 October 2017 and were signed on its behalf by: John Martin Group Chief Executive Mike Powell Chief Financial Officer 88 Ferguson plc Annual Report and Accounts 2017 Strategic report Governance Financials Other information Group cash ﬂow statement Year ended 31 July 2017 Cash ﬂows from operating activities Cash generated from operations Interest received Interest paid Tax paid Net cash generated from operating activities Cash ﬂows from investing activities Acquisition of businesses (net of cash acquired) Disposals of businesses (net of cash disposed of) Purchases of property, plant and equipment Proceeds from sale of property, plant and equipment and assets held for sale Purchases of intangible assets Disposals of ﬁnancial assets Net cash used in investing activities Cash ﬂows from ﬁnancing activities Purchase of own shares by Employee Beneﬁt Trusts Purchase of Treasury shares Proceeds from the sale of shares by Employee Beneﬁt Trusts Proceeds from the sale of Treasury shares Proceeds from borrowings and derivatives Repayments of borrowings Finance lease capital payments Dividends paid to shareholders Net cash used by ﬁnancing activities Net cash generated/(used) Effects of exchange rate changes Net increase/(decrease) in cash, cash equivalents and bank overdrafts Cash, cash equivalents and bank overdrafts at the beginning of the year Cash, cash equivalents and bank overdrafts at the end of the year Cash, cash equivalents and bank overdrafts at the end of the year in the Group balance sheet Cash, cash equivalents and bank overdrafts in assets held for sale Cash, cash equivalents and bank overdrafts at the end of the year Notes 29 30 31 27 27 27 27 9 32 20 2017 £m 1,115 3 (56) (310) 752 (256) 231 (153) 19 (25) 17 (167) (6) – – 21 339 (464) (5) (259) (374) 211 (15) 196 248 444 2017 £m 411 33 444 2016 £m 1,019 2 (41) (193) 787 (113) 9 (187) 56 (31) – (266) (14) (300) 1 14 585 (591) (4) (238) (547) (26) 18 (8) 256 248 2016 £m 248 – 248 Ferguson plc Annual Report and Accounts 2017 89 Notes to the consolidated ﬁnancial statements Year ended 31 July 2017 1 – Accounting policies and critical estimates and judgements Basis of preparation The consolidated ﬁnancial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as adopted by the European Union, including interpretations issued by the International Accounting Standards Board (“IASB”) and its committees. Ferguson plc is a public company limited by shares incorporated in Jersey under the Companies (Jersey) Law 1991 and is headquartered in Switzerland. The Company changed its name from Wolseley plc to Ferguson plc on 31 July 2017. The consolidated ﬁnancial statements have been prepared on a going concern basis (see page 41) and under the historical cost convention as modiﬁed by the revaluation of ﬁnancial assets and liabilities held for trading. The consolidated ﬁnancial statements are presented in sterling, which is the presentational currency of the Group. The Group’s presentational currency will change from sterling to US dollars from 1 August 2017. The Nordic businesses have been reclassiﬁed as discontinued operations in accordance with IFRS 5 “Non-current Assets Held for Sale and Discontinued Operations” and the consolidated ﬁnancial statements and affected notes for the year ended 31 July 2016 have been restated to reﬂect this. Accounting developments and changes At the time of this report a number of accounting standards have been published, but not yet applied. IFRS 9 “Financial Instruments” and IFRS 15 “Revenue from Contracts with Customers” are effective for the Group from the year ending 31 July 2019. The Group has completed an initial assessment of the impact of IFRS 9 and IFRS 15 and it is expected adoption will not have a material impact on the Group’s consolidated ﬁnancial results. IFRS 16 “Leases”, which is yet to be endorsed by the EU, is effective for the Group for the year ending 31 July 2020. IFRS 16 represents a signiﬁcant change for the treatment of leases in the lessee’s ﬁnancial results. Lessees will be required to apply a single model to recognise a lease liability and asset for all leases, including those classiﬁed as operating leases under current accounting standards (note 34), unless the underlying asset has a low value or the lease term is 12 months or less. On adoption of IFRS 16 there will be a signiﬁcant change to the ﬁnancial statements, as each lease will give rise to a right of use asset, which will be depreciated on a straight-line basis, and a lease liability, with the related interest charge. This will replace existing lease balances on the balance sheet and charges to the income statement. The Group continues to assess the full impact of IFRS 16, however the impact will depend on the transition approach and the contracts in effect at the time of adoption. It is therefore not yet practicable to provide a reliable estimate of the ﬁnancial impact on the Group’s consolidated ﬁnancial results. Choices permitted by IFRS The Group has elected to apply hedge accounting to some of its ﬁnancial instruments. Accounting policies Note 37 details the principal accounting policies applied in the preparation of the consolidated ﬁnancial statements. Critical accounting judgements Exceptional Items Note 2 provides a deﬁnition of exceptional items. The classiﬁcation of exceptional items requires signiﬁcant management judgement to determine the nature and intentions of a transaction. Note 5 provides further details on current year exceptional items. Pensions and other post-retirement beneﬁts The Group operates deﬁned beneﬁt pension plans in the UK and in a number of overseas locations that are accounted for using methods that rely on actuarial assumptions to estimate costs and liabilities for inclusion in the ﬁnancial statements. The Group takes advice from independent actuaries relating to the appropriateness of the assumptions. The cost of providing beneﬁts is determined annually using the Projected Unit Credit Method, which includes actuarial assumptions for discount rates, expected salary and pension increases, inﬂation and life expectancy and are disclosed in note 26. The discount rate used is the yield at the valuation date on high quality corporate bonds that have a maturity approximating to the terms of the pension obligations. Signiﬁcant judgement is required when setting the criteria from which the yield curve is derived. Sources of estimation uncertainty In applying the Group’s accounting policies, various transactions and balances are valued using estimates or assumptions. Should these estimates or assumptions prove incorrect there may be an impact on the following year’s ﬁnancial statements. The Group believes that the estimates and assumptions that have been applied would not give rise to a material impact within the next ﬁnancial year. 90 Ferguson plc Annual Report and Accounts 2017 Strategic report Governance Financials Other information 2 – Alternative performance measures The Group uses alternative performance measures (“APMs”), which are not deﬁned or speciﬁed under IFRS. The Group believes that these APMs, which are not considered to be a substitute for IFRS measures, provide additional helpful information. APMs are consistent with how business performance is planned, reported and assessed internally by management and the Board and provide comparable information across the Group. The Group reports some ﬁnancial measures net of businesses or branches that have been disposed of, closed or classiﬁed as held for sale and uses the following terminology: Non-ongoing operations: businesses and groups of branches, which do not meet the criteria to be classiﬁed as discontinued operations under IFRS 5 “Non-current Assets Held for Sale and Discontinued Operations”, which have been disposed of, closed or classiﬁed as held for sale. In 2017, the Group’s Swiss business, Tobler, and a small Industrial business in the USA, Endries, have been classiﬁed as non-ongoing. Ongoing operations: continuing operations excluding non-ongoing operations. A reconciliation between ongoing and continuing operations is shown below. Ongoing operations Non-ongoing operations Continuing operations Discontinued operations Revenue Restated 2016 £m 12,146 403 12,549 2,136 2017 £m 14,878 346 15,224 2,100 Trading proﬁt Restated 2016 £m 827 30 857 59 2017 £m 1,032 27 1,059 63 Constant exchange rates The Group measures some ﬁnancial metrics on both a reported basis and at constant exchange rates. The constant exchange rate basis re-translates the prior year at the current year exchange rate to eliminate the effect of exchange rate ﬂuctuations when comparing information year-on-year. Reported 2016 at 2016 exchange rates Impact of exchange rates Reported 2016 at 2017 exchange rates Constant currency growth Reported 2017 Ongoing revenue Ongoing trading proﬁt £m % 12,146 1,550 13,696 1,182 14,878 8.6 £m 827 122 949 83 1,032 % 8.7 Like-for-like revenue growth Management uses like-for-like revenue growth as it provides a consistent measure of the percentage increase/decrease in revenue year-on-year, excluding the effect of currency exchange, acquisitions and disposals, trading days and branch openings and closures. Reported 2016 at 2017 exchange rates Like-for-like revenue growth Opened and closed branches Trading days Acquisitions and divestments Reported 2017 Ongoing revenue % 6.0 £m 13,696 818 10 60 294 14,878 Exceptional items Exceptional items are those which are considered signiﬁcant by virtue of their nature, size or incidence. These items are presented as exceptional within their relevant income statement category to assist in the understanding of the trading and ﬁnancial results of the Group as these types of cost do not form part of the underlying business. Examples of items that are considered by the Directors for designation as exceptional items include, but are not limited to: – material restructuring costs within a segment incurred as part of a signiﬁcant change in strategy or due to the closure of a large part of a business and are not expected to be repeated on a regular basis. – signiﬁcant costs incurred as part of the integration of an acquired business and which are considered to be material. – gains or losses on disposals of businesses are considered to be exceptional in nature as they do not reﬂect the performance of the trading business. – costs or credits arising as a result of material regulatory and litigation matters. If provisions have been made for exceptional items in previous years, then any reversal of these provisions is treated as exceptional. Exceptional items for the current and prior year are disclosed in note 5. Ferguson plc Annual Report and Accounts 2017 91 Notes to the consolidated ﬁnancial statements continued Year ended 31 July 2017 2 – Alternative performance measures continued Gross margin The ratio of gross proﬁt, excluding exceptional items, to revenue. This is presented for both ongoing operations and continuing operations. Gross margin is used by management for assessing business unit performance and it is a key performance indicator for the Group (see page 26). Trading proﬁt Trading proﬁt is deﬁned as operating proﬁt before exceptional items and the amortisation and impairment of acquired intangible assets. Trading proﬁt is used as a performance measure because it excludes costs and other items that do not form part of the underlying trading business. Operating proﬁt Amortisation and impairment of acquired intangible assets Exceptional items Trading proﬁt Ongoing Restated 2016 £m 675 142 10 827 2017 £m 931 64 37 1,032 Continuing Restated 2016 £m 711 142 4 857 2017 £m 1,224 64 (229) 1,059 Ongoing trading margin The ratio of ongoing trading proﬁt to ongoing revenue is used to assess business unit proﬁtability and is a key performance indicator for the Group (see page 26). EBITDA before exceptional items The proﬁt before charges/credits relating to interest, tax, depreciation, amortisation and exceptional items. EBITDA before exceptional items is used in the net debt to EBITDA ratio to assess the appropriateness of the Group’s ﬁnancial gearing. Trading proﬁt Depreciation, amortisation and impairment of property, plant and equipment and software excluding exceptional items in operating proﬁt EBITDA before exceptional items 2017 £m 1,059 140 1,199 Restated 2016 £m 857 114 971 Ongoing effective tax rate The ongoing effective tax rate is the ratio of the ongoing tax expense to ongoing proﬁt before tax and is used as a measure of the tax rate of the ongoing business. See reconciliation in note 7. Headline proﬁt after tax and headline earnings per share Headline proﬁt after tax is calculated as the proﬁt from continuing operations after tax, before charges for amortisation and impairment of acquired intangible assets net of tax, exceptional items net of tax and non-recurring tax relating to changes in tax rates. Headline earnings per share is the ratio of headline proﬁt after tax to the weighted average number of ordinary shares in issue during the year, excluding those held by the Employee Beneﬁt Trusts and those held by the Company as Treasury shares. Headline earnings per share is used for the purpose of setting remuneration targets for executive directors and other senior executives. See reconciliation in note 10. Net debt and adjusted net debt Net debt comprises cash and cash equivalents, bank overdrafts, bank loans, derivative ﬁnancial instruments and obligations under ﬁnance leases. Net debt is a good indicator of the strength of the Group’s balance sheet position and is widely used by credit rating agencies. See note 32 for a reconciliation. Adjusted net debt is net debt after the year-end working capital adjustment used in the return on gross capital employed calculation below. Return on gross capital employed Return on gross capital employed is the ratio of the Group’s total trading proﬁt to the average year-end aggregate of shareholders’ equity, adjusted net debt and cumulative goodwill and other acquired intangible assets written off. Return on gross capital employed is a key performance indicator (see page 27). Net debt (a) Year-end working capital adjustment Adjusted net debt Cumulative goodwill and other acquired intangibles written off (b) Shareholders’ equity (a) Includes £46 million in assets and liabilities held for sale. (b) Includes amounts in assets held for sale. (c) Includes continuing and discontinued operations. 92 Ferguson plc Annual Report and Accounts 2017 Gross capital employed 2017 £m Gross capital employed 2016 £m Average capital employed £m Trading proﬁt (c) £m Return on gross capital employed 580 – 580 1,868 3,438 5,886 936 120 1,056 1,646 2,903 5,605 5,746 1,122 19.5% Strategic report Governance Financials Other information 3 – Segmental analysis The Group’s reportable segments are the operating businesses overseen by distinct divisional management teams responsible for their performance. All reportable segments derive their revenue from a single business activity, the distribution of plumbing and heating products. The Group’s business is not highly seasonal and the Group’s customer base is highly diversiﬁed, with no individually signiﬁcant customer. In the year ended 31 July 2017, the Nordic businesses have been reclassiﬁed into discontinued operations and all comparatives have been restated for consistency and comparability. The changes in revenue and trading proﬁt for continuing operations between the years ended 31 July 2016 and 31 July 2017 include changes in exchange rates, disposals, acquisitions and organic change. Where businesses are disposed in the year, the difference between the revenue and trading proﬁt in the current year up to the date of disposal and the revenue and trading proﬁt in the equivalent portion of the prior year is included in organic change. Revenue by reportable segment for continuing operations is as follows: Analysis of change in revenue USA UK Canada and Central Europe Group Restated 2016 £m 9,456 1,996 1,097 12,549 Exchange £m Disposals £m Acquisitions £m 1,445 – 164 1,609 (35) – (85) (120) 285 – 9 294 Trading proﬁt/(loss) (note 2) by reportable segment for continuing operations is as follows: Analysis of change in trading proﬁt/(loss) (note 2) USA UK Canada and Central Europe Central and other costs Group Restated 2016 £m 775 74 53 (45) 857 Exchange £m Disposals £m Acquisitions £m 118 – 8 – 126 (4) – (5) – (9) 33 – 1 – 34 Organic change £m 843 16 33 892 Organic change £m 44 2 (1) 6 51 2017 £m 11,994 2,012 1,218 15,224 2017 £m 966 76 56 (39) 1,059 The reconciliation between trading proﬁt/(loss) (note 2) and operating proﬁt/(loss) by reportable segment for continuing operations is as follows: Trading proﬁt/(loss) £m Exceptional items £m 966 76 56 (39) 1,059 94 (28) 170 (7) 229 Amortisation and impairment of acquired intangible assets £m (62) – (2) – (64) 2017 Operating proﬁt/(loss) £m Trading proﬁt/(loss) £m Exceptional items £m Amortisation and impairment of acquired intangible assets £m Restated 2016 Operating proﬁt/(loss) £m 998 48 224 (46) 1,224 (43) (1) 1,180 775 74 53 (45) 857 2 (9) – 3 (4) (34) (106) (2) – (142) 743 (41) 51 (42) 711 (36) – 675 USA UK Canada and Central Europe Central and other costs Group Finance costs Share of after tax loss of associate Proﬁt before tax Ferguson plc Annual Report and Accounts 2017 93 Notes to the consolidated ﬁnancial statements continued Year ended 31 July 2017 3 – Segmental analysis continued In 2016 and 2017, a number of Group businesses or groups of branches have been disposed of, closed or are classiﬁed as held for sale. The revenue and trading proﬁt of the Group’s segments excluding those businesses and branches (“ongoing operations”) are analysed in the following table. These are alternative performance measures. Ongoing operations USA UK Canada and Central Europe Central and other costs Total ongoing operations Non-ongoing operations Continuing operations Other information on assets and liabilities by segment is set out in the tables below: Segment assets and liabilities USA UK Canada and Central Europe (a) Central and other costs Discontinued Total Tax assets and liabilities Net cash/(debt) Group assets/(liabilities) (a) 2017 segmental assets includes £124 million relating to interest in associate. Segment assets £m 4,681 850 598 16 1,304 7,449 123 1,931 9,503 Segment liabilities £m (1,872) (492) (195) (95) (851) (3,505) (97) (2,465) (6,067) 2017 Revenue Restated 2016 £m 9,288 1,996 862 – 12,146 403 12,549 Segment assets £m 4,268 856 599 18 1,312 7,053 127 971 8,151 2017 £m 11,824 2,012 1,042 – 14,878 346 15,224 2017 Segment net assets/ (liabilities) £m 2,809 358 403 (79) 453 3,944 26 (534) 3,436 2017 £m 950 76 45 (39) 1,032 27 1,059 Segment liabilities £m (1,645) (508) (265) (103) (656) (3,177) (166) (1,907) (5,250) Trading proﬁt Restated 2016 £m 761 74 37 (45) 827 30 857 Restated 2016 Segment net assets/ (liabilities) £m 2,623 348 334 (85) 656 3,876 (39) (936) 2,901 Restated 2016 Additions to other acquired intangible assets £m Additions to non-acquired intangible assets £m Additions to property, plant and equipment £m Additions to other acquired intangible assets £m Additions to non-acquired intangible assets £m Additions to property, plant and equipment £m Additions to goodwill £m 80 – – – 1 81 11 8 3 1 2 25 81 21 9 – 46 157 34 – 6 – – 40 25 – 3 – – 28 17 5 2 1 6 31 123 15 18 1 33 190 Additions to goodwill £m 136 – – – 3 139 USA UK Canada and Central Europe Central and other costs Discontinued Group 94 Ferguson plc Annual Report and Accounts 2017 Strategic report Governance Financials Other information 3 – Segmental analysis continued Impairment of goodwill and other acquired intangible assets £m Amortisation of other acquired intangible assets £m Amortisation and impairment of non- acquired intangible assets £m – – – – 102 102 62 – 2 – 4 68 11 5 2 3 3 24 2017 Depreciation and impairment of property, plant and equipment £m 92 17 8 2 24 143 USA UK Canada and Central Europe Central and other costs Discontinued Group 4 – Operating proﬁt Amounts charged/(credited) in arriving at operating proﬁt include: Depreciation of property, plant and equipment Impairment of property, plant and equipment Gain on disposal and closure of businesses Loss on disposal of property, plant and equipment and assets held for sale Staff costs Amortisation of non-acquired intangible assets Amortisation of acquired intangible assets Impairment of non-acquired intangible assets Impairment of goodwill and acquired intangible assets Operating lease rentals: land and buildings Operating lease rentals: plant and machinery Impairment of goodwill and other acquired intangible assets £m Amortisation of other acquired intangible assets £m Amortisation and impairment of non- acquired intangible assets £m – 94 – – – 94 34 12 2 – 5 53 Notes 14 14 31 11 13 13 13 12, 13 7 5 1 1 1 15 2017 £m 118 1 (266) – 2,140 19 64 2 – 187 59 Restated 2016 Depreciation and impairment of property, plant and equipment £m 72 17 9 2 25 125 Restated 2016 £m 99 1 (6) 1 1,766 14 48 – 94 161 49 Amounts included in costs of goods sold with respect to inventory 10,758 8,806 Trade receivables impairment During the year, the Group obtained the following services from the Company’s auditor and its associates: Fees for the audit of the parent company and consolidated ﬁnancial statements Fees for the audit of the Company’s subsidiaries pursuant to legislation Total audit fees Audit related assurance services Other assurance services Other services Total non-audit fees Total fees payable to the auditor 10 2017 £m 0.9 2.5 3.4 0.5 0.1 0.2 0.8 4.2 9 2016 £m 0.9 2.0 2.9 0.2 – – 0.2 3.1 Details of the Company’s policy on the use of the auditor for non-audit services, the reasons why the auditor was used and how the auditor’s independence and objectivity was safeguarded are set out in the Audit Committee Report on page 62. No services were provided pursuant to contingent fee arrangements. Ferguson plc Annual Report and Accounts 2017 95 Notes to the consolidated ﬁnancial statements continued Year ended 31 July 2017 5 – Exceptional items Exceptional items included in operating proﬁt from continuing operations are analysed by purpose as follows: Gain on disposal of businesses (note 31) Business restructuring Other exceptional items Total included in operating proﬁt 2017 £m 266 (40) 3 229 Restated 2016 £m 6 (10) – (4) For the year to 31 July 2017, business restructuring comprises costs incurred in the UK in respect of its business transformation strategy and includes £2 million charged to cost of sales for inventory write downs. Other exceptional items include an £11 million one-off credit relating to the UK deﬁned beneﬁt pension plan which arose as a result of a change in future earnings assumptions. The net cash outﬂow from exceptional items, excluding the gain on disposal of businesses, was £20 million (2016: £6 million). The net inﬂow of cash in respect of the disposal of businesses is detailed in note 31. Exceptional items relating to discontinued operations are disclosed in note 8. 6 – Finance costs Interest payable – Bank loans and overdrafts – Unwind of fair value adjustment to senior unsecured loan notes – Finance lease charges Net interest expense/(income) on deﬁned beneﬁt obligation (note 26) Valuation gains on ﬁnancial instruments – Derivatives held at fair value through proﬁt and loss Total ﬁnance costs Finance costs relating to discontinued operations are detailed in note 8. 7 – Tax The tax charge for the year comprises: Current year tax charge Adjustments to tax charge in respect of prior years Total current tax charge Deferred tax credit: origination and reversal of temporary differences Total tax charge 2017 £m Restated 2016 £m 48 (8) 1 2 – 43 2017 £m 294 1 295 (3) 292 45 (9) 2 (1) (1) 36 Restated 2016 £m 225 (13) 212 (2) 210 An exceptional tax charge of £22 million was recorded against exceptional items (2016: credit £1 million). The deferred tax credit of £3 million (2016: credit £2 million) includes a charge of £10 million (2016: charge £5 million) resulting from changes in tax rates. Tax on items credited/(charged) to the statement of other comprehensive income: Deferred tax (charge)/credit on actuarial loss on retirement beneﬁts Current tax credit on actuarial loss on retirement beneﬁts Deferred tax credit/(charge) on losses Total tax on items credited to the statement of other comprehensive income 2017 £m (3) 2 1 – 2016 £m 25 – (7) 18 In 2017, there is no tax in the statement of other comprehensive income which relates to changes in tax rates. In 2016, £1 million of the £18 million credit related to changes in tax rates. 96 Ferguson plc Annual Report and Accounts 2017 Strategic report Governance Financials Other information 7 – Tax continued Tax on items credited/(charged) to equity: Current tax credit on share-based payments Deferred tax credit/(charge) on share-based payments Total tax on items credited to equity Tax reconciliation: Proﬁt before tax Expected tax at weighted average tax rate (a) Adjusted for the effects of: (under)/over provisions in respect of prior periods (b) exceptional items which are non-taxable/(non-tax deductible) (d) current year increase in uncertain tax provisions (e) tax credits and incentives non-taxable income other non-tax deductible expenditure (f) other effect of UK tax rate changes (g) Tax charge/effective tax rate Tax reconciliation: Proﬁt/(loss) before tax Expected tax at weighted average tax rate (a) Adjusted for the effects of: over provisions in respect of prior periods (b) non-tax deductible amortisation/impairment of acquired intangible assets (c) exceptional items which are non-taxable/(non-tax deductible) (d) current year increase in uncertain tax provisions (e) tax credits and incentives non-taxable income other non-tax deductible expenditure (f) other effect of UK tax rate changes (g) Tax (charge)/credit/effective tax rate 2017 £m 3 1 4 2016 £m 6 (6) – 2017 Ongoing proﬁt/tax (h) Non-ongoing and other proﬁt/tax (i) Total proﬁt/tax from continuing operations £m 989 (241) (5) – (25) 3 8 (9) 2 (10) % 24.4 0.5 – 2.5 (0.3) (0.8) 0.9 (0.2) 1.0 £m 191 (52) 11 26 – – – – – – % 27.2 (5.7) (13.6) – – – – – – £m 1,180 (293) 6 26 (25) 3 8 (9) 2 (10) (277) 28.0 (15) 7.9 (292) % 24.8 (0.5) (2.2) 2.1 (0.2) (0.7) 0.8 (0.2) 0.8 24.7 Restated 2016 Ongoing proﬁt/tax (h) Non-ongoing and other loss/tax (i) Total proﬁt/tax from continuing operations £m 792 (202) 18 – – (31) 3 4 (6) (3) – (217) % 25.5 (2.3) – – 3.9 (0.4) (0.5) 0.8 0.4 – 27.4 £m (117) 26 – (15) 1 – – – – – (5) 7 % 22.2 – (12.8) 0.9 – – – – – (4.3) 6.0 £m 675 (176) 18 (15) 1 (31) 3 4 (6) (3) (5) (210) % 26.1 (2.7) 2.2 (0.1) 4.6 (0.4) (0.6) 0.9 0.4 0.7 31.1 (a) This expected weighted average tax rate reﬂects the applicable statutory corporate tax rates on the accounting proﬁts/losses in the countries in which the Group operates after intra-group ﬁnancing. This results in interest deductions and lower taxable proﬁts in many of the countries and therefore reduces the tax rate. The pre intra-group ﬁnancing ongoing expected weighted average tax rate is 37.2 per cent (2016: 37.6 per cent) and this is reduced to a post intra-group ﬁnancing ongoing expected weighted average tax rate of 24.4 per cent (2016: 25.5 per cent). The 1.1 per cent decrease in the post intra-group ﬁnancing ongoing expected weighted average tax rate is primarily due to a change in proﬁt mix. (b) This includes adjustments arising out of movements in uncertain tax provisions regarding prior periods and differences between the ﬁnal tax liabilities in the tax computations and the tax liabilities provided in the accounts. The non-ongoing and other credit of £11 million relates primarily to a one-off settlement of tax enquiries in the UK. (c) In 2016, this relates primarily to non-tax deductible impairment of goodwill in the UK. (d) In 2017, this relates primarily to non-taxable disposals of businesses. (e) This reﬂects management’s assessment of the potential tax liability for the current year in relation to open tax issues and audits. (f) This relates to certain expenditure for which no tax relief is available such as disallowable business entertaining costs. (g) This relates to the reduction in the UK standard rate of corporation tax from 20 per cent to 19 per cent from 1 April 2017 and to 17 per cent from 1 April 2020. The rate change was considered exceptional in 2016 on the grounds that it was only announced at the end of the 2015 ﬁnancial year and could not be foreseen in the Group’s forecast ongoing effective tax rate for the 2016 ﬁnancial year. (h) Ongoing proﬁt means proﬁt before tax, exceptional items and the amortisation and impairment of acquired intangible assets for ongoing operations as deﬁned in note 2. Ongoing tax is the tax expense arising on ongoing proﬁt. (i) Non-ongoing and other proﬁt or loss is proﬁt or loss from non-ongoing operations as deﬁned in note 2 and from the amortisation and impairment of acquired intangible assets and exceptional items. Non-ongoing and other tax is the tax expense or credit arising on the non-ongoing and other proﬁt or loss. Ferguson plc Annual Report and Accounts 2017 97 Notes to the consolidated ﬁnancial statements continued Year ended 31 July 2017 8 – Discontinued operations The Group is in the process of selling its business and property assets (the “disposal group”) in the Nordic region and, in accordance with IFRS 5 “Non-current Assets Held for Sale and Discontinued Operations”, the disposal group has been classiﬁed as discontinued and prior periods have been restated to reﬂect this. As at 31 July 2017, the sales process for the remaining French property assets is in progress and these are classiﬁed as discontinued. The results from discontinued operations, which have been included in the Group income statement, are set out below. Revenue Cost of sales Gross proﬁt Operating costs: gain on disposal of businesses amortisation of acquired intangible assets impairment of goodwill and acquired intangible assets other Operating costs Operating (loss)/proﬁt Finance (costs)/income (Loss)/proﬁt before tax Attributable tax (Loss)/proﬁt from discontinued operations Basic (loss)/earnings per share Diluted (loss)/earnings per share Before exceptional items £m Exceptional items £m 2,100 (1,565) 535 – (4) (102) (472) (578) (43) (4) (47) – (47) – (8) (8) – – – (60) (60) (68) 8 (60) 2 (58) 2017 Total £m 2,100 (1,573) 527 – (4) (102) (532) (638) (111) 4 (107) 2 (105) (18.7)p (18.5)p (23.1)p (22.9)p (41.8)p (41.4)p Before exceptional items £m Exceptional items £m Restated 2016 Total £m 2,136 (1,573) 563 139 (5) – (488) (354) 209 2 211 (26) 185 – – – 139 – – 16 155 155 4 159 (5) 154 60.7p 60.4p 73.0p 72.5p 2,136 (1,573) 563 – (5) – (504) (509) 54 (2) 52 (21) 31 12.3p 12.1p The discontinued exceptional items in 2017 relate predominantly to restructuring activities in the Nordic region. During the year, discontinued operations generated cash of £51 million (2016: £51 million) in respect of operating activities, used £28 million (2016: generated £17 million) in respect of investing activities and used £54 million (2016: generated £26 million) in respect of ﬁnancing activities. 9 – Dividends Amounts recognised as distributions to equity shareholders: Final dividend for the year ended 31 July 2015 Interim dividend for the year ended 31 July 2016 Final dividend for the year ended 31 July 2016 Interim dividend for the year ended 31 July 2017 Dividends paid 2017 Pence per share – – 66.72p 36.67p £m – – 167 92 259 2016 Pence per share 60.50p 33.28p – – £m 154 84 – – 238 Since the end of the ﬁnancial year, the Directors have proposed a ﬁnal ordinary dividend of £185 million (73.33 pence per share). The dividend is subject to approval by shareholders at the Annual General Meeting and is therefore not included in the balance sheet as a liability at 31 July 2017. 98 Ferguson plc Annual Report and Accounts 2017 Strategic report Governance Financials Other information 10 – Earnings per share Headline proﬁt after tax from continuing operations Exceptional items (net of tax) Amortisation and impairment of acquired intangible assets (net of tax) Non-recurring tax charge relating to changes in tax rates Proﬁt from continuing operations (Loss)/proﬁt from discontinued operations Proﬁt from continuing and discontinued operations Earnings £m 726 207 (45) – 888 (105) 783 Basic earnings per share pence 288.9 82.4 (17.9) – 353.4 (41.8) 311.6 2017 Diluted earnings per share pence 350.8 (41.4) 309.4 Earnings £m 595 (3) (122) (5) 465 185 650 Basic earnings per share pence 234.7 (1.2) (48.1) (2.0) 183.4 73.0 256.4 Restated 2016 Diluted earnings per share pence 182.3 72.5 254.8 The weighted average number of ordinary shares in issue during the year, excluding those held by Employee Beneﬁt Trusts and those held by the Company as Treasury shares, was 251.3 million (2016: 253.5 million). The impact of all potentially dilutive share options on earnings per share would be to increase the weighted average number of shares in issue to 253.1 million (2016: 255.1 million). 11 – Employee information and Directors’ remuneration Wages and salaries Social security costs Pension costs – deﬁned contribution plans Pension (credit)/costs – deﬁned beneﬁt plans (note 26) Share-based payments (note 28) Total staff costs The total staff costs, including discontinued operations, was £2,451 million (2016: £2,071 million). Average number of employees USA UK Canada and Central Europe Central and other Group 2017 £m 1,936 134 57 (7) 20 Restated 2016 £m 1,585 111 48 5 17 2,140 1,766 2017 24,086 6,064 3,257 104 33,511 Restated 2016 22,468 6,208 3,489 104 32,269 The average number of employees including discontinued operations was 39,205 (2016: 39,717). Further details of Directors’ remuneration and share options are set out in the Remuneration Report on pages 69 to 84, which form part of these ﬁnancial statements. The aggregate emoluments for all key management are set out in the following table: Key management personnel compensation (including Directors) Salaries, bonuses and other short-term employee beneﬁts Termination and post-employment beneﬁts Share-based payments Total compensation 2017 £m 11 – 4 15 2016 £m 8 1 4 13 Ferguson plc Annual Report and Accounts 2017 99 Notes to the consolidated ﬁnancial statements continued Year ended 31 July 2017 12 – Intangible assets – goodwill Cost At 1 August Exchange rate adjustment Acquisitions Adjustment to fair value on prior year acquisitions Disposal of businesses Reclassiﬁcation as held for sale At 31 July Accumulated impairment losses At 1 August Exchange rate adjustment Impairment charge for the year Disposal of businesses Reclassiﬁcation as held for sale At 31 July Net book amount at 31 July 2017 £m 1,711 54 139 – (65) (871) 968 809 48 82 (3) (856) 80 888 2016 £m 1,404 266 40 1 – – 1,711 588 135 86 – – 809 902 The impairment charge for the year includes £82 million (2016: £nil) in respect of discontinued operations. Goodwill and intangible assets acquired during the year have been allocated to the individual cash generating units or aggregated cash generating units (together “CGUs”) which are deemed to be the smallest identiﬁable group of assets generating independent cash inﬂows. CGUs have been aggregated in the disclosure below at a segmental level except for certain CGUs in the USA which are considered to be signiﬁcant (more than 10 per cent of the current year goodwill balance). Impairment reviews were performed for each individual CGU during the year ended 31 July 2017. Long-term growth rate % Post-tax discount rate % Pre-tax discount rate % 2.3 2.0 2.0 n/a n/a 9.3 8.1 8.7 n/a n/a 15.2 10.0 11.9 n/a n/a 2017 Goodwill £m 327 199 128 110 764 32 92 – – 888 Long-term growth rate % Post-tax discount rate % Pre-tax discount rate % 2.2 2.0 2.0 1.0 2.2 8.2 8.2 8.0 6.6 7.5 13.4 10.2 10.8 8.4 9.7 2016 Goodwill £m 314 89 127 113 643 32 88 48 91 902 Blended Branches B2C Waterworks Rest of USA USA UK Canada Central Europe Nordic (held for sale) Total The relevant inputs to the value in use calculations of each CGU were: Cash ﬂow forecasts for years one to three are derived from the most recent Board approved strategic plan. The forecast for year ﬁve represents an estimate of “mid-cycle” trading performance for the CGU based on historic analysis. Year four is calculated as the average of the ﬁnal year of the strategic plan and year ﬁve’s mid-cycle estimate. The other inputs include a risk-adjusted, pre-tax discount rate, calculated by reference to the weighted average cost of capital (“WACC”) of each country and the 30-year long-term growth rate by country, as published by the IMF in April 2017. The strategic plan is developed based on analyses of sales, markets and costs at a regional level. Consideration is given to past events, knowledge of future contracts and the wider economy. It takes into account both current business and future initiatives. Management has performed a sensitivity analysis across all CGUs which have goodwill and acquired intangible assets using reasonably possible changes in the following key impairment review assumptions: compound average revenue growth rate, post-tax discount rate and long-term growth rate, keeping all other assumptions constant. The sensitivity testing identiﬁed no reasonably possible changes in key assumptions that would cause the carrying amount of any CGU to exceed its recoverable amount. 100 Ferguson plc Annual Report and Accounts 2017 Strategic report Governance Financials Other information 12 – Intangible assets – goodwill continued Nordic During the period, the performance of our Swedish building materials business, Beijer, deteriorated sharply with trading proﬁt signiﬁcantly lower compared with the corresponding period last year and below management’s expectations. This generated a trigger event for management to reassess the recoverability of its associated goodwill and acquired intangible assets. This assessment resulted in an impairment charge, as follows: CGU Beijer Goodwill £m 82 Acquired intangible assets £m 20 Total £m 102 Impairment £m Remaining balance £m Post-tax discount rate % Pre-tax discount rate % (102) – 7.5 9.6 As at 31 July 2017, the Nordic businesses have been classiﬁed as held for sale (note 20) and discontinued operations (note 8). 13 – Intangible assets – other Cost At 1 August 2015 Exchange rate adjustment Acquisitions Additions Disposals and transfers At 31 July 2016 Exchange rate adjustment Acquisitions Additions Disposals and transfers Disposal of businesses Reclassiﬁcation as held for sale At 31 July 2017 Accumulated amortisation and impairment losses At 1 August 2015 Exchange rate adjustment Amortisation charge for the year Impairment charge for the year Disposals and transfers At 31 July 2016 Exchange rate adjustment Amortisation charge for the year Impairment charge for the year Disposals and transfers Disposal of businesses Reclassiﬁcation as held for sale At 31 July 2017 Net book amount at 31 July 2017 Net book amount at 31 July 2016 Acquired intangible assets Software £m Trade names and brands £m Customer relationships £m Other £m 125 15 – 31 (19) 152 1 – 25 (7) (13) (11) 147 82 10 15 – (14) 93 – 22 2 (7) (10) (5) 95 52 59 264 51 7 – – 322 17 46 – – (2) (289) 94 234 45 8 2 – 289 15 13 13 – (1) (286) 43 51 33 481 86 16 – (2) 581 14 25 – – (20) (251) 349 383 72 40 6 (2) 499 15 36 7 – (18) (250) 289 60 82 61 11 5 – – 77 – 10 – – (4) – 83 37 7 5 – – 49 – 19 – – (4) – 64 19 28 Total £m 931 163 28 31 (21) 1,132 32 81 25 (7) (39) (551) 673 736 134 68 8 (16) 930 30 90 22 (7) (33) (541) 491 182 202 The amortisation charge includes £7 million (2016: £6 million) in respect of discontinued operations of which £3 million relates to software (2016: £1 million). The impairment charge includes £20 million (2016: £nil) in respect of discontinued operations of which £nil relates to software. Ferguson plc Annual Report and Accounts 2017 101 Notes to the consolidated ﬁnancial statements continued Year ended 31 July 2017 14 – Property, plant and equipment Land and buildings Freehold £m Finance leases £m Operating leasehold improvements £m Plant machinery and equipment £m Cost At 1 August 2015 Exchange rate adjustment Acquisitions Additions Disposals and transfers Reclassiﬁcation as held for sale At 31 July 2016 Exchange rate adjustment Acquisitions Additions Disposal of businesses Disposals and transfers Reclassiﬁcation as held for sale At 31 July 2017 Accumulated depreciation At 1 August 2015 Exchange rate adjustment Depreciation charge for the year Impairment charge for the year Disposals and transfers Reclassiﬁcation as held for sale At 31 July 2016 Exchange rate adjustment Depreciation charge for the year Impairment charge for the year Disposal of businesses Disposals and transfers Reclassiﬁcation as held for sale At 31 July 2017 Owned assets Assets under ﬁnance leases Net book amount at 31 July 2017 Owned assets Assets under ﬁnance leases Net book amount at 31 July 2016 1,076 28 278 193 9 85 (1) (3) 1,359 43 12 55 (11) (7) (745) 706 219 42 30 2 – (1) 292 6 35 1 (1) (2) (142) 189 517 – 517 1,067 – 1,067 4 – 1 (1) – 32 – – – (24) (6) – 2 7 – 1 – – – 8 – – – (3) (5) – – – 2 2 – 24 24 43 – 12 (7) – 326 1 – 25 (1) (22) (7) 322 182 28 20 – (7) – 223 2 24 – (2) (8) (6) 233 89 – 89 103 – 103 637 91 2 92 (39) – 783 8 14 77 (44) (65) (96) 677 447 63 72 – (39) – 543 3 83 – (34) (61) (57) 477 194 6 200 232 8 240 Total £m 2,019 331 11 190 (48) (3) 2,500 52 26 157 (80) (100) (848) 1,707 855 133 123 2 (46) (1) 1,066 11 142 1 (40) (76) (205) 899 800 8 808 1,402 32 1,434 At 31 July 2017, the book value of property, plant and equipment that had been pledged as security for liabilities was £12 million (2016: £591 million). In addition, £179 million of property, plant and equipment included in assets held for sale (note 20) had been pledged as security for liabilities at 31 July 2017. The depreciation charge and impairment charge for the year include £24 million (2016: £24 million) and £nil (2016: £1 million) respectively relating to discontinued operations. 102 Ferguson plc Annual Report and Accounts 2017 Strategic report Governance Financials Other information 15 – Associates In April 2017, the Group acquired a 39.21% share in Walter Meier AG, a trading company whose principal place of business is Switzerland and which is engaged in the distribution and maintenance of heating and air conditioning systems. The investment in Walter Meier AG is accounted for as an associate using the equity method. Walter Meier AG prepares accounts under Swiss GAAP FER with a year-end of 31 December. The Group’s accounts have been prepared based on Walter Meier AG’s half year accounts ended 30 June 2017. There were no signiﬁcant transactions between that date and 31 July 2017 and no material differences would arise if the accounts were prepared under IFRS. Summarised ﬁnancial information from Walter Meier AG’s half year accounts ended 30 June 2017 is set out below. Trading results are from the date of acquisition. Non-current assets Current assets Current liabilities Non-current liabilities Net assets Revenue Loss from continuing operations Other comprehensive income attributable to the owners of the company Total comprehensive income The amount recognised in the Group’s consolidated ﬁnancial statements is as follows: Share of result of associate 39.21% There were no dividends received from the associate in the year. The reconciliation of associate net assets to the carrying amount recognised in the Group’s consolidated ﬁnancial statements is as follows: Net assets of associate Proportion of the Group’s ownership interest in the associate Goodwill Carrying amount of the Group’s interest in the associate % 39.21 2017 £m 138 244 (149) (96) 137 109 (3) – (3) (1) 2017 £m 137 54 70 124 Ferguson plc Annual Report and Accounts 2017 103 Notes to the consolidated ﬁnancial statements continued Year ended 31 July 2017 16 – Deferred tax assets and liabilities The deferred tax assets and liabilities shown in the balance sheet are analysed as follows: Deferred tax Deferred tax assets Deferred tax liabilities 2017 £m 121 (9) 112 The following are the major deferred tax assets and liabilities recognised by the Group and movements thereon during the current and prior reporting year: At 31 July 2015 Credit/(charge) to income Credit/(charge) to other comprehensive income Charge to equity Acquisitions Exchange rate adjustment At 31 July 2016 Credit/(charge) to income (Charge)/credit to other comprehensive income Credit to equity Acquisitions Disposals of businesses Transferred to held for sale Transfers between categories Exchange rate adjustment At 31 July 2017 Goodwill and intangible assets £m Share-based payments £m Property, plant and equipment £m Retirement beneﬁt obligations £m Inventory £m Tax losses £m (47) 5 – – (2) (8) (52) 7 – – (6) – 2 – – (49) 21 – – (6) – 3 18 (1) – 1 – – (1) – – 17 16 (13) – – – (10) (7) (4) – – (3) 1 61 – (1) 47 45 2 25 – – 12 84 (3) (3) – – (1) (3) – 1 75 (75) 9 – – – (12) (78) (4) – – – 2 (4) – – (84) 58 (2) (7) – – 2 51 21 1 – – – (6) (7) – 60 Other £m 44 (5) – – – 7 46 (9) – – – – 2 7 – 2016 £m 127 (65) 62 Total £m 62 (4) 18 (6) (2) (6) 62 7 (2) 1 (9) 2 51 – – 46 112 Legislation has been enacted in the UK to reduce the standard rate of UK corporation tax from 20 per cent to 19 per cent with effect from 1 April 2017 and to 17 per cent with effect from 1 April 2020. Accordingly, the UK deferred tax assets and liabilities have predominantly been calculated based on a 17 per cent tax rate which materially reﬂects the rate for the period in which the deferred tax assets and liabilities are expected to reverse. Net deferred tax assets have been recognised on the basis that sufficient taxable proﬁts are forecast to be available in the future to enable them to be utilised. In addition, the Group has unrecognised gross tax losses totalling £328 million (2016: £68 million) that have not been recognised on the basis that their future economic beneﬁt is uncertain. These losses have no expiry date and relate predominantly to capital losses. No deferred tax liability has been recognised in respect of temporary differences associated with investments in subsidiaries. However, tax may arise on £284 million (2016: £253 million) of temporary differences but the Group is in a position to control the timing of their reversal and it is probable that such differences will not reverse in the foreseeable future. 104 Ferguson plc Annual Report and Accounts 2017 Strategic report Governance Financials Other information 17 – Trade and other receivables Current Trade receivables Less: provision for impairment Net trade receivables Other receivables Prepayments Non-current Other receivables 2017 £m 1,795 (24) 1,771 92 230 2,093 2016 £m 1,933 (39) 1,894 81 232 2,207 226 212 Included in prepayments is £177 million (2016: £182 million) due in relation to Supplier Rebates where there is no right to offset against trade payable balances. Movements in the provision for impairment of trade receivables are as follows: At 1 August Net charge for the year Utilised in the year Disposal of businesses and reclassiﬁed as held for sale Exchange rate adjustment At 31 July 2017 £m 39 13 (17) (11) – 24 2016 £m 35 14 (14) – 4 39 Provisions for impairment of receivables have two components comprising a provision for amounts that have been individually determined not to be collectable in full, because of known ﬁnancial difficulties of the debtor or evidence of default or delinquency in payment, amounting to £13 million at 31 July 2017 (2016: £16 million); and a provision based on historic experience of non-collectability of receivables, amounting to £11 million at 31 July 2017 (2016: £23 million). Trade receivables have been aged with respect to the payment terms speciﬁed in the terms and conditions established with customers as follows: Amounts not yet due and less than one month past due Past due more than one month 2017 £m 1,620 175 1,795 2016 £m 1,452 481 1,933 18 – Derivative ﬁnancial instruments The Group uses interest rate swaps to manage its exposure to interest rate movements on its borrowings and foreign exchange swaps to hedge cash ﬂows in respect of committed transactions or to hedge its investment in overseas operations. The fair values of derivative ﬁnancial instruments are as follows: Derivative ﬁnancial instrument type Interest rate swaps Foreign exchange swaps Assets £m Liabilities £m 20 – 20 – – – 2017 Total £m 20 – 20 Assets £m Liabilities £m 29 2 31 – – – 2016 Total £m 29 2 31 The current element of derivative ﬁnancial assets is £5 million (2016: £11 million) and the non-current element is £15 million (2016: £20 million). The Group’s accounting and risk management policies, and further information about the derivative ﬁnancial instruments that it uses, are set out on pages 123 to 126. Ferguson plc Annual Report and Accounts 2017 105 Notes to the consolidated ﬁnancial statements continued Year ended 31 July 2017 19 – Cash and cash equivalents Cash and cash equivalents 2017 £m 1,911 2016 £m 940 Included in the balance at 31 July 2017 is an amount of £1,420 million (2016: £606 million) which is part of the Group’s cash pooling arrangements where there is an equal and opposite balance included within bank overdrafts (note 22). These amounts are subject to a master netting arrangement. At 31 July 2017, cash and cash equivalents included £64 million (2016: £60 million) which is used to collateralise letters of credit on behalf of Wolseley Insurance Limited. Restricted cash held by the Group at the balance sheet date amounted to £17 million (2016: £3 million) and is recorded in other receivables. 20 – Assets and liabilities held for sale Properties awaiting disposal Assets of disposal groups held for sale Assets held for sale Liabilities of disposal groups held for sale 2017 £m 66 1,232 1,298 821 2016 £m 10 46 56 12 During the year ended 31 July 2017, the Group announced its decision to sell its Nordic businesses and subsequently classiﬁed these as held for sale. At 31 July 2017, the sales process for the remaining French property assets was progressing and accordingly these properties have been reclassiﬁed as properties awaiting disposal. The assets and liabilities of disposal groups held for sale consist of: Intangible assets Property, plant and equipment Inventories Trade and other receivables Tax receivables Cash and cash equivalents Bank loans Trade and other payables Provisions and retirement beneﬁt obligations Tax payables 21 – Trade and other payables Current Trade payables Tax and social security Other payables Accruals Deferred income Non-current Other payables 2017 £m 25 615 274 256 29 33 (79) (598) (73) (71) 411 2017 £m 1,767 66 90 354 2 2016 £m – 42 – 4 – – – (7) (1) (4) 34 2016 £m 2,121 88 71 346 8 2,279 2,634 180 163 Trade payables are stated net of £nil (2016: £15 million) due from suppliers with respect to Supplier Rebates where an agreement exists that allows these to be net settled. 106 Ferguson plc Annual Report and Accounts 2017 Strategic report Governance Financials Other information 22 – Bank loans and overdrafts Bank overdrafts Bank and other loans Senior unsecured loan notes Total bank loans and overdrafts Current £m 1,500 2 125 1,627 Non-current £m – 4 827 831 2017 Total £m 1,500 6 952 2,458 Current £m 692 1 8 701 Non-current £m – 224 951 1,175 2016 Total £m 692 225 959 1,876 Included in bank overdrafts at 31 July 2017 is an amount of £1,420 million (2016: £606 million) which is part of the Group’s cash pooling arrangements where there is an equal and opposite balance included within cash and cash equivalents (note 19). These amounts are subject to a master netting arrangement. £2 million of bank loans are secured against the Group’s freehold property (2016: £130 million). In addition, £79 million of bank loans included in liabilities held for sale (note 20) are secured against freehold property included in assets held for sale. No bank loans were secured against trade receivables at 31 July 2017 (2016: £nil) as the trade receivables facility of £454 million was undrawn as at 31 July 2017. Non-current loans are repayable as follows: Due in one to two years Due in two to three years Due in three to four years Due in four to ﬁve years Due in over ﬁve years Total 2017 £m 6 4 214 1 606 831 2016 £m 124 4 4 215 828 1,175 The carrying value of the senior unsecured loan notes of £952 million comprises a par value of £937 million and a fair value adjustment of £15 million (2016: £959 million, £936 million and £23 million respectively). The fair value adjustment arose before 30 November 2011 when the loan notes were hedged by a series of interest rate swaps. From 30 November 2011, the hedge relationship was de-designated and the fair value adjustment is being released to the income statement on an amortised cost basis and the fair value hedge is based on a recalculated effective interest rate at the date when hedge accounting was discontinued. The adjustment will be fully amortised at the point the unsecured loan notes mature. Finance costs are disclosed in note 6. There have been no signiﬁcant changes during the year to the Group’s policies on accounting for, valuing and managing the risk of ﬁnancial instruments. These policies are summarised on pages 123 to 126. 23 – Financial instruments and ﬁnancial risk management Capital structure To assess the appropriateness of its capital structure based on current and forecast trading, the Group’s principal measure of ﬁnancial gearing is the ratio of net debt to EBITDA before exceptional items. The Group aims to operate with investment grade credit metrics and ensure this ratio remains within 1 to 2 times. The Group’s main borrowing facilities contain a ﬁnancial covenant limiting the ratio of net debt to EBITDA before exceptional items to 3.5:1. The reconciliation of opening to closing net debt is detailed in note 32. In order to maintain or adjust the capital structure, the Group may return capital to shareholders, repurchase its own shares, issue new shares or sell assets to reduce debt. Liquidity During the year ended 31 July 2017, the Group’s US$600 million revolving credit facility has been extended by one year and matures in December 2019. The Group also entered into a US$190 million bilateral revolving credit facility agreement maturing in December 2017. As at 31 July 2017, all of the Group’s revolving credit facilities were undrawn. The maturity proﬁle of the Group’s undrawn facilities is as follows: Less than one year Between one and two years Between two and three years Between three and four years Between four and ﬁve years Greater than ﬁve years Total 2017 £m 144 – 454 – 800 – 1,398 2016 £m – – 454 – – 705 1,159 Ferguson plc Annual Report and Accounts 2017 107 Notes to the consolidated ﬁnancial statements continued Year ended 31 July 2017 23 – Financial instruments and ﬁnancial risk management continued Foreign currency Net debt by currency was as follows: As at 31 July 2017 Pounds sterling US dollars Euro, Danish kroner and Swedish kronor Other currencies Total As at 31 July 2016 Pounds sterling US dollars Euro, Danish kroner and Swedish kronor Other currencies Total Interest rate swaps £m Finance lease obligations £m Cash, overdrafts and bank loans £m Currency (sold)/bought forward £m – 20 – – 20 (3) (4) – – (7) 62 (604) 6 (11) (547) (7) 7 – – – Interest rate swaps £m Finance lease obligations £m Cash, overdrafts and bank loans £m Currency bought/(sold) forward £m – 29 – – 29 (3) (6) – (22) (31) (60) (789) (102) 15 (936) 65 (151) 88 – 2 Total £m 52 (581) 6 (11) (534) Total £m 2 (917) (14) (7) (936) Currency bought/(sold) forward comprises short-term foreign exchange swaps which were designated and effective as hedges of overseas operations. Interest rates The interest rate proﬁle of the Group’s net debt including the effect of interest rate swaps is set out in the following tables: As at 31 July Pounds sterling US dollars Euro, Danish kroner and Swedish kronor Other currencies Total Floating £m 55 360 6 (11) 410 Fixed £m (3) (941) – – (944) 2017 Total £m 52 (581) 6 (11) (534) Floating £m 5 48 113 15 181 Fixed £m (3) (965) (127) (22) (1,117) 2016 Total £m 2 (917) (14) (7) (936) Fixed rate borrowings at 31 July 2017 carried a weighted average interest rate of 3.3 per cent ﬁxed for a weighted average duration of 6.5 years (31 July 2016: 3.2 per cent for 7.6 years). The Group had no ﬂoating rate borrowings at 31 July 2017 (31 July 2016: ﬂoating rate borrowings carried a weighted average interest rate of 0.9 per cent). 24 – Obligations under ﬁnance leases Due within one year Due in one to ﬁve years Due in over ﬁve years Less: future ﬁnance charges Present value of ﬁnance lease obligations Current Non-current Total obligations under ﬁnance leases Gross 2017 £m Gross 2016 £m Net 2017 £m Net 2016 £m 4 3 4 11 (4) 7 5 10 25 40 (9) 31 3 3 1 7 3 4 7 4 7 20 31 4 27 31 It is the Group’s policy to lease certain of its property, plant and equipment under ﬁnance leases. Finance lease obligations included above are secured against the assets concerned. 108 Ferguson plc Annual Report and Accounts 2017 Strategic report Governance Financials Other information 25 – Provisions At 31 July 2015 Utilised in the year Amortisation of discount Charge for the year Disposal of businesses and reclassiﬁed as held for sale Exchange rate adjustment At 31 July 2016 Utilised in the year Changes in discount rate Charge for the year Disposal of businesses and reclassiﬁed as held for sale Exchange rate adjustment At 31 July 2017 Provisions have been analysed between current and non-current as follows: At 31 July 2017 Current Non-current Total provisions At 31 July 2016 Current Non-current Total provisions Environmental and legal £m Wolseley Insurance £m Restructuring £m Other provisions £m 70 (7) 3 5 (7) 11 75 (11) (10) 7 (3) 1 59 41 (12) – 18 – 6 53 (13) – 14 – – 54 32 (12) – 8 (1) 1 28 (23) – 50 (10) – 45 63 (4) – 7 (11) 10 65 (4) – 5 (24) 1 43 Environmental and legal £m Wolseley Insurance £m Restructuring £m Other provisions £m 10 49 59 18 36 54 28 17 45 25 18 43 Environmental and legal £m Wolseley Insurance £m Restructuring £m Other provisions £m 23 52 75 14 39 53 16 12 28 35 30 65 Total £m 206 (35) 3 38 (19) 28 221 (51) (10) 76 (37) 2 201 Total £m 81 120 201 Total £m 88 133 221 The environmental and legal provision includes £52 million (2016: £61 million) for the estimated liability for asbestos litigation on a discounted basis using a long-term discount rate of 2.3 per cent (2016: 1.5 per cent). This amount has been actuarially determined as at 31 July 2017 based on advice from independent professional advisers. The Group has insurance that it believes is sufficient cover for the estimated liability and accordingly an equivalent insurance receivable has been recorded in other receivables. Based on current estimates, the amount of performing insurance cover signiﬁcantly exceeds the expected level of future claims and no material proﬁt or cash ﬂow impact is therefore expected to arise in the foreseeable future. Due to the nature of these provisions, the timing of any settlements is uncertain. Wolseley Insurance provisions represent an estimate, based on historical experience, of the ultimate cost of settling outstanding claims and claims incurred but not reported on certain risks retained by the Group (principally USA casualty and global property damage). Due to the nature of these provisions, the timing of any settlements is uncertain. Restructuring provisions include provisions for staff redundancy costs and future lease rentals on closed branches. In determining the provision for onerous leases, the cash ﬂows have been discounted on a pre-tax basis using appropriate government bond rates. The weighted average maturity of these obligations is approximately three years. Other provisions include warranty costs relating to businesses disposed of, rental commitments on vacant properties and dilapidations on leased properties. The weighted average maturity of these obligations is approximately three years. Ferguson plc Annual Report and Accounts 2017 109 Notes to the consolidated ﬁnancial statements continued Year ended 31 July 2017 26 – Retirement beneﬁt obligations (i) Long-term beneﬁt plans provided by the Group The Group has a deﬁned beneﬁt pension plan for certain of its UK employees. This plan was closed for future service accrual in December 2013 and during October 2016 the plan was closed for future non-inﬂationary salary accrual. The Group operates a number of smaller plans in other jurisdictions, providing pensions or other long-term beneﬁts such as long service or termination awards. More information about the plans operated by the Group is set out on page 126. During the year, the Group secured a buy-in insurance policy with Pension Insurance Corporation (PIC) for the UK pension plan. This policy covered all of the pensioner members of the plan and exactly matches the beneﬁts provided by the plan. This has led to the recognition of an asset in respect of this policy exactly equal to the insured liabilities at 31 July 2017. The difference between the premium paid and the asset recognised in respect of this policy has been recognised as an actuarial movement in other comprehensive income. (ii) Financial impact of plans As disclosed in the Group balance sheet Non-current asset Current liability Non-current liability Total liability Net liability Analysis of Group balance sheet net asset/(liability) Fair value of plan assets Present value of deﬁned beneﬁt obligation Net asset/(liability) Analysis of total (income)/expense recognised in the Group income statement Current service cost Administration costs Exceptional past service gain (note 5) Past service gain from settlements (Credited)/charged to operating costs (a) Charged to ﬁnance costs (note 6) (b) Total (income)/expense recognised in the Group income statement (a) Includes a charge of £2 million (2016: £nil) relating to discontinued operations. (b) Includes a charge of £1 million (2016: £1 million) relating to discontinued operations. UK £m 1,337 (1,334) 3 Non-UK £m 164 (188) (24) 2017 Total £m 1,501 (1,522) (21) UK £m 1,308 (1,336) (28) 2017 £m 3 (8) (16) (24) (21) Non-UK £m 250 (369) (119) 2017 £m 5 3 (11) (2) (5) 3 (2) 2016 £m – (9) (138) (147) (147) 2016 Total £m 1,558 (1,705) (147) 2016 £m 7 2 – (4) 5 – 5 Expected employer contributions to the deﬁned beneﬁt plans for the year ending 31 July 2018 are £14 million. The remeasurement of the deﬁned beneﬁt net liability is included in the Group statement of comprehensive income. Analysis of amount recognised in the Group statement of comprehensive income The return on plan assets (excluding amounts included in net interest expense) Actuarial gain arising from changes in demographic assumptions Actuarial loss arising from changes in ﬁnancial assumptions Actuarial gain arising from experience adjustments Tax Total amount recognised in the Group statement of comprehensive income 2017 £m 5 32 (78) 40 (1) (2) 2016 £m 40 17 (200) 23 25 (95) The cumulative amount of actuarial losses recognised in the Group statement of comprehensive income is £370 million (2016: £369 million). 110 Ferguson plc Annual Report and Accounts 2017 Strategic report Governance Financials Other information Employer’s contributions included special funding contributions of £55 million (2016: £nil). At 31 July 2017, the plan assets were invested in a diversiﬁed portfolio comprised of: 26 – Retirement beneﬁt obligations continued (ii) Financial impact of plans continued The fair value of plan assets is as follows: Fair value of plan assets At 1 August Interest income Employer’s contributions Participants’ contributions Beneﬁt payments Settlement payments Disposal of businesses Reclassiﬁcation as held for sale Remeasurement gain/(loss): Return on plan assets (excluding amounts included in net interest expense) Currency translation At 31 July Actual return on plan assets quoted quoted quoted Value at 31 July Equity type assets Government bonds Corporate bonds Real estate Cash Insurance policies Other Total market value of assets Present value of deﬁned beneﬁt obligation At 1 August Current service cost (including administrative costs) Past service gain Interest cost Beneﬁt payments Settlement and curtailment payments Participants’ contributions Remeasurement (gain)/loss: Actuarial gain arising from changes in demographic assumptions Actuarial loss/(gain) arising from changes in ﬁnancial assumptions Actuarial (gain)/loss arising from experience adjustments Disposal of businesses Reclassiﬁed as held for sale Currency translation At 31 July UK £m Non-UK £m 2017 Total £m 1,308 250 1,558 UK £m 1,262 Non-UK £m 215 45 2 – (45) – – – 44 – 1,308 89 UK £m 663 356 147 4 12 – 126 1,308 6 7 3 (15) – – – (4) 38 250 2 Non-UK £m 85 22 75 24 10 17 17 250 1,558 31 37 – (46) – – – 7 – 1,337 38 5 30 2 (14) (3) (102) (8) (2) 6 164 3 UK £m 406 255 31 40 35 505 65 1,337 Non-UK £m 53 36 56 – 8 – 11 164 UK £m Non-UK £m 36 67 2 (60) (3) (102) (8) 5 6 1,501 41 2017 Total £m 459 291 87 40 43 505 76 1,501 2017 Total £m UK £m 1,206 Non-UK £m 286 1,336 369 1,705 2 (11) 31 (46) – – (31) 91 (38) – – – 1,334 6 (2) 8 (14) (5) 2 (1) (13) (2) (120) (49) 9 188 8 (13) 39 (60) (5) 2 (32) 78 (40) (120) (49) 9 2 (2) 41 (45) – – (14) 174 (26) – – – 1,522 1,336 7 (2) 10 (15) – 3 (3) 26 3 – – 54 369 Ferguson plc Annual Report and Accounts 2017 111 2016 Total £m 1,477 51 9 3 (60) – – – 40 38 1,558 91 2016 Total £m 748 378 222 28 22 17 143 2016 Total £m 1,492 9 (4) 51 (60) – 3 (17) 200 (23) – – 54 1,705 Notes to the consolidated ﬁnancial statements continued Year ended 31 July 2017 26 – Retirement beneﬁt obligations continued (ii) Financial impact of plans continued Analysis of present value of deﬁned beneﬁt obligation Amounts arising from wholly unfunded plans Amounts arising from plans that are wholly or partly funded (iii) Valuation assumptions The ﬁnancial assumptions used to estimate deﬁned beneﬁt obligations are: Discount rate Inﬂation rate Increase to deferred beneﬁts during deferment Increases to pensions in payment Salary increases The life expectancy assumptions used to estimate deﬁned beneﬁt obligations are: Current pensioners (at age 65) – male Current pensioners (at age 65) – female Future pensioners (at age 65) – male Future pensioners (at age 65) – female 2017 £m 3 1,519 1,522 UK 2.4% 2.8% 1.7% 2.5% 1.7% UK Years 22 24 25 27 2016 £m 44 1,661 1,705 2016 Non-UK 2.2% 1.4% 1.8% 1.8% 1.8% 2016 Non-UK Years 22 24 24 26 UK 2.6% 3.2% 2.1% 2.9% 2.1% UK Years 22 24 24 26 2017 Non-UK 3.6% 2.5% n/a 2.0% 2.5% 2017 Non-UK Years 21 24 23 25 The weighted average duration of the deﬁned beneﬁt obligation is 20.4 years (2016: 21.2 years). (iv) Sensitivity analysis The Group considers that the most sensitive assumptions are the discount rate, inﬂation and life expectancy. The table below shows the impact of the sensitivities on the Group’s deﬁned beneﬁt plan net liability. Discount rate Inﬂation Life expectancy Change +0.25% (0.25)% +0.25% (0.25)% +1 year UK £m 69 (75) (65) 63 52 2017 Non-UK £m 4 (4) – – 6 Change +0.25% (0.25)% +0.25% (0.25)% +1 year 2016 Non-UK £m 13 (14) (2) 2 9 UK £m 68 (71) (61) 52 57 112 Ferguson plc Annual Report and Accounts 2017 Strategic report Governance Financials Other information 27 – Share capital (i) Ordinary shares in issue Number of ordinary 10 53⁄66 pence shares in the Company (million) Nominal value of ordinary 10 53⁄66 pence shares in the Company (£ million) Authorised numbers Allotted and issued numbers 2017 463 50 2016 463 50 2017 267 29 2016 267 29 All the allotted and issued shares, including those held by Employee Beneﬁt Trusts and in Treasury, are fully paid or credited as fully paid. A summary of the movements in the year is detailed in the following table: Number of ordinary shares 10 53⁄66 pence ordinary shares in the Company in issue at 1 August New shares issued to settle share options Number of 10 53⁄66 pence ordinary shares in the Company in issue at 31 July 2017 2016 266,636,106 266,592,678 – 43,428 266,636,106 266,636,106 Consideration received, net of transaction costs, in respect of shares issued to participants in the long term incentive plans and all-employee sharesave plans amounted to £nil (2016: £nil). (ii) Treasury shares The shares purchased under the Group’s buyback programme have been retained in issue as Treasury shares and represent a deduction from equity attributable to owners of the parent. A summary of the movements in Treasury shares in the year is detailed in the following table: Treasury shares As at 1 August Treasury shares purchased Disposal of Treasury shares to settle share options As at 31 July Number of shares 14,259,276 – (876,696) 2017 Cost £m 516 – (31) Number of shares 7,105,842 7,862,836 (709,402) 13,382,580 485 14,259,276 2016 Cost £m 240 300 (24) 516 Consideration received in respect of shares transferred to participants in the long term incentive plans and all-employee sharesave plans amounted to £21 million (2016: £14 million). After the reporting date the Directors proposed a further share buyback programme of up to £500 million. (iii) Own shares Two Employee Beneﬁt Trusts have been established in connection with the Company’s discretionary share option plans and long term incentive plans. A summary of the movements in own shares held in Employee Beneﬁt Trusts is detailed in the following table below: Own shares As at 1 August New shares purchased Exercise of share options As at 31 July Number of shares 1,762,657 142,000 (469,502) 1,435,155 2017 Cost £m 57 6 (15) 48 Number of shares 2,019,377 368,441 (625,161) 1,762,657 2016 Cost £m 63 14 (20) 57 Consideration received in respect of shares transferred to participants in the discretionary share option plans and long term incentive plans amounted to £nil (2016: £1 million). At 31 July 2017, the shares held in the trusts had a market value of £65 million (2016: £74 million). Dividends due on shares held by the Employee Beneﬁt Trusts are waived in accordance with the provisions of the trust deeds. Ferguson plc Annual Report and Accounts 2017 113 Notes to the consolidated ﬁnancial statements continued Year ended 31 July 2017 28 – Share-based payments Analysis of charge to income statement Executive share option plans Ordinary share plans All-employee sharesave plans Long term incentive plans 2017 £m – 15 2 3 20 Restated 2016 £m 2 12 1 2 17 The total share-based payments charge including discontinued operations was £22 million (2016: £20 million). The number and weighted average exercise price of outstanding and exercisable share options and share awards are detailed below: Outstanding at 1 August Granted Options exercised or shares vested Surrendered or expired Outstanding at 31 July Exercisable at 31 July Weighted average fair value per share/option granted during the year (£) 2017 2016 Number of shares/options 000’s Weighted average exercise price £ Number of shares/options 000’s Weighted average exercise price £ 3,728 1,282 (1,350) (401) 3,259 353 13.21 8.60 15.61 9.99 10.80 18.80 4,423 1,022 (1,438) (279) 3,728 696 2017 32.95 13.91 9.80 11.89 18.65 13.21 18.35 2016 24.28 At 31 July 2017 and 31 July 2016, all of the shares and options outstanding had an exercise price which was below the market price. The market price at 31 July 2017 was £45.27 (2016: £42.09) and the average share price in the year to 31 July 2017 was £47.28 (2016: £38.30). For executive share option plans and all-employee sharesave plans, the range of exercise prices for shares and options outstanding at 31 July 2017 was £12.69 to £42.96 (2016: £7.01 to £33.62). For the ordinary share plan and long term incentive plans, all share options outstanding at 31 July 2017 had an exercise price of £nil (2016: £nil). For shares and options outstanding at 31 July 2017, the weighted average remaining contractual life was three years (2016: four years). The fair value at the date of grant of options awarded during the year has been estimated using the binomial methodology for all plans except the portion of the grants awarded under the long term incentive plan that are subject to a relative Total Shareholder Return (“TSR”) performance condition, for which a Monte Carlo simulation was used. The fair value of shares granted under the ordinary share plan was calculated as the market price of the shares at the date of grant reduced by the present value of dividends expected to be paid over the vesting period. The principal assumptions required by these methodologies were: Risk-free interest rate Expected dividend yield Expected volatility Expected life Ordinary share plans All-employee sharesave plans Long term incentive plans 2017 0.3% 2.7% 22% 2016 0.7% 3.0% 23% 2017 0.1% 2.4% 22% 2016 0.6% 2.7% 25% 2017 0.3% 0.0% 22% 2016 0.7% 2.2% 23% 1–3 years 3 years 1–6 years 1–6 years 3 years 3 years There were no executive share options granted in the period. Expected volatility has been estimated on the basis of historical volatility over the expected term, excluding the effect of extraordinary volatility due to the Group’s capital reorganisation and rights issue in 2009. Expected life has been estimated on the basis of historical data on the exercise pattern. Additional information on share-based payment plans operated by the Group is provided on page 127. 114 Ferguson plc Annual Report and Accounts 2017 Strategic report Governance Financials Other information 29 – Reconciliation of proﬁt to cash generated from operations Proﬁt for the year is reconciled to cash generated from continuing and discontinued operations as follows: Proﬁt for the year Net ﬁnance costs Share of result of associate Tax expense Gain on disposal and closure of businesses and revaluation of assets held for sale Depreciation and impairment of property, plant and equipment Amortisation and impairment of non-acquired intangible assets Amortisation and impairment of goodwill and acquired intangible assets Loss/(proﬁt) on disposal of property, plant and equipment and assets held for sale Increase in inventories Increase in trade and other receivables Increase in trade and other payables (Decrease)/increase in provisions and other liabilities Share-based payments Cash generated from operations Trading proﬁt is reconciled to cash generated from continuing and discontinued operations as follows: Trading proﬁt Exceptional items in operating proﬁt Gain on disposal and closure of businesses and revaluation of assets held for sale Operating (loss)/proﬁt from discontinued operations before the amortisation and impairment of goodwill and acquired intangible assets (note 8) Depreciation and impairment of property, plant and equipment Amortisation and impairment of non-acquired intangible assets Loss/(proﬁt) on disposal of property, plant and equipment and assets held for sale Increase in inventories Increase in trade and other receivables Increase in trade and other payables (Decrease)/increase in provisions and other liabilities Share-based payments Cash generated from operations 2017 £m 783 39 1 290 (256) 143 24 170 9 (97) (211) 231 (33) 22 2016 £m 650 34 – 236 (147) 125 15 147 (18) (36) (21) 13 1 20 1,115 1,019 2017 £m 1,059 229 (256) (5) 143 24 9 (97) (211) 231 (33) 22 Restated 2016 £m 857 (4) (147) 214 125 15 (18) (36) (21) 13 1 20 1,115 1,019 Ferguson plc Annual Report and Accounts 2017 115 Notes to the consolidated ﬁnancial statements continued Year ended 31 July 2017 30 – Acquisitions The Group acquired the following 11 businesses in the year ended 31 July 2017. All these businesses are engaged in the distribution of plumbing and heating products and building materials. All transactions have been accounted for by the purchase method of accounting. The Group also acquired a share of Walter Meier AG (see note 15), which has been accounted for as an associate. Name Clawfoot Supply LLC (t/a Signature Hardware) Westﬁeld Lighting Co., Inc. Mölnlycke Trä AB Berners Tunga Fordon Fastighet AB Ramapo Wholesalers Inc. The Plumbing Source Co., Inc. Underground Pipe & Valve, Incorporated Matera Paper Company, Inc. P.V. Sullivan Supply Co., Inc. Custom Lighting Incorporated and Custom Hardware and Accessories, Inc. Lighting Unlimited, LLC Date of acquisition Country of incorporation Shares/asset deal % acquired August 2016 August 2016 October 2016 October 2016 October 2016 October 2016 November 2016 December 2016 February 2017 February 2017 February 2017 USA USA Sweden Sweden USA USA USA USA USA USA USA Shares Asset Shares Shares Asset Shares Asset Shares Asset Asset Asset 100 100 100 100 100 100 100 100 100 100 100 The assets and liabilities acquired and the consideration for all acquisitions in the period are as follows: Book values acquired £m Fair value adjustments £m Provisional fair values acquired £m Intangible assets – Customer relationships – Trade names and brands – Other Property, plant and equipment Inventories Receivables Cash, cash equivalents and bank overdrafts Payables Deferred tax Total Goodwill arising Consideration Satisﬁed by: Cash Deferred consideration Total consideration – – – 25 47 23 8 (14) – 89 25 46 10 1 (9) – – – (9) 64 25 46 10 26 38 23 8 (14) (9) 153 139 292 254 38 292 The fair value adjustments are provisional ﬁgures, being the best estimates currently available. Further adjustments may be necessary when additional information is available for some of the judgemental areas. The goodwill arising on these acquisitions is attributable to the anticipated proﬁtability of the new markets and product ranges to which the Group has gained access and additional proﬁtability and operating efficiencies available in respect of existing markets. The acquisitions contributed £214 million to revenue, £29 million to trading proﬁt and £12 million to the Group’s operating proﬁt for the period between the date of acquisition and the balance sheet date. It is not practicable to disclose proﬁt before and after tax, as the Group manages its borrowings as a portfolio and cannot attribute an effective borrowing rate to an individual acquisition. If each acquisition had been completed on the ﬁrst day of the ﬁnancial year, Group revenue would have been £15,277 million and Group trading proﬁt would have been £1,062 million. It is not practicable to disclose proﬁt before tax or proﬁt attributable to equity shareholders, as stated above. It is also not practicable to disclose operating proﬁt as the Group cannot estimate the amount of intangible assets that would have been acquired at a date other than the acquisition date. 116 Ferguson plc Annual Report and Accounts 2017 Strategic report Governance Financials Other information 30 – Acquisitions continued The net outﬂow of cash in respect of the purchase of businesses is as follows: Purchase consideration Deferred and contingent consideration in respect of prior year acquisitions Cash consideration Cash acquired Net cash outﬂow in respect of the purchase of businesses 31 – Disposals In the year ended 31 July 2017, the Group disposed of the following businesses: Name HR Sandvold AS Tobler Haustechnik AG Endries International Inc. Endries International Canada Inc. Endries International de Mexico SA de C.V. Wolseley Liegenschaftsverwaltung GmbH Country Norway Switzerland USA Canada Mexico Austria The Group recognised a total gain on current year disposals of £266 million. Consideration received Net assets disposed of Disposal costs Recycling of deferred foreign exchange gains Gain on disposal Details of assets and liabilities at the date of disposal are provided in the following table: Goodwill and intangible assets Property, plant and equipment Inventories Receivables Payables Provisions Pensions Current and deferred tax Net debt Total net assets disposed of The net inﬂow/(outﬂow) of cash in respect of the disposal of businesses is as follows: Cash consideration received for current year disposals (net of cash disposed of) Cash paid in respect of prior year disposals Disposal costs paid Net cash inﬂow/(outﬂow) 2017 £m 254 10 264 (8) 256 2016 £m 94 21 115 (2) 113 Date of disposal Shares/asset deal March 2017 April 2017 June 2017 June 2017 June 2017 June 2017 Continuing operations £m Discontinued operations £m 408 (166) (25) 49 266 – – – – – Continuing operations £m Discontinued operations £m 68 40 78 71 (63) (2) (18) (4) (4) 166 – – 1 – (1) – – – – – Continuing operations £m Discontinued operations £m 257 – (25) 232 – (1) – (1) Shares Shares Shares Shares Shares Shares Group 2017 £m 408 (166) (25) 49 266 Group 2017 £m 68 40 79 71 (64) (2) (18) (4) (4) 166 Group 2017 £m 257 (1) (25) 231 Ferguson plc Annual Report and Accounts 2017 117 Notes to the consolidated ﬁnancial statements continued Year ended 31 July 2017 32 – Reconciliation of opening to closing net debt For the year ended 31 July 2017 Cash and cash equivalents Bank overdrafts Derivative ﬁnancial instruments Bank and other loans Obligations under ﬁnance leases Net debt For the year ended 31 July 2016 Cash and cash equivalents Bank overdrafts Derivative ﬁnancial instruments Bank and other loans Obligations under ﬁnance leases Net debt At 1 August 2016 £m Cash ﬂows £m Acquisitions and new ﬁnance leases £m Disposal of businesses £m Fair value and other adjustments £m Held for sale movements £m Exchange movement £m 940 (692) 248 31 (1,184) (31) (936) 228 (9) 134 5 358 8 – – (3) 5 (25) – 7 22 4 – – 8 – 8 (33) – 79 – 46 At 1 August 2015 £m Cash ﬂows £m Acquisitions and new ﬁnance leases £m Disposal of businesses £m Fair value and other adjustments £m Held for sale movements £m Exchange movement £m 1,105 (848) 257 33 (1,066) (29) (805) (28) (10) 16 4 (18) 2 – – (2) – – – 27 – 27 – 1 9 – 10 (1) – – – (1) (15) (2) (2) – (19) (534) At 31 July 2017 £m 1,911 (1,500) 411 20 (958) (7) At 31 July 2016 £m 940 (692) 248 31 18 7 (170) (1,184) (4) (149) (31) (936) 33 – Related party transactions There are no related party transactions requiring disclosure under IAS 24 “Related Party Disclosures” other than the compensation of key management personnel which is set out in note 11. 34 – Operating lease commitments Future minimum lease payments under non-cancellable operating leases for the following periods are: Within one year Later than one year and less than ﬁve years After ﬁve years Total operating lease commitments 2017 £m 260 461 133 854 2016 £m 253 457 143 853 Operating lease payments mainly represent rents payable for properties. Some of the Group’s operating lease arrangements have renewal options and rental escalation clauses. No arrangements have been entered into for contingent rental payments. The commitments shown above include commitments for onerous leases which have already been provided for. At 31 July 2017, provisions include an amount of £27 million (2016: £25 million) in respect of minimum lease payments for such onerous leases net of sublease income expected to be received. The total minimum sublease income expected to be received under non-cancellable subleases at 31 July 2017 is £7 million (2016: £8 million). The commitments above include £91 million operating lease commitments (2016: £102 million) for discontinued operations. 118 Ferguson plc Annual Report and Accounts 2017 Strategic report Governance Financials Other information 35 – Contingent liabilities Group companies are, from time to time, subject to certain claims and litigation arising in the normal course of business in relation to, among other things, the products that they supply, contractual and commercial disputes and disputes with employees. Provision is made if, on the basis of current information and professional advice, liabilities are considered likely to arise. In the case of unfavourable outcomes, the Group may beneﬁt from applicable insurance protection. Warranties and indemnities in relation to business disposals Over the past few years, the Group has disposed of a number of non-core businesses and various Group companies have provided certain standard warranties and indemnities to acquirers and other third parties. Provision is made where the Group considers that a liability is likely to crystallise, though it is possible that claims in respect of which no provision has been made could crystallise in the future. Group companies have also made contractual commitments for certain property and other obligations which could be called upon in an event of default. As at the date of this report, there are no signiﬁcant outstanding claims in relation to business disposals. Environmental liabilities The operations of certain Group companies are subject to speciﬁc environmental regulations. From time to time, the Group conducts preliminary investigations through third parties to assess potential risks including potential soil or groundwater contamination of sites. Where an obligation to remediate contamination arises then this is provided for, though future liabilities could arise from sites for which no provision is made. Outcome of claims and litigation The outcome of claims and litigation to which Group companies are party cannot readily be foreseen as, in some cases, the facts are unclear, further time is needed to assess properly the merits of the case, or they are part of continuing legal proceedings. However, based on information currently available, the Directors consider that the cost to the Group of an unfavourable outcome arising from such litigation is not expected to have a material adverse effect on the ﬁnancial position of the Group. 36 – Post-balance sheet events Since the year-end, the Group has acquired ﬁve businesses, two in the USA and three in Canada and Central Europe with a combined annual revenue of £109 million. As at the date of this report, the accounting for these transactions has not been ﬁnalised. On 31 August 2017, the Group disposed of Silvan, its DIY business in Denmark. 37 – Additional information (i) Group accounting policies A summary of the principal accounting policies applied by the Group in the preparation of the consolidated ﬁnancial statements is set out below. The accounting policies have been applied consistently throughout the current and preceding year. Consolidation The consolidated ﬁnancial information includes the results of the parent company and entities controlled by the Company (its subsidiary undertakings and controlling interests) and its share of the results of its associate drawn up to 31 July 2017. The trading results of business operations are included in proﬁt from continuing operations from the date of acquisition or up to the date of sale. Intra-group transactions and balances and any unrealised gains and losses arising from intra-group transactions are eliminated on consolidation, with the exception of gains or losses required under relevant IFRS accounting standards. Discontinued operations When the Group has disposed of or intends to dispose of a business component that represents a separate major line of business or geographical area of operations, it classiﬁes such operations as discontinued. The post-tax proﬁt or loss of the discontinued operations is shown as a single line on the face of the income statement, separate from the other results of the Group. Foreign currencies Items included in the ﬁnancial statements of each of the Group’s subsidiary undertakings are measured using the currency of the primary economic environment in which the subsidiary undertaking operates (the “functional currency”). The consolidated ﬁnancial statements are presented in sterling, which is the presentational currency of the Group and the functional currency of the parent company. The trading results of overseas subsidiary undertakings are translated into sterling using the average rates of exchange ruling during the relevant ﬁnancial period. The balance sheets of overseas subsidiary undertakings are translated into sterling at the rates of exchange ruling at the period end. Exchange differences arising between the translation into sterling of the net assets of these subsidiary undertakings are recognised in the currency translation reserve (as are exchange differences on foreign currency borrowings to the extent that they are used to ﬁnance or provide a hedge against foreign currency net assets). Changes in the fair value of derivative ﬁnancial instruments, entered into to hedge foreign currency net assets and that satisfy the hedging conditions of IAS 39, are recognised in the currency translation reserve (see the separate accounting policy on derivative ﬁnancial instruments). In the event that a subsidiary undertaking which has a non-sterling functional currency is disposed of, the gain or loss on disposal recognised in the income statement is determined after taking into account the cumulative currency translation differences that are attributable to the subsidiary undertaking concerned. Foreign currency transactions entered into during the year are translated into sterling at the rates of exchange ruling on the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies are retranslated at the rate of exchange ruling at the balance sheet date. All currency translation differences are taken to the income statement with the exception of differences on foreign currency net borrowings to the extent that they are used to ﬁnance or provide a hedge against foreign currency net assets as detailed above. Business combinations The cost of an acquisition is measured as the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange. Identiﬁable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date, irrespective of the extent of any non- controlling interest. Acquisition-related costs are expensed as incurred. The excess of the cost of acquisition over the fair value of the Group’s share of the identiﬁable net assets acquired is recorded as goodwill. If the cost of acquisition is less than the fair value of the Group’s share of the net assets of the subsidiary acquired, the difference is recognised directly in the income statement. Non-controlling interests Non-controlling interests in subsidiaries are identiﬁed separately from the equity attributable to shareholders of the Company. The interests of non- controlling shareholders are initially measured at fair value. Subsequent to acquisition, the carrying amount of non-controlling interests is the amount of those interests at initial recognition plus the non-controlling interests’ share of subsequent changes in equity. Total comprehensive income is attributed to non-controlling interests even if this results in the non-controlling interests showing a deﬁcit balance. Ferguson plc Annual Report and Accounts 2017 119 Notes to the consolidated ﬁnancial statements continued Year ended 31 July 2017 37 – Additional information continued (i) Group accounting policies continued Interests in associates Investments in companies where signiﬁcant inﬂuence is exercised are accounted for as interests in associates using the equity method of accounting from the date the investee becomes an associate. The investment is initially recognised at cost and adjusted thereafter for changes in the Group’s share in the net assets of the investee. The Group’s share of proﬁt or loss after tax is recognised in the Group income statement and share of other comprehensive income or expense is recognised in the Group statement of other comprehensive income. On acquisition of the investment in an associate, any excess of the cost of the investment over the Group’s share of the net assets of the investee is recognised as goodwill, which is included within the carrying amount of the investment. The requirements of IAS 36 are applied to determine whether it is necessary to recognise any impairment loss with respect to the Group’s investment in an associate. Revenue Revenue is the amount receivable for the provision of goods and services falling within the Group’s ordinary activities, excluding intra-group sales, estimated and actual sales returns, trade and early settlement discounts, value added tax and similar sales taxes. The Group acts as principal for direct sales which are delivered directly to the customer by the supplier. Revenue from the provision of goods is recognised when the risks and rewards of ownership of goods have been transferred to the customer. The risks and rewards of ownership of goods are deemed to have been transferred when the goods are shipped to, or picked up by, the customer. Revenue from services is recognised when the service provided to the customer has been completed. Customer loyalty credits are accounted for as a separate component of the sales transaction in which they are granted. A portion of the fair value of the consideration received is allocated to the loyalty credits and recognised in the period that loyalty credits are redeemed. Revenue from the provision of goods and services is only recognised when the amounts to be recognised are ﬁxed or determinable and collectability is reasonably assured. Cost of sales Cost of sales includes purchased goods, the cost of bringing inventory to its present location and condition and labour and overheads attributable to assembly and construction services. Supplier rebates In line with industry practice, the Group has agreements (“Supplier Rebates”) with a number of its suppliers whereby volume-based rebates, marketing support and other discounts are received in connection with the purchase of goods for resale from those suppliers. Rebates relating to the purchase of goods for resale are accrued as earned and are recorded initially as a deduction in inventory with a subsequent reduction in cost of sales when the related product is sold. Volume-based rebates The majority of volume-based rebates are determined by reference to guaranteed rates of rebate. These are calculated through a mechanical process with minimal judgement required to determine the amount recorded in the income statement. 120 Ferguson plc Annual Report and Accounts 2017 A small proportion of volume-based rebates are subject to stepped targets where the rebate percentage increases as volumes purchased reach agreed targets within a set period of time. The majority of rebate agreements apply to purchases in a calendar year and therefore, for stepped rebates, judgement is required to estimate the rebate amount recorded in the income statement at the end of the period. The Group assesses the probability that targeted volumes will be achieved in the year based on forecasts which are informed by historical trading patterns, current performance and trends. This judgement is exercised consistently with historically insigniﬁcant true ups at the end of the period. An amount due in respect of Supplier Rebates is not recognised within the income statement until all the relevant performance criteria, where applicable, have been met and the goods have been sold to a third party. Marketing support Marketing support, which represents a smaller element of the Group’s overall Supplier Rebates, is recognised in the income statement when all performance conditions have been fulﬁlled. Supplier Rebates receivable Where Supplier Rebates are netted off the amounts owing to that supplier, any outstanding amount at the balance sheet date is included within trade payables. Where the Supplier Rebates are not offset against amounts owing to a supplier, the outstanding amount is included within prepayments. The carrying value of inventory is reduced by the relevant amount where the inventory has not been sold by the balance sheet date. Intangible assets Goodwill Goodwill represents the excess of the cost of an acquisition over the fair value of the Group’s share of the net identiﬁable assets of the acquired subsidiary undertaking at the date of acquisition. Goodwill on acquisitions of subsidiary undertakings is included within intangible assets. Goodwill is allocated to cash generating units or aggregations of cash generating units (together “CGUs”) where synergy beneﬁts are expected. CGUs are independent sources of income streams and represent the lowest level within the Group at which the associated goodwill is monitored for management purposes. The Group considers that a CGU is a business unit because independent cash ﬂows cannot be identiﬁed below this level. Goodwill is not amortised but is tested annually for impairment and carried at cost less accumulated impairment losses. For goodwill impairment testing purposes, no CGU is larger than the reporting segments determined in accordance with IFRS 8 “Operating Segments”. The recoverable amount of goodwill and acquired intangible assets is assessed on the basis of the value in use estimate for CGUs to which they are attributed. Where carrying value exceeds the recoverable amount a provision for the impairment is established with a charge included in the income statement. Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold. Other intangible assets An intangible asset, which is an identiﬁable non-monetary asset without physical substance, is recognised to the extent that it is probable that the expected future economic beneﬁts attributable to the asset will ﬂow to the Group and that its cost can be measured reliably. The asset is deemed to be identiﬁable when it is separable or when it arises from contractual or other legal rights. Intangible assets, primarily brands, trade names and customer relationships, acquired as part of a business combination are capitalised separately from goodwill and are carried at cost less accumulated amortisation and accumulated impairment losses. Amortisation is calculated using the reducing balance method for customer relationships and the straight-line method for other intangible assets. Strategic report Governance Financials Other information 37 – Additional information continued (i) Group accounting policies continued The cost of the intangible assets is amortised and charged to operating costs in the income statement over their estimated useful lives as follows: Customer relationships Trade names and brands Other 4–25 years 1–15 years 1–4 years Computer software that is not integral to an item of property, plant and equipment is recognised separately as an intangible asset and is carried at cost less accumulated amortisation and accumulated impairment losses. Costs include software licences and external and internal costs directly attributable to the development, design and implementation of the computer software. Costs in respect of training and data conversion are expensed as incurred. Amortisation is calculated using the straight-line method so as to charge the cost of the computer software to operating costs in the income statement over its estimated useful life of between three and ﬁve years. Property, plant and equipment (“PPE”) PPE is carried at cost less accumulated depreciation and accumulated impairment losses, except for land and assets in the course of construction, which are not depreciated and are carried at cost less accumulated impairment losses. Cost includes expenditure that is directly attributable to the acquisition of the items. In addition, subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic beneﬁts associated with the item will ﬂow to the Group and the cost of the item can be measured reliably. All other repairs and maintenance costs are charged to the income statement during the ﬁnancial period in which they are incurred. Assets are depreciated to their estimated residual value using the straight-line method over their useful lives as follows: Freehold buildings and long leaseholds 20–50 years Operating leasehold improvements over the period of the lease Plant and machinery Computer hardware Fixtures and ﬁttings Motor vehicles 7–10 years 3–5 years 5–7 years 4 years The residual values and useful lives of PPE are reviewed and adjusted if appropriate at each balance sheet date. Borrowing costs directly attributable to the long-term construction or production of an asset are capitalised as part of the cost of the asset. Leased assets Assets held under ﬁnance leases, which are leases where substantially all the risks and rewards of ownership of the asset have transferred to the Group, are capitalised in the balance sheet and depreciated over the shorter of the lease term or their useful lives. The asset is recorded at the lower of its fair value and the present value of the minimum lease payments at the inception of the lease. The capital elements of future obligations under ﬁnance leases are included in liabilities in the balance sheet and analysed between current and non-current amounts. The interest elements of future obligations under ﬁnance leases are charged to the income statement over the periods of the leases and represent a constant proportion of the balance of capital repayments outstanding in accordance with the effective interest rate method. Leases where the lessor retains substantially all the risks and rewards of ownership are classiﬁed as operating leases. The cost of operating leases (net of any incentives received from the lessor) is charged to the income statement on a straight-line basis over the period of the leases. Assets and disposal groups held for sale Assets are classiﬁed as held for sale if their carrying amount will be recovered by sale rather than by continuing use in the business. Where a group of assets and their directly associated liabilities are to be disposed of in a single transaction, such disposal groups are also classiﬁed as held for sale. For this to be the case, the asset or disposal group must be available for immediate sale in its present condition and management must be committed to and have initiated a plan to sell the asset or disposal group which, when initiated, was expected to result in a completed sale within 12 months. Assets that are classiﬁed as held for sale are not depreciated. Assets or disposal groups that are classiﬁed as held for sale are measured at the lower of their carrying amount and fair value less costs to sell. Inventories Inventories, which comprise goods purchased for resale, are stated at the lower of cost and net realisable value. Cost is determined using the ﬁrst-in, ﬁrst-out (“FIFO”) method or the average cost method as appropriate to the nature of the transactions in those items of inventory. The cost of goods purchased for resale includes import and custom duties, transport and handling costs, freight and packing costs and other attributable costs less trade discounts, rebates and other subsidies. It excludes borrowing costs. Net realisable value is the estimated selling price in the ordinary course of business, less applicable variable selling expenses. Provisions are made against slow-moving, obsolete and damaged inventories for which the net realisable value is estimated to be less than the cost. The risk of obsolescence of slow-moving inventory is assessed by comparing the level of inventory held to estimated future sales on the basis of historical experience. Trade receivables Trade receivables are recognised initially at fair value and measured subsequently at amortised cost using the effective interest method, less provision for impairment. A provision for impairment of trade receivables is established when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of the receivables. The amount of the loss is recognised in the income statement. Trade receivables are written off against the provision when recoverability is assessed as being remote. Subsequent recoveries of amounts previously written off are credited to the income statement. Provisions Provisions for self-insured risks, legal claims, environmental restoration and onerous leases are recognised when the Group has a present legal or constructive obligation as a result of past events, it is more likely than not that an outﬂow of resources will be required to settle the obligation and the amount can be reliably estimated. Such provisions are measured at the present value of management’s best estimate of the expenditure required to settle the present obligation at the balance sheet date. The discount rate used to determine the present value reﬂects current market assessments of the time value of money. Provisions are not recognised for future operating losses. Retirement beneﬁt obligations Contributions to deﬁned contribution pension plans and other post- retirement beneﬁts are charged to the income statement as incurred. For deﬁned beneﬁt pension plans and other retirement beneﬁts, the cost of providing beneﬁts is determined annually using the Projected Unit Credit Method by independent qualiﬁed actuaries. The current service cost of deﬁned beneﬁt plans is recorded within operating proﬁt. Past service costs are recognised immediately in income. Ferguson plc Annual Report and Accounts 2017 121 Notes to the consolidated ﬁnancial statements continued Year ended 31 July 2017 37 – Additional information continued (i) Group accounting policies continued The net interest amount is calculated by applying the discount rate used to measure the deﬁned beneﬁt net asset or liability at the beginning of the period. The pension plan net interest is presented as ﬁnance income or expense. Actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions are charged or credited to equity in other comprehensive income in the period in which they arise. The liability/asset recognised in the balance sheet in respect of deﬁned beneﬁt pension plans is the fair value of plan assets less the present value of the deﬁned beneﬁt obligation at the end of the reporting period. Tax Current tax represents the expected tax payable (or recoverable) on the taxable income (or losses) for the year using tax rates enacted or substantively enacted at the balance sheet date and taking into account any adjustments arising from prior years. Deferred tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated ﬁnancial statements. Deferred tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction, other than a business combination, that at the time of the transaction affects neither accounting nor taxable proﬁt or loss. Deferred tax is determined using tax rates (and laws) that have been enacted or substantively enacted by the balance sheet date and are expected to apply when the related deferred tax asset is realised or the deferred tax liability is settled. Deferred tax assets are recognised to the extent that it is probable that future taxable proﬁt will be available against which the temporary differences can be utilised. Deferred tax is provided on temporary differences arising on investments in subsidiaries except where the timing of the reversal of the temporary difference is controlled by the Group and it is probable that the temporary difference will not reverse in the foreseeable future. Tax provisions The Group is subject to income taxes in numerous jurisdictions. Judgement is sometimes required in determining the worldwide provision for income taxes. There may be transactions and calculations for which the ultimate tax determination is uncertain and may be challenged by the tax authorities. The Group recognises liabilities for anticipated or actual tax audit issues based on estimates of whether additional taxes will be due. Where an outﬂow of funds to a tax authority is considered probable and the Group can make a reliable estimate of the outcome of the dispute, management calculates the provision using the single best estimate of likely outcome approach. In assessing its uncertain tax provisions, management takes into account the speciﬁc facts of each dispute, the likelihood of settlement and the advice from its in-house tax specialists and professional advisers. Where the ultimate liability in a dispute varies from the amounts provided, such differences could impact the current and deferred income tax assets and liabilities in the period in which the dispute is concluded. The Group believes that it has made adequate provision for the liabilities likely to arise from open audits and assessments. At 31 July 2017, the Group has recognised provisions of £162 million in respect of its uncertain tax positions (2016: £166 million). The total provision has decreased by £4 million in the year due to the settlement of various open tax issues in the UK. The remaining open signiﬁcant tax issues relate predominantly to cross border transfer pricing risks. Given the uncertainty regarding the timing of the resolution of these matters, it is difficult for the Group to estimate whether there will be a material change in its estimate of uncertain tax provisions within the next 12 months. 122 Ferguson plc Annual Report and Accounts 2017 Share capital Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction from the proceeds, net of tax. Where any Group company purchases the Company’s equity share capital (Treasury shares), the consideration paid, including any directly attributable incremental costs (net of tax), is deducted from equity attributable to the Company’s equity holders until the shares are cancelled, reissued or disposed of. Where such shares are subsequently sold or reissued, any consideration received, net of any directly attributable incremental transaction costs and the related tax effects, is included in equity attributable to the Company’s equity holders. Share-based payments Share-based incentives are provided to employees under the Group’s executive share option plan, long term incentive plan, all-employee sharesave plan, ordinary share plan, performance ordinary share plan and revised ordinary share plan. The Group recognises a compensation cost in respect of these plans that is based on the fair value of the awards, measured using Binomial and Monte Carlo valuation methodologies. For equity-settled plans, the fair value is determined at the date of grant (including the impact of any non-vesting conditions such as a requirement for employees to save) and is not subsequently remeasured unless the conditions on which the award were granted are modiﬁed. For cash-settled plans, the fair value is determined at the date of grant and is remeasured at each balance sheet date until the liability is settled. Generally, the compensation cost is recognised on a straight-line basis over the vesting period. Adjustments are made to reﬂect expected and actual forfeitures during the vesting period due to the failure to satisfy service conditions or non-market performance conditions. Dividends payable Dividends on ordinary shares are recognised in the Group’s ﬁnancial statements in the period in which the dividends are approved by the shareholders of the Company or paid. Cash and cash equivalents Cash and cash equivalents includes cash in hand, deposits held at call with banks, other short-term highly liquid investments with original maturities of three months or less and bank overdrafts. Bank overdrafts are shown within borrowings in current liabilities on the balance sheet to the extent that there is no legal right of offset and no practice of net settlement with cash balances. Cash which is not freely available to the Group is disclosed as restricted cash. Derivative ﬁnancial instruments Derivative ﬁnancial instruments, in particular interest rate swaps and foreign exchange swaps, are used to manage the ﬁnancial risks arising from the business activities of the Group and the ﬁnancing of those activities. There is no trading activity in derivative ﬁnancial instruments. At the inception of a hedging transaction involving the use of derivative ﬁnancial instruments, the Group documents the relationship between the hedged item and the hedging instrument together with its risk management objective and the strategy underlying the proposed transaction. The Group also documents its assessment, both at the inception of the hedging relationship and subsequently on an ongoing basis, of the effectiveness of the hedge in offsetting movements in the fair values or cash ﬂows of the hedged items. Derivative ﬁnancial instruments are recognised as assets and liabilities measured at their fair values at the balance sheet date. Where derivative ﬁnancial instruments do not fulﬁl the criteria for hedge accounting contained in IAS 39, changes in their fair values are recognised in the income statement. When hedge accounting is used, the relevant hedging relationships are classiﬁed as fair value hedges, cash ﬂow hedges or net investment hedges. Strategic report Governance Financials Other information 37 – Additional information continued (ii) Additional information about ﬁnancial instruments Where the hedging relationship is classiﬁed as a fair value hedge, the carrying amount of the hedged asset or liability is adjusted by the increase or decrease in its fair value attributable to the hedged risk and the resulting gain or loss is recognised in the income statement where, to the extent that the hedge is effective, it will be offset by the change in the fair value of the hedging instrument. If the hedge no longer meets the criteria for hedge accounting, the adjustment to the carrying amount of a hedged item for which the effective interest method is used is amortised to proﬁt or loss over the period to maturity. Where the hedging relationship is classiﬁed as a cash ﬂow hedge or as a net investment hedge, to the extent the hedge is effective, changes in the fair value of the hedging instrument arising from the hedged risk are recognised directly in equity. When the hedged item is recognised in the ﬁnancial statements, the accumulated gains and losses recognised in equity are either recycled to the income statement or, if the hedged item results in a non-ﬁnancial asset, are recognised as adjustments to its initial carrying amount. When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in equity at that time remains in equity and is recognised when the forecast transaction is ultimately recognised in the income statement. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was reported in equity is immediately transferred to the income statement. Borrowings Borrowings are recognised initially at the fair value of the consideration received net of transaction costs incurred. Borrowings are subsequently stated at amortised cost with any difference between the proceeds (net of transaction costs) and the redemption value being recognised in the income statement over the period of the borrowings using the effective interest method. Borrowings are classiﬁed as current liabilities unless the Group has an unconditional right to defer settlement of the liability for at least 12 months after the balance sheet date. Financial instruments by measurement basis The carrying amount of ﬁnancial instruments by category as deﬁned by IAS 39 “Financial Instruments: Recognition and Measurement” is as follows: Financial assets Financial assets at fair value through proﬁt and loss Loans and receivables Financial liabilities Financial liabilities at amortised cost 2017 £m 2016 £m 20 2,277 31 2,392 4,596 4,403 Financial instruments in the category “fair value through proﬁt and loss” are measured in the balance sheet at fair value. Fair value measurements can be classiﬁed in the following hierarchy: – quoted prices (unadjusted) in active markets for identical assets or liabilities (level 1); – inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly or indirectly (level 2); and – inputs for the asset or liability that are not based on observable market data (that is, unobservable inputs) (level 3). The following tables present the Group’s assets and liabilities that are measured at fair value at 31 July 2017 and 31 July 2016: Derivatives at fair value through proﬁt and loss Level 1 £m – Level 2 £m 20 Level 3 £m – 2017 Total £m 20 Level 1 £m – Level 2 £m 31 Level 3 £m – 2016 Total £m 31 As at 31 July 2017 and 31 July 2016, there were no derivative liabilities held at fair value through proﬁt and loss. No transfers between levels occurred during the current or prior year. The fair value of ﬁnancial instruments traded in active markets is based on quoted market prices at the balance sheet date. The fair value of ﬁnancial instruments that are not traded in an active market (such as over-the-counter derivatives) is determined by using valuation techniques. The Group’s other ﬁnancial instruments are measured on bases other than fair value. Other receivables include an amount of £50 million (2016: £60 million) which has been discounted at a rate of 2.3 per cent (2016: 1.5 per cent) due to the long-term nature of the receivable. Other current assets and liabilities are either of short maturity or bear ﬂoating rate interest and their fair values approximate to book values. The only non-current ﬁnancial assets or liabilities for which fair value does not approximate to book value are the senior unsecured loan notes, which had a book value of £952 million (2016: £959 million) and a fair value (level 2) of £991 million (2016: £1,027 million). Ferguson plc Annual Report and Accounts 2017 123 Notes to the consolidated ﬁnancial statements continued Year ended 31 July 2017 37 – Additional information continued (ii) Additional information about ﬁnancial instruments continued Financial instruments: disclosure of offsetting arrangements The ﬁnancial instruments that have been offset in the ﬁnancial statements are disclosed below: At 31 July 2017 Financial assets Non-current assets Derivative ﬁnancial assets Current assets Derivative ﬁnancial assets Cash and cash equivalents Financial liabilities Current liabilities Derivative ﬁnancial liabilities Bank loans and overdrafts Finance leases Non-current liabilities Derivative ﬁnancial liabilities Bank loans Finance leases Closing net debt At 31 July 2016 Financial assets Non-current assets Derivative ﬁnancial assets Current assets Derivative ﬁnancial assets Cash and cash equivalents Financial liabilities Current liabilities Derivative ﬁnancial liabilities Bank loans and overdrafts Finance leases Non-current liabilities Derivative ﬁnancial liabilities Bank loans Finance leases Closing net debt Gross balances (a) £m Offset amounts (b) Financial statements (c) Cash pooling amounts (d) £m £m £m Net total (e) £m Notes 18 18 19 18 22 24 18 22 24 32 39 17 1,911 1,967 12 1,627 3 24 831 4 2,501 (534) (24) (12) – (36) (12) – – (24) – – (36) – 15 5 1,911 1,931 – – (1,420) (1,420) – 1,627 – (1,420) 3 – 831 4 2,465 (534) – – – – (1,420) – 15 5 491 511 – 207 3 – 831 4 1,045 (534) Gross balances (a) £m Offset amounts (b) £m Financial statements (c) Cash pooling amounts (d) £m £m Net total (e) £m Notes 18 18 19 18 22 24 18 22 24 32 51 24 940 1,015 13 701 4 31 1,175 27 1,951 (936) (31) (13) – (44) (13) – – (31) – – (44) – 20 11 940 971 – 701 4 – 1,175 27 1,907 (936) – – (606) (606) – (606) – – – – (606) – 20 11 334 365 – 95 4 – 1,175 27 1,301 (936) (a) The gross amounts of the recognised ﬁnancial assets and liabilities under a master netting agreement, or similar arrangement. (b) The amounts offset in accordance with the criteria in IAS 32. (c) The net amounts presented in the Group balance sheet. (d) The amounts subject to a master netting arrangement, or similar arrangement, not included in (c). (e) The net amount after deducting the amounts in (d) from the amounts in (c). 124 Ferguson plc Annual Report and Accounts 2017 Strategic report Governance Financials Other information 37 – Additional information continued (ii) Additional information about ﬁnancial instruments continued Financial instruments: risk management policies The Group is exposed to market risks arising from its international operations and the ﬁnancial instruments which fund them. The main risks arising from the Group’s ﬁnancial instruments are foreign currency risk, interest rate risk and liquidity risk. The Group has well-deﬁned policies for the management of interest rate, liquidity, foreign exchange and counterparty exposures, which have been consistently applied during the ﬁnancial years ended 31 July 2017 and 31 July 2016. By the nature of its business, the Group also has trade credit and commodity price exposures, the management of which is delegated to the operating businesses. There has been no change since the previous year in the major ﬁnancial risks faced by the Group. Policies for managing each of these risks are regularly reviewed and are summarised below. When the Group enters into derivative transactions (principally interest rate swaps and foreign exchange contracts), the purpose of such transactions is to hedge certain interest rate and currency risks arising from the Group’s operations and its sources of ﬁnance. It is, and has been throughout the period under review, the Group’s policy that no trading in ﬁnancial instruments or speculative transactions be undertaken. Capital risk management The Group’s sources of funding currently comprise cash ﬂows generated by operations, equity contributed by shareholders and borrowings from banks and other ﬁnancial institutions. In order to maintain or adjust the capital structure, the Group may pay a special dividend, return capital to shareholders, repurchase its own shares, issue new shares or sell assets to reduce debt. Liquidity risk The Group maintains a policy of ensuring sufficient borrowing headroom to ﬁnance all investment and capital expenditure included in its strategic plan, with an additional contingent safety margin. The Group has estimated its anticipated contractual cash outﬂows (excluding interest income and income from derivatives) including interest payable in respect of its trade and other payables and bank borrowings on an undiscounted basis. The principal assumptions are that ﬂoating rate interest is calculated using the prevailing interest rate at the balance sheet date and cash ﬂows in foreign currency are translated using spot rates at the balance sheet date. These cash ﬂows can be analysed by maturity as follows: As at 31 July Due in less than one year Due in one to two years Due in two to three years Due in three to four years Due in four to ﬁve years Due in over ﬁve years Total Trade and other payables £m 1,935 20 21 10 9 120 2,115 2017 Total £m 2,100 61 56 257 37 792 Interest on debt £m 40 37 34 34 27 66 238 3,303 Trade and other payables £m 2,280 19 12 14 8 110 2,443 Debt £m 125 4 1 213 1 606 950 Debt £m 5 122 2 1 215 847 1,192 Interest on debt £m 44 40 37 37 31 116 305 2016 Total £m 2,329 181 51 52 254 1,073 3,940 Foreign currency risk The Group has signiﬁcant overseas businesses whose revenues are mainly denominated in the currencies of the countries in which the operations are located. Approximately 79 per cent of the Group’s revenue is in US dollars. Within each country it operates, the Group does not have signiﬁcant transactional foreign currency cash ﬂow exposures. However, those that do arise may be hedged with either forward contracts or currency options. The Group does not normally hedge proﬁt translation exposure since such hedges have only a temporary effect. The Group’s policy is to adjust the currencies in which its net debt is denominated materially to match the currencies in which its trading proﬁt is generated. Details of average exchange rates used in the translation of overseas earnings and of year-end exchange rates used in the translation of overseas balance sheets for the principal currencies used by the Group are shown in the ﬁve-year summary on page 139. The net effect of currency translation was to increase revenue by £1,609 million (2016 restated: increase by £548 million) and to increase trading proﬁt by £126 million (2016 restated: increase by £46 million). These currency effects primarily reﬂect a movement of the average sterling exchange rate against US dollars, euro and Canadian dollars as follows: US dollars Euro Canadian dollars 2017 Weakening of sterling 2016 (Weakening)/ strengthening of sterling (15.3%) (13.5%) (15.5%) (6.8%) (0.8%) 4.1% The Group has net ﬁnancial liabilities denominated in foreign currencies which have been designated as hedges of the net investment in its overseas subsidiaries. The principal value of those ﬁnancial liabilities designated as hedges at the balance sheet date was £1,528 million (2016: £1,636 million). The loss on translation of these ﬁnancial instruments into sterling of £6 million (2016: £107 million) has been taken to the translation reserve. Ferguson plc Annual Report and Accounts 2017 125 Notes to the consolidated ﬁnancial statements continued Year ended 31 July 2017 37 – Additional information continued (ii) Additional information about ﬁnancial instruments continued Net investment hedging Exchange differences arising from the translation of the net investment in foreign operations are recognised directly in equity. Gains and losses on those hedging instruments designated as hedges of the net investments in foreign operations are recognised in equity to the extent that the hedging relationship is effective; these amounts are included in exchange differences on translation of foreign operations as stated in the Group statement of comprehensive income. Gains and losses relating to hedge ineffectiveness are recognised immediately in the income statement for the period. Gains and losses accumulated in the translation reserve are included in the income statement when the foreign operation is disposed of. Interest rate risk At 31 July 2017, 100 per cent of loans were at ﬁxed rates. The Group borrows in the desired currencies principally at rates determined by reference to short-term benchmark rates applicable to the relevant currency or market, such as LIBOR. Rates which reset at least every 12 months are regarded as ﬂoating rates and the Group then, if appropriate, considers interest rate swaps to generate the desired interest rate proﬁle. The Group reviews deposits and borrowings by currency at Treasury Committee and Board meetings. The Treasury Committee gives prior approval to any variations from ﬂoating rate arrangements. During November 2011, the Group entered into interest rate swap contracts comprising ﬁxed interest payable on US$729 million of notional principal. The residual contracts of US$438 million expire between November 2017 and November 2020 and the ﬁxed interest rates range between 2.06 per cent and 2.94 per cent (2016: 2.06 per cent and 2.94 per cent). These contracts have been held since inception at fair value through proﬁt and loss. With effect from 1 December 2011, interest rate swap contracts comprising ﬁxed interest receivable on an original notional principal of US$729 million and as at 31 July 2017, residual contracts of US$438 million have been classiﬁed as held at fair value through proﬁt and loss. The contracts expire between November 2017 and November 2020 and the ﬁxed interest rates range between 5.18 per cent and 5.32 per cent (2016: 5.18 per cent and 5.32 per cent). The table below shows the income statement movement on interest rate swaps at fair value through proﬁt and loss. At fair value through proﬁt and loss (hedge accounting not applied) At 1 August Settled Valuation gain credited to income statement Exchange At 31 July 2017 £m 29 (9) – – 20 2016 £m 34 (11) 1 5 29 There are no ﬁxed rate interest borrowings that form part of a hedge relationship. Monitoring interest rate and foreign currency risk The Group monitors its interest rate and foreign currency risk by reviewing the effect on ﬁnancial instruments over various periods of a range of possible changes in interest rates and exchange rates. The Group has estimated that an increase of one percentage point in the principal ﬂoating interest rates to which it is exposed would result in a charge to the income statement of £nil (2016: £1 million). The Group has estimated that a weakening of sterling by 10 per cent against gross borrowings denominated in foreign currency in which the Group does business would result in a charge to equity of £156 million (2016: £177 million). 126 Ferguson plc Annual Report and Accounts 2017 The Group does not require operating businesses to adhere to a formalised risk management policy in respect of trade credit risk or commodity price risk and does not consider that there is a useful way of quantifying the Group’s exposure to any of the macroeconomic variables that might affect the collectability of receivables or the prices of commodities. Credit risk The Group provides sales on credit terms to most of its customers. There is an associated risk that customers may not be able to pay outstanding balances. At 31 July 2017, the maximum exposure to credit risk was £2,022 million (2016: £2,187 million). Each of the Group’s businesses have established procedures in place to review and collect outstanding receivables. Signiﬁcant outstanding and overdue balances are reviewed on a regular basis and resulting actions are put in place on a timely basis. In some cases, protection is provided through credit insurance arrangements. All of the major businesses use professional, dedicated credit teams, in some cases ﬁeld-based. Appropriate provisions are made for debts that may be impaired on a timely basis. Concentration of credit risk in trade receivables is limited as the Group’s customer base is large and unrelated. Accordingly, the Group considers that there is no further credit risk provision required above the current provision for impairment. The Group has cash balances deposited for short periods with ﬁnancial institutions and enters into certain contracts (such as interest rate swaps) which entitle the Group to receive future cash ﬂows from ﬁnancial institutions. These transactions give rise to credit risk on amounts due from counterparties with a maximum exposure of £424 million (2016: £237 million). This risk is managed by setting credit and settlement limits for a panel of approved counterparties. The limits are approved by the Treasury Committee and ratings are monitored regularly. (iii) Additional information on the allotment of equity securities for cash During the year, the Company did not issue any ordinary shares to participants in the long term incentive plans and all-employee sharesave plans (2016: issued 43,428 ordinary shares with a nominal value of 10 53/66 pence per share). (iv) Additional information about pensions and other long-term employee beneﬁts Description of plans The principal UK deﬁned beneﬁt plan is the Wolseley Group Retirement Beneﬁts Plan which provides beneﬁts based on ﬁnal pensionable salaries. This plan was closed to new entrants in 2009. The assets are held in separate trustee administered funds. The Group contribution rate is calculated on the Projected Unit Credit Method and agreed with an independent consulting actuary. The Group Retirement Beneﬁts Plan was closed to future service accrual in December 2013 and was replaced by a deﬁned contribution plan. During October 2016, the plan was closed for future non-inﬂationary salary accrual. The principal plans operated for USA employees are deﬁned contribution plans, which are established in accordance with USA 401k rules. Companies contribute to both employee compensation deferral and proﬁt sharing plans. The Group also operates two deﬁned beneﬁt plans in the USA which are closed to new entrants. One of the plans is funded and the majority of assets are held in trustee administered funds independent of the assets of the companies. The closed plans now provide a minimum pension guarantee in conjunction with a deﬁned contribution plan. The contribution rate is calculated on the Projected Unit Credit Method as agreed with independent consulting actuaries. In Canada, deﬁned beneﬁt plans and a deﬁned contribution plan are operated. Most of the Canadian deﬁned beneﬁt plans are funded. Strategic report Governance Financials Other information For historical awards granted under the long term incentive plan (“LTIP 2012”), senior executives were awarded a variable number of shares depending on the level of total shareholder return over a three-year period relative to that of the FTSE 100. The maximum award under the LTIP 2012 was determined at grant date and then adjusted at vesting date in accordance with the market performance condition. The vesting period is three years. For awards granted under the new long term incentive plan (“LTIP 2015”) senior executives are awarded a variable number of shares depending on three equally weighted conditions of: (1) level of total shareholder return over a three-year period relative to that of the FTSE 100; (2) growth in headline earnings per share over a period of three consecutive ﬁnancial years, which must exceed the growth in the UK Retail Price Index over the same period by at least 9 per cent; and (3) a cumulative three-year ﬁgure of operating cash ﬂow measured against the agreed three-year target. The vesting period is three years. For awards granted to eligible employees (excluding Executive Directors) under the ordinary share plan, such employees may be granted a variable number of awards in any form or combination of options, restricted share awards, conditional share awards or phantom share awards up to a maximum of 100 per cent of their current salary. The vesting period is typically three years and there are no performance measures other than retained employment. For awards granted to eligible employees (excluding Executive Directors) under the performance ordinary share plan, such employees may be granted a variable number of awards in any form or combination of options, restricted share awards, conditional share awards or phantom share awards with a maximum amount typically set at 5 times salary. The vesting period is typically three years and the performance period relating to the relevant operating business’ performance is typically over a three-year period. For awards granted to eligible employees (excluding Executive Directors) under the revised ordinary share plan, such employees may be granted a variable number of awards in any form or combination of options, restricted share awards, conditional share awards with a maximum amount typically set at 3 times salary. The vesting period is typically three years and the performance period relating to the relevant operating business’ performance is typically over a one-year performance period. Awards granted under the all-employee sharesave plans vest over periods ranging from three to seven years, except for awards granted under the Employee Share Purchase Plan (“ESPP”) in the USA and Canada, which vest over a one-year period. (vi) Additional information about the parent company of the Group The Company is incorporated in Jersey under the Companies (Jersey) Law 1991 and is headquartered in Switzerland. It operates as the ultimate parent company of the Ferguson Group. Its registered office is 26 New Street, St Helier, Jersey, JE2 3RA, Channel Islands. The Group’s subsidiary undertakings are set out on pages 140 and 141. 37 – Additional information continued (iv) Additional information about pensions and other long-term employee beneﬁts continued The contribution rate is calculated on the Projected Unit Credit Method as agreed with independent consulting actuaries. In Europe, both deﬁned contribution and deﬁned beneﬁt plans are operated. Liabilities arising under deﬁned beneﬁt plans are calculated in accordance with actuarial advice. Investment policy The Group’s investment strategy for its funded post-employment plans is decided locally and, if relevant, by the trustees of the plan and takes account of the relevant statutory requirements. The Group’s objective for the investment strategy is to achieve a target rate of return in excess of the increase in the liabilities, while taking an acceptable amount of investment risk relative to the liabilities. This objective is implemented by using speciﬁc allocations to a variety of asset classes that are expected over the long term to deliver the target rate of return. Most investment strategies have signiﬁcant allocations to equities, with the intention that this will result in the ongoing cost to the Group of the post-employment plans being lower over the long-term and within acceptable boundaries of risk. For the UK plan, the buy-in insurance policy represents approximately 40 per cent of the plan assets. For the remaining assets, the strategy is to invest predominantly in growth assets including equities and diversiﬁed growth assets. The investment strategy is subject to regular review by the plan trustees in consultation with the Company. For the overseas plans, the investment strategy involves the investment in deﬁned levels of predominantly equities with the remainder of the assets being invested in cash and bonds. Investment risk The present value of the UK deﬁned beneﬁt plan liability is calculated using a discount rate determined by reference to high quality corporate bond yields; if the actual return on plan assets is below this rate, it will decrease a net surplus or increase a net pension liability. Currently, the plan has a relatively balanced investment in equity securities, debt instruments and property. Due to the long-term nature of the plan liabilities, the trustees of the pension plan consider it appropriate that a reasonable portion of the plan assets should be invested in equity securities to leverage the return generated by the fund. Interest risk A decrease in the bond interest rate will increase the UK plan liability and this will be partially offset by an increase in the value of the plan’s debt investments. Longevity risk The present value of the deﬁned beneﬁt obligation is calculated by reference to the best estimate of the mortality of the UK plan participants both during and after their employment. An increase in the life expectancy of the plan participants will increase the plan’s liability. (v) Additional information about share-based payment plans The Group currently operates ﬁve types of discretionary plans and two types of all-employee sharesave plans. Historical awards granted under the executive share option plans are subject to a condition such that they may not be exercised unless the growth in headline earnings per share over a period of three consecutive ﬁnancial years exceeds the growth in the UK Retail Price Index over the same period by at least 9 per cent and consequently vest over a period of three years. Ferguson plc Annual Report and Accounts 2017 127 Independent auditor’s report to the members of Ferguson plc Report on the audit of the ﬁnancial statements Opinion In our opinion: – the ﬁnancial statements give a true and fair view of the state of the Group’s and of the parent company’s affairs as at 31 July 2017 and of the Group’s and the parent company’s proﬁt for the year then ended; – the Group ﬁnancial statements have been properly prepared in accordance with International Financial Reporting Standards (“IFRSs”) as adopted by the European Union; – the parent company ﬁnancial statements have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice including Financial Reporting Standard 101 “Reduced Disclosure Framework”; and – the ﬁnancial statements have been properly prepared in accordance with the Companies (Jersey) Law, 1991. We have audited the ﬁnancial statements of Ferguson plc (the “parent company”) and its subsidiaries (the “Group”) which comprise: – the Group Income Statement; – the Group Statement of Comprehensive Income; – the Parent Company Proﬁt and Loss Account; – the Group and Parent Company Balance Sheets; – the Group Cash Flow Statement; – the Group and Parent Company Statements of Changes in Equity; – the notes to the Group ﬁnancial statements 1 to 37; and – the notes to the Parent Company ﬁnancial statements 1 to 15. The ﬁnancial reporting framework that has been applied in the preparation of the Group ﬁnancial statements is applicable law and IFRSs as adopted by the European Union. The ﬁnancial reporting framework that has been applied in the preparation of the parent company ﬁnancial statements is applicable law and United Kingdom Accounting Standards, including FRS 101 “Reduced Disclosure Framework” (United Kingdom Generally Accepted Accounting Practice). Basis for opinion We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our responsibilities under those standards are further described in the auditor’s responsibilities for the audit of the ﬁnancial statements section of our report. We are independent of the Group and the parent company in accordance with the ethical requirements that are relevant to our audit of the ﬁnancial statements in the UK, including the FRC’s Ethical Standard as applied to listed public interest entities, and we have fulﬁlled our other ethical responsibilities in accordance with these requirements. We conﬁrm that the non-audit services prohibited by the FRC’s Ethical Standard were not provided to the parent company. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. While the parent company is not a public interest entity as deﬁned by European Regulation 537/2014, the Directors have decided that the parent company should follow the same requirements as if that Regulation applied to the parent company. Summary of our audit approach Key audit matters The key risks that we identiﬁed in the current year were: – Appropriateness of supplier rebates; – Inventory provision for slow-moving and obsolete inventory; and – Accounting for restructuring costs. Materiality Scoping Signiﬁcant changes in our approach The materiality that we used in the current year was £45m (2016: £40m) which was determined on the basis of approximately 5% of proﬁt before tax excluding exceptional items. We performed full audits on the three key regions of continuing businesses, Head office entities and the consolidation process, representing 97% (2016: 96%) of revenue, 99% (2016: 86%) of proﬁt before tax and 98% (2016: 99%) of net assets. Our approach is consistent with the previous year with the exception of: – the inclusion of an additional key audit matter relating to the accounting for restructuring costs. This relates to the disposal of the Nordic region businesses and the restructuring in the UK where judgements are made over the costs categorised as exceptional. – the exclusion of the key audit matter relating to goodwill and intangible asset carrying values. Following the impairment charge recognised for Beijer and the proposed sale of the Nordic businesses, the judgement over the carrying value of goodwill and intangible assets reduced; and – our planned audit scope has changed, taking into consideration changes in the Group structure as a result of completed and planned disposals. The Nordic regions (Denmark, Sweden, Finland and Norway) and Switzerland were subject to full scope audits in the previous year. This year the scope has been reduced to analytical procedures. 128 Ferguson plc Annual Report and Accounts 2017 Strategic report Governance Financials Other information Conclusions related to principal risks, going concern and viability statement We have reviewed the Directors’ statement regarding the appropriateness of the going concern basis of accounting contained within note 1 to the Financial Statements and the Directors’ statement on the longer-term viability of the Group contained within the principal risks and their management section on page 43. We are required to state whether we have anything material to add or draw attention to in relation to: – the disclosures on pages 42-49 that describe the principal risks and explain how they are being managed or mitigated; – the Directors’ conﬁrmation on page 51 that they have carried out a robust assessment of the principal risks facing the Group, including those that would threaten its business model, future performance, solvency or liquidity; – the Directors’ statement in note 1 to the Financial Statements about whether they considered it appropriate to adopt the going concern basis of accounting in preparing them and their identiﬁcation of any material uncertainties to the Group and the parent company’s ability to continue to do so over a period of at least 12 months from the date of approval of the ﬁnancial statements; – the Directors’ explanation on page 43 as to how they have assessed the prospects of the Group, over what period they have done so and why they consider that period to be appropriate, and their statement as to whether they have a reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they fall due over the period of their assessment, including any related disclosures drawing attention to any necessary qualiﬁcations or assumptions; or – whether the Directors’ statements relating to going concern and the prospects of the Company required in accordance with Listing Rule 9.8.6R(3) are materially inconsistent with our knowledge obtained in the audit. We conﬁrm that we have nothing material to add or draw attention to in respect of these matters. We agreed with the Directors’ adoption of the going concern basis of accounting and we did not identify any such material uncertainties. However, because not all future events or conditions can be predicted, this statement is not a guarantee as to the Group’s ability to continue as a going concern. Key audit matters Key audit matters are those matters that, in our professional judgement, were of most signiﬁcance in our audit of the ﬁnancial statements of the current period and include the most signiﬁcant assessed risks of material misstatement (whether or not due to fraud) that we identiﬁed. These matters included those which had the greatest effect on: the overall audit strategy; the allocation of resources in the audit; and directing the efforts of the engagement team. These matters were addressed in the context of our audit of the ﬁnancial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. Appropriateness of supplier rebates Key audit matter description How the scope of our audit responded to the key audit matter As described in the Audit Committee report on page 61 as a signiﬁcant judgement and the Accounting Policies in note 37 to the Financial Statements, the Group recognises a reduction in cost of sales as a result of amounts receivable from suppliers in the form of rebate arrangements. Where the rebate arrangements are non-tiered arrangements (ﬂat rate), there is limited judgement. However, a proportion of the rebate arrangements comprise annual volume rebates, for which the end of the period is often non coterminous with the Group’s year-end. Additionally, in some cases the rebate rises as a portion of purchases, as higher quantities or values of the purchases are made. There is complexity in supplier rebates which give rise to management judgement and scope for fraud and error in accounting for this income. Judgement is required in estimating the expected level of rebates for the rebate year, driven by the forecast purchase volumes. This requires a detailed understanding of the speciﬁc contractual arrangements themselves as well as complete and accurate source data to apply the arrangements to. We assessed the design and implementation of manual and automated controls over the recording of supplier rebate income. Our procedures on supplier rebates included: – evaluating the design and implementation of key controls operating across the Group over the appropriateness of supplier rebates; – in certain components, testing the operating effectiveness of the controls relating to supplier rebates; – interviewing a sample of Ferguson’s internal buyers to supplement our understanding of the key contractual rebate arrangements; – testing the accuracy of the amounts recognised by agreeing a sample to individual supplier agreements; – circularising a sample of suppliers to test whether the arrangements recorded were complete; – testing the completeness and accuracy of the inputs to the calculations for recording supplier rebates by agreement to supporting evidence, including historical volume data. We challenged the assumptions underlying management’s estimates of purchase volumes including looking at the historical accuracy of previous estimates and historical purchase trends and recalculation of rebates for a sample of suppliers; – consider the adequacy of rebate related disclosure within the Group’s ﬁnancial statement; – holding discussions with management to understand if there has been any whistleblowing; and – testing post year-end cash receipts, where relevant, to test the recoverability of amounts recorded. Key observations We consider the Group’s estimation methodology to be prudent based on a number of factors, including a look back at historical cash receipts. However, the methodology is consistently applied year-on-year and the understatement of rebate income is not material to the ﬁnancial position or the reported ﬁnancial result as at 31 July 2017. Ferguson plc Annual Report and Accounts 2017 129 Independent auditor’s report to the members of Ferguson plc continued Inventory provision for slow-moving and obsolete inventory Key audit matter description The Group had inventory of £1,816m at 31 July 2017, held in distribution centres, warehouses and numerous branches, and across multiple product lines. Details of its valuation are included in the Audit Committee report on page 61 and the Accounting policies in note 37 to the Financial Statements. Inventories are carried at the lower of cost and net realisable value. As a result, the Directors apply judgement in determining the appropriate values for slow-moving or obsolete items. Inventory is net of a provision of £113m which is primarily driven by comparing the level of inventory held to future projected sales. The provision is calculated within the Group’s accounting systems using an automated process. We consider the assessment of inventory provisions to require judgement based on the size of the inventory balance held at year-end and the manual intervention required in the calculation. There is risk that inappropriate management override and/or error may occur. How the scope of our audit responded to the key audit matter We challenged the appropriateness of management’s assumptions applied in calculating the value of the inventory provisions by: – evaluating the design and implementation of key inventory provision controls operating across the Group, including those at a sample of distribution centres, warehouses and branches; – evaluating the design and implementation of key system controls around the provision calculation and their operating effectiveness; – comparing the net realisable value, obtained through a detailed review of sales subsequent to the year-end, to the cost price of a sample of inventories and comparison to the associated provision to assess whether inventory provisions are complete; – reviewing the historical accuracy of inventory provisioning, and the level of inventory write-offs during the year; and – challenging the completeness of inventory provisions through assessing actual and forecast sales of inventory lines to assess whether provisions for slow moving or obsolete stock are valid and complete. Key observations We consider the Group’s provisioning methodology to be prudent when compared with historical levels of inventory write-offs. However, the methodology is consistently applied year-on-year and our estimate of the potential overstatement of the provision is not material to the ﬁnancial position or the reported result as at 31 July 2017. Accounting for restructuring costs Key audit matter description As described in notes 5 and 8 to the Financial Statements, the Group has announced a restructuring plan for the UK business and the disposal of the Nordic region businesses. The key judgements related to this risk lie in the estimation of the restructuring costs where they may differ from the future obligations. By nature, the provision is difficult to estimate and includes many variables. There is a risk that the provision could be underestimated by management to minimise the liabilities. Additionally, depending on timing there is a risk that costs could be provided inappropriately that are not yet committed. The impact of strategic reviews within the business and other future events gives rise to a source of estimation uncertainty. The Group has recognised a cost of £40m in the year in respect of the UK restructuring, which is reported as an exceptional item in note 5, and an additional amount related to the Nordic region businesses, which is shown within discontinued exceptional items (note 8). There is a judgement required in determining whether disclosure as an exceptional item is appropriate. The UK business is in phase 2 of the restructuring and given the branch closures and expected job losses, there is judgement around the estimated costs. How the scope of our audit responded to the key audit matter Our procedures on restructuring costs included: – challenging the key judgements made by management including evaluating the positions taken on which costs were provided for; – determining whether what is disclosed as exceptional directly related to the restructuring was incremental; – checking the consistency of items included year-on-year and assessing adherence to IFRS requirements and latest Financial Reporting Council (“FRC”) guidance; – holding discussions with the ﬁnance teams on the provision recorded; – testing the provision in place by agreeing it to documentation to assess appropriateness of the level of provisioning; and – understanding if any aspects of the restructuring could result in items to be classiﬁed as impaired. Key observations We consider the restructuring charge recorded in the year to have been appropriately calculated. 130 Ferguson plc Annual Report and Accounts 2017 Strategic report Governance Financials Other information Our application of materiality We deﬁne materiality as the magnitude of misstatement in the ﬁnancial statements that makes it probable that the economic decisions of a reasonably knowledgeable person would be changed or inﬂuenced. We use materiality both in planning the scope of our audit work and in evaluating the results of our work. Based on our professional judgement, we determined materiality for the ﬁnancial statements as a whole as follows: Group materiality £45m (2016: £40m) Basis for determining materiality Approximately 5% of proﬁt before tax excluding exceptional items. The proﬁt before tax excluding exceptional items was £951m, which is £229m lower than the statutory proﬁt of £1,180m. The exceptional items we excluded from our determination are non-recurring in nature and explained further in note 5. Rationale for the benchmark applied Proﬁt before tax is a key metric for users of the ﬁnancial statements and adjusting for exceptional items is to reﬂect the manner in which business performance is reported and assessed by external users of the ﬁnancial statements. £951m £45m PBT excluding exceptionals Group materiality Group materiality £45m Component materiality range £23m to £36m Audit Committee reporting threshold £2m We agreed with the Audit Committee that we would report to the Committee all audit differences in excess of £2m (2016: £1m), as well as differences below that threshold that, in our view, warranted reporting on qualitative grounds. This is a change from the prior year where we reported all misstatements above £1m. This reﬂects the continued growth in the business. We also report to the Audit Committee on disclosure matters that we identiﬁed when assessing the overall presentation of the ﬁnancial statements. An overview of the scope of our audit Our Group audit was scoped by obtaining an understanding of the Group and its environment, including Group-wide controls, and assessing the risks of material misstatement at the Group level. In addition, the understanding gained in our ﬁrst year audit was utilised in scoping our second year audit. Based on that assessment we focused our Group audit scope primarily on the audit work at the three key regions of continuing businesses (USA, UK and Canada). Full audits were performed in these locations. At the Group level we also tested Head office entities and the consolidation process. Of continuing results, this provided coverage of 97% of revenue, 99% of the proﬁt before tax and 98% of the net assets. In 2016, Switzerland (Tobler) and the Nordic regions (Denmark, Sweden, Norway and Finland) were in full audit scope. Following changes to the Group structure as a result of completed and planned disposals, Switzerland and the Nordic regions are subject to analytical procedures in the current year, which is consistent with the remaining entities in the Group. Full audit scope Analytical procedures Revenue 97% 3% Proﬁt before tax 99% 1% Net assets 98% 2% The Group team is responsible for the Head Office entities in the UK and Switzerland and the consolidation. The Group team carried out analytical procedures to conﬁrm our conclusion that there were no signiﬁcant risks of material misstatement of the aggregated ﬁnancial information of the remaining components not subject to audit. The component teams in the USA, UK and Canada perform audit work and report into the Group team. The Group audit team continued to follow a programme of planned visits that has been designed so that a senior member of the Group audit team visits each of the most signiﬁcant locations where the Group audit scope was focused every year, being the USA, UK and Canada. Senior members of the Group team also visited Denmark. In years when we do not visit a signiﬁcant component we will include the component audit partner in our team brieﬁng, send detailed instructions to our component audit teams, discuss their risk assessment, and review documentation of the ﬁndings from their work. For all components we attend the local close meetings. Ferguson plc Annual Report and Accounts 2017 131 Independent auditor’s report to the members of Ferguson plc continued Other information The Directors are responsible for the other information. The other information comprises the information included in the Annual Report, other than the ﬁnancial statements and our auditor’s report thereon. Our opinion on the ﬁnancial statements does not cover the other information and, except to the extent otherwise explicitly stated in our auditor’s report, we do not express any form of assurance conclusion thereon. In connection with our audit of the ﬁnancial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the ﬁnancial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated. If we identify such material inconsistencies or apparent material misstatements, we are required to determine whether there is a material misstatement in the ﬁnancial statements or a material misstatement of other information. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. In this context, matters that we are speciﬁcally required to report to you as uncorrected material misstatements of the other information include where we conclude that: – Fair, balanced and understandable – the statement given by the Directors that they consider the Annual Report and Financial Statements taken as a whole is fair, balanced and understandable and provides the information necessary for shareholders to assess the Group’s performance, business model and strategy, is materially inconsistent with our knowledge obtained in the audit; or – Audit Committee reporting – the section describing the work of the Audit Committee does not appropriately address matters communicated by us to the audit committee; or – Directors’ statement of compliance with the UK Corporate Governance Code – the parts of the Directors’ statement relating to the Company’s compliance with the UK Corporate Governance Code containing provisions speciﬁed for review by the auditor in accordance with Listing Rule 9.8.10R(2) do not properly disclose a departure from a relevant provision of the UK Corporate Governance Code. We have nothing to report in respect of these matters. Responsibilities of the Directors As explained more fully in the Directors’ responsibilities statement, the Directors are responsible for the preparation of the ﬁnancial statements and for being satisﬁed that they give a true and fair view, and for such internal control as the Directors determine is necessary to enable the preparation of ﬁnancial statements that are free from material misstatement, whether due to fraud or error. In preparing the ﬁnancial statements, the Directors are responsible for assessing the Group’s and the parent company’s ability to continue as a going concern, disclosing as applicable, matters related to going concern and using the going concern basis of accounting unless the Directors either intend to liquidate the Group or the parent company or to cease operations, or have no realistic alternative but to do so. Auditor’s responsibilities for the audit of the ﬁnancial statements Our objectives are to obtain reasonable assurance about whether the ﬁnancial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to inﬂuence the economic decisions of users taken on the basis of these ﬁnancial statements. A further description of our responsibilities for the audit for the ﬁnancial statements is located on the Financial Reporting Council’s website at: www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditor’s report. Use of our report This report is made solely to the Company’s members, as a body, in accordance with Article 113A of the Companies (Jersey) Law, 1991. Our audit work has been undertaken so that we might state to the Company’s members those matters we are required to state to them in an auditor’s report and/or those further matters we have expressly agreed to report to them on in our engagement letter and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company’s members as a body, for our audit work, for this report, or for the opinions we have formed. 132 Ferguson plc Annual Report and Accounts 2017 Strategic report Governance Financials Other information Report on other legal and regulatory requirements Opinions on other matters prescribed by our engagement letter In our opinion the part of the Directors’ Remuneration Report to be audited has been properly prepared in accordance with the provisions of the UK Companies Act 2006 as if that Act had applied to the Company. In our opinion, based on the work undertaken in the course of the audit: – the information given in the strategic report and the Directors’ report for the ﬁnancial year for which the ﬁnancial statements are prepared is consistent with the ﬁnancial statements; and – the strategic report and the Directors’ report have been prepared in accordance with applicable legal requirements. In the light of the knowledge and understanding of the Group and of the parent company and their environment obtained in the course of the audit, we have not identiﬁed any material misstatements in the strategic report or the Directors’ report. Matters on which we are required to report by exception Adequacy of explanations received and accounting records Under the Companies (Jersey) Law, 1991 we are required to report to you if, in our opinion: – we have not received all the information and explanations we require for our audit; or – adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received from branches not visited by us; or – the ﬁnancial statements are not in agreement with the accounting records and returns. We have nothing to report in respect of these matters. Directors’ remuneration We are also required to report, under the Companies Act 2006 (as if that Act had applied to the Company) if in our opinion certain disclosures of Directors’ remuneration have not been made or the part of the Directors’ Remuneration Report to be audited is not in agreement with the accounting records and returns. We have nothing to report arising from these matters. Other matters Auditor tenure Following the recommendation of the Audit Committee, we were appointed by the Company on 12 November 2015 to audit the ﬁnancial statements for the year ending 31 July 2016 and subsequent ﬁnancial periods. The period of total uninterrupted engagement including previous renewals and reappointments of the ﬁrm is two years, covering periods from our appointment to 31 July 2017. Consistency of the audit report with the additional report to the Audit Committee Our audit opinion is consistent with the additional report to the Audit Committee we are required to provide in accordance with ISAs (UK). Ian Waller For and on behalf of Deloitte LLP Recognized Auditor London, UK 2 October 2017 Ferguson plc Annual Report and Accounts 2017 133 Company proﬁt and loss account Year ended 31 July 2017 Administrative expenses Operating loss Income from shares in Group undertakings Proﬁt on ordinary activities before interest Interest payable and similar charges Proﬁt before tax Tax Proﬁt for the ﬁnancial year Company statement of changes in equity At 1 August 2015 Proﬁt for the year Purchase of own shares by Employee Beneﬁt Trusts Issue of own shares by Employee Beneﬁt Trusts Credit to equity for share-based payments Purchase of Treasury shares Disposal of Treasury shares Dividends paid At 31 July 2016 Proﬁt for the year Purchase of own shares by Employee Beneﬁt Trusts Issue of own shares by Employee Beneﬁt Trusts Credit to equity for share-based payments Disposal of Treasury shares Dividends paid At 31 July 2017 Called up share capital £m Share premium £m Notes Treasury shares reserve £m Own shares reserve £m 9 10 8 8 9 10 8 29 42 (240) – – – – – – – – – – – – – – – – – – (300) 24 – 29 42 (516) – – – – – – – – – – – – – – – – 31 – (63) – (14) 20 – – – – (57) – (6) 15 – – – 29 42 (485) (48) 2017 £m (11) (11) 466 455 (8) 447 – 447 2016 £m (11) (11) 600 589 (12) 577 – 577 Retained earnings £m 7,469 577 – (19) 20 – (10) (238) 7,799 447 – (15) 22 (10) (259) 7,984 Total shareholders’ equity £m 7,237 577 (14) 1 20 (300) 14 (238) 7,297 447 (6) – 22 21 (259) 7,522 134 Ferguson plc Annual Report and Accounts 2017 Strategic report Governance Financials Other information Company balance sheet Year ended 31 July 2017 Fixed assets Investments in subsidiaries Current assets Debtors: amounts falling due within one year Current liabilities Creditors: amounts falling due within one year Net current liabilities Net assets Capital and reserves Called up share capital Share premium Treasury shares reserve Own shares reserve Retained earnings Total shareholders’ equity Notes 2017 £m 2016 £m 3 4 5 6 7 8 9 8,309 8,309 7,945 7,945 1 2 (788) (787) 7,522 29 42 (485) (48) 7,984 7,522 (650) (648) 7,297 29 42 (516) (57) 7,799 7,297 The accompanying notes are an integral part of these Company ﬁnancial statements. The Company ﬁnancial statements on pages 134 to 137 were approved by the Board of Directors on 2 October 2017 and were signed on its behalf by: John Martin Group Chief Executive Mike Powell Chief Financial Officer Ferguson plc Annual Report and Accounts 2017 135 Notes to the Company ﬁnancial statements Year ended 31 July 2017 1 – Corporate information Ferguson plc (the “Company”) was incorporated and registered in Jersey on 28 September 2010 under the Jersey Companies Law as a public company limited by shares under the name Ferguson plc with registered number 106605. The principal legislation under which the Company operates is the Companies (Jersey) Law 1991, as amended, and regulations made thereunder. The address of its registered office is 26 New Street, St Helier, Jersey, JE2 3RA, Channel Islands. It is headquartered in Switzerland. The principal activity of the Company is to act as the ultimate holding company of the Ferguson Group of companies. The Company changed its name from Wolseley plc to Ferguson plc on 31 July 2017. 2 – Company accounting policies Basis of accounting The Company meets the deﬁnition of a qualifying entity under FRS 100 (Financial Reporting Standard 100) issued by the Financial Reporting Council (“FRC”). Accordingly, the ﬁnancial statements have been prepared in accordance with FRS 101 (Financial Reporting Standard 101) “Reduced Disclosure Framework” as issued by the FRC. As permitted by FRS 101, the Company has taken advantage of the disclosure exemptions available under that standard in relation to share- based payments, ﬁnancial instruments, capital management, presentation of comparative information in respect of certain assets, presentation of a cash ﬂow statement, standards not yet effective, impairment of assets and related party transactions. The ﬁnancial statements have been prepared on the historical cost basis and on the going concern basis. Note 4 (Operating proﬁt) on page 95, note 9 (Dividends) on page 98, note 27 (Share capital) on page 113, note 28 (Share-based payments) on page 114 and note 36 (Post-balance sheet events) on page 119 of the Ferguson plc consolidated ﬁnancial statements form part of these ﬁnancial statements. Foreign currencies The ﬁnancial statements are presented in sterling which was the functional currency of the Company at 31 July 2017. The cost of the Company’s investments in overseas subsidiary undertakings is translated into sterling at the rate ruling at the date of investment. Foreign currency transactions entered into during the year are translated into sterling at the rates of exchange ruling on the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies are retranslated at the rate of exchange ruling at the balance sheet date. All currency translation differences are charged or credited to retained earnings. Cash at bank and in-hand Cash at bank and in-hand includes cash in-hand and deposits held with banks which are readily convertible to known amounts of cash. Bank overdrafts are shown within borrowings in current liabilities on the balance sheet to the extent there is no right of offset or intention to net settle with cash balances. Share capital The Company has one class of shares, ordinary shares, which are classiﬁed as equity. Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction from the proceeds, net of tax. Where the Company or one of the Company’s trusts purchases the Company’s equity share capital, the consideration paid, including any directly attributable incremental costs (net of tax), is deducted from equity attributable to the Company’s equity holders until the shares are cancelled, reissued or disposed of. Where such shares are subsequently disposed or reissued, any consideration received, net of any directly attributable incremental transaction costs and the related tax effects, is included in equity attributable to the Company’s equity holders. Share-based payments Share-based incentives are provided to employees under the Company’s executive share option, long term incentive and share purchase and ordinary share plans. The Company recognises a compensation cost in respect of these plans that is based on the fair value of the awards, measured using Binomial and Monte Carlo valuation methodologies. For equity-settled plans, the fair value is determined at the date of grant (including the impact of non-vesting conditions such as requirement for employees to save) and is not subsequently remeasured unless the conditions on which the award was granted are modiﬁed. Generally, the compensation cost is recognised on a straight-line basis over the vesting period. Adjustments are made to reﬂect expected and actual forfeitures during the vesting period due to the failure to satisfy service conditions or achieve non-market performance conditions. Dividends payable Dividends on ordinary shares are recognised in the Company’s ﬁnancial statements in the period in which the dividends are paid or approved by the shareholders of the Company. Tax Ferguson plc is taxed as a holding company in Switzerland so no tax is due at cantonal or communal level. The tax charge is therefore made up of federal tax and capital tax. Federal tax is levied on proﬁts in the year subject to any participation exemption for qualifying dividends from subsidiaries. Capital tax is based on the value of the Company’s assets, primarily its investment in Wolseley Limited and Ferguson Holdings (Switzerland) AG. 3 – Fixed asset investments Investments in subsidiaries Fixed asset investments are recorded at cost less provision for impairment. The Company assesses at each balance sheet date whether there is objective evidence that an investment or a group of investments is impaired. At 1 August 2016 Additions At 31 July 2017 All of the above investments are in unlisted shares. The Directors believe that the carrying value of the investments is supported by the recoverable amount of their underlying assets. 136 Ferguson plc Annual Report and Accounts 2017 Cost £m 7,945 364 8,309 Strategic report Governance Financials Other information 3 – Fixed asset investments continued The Company’s direct holdings in subsidiary undertakings as at 31 July 2017 were as follows: Company Country of registration and operation Principal activity Wolseley Limited England and Wales Investment Ferguson de Puerto Rico, Inc. Commonwealth of Puerto Rico Distributor of industrial products Ferguson Holdings (Switzerland) AG Switzerland Investment Percentage of ordinary shares held 100% 100% 100% Details of the subsidiary undertakings of the Company, including those that are held indirectly, are listed on pages 140 and 141 of the Ferguson plc Annual Report. 10 – Share-based payments Details of share awards granted by Group companies to employees, and that remain outstanding over the Company’s shares are set out in note 28 on page 114 to the Ferguson plc consolidated ﬁnancial statements. The net proﬁt and loss charge to the Company for equity-settled share- based payments was £nil (2016: £nil). The Company charged the full amount incurred for equity-settled share-based payments of £22 million (2016: £20 million) to its subsidiary undertakings. 11 – Contingent liabilities Provision is made for the Directors’ best estimate of known claims and legal actions in progress. The Company takes legal advice as to the likelihood of success of claims and actions and no provision is made where the Directors consider, based on that advice, that the action is unlikely to succeed or a sufficiently reliable estimate of the potential obligation cannot be made. 4 – Debtors: amounts falling due within one year Other debtors Total 2017 £m 1 1 2016 £m 2 2 In addition, the Company has given certain banks and lenders authority to transfer at any time any sum outstanding to its credit against or towards satisfaction of its liability to those banks of certain subsidiary undertakings. The Company has also given indemnities and warranties to the purchasers of businesses from the Company and certain Group companies in respect of which no material liabilities are expected to arise. The fair value of amounts included in debtors approximates to book value. 5 – Creditors: amounts falling due within one year The Company acts as a guarantor for the Group’s UK deﬁned beneﬁt pension plan, which is disclosed in note 26 on pages 110 to 112 to the Ferguson plc consolidated ﬁnancial statements. Bank overdrafts Other creditors Amounts owed to Group companies Total 2017 £m 787 1 – 788 2016 £m – 3 647 650 The fair value of amounts included in creditors approximates to book value. Bank overdrafts are interest bearing, carrying an interest rate of 2.0 per cent and are payable on demand. Amounts owed to Group companies in 2016 were interest bearing, carrying an interest rate of 1.2 per cent and were payable on demand. 12 – Employees, employee costs and auditor’s remuneration The average number of employees of the Company in the year ended 31 July 2017 was one (2016: one). Other employees of Group companies were seconded or assigned to the Company in the period in order to fulﬁl their duties or to carry out the work of the Company. Each of the Non Executive Directors of the Company has an appointment letter with the Company. The Executive Directors and certain other senior managers of the Group have assignment letters in place with the Company. Total employment costs of the Company for the period, including Non Executive Directors and seconded employees, were £2 million (2016: £2 million). 6 – Share capital Details of the Company’s share capital are set out in note 27 on page 113 to the Ferguson plc consolidated ﬁnancial statements. Fees payable to the auditor for the audit of the Company’s ﬁnancial statements are set out in note 4 on page 95 to the Ferguson plc consolidated ﬁnancial statements. 7 – Share premium account Details of new share capital subscribed are set out in note 27 on page 113 to the Ferguson plc consolidated ﬁnancial statements. 13 – Dividends Details of the Company’s dividends are set out in note 9 on page 98 to the Ferguson plc consolidated ﬁnancial statements. 8 – Treasury shares Details on Treasury shares are set out in note 27 on page 113 to the Ferguson plc consolidated ﬁnancial statements. 9 – Own shares reserve During the year, the Company contributed £6 million (2016: £11 million) of cash to its USA Employee Beneﬁt Trust and £nil (2016: £3 million) to its Jersey Employee Beneﬁt Trust to purchase shares. The Treasury shares held by both of these Trusts have been consolidated within the Company’s balance sheet as at 31 July 2017 and amount to £48 million (2016: £57 million). 14 – Related party transactions The Company is exempt under the terms of FRS 101 from disclosing related party transactions with entities that are 100 per cent owned by Ferguson plc. 15 – Post-balance sheet events Details of post-balance sheet events are given in note 36 on page 119 of the Ferguson plc consolidated ﬁnancial statements. Ferguson plc Annual Report and Accounts 2017 137 2017 £m 2016 £m 2015 £m 2014 £m 11,994 2,012 1,218 15,224 9,456 1,996 1,097 12,549 8,343 1,987 1,138 11,468 7,070 1,853 1,413 10,336 966 76 56 (39) 1,059 (64) – 229 1,224 (43) (1) 1,180 (292) 888 (105) 783 (259) – (259) 1,070 808 2,094 3,972 29 42 351 3,016 3,438 534 3,972 775 74 53 (45) 857 (48) (94) (4) 711 (36) – 675 (210) 465 185 650 (238) – (238) 1,104 1,434 1,301 3,839 29 42 380 2,452 2,903 936 3,839 681 90 55 (43) 783 (41) (4) (2) 736 (43) – 693 (215) 478 (265) 213 (222) – (222) 1,011 1,164 1,230 3,405 29 42 117 2,412 2,600 805 3,405 546 96 72 (35) 679 (15) – 27 691 (24) – 667 (199) 468 36 504 (191) (298) (489) 1,198 1,226 1,173 3,597 29 41 127 2,689 2,886 711 3,597 Restated 2013 £m 6,785 1,769 1,568 10,122 492 95 80 (42) 625 (20) (10) (13) 582 (25) – 557 (185) 372 (76) 296 (173) (348) (521) 1,246 1,263 955 3,464 28 27 402 2,596 3,053 411 3,464 Five-year summary(a) Revenue USA UK Canada and Central Europe Group Trading proﬁt USA UK Canada and Central Europe Central and other costs Group Amortisation of acquired intangible assets Impairment of goodwill and acquired intangible assets Exceptional items Operating proﬁt Finance costs Share of result of associate Proﬁt before tax Tax Proﬁt from continuing operations (Loss)/proﬁt from discontinued operations Proﬁt attributable to equity shareholders Ordinary dividends Special dividend Total dividends Net assets employed Intangible ﬁxed assets Property, plant and equipment Other net assets, excluding liquid funds Financed by Share capital Share premium Translation reserve Retained earnings and other reserves Equity attributable to shareholders of the Company Net debt Net assets employed 138 Ferguson plc Annual Report and Accounts 2017 Strategic report Governance Financials Other information Continuing operations (unless otherwise stated) Like-for-like revenue growth Gross margin Trading margin Headline earnings per share Basic earnings per share from continuing and discontinued operations Dividends per share (in respect of the ﬁnancial year) Special dividend per share Cover for ordinary dividends Net tangible assets per ordinary share Return on gross capital employed Average number of employees Number of shares in issue at year-end (million) Number of branches at year-end Continuing operations Discontinued operations Total branches US dollar translation rate Income statement/proﬁt and loss Balance sheet Euro translation rate Income statement/proﬁt and loss Balance sheet Canadian dollar translation rate Income statement/proﬁt and loss Balance sheet 2017 5.8% 29.0% 7.0% 288.9p 311.6p 110.0p – 2.6 886.9p 19.6% 33,511 267 2,310 380 2,690 1.27 1.32 1.16 1.12 1.68 1.65 2016 2.7% 28.6% 6.8% 234.7p 256.4p 100.0p – 2.3 673.8p 17.2% 32,269 267 2,498 256 2,754 1.46 1.32 1.31 1.18 1.94 1.72 2015 7.1% 28.3% 6.8% 206.7p 82.1p 90.75p – 2.3 595.1p 16.9% 31,033 267 2,480 427 2,907 1.56 1.56 1.33 1.42 1.86 2.04 2014 5.2% 28.1% 6.6% 173.2p 189.8p 82.5p 110.0p 2.1 632.1p 14.8% 29,596 267 2,444 436 2,880 1.64 1.69 1.21 1.26 1.76 1.84 Restated 2013 5.8% 27.7% 6.2% 154.5p 107.4p 66.0p 122.0p 2.3 659.9p 14.3% 28,990 274 2,470 558 3,028 1.56 1.52 1.20 1.14 1.57 1.56 (a) for an extract of the ﬁve-year summary presented in US dollars please visit www.fergusonplc.com Ferguson plc Annual Report and Accounts 2017 139 Group companies The Ferguson Group comprises a large number of companies. This list includes only those subsidiaries which in the Directors’ opinion principally affect the ﬁgures shown in the consolidated ﬁnancial statements. A full list of subsidiary undertakings is detailed in the second list below and on the next page. Principal subsidiary undertakings Company name Beijer Byggmaterial AB Capstone Global Solutions AG DT Finland Oy Ferguson Enterprises Inc Ferguson Finance (Switzerland) AG Principal activity Operating company Operating company Operating company Operating company Financing company Ferguson Holdings (Switzerland) AG* Investment company Ferguson Group Services Limited Neumann Bygg AS Stark Group Holdings A/S Wasco Holding B.V. Wolseley Canada Inc. Wolseley UK Limited Wolseley Capital, Inc. Wolseley Insurance Limited Wolseley Investments North America, Inc. Wolseley Limited * Service company Operating company Operating company Operating company Operating company Operating company Financing company Operating company Investment company Investment company Country of incorporation Sweden Switzerland Finland USA Switzerland Switzerland England and Wales Norway Denmark The Netherlands Canada England and Wales USA Isle of Man USA England and Wales (1) Shareholdings in companies marked * are held 100 per cent directly by Ferguson plc. The proportion of the voting rights in the subsidiary undertakings held directly by Ferguson plc do not differ from the proportion of the ordinary shares held. All other shareholdings in the above mentioned companies are held by intermediate subsidiary undertakings. (2) All shareholdings in the above subsidiary undertakings are of ordinary shares or equity capital. (3) All subsidiary undertakings have been included in the consolidation. Full list of subsidiary undertakings A full list of subsidiaries, joint ventures, companies in which a Ferguson Group company has a controlling interest and associated undertakings as at 31 July 2017. The country of incorporation and the effective percentage of equity owned (if less than 100 per cent) is also detailed below. Unless otherwise noted, the share capital comprises ordinary shares which are indirectly held by Ferguson plc. Fully owned subsidiaries 893111 Canada Inc. (Canada)(x)(11) A C Electrical Holdings Limited (England)(ix)(30) A C Electrical Wholesale Limited (England)(iii)(30) A C Ferguson Limited (Scotland)(ii)(iii)(20) Advancechief Limited (England)(ii)(iii)(2) B Holding SAS (France)(iii)(7) B Participations SAS (France)(iii)(7) Beijer Byggmaterial AB (Sweden)(iii)(14) Beijer Byggmaterial i Uppsaala AB (Sweden)(iii)(14) British Fittings Central Limited (England)(ii)(iii)(2) British Fittings Company (North Eastern) Limited (England)(ii)(ix)(2) British Fittings Group Limited (England)(ii)(iii)(2) British Fittings Limited (England)(ii)(iii)(2) Broughton’s Limited (England)(ii)(iii)(2) Build Center Limited (England)(ii)(iii)(2) Build.com, Inc.(US)(ix)(3) Builder Center Limited (England)(ii)(iii)(2) Building & Engineering Plastics Limited (England)(ii)(iii)(2) Capstone Global Solutions AG (Switzerland)(iii)(1) Caselco Limited (England)(ii)(iii)(2) Clawfoot Supply, LLC (US)(xii)(3) Clayton International, LLC (US)(xii)(3) Controls Center Limited (England)(ii)(ix)(2) Crew-Davis Limited (England)(ii)(iii)(2) 140 Ferguson plc Annual Report and Accounts 2017 Davidson Group Leasing Co. LLC (US)(xii)(3) Drain Center Limited (England)(ii)(iii)(2) DT Finland Oy (Finland)(iii)(21) DT Holding (Sweden) AB (Sweden)(iii)(14) DT Holding 1 AS (Denmark)(iii)(17) Electro Energy A/S (Denmark)(iii)(16) Energy & Process Corporation (US)(x)(3) Ferguson Enterprises Inc (US)(x)(3) Ferguson Enterprises Real Estate, Inc (US)(iii)(3) Ferguson Finance (Switzerland) AG (Switzerland)(iii)(1) Ferguson Fire & Fabrication Inc. (US)(iii)(5) Ferguson Group Services Limited (England)(iii)(2) Ferguson Holdings (Switzerland) AG (Switzerland)(i)(iii)(1) Ferguson Panama, S.A. (Panama)(x)(4) Ferguson Receivables, LLC. (US)(x)(3) Ferguson Sourcing (Switzerland) AG (Switzerland)(iii)(1) Fusion Provida Holdco Limited (England)(iii)(30) Fusion Provida UK Limited (England)(iii)(30) G. L. Headley Limited (England)(ii)(iii)(2) Glegg & Thomson Limited (Scotland)(ii)(iii)(20) H.P. Products Corporation (US)(x)(3) Hall & Co. Limited (England)(ii)(iii)(30) Health Equipment Hire Limited (England)(ii)(iii)(2) Heating Replacement Parts & Controls Limited (England)(ii)(iii)(2) Heatmerchants Limited (England)(ii)(iii)(2) Het Onderdeel BV (Netherlands)(iii)(24) Hobro Ny Trælast A/S (Denmark)(iii)(26) Home Outlet Online Limited (England)(iii)(30) HP Logistics, Inc. (US)(x)(3) Huggjärnet 6 Kommanditbolag (Sweden)(xiii)(14) Improvement Brand Holdings, Inc. (US)(x)(3) Julise Limited (England)(ii)(iii)(2) King & Company (1744) Limited (England)(ii)(iii)(2) Kommanditbolaget Näringen 8:4 (Sweden)(xiii)(14) Living Direct, Inc. (US)(x)(3) M. A. Ray & Sons Limited (England)(ii)(iii)(2) Matera Paper Company, Inc. (US)(x)(3) Melanie Limited (England)(ii)(iii)(2) Mölnlycke Trä AB (Sweden)(iii)(14) MPS Builders Merchants Limited (England)(iii)(30) Neumann Bygg AS (Norway)(iii)(29) Nevill Long Limited (England)(iii)(30) Ningbo Capstone Service Solutions Company Limited (China)(iii)(27) Northern Heating Limited (Scotland)(ii)(iii)(20) Northern Heating Supplies Limited (Scotland)(ii)(iii)(20) Strategic report Governance Financials Other information Wolseley Centers Limited (England)(ii)(iii)(2) Wolseley Centres Limited (England)(ii)(iii)(2) Wolseley de Puerto Rico, Inc. (Puerto Rico)(i)(x)(3) Wolseley Developments Limited (England)(ii)(iii)(2) Wolseley Directors Limited (England)(ii)(iii)(2) Wolseley ECD Limited (Northern Ireland)(ii)(iii)(9) Wolseley Engineering Limited (England)(ii)(iii)(2) Wolseley Europe Limited (England)(iii)(2) Wolseley Finance (Isle of Man) Limited (Isle of Man)(ii)(ix)(xiv)(8) Wolseley Finance (Thames) Limited (England)(ii)(iii)(2) Wolseley Finance (Theale) Limited (England)(ii)(vii)(2) WFBM SNC (France)(iii)(7) Wolseley Green Deal Services Limited (England)(iii)(30) Wolseley Group Holdings Limited (England)(iii)(2) Wolseley Haworth Limited (England)(iii)(30) Wolseley Holding A/S (Denmark)(iii)(17) Wolseley Holdings (Ireland) (Republic of Ireland)(ii)(iii)(xiv)(6) Wolseley Holdings Canada Inc. (Canada)(xi)(11) Wolseley Industrial Canada Inc. (Canada)(iii)(11) Wolseley Insurance Limited (Isle of Man)(ix)(31) Wolseley Integrated de Mexico, S.A. de C.V. (Mexico)(iv)(33) Wolseley Integrated Services Inc. (Canada)(x)(11) Wolseley Investments Limited (England)(ii)(iii)(2) Wolseley Investments North America, Inc. (US)(iii)(3) Wolseley Investments, Inc. (US)(iii)(3) Wolseley Limited (England)(i)(iii)(2) Wolseley NA Construction Services, LLC (US)(xii)(3) Wolseley Nordic Holdings AB (Sweden)(iii)(14) Wolseley North America, Inc. (US)(ii)(iii)(3) Wolseley Overseas Limited (England)(iii)(2) Wolseley Pension Trustees Limited (England)(ii)(iii)(2) Wolseley Properties Limited (England)(ii)(iii)(2) Wolseley QUEST Limited (England)(ii)(iii)(2) Wolseley Trinidad Ltd (Trinidad and Tobago)(iii)(15) Wolseley UK Directors Limited (England)(iii)(30) Wolseley UK Finance Limited (Guernsey)(ii)(iii)(xiv)(18) Wolseley UK Limited (England)(ix)(30) Wolseley Utilities Limited (England)(iii)(30) Wolseley-Hughes Limited (England)(ii)(iii)(2) Wolseley-Hughes Merchants Limited (England)(ii)(iii)(2) Wright (Bedford) Limited (England)(ii)(iii)(2) Yorkshire Heating Supplies Limited (England)(ii)(iii)(2) Fully owned subsidiaries (continued) Nu-Way Heating Plants Limited (England)(ii)(iii)(2) O.B.C. Limited (England)(ii)(iii)(2) O.B.C. Limited (Northern Ireland)(ii)(iii)(9) Oil Burner Components Limited (England)(ii)(iii)(2) P.D.M. (Plumbers Merchants) Limited (Scotland)(ii)(iii)(20) Parts Center Limited (England)(ii)(iii)(2) Pat Murphy Industrial (Sales & Service) Limited (Republic of Ireland)(iii)(6) Pipeline Controls Limited (England)(ii)(iii)(2) Plumb-Center Limited (England)(ii)(iii)(2) Power Equipment Direct Inc. (US)(x)(3) Promandis Limited (England)(ii)(iii)(2) Reay Electrical Distributors Limited (England)(ii)(iii)(2) Rosco Industrial Limited (Scotland)(ii)(iii)(20) Sellers of Leeds (Group Services) Limited (England)(ii)(iii)(2) Sellers of Leeds International Limited (England)(ii)(iii)(2) Sellers of Leeds Limited (England)(ix)(30) SEMSCO Barbados, LLC (US)(ii)(x)(12) Soak B.V. (Netherlands)(ii)(iii)(32) St. Nicholas Finance Limited (England)(ii)(ix)(2) STARK Føroyar PF (Denmark)(iii)(19) Stark Group A/S (Denmark)(iii)(17) Stark Group Holdings A/S (Denmark)(iii)(17) Stark Kalaallit Nunaat A/S (Greenland)(iii)(22) Starkki Property Oy (Finland)(iii)(21) Stock Loan Services LLC (US)(xii)(3) Sundsvall Vagnen 1 Fastighets AB (Sweden)(ii)(iii)(14) T & R Electrical Wholesalers Ltd (England)(iii)(30) Tellum Construction, LLC (US)(xii)(3) Thames Finance Company Limited (England)(ii)(iii)(2) Thomson Brothers Limited (Scotland)(iii)(20) Uni-Rents Limited (England)(ii)(iii)(2) Utility Power Systems Limited (England)(vi)(30) Wasco Distributiecentrum B.V. (Netherlands)(iii)(24) Wasco Energie Centrum B.V. (Netherlands)(iii)(24) Wasco Groothandelsgroep B.V. (Netherlands)(iii)(24) Wasco Holding B.V. (Netherlands)(iii)(24) Wasco Twello B.V. (Netherlands)(iii)(23) Wholesale Group Operations, Inc. (US)(x)(3) Wholesale Supplies (C.I.) Ltd (Jersey)(iii)(v)(10) William Wilson & Co. (Aberdeen) Limited (Scotland)(ii)(iii)(20) William Wilson & Company (Glasgow) Limited (Scotland)(ii)(iii)(20) William Wilson (Rugby) Limited (England)(ii)(iii)(2) William Wilson Holdings Limited (Scotland)(iii)(vi)(20) William Wilson Ltd (Scotland)(iii)(20) WM. C. Yuille & Company Limited (Scotland)(ii)(iii)(20) Wolseley (Barbados) Ltd (Barbados)(iii)(3) Wolseley Bristol Limited (England)(ii)(iii)(2) Wolseley Canada Inc (Canada)(x)(11) Wolseley Capital, Inc. (US)(x)(3) Joint ventures Brabyggare Sverige AB (Sweden)(iii)(25) Controlling interests Luxury for Less Limited (England, 68%)(viii)(13) SCI de Lhoumaille (France, 53%)(iii)(7) Shanghai Du De International Trading Company (China)(iii)(xv)(28) Associated undertakings Walter Meier AG (Switzerland, 39%)(iii)(34) Notes: (i) Directly owned by Ferguson plc (ii) Dormant (iii) Ownership held in ordinary shares (iv) Ownership held in class of A shares (v) Ownership held in class of B Shares (vi) Ownership held in classes of A and B shares (vii) Ownership held in classes of A, B, C and D shares (viii) Ownership held in classes of A1, A2, B, C, D, E, G shares (ix) Ownership held in ordinary and preference shares (x) Ownership held in common stock (xi) Ownership held in common stock and preferred stock (xii) Ownership held as membership interests (xiii) Ownership held as partnership interests (xiv) Companies controlled by the Group based on management’s assessment (xv) Ownership held 100% by Luxury for Less Limited Registered office addresses: (1) Grafenauweg 10, CH-6301, Zug, Switzerland (2) Parkview 1220, Arlington Business Park, Theale, Reading, RG7 4GA, United Kingdom 12500 Jefferson Avenue, Newport News VA 23602, United States 140 Commerce Road, Boynton Beach, FL 33426, Panama 18825 San Jose, City of Industry CA, United States 25/28 North Wall Quay, Dublin 1, Ireland 3 avenue de l’Opera, 75001, Paris, France 33-37 Athol Street, Douglas, IM1 1LB, Isle of Man 42-46 Fountain Street, Belfast, Northern Ireland, BT1 5EF, United Kingdom (3) (4) (5) (6) (7) (8) (9) (10) 47 Esplanade, St Helier, Jersey, JE1 0BD, Jersey (11) (12) 9501 Highway, 92 East, Tampa FL FL 33610, 880 Laurentian Drive, Burlington ON L7N 3V6, Canada United States (13) Attleborough House, Townsend Drive, Attleborough Fields Industrial Estate, Nuneaton, Warwickshire, CV11 6RU, United Kingdom (14) Box 798, S-19127, Sollentuna, Sweden (15) Building no 6, Fernandes Industrial Centre, Eastern Main Road, Laventille, Port of Spain, Trinidad and Tobago (16) GI Landevej 2, POB 1499, DK-2600, Glostrup, Denmark (17) Gladsaxe Møllevej 5, 2860, Søborg, Denmark (18) Glategny Court, Glategny Esplanade, St Peter Port, GY1 1WR, Guernsey (19) Gulsteinsvegur 3, Saltangara, Færøerne, Denmark, FO-600, Faroe Islands (20) Hareness Road, Altens Industrial Estate, Aberdeen, AB12 3QA, United Kingdom (21) Helsingintie 50, Lahti, 15100, Finland (22) Industrivej 16, Nuuk, 3900, Greenland (23) Koppelstraat 9, 7391 AK, Twello, Netherlands (24) Leigraaf 54, 7391 AL Twello, Twello, Netherlands (25) Lindingo, Stureplan 6, 4tr, 114 35, Stockholm, Sweden (26) Lucernevej 2, DK-9500 Hobro, Denmark (27) Room 1203, Building 1 (Beilun Financial Building), 527 Baoshan Road, Xinqi, Beliun District, Ningbo, China (28) Room 306-1 Building 2, 3000 Yixian Road, Baoshan district, Shanghai, China (29) Sandviksboder 58, Postboks 705, Bergen, NO-5807, Norway (30) The Wolseley Center, Harrison Way, Leamington Spa, CV31 3HH, United Kingdom (31) Tower House, Loch Promenade, Douglas, Isle of Man, IM1 2LZ, Isle of Man (32) Bergpoortstraat 71, 7411 cl Deventer, Netherlands (33) Carretera a General Cepeda 8395, Derramadero, Coahuila, 25300, Mexico (34) Bahnstrasse 24, 8603 Scherzenbach, Switzerland Ferguson plc Annual Report and Accounts 2017 141 Shareholder information This section provides shareholders with key information to assist in the management of their shareholding. If you have any questions which are not answered below or on the Ferguson plc website www.fergusonplc.com, you can contact Equiniti (our registrar) or Ferguson’s Investor Relations department at investor@fergusonplc.com. Financial calendar Key dates for 2017/18 are set out below. Please note that such dates are based on current expectations and all future dates should be considered as provisional and subject to change. 28 November 2017, 2.00pm Swiss time 1 December 2017 5 December 2017 27 March 2018 27 April 2018 19 June 2018 31 July 2018 2 October 2018 Ferguson plc 2017 Annual General Meeting 2017 ﬁnal dividend payment date Interim Management Statement released Announcement of Half Year results for the period ending 31 January 2018 2018 proposed interim dividend payment date Interim Management Statement released End of ﬁnancial year 2017/18 Final results for the year ending 31 July 2018 Ferguson shares Share price history Set out below is a graph showing the performance of Ferguson’s share price (using normalised share price data) compared to the FTSE 100 Index during the ﬁnancial year. FTSE 100 Index – Ferguson and FTSE 100 31 July 2017 120 110 100 90 29 July 2016 Aug 2016 Sept 2016 Oct 2016 Nov 2016 Dec 2016 Jan 2017 Feb 2017 Mar 2017 Apr 2017 May 2017 June 2017 July 2017 Aug 2017 Ferguson plc FTSE 100 Index Recent share capital history Since 2009, there have been four events affecting the share capital of Ferguson plc: 2013 – Special dividend, share consolidation and consequential redenomination of shares as 10 53⁄66 pence. 2012 – Special dividend, share consolidation and consequential redenomination of shares as 10 5⁄11 pence. 2010 – Scheme of arrangement and redomiciliation. 2009 – Share capitalisation and rights issue. Further details can be found on the Ferguson plc website www.fergusonplc.com. Ordinary shares and ADRs Ferguson shares are listed on the London Stock Exchange using code “FERG”. Ferguson also has an ADR programme which trades under the symbol “FERGY”. The ADRs are listed on the premier tier of the over-the-counter market “OTCQX”. For further information please contact the ADR Depositary: Deutsche Bank Trust Company Americas Transfer agent: American Stock Transfer & Trust Company Operations Center 6201 15th Avenue Brooklyn, NY 11219 Email enquiries: DB@astﬁnancial.com Telephone: Within the USA toll free: 866 249 2593 International: +1 718 921 8124 Website: www.adr.db.com 142 Ferguson plc Annual Report and Accounts 2017 Strategic report Governance Financials Other information Dividend Proposed ﬁnal dividend 73.33 pence per share The Directors have recommended a ﬁnal dividend of 73.33 pence per share. Payment of this dividend is subject to approval at the 2017 AGM. On 1 August 2017, the Company changed its reporting currency from sterling to US dollars. For the ﬁnancial year ending 31 July 2018 onwards dividends will be declared in US dollars and shareholders will be able to choose between payment in US dollars or sterling. Key dates for this dividend Ex-dividend date Record date DRIP election date AGM (to approve ﬁnal dividend) Payment date DRIP certiﬁcates posted/CREST accounts credited 26 October 2017 27 October 2017 10 November 2017 28 November 2017 1 December 2017 6 December 2017 Dividend history Details of dividends paid in the ﬁnancial years 2015/16 and 2016/17 are set out below. For details of other historical payments, please refer to the Ferguson plc website www.fergusonplc.com under “Dividends” in the “Shareholder centre” section. Financial year Dividend period 2016/17 2015/16 2015/16 Interim 2017 Final 2016 Interim 2016 Dividend payment methods Dividend amount (pence per share) 36.67 66.72 33.28 Record date 7 April 2017 Payment date 28 April 2017 28 October 2016 1 December 2016 1 April 2016 29 April 2016 DRIP share price £49.3796 £46.5923 £38.7674 1. Direct payment to your bank: You are encouraged to receive your dividends directly to your bank or building society account. This is more convenient and helps reduce the risk of cheques becoming lost or delayed in the post. The associated dividend conﬁrmation will still be sent direct to your registered address. To switch to this method of payment you can download a dividend mandate form from the Shareview website (www.shareview.co.uk). Alternatively, you can contact Equiniti by telephone who will also be able to assist with any questions you may have. 2. Overseas payment service: If you live overseas, Equiniti offers an Overseas Payment Service which is available in certain countries. This may make it possible to receive dividends direct into your bank account in your local currency*. Further information can be found on the Ferguson plc website, Shareview website or you can contact Equiniti by telephone. 3. Dividend Reinvestment Plan (“DRIP”): The Company offers a DRIP which gives shareholders the opportunity to use their dividend to purchase further Ferguson shares. Instead of receiving cash, shareholders receive as many whole shares as can be bought with their dividend, taking into account related purchase costs. Any residual cash will be carried forward and added to their next dividend. If you wish to join the DRIP, you can download copies of the DRIP terms and conditions and the DRIP mandate form from the Shareview website. Simply complete the DRIP mandate form and return it to Equiniti. Should you have any questions on the DRIP or wish for a paper mandate form to be sent to you, please contact Equiniti on 0371 384 2934. Please note that if you wish to join the DRIP in time for the 2017 ﬁnal dividend, our Registrars, Equiniti, must have received the instruction by 10 November 2017. Instructions received by Equiniti after this date will be applied to the next dividend. * Please note that a payment charge would be deducted from each individual payment before conversion into your local currency. Ferguson plc Annual Report and Accounts 2017 143 Shareholder information continued Shareholder communications Annual General Meeting (“AGM”) The 2017 AGM will be held on Tuesday, 28 November 2017 at Parkhotel, Industriestrasse 14, CH-6300, Zug, Switzerland and will commence at 2.00pm, Swiss time. An audio visual link to the meeting is proposed to be available at the offices of Freshﬁelds Bruckhaus Deringer LLP, 26-28 Tudor Street, London EC4Y 0BQ, United Kingdom, commencing at 1.00pm (UK time). The AGM provides an opportunity each year for shareholders to ask questions about the business in the Notice of AGM and to raise matters about the business of Ferguson. Full details of the AGM can be found in the Notice of AGM. Venue location maps are provided below. Zug: AGM venue Dam mstrasse Albisstrasse Gubelstrasse Metallstrasse Bärenplatz Zug Bahnhof Rail station Zug Bahnhofplatz e s s a r t s r e r a a B Kino Gotthard Parkhotel e s s a r t s e i r t s u d n I Metalliplatz London: audio visual link venue Fleet St W h i t e f r i a r s Freshﬁelds Bruckhaus Deringer LLP D o r s e t R i s e City Thameslink N e w B r i d g e S t B o u v e r i e S t l T e m p e A v e Inner Temple Inner Temple Gardens Embankment River Thames Tudor St B r i d g e l B a c k f r i a r s Website See the inside front cover for further details about the Ferguson plc website. Annual report Ferguson publishes an annual report every year. It is sent to shareholders through the post as a printed document unless the shareholder has chosen to receive e-communications (see below). E-communications The Company offers shareholders the opportunity to access shareholder documents, such as annual reports and notices of AGM, via e-communications rather than receiving printed documents in the post. You will be notiﬁed by email as soon as shareholder documents are available on the website. Managing your shares Share registration enquiries To manage your shareholding, please contact Equiniti. They will be able to assist you in various matters including: – changing your registered name and address; – consolidating share certiﬁcates; – managing your dividend payments; – notifying the death of a shareholder; – registering a lost share certiﬁcate and obtaining a replacement; – registering for electronic communications; and – transferring your shares. You can contact Equiniti in writing, by telephone or online. Further contact details are set out below. Please use your shareholder reference number when contacting Equiniti. This can be found on your share certiﬁcate or dividend conﬁrmation. If you are not already registered to view your shareholding online, you will need to register via Equiniti’s Shareview website. Equiniti Address: Equiniti (Jersey) Limited, c/o Equiniti (8063) PO Box 75 26 New Street St Helier Jersey JE4 8PP Channel Islands Telephone: 0371 384 2934 and from outside the UK +44 (0)121 415 7011 Website: www.equiniti.com Shareview website: www.shareview.co.uk/myportfolio Blackfriars Share dealing If you wish to buy or sell Ferguson shares and hold a share certiﬁcate, you can do this: – by using the services of a stockbroker or high street bank; or – through telephone or online services. Equiniti also offer a share dealing service to UK-based shareholders. Further details of their telephone, internet and postal dealing services can be obtained from their Shareview website (www.shareview.co.uk) or by calling 03456 037 037. 144 Ferguson plc Annual Report and Accounts 2017 Strategic report Governance Financials Other information Company contacts Investor relations (investor@fergusonplc.com) Group Director of Communications and Investor Relations Mark Fearon Company secretariat Group Company Secretary Graham Middlemiss Company advisers Auditor Deloitte LLP Public relations Brunswick Corporate brokers Bank of America Merrill Lynch Barclays Solicitor Freshﬁelds Bruckhaus Deringer LLP Group information Company details Registered Office Ferguson plc 26 New Street St Helier Jersey JE2 3RA Channel Islands Registration No. 106605 Jersey Ferguson Corporate Head Office Ferguson plc Grafenauweg 10 CH-6301 Zug Switzerland Telephone: +41 (0) 41 723 2230 Fax: +41 (0) 41 723 2231 Ferguson Group Services Office Parkview 1220 Arlington Business Park Theale Reading RG7 4GA Telephone: +44 (0) 118 929 8700 Fax: +44 (0) 118 929 8701 Website www.fergusonplc.com Stay informed Main corporate site www.fergusonplc.com Shareholder information section Key sections include Our businesses, Investors and media and Sustainability. There is also information on our strategy and links to our business unit websites. Site tools include information pack download, alert services and an option to receive content feeds. Visit our Investor and media centre on our corporate website to stay up to date on Ferguson’s results, ﬁnancial calendar and latest press releases. Within the Investor and media centre you will ﬁnd the Shareholder centre where you will ﬁnd information on the AGM, dividends, electronic communications, share price and managing your shares. Ferguson plc Annual Report and Accounts 2017 145 Forward-looking statements Certain information included in this Annual Report and Accounts is forward-looking and involves risks, assumptions and uncertainties that could cause actual results to differ materially from those expressed or implied by forward-looking statements. Forward-looking statements cover all matters which are not historical facts and include, without limitation, projections relating to results of operations and ﬁnancial conditions and the Company’s plans and objectives for future operations, including, without limitation, discussions of expected future revenues, ﬁnancing plans, expected expenditures and divestments, risks associated with changes in market conditions and pressures on margins, changes in the level of litigation, employee motivation, the performance and resilience of the Company’s systems and infrastructure, the level of government regulation and ﬁnancial risks (such as ﬂuctuations in exchange and interest rates). Forward-looking statements can be identiﬁed by the use of forward- looking terminology, including terms such as “believes”, “estimates”, “anticipates”, “expects”, “forecasts”, “intends”, “plans”, “projects”, “goal”, “target”, “aim”, “may”, “will”, “would”, “could” or “should” or, in each case, their negative or other variations or comparable terminology. Forward-looking statements are not guarantees of future performance. All forward-looking statements in this Annual Report and Accounts are based upon information known to the Company on the date of this Annual Report and Accounts. Accordingly, no assurance can be given that any particular expectation will be met and readers are cautioned not to place undue reliance on forward-looking statements, which speak only at their respective dates. Additionally, forward-looking statements regarding past trends or activities should not be taken as a representation that such trends or activities will continue in the future. Other than in accordance with its legal or regulatory obligations (including under the UK Listing Rules, the Prospectus Rules, the Disclosure Rules and the Transparency Rules of the Financial Conduct Authority), the Company undertakes no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. Nothing in this Annual Report and Accounts shall exclude any liability under applicable laws that cannot be excluded in accordance with such laws. 146 Ferguson plc Annual Report and Accounts 2017 Credits Designed and produced by Radley Yeldar www.ry.com Photography: Andy Wilson Paper This report is printed on Revive 50 Silk paper and cover board, with Revive 100 offset used in the ﬁnancial section. Revive 50 Silk is made from 25 per cent de-inked post- consumer waste, 25 per cent unprinted pre-consumer waste and 50 per cent virgin ﬁbre. Revive 100 offset is made from 100 per cent de-inked post consumer waste. Both products are fully biodegradable and recyclable and produced in mills which hold IS0 9001 and ISO 14001 accreditation. Printing Printed by Pureprint Group. The printing inks are made with non- hazardous vegetable oil from renewable sources. Over 95 per cent of solvents and developers are recycled for further use and recycling initiatives are in place for all other waste associated with this production. Pureprint Group is FSC® with strict procedures in place to safeguard the environment through all processes. The greenhouse gas emissions from the production and distribution of this Annual Report and Accounts have been neutralised through The Gold Standard Basa Magogo offsetting project in South Africa. The ﬁrst Gold Standard project of its kind in the world, this innovative behaviour-change programme teaches local communities in South Africa to burn coal differently in order to be more fuel efficient, thereby reducing carbon emissions. The technique, called Basa Magogo, means “Light it up! Grandmother” in Zulu. In addition to the emission reductions, the Basa Magogo technique also improves visibility and reduces health risks by producing less smoke. Ferguson plc Registered Ofﬁce 26 New Street St Helier Jersey JE2 3RA Channel Islands Registration No. 106605 Jersey Corporate Headquarters Grafenauweg 10 CH-6301 Zug Switzerland Telephone +41 (0)41 723 2230 Fax +41 (0)41 723 2231 www.fergusonplc.com Follow us on Twitter @ferguson_plc

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