Strategic Report Governance Financials Other Information

Ferguson plc Annual Report and Accounts 2019 Welcome to Ferguson

IFC–53 54–106 107–159 160–168 Strategic report Governance Financials Other information

IFC Contents 55 Governance overview 108 Group income statement 160 Five-year summary IFC Welcome to Ferguson 56 Board of Directors 109 Group statement of 162 Group companies 2 Chairman’s statement 58 Ferguson’s governance comprehensive income 164 Shareholder information 2 Financial highlights structure 110 Group statement of 167 Group information changes in equity 4 Ferguson at a glance 60 How the Board operates 168 Forward-looking statements 111 Group balance sheet 6 Group Chief Executive’s review 61 What the Board has done during the year 112 Group cash flow statement 11 Marketplace overview 62 Board composition and 113 Notes to the consolidated 12 Strategic priorities development financial statements 14 Our business model 63 Evaluating the performance 150 Independent auditor’s report 16 Key resources and relationships of the Board of Directors to the members of Ferguson plc 20 Key performance indicators 64 Relations with shareholders 156 Company income statement (“KPIs”) and other stakeholders 156 Company statement 22 Financial review 66 Audit Committee of changes in equity 26 Regional performance 72 Nominations Committee 157 Company balance sheet and overview 76 Directors’ Report – 158 Notes to the Company 42 Sustainability other disclosures financial statements 47 Principal risks and 80 Directors’ Remuneration Report their management 84 2019 Remuneration Policy 97 Annual report on remuneration

Pages 2 and 3 Pages 22 to 25 A year of A strong signiﬁcant operating change and performance Mike Powell considerable Group Chief Financial Officer progress Gareth Davis Chairman

Pages 26 to 41 Pages 6 to 10 Making a difference Creating through our vision, a simpler, mission and values stronger business dedicated to service John Martin Group Chief Executive Ferguson plc 01 Annual Report and Accounts 2019 Strategic report GovernanceFinancials Other information

A simpler, stronger business

John Martin, our Group Chief Executive, outlines the strengths of our business Over several years we have simpliﬁed in his review. our business to make it stronger. Pages 6 to 10 We offer the best support, advice and widest range of specialist plumbing and heating products and we have focused on key markets which offer the greatest growth opportunities. Across these markets, we pride ourselves on our exceptional customer service. The values we are driving Throughout the Regional performance and overview section we feature examples across the business underpin the of our values in action. way we work and help us to achieve Pages 26 to 41 our vision to be a trusted partner and deliver the best service to customers in our industry. Ferguson plc 02 Annual Report and Accounts 2019 Chairman’s statement

In line with these capital priorities the Board is recommending a final dividend of A year of 145.1 cents per share (2017/18: 131.9 cents per share), to be paid on 28 November 2019 to shareholders on the register at significant change 25 October 2019. This will bring the total dividend for the year to 208.2 cents per share and considerable (2017/18: 189.3 cents per share) representing a year-on-year increase of 10.0 per cent. We want to maintain an attractive, growing progress and sustainable dividend. Our balance sheet remains strong and we continue to target net debt of one to two times adjusted EBITDA. The dividend is covered 2.5 times Ferguson delivered a strong operating performance in the by headline earnings per share. year despite mixed market conditions, with the growth rate The Group’s cash generation has been in our US markets, in particular, moderating in the second half. strong, and the Company ended the We have continued to execute our strategies and generate year with a net debt to adjusted EBITDA ratio of 0.7 times. In June, we announced further market share gains and profitable growth. a $500 million share buy back programme which we expect to complete over the 2019 has been an important year for The Board has kept our listing structure next 12 months. the Group as we have continued to under review over several years. In light focus our strategy on the excellent growth of the Group’s ongoing focus on the USA Board changes opportunities that exist in our markets and Canada, the Board is again assessing In September, we announced that John in the USA and Canada. In September the most appropriate listing structure for Martin will step down as Chief Executive on we announced our proposal to demerge the Group going forward. A range of options 19 November 2019. John joined the Board Wolseley UK which will enable it to pursue and associated costs and benefits will be as Chief Financial Officer in 2010 before its independent strategy as a standalone assessed and the Company will further being appointed Group Chief Executive company (you can read more about this consult with shareholders in due course. in 2016. During his tenure the Group has in the Chief Executive’s Review on pages been significantly simplified, exiting less 6 to 10). Shareholder returns attractive markets and focusing resources on those markets where the Company is With Ferguson’s increasing geographic The Board is committed to maximising best equipped to win. John’s contribution focus on North America, we have continued long-term shareholder value. Our investment to Ferguson has been outstanding for nearly to make excellent progress on reshaping the priorities remain firmly focused on achieving a decade and he leaves the business in Board this year to ensure we have the right organic growth, funding the ordinary great shape. We wish him well for the future. balance of Executive and Non Executive dividend through the cycle and investing in skills and experience to support the business bolt-on acquisitions that meet our stringent The Board is delighted that Kevin Murphy over the long term. This is discussed in more investment criteria. Any surplus cash after will succeed John as Chief Executive in detail below. meeting these investment needs will be November. Kevin, a US national based in returned to shareholders. Virginia, was appointed Chief Executive of Ferguson Enterprises in the USA and joined the Board in August 2017. Under his leadership Ferguson has continued to gain market share and generate profitable growth.

Financial highlights Statutory ﬁnancial results $22,010m 481.3c Revenue Basic earnings per share +6.1% (2017/18: $20,752m) -6.7% (2017/18: $515.7c) $1,324m 208.2c Proﬁt before tax Ordinary dividend per share +11.5% (2017/18: $1,187m) +10% (2017/18: 189.3c) Ferguson plc 03 Annual Report and Accounts 2019 Strategic report GovernanceFinancials Other information

He has a wealth of operational experience During the year two other Non Executive We continue to meet these disclosure gained in the plumbing and heating industry Directors joined the Board. Cathy Halligan requirements, monitor developments and in the USA and joined the business through joined in January 2019. She is a US adopt best practice in corporate governance. an acquisition of his family’s Waterworks citizen and currently serves on the Board We describe how we have applied the business, Midwest Pipe and Supply, of two NASDAQ-listed companies: Ulta UK Corporate Governance Code’s main in 1999. He has a strong track record of Beauty, the omni-channel retailer; and FLIR principles in the Governance section of this delivering results having previously served Systems, a global thermal imaging, infrared report on pages 54 to 106. The Board places as Ferguson’s Chief Operating Officer technology company. Cathy previously great emphasis on providing clear and for 10 years. worked for Walmart for five years where transparent reporting and believes this Annual she held Executive roles across marketing Report is fair, balanced and understandable. In May we announced the appointment of and e-commerce, including Chief Marketing Geoff Drabble as a Non Executive Director. Officer for Walmart.com. Cathy has extensive Geoff will succeed me as Chairman after Looking ahead digital transformation, marketing and Board the 2019 Annual General Meeting (“AGM”), Ferguson has made excellent progress this experience. In February Tom Schmitt, a US subject to shareholder approval. I have year on many fronts. The Board is confident citizen, was appointed to the Board and is served as a Non Executive Director of that the Company has the right strategy, currently Chairman and Chief Executive of Ferguson for 16 years including nearly nine leadership and culture to continue to deliver Forward Air Corporation, the NASDAQ-listed years as the Company’s Chairman and it is on its full potential. Our consistent strong premium ground transportation company. the right time for me to hand over the Chair. performance, together with continued From 2013 to 2016 Tom served as a Non Geoff joins Ferguson following a 12-year rapid execution of our strategy, ensures Executive Director of Zooplus AG, the period as Chief Executive of Ashtead Group, the Board continues to look to the future e-commerce based provider of pet foods the FTSE 100 industrial equipment rental with confidence. and supplies listed on the Frankfurt Stock company. He was previously an executive Exchange. Tom has significant operational And finally, since this is my last letter to you director of The Laird Group and held a experience of running large international as Chairman, it has been a huge privilege for number of senior management positions logistics and supply chain businesses. me to have served this great Company and at Black & Decker. We are delighted to you as shareholders. It’s the right time for me welcome Geoff to the Board of Ferguson. Change of corporate headquarters to step down with the business performing His record of value creation is outstanding well, a clear strategy and a sound platform In May, following shareholder approval, and he brings a wealth of experience in the on which to generate substantial growth in the Company changed to a new corporate distribution, technology and manufacturing the future. I would like to take this opportunity structure moving the Group’s headquarters sectors, particularly in the USA. to thank my Board colleagues, the leadership and the tax residence of its holding company team and, above all, our incredible associates Darren Shapland will be stepping down from Switzerland to the UK. This further for their passion, commitment and hard work as a Non Executive Director at the AGM simplified the Group’s corporate structure which have been instrumental to our success. in November. The Board thanks him for his following recently announced Swiss tax I strongly commend my proposed successor, significant contribution to the Company over reform. This change also allows us to hold Geoff Drabble to you and Kevin Murphy, the last six years. Darren’s responsibilities the AGM in London on 21 November 2019. Ferguson’s new Chief Executive. The Board as Chairman of the Audit Committee will The Board and I are greatly looking forward has made excellent choices in both of them be taken on by Alan Murray the Senior to meeting with shareholders in person at and I have every confidence that together Independent Director. Alan, a US resident, the event this year. is a Chartered Management Accountant they will be superb stewards of the Company with considerable financial, operational in the future. and international experience within global Governance businesses including 19 years at Hanson plc, The Company remains UK-listed and meets with five years as CEO. the requirements of the regulations published by the UK Government concerning narrative and Directors’ remuneration reporting. Gareth Davis Chairman

Alternative performance measures $21,771m $1,601m Ongoing revenue1 Ongoing trading proﬁt1 +7.1% (2017/18: $20,334m) +7.2% (2017/18: $1,493m) 29.4% 517.4c Ongoing gross margin1 Headline EPS1 +0.1% (2017/18: 29.3%) +16.4% (2017/18: 444.4c)

1. 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. For further information on APMs, including a description of our policy, purpose, definitions and reconciliations to equivalent IFRS statutory measures, see notes 2 and 3 on pages 118 to 122. Ferguson plc 04 Annual Report and Accounts 2019 Ferguson at a glance

A more focused business Ferguson plc is a leading specialist distributor of plumbing and heating products. Our business serves customers throughout North America and the United Kingdom, predominantly serving the repair, maintenance and improvement (“RMI”) markets.

We operate nine strategic business units (“SBUs”) in For more information on our SBUs the USA providing a broad range of plumbing and heating Pages 26 to 41 products and solutions. For more information on the markets of our SBUs These are delivered through specialist sales associates, counter service, showroom consultants and e-commerce. Page 7 Our nine SBUs are organised by customer requirements for strategic planning purposes. Blended Branches mainly comprises three principal SBUs: Residential Trade, Residential Showroom and Commercial. In certain markets where it is more efficient to do so, we serve our customers through a Blended Branches location rather than a standalone business unit.

Residential Trade Serves the residential RMI and new construction sectors with a large proportion of sales through the branch counters. It provides plumbing and sanitary supplies, tools, repair parts and bathroom ﬁxtures to plumbing contractors. 20% of total US revenue

Residential Showroom eBusiness HVAC Operates a national network of 277 showrooms, Sells home improvement products directly to Distributes heating, ventilation, air conditioning serving consumers and trade customers. consumers and trade customers online through (“HVAC”) and refrigeration equipment, parts and Showrooms display bathroom, kitchen and lighting various websites. The primary brand is supplies to specialist contractors in the products and assist customers by providing Build.com and the business uses the same residential and commercial markets for advice and project management services for distribution network as the trade businesses. repair and replacement. their home improvement projects. 8% 9% 14% of total US revenue of total US revenue of total US revenue Ferguson plc 05 Annual Report and Accounts 2019 Strategic report GovernanceFinancials Other information

Group USA UK Canada

Canada Canada USA UK 4% USA UK 6% 84% 4% 92% $18,358m $2,222m $1,191m 10% Ongoing revenue1 Ongoing revenue1 Ongoing revenue1 (2017/18: $16,670m) (2017/18: $2,472m) (2017/18: $1,192m) Ongoing Ongoing trading revenue1 proﬁt1 8.2% 3.1% 5.6% Ongoing trading margin1 Ongoing trading margin1 Ongoing trading margin1 (2017/18: 8.4%) (2017/18: 2.9%) (2017/18: 5.9%)

Commercial Facilities Supply Provides commercial plumbing and Provides products, services and solutions to enable mechanical contractors with products and reliable maintenance of commercial facilities services including bidding and tendering across multiple RMI markets including multi-family support and timeline planning to assist with properties, government agencies, hospitality, their construction projects. education and healthcare. 15% 5% of total US revenue of total US revenue

Fire and Fabrication Waterworks Industrial Fabricates and supplies fire protection Distributes pipes, valves and fittings (“PVF”), Supplies PVF and industrial maintenance, repair products, fire protection systems and bespoke hydrants, meters and related water management and operations (“MRO”) specialising in delivering fabrication services to commercial contractors products alongside related services including automation, instrumentation, engineered products for new construction projects. water line tapping and pipe fusion. and turn-key solutions. Also provides supply 4% 17% chain management solutions. of total US revenue of total US revenue 8% of total US revenue

1. This is an APM, for further information on APMs, including a description of our policy, purpose, deﬁnitions and reconciliations to equivalent IFRS statutory measures, see notes 2 and 3 on pages 118 to 122. Ferguson plc 06 Annual Report and Accounts 2019 Group Chief Executive’s review

Signiﬁcant progress in executing our strategy

The Group generated another strong operating performance despite a slowing macroeconomic environment in the second half of the year.

Ongoing revenue increased to $21.8 billion A simpler, stronger and more 1. Fragmented markets and ongoing trading profit increased by profitable business Today, Ferguson is focused on 14 businesses $108 million to $1.6 billion compared to We have substantially simplified our across three countries where we are last year. Cash generation was excellent business over the last 11 years, focusing well-equipped to win and make attractive and the Group continues to operate with where we are best equipped to win, returns. In the USA we operate nine strategic a strong balance sheet. We made further to become stronger and more profitable business units with a number one or two excellent progress on executing our strategy as shown in figure 1. Today we have an market position in the majority of them as and we continue to focus on developing attractive business model that combines shown in figure 2. There is a significant our businesses in the USA and Canada fragmented markets, a differentiated service opportunity for strong growth and continued where we see considerable opportunities offering, fantastic growth opportunities and consolidation within each of these large, for profitable growth. You can read about strong, consistent returns for shareholders. fragmented markets. Many customer our strategic priorities and some of our key These are discussed in more detail over projects require a range of products and achievements this year on pages 12 and 13. the next few pages. services from across our business units and we leverage our scale and expertise across the organisation for the benefit Figure 1: How we have improved our business of our customers, which provides the opportunity to make attractive returns for 2008 2019 our shareholders. Simpler Business units 45 14 We benefit from significant synergies as Number of countries 27 3 shown in the shared infrastructure table Presentational currency £$(figure 3), to help lower US costs and improve Stronger Net debt: adjusted EBITDA 2.7x 0.7x margins. We have chosen to operate in these Operating leases ($3.0bn) ($1.1bn) markets because we can generate strong growth, decent gross and net margins and Pensions (deficit)/surplus ($0.5bn) $0.2bn good returns on capital in each of these 1 More profitable Return on gross capital employed 12.5% 26.2% businesses, which is good for our customers, Ongoing gross margin1 27.7% 29.4% suppliers, associates and shareholders. Ongoing trading profit1 $920m $1,601m

1. This is an APM, for further information on APMs, including a description of our policy, purpose, deﬁnitions and reconciliations to equivalent IFRS statutory measures, see notes 2 and 3 on pages 118 to 122. Ferguson plc 07 Annual Report and Accounts 2019 Strategic report GovernanceFinancials Other information

Figure 2: Strong positions in fragmented markets* in the USA

#6 $90bn #3 $50bn #4

#1 25 #2

20 #4 #1 15 #1 5 Market size ($bn)

5 5 10 4 Home 3 Depot 8 6 4 Amazon

5 Watsco MRC #1 HD 17% Supply 11% 20% 23% 6 4% 5% 10% 1% 22% 0 Residential Residential Commercial Waterworks HVAC Industrial Fire & Facilities Standalone Trade Showroom Fabrication Supply eBusiness (formerly B2C)

Ferguson Number of other large competitors >1% Market leader if not Ferguson Other small competitors #1 Ferguson market position

* Management estimated market share.

Figure 3: US shared infrastructure The chart below shows the shared infrastructure between our strategic business units.

Residential Residential Fire and Facilities Standalone Shared… Trade Showroom Commercial Waterworks HVAC Industrial Fabrication Supply eBusiness Branches Distribution centres ERP* Sourcing Back office Own brand Sales associates Other large competitors

Signiﬁcant shared infrastructure Partial shared infrastructure * Enterprise resource planning. Ferguson plc 08 Annual Report and Accounts 2019 Group Chief Executive’s review (continued)

2. Differentiated service offering Figure 4: We differentiate ourselves through the and dedicated associates unrivalled service we provide to our customers in the USA We have a highly valued and differentiated Our customers return to us day after day for our expertise and relentless service offering, providing support for focus on service. Below are some examples of how we support our our customers’ projects and delivered customers to deliver a wide variety of projects, from small residential by the best associates in our industry repair jobs to major new construction work. (see customer service in the KPI section on pages 20 and 21). Our customers are not completing a transaction, they are building, renovating, developing or installing projects in challenging environments to tight timescales, and their wants are complex. Basic building blocks of our service include After-sales excellent availability, quick and reliable support delivery, account-based credit and a large and convenient branch network. However, Showroom Pick-up to keep our sustainable competitive consultancy options advantage we must fulfil our customers’ “wants” (see figure 4). We provide unique value-added services, combined with industry leading service levels from our associates, to take market share and Sales Delivery continue our sustainable, profitable growth. channels options For example: – We offer unrivalled delivery and Customer wants pick-up options for our customers, some of whom want to come into the branch and get advice from our very knowledgeable associates. – “Pro Pick-up” is a one-hour pick-up service available in 617 branches across the USA Sourcing Product for those customers who are particularly information time sensitive. – Other deliveries can be set at later dates, for specific locations and times on different job sites and we offer specialist vehicles for products that require them. Customised Branch – Approximately 50 per cent of US solutions services revenue comes through working with our customers when they are bidding Bidding or tendering for work. Our 2,000 sales and tendering associates work hard to understand our customers’ needs, identify the most appropriate products, source and price them. We help our customers win work After-sales support Delivery options Bidding and tendering Sales channels and when they are successful, we are too. No hassle returns Call off options Value engineering Inside sales – We operate a 24/7 water heater (order book) Credit Take-off software Online and EDI emergency support service across Multiple delivery Warranty support Project-specific Outside field sales more than 150 branches focused on locations tendering support Project-based billing commercial properties. We deliver the Same-day delivery Call centres water heaters with all the required fittings

Specialist delivery Customised solutions Pick-up options e-commerce call centre and arrange for the removal of the broken- e.g. crane & FLT trucks Commercial 24/7 secure access down equipment. water heaters Showroom Scheduled forward Product information Kits consultancy delivery dates Technical data and Pre-assembled units “Provisions” bespoke One-hour “Pro Pick-up” rich content catalogue/order service Fabrication

Appliance installation Branch services Valve actuation services Product advice Project management Sourcing Emergency out of hours Design services Own brand Exclusive distribution Sourcing of non-stock items

Pages 14 and 15 Ferguson plc 09 Annual Report and Accounts 2019 Strategic report GovernanceFinancials Other information

Figure 5: Focus on US Figure 6: Great growth opportunities: RMI market Consistent Group revenue, gross margin and proﬁt growth

11% 8% 32% $21.8bn 58%

29.4%

$15.9bn $1.6bn

60%

$0.9bn 27.7% 31% 60% The RMI market now represents 60% of US revenue

2008 2019 20082009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

RMI New construction Civil infrastructure Ongoing revenue1 Ongoing trading proﬁt1 Ongoing gross margin1

3. Growth opportunities As set out in figure 6, since 2010 we have Health and safety grown ongoing revenue and trading profit Our principal markets have good The safety of our associates and every year. Our objective is that we should demographics which support continued stakeholders impacted by our operations grow, profitably, above the market and we growth. Population growth and expansion is our highest priority, consistent with our have consistently outperformed the market of household formation provide strategy of recruiting and developing the for the last 11 years. We have also completed underlying demand for new homes and best associates in our industry. selective bolt-on acquisitions that have consumers demand more comfortable added between one and two per cent We have made demonstrable improvements and better equipped homes and buildings of growth each year. in the safety of our workplace over the last (see Marketplace overview on page 11). year, with a 22 per cent improvement in Ferguson has a strong sales culture and The expansion of our gross margins is the Group’s Recordable Injury Rate and our teams work hard to generate profitable also an important attribute of our business. a 13 per cent improvement in the Lost growth above the market. There are also We have aligned with the right vendors Time Rate. These results, though, do not plenty of opportunities for profitable and carefully managed our product mix reflect the whole story. During the year bolt-on acquisitions. whilst developing our own brand, ensuring we have institutionalised engagement that we are adding value to our customers The Group is primarily focused on the repair, conversations with our associates, site visits through our service and recovering that maintenance and improvement (“RMI”) and ride-alongs by senior management value in our pricing. We have typically market, which typically involves smaller, dedicated entirely to safety. For major achieved gross margin improvements of non-discretionary projects with short lead injuries, we stand down our operations to 10 to 20 basis points per year. Growing our times. The RMI market has traditionally examine and discuss the cause of accidents own brand percentage of revenue remains been less volatile than the new construction and how we can improve our operations to an important key performance indicator market and over the last 11 years we have avoid them in the future. We have specified (see pages 20 and 21). focused our resources on it as part of a the best personal safety wear for our realignment towards more stable recurring In recent years we have exited a number associates and are investing in the most income streams (see figure 5). of weaker or sub-scale markets where appropriate materials handling equipment decent returns were not available. We now in our warehouses and distribution centres 4. Strong, consistent returns have a much stronger, simpler and more (“DCs”). We are redesigning our Safety We are very results focused and we focused business with excellent positions Development Programme for our drivers and have improved returns substantially in markets where we are well equipped have renewed our health and safety training by a combination of driving profitability to win. We are well placed to capitalise on to ensure that it is appropriate and reinforced and careful balance sheet management, the opportunities to consolidate and gain at all levels throughout the organisation. most notably working to ensure that market share profitably and have excellent we have the right inventory and we are opportunities for profitable growth in our commercially astute in the management core markets for many years to come. of trade receivables.

1. This is an APM, for further information on APMs, including a description of our policy, purpose, deﬁnitions and reconciliations to equivalent IFRS statutory measures, see notes 2 and 3 on pages 118 to 122. Ferguson plc 10 Annual Report and Accounts 2019 Group Chief Executive’s review (continued)

For the first time we have set out the safety Acquisitions I am particularly pleased that my successor behaviours we expect from ourselves and will be Kevin Murphy, Chief Executive of The majority of our growth is organic our associates and provided improved Ferguson Enterprises in the USA. Kevin is and our first priority for the deployment guidance on the rules we need to follow a highly respected leader with unparalleled of capital and resources is to support our to avoid accidents. Our performance has experience of the plumbing and heating organic growth. Our strategy is also to make improved but we have historically been too industry. I am confident that Ferguson is in selective bolt-on acquisitions that meet reactive. Today we have a clear roadmap safe hands and I wish both Kevin and all of our investment criteria and where we can to move towards our goals of leadership our associates every success for the future. generate shareholder value. During the year, in safety in the distribution industry. we acquired 15 businesses with annualised You can read more about our health revenue of $726 million in the USA Outlook and safety programme this year and our and Canada. The Board expects to make further good wider sustainability performance on pages progress in the year ahead. Whilst US 42 to 46. UK demerger market growth is currently broadly flat, consistent with the second half of 2019, we In September we announced our intention expect to continue to outperform. Our order Making a difference through to demerge our UK operations subject books support continued modest growth our vision, mission and values to shareholder approval. The decision in the months ahead and our business is marked the conclusion of a detailed Good business is about great people and performing well. We remain focused on review of the Group’s assets over several our associates are the driving force behind maximising our organic revenue growth rate, years. On completion of the transaction our Company. They are consistently focused gross margin expansion, tight cost control Wolseley UK will become an independent on delighting our customers and developing and strong cash generation. our business. That’s why our customers keep listed Company serving residential and coming back to us. That is the essence of commercial tradespeople and customers. Ferguson and our vision is to be a trusted The separation will further simplify the Group partner and deliver the best service to and will enable Wolseley UK to pursue customers in our industry. its independent strategy. Following the John Martin demerger Ferguson will be wholly focused Group Chief Executive This year we have updated our vision, on serving customers in North America. mission and values and you can read more Wolseley UK has a strong market position, about this on page 16 and examples of how leading customer propositions and an our associates live our values on pages experienced management team with 28 to 39. Our vision, mission and values significant opportunities for development are a reminder of the goals we are working in the large and fragmented plumbing, towards and how we expect to get there. heating and infrastructure markets. They apply to all of our operations and business units. From our mission today to People and succession our vision for the future, our values underpin all that we do and help us to make the right I am stepping down as Chief Executive on decision when it counts, inform stakeholders 19 November 2019 after nearly 10 years with about what we stand for and help attract and the Company. It’s been a huge honour to retain our talented associates. Our values serve Ferguson and I am extremely proud engender great behaviours that we expect of our achievements, which are wholly of ourselves in all the business that we do. attributable to our talented and dedicated They inspire us to serve our customers, associates. Ferguson today is in great to respect our fellow associates and stretch shape, we are a focused distributor with ourselves every day. the best management and associates in our industry, operating in attractive and fragmented markets with fantastic long-term opportunities for further profitable growth and expansion. Ferguson plc 11 Annual Report and Accounts 2019 Strategic report GovernanceFinancials Other information Marketplace overview

Our markets are large and fragmented with strong growth characteristics The USA continues to be our largest market with the greatest growth opportunities. It is highly fragmented with no market dominated by any single distributor.

Market characteristics and opportunities

Average customer Customers’ needs Large Clear need for distributors basket of goods are local supplier base in the supply chain Ferguson serves over one million The customer base is fragmented. Ferguson distributes over Distributors, including Ferguson, customers. In the USA, the average Professional contractors typically one million products from bridge the gap between a basket size is four products valued operate within 20 miles of their approximately 45,000 suppliers fragmented supplier base and the at approximately $500. home base and may visit their local across the world. large and geographically dispersed branch several times per week. professional customer base. In addition, they continue to increase the usage of digital channels which complement their working patterns.

Highly fragmented Beneﬁts Strong organic Bolt-on acquisition industry of scale growth opportunities opportunities Our markets are typically highly Due to scale beneﬁts, market leaders Market characteristics Ferguson has a large fragmented, with few large can perform better through the support long-term organic database of targets to support players in the industry. economic cycle and customers have growth opportunities. continued growth. quicker access to products.

Market growth drivers in the USA

Population growth Housing transactions Consumer confidence >5% 5.0-5.5m High Total population growth of more than Existing home sales continued to be in In the USA, consumer confidence 5 per cent is expected in the USA in the the 5.0-5.5 million range while remaining in 2018/19 was high. There is a strong next decade. significantly below the previous peak. correlation between consumer confidence Source: United Nations Department Source: National Association and activity levels in our markets. of Economic and Social Affairs. of Realtors. Source: The Conference Board.

Ageing housing stock Increased comfort levels in homes Disposable income 42 years 95% No. 1 The median age of homes in the USA is 95 per cent of new single family homes The USA has the highest levels of disposable 42 years. There is high demand for repairs, in the USA have two or more bathrooms. income per household in the OECD. maintenance and improvement in the large There is a trend towards increasing Source: Organisation for Economic installed base of existing homes. levels of comfort in homes. Co-operation and Development (“OECD”). Source: US Department of Source: US Department of Housing and Urban Development. Housing and Urban Development.

For further information on the regional markets we operate in, please see pages 26 to 41. Ferguson plc 12 Annual Report and Accounts 2019 Strategic priorities

Our strategic priorities to drive performance We focus on a number of strategic priorities to drive sustainable profitable growth. These set out how we aim to win in our local markets, outperform our competitors and drive strong financial results. Our businesses are not homogeneous and they require specific strategies which depend on local market conditions, specific customer needs and the competitive environment.

Engaged associates Key achievements in 2018/19 Well trained, highly engaged associates Launched a Group-wide engagement Rolled out a number of development deliver excellent customer service. survey with the same core engagement programmes to associates across A relentless focus in this area drives questions for all associates. The new branches and DCs in the USA. customer loyalty. engagement survey allows for better See page 17 for more information. external benchmarking, see page 21. The Group’s total recordable injury rate and lost time rate improved by 22 per cent and 13 per cent respectively compared to last year (see pages 42 and 43).

Excellent service ethic Key achievements in 2018/19 Our aim is to provide the best customer Relaunched the one-hour pick-up Implemented a new customer insights service in the industry, consistently across service as “Pro Pick-up” and expanded tool to measure Net Promotor Score and branches and regions. the programme to 617 branches across Overall Satisfaction ratings of customer the USA. interactions (see pages 20 and 21). We are trialling the beneﬁts of in-house installation teams for semi-custom and custom installation of appliances in our residential showroom business across Texas and Florida.

Strong sales culture Key achievements in 2018/19 We continue to drive a strong sales culture. Revenue growth is broadly based across When our associates are proud and conﬁdent all geographies in the USA. about our services and have the best tools, Updated our company values to support knowledge and data to support them, we will a strong sales culture, read more about achieve the strongest results. They engage our values on page 16. with existing and new customers to make We have invested further in training and sure we are front of mind when it comes to development for all our associates which bids for work, which generate a signiﬁcant you can read more about on page 17. proportion of our revenue.

Organic expansion Key achievements in 2018/19 Our aim is to accelerate proﬁtable growth We have continued to outperform through above market revenue growth markets in the USA and take share. and targeted branch expansion. During the year the Group generated ongoing organic revenue growth of 4.4 per cent (see page 20). Ferguson plc 13 Annual Report and Accounts 2019 Strategic report GovernanceFinancials Other information

Bolt-on acquisitions Key achievements in 2018/19 We complement our organic growth We have invested $657 million to strategy with bolt-on acquisitions to expand acquire 15 businesses during the year our leadership positions and capabilities with annualised revenue of $726 million. to extend the value of our brand. These are rapidly integrated into our network to deliver attractive returns.

Adjacent opportunities Key achievements in 2018/19 We utilise our existing knowledge, We have made acquisitions in adjacent skills and infrastructure to capitalise areas to the business to help support on new market opportunities. For example, our growth. These include cabinetry, Facilities Supply and our B2C e-commerce valve and automation solutions and services, geotextiles and erosion control businesses. solutions serving customer irrigation needs. These acquisitions allow us to gain expertise and experience and reach a new customer base.

Operating model and Key achievements in 2018/19 We rapidly reduced the cost base given Ferguson.com increased its range to e-commerce development weaker market conditions in the USA over 1 million products. in the second half of the year. We ensure that our operating model is Search results are more robust and agile and flexible so it can adapt to changing The Ferguson app was released in the allow users to filter results to easily and customer needs and that we are able to flex USA which combines barcode scanning quickly find the products they need with our cost base when required. Increasingly our capabilities with existing functionality more complete information. customers want to deal with us online and we of Ferguson.com to provide trade must ensure we have the leading e-commerce professionals the tools they need on-the-go, anywhere. platform in each market in our industry.

Pricing discipline Key achievements in 2018/19 We work constantly to understand We continue to develop capabilities our customers’ needs more accurately and to analyse pricing in our bid and structure our pricing to be fair, consistent tender processes. and competitive. Implemented dynamic eBusiness pricing, enabling insight and the ability to adjust pricing in response to real-time trends.

Own brand penetration Key achievements in 2018/19 We systematically build upon and extend Acquired a number of own brand Extended our own brand product set our portfolio of own brand products which businesses in the USA during the year to in the USA to include vanities, lighting provide additional choice and great value support growth such as Jones Stephens, and plumbing, speciality plumbing and for our customers. We have an opportunity Millennium Lighting and James Martin. repair products. to offer a wider range of own brand products Launched two new own brand product to our customers, some of which attract ranges in Canada including Fredrick higher gross margins. York, a decorative plumbing brand.

Accelerate innovation Key achievements in 2018/19 Five investments from 21 proof of Investment in startup Payzer, helping across the Group concepts executed with startups and to accelerate the business in the HVAC We work to identify new technologies the establishment of two innovation labs. and plumbing markets, resulting in new customers for Payzer. and business models which customers Five partnerships focused on building will value in the future. We will also invest capacity in the Virginia entrepreneurial or partner with innovative businesses and ecosystem, including hosting the Ferguson people to stay at the forefront of our industry. Innovation Challenge with The College of William & Mary’s top students selected as Innovation Lab interns. Ferguson plc 14 Annual Report and Accounts 2019 Our business model

Creating value through superior service We are a specialist distributor who creates value through the expertise of our people, our scale, bespoke logistics network, technology and the support and service we give our customers. We partner with them to improve their construction, renovation and maintenance projects.

Key resources and relationships What makes us different?

Our people Channels to market The differentiator in our ability Branches, e-commerce, to deliver outstanding customer showrooms and call centres service for our customers Technology Our customers Ongoing investment to Best Sole traders, small businesses improve our business up to large contractors and associates construction companies Distribution network Distribution centres, branches, We aim to recruit, develop and retain Our suppliers showrooms and specialist the best people with a passion for customer Over 45,000 reputable suppliers vehicle ﬂeets service. We have a strong sales culture giving us access to a diverse and which helps drive proﬁtable growth. broad range of quality products Capital A strong balance sheet to enable Read more about our associates ongoing investment Pages 16 to 19 and 26 to 41 Find out more about our key resources and relationships Pages 16 to 19

Fundamentals of our business Source 4 1 3 45,000 suppliers How our We have a diverse supplier customers base providing us with a wide 2 buy % Group range of over one million revenue of products worldwide. Customers value scale 1 Distribute In branches 71% We have market leading positions in 2 In showrooms 10% the majority of our markets. These markets 15 distribution centres 3 Via e-commerce 18% offer opportunities for strong growth We service our customers 4 Through central account 1% through a network of distribution management and call centres and continued consolidation. As a market centres and branches where we leader, we beneﬁt from economies of scale 1 offer support and advice. 4 across our supply chain network, sourcing and technology that many local competitors cannot compete with. 3 How we Read more about our markets Sell fulﬁl orders +1 million customers % Group Pages 6 to 11 and 26 to 41 revenue We sell to and advise customers through branches, showrooms, e-commerce and central accounts. 2 1 Delivered from branches 52% 2 Collected from branches 25% 3 Delivered from suppliers 15% 4 Delivered from DCs 8% Ferguson plc 15 Annual Report and Accounts 2019 Strategic report GovernanceFinancials Other information

For detail on the structure of our business and the markets in which we operate: See pages 4 and 5, 11 and 26 to 41

Our strategy underpins our ability to create value, ﬁnd out more: See pages 6 to 10 and 12 and 13

The value we create Strong returns We are able to generate strong returns by consistently winning market share and efficiently managing our operations. Our beneﬁts of scale also help to improve our margins.

Our shareholders We are committed to delivering long-term value to our shareholders and sharing in our success through dividends. $1,601m $1,609m 208.2c ongoing trading cash generated from dividend per proﬁt 2018/19 operations share 2018/19 +7.2% +10.0%

Ongoing trading profit is an APM, see note 2 and 3 Differentiated on pages 118 to 122 for further information Our customers service offering We provide essential products and services which We are differentiated by the services enable them to run their operations efficiently. we offer, which are highly valued by our customers. We pride ourselves on our levels of customer service, Our relentless focus on training and developing our which is reflected in our net promoter score in the USA. associates and the service and the support they offer our customers is something that sets us apart. It is an area that few of our competitors can 57% match, with the added benefit of us being able is amongst the highest in our industry (2018/19) to introduce our own trusted brands. Our associates Read more about our service offering We work hard to make sure associates are safe and Page 8 have a place of work where they feel motivated and part of our success.

Society We understand and respect our role in minimising our carbon footprint, focusing on eco-friendly products and playing our part in supporting a variety of community and charity initiatives.

Carbon emissions Total waste 12.9% 8.1% improvement versus 2015/16 improvement versus 2015/16 baseline (23.3 to 20.3 tCO2e baseline (3.7 to 3.4 US Tons per $m revenue) per $m revenue)

Find out more about the outcomes of what we do Pages 2 and 3, 16 to 19 and 42 to 46 Ferguson plc 16 Annual Report and Accounts 2019 Key resources and relationships

What it takes to serve our customers Our resources and relationships are critical to offering our customers industry leading service and ultimately driving proﬁtable growth. Our associates are the driving force of the business and a key differentiator in how we create value. They are guided by our Vision, Mission and Values that are a reminder of the goals we are working towards and how we expect to get there.

Our Vision: Our Mission: Our Values: To be a trusted partner Our associates provide Our values recognise and deliver the best expert advice and a the behaviours that service to customers range of products and guide our actions and in our industry. services our customers those of our Company want to improve their (as shown below). construction, renovation Pages 26 to 41 and maintenance projects.

Delﬁno Cervantes Lead Counter Representative, Waterworks

People Integrity Innovation We recruit passionate We act fairly, We encourage people and provide honestly and innovation to improve excellent development with integrity. our customers’ solutions. opportunities.

Safety Service Results We are accountable We source great products, We have high for our own safety and provide unrivalled service expectations and drive the safety of others. and build enduring performance to deliver relationships to deliver excellent results. value to our customers. Ferguson plc 17 Annual Report and Accounts 2019 Strategic report GovernanceFinancials Other information

In the USA, we launched a comprehensive Community Spotlight: Our people branch management development California wildfires programme comprised of virtual, classroom and a hands-on immersion to practise new Our widespread logistics and distribution 35,000 skills and behaviours. A distribution centre network, and tireless business continuity associates management development programme also planning offers Ferguson an opportunity launched in July 2019. This year, the US had to help our communities and associates Our associates are key to the success of over 220,000 enrolments in web-based impacted by natural disasters. During the our business. They demonstrate our values training and micro-learnings on topics year, our Build.com associates faced the (page 16) every day by providing superior ranging from compliance, safety, product devastating Camp Fire, the deadliest customer service, working with the utmost knowledge, management, systems, and and most destructive wildfire in integrity, delivering exceptional results, sales with an additional 6,600 completions Californian history. Ferguson provided thinking innovatively, keeping themselves of instructor-led development courses immediate and long-term assistance and others safe and limiting the impact on including our College of Ferguson trainee to associates impacted by this tragedy the environment. They foster our culture programme. We continue to add to the through the Ferguson Family Fund, by maintaining lasting relationships with curriculum to develop our associates. which was established in 2007 to assist customers whilst delivering excellence at all associates and their families with financial In both the UK and Canada, we are building levels. You can read more about our values support during times of emergency need. organisational capabilities focused on on page 16 and how our associates embody This fund has also provided support to developing the core skills of leaders and these values on pages 28 to 39. those impacted by hurricanes, flooding associates, as well as delivering exceptional and other severe weather events, Pages 28 to 39 customer service. granting over $2 million to date. Leadership Diversity and inclusion To achieve our objectives, all people We want access to the best talent Continuously improving our business decisions at Ferguson are based on merit, irrespective of race, colour, religion, gender, relies on the effectiveness of our leaders where the best candidates are hired and age, sexual orientation, marital status, and how they manage our associates. promoted within the organisation and disability or any other characteristics that As with last year, we continue to see a associates are encouraged, supported make people unique. The Board has a number of external and internal succession and developed to reach their full potential. 50:50 balance of males and females in our appointments within the USA, Canada and To ensure success, senior leaders are Non Executive Directors. The percentage the UK to leadership positions this year, participating in training sessions focused of women in senior management positions enabling us to broaden the experience, on reducing unconscious bias in order to across the Group was 24 per cent. Detail on knowledge and diversity of our leaders. continue to support an environment that is the Board’s approach to diversity, including How we develop all our associates, free from discrimination and harassment, the Board Diversity Policy and performance including our leaders, is discussed in the where all associates are treated with against its specified objectives, can be found “Talent management and development” dignity, fairness and respect. In the coming on page 75. section below. year, we will be forming business resource We have rolled out our new Group Diversity groups across the Group to ensure that all Talent management and Inclusion framework which builds on our associates feel a sense of belonging and development our current practices where we continue and inclusion. Our recruitment practices To ensure we can connect our associates to identify and remove any potential for factor in under-represented groups and to the overall direction of the business we unconscious bias in our employment, we insist on diverse candidate slates when have updated the Group’s Mission, Vision, promotion and succession practices. using executive search firms. In the UK, the Government requires certain businesses and Values. These underpin all that we do Ferguson is committed to developing a to declare their gender pay gap. Our UK and help us to make the right decision when diverse workforce and an inclusive working business has a 5.02 per cent gap in base it counts, inform stakeholders about what environment in the communities where pay compared to the UK average of 17.9 per we stand for and help attract and retain our we operate. We continue to review our cent. We are continuing to deploy strategies talented associates. Our values encourage progress as we make strides in delivering and develop new initiatives to eliminate the great behaviours and inspire our associates improvements in workforce diversity. pay gap. to give the best customer service, respect We believe that creating a more diverse our fellow associates and stretch ourselves and inclusive organisation that reflects our All material issues relating to our people every day. communities provides us with a competitive directly affect our strategic priorities on In 2018/19, we invested in our talent advantage in all areas of our business. pages 12 and 13. The effectiveness and level management model which includes a of engagement of our people is critical in comprehensive talent review and succession delivering on our strategy and maintaining planning process for leadership roles. the success of the business. This effort focuses on development of high potential individuals, identifying emerging Diversity and inclusion gender breakdown talent, as well as business critical key Unspecified Total men Total women % women roles across the organisation. In 2019 we Non Executive Directors (Board) 4 4 50% welcomed over 1,200 college graduates Directors (Board) 8 4 33% to the US business, more than double Senior leadership1 67 21 24% compared to last year, bringing our total Total associates 2 82 27,176 8,209 23% number of associates with higher education degrees to almost 8,200. 1. The senior leadership group consists of those members of the Executive Committee, who are not Board Directors, and their direct reports. This is consistent with the data we supply to the annual Hampton-Alexander review and is correct as at 30 June 2019. 2. The total average individual associate number of 35,467 is reported above (total men plus total women plus total unspecified) including all continuing businesses. Ferguson plc 18 Annual Report and Accounts 2019 Key resources and relationships (continued)

Sessions will have representatives from all Competitive pay and reward People spotlight: Kathy Scull, subsidiaries, functions and business groups We use our reward programmes to celebrate District Manager, DC Metro, USA in the region. The first of these meetings success, reinforcing the way we do business. Kathy Scull is a great example of the took place in the USA in July 2019 with Every year our incentive programmes across opportunities Ferguson provides for discussion focused on several key topics the Group are reviewed, to ensure they associates to grow and develop into including safety, customer service, culture, drive business performance by rewarding future leaders. Kathy joined Ferguson the use of technology, sustainability and the the right behaviours, supporting our values in 1997 as a showroom inside sales future of Ferguson. and continuing to reward high performance. associate in Gainesville, Virginia. We typically incentivise associates based Since then, she has had a diverse career on combinations of improvements in trading Health and safety path with stints in sales, operations and profit and average cash-to-cash days. For information on health and safety and branch management which allowed her 2018/19 performance, see the Sustainability In the USA, we have a number of to find her passion for developing people section on pages 42 and 43. well-established recognition programmes, and provided her with the leadership these include the President’s Club which skills needed to run DC Metro, the fifth recognises our top performing outside largest Blended Branches district in Ethical behaviour and sales associates; the President’s Circle, the USA. human rights recognising top performing sales associates We are committed to complying with the law and sales managers; and the President’s and to operating under the highest ethical Gallery, honouring showroom sales standards. This protects us from business associates. All these programmes are disruption; it also strengthens our reputation structured to recognise our values and with customers, suppliers and other reward both exceptional performance and stakeholders. The standards that we expect outstanding contributions that support of our associates and our stakeholders profitable growth in the field. In addition, are set out in our Code of Conduct which we also have the Bob Wells Leadership Associate engagement was updated during the year. This includes Award, which is presented to a remarkable examples of how our associates can Ferguson sales associate who consistently During the year, we launched a new global practically apply our values to situations that demonstrates exceptional performance associate engagement survey, ensuring may arise in our everyday lives and provides and sales leadership. we understand in detail the drivers guidance where there is doubt over how impacting engagement, retention and to proceed. In the UK we have launched “The advocacy. Centred on four key engagement Wolseley’s” to align recognition to our dimensions, with standard global questions, All of our businesses provide training for strategic objectives, bringing together as well as business specific questions, our relevant associates on anti-corruption, sales, operations and business support survey results are now benchmarked in each anti-trust and modern slavery matters. for an annual awards event. We are also country of operation, allowing us greater This is typically provided through online developing new approaches to bring to insight into how we compare externally. training material and face-to-face training is life recognition on a daily basis to further This year serves as a new benchmark for also provided. Training is provided for new develop our performance culture. how each business measures progress, associates on induction. During 2018/19, we re-launched training to our associates In Canada, we are focusing on our while correlating results with other data in the USA based on our updated Code pay-for-performance culture with emphasis elements such as customer satisfaction and of Conduct. on targeted incentive programmes that business performance. Insights from the reward associates for delivering on our global survey will inform business priorities For information on ethical behaviour in our strategic priorities. We are also launching a and direct efforts to create high performing supply chain and a summary of the Group’s national recognition programme that uses an teams. Development of rigorous action Modern Slavery Act statement please refer advanced technology platform to recognise plans are underway. See our KPIs on pages to pages 41 to 46. employees who demonstrate our values and 20 and 21. Page 41 to 46 contribute to our strategy. Special annual awards will be granted to outstanding Employee Engagement Director – “Beyond the Boardroom” employee performance in critical areas Our customers such as innovation and safety. During the year, Alan Murray, Senior During the year we redesigned our Independent Director, was appointed over Group-wide long-term incentive programme, Employee Engagement Director. In this role rewarding our leaders and senior managers he will enhance communication channels 1 million for improved trading profit performance between associates and the Boardroom, customers in their business. Our investment in providing the Board with additional insight this programme is overseen by the into the views and concerns of associates Customers rely on us for high levels of Remuneration Committee. in their discussions and decision-making. availability on a broad range of products, Alan has begun to host a series of meetings ready for collection or delivery when and For more information on Directors’ with our associates across the Group to where they need it. Our customers value remuneration please see pages 80 to 106. further understand their thoughts and high quality and efficient service from local Pages 80 to 106 opinions. These sessions will be held four relationships, competitive pricing, account- times a year and are an opportunity to based credit and billing and order accuracy. foster a transparent discussion, understand They also want flexibility in choosing the any challenges and identify areas most convenient way to do business with us, for improvement. whether in a branch, by phone or online. Ferguson plc 19 Annual Report and Accounts 2019 Strategic report GovernanceFinancials Other information

These are the basic transactional aspects We have a clearly defined technology of our business which need to be executed Channels to market strategy and roadmap. This provides a consistently. Additionally, customers rely on clear route forward for the development Ferguson for a range of additional services of our order and transaction management and advice that we offer. For example, 2,259 systems. We continue to implement strategic branches outside sales associates often visit investments which will mean we have customers at their job sites and support them many order capture channels that feed when they are bidding for work. An overview Our customers interact with us through into one fulfilment and transaction platform of these services is set out on page 8 in the multiple sales channels on a 24/7 basis connected through cloud-based systems. Chief Executive’s review. which is often a combination of branches, Our aim is to provide a seamless experience for our customers no matter what sales We operate our business responsibly so that showrooms, transactional websites, call order channel they use. Our associates our customers can feel confident that we centres and inside/outside sales teams. will spend less time processing orders and look after our associates, provide safe and We conduct the majority of our business more time interacting with our customers, high-quality products, operate efficiently through sales associates or consultants. enhancing productivity, customer service and actively contribute to the communities A large proportion of the business is still and relationships. in which we operate. We consult with key conducted through our branches and our customers each year to understand their extensive branch network means customers business needs and their sustainability minimise the distance they travel to buy from Distribution network priorities so that we can continually evolve us and visit several times a week. The branch our business to meet their expectations. network is also an important delivery Where the market demand exists, we channel, particularly when customers need 6,100 promote sustainable products and provide immediate availability. This multi-channel fleet vehicles training and advice to customers to support approach allows our customers to access growth in these new product categories. products and advice whenever it is required. Customers of Build.com in the USA can filter To ensure the availability of a wide range of their product search to view products with We manage our locations very carefully products to our customers we continue to recognised national environmental labels. to ensure the health and safety of our invest in our extensive distribution network associates, customers, suppliers and and large vehicle fleet. Our customers rely any other visitors. Health and safety upon us for prompt and flexible delivery Our suppliers risk assessments and branch audits are options to meet their own needs, such as carried out regularly so that we maintain specialist vehicles and same-day delivery. our equipment and product racking and Suppliers deliver to our distribution centres, 45,000 are prepared for any potential emergency our branches or directly to our customers. suppliers incident. Our insurers also support these We predominantly distribute from branches efforts, undertaking their own safety to customers, though in large metropolitan assessments at selected key sites each year. We have approximately 45,000 reputable areas we aim to use more specialist suppliers that give us access to a diverse and For information about our environmental market distribution centres to centralise broad range of quality products. While the efficiency efforts see pages 44 and 45. final mile logistics and reduce fleet and product is incredibly important, an equally Pages 44 and 45 distribution costs. essential part of the equation is the expert More than half our carbon footprint knowledge that we bring. We are frequently For information about our health and safety is generated by transport. Within the asked by our customers to help them find programme see pages 42 and 43. distribution network we have reduced our a suitable product to meet a specific need. carbon emissions through improved fleet The expert guidance that we offer is based Pages 42 and 43 operations. As in prior years, each of our on a broad knowledge of the supplier businesses has performance targets to landscape. Our logistics network, which reduce carbon and the associated costs connects these suppliers to our customers, Technology for transport and fuel, relative to revenue. is another key differentiator. These emission reduction projects ensure Our leading market positions enable our 18% that we are able to meet our goals for central sourcing teams in each region proportion of Group revenue environmental performance in addition to to leverage our scale and negotiate from e-commerce activities our financial goals. competitive prices in return for access to Our branches continue to utilise our over one million customers. We work with We are continually investing in technology distribution networks to send recyclable our suppliers to ensure that they are reliable to improve the customer experience, retain waste back to distribution centres for and ethical and that their products are fully existing customers and win new ones. sorting, baling and weighing. When returned compliant with the laws and regulations Technology investments are aimed at products are unable to be resold, they are of the countries in which we operate. improving execution and efficiency in all also transported back to our distribution This provides protection to us and our areas of our business from warehousing, centres where we aim to reduce or re-use customers in the event of a product failure fleet, inventory and customer relationship these products to avoid landfill. or breach of regulation in the supply chain. management to back-office human On the rare occasion that a product is faulty, resources and financial management and For information about our environmental customers have the confidence of knowing reporting systems. efficiency efforts and health and safety, that we will support them. see pages 42 to 46. Ferguson plc 20 Annual Report and Accounts 2019 Key performance indicators (“KPIs”)

How we measure our progress We have reviewed and aligned our KPIs to our strategic priorities set out in detail on pages 12 and 13.

Ongoing organic revenue growth1

Deﬁnition Performance The percentage increase or decrease in ongoing revenue year-on-year excluding the 7.8% +4.4% 7.5% effect of currency exchange, acquisitions and Organic revenue growth was 4.4 per cent disposals and trading days. 6.0% in 2018/19. Growth was due to a strong outperformance of the market in the USA, 4.4% see pages 26 to 39 for further details. Engaged Excellent 3.3% associates service ethic

Strong sales Organic culture expansion

Adjacent opportunities 2015 2016 2017 2018 2019

Ongoing gross margin1

Deﬁnition Performance The ratio of ongoing gross proﬁt, excluding exceptional items, to ongoing revenue. 29.3% 29.4% +0.1% 29.0% Gross margin improved by 10 basis points 28.6% compared to 2017/18 principally as a result 28.2% of disciplined pricing controls combined with the favourable impact of acquisitions. Engaged Excellent associates service ethic

Strong sales Operating model and culture e-commerce development

Pricing Own brand discipline penetration 2015 2016 2017 2018 2019

Ongoing trading margin1

Deﬁnition Performance The ratio of ongoing trading proﬁt to ongoing revenue. 7.4% +0.1% 7.3% The trading margin rose to 7.4 per cent. 7.0% 7.0% 6.9% Trading margin expansion was due to gross margin improvements and operating cost efficiencies. Engaged Excellent associates service ethic

Strong sales Operating model and culture e-commerce development

Pricing Own brand discipline penetration 2015 2016 2017 2018 2019

Operating cash ﬂow

Definition Performance Cash generated from operations before interest and tax. $1,609m $1,609m Cash flow from operations was $1.6 billion $1,462m $1,488m $1,410m $1,323m in the year. This improvement was mainly due to a strong performance in the US business for 2018/19 and a one off payment to pension plans in 2017/18. Continued good cash flow is a key part of the Group’s long-term generation of cash to fund investment and returns to shareholders.

All 10 of our priorities All driving performance 2015 2016 2017 2018 2019

1. This is an APM, for further information on APMs, including a description of our policy, purpose, deﬁnitions and reconciliations to equivalent IFRS statutory measures, see notes 2 and 3 on pages 118 to 122. Ferguson plc 21 Annual Report and Accounts 2019 Strategic report GovernanceFinancials Other information

Own brand percentage of revenue

Deﬁnition Performance The proportion of ongoing revenue from own brand products to total ongoing revenue. 8.3% +1.7% The percentage of own brand revenue 6.7% 6.6% 6.0% increased by 1.7 per cent in 2018/19 to 5.7% 8.3 per cent. All regions grew own brand revenue with acquisitions also contributing signiﬁcantly to the overall increase.

Own brand penetration 2015 2016 2017 2018 2019

Return on gross capital employed1

Deﬁnition Performance The ratio of trading proﬁt to the average year-end aggregate of shareholders’ equity, adjusted net 26.2% 26.2% debt and cumulative goodwill and other acquired 22.7% Return on gross capital employed was intangible assets written off. This is for continuing 26.2 per cent with the increase partially due and discontinued operations. 17.5% 18.6% 16.2% to the divestment of businesses carrying lower returns than the remaining Group. This is in line Engaged Excellent with our investment case and long-term objective associates service ethic of generating attractive returns on capital. Strong sales Operating model and culture e-commerce development

Pricing Own brand discipline penetration 2015 2016 2017 2018 2019

Associate engagement

Deﬁnition Performance In 2018/19 we launched a new Group-wide The initial survey result across the Group was 51 per associate engagement survey ensuring we cent. This sets a high bar as “engaged associates” understand the drivers impacting engagement, must agree with all four engagement questions. retention and advocacy. The survey offers global This demanding score will now act as a baseline and country speciﬁc benchmarks allowing us for performance moving forward and we will report greater insight into how we compare externally. on improvement actions in the Annual Report The survey focuses on four engagement questions next year. We will conduct future global surveys on advocacy, pride, satisfaction and commitment. every 18 months. N.B. The global survey results Associates must agree with all four questions are not comparable with previous country surveys to be recognised as “engaged”. published in prior year Annual Reports.

Engaged Excellent associates service ethic

Customer service

Deﬁnition Performance There is a good correlation in our business between high customer service scores in a branch and better 57% 57% ﬁnancial performance. The net promoter score is The process of tracking and reporting customer a means of measuring customer service. The survey service differs by region, therefore an example asks: “How likely is it that you would recommend is given for the USA. The average net promoter Ferguson to a friend or colleague?” and customers score remains an excellent score and is best in respond with a score between zero (bad) and 10 class in our industry and is among the highest (exceptional). We look at the four quarter average levels achieved in any industry. of the proportion of customers who scored nine or more, less those customers scoring six or less. The methodology was changed in 2019 to align to industry best practice whilst also collating Engaged Excellent a broader number of responses. As such, prior associates service ethic 2019 year scores are not comparable.

Group recordable injury rate

Definition Performance Total number of injuries per 200,000 worker hours. improvement The change to 200,000 hours (from 100,000 hours 3.80 22% last year) is in line with globally recognised standards The Group recordable injury rate improved (including the US Depart of Labor’s Occupational 2.96 by 22 per cent compared to the previous year. Safety and Health Administration regulations). This is primarily as a result of our continued The injury number is based on associates receiving focus on health and safety, a robust associate medical treatment beyond first aid that requires them engagement programme, senior leadership to leave the workplace. 2017/18 figures have been commitment and deployment of safety restated in line with this calculation. professionals in the field to focus on areas such as material handling and training. See the Sustainability section for more information Engaged Operating model and on pages 42 to 46. associates e-commerce development 2018 2019 Ferguson plc 22 Annual Report and Accounts 2019 Financial review

Statutory results Strong The financial results have been prepared under IFRS and the Group’s accounting policies are set out on pages 113 to 117. 2019 2018 operating Continuing operations $m $m Revenue 22,010 20,752 performance Operating profit 1,402 1,360 Net finance costs (74) (53) Share of profit after tax of associates 2 2 Gain on disposal of interests in associates 3 – Impairment of interests in associates (9) (122) Profit before tax 1,324 1,187 Tax (263) (346) Ferguson performed strongly in 2018/19 with Profit from continuing operations 1,061 841 organic revenue growth in the US of 6.2 per cent Profit from discontinued operations 47 426 and substantial investment in acquisitions to further Profit for the year attributable to shareholders 1,108 1,267 consolidate our market leading positions. Markets weakened in the second half but our well-executed Revenue of $22,010 million (2017/18: $20,752 million) was 6.1 per cent approach to expanding gross margins and decisive ahead of last year. cost control measures ensured strong profit delivery. Operating profit of $1,402 million (2017/18: $1,360 million) was 3.1 per cent higher than last year, with trading profit growth in the operating segments partially offset by an increase in the amortisation Key highlights of acquired intangible assets. – Revenue growth of 6.1 per cent including ongoing organic Profit for the year attributable to shareholders decreased to revenue growth of 4.4 per cent $1,108 million (2017/18: $1,267 million) as last year there was a large gain on disposal within profit from discontinued operations which – Ongoing gross margin expansion of 10 basis points, was not repeated. ongoing trading profit margin up 10 basis points – Completed 15 acquisitions for total consideration of $657 million Reconciliation between ongoing trading profit and statutory operating profit – Returned $595 million to shareholders during the year including $150 million of the $500 million share buyback In order to monitor performance on a consistent basis the Group announced in June 2019 uses certain alternative performance measures which enable it to assess the underlying performance of its businesses. The Group’s – Return on gross capital employed increased from key financial performance metric is “trading profit” which is operating 22.7 per cent to 26.2 per cent 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 non-recurring items. In accordance with IFRS 5 “Non-current Assets Held for Sale and Discontinued Operations”, the Group has businesses which were classified 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, referred to as “non-ongoing” 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 “non-ongoing” businesses. See note 2 on pages 118 to 120 for further information, definitions and reconciliations of alternative performance measures. Ferguson plc 23 Annual Report and Accounts 2019 Strategic report GovernanceFinancials Other information

Ongoing trading profit is reconciled to statutory operating profit as Exceptional items shown in the table below: Net exceptional charges in operating profit totalled $94 million in the Restated year (2017/18: $82 million), comprising a $23 million gain on disposal 2019 2018 of businesses, $108 million business restructuring charges and $m $m $9 million of other exceptional charges in relation to the UK defined Ongoing trading profit 1,601 1,493 benefit pension plan. The restructuring charges were in relation to Non-ongoing trading profit 5 14 programmes undertaken in the US, UK and Canada and the change Continuing trading profit 1,606 1,507 of Group corporate headquarters. Amortisation of acquired intangible assets (110) (65) Exceptional items (94) (82) Net finance costs Statutory operating profit 1,402 1,360 Net finance costs were $74 million (2017/18: $53 million). The increase was principally due to a higher level of average net debt in the year, Operating profit as last year the Group was in receipt of proceeds of disposal of non-core operations for part of the year. Performance of the ongoing business Growth at Tax constant Restated exchange The Group generates 92 per cent of its ongoing trading profit in the 2019 2018 Growth rates $m $m % % USA, 4 per cent in the UK and 4 per cent in Canada before central Revenue 21,771 20,334 +7.1% +7.9% costs. The Group’s profits are therefore subject to different overseas tax rates and tax laws. Gross profit 6,396 5,948 +7.5% +8.2% Operating expenses (4,795) (4,455) +7.6% +8.4% Other than intra-group financing and the recharging of shared Trading profit 1,601 1,493 +7.2% +7.5% management services costs, the Group currently has no significant Gross margin 29.4% 29.3% +0.1% transfer pricing arrangements. Trading margin 7.4% 7.3% +0.1% The Group’s Tax Strategy is to maintain the highest standards of tax compliance. We support the execution of the Ferguson business Ongoing revenue of $21,771 million (2017/18: $20,334 million) strategy by managing our tax affairs in full compliance with local laws was 7.9 per cent ahead at constant exchange rates and and international guidelines while seeking to maximise shareholder 4.4 per cent ahead on an organic basis. Inflation in the year was value and serving the interest of all our stakeholders. The Group Tax approximately 3 per cent. Ongoing gross margins of 29.4 per cent Strategy can be found at www.fergusonplc.com. (2017/18: 29.3 per cent) were 10 basis points ahead as a result of disciplined pricing controls combined with the favourable impact The Group incurred a tax charge of $263 million (2017/18: $346 million) of acquisitions. Operating expenses in the ongoing business were on profit before tax of $1,324 million (2017/18: $1,187 million) resulting very well controlled with organic growth restricted to 3.6 per cent. in an effective tax rate of 19.9 per cent (2017/18: 29.1 per cent). The ongoing tax charge is $344 million (2017/18: $363 million) Ongoing trading profit was $1,601 million (2017/18: $1,493 million), which equates to an ongoing effective tax rate of 22.5 per cent 7.5 per cent ahead of last year at constant exchange rates. (2017/18: 25.1 per cent) on the ongoing profit before tax, exceptional The ongoing trading margin was 10 basis points ahead of last year items, the amortisation and impairment of acquired intangible at 7.4 per cent. There was one fewer trading day compared to assets and the impairment of interests in associates of $1,529 million the prior year, which reduced trading profit by about $12 million. (2017/18: $1,445 million). The decrease is primarily due to the Acquisitions generated revenue of $760 million and trading profit reduction in US statutory tax rate and a change in profit mix. of $45 million, net of $14 million of transaction and integration costs which were charged to trading profit. Foreign exchange rate The wider macro political and economic situation is uncertain movements decreased ongoing revenue by $155 million and trading in some of the main territories in which Ferguson operates and profit by $4 million. changes could adversely impact the Group’s business as well as the Group’s future tax rate. A combination of growing international Non-ongoing trading profit trade pressures, including trade-related actions taken by the US The Group’s non-ongoing businesses, which comprised a small and China and rising debt levels, is creating political and regulatory non-core UK business and the Group’s Dutch business, Wasco, uncertainty which could lead to changes to the prevailing tax regime generated revenue of $239 million (2017/18: $418 million) and trading and adversely impact the Group’s results. The Group is engaged with profit of $5 million (2017/18: $14 million). the relevant tax authorities and will ensure any changes are reflected in Ferguson’s tax strategy. Amortisation of acquired intangible assets Amortisation of $110 million (2017/18: $65 million) represents The Group will continue to monitor and assess all external the charge in respect of the Group’s acquired intangible assets. developments which could potentially impact the rate. The increase is due to the timing of the more significant acquisitions in the current and prior year. 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 goodwill or acquired intangible assets was identified as part of the annual review. Goodwill, with a carrying value of $1,656 million (2017/18: $1,408 million), remains on the balance sheet and is supported by value in use calculations. Ferguson plc 24 Annual Report and Accounts 2019 Financial review (continued)

The Group paid $242 million (2017/18: $234 million) in corporation tax Acquisitions and capital expenditure in the year. The corporation tax paid in the year will typically differ to Acquisitions are an important part of our growth model and during the total tax charge in the income statement as a result of: the year we invested $657 million in 15 bolt-on acquisitions, – non-cash deferred tax expense or income arising from accounting principally in the USA. Since the year-end, the Group has acquired requirements in IAS 12: “Income Taxes” to recognise tax which may one business in the UK. become payable or recoverable in future periods; The strategy of investing in the development of the Group’s business – adjustments to the current year’s tax charge in respect of the models is supported by capital expenditure of $418 million (2017/18: under or over provision of tax for prior years; and $299 million). The increased investment was primarily for one new – timing differences between when tax is reflected as a charge freehold distribution centre in the USA. The Group also continues in the accounts and when it is paid to the tax authority. to invest in strategic projects to support future growth such as distribution hubs, technology, processes and network infrastructure. Discontinued operations Discontinued operations include the results of the Nordic region. Leases The result from discontinued operations is comprised as follows: As at 31 July 2019, the Group had total operating lease commitments 2019 2018 of $1,126 million (2017/18: $1,081 million). $m $m Discontinued trading profit 5 59 On 1 August 2019, the Group adopted IFRS 16 “Leases”. The Group is Finance income/(costs) 1 (6) using the modified retrospective approach to transition. The impact on the opening balance sheet at the date of initial application will Exceptional items before tax 45 404 be the creation of a right of use asset of $1.2 billion and a lease Tax (4) (31) liability of $1.5 billion. The lease liability on transition is greater than Profit from discontinued operations 47 426 the operating lease commitments due to the inclusion of options to extend which the Group is reasonably certain to exercise, partially Discontinued trading profit in the prior year represents the results of offset by the effect of discounting. the Nordic region for the eight months of ownership and the results relating to the remaining French property assets. The net impact on profit for the year (year ending 31 July 2020) is not expected to be material, however, adjusted EBITDA will improve due Discontinued exceptional items primarily relate to the disposal of to the reduction in rental charges which will be broadly offset by an several Nordic property companies. The prior year discontinued increase in depreciation and interest charges. exceptional items included the significant gain on disposal of Stark Group. There is no economic impact on the cash flows of the Group as a result of the adoption of IFRS 16 although the presentation in Earnings per share the cash flow statement will change to increase cash generated from operations and increase interest paid and cash used by Headline earnings per share increased by 16.4 per cent from financing activities. 444.4 cents to 517.4 cents. Basic earnings per share from continuing operations were 460.9 cents (2017/18: 342.3 cents) and diluted earnings per share were 457.5 cents (2017/18: 339.8 cents). Returns to shareholders Total basic earnings per share, including discontinued operations, The Group paid an interim dividend of 63.1 cents per share were 481.3 cents (2017/18: 515.7 cents) and total diluted earnings (2017/18: 57.4 pence per share) amounting to $146 million. A final per share were 477.8 cents (2017/18: 511.9 cents). dividend of 145.1 cents per share (2017/18: 131.9 pence per share), equivalent to $332 million is proposed. This brings the total ordinary Cash flow dividend for 2018/19 to 208.2 cents per share, an increase of 10.0 per cent. The Group has continued to generate strong cash flows during the year with cash generated from operations of $1,609 million In June 2019, the Group announced its intention to return (2017/18: $1,323 million) and a good cash conversion ratio of $500 million to shareholders by way of a share buyback programme. cash generated from operations/adjusted EBITDA of 90 per cent As at 31 July 2019, the Group had completed $150 million of the (2017/18: 76 per cent). Cash generated from operations in the prior $500 million share buyback and had irrevocably committed to year includes one-off payments to pension plans of $99 million. complete a further $159 million. The Group expects to complete Without this, the cash conversion ratio would have been 81 per cent. the remainder of the share buyback over the next 12 months. 2019 2018 $m $m Return on gross capital employed Cash generated from operations 1,609 1,323 Return on gross capital employed increased from 22.7 per cent Interest and tax (319) (287) to 26.2 per cent. The increase was partially due to the divestment Acquisitions and capital expenditure (1,075) (715) of businesses carrying lower returns than the remaining Group. Disposal proceeds 303 1,440 This is in line with our investment case and long-term objective Dividends paid (445) (1,359) of generating attractive returns on capital. Share buyback (150) (675) Purchase of shares by Employee Benefit Trusts (38) (41) Foreign exchange and other items – (60) Movement in net debt (115) (374) Ferguson plc 25 Annual Report and Accounts 2019 Strategic report GovernanceFinancials Other information

Net debt Liquidity Net debt increased during the year by $115 million to $1,195 million at The Group maintains sufficient borrowing facilities to finance 31 July 2019. Strong operating cash flow generation of $1,609 million all investment and capital expenditure included in its strategic plan and disposal proceeds of $303 million were more than offset by with an additional margin for contingencies. The Group aims to acquisition and capital expenditure of $1,075 million, interest and tax have a range of borrowings from different financial institutions to payments of $319 million and shareholder returns of $595 million. ensure continuity of financing. At 31 July 2019, the Group had total committed facilities, excluding bank overdrafts, of $3,870 million Pensions (2017/18: $3,470 million). Of the Group’s committed facilities at 31 July 2019, $1,573 million (2017/18: $1,940 million) was undrawn. At 31 July 2019, the Group’s net pension asset of $153 million $1,610 million (2017/18: $984 million) of the total facilities mature after (2017/18: $174 million) comprised assets of $1,904 million (2017/18: more than five years. $1,945 million) and liabilities of $1,751 million (2017/18: $1,771 million). IAS 19 (Revised) “Employee Benefits” requires the Group to Change of corporate headquarters make assumptions including, but not limited to, rates of inflation, Following a thorough review of the location of the Company’s discount rates, and current and future life expectancy. The value headquarters, the Board concluded that the interests of the business of the liabilities and assets could change if different assumptions and shareholders would be best served by establishing a new were used. To help understand the impact of changes in these corporate structure with the Group headquartered and tax-resident assumptions we have included key sensitivities as part of our in the UK. The move facilitates the continued simplification of the pension disclosure in note 24 (iv) on page 143. Group’s corporate structure in line with its strategy. The UK defined benefit pension plan is in the process of its next The move was executed through a Scheme of Arrangement on triennial valuation. 10 May 2019, when a new parent company was introduced. On 9 May 2019, prior to the Scheme of Arrangement, all Treasury shares held In 2018/19, the Group offered deferred members of the UK defined by Ferguson were cancelled. benefit pension plan an enhanced transfer value to settle their benefits accrued under the plan. This resulted in a small charge to Financial risk management exceptional costs and a reduction in the defined benefit obligation The Group is exposed to risks arising from the international nature relating to the members who exited the plan. of its operations and the financial instruments which fund them. These instruments include cash, liquid investments and borrowing Other matters and items such as trade receivables and trade payables which Capital structure arise directly from operations. The Group also enters into selective derivative transactions, principally interest rate swaps and forward The Group’s sources of funding currently comprise operating foreign exchange contracts, to reduce uncertainty about the amount cash flow, access to substantial committed bank facilities from of future committed or forecast cash flows. The policies to manage a range of banks and access to global capital markets. The Group these risks have been applied consistently throughout the year. maintains a capital structure appropriate for current and prospective It is Group policy not to undertake trading in financial instruments trading and aims to operate with investment grade credit metrics or speculative transactions. and within a through-cycle range of net debt of one to two times adjusted EBITDA. Other financial risks The Group is highly cash generative and the Board has established The nature of the Group’s business exposes it to risks which are clear priorities for the utilisation of cash. In order of priority these are: partly financial in nature including counterparty and commodity risk. Counterparty risk is the risk that banks and other financial institutions, (i) to re-invest in organic growth opportunities; which are contractually committed to make payments to the Group, (ii) to fund the ordinary dividend to grow in line with the Group’s may fail to do so. Commodity risk is the risk that the Group may have expectations of long-term earnings growth; purchased commodities which subsequently fall in value. (iii) to fund selective bolt-on acquisitions to improve our market The Group manages counterparty risk by setting credit and leadership positions or expand the capabilities of our existing settlement limits for a panel of approved counterparties, which are business model; and approved by the Group’s Treasury Committee and are monitored regularly. The management of customer trade credit and commodity (iv) if there is excess cash after these priorities, return it to risk is considered to be the responsibility of operational management shareholders reasonably promptly. 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 47 to 53.

Mike Powell Group Chief Financial Officer Ferguson plc 26 Annual Report and Accounts 2019 Regional performance and overview

USA We have progressively focused more resources on our business in the USA where we generate the most attractive returns for our shareholders.

Key highlights Business units We operate nine strategic business units – Organic revenue growth of 6.2 per cent in the USA providing a broad range of – Ongoing trading profit growth of $102 million plumbing and heating products and solutions delivered through specialist sales – Continued market share gains across all end markets associates, counter service, showroom – 14 acquisitions completed in the year consultants and e-commerce. Business profile The US business operates primarily under Five-year performance $m the Ferguson brand and is the market leading distributor of plumbing and heating Ongoing revenue1 Ongoing trading profit1 products in the USA. It operates nationally, 18,358 1,508 serving the residential, commercial, civil and 1,406 16,670 industrial markets. The largest end market 14,977 1,204 for Ferguson is residential which represents 13,562 1,111 12,753 1,050 about 50 per cent of sales, commercial about 35 per cent of sales and the remainder is split between civil/infrastructure and 2015 2016 2017 2018 2019 2015 2016 2017 2018 2019 industrial. Ferguson predominantly serves 1. This is an APM, for further information on APMs, including a description of our policy, purpose, definitions the Repair, Maintenance and Improvement and reconciliations to equivalent IFRS statutory measures, see notes 2 and 3 on pages 118 to 122. (“RMI”) markets, with relatively low exposure Quarterly organic revenue growth % to the new construction market. 11.4% Ferguson operates 1,491 branches serving 10.6% 9.1% 9.6% 9.7% all 50 states with approximately 27,000 8.3% associates. The branches are served by 10 distribution centres, providing same-day 3.3% 3.0% and next-day product availability, a key competitive advantage and an important Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 requirement for customers. 2018 2019 Each strategic business unit provides a 1 GDP growth % change per calendar year different customer offering, with the majority 2.3 2.5 2.9 3.2 3.1 2.5 2.7 2.3 predominantly serving trade customers. 100 Consumer confidence2 Each business unit supports differentiated 95 customer types and therefore provides 90 bespoke services and requirements, see 85 pages 28 to 39 for further detail. Each has 80 its own set of competitors that range from Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 large national companies, including trade 2017 2018 2019 sales by large home improvement chains, 1. GDP: % change compared to the same quarter of the previous calendar year. Source: OECD. to small, privately owned distributors. In line 2. Confidence: Index of results from a consumer confidence survey that measures the level of optimism with the Group’s strategy the business consumers have about the performance of the economy in the next 12 months. aims to strengthen its position in existing Source: Surveys of consumers, University of Michigan. and adjacent markets through bolt- Leading Indicator of Remodelling Activity (“LIRA”)1 $bn calendar year on acquisitions. 288.4 292.4 295.7 301.5 308.1 313.4 316.4 321.9 10 8 % change 6 4 2

Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 2017 2018 2019 1. $bn remodelling spend and % change compared to the same quarter of the previous calendar year. The LIRA underwent a rebenchmarking in April 2016. Source: The Joint Center for Housing Studies. Ferguson plc 27 Annual Report and Accounts 2019 Strategic report GovernanceFinancials Other information

Market trends Commercial In line with recent guidance, the market growth moderated in the second half and Macroeconomic trends (Approximately 35 per cent of revenue) we continued to outperform. Our largest Demand in the US business is correlated The American Institute of Architects (“AIA”) quoted suppliers1 grew at an average rate of with changes in activity in the economy Billings Index – Commercial/Industrial is a 0.8 per cent in the quarter ended 30 June in the USA. The following macroeconomic leading economic indicator of construction 2019 which compares to Ferguson’s Q3 indicators and their trends have an impact activity and is widely seen as reflecting organic revenue growth rate of 3.3 per cent. on all of the business units. prospective construction spending. Our orderbooks have grown year-on-year Any score below 50 indicates a decline Gross Domestic Product (“GDP”) is one suggesting continuing modest growth over in business activity across the architecture of the primary indicators used to gauge the the coming months. profession. An index score above 50 health of a country’s economy. It is equal indicates growth. The index has averaged Gross margins were well controlled with to the total expenditure for all final goods above 50 for the last 12 months but dipped good pricing discipline and the favourable and services produced within the country below 50 in two months throughout the year. mix impact of recent acquisitions. in a specific period. Civil/Infrastructure In light of the tighter market environment in GDP growth in the USA has slowed slightly the second half we took decisive action to over the past year but remains positive, (Approximately 7 per cent of revenue) control cost growth, particularly labour which indicating expansion in the economy. The AIA Billings Index – Commercial/ comprises about 60 per cent of operating Industrial is also an indicator for the civils costs. Since the start of the calendar year we The unemployment rate has held at market. historical lows and currently remains reduced headcount significantly and this led below four per cent. The non-residential construction Put In Place to strong trading profit delivery in the final survey reflects the historical amount spent months of the financial year, despite modest Specific market trends each month on construction. The value of organic growth rates. Actions also included The markets that Ferguson serves have non-residential spending rose year-over-year a voluntary early retirement programme and different characteristics and as such certain in all quarters throughout the financial year. some selective closures of underperforming market data is more relevant to specific branches. These reductions will enable Industrial end markets. us to fund pay rises for our associates (Approximately 8 per cent of revenue) Residential and continue with ongoing investments The strength of the industrial market is in our business. (Approximately 50 per cent of revenue) indicated by the Institute of Supply Chain Fourteen bolt-on acquisitions were The Leading Indicator of Remodelling Management Purchase Managers Index. completed in the year with total annualised Activity (“LIRA”) provides a short-term Any reading above 50 indicates that the revenues of $715 million. In addition to outlook of national home improvement manufacturing economy is generally those previously announced we acquired and repair spending to owner-occupied expanding, below 50 indicates that it is Mission Valley Pipe & Supply, a plumbing homes. It is designed to project the annual generally declining. The index has been distributor in San Diego, Action Plumbing rate of change in spending for the current at levels above 50 throughout 2018/19 Supply, a leading supplier of commercial and quarter and subsequent four quarters. indicating continued growth in the market industrial products in Florida, and Innovative The LIRA projections for the year ahead in that period. have weakened but still remain positive. Soil Solutions, a Texas-based specialist in geosynthetics and erosion control In addition, existing single-family home Operating performance solutions which will support our focus on this sales is a good indicator of the strength The US business grew by 6.2 per cent on exciting area of our Waterworks business. of the housing market and tends to be a an organic basis with acquisitions generating We incurred integration costs of $14 million driver of remodelling spend. The seasonally 4.2 per cent of additional revenue growth. which have been charged to trading profit, adjusted annual rate of sales has remained Price inflation was about 3 per cent. the majority of which related to the Blackman at between 5.0-5.5 million throughout and Wallwork businesses. the last 12 months. Blended Branches continued to grow well across all geographic regions including Trading profit of $1,508 million (2017/18: US new residential construction data, 6.0 per cent in the East, 6.0 per cent in the $1,406 million) was 7.3 per cent ahead released by the U.S. Census Bureau, West and 5.8 per cent in the Central region. of last year and the trading margin was provides data on the number of building Waterworks grew very well and Industrial 8.2 per cent (2017/18: 8.4%). permits and new housing starts. Building and HVAC revenue growth was particularly permits, a leading indicator, have averaged 1. Refers to published data for the relevant divisions strong. Standalone eBusiness was slightly of Fortune Brands, Masco, Lixil, Whirlpool, 1.3 million through 2018/19 whilst housing lower as we continued to consolidate pay- A O Smith. starts have averaged 1.2 million units. per-click advertising spend around fewer These measures have been broadly flat trading websites. over the past couple of years. The organic revenue growth by end market can be seen in figure 1.

Figure 1: Estimated end market growth 2018/19 Estimated Estimated Estimated organic % of USA market growth market growth market growth revenue Growth by customer end market revenue H1 2018/19 H2 2018/19 2018/19 growth Residential ~50% 6% 1% 3% +5% Commercial ~35% 5% 2% 3% +7% Civil/Infrastructure ~7% 5% 2% 3% +6% Industrial ~8% 13% – 6% +9% 6% 1% 3% +6.2% Ferguson plc 28 Annual Report and Accounts 2019 Regional performance and overview (continued)

Residential Trade Residential Trade is part of our Blended Branches business unit and serves the residential RMI and new construction sectors with a large proportion of sales through the branch counters.

Key highlights this year – Continued to increase proportion of own brand sales – Rebranded and expanded the number of locations offering our one-hour “Pro pick-up” service – Acquisition of Blackman Plumbing Supply in the Northeast

Key products and services Plumbing supplies Pipes, valves and ﬁttings Contribution to US revenue Bathroom ﬁxtures 20% Water heaters Plumbing counters Pro pick-up

Sales are typically made to plumbing Own brand continues to be a key contractors across both RMI and new part of our strategy and we have made construction. RMI contractors usually good progress in this area over the operate with a small number of vehicles year. These products offer higher gross and employees, working on small margins than branded equivalents projects and day-to-day residential repair and provide additional customer choice. work. In these instances, their work is We continue to increase own brand sales awarded based on their availability, as a proportion of the overall product mix. price and severity of plumbing problem. We continue to diversify our product The business is characterised by high offering through multiple brands to attract order volumes though average order and retain a larger base of customers size for RMI customers tends to be small. whilst aligning prices based on our cost New construction contractors work on to serve. We also continue to work on our a range of projects from single homes digital presence providing mobile apps and to mid-sized housing developments and inventory management for our customers. are typically contracted by construction ﬁrms. This type of work is usually awarded Ferguson is the number two in residential through a tender process in advance of trade in the USA with an estimated market the project. share of 17 per cent. The estimated combined market share of the top three During the year we successfully rebranded companies is 54 per cent with much our one-hour pick-up service for customers of the market fragmented between as “Pro pick-up” and expanded this to an mid-size regional distributors and small, additional 430 locations across the USA, local distributors. For more information bringing the total number of locations for on market size and position see page 7. this service to 617. This service is available to customers through every order channel. See pages 26 and 27 for relevant residential market indicators and trends. During the year we acquired Blackman Plumbing Supply, one of the Northeast’s largest distributors of plumbing supplies and a leading supplier of HVAC and Waterworks products and solutions. The acquisition of Blackman signiﬁcantly improves our presence in New York and New Jersey and we now have 103 locations across the region. Ferguson plc 29 Annual Report and Accounts 2019 Strategic report GovernanceFinancials Other information

Our values in action: Service Nursing home emergency

“It was late on a Friday afternoon when I got the call that two boilers had gone down at a nursing home with an immediate need for replacement parts. Without hot water and an immediate ﬁx, the nursing home would need meals catered or have to relocate residents to alternative locations – both costly options and disruptive to the elderly residents. Time was of the essence. I quickly picked up the replacement parts from the supplier representative and drove three hours to the customer’s location, arriving at 9:30p.m. Ten minutes after I left, the customer called to let me know they were up and running. Through our 24/7 Commercial water heater programme, Ferguson is available around the clock to provide delivery to the point of installation and offer haul-away and disposal of old units. But to me, service is just what we do. It’s the friendship and the service that creates customer loyalty and repeat business.”

Walter Smith Category Sales Specialist

Images Right: Walter Smith; Top: Securing a water heater to a delivery truck; Above: Ferguson truck out on delivery. Ferguson plc 30 Annual Report and Accounts 2019 Regional performance and overview (continued)

Residential Showroom Residential Showroom is part of our Blended Branches business unit and operates a national network of 277 showrooms, serving consumers and trade customers.

Key highlights this year – Continued expansion, both organically and through acquisitions – Improved customer service with strategic new hires – Enhanced our “ﬁnal mile” installation of appliances

Key products and services Kitchen and bathroom plumbing supplies Contribution Lighting and fans to US revenue 14% Heating and cooling Consultation, advice and project management White glove, two person delivery

Showrooms display bathroom, kitchen and We continue to expand organically and lighting products and assist customers by through acquisitions. During 2018/19 we providing advice and project management have successfully integrated a number services for their home improvement of bolt-on acquisitions into our showroom projects. business. For example, we acquired Capital Distributing in Dallas, Texas which has Customers include consumers, builders increased our market share, enhanced and remodellers. The builders and our appliance installation services and remodellers utilise the showroom network expanded our local relationships. We also to help their clients, typically homeowners, acquired Kitchen Art, a high-end custom to select the products they wish to install kitchen cabinetry design, installation for their bathroom, kitchen and lighting and remodelling business. Its successful projects. These contractors expect integration has given us industry expertise Ferguson to understand their business and it will also serve as a centre for further requirements and assist their client through expansion into this market. the selection process in our showrooms. We also sell into the new construction A number of other initiatives focused on market with customers working with us for improving our customer service included our signiﬁcant product range, know-how online bookings, new hires and after sales and the timely delivery of products. In most care. To enhance the customer experience instances this work is awarded in contracts we have implemented software to allow at the regional or national level. customers to book online appointments to meet with our showroom consultants Over the year we have improved our in store. We have also made numerous “ﬁnal mile” installation of appliances by strategic hires of product category experts standardising the process and integrating that will improve customer service. customer feedback. This has allowed us to create actionable areas of focus to improve Ferguson is the market leader with an customer service. estimated 11 per cent market share, the next largest competitor is about half of the size. For more information on market size and position see page 7. See pages 26 and 27 for relevant residential market indicators and trends. Ferguson plc 31 Annual Report and Accounts 2019 Strategic report GovernanceFinancials Other information

Our values in action: Safety Safety observations key to raising awareness

“We started safety observations this year, a programme where executives observe and ask questions to front-line associates to learn about the risks associates face every day. I wrongly assumed that branch associates would not want to participate, but they embraced the opportunity to share feedback. They appreciated that we not only cared enough to implement new programmes to create a safer work environment, but that we followed up to see how things were going. They were eager to share what was working and what could be improved. It was also a great opportunity to get in front of our associates and let them know we value their contributions. I found myself being more attentive and questioning behaviours after the visit. Safety moments, stand downs, safety observations – they are all part of creating a safe environment and building our First in Safety culture that absolutely leads to better service.”

Todd Young Vice President, Commercial

Images Left: Yareli Wario, Warehouse associate; Above left: Todd Young during a safety observation; Above right: Safely moving heavy products. Ferguson plc 32 Annual Report and Accounts 2019 Regional performance and overview (continued)

Our values in action: Results Images Below: Willie Worthan, Partnering with customers Quotations Manager, Commercial; for win-win results Above: David Richael (left) working with Jose Mejia Jr., counter associate “We expanded our influence beyond our typical (right); Top right: The L.A. stadium; Right: Jose Mejia Jr. customer base and worked with a general contracting team that is building a stadium in Los Angeles. Understanding the customer’s wants and needs was critical, and Quotations Manager Willie Worthan worked tirelessly on a competitive bid while I managed the relationship. We specified a balanced product bundle of branded manufacturers’ products and own brand products at competitive prices that would fulfil their needs. The large order resulted in Ferguson supplying PROFLO™ toilets, from our own brand range, and other plumbing products for the stadium.”

David Richeal Commercial Area Sales Manager Ferguson plc 33 Annual Report and Accounts 2019 Strategic report GovernanceFinancials Other information

Commercial Commercial is part of our Blended Branches business and provides commercial plumbing and mechanical contractors with products and services including bidding and tendering support and timeline planning to assist with their construction projects.

Key highlights this year – Diversiﬁed our product range by partnering with new suppliers – Focused on integrating Building Information Modelling (“BIM”) systems with our software to improve ordering efficiencies – Broadened offerings to include equipment and other technical products

Key products and services Plumbing parts and supplies Pipes, valves and ﬁttings Contribution to US revenue Hangers, struts and fasteners 15% Quotation services (partnering with customers on bids/tenders) Jobsite deliver and logistics

Projects span weeks or months with When it comes to digital innovation we are Ferguson’s established supply chain leading the way in integrating our ordering logistics ensuring the appropriate products systems with customer BIM systems. are delivered at the correct time throughout This makes the ordering process highly the course of the job. efficient to our commercial customers who use BIM as the system maps what We typically serve plumbers and products are required when and where for mechanical contractors focused on new the construction project. The idea being commercial construction projects including that the customer can place an order for schools, hospitals, office buildings and a construction project with the systems hospitality venues. The plumbing contracts working together seamlessly to co-ordinate are often awarded based on bids from products and delivery schedules. a set of building plans and specifications. For the mechanical contractor, whose In 2018/19 we focused on expanding primary focus is the heating, cooling and our services to facilitate sales growth in water delivery systems in the building, equipment and other technical products, contracts are awarded based on bids and increasing our value to the mechanical specifications but also take into account contractor. We also added project managers the relationship and service provided when to our inside sales support team across supporting the design of these intricate all markets and geographies with the aim systems. We also sell to service contractors to provide a higher level of focused support affiliated with either customer type to help our contractor partners bring a job mentioned above focused on smaller jobs, to completion on time and under budget. remodels and immediate service needs in Ferguson is the number one in the those building types. USA with an estimated market share of During the year we have continued to 20 per cent, roughly twice the size of its expand our supplier base, diversifying nearest competitor. For more information our product range and reducing the risk on market size and position see page 7. of supply disruption. For example, in one of See page 26 and 27 for relevant many key product categories, copper press commercial market indicators and trends. fittings, we have added three new supplier partners and successfully integrated them into our supply chain. In line with our strategy, our own brand sales growth continues to outpace the growth of sales for the commercial business overall. Ferguson plc 34 Annual Report and Accounts 2019 Regional performance and overview (continued)

Waterworks Waterworks distributes pipe, valves and ﬁttings (“PVF”), hydrants, meter systems and related water management products alongside related services including water line tapping and pipe fusion.

Key highlights this year – Enhanced our project management, quotations and computer assisted design offerings for water and wastewater customers – Established a central estimating team to support customers in major metro areas – Continued focus on the stormwater and geotextile segments

Key products and services Pipes, valves and ﬁttings Valve insertion Contribution to US revenue Irrigation and drainage 17% Water meters and automation Advanced metering infrastructure Geosynthetics and stormwater management

Sales tend to be part of large planned Organic expansion continued in 2018/19 projects to public and private water with a number of new greenfield sites in authorities, utility contractors, public locations where we had identified strong works/line contractors and heavy highway growth potential. We continue to focus on contractors on residential, commercial and the stormwater segment and enhancing municipal projects across the water, sewer our offerings in adjacent markets such and stormwater management markets. as geotextiles and erosion control products. The acquisition of Texas-based Municipal customers purchase products Innovative Soil Solutions has assisted this to repair their water and sewer systems expansion. Investing in our associates or for capital improvement projects such as remains a priority as we further develop meter systems or pipelines. We sell to utility our water plant and municipal sales teams contractors who tend to focus on water, to offer customers additional specification sewerage and storm drainage construction support during tenders. for residential or commercial construction projects. Water treatment plant contractors, We regularly review historical project which are large regional or national players, pricing to ensure we remain competitive for typically work on very large long-term our customers and are able to successfully capital intensive projects. We also sell to convert more bids. utility pipeline contractors who install and Ferguson is the largest operator in maintain publicly funded water and sewage the USA, with an estimated market share line projects. of 23 per cent, slightly higher than the During the year we enhanced our project number two. Outside the top two, no other management, quotations and computer company holds greater than 5 per cent assisted design offerings for water market share. and wastewater customers. We also See pages 26 and 27 for relevant established an estimating team that acts civil/infrastructure market indicators as a centre of excellence supporting and trends. customers in a number of major metro areas across the USA. Ferguson plc 35 Annual Report and Accounts 2019 Strategic report GovernanceFinancials Other information

Our values in action: People College of Ferguson

“Through the College of Ferguson, I learned so much about the industry, our customers and the products we sell in just ﬁve short months. All new sales trainees go through a similar training programme. The programme provided a combination of hands-on learning, supplier site visits and classroom training. I saw how different types of pipe are made and the real-life application of our products. I spent two months in the warehouse, learning how to pick orders, drive a forklift and doing a variety of warehouse operational tasks. I shadowed Inside Sales, Outside Sales and the Estimating teams to learn more about our customers, their needs and the solutions Ferguson provides. Product knowledge training was a huge part of the experience. The programme helped me see the full picture of the Waterworks business. Learning to listen to Images our customers’ needs and solve their problems is Below: Brittany Kinsella; Top left: Brittany on a sales a huge part of what I do. This programme prepared call; Bottom left and right: me for a career at Ferguson, not just a job, and Brittany working with other the experience was invaluable. The culture of the Ferguson associates. associates and environment makes the job feel welcoming and excites me for the future.”

Brittanyy Kinsella InsideInside sasalesles rerepresentative,presentative, WWaterworksaterworks Ferguson plc 36 Annual Report and Accounts 2019 Regional performance and overview (continued)

HVAC HVAC distributes heating, ventilation, air conditioning and refrigeration equipment, parts and supplies for use in the residential and commercial markets.

Key highlights this year – Continued expansion focused on major metro markets – Acquired Wallwork, a leading supplier of heating and cooling products across New York and New Jersey – Enhanced digital offerings to better support customers

Key products and services Fans and ventilation Air conditioners Contribution to US revenue Heat pumps 9% Variable refrigeration flow training and systems Repair and maintenance parts Images Below: Jack DiFranco; Top left: Jack discussing product specifications; Right: A solar operated valve. We partner with a variety We have enhanced digital of HVAC manufacturers, offerings in the year to further providing distribution services support customers and across different geographies assist them in growing their in the USA. businesses. These offerings give the customer choice Typical customers include over how they place orders specialist contractors focused with Ferguson and enable on installing, repairing and them to review their specific maintaining HVAC units product pricing, previous serving single and multi-family invoices and delivery notes. residential developments. We also sell to contractors Ferguson is the third largest working on large RMI contracts wholesale distributor in a large in the commercial market with highly fragmented market with the majority of trade going an estimated market share through the branch network. of approximately 4 per cent. The market leader is about We have continued to twice the size of Ferguson. expand, both organically and by acquisitions during See pages 26 and 27 for the year. The expansion to relevant residential and our geographic footprint commercial indicators and has focused on major metro trends. markets such as the Wallwork acquisition in New York City. Our HVAC business also maintains close relationships with the Commercial business unit where we are able to leverage our HVAC knowledge on large commercial project tenders. Ferguson plc 37 Annual Report and Accounts 2019 Strategic report GovernanceFinancials Other information

Industrial Industrial offers products and services across the full range of industrial sectors.

Key highlights this year – Strong market conditions during the year – Focus on growing the valve automation business – Secured several new larger PVF maintenance, repair and operations (“MRO”) contracts whilst also successfully retaining a number of renewals

Key products and services Pipes, valves and ﬁttings Supply chain services Contribution to US revenue High-density polyethylene resin fabrication, fusion and 8% rental services MRO products

Supplies pipe, valves & fittings During the year, the Industrial (“PVF”) as well as specialised business benefited from strong services including valve end market demand across automation and supply chain all industries. management. Customers rely Growing the valve automation on our technical expertise business continues to be a when building, maintaining priority. We integrated Action Our values in action: Innovation and repairing infrastructure Automation, an Illinois-based for the industrial market. Innovation in the oilfields acquisition focused on valve The Industrial business automation products and “Automated valve technology is key for water operates across all sectors services in the year. disposal operations in the midstream oil and including energy, pulp and gas market. Engineers from a water gathering Another area of focus is paper, chemical, mining company brought us a unique challenge to solve – MRO where we have seen and food and beverage. no power to operate the valves. By calculating the several successful PVF Customers include industrial number of cloudy and sunny days in the oilfields, contract renewals as well as contractors where Ferguson our team determined that we would need to new contract awards during typically provides PVF design and install 22 solar-power control stations, the year and continue to products. We also sell each with its own solar panels to generate the develop the Industrial MRO directly to end users and electricity needed to power the actuator for service offering. manufacturers where we five strokes per day, over a five-day period, can offer both a wide variety The industrial market is with little or no sunlight. The system also includes of products and specialised fragmented, we estimate our a low-voltage alarm that notifies pipeline operators services to ensure that market share to be 5 per cent, if the power from the solar system has dropped facilities continue to operate with the market leader nearly below the level required for valve operation and efficiently. Average order sizes three times larger. the valves can be operated remotely. With solar in Industrial tend to be larger power, we developed a reliable, environmentally See pages 26 and 27 for than the remainder of the friendly solution that was less expensive than relevant industrial market Ferguson business. running power, while building our credibility – indicators and trends. a true win-win for our US industrial business and the customer.”

Jack DiFranco Category Sales Specialist, US Industrial Ferguson plc 38 Annual Report and Accounts 2019 Regional performance and overview (continued)

Fire and Fabrication Facilities Supply Fire and Fabrication supports our customers Facilities Supply provides products, services working on ﬁre protection systems in and solutions to enable reliable maintenance commercial buildings. and renovation of commercial facilities.

Key highlights this year Key highlights this year – Expanded own brand product offerings – Excellent growth in multi-family and hospitality sectors – Broadened the fabrication services we offer to customers – Continued to use technology to increase productivity and improve customer service – Opened a number of new locations during the year and expanded the size of several existing locations to support – Leveraged ferguson.com to free up associate time customer demand to serve our customers

Key products and services Key products and services Sprinkler systems Janitorial supplies Hangers, struts Door and cabinet hardware Contribution and fasteners Contribution to US revenue to US revenue Appliances Pipe ﬁttings 4% 5% Lighting Pipe fabrication Paint equipment Pipes and tubing Fire hydrant repair

Fabricates and supplies Organic expansion during Facilities Supply operates We continue to use technology fire protection products, the year has included opening across several repair, to increase productivity and fire protection systems and several new locations and maintenance and improvement improve customer service. bespoke fabrication services expanding a number of markets. The majority of Our outside sales team is using to fire contractors. These existing fabrication facilities deliveries are made directly customer mapping technology contractors work on new to support continued growth. from Ferguson’s distribution to increase efficiency when installations, renovations We continue to expand our centre network to customer calling on customers and we and servicing of fire systems own brand product offerings store rooms within a facility. have developed an in-depth principally in commercial and broaden the fabrication Customers include multi-family customer feedback process buildings. Purchasing services we offer. properties, government to help us identify and improve decisions are made based agencies, hospitality, education, customer service in real-time. Ferguson is the number one on service, relationships healthcare, commercial We encourage customers to in the USA with an estimated and inventory availability. properties or building service use ferguson.com and system 22 per cent market share. The contractors. to system integrations freeing Product offerings include three next largest competitors up associate time to serve sprinklers and pipework, hold approximately 37 per cent During the year the business our customers. fittings, hangers and supplies. market share between them. grew well with excellent growth We offer fabrication services in the multi-family properties The market is both large See pages 26 and 27 for to customise the product and hospitality sectors. and highly fragmented with relevant commercial market offering based on our The renovation business no competitors holding more indicators and trends. customers’ needs. We also side of Facilities Supply has than 3 per cent market share. supply materials to large continued to grow organically Ferguson’s market share is government, manufacturing and with the acquisition of estimated at approximately and sports facilities. Dogwood Supply. 1 per cent. See pages 26 and 27 for relevant commercial market indicators and trends. Ferguson plc 39 Annual Report and Accounts 2019 Strategic report GovernanceFinancials Other information

Our values in action: Integrity Helping those in need eBusiness “Ferguson comes to the rescue when no one else can, especially in times of natural disaster. eBusiness leverages our US product categories Initially we support communities by supplying items such as generators and drinking water and supply chain with the majority of revenue to help communities get back on their feet. generated through Build.com. Through our vast distribution network and wide product range, we work to help with the rebuild process. Recent examples are Puerto Rico and Key highlights this year the US Virgin Islands. I go in, assess the situation and bring in Ferguson resources and supplies that – Enhanced capabilities to deliver to more than 70 per cent will help get people back on their feet. The sooner of the US population in one day our customers place purchase orders, the quicker – Created augmented and virtual reality functionality for we can get to rebuilding the lives of the people thousands of plumbing and lighting products in app in these ravaged communities. There are billions of dollars earmarked from the federal government – Continued to focus on trade customers to reduce for disaster work. We need to be fast and efficient pay-per-click spend and demonstrate our value to government agencies in rebuilding communities. If we have Key products and services products in customers’ hands when they need Bathroom, kitchen and them, then we’ve done our job, connecting our lighting products resources to the people who need them most.” Contribution Door and cabinet hardware Matt Lowry to US revenue Business Development Manager 8% Appliances Call centre support and advice Furniture and decor

eBusiness sells home Our supply chain at Ferguson improvement products enables us to deliver to more directly to professional trade than 70 per cent of the US customers and consumers population in one day, which online predominantly using we are now promoting on the the Group’s existing product website. We will continue to lines and distribution network. integrate across Ferguson’s The majority of eBusiness is branch network to support conducted through the brand a more robust omni-channel Build.com, which is supported experience for the customer. by a call centre. The call centre During the year we continued is staffed with knowledgeable to consolidate pay-per-click consultants who deliver expert advertising spend around advice across all product fewer trading websites and categories. This differentiation really focus on Build.com gives us a competitive due to its excellent customer advantage against the other Images experience, well-known large competitors in the space. Left: Matt Lowry; brand and search engine Above: Destruction caused by Hurricane Maria across eBusiness continues to evolve optimisation. Our dynamic the US Virgin Islands, to support both professional pricing strategy and own brand Puerto Rico and Dominica. trade customers and penetration meant that gross consumers driving a best-in- margin held up well in the year. class experience through an The market is predominantly improved website, mobile app comprised of large competitors and call centre. During the year with the top four businesses we have created a tool on the holding an estimated website allowing customers 67 per cent of the market. to envision and design Ferguson is estimated to their projects in a simple, be number four, down from user-friendly way. Our mobile last year as we consolidated Build.com app has been pay-per-click advertising spend enabled to support augmented around fewer trading websites. and virtual reality for thousands of plumbing and lighting See pages 26 and 27 for products, achieving nearly relevant residential market half a million downloads. indicators and trends. Ferguson plc 40 Annual Report and Accounts 2019 Regional performance and overview (continued)

UK A leading trade distributor operating in the large and fragmented UK plumbing, heating and infrastructure markets. In September 2019, we announced our intention to demerge the UK operations subject to shareholder approval (see page 10 for further information).

Business profile Key highlights The UK principally operates under the – Like-for-like revenue growth of 0.6 per cent Wolseley brand serving the trade market – UK trading profit ahead in constant currency through 551 branches and four distribution centres. Branches provide same-day and – Markets remain challenging next-day product availability, a key service – Preparing for proposed demerger offering to our customers. The UK business mainly serves RMI markets, and has relatively low exposure to the new residential construction market. At the year-end, Five-year performance £m Wolseley had over 5,000 associates. Ongoing revenue1 Ongoing trading profit1 Business units and 1,973 1,952 1,955 90 market position 1,835 1,725 Blended Branches is the largest business 74 75 within the UK, generating 82 per cent of the revenue. This business provides plumbing 53 54 and heating products, air conditioning and refrigeration products and the associated 2015 2016 2017 2018 2019 2015 2016 2017 2018 2019 pipes, valves and fittings to customers in the 1. This is an APM, for further information on APMs, including a description of our policy, purpose, definitions residential and commercial sectors. It also and reconciliations to equivalent IFRS statutory measures, see notes 2 and 3 on pages 118 to 122. provides specialist above ground drainage Quarterly like-for-like revenue growth % products. Wolseley is the second largest merchant distributor in the UK. 3.2% 2.8% Infrastructure is a specialist in below ground drainage serving the civil infrastructure and utilities markets. The business is estimated to 0.8% have a market share of about 20 per cent. 0.2% Market trends -0.3% -0.6% The quarterly GDP growth rate in the UK -1.0% has declined over the last 12 months from 1.6 per cent in the first quarter to 1.2 per cent in the final quarter. Consumer confidence -2.6% has been negative for the last 12 months. Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2018 2019 Operating performance Like-for-like revenue growth in the UK was 0.6 per cent. Repairs, maintenance and improvement markets were flat. Gross margins were slightly ahead due to improved product mix. Ongoing trading profit of $69 million was ahead on a constant currency basis and the trading margin was ahead at 3.1 per cent (2017/18: 2.9 per cent). We continue to focus on the execution of our strategy and the focus of the business under new management over the last 18 months has been on industry leading availability, in-night branch fulfilment and outstanding customer service. We also made good progress on rationalising the logistics and supply chain network, closing the Leamington distribution centre in the second half with no disruption to customer service. Ferguson plc 41 Annual Report and Accounts 2019 Strategic report GovernanceFinancials Other information

Canada A wholesale distributor of plumbing, heating, ventilation and air conditioning, refrigeration, waterworks, ﬁre protection, pipes, valves and ﬁttings and industrial products.

Business profile Key highlights Wolseley Canada predominantly serves – Organic revenue decline of 1.1 per cent trade customers across the residential, – Ongoing trading profit flat in constant currency despite challenging market conditions commercial and industrial sectors in both RMI and new construction. The business – Markets weakened through the year operates 217 branches with one distribution – One acquisition completed in the year centre. At the year-end Canada had approximately 3,000 associates.

Business units and Five-year performance $CADm market position Ongoing revenue1 Ongoing trading profit1 Canada operates primarily under the Wolseley brand and supplies plumbing, 1,576 89 89 1,517 heating, ventilation, air conditioning and 1,391 1,334 refrigeration products to residential and 1,316 72 69 commercial contractors. It also supplies 63 specialist water and wastewater treatment products to residential, commercial and municipal contractors, and supplies 2015 2016 2017 2018 2019 2015 2016 2017 2018 2019 PVF solutions to industrial customers. 1. This is an APM, for further information on APMs, including a description of our policy, purpose, definitions The business is the second largest in and reconciliations to equivalent IFRS statutory measures, see notes 2 and 3 on pages 118 to 122. the market. Quarterly organic revenue growth % 9.9% Market trends Canadian GDP growth has decreased 7.2% through the year from a high level in the 6.3% first quarter of 2.0 per cent to 1.6 per cent 4.7% in the final quarter. Consumer confidence 3.3% has been high through the year with an average of approximately 55, a score above 0.5% 50 indicates an expectation of growth.

Operating performance -2.9% In Canada, organic revenue was 1.1 per -5.2% cent lower. Residential markets weakened Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 throughout the year as a result of 2018 2019 government measures to restrict mortgage credit, the impact of foreign buyer taxes and rising interest rates. Acquisitions contributed 5.0 per cent of additional growth. Gross margins were ahead of last year and operating expenses were well controlled. Trading proﬁt of $67 million was $3 million ahead of last year when adjusted for the one-off gain of $6 million from a legal settlement in 2017/18. The trading margin was 5.6 per cent (2017/18: 5.9 per cent). As previously announced, we completed one acquisition in the year with total annualised revenue of $11 million. Ferguson plc 42 Annual Report and Accounts 2019 Sustainability

Our sustainability programme Our sustainability programme concentrates on three key focus areas which actively support our growth, improve associate engagement, address our top risks and compliance requirements or are important to our customers, suppliers and shareholders.

Expected safe behaviours and safety rules: Key focus areas 1. Best associates We have rolled out a defined set of expected During the year the Group Sustainability As our associates are our most safe behaviours for all associates to follow. team conducted a detailed review important asset, this focus area The safety rules provide guidelines on safe of our sustainability programme to includes health and safety, diversity and practices around high-risk activities. Both the continue to align it with the latest best inclusion, compensation and benefits, expected safe behaviours and safety rules practice, utilising the guidance and development and retention and social underpin our safety value (see pages 16 methods provided by the Sustainability investment. For more information on our and 31). Accounting Standards Board. We also associates, see pages 16 to 19. surveyed over 4,000 associates and Closing the knowledge gap: We have a number of suppliers and customers developed a new safety programme for to understand what they considered our leadership teams and all new associates. the key material issues that would most The aim of the new programme is to develop influence the long-term success of the our safety leadership and empower our Company. The results were reviewed by associates to take control of their safety and the Executive Committee to ensure that look out for their colleagues. This safety programme will be rolled out to all associates. our programme continues to align with Health and safety our strategic objectives. Consequently, The health and safety of our associates, Leadership engagement: Tone from the our sustainability strategy has evolved customers and suppliers is a fundamental top is critical and this year senior leaders this year to address the following three value of the Group (see our values on were challenged to make site visits and important focus areas: page 16). We continue to invest in this area engage associates in safety conversations to address the causes of injuries, and engage about the risks they face on a daily basis Best with our associates, empowering them to at work. They were also asked to participate 1 associates do what is right. We have made encouraging in behavioural observations and identify improvements in our overall performance any good or unwanted practices and this year and there is much more still to do share those with associates in real time. and we must never become complacent. These engagements encourage collective An engaged, knowledgeable and learning, increase awareness of safety empowered workforce is critical to our focus challenges among our leaders and provide in health and safety. We are committed to timely feedback on safe and unsafe work investing the time and resources to continue practices. For an example of this in action improving our health and safety performance. see our safety value case study on page 31. This year, we embarked on improvement Workplace improvement: We have Efficient programmes that focus on proactively provided our associates with the necessary 2 operations leading safety such as the following: tools needed to reduce disabling workplace injuries from material handling which is an ongoing challenge given the nature of “For the first time we have set out our business. We have identified common the safety behaviours we expect risk factors in handling products and the from ourselves and our associates appropriate equipment required to reduce and provided improved guidance the risk while equipping our branches with on the rules we need to follow to ergonomically designed equipment to help avoid accidents. Our performance prevent injuries. has improved but we have historically been too reactive. Today we have Driver safety: With over 5,000 drivers on Sustainable products the road it is critical to protect our drivers and and solutions a clear roadmap to move towards 3 our goal of leadership in safety other road users. This year we revised our in the distribution industry.” driver safety programme with an emphasis on safe driving by incorporating Smith John Martin System’s (a leading accident avoidance Chief Executive training company) Safe Driving Programme into our overall driver safety training. Ferguson plc 43 Annual Report and Accounts 2019 Strategic report GovernanceFinancials Other information

Health and safety performance in 2018/19 An estimated 1.6 million Americans still lack access to clean water and Ferguson will Figure 1: Group total recordable injury rate be providing both monetary and product Group 2018/19 Total Recordable Injury rate: 2.96 – 22% improvement (3.80 in 2017/18) donations to help address this issue. Specifically, the donations from Ferguson 6.00 will be used to fund the Community Plumbing 5.00 Challenge, an annual project to expand 4.00 water access in the Navajo Nation. 3.00 Not only does this project measurably 2.00 improve access to clean water and 1.00 sanitation in these communities, but also 0 brings together the skills of water industry Aug Sept Oct Nov Dec Jan Feb Mar Apr May Jun Jul professionals with students learning to enter 2018/19 2017/18 a career in the skilled trades. Hunger: Every spring, Ferguson associates across the USA participate in the Feed the Figure 2: Group lost time rate Need challenge to help eradicate hunger Group 2018/19 Lost time rate: 0.97 – 13% improvement (1.11 in 2017/18) in the communities we serve. Collectively, 1.6 Ferguson associates collected more than 1.4 50,000 pounds of food and provided 1.2 43,000 meals for our neighbours in need. 1.0 Every year the three locations that collect the 0.8 most food receive a corporate donation of 0.6 $5,000 to their local community food bank. 0.4 0.2 This year, our Richland Distribution Centre 0 associates won the competition by collecting Aug Sept Oct Nov Dec Jan Feb Mar Apr May Jun Jul over 11,900 pounds of food to donate to their 2018/19 2017/18 community partner, Tri City Foodbank. Total recordable injury rate: Total number of injuries per 200,000 hours (this represents 100 associates working Housing: Ferguson continues to support 40 hours per week for 50 weeks). The change to 200,000 hours (from 100,000 hours last year) brings us in line Homes For Our Troops, a non-profit with the US Occupational Safety and Health Administration guidelines. The injury number is based on associates receiving medical treatment beyond first aid that requires them to leave the workplace. The hours worked organisation dedicated to building and are calculated using full-time equivalent associate numbers and average days by business and assume an donating specially adapted custom homes eight-hour working day. for severely injured veterans. Ferguson’s Lost time rate: An injury case that involves at least one day absent following the day of an injury authorised by recent acquisitions to our Own Brand a registered medical professional. portfolio, including Safe Step, which offers walk-in tubs, allows us to provide not only In 2018/19 the Group’s total recordable Founded upon the mission to change the financial support to Homes For Our Troops, injury rate and lost time rate improved perception that a four-year degree is the but also product donations. by 22 per cent and 13 per cent respectively best path to success, the mikeroweWORKS compared to last year (see figures 1 and 2). Foundation is committed to challenging the Front Royal distribution upcycles waste This improvement is due to robust associate stigmas and stereotypes that discourage engagement programme, senior leadership individuals from pursuing the millions Recycling and fitness don’t necessarily commitment and engagement from all of available jobs. Since its inception, go hand in hand – but at Ferguson, they management levels, allocation of safety mikeroweWORKS has granted or helped do! We have high standards for product resources and deployment of safety facilitate the granting of more than $5 million quality and our Front Royal Distribution professionals in the field to focus on areas in Work Ethic Scholarships and other Centre associates upcycle water tubing such as material handling and training. like-minded programmes that also work that doesn’t make the cut, building to close the skills gap. The Foundation hula hoops for local public schools. Focusing our social investment is Ferguson’s second major partnership We’ve donated over 400 hula hoops every year, for eight years. Our associates are incredibly generous in the skilled trades. In 2017/18 we signed with their time and talents in the communities an agreement to support SkillsUSA, we serve, and the Group is committed to a partnership of students, teachers and supporting our four key priorities for social industry professionals working together investment following engagement with to ensure the USA has a skilled workforce. our associates: Clean water and sanitation: Given our size Skilled trade: The skilled labour gap remains and national footprint in the USA, we are a challenge for many of our customers, and uniquely positioned to assist those in our Ferguson is committed to ensuring that more communities that lack access to running plumbers, HVAC technicians, electricians water and sanitation. Recognising this and welders enter the workforce. In 2018/19, opportunity, the US business committed our US business reiterated its commitment to to a three-year partnership with Dig investing in the Skilled Trades by supporting Deep, a non-profit organisation working the mikeroweWORKS Foundation through to provide access to clean water for funding of their Work Ethic Scholarships. underserved communities. Ferguson plc 44 Annual Report and Accounts 2019 Sustainability (continued)

In September 2019 Ferguson was included Wolseley Canada’s Scope 3 emissions 2. Efficient operations in the Dow Jones Sustainability Europe Index. increased slightly year-over-year due to Initiatives that support this focus We achieved a perfect score of 100 in the vehicle fuel usage. Our Canadian business area include energy management, environmental reporting category, reflecting is exploring technology and fleet incentives supply chain management, fuel the commitment to meet our sustainability to achieve future reductions in this area. consumption and emissions reduction. goals and to continually improve reporting transparency. Launched in 1999, the Dow Decreasing our carbon footprint Jones Sustainability Index is the longest- Our fleet of trucks and vans are essential running global sustainability index worldwide for getting products to customers on- and tracks the sustainability performance time. Always looking for ways to use of the world’s largest companies. less fuel, we implemented an innovative solution for 50 vehicles within the US Carbon emissions business: applying regenerative braking Our carbon emissions per $ million revenue, technology developed by XL Hybrids. (shown in figure 1) improved by 12.9 per By adding this to our vehicles, we saved cent compared to the 2015/16 baseline over 22,000 gallons of fuel last year.

Goals (20.3 tCO2e per $m revenue in 2018/19

Ferguson strives to increase accuracy in compared to 23.3 tCO2e per $m revenue our environmental data wherever possible, in 2015/16). The significant improvement Waste and in 2018/19 our estimates of historical year-over-year was as a result of carbon During 2018/19, total waste has decreased data were replaced with actual data where reduction initiatives in the year. We also 8.1 per cent relative to revenue versus our available. We improved methods for benefited from a continued reduction base line in 2015/16 (3.4 US Tons per $m estimating outsourced transportation data in Scope 2 emissions due to a cleaner revenue in 2018/19 versus 3.7 US Tons and air emissions resulting from business conventional electricity grid mix in the per $m revenue in 2015/16) due to our travel. For consistency, we also removed countries where we operate. waste reduction initiatives and revenue data for non-ongoing businesses Wasco The Group grew in both size and revenue growth outpacing increases in total waste. and Soak.com. Further detail on the data in 2018/19, and as a result, our Scope 1 and The total waste recycled during the year provided can be found in the “Basis of Scope 3 emissions grew year-over-year. was 24.1 per cent. Reporting” document on the Ferguson plc Scope 1 emissions increased as our website www.fergusonplc.com. As part of our waste reduction initiatives, businesses experienced a higher number we added over 60 new recycling locations of heating days in 2018/19, which increased in the US business and continue to recycle Our five-year carbon and waste reduction our natural gas usage. Our owned fleet significant volumes of corrugated cardboard, goals set in 2015/16: vehicles also contributed to the increase shrink wrap, pallets, scrap metal and bottles Reduce carbon emissions in our Scope 1 emissions and we are and cans. We also introduced new waste currently implementing a new transportation minimisation strategies including providing management system to ensure we are reusable totes in distribution centres and -10% minimising our fleet emissions. donating discontinued products to charities. Reduce total waste In the USA, we introduced feasibility However, hard-to-recycle commodities studies targeting introducing renewable including fibreglass and acrylic products -15% energy projects to our distribution centres. remain a challenge and we are conducting With Scope 3 emissions driven largely research on innovative ways to divert Achieve recycling rate of by our outsourced transportation partners, these from landfill to ensure we meet our we connected with our three largest US recycling goals. 40% suppliers to ensure that they are reducing their carbon emissions and improving Performance at the end of 2018/19, three their fuel efficiency. Each of these carriers years into the target period, is as follows: maintains US Environmental Protection Agency’s SmartWay Transport Partnership Carbon status and received 2018 SmartWay -12.9% Excellence Awards. In 2018/19, branch closures in the Wolseley Total waste UK business contributed to a reduction in energy usage and reduced Scope 2 carbon -8.1% emission. Additionally, 100% of the energy Total waste recycled required to power the Wolseley UK head office was sourced from a mixed renewable 24.1% blend, including biomass, wind and solar. Ferguson plc 45 Annual Report and Accounts 2019 Strategic report GovernanceFinancials Other information

Our waste data accuracy in the UK improved Figure 1: Carbon emissions as we switched to a new supplier for wood pallet recycling. While we previously Metric tonnes of CO2 equivalent per million US dollars of revenue received estimated weight tickets for the Increase/ Increase/ (reduction) (reduction) pallets recycled across the UK business, from from our actual data reﬂected a higher amount of Carbon emissions 2015/16 2016/17 2017/18 2018/19 2017/18 2015/16 recycling than previously stated. Our waste Scope 1 and 2 emissions 17.5 15.7 14.0 12.7 (9%) diversion numbers have been appropriately Scope 3 emissions 5.8 5.8 7.9 7.6 (4%) restated to capture this improvement in data. Total emissions 23.3 21.5 21.9 20.3 (7%) (12.9%) Wolseley Canada reduced the amount of total waste generated year-over-year, Total carbon emissions Metric tonnes CO2 equivalent but saw no growth in the rate of recycling for the business. The business will be focusing 400,272 399,786 442,403 445,190 on this area of improvement in 2019/20. Further detail on the data provided 100,100 107,682 159,487 166,593 can be found in the “Basis of Reporting” document on the Ferguson plc website 126,981 115,164 107,352 96,889 www.fergusonplc.com.

173,191 176,940 175,564 181,708 Reducing waste and helping communities 2015/16 2016/17 2017/18 2018/19 Scope 1 Scope 2 Scope 3 Focusing on our waste footprint is critical to achieving our recycling target, and our associates are making a difference Figure 2: Waste generation every day by helping us focus on this goal. Eduardo Gomez, an associate in Relative waste – US Tons per $ million revenue Pomona, California, enlisted the help Increase/ Increase/ of Good360 to repurpose discontinued (reduction) (reduction) items destined for landﬁll. 50 toilets and from from Carbon emissions 2015/16 2016/17 2017/18 2018/19 2017/18 2015/16 30 porcelain sinks were sent to help Landﬁlled and incinerated 2.6 2.6 2.7 2.6 (4%) disaster recovery efforts in Florida and Recycled 1.1 0.9 0.9 0.8 (11%) areas affected by Hurricane Harvey. These efforts were not a one-off: we Total waste 3.7 3.5 3.6 3.4 (6%) (8.1%) are in the process of donating additional products to Good360. Total waste generation US Tons

63,634 66,297 71,775 74,408 “People are still putting their lives together after the hurricanes. 1,462 1,601 We’re happy these products found 1,052 189 17,826 17,915 a second life, helping people who 17,032 18,282 lost their homes to natural disasters.”

Eduardo Gomez 52,487 54,892 45,163 48,213 Conﬁguration Analyst, Pomona

2015/16 2016/17 2017/18 2018/19 Landﬁlled Recycled Incinerated

Our approach to measuring carbon was developed in accordance with the Greenhouse Gas Protocol. Emissions are calculated using the carbon factors from the Department for Environment, Food & Rural Affairs in the UK, the International Energy Agency in France and the Environmental Protection Agency in the USA and are reported as tonnes of CO2 equivalent (abbreviated as tCO2e) based on the Global Warming Potential of each of the “basket of six” greenhouse gases, as defined by the Kyoto Protocol. 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 performing figures. Ferguson plc 46 Annual Report and Accounts 2019 Sustainability (continued)

During 2018/19, key milestones included: Climate-related risks and 3. Sustainable products opportunities and solutions – Continuing to commit suppliers to Ferguson’s anti-slavery standards. Following the recommendations from Projects within this focus area include In total, over 1,800 major suppliers the Task Force for Climate-related product quality and integrity, product have contractually pledged to abstain Financial Disclosures (“TCFD”), Ferguson packaging and design, and lifecycle from use of child, forced, or involuntary has convened subject matter experts impacts of the products and services labour in their operations. Approximately from across the business to examine we offer. 14 per cent of these suppliers are in the specific risks and opportunities to countries with a prevalence of modern the business posed by climate change. slavery according to The Global For additional information on the climate- Slavery Index. related risks and opportunities specific – Harmonisation of anti-slavery to Ferguson, please refer to our public measures across our businesses. Climate Change CDP Response, available Our businesses have continued at www.cdp.net. You can view our climate- the process of incorporating ethical related risks and opportunities online at Product quality and integrity and anti-slavery elements in their www.fergusonplc.com. supplier audit methodologies, best We require all our major suppliers to sign practices from our acquired businesses Section 172 of the Companies a Supplier Code of Conduct (or operate (e.g. Jones Stephens). Act 2006 under its own comparable business conduct principles) and reserve the right – Launching a new risk assessment Information on how the Directors have had to terminate a business relationship with any tool to enhance the effectiveness regard to the provisions of section 172 of the supplier that violates any of our principles. of our anti-slavery engagement with Companies Act 2006 is available on pages This agreement includes requirements for our international suppliers. 14 to 19, 42 to 53 and 64 and 65. social responsibility, including human rights We have implemented a new risk and labour standards, standards for meeting assessment tool that flags potential Non-financial information environmental regulations and providing high-risk suppliers for further inquiry, statement safe working conditions, measures for based on geographic location (linked to The Global Slavery Index 2018 and In December 2016, the UK Government anti-bribery and corruption and supply chain published new regulations implementing transparency. During 2018/19 we continued Transparency International’s Corruption Perceptions Index). the European Union Directive on disclosure to strengthen our quality control procedures of non-financial and diversity information for sourcing products. Quality teams in our We are determined in our commitment to (the “Non-Financial Reporting Directive”). overseas sourcing entities continue to visit eradicate any form of modern slavery in our The regulations amend the Companies and assess our suppliers. Each business global supply chain. Act 2006 requirements for the strategic also assesses its suppliers against set criteria report and include diversity requirements to provide protection to both us and our Additional details of our anti-slavery practices and activities during 2018/19 are set out in the Disclosure and Transparency Rules. customers in the event of a product failure Ferguson falls within the scope of the or breach of regulation in the supply chain. in our annual statement in accordance with section 54 of the Modern Slavery Act, Non-Financial Reporting Directive and sets A new role of Director of Quality was available here www.fergusonplc.com. out the required information below: recruited in 2018/19 to focus on our own – Environmental matters (including the brand suppliers and oversee a quality Sustainability and impact of the Company’s business on the assurance team that performs on-site audits product design environment) on pages 42 to 46. for all new suppliers. The team uses a – The Company’s employees on pages checklist to measure supplier performance Offering a range of products with lower 16 to 19 and 42 to 46. against criteria for quality, labour, wages environmental impact is important for and working hours, health and safety and our customers and we are focusing on the – Social matters on pages 42 to 46. environmental protection, and ensures that sustainability benefits of the products that – Respect for human rights on pages on-site conditions meet Ferguson standards. we sell, particularly in our own brand range. 16 to 19 and 42 to 46. Ferguson received four Platinum ADEX – Anti-corruption and anti-bribery matters UK Modern Slavery Act awards for products in our Mirabelle and Park Harbor lines. This recognition, provided on pages 16 to 19. Since 2016, the Company has responded by the Awards for Design Excellence, was The Directive also requires references to to the UK government’s directive under based on the design and sustainability a description of the Group’s business model the Modern Slavery Act for concerted of the products designed by Ferguson. (pages 14 to 19), principal risks, including action to tackle the occurrence of forced, They included the Mirabelle Sitka one-piece those relating to the matters identified above, involuntary and child labour in the global high efficiency skirted toilet, the Park Harbor (on pages 47 to 53), and key performance supply chain. Whilst collectively Ferguson Woodbury LED exterior wall lantern, the indicators (on pages 20 and 21). buys products from over 45,000 suppliers Park Harbor LED bath light and the Park in over 40 countries, we source over 95% Harbor LED chandelier. of our manufactured goods from suppliers in North America and Western Europe where the risk of modern slavery is lower. As we continue to enhance our anti-slavery measures, we will focus our efforts on our international suppliers. Ferguson plc 47 Annual Report and Accounts 2019 Strategic report GovernanceFinancials Other information Principal risks and their management

Risk management at Ferguson Monitoring risk throughout the Group The Board is 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 assurance.

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. Ethics “Speak Up” hotline Overall system of risk management Audit reports throughout the year reviewed by the Audit Committee on behalf of the Board.

Performance reports Semi-annual risk reports

Corporate functions analyse Audit ﬁndings inform risk and control data, assessments of control set policies and procedures effectiveness by Group Legal Operations report on Reports from Group Legal risk and control status and inform audit priorities and submit performance reports plans for the coming year

Front line business operations Corporate Independent and line management functions assurance e.g. branches and Group and subsidiary level, Internal audit function and other distribution centres e.g. legal, treasury, ﬁnance, tax and IT independent assurance

First level Second level Third level Business operations implement policies. Set policies and procedures. Test the design and effectiveness of procedures and controls. Associates act in line with Ferguson’s Monitor risks and controls. Code of Conduct and Group policies. Collate and submit risk reports. Ferguson plc 48 Annual Report and Accounts 2019 Principal risks and their management (continued)

Risk analysis during the year Longer-term viability of the Group 2018/19 risk and control assessments Building on this risk analysis, the Directors have assessed the Group’s Ferguson formally reviews its principal Group and business unit risks prospects and viability in light of its current financial position, strategic every six months – at the half-year and at the year-end. plan and principal risks. The Board believes that a three-year viability assessment period to July 2022 is appropriate as this aligns to the In January and July 2019, the Board provided its perspective on risks Group’s planning horizon. Furthermore, the Group’s principal risks relating to the Group’s strategy for 2019/20 and beyond. The Board’s are ongoing in nature and could materialise at any time. None are assessment was then combined with bottom-up risk reports received triggered by a specific, known event that will happen beyond that from business units in February and August 2019 to produce an three-year timeframe. Forecasting beyond the three-year timeframe overall risk profile and report for the Group. does not therefore provide additional accuracy or risk insight. This risk report, listing principal and emerging risks and how they The Group’s strategic approach and future prospects are described have changed, was reviewed, amended and finalised with the on pages 2 and 3 and 6 to 19. Strategic plans have been prepared Executive Committee in March and July 2019. The mitigation in place by business units and financial forecasts and budgets have been for each principal risk was then reported to and reviewed by the Audit reviewed by the Board. The principal risks to the Group’s strategy Committee in March 2019 and in September 2019. were formally reviewed by the Board and the Executive team in Throughout the year, members of the Board, Audit Committee and January and July 2019. Consideration has also been given to the Executive Committee have received updates on the Group’s principal strength of the Group’s balance sheet and its credit facilities. risks, as follows: Assessment of viability Risk Updates provided Whilst the strategic plans represent the Board’s best estimates of the A New competitors Formal update provided to the Board in future prospects of the business, the Group has also assessed the and technology January 2019. Related risks considered financial impact of a number of alternative scenarios. by the Board in January and July 2019 and by the Executive team. Scenario modelled Link to principal risks New competitors Monthly performance reviews with Scenario 1 B Market conditions and technology CEO and CFO. CEO update to the Revenue reduction C Pressure on margins Board at each Board meeting. We considered a number of forward-looking Market conditions scenarios under which forecast revenue Talent management D Information Reports on the status of the Group’s was adversely impacted in all years of the and retention technology information technology strategy and assessment period. This was considered operational risks were provided to the alongside mitigating actions which Executive Committee, the Board and management could reasonably put in place the Audit Committee throughout the year. should such conditions be experienced. E Health and safety Performance updates were provided Scenario 2 Pressure on margins at every Executive Committee and Margin compression Board meeting during the year. Macro political tax risk A number of scenarios were considered F Regulations With the appointment of a new General whereby our ability to maintain attractive Counsel, the Group will be conducting margins was tested. This was considered a broader assessment of the Group’s both in isolation and in conjunction with compliance programme in 2019/20. a fall in revenue. The status of the Group’s anti-bribery programme was reported to the Audit Scenario 3 Information technology Committee in January 2019. Large, one-off operational expense Health and safety We considered the impact of any potential The Board, supported by the Nominations Regulations G Talent management legal or regulatory fines. and retention and Audit Committees, has received detailed updates throughout the year from leadership teams around the Group. Whilst linked to the Group’s principal risk factors the scenarios detailed above are hypothetical and designed to test the ability of Macro political Reported on tax risks and future reforms to H the Group to withstand such severe outcomes. In practice the Group tax risk the Audit Committee in September 2018 and March 2019. The Group is focused on has an established series of risk control measures in place that are the ongoing uncertainty regarding tariffs designed to both prevent and mitigate the impact of any such and international trading (in particular occurrences from taking place. between the USA and China) and responding with appropriate actions. Ferguson plc 49 Annual Report and Accounts 2019 Strategic report GovernanceFinancials Other information

In each of the scenarios considered, the Directors have made practical assumptions around the Group’s ability to raise future Heat map debt financing. In addition, the testing took account of a number (after mitigating controls and actions) of mitigating actions available to the business to respond to the The heat map below illustrates the relative positioning of our risk being considered including, but not limited to, reductions in principal risks by severity and likelihood. operational and capital expenditure, the release of trade working capital and reductions in acquisition activity. The results of the stress Principal risks After mitigating controls or actions testing undertaken showed that the Group would be able to absorb A New competitors the impact of the scenarios considered should they occur within the and technology High assessment time period. B Market conditions Viability statement A C Pressure F B Based on the outcomes of the scenarios and considering the on margins D Group’s financial position, strategic plans and principal risks, the Directors have a reasonable expectation that the Group will be able D Information technology C H to continue in operation and meet its liabilities as they fall due over Medium the period of their assessment. The Directors’ statement regarding E Health and safety G E the adoption of the going concern basis for the preparation of the financial statements can be found on page 77. F Regulations

G Talent UK withdrawal from the European Union management and retention Severity Low The UK leaving the European Union (“EU”), and the uncertain terms Less likely More likely of such withdrawal, continues to produce some market uncertainties H Macro political Likelihood tax risk including volatility in the sterling exchange rate against the US dollar. From 2018 the Group changed the presentation of its financial statements from sterling to US dollars which has greatly reduced the impact of foreign exchange rate movements, most notably sterling, The materialisation of these risks could have an adverse effect on reported revenue and trading profit. Since the large majority of on the Group’s results or financial condition. If more than one of the Group’s profit is derived from North America, the Group does these risks occur, the combined overall effect of such events may not envisage a material adverse impact from sterling vs US dollar be compounded. exchange rates in the future. There is a risk that leaving the EU The chart shows management’s assessment of material risks. adversely affects UK domestic demand which could have a negative Various strategies are employed to reduce these inherent risks to impact on the business. Leaving the EU without future certainty over an acceptable level. These are summarised in the tables on the future tariffs and regulations could impact the UK’s supply chain and following pages. lead to inventory shortages which could adversely impact demand. In addition, disruption in the financial markets could adversely affect The effectiveness of these mitigation strategies can change over the share price. The Group will continue to monitor developments. 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. As part of the ongoing risk management process, the Board and the Group’s management have identified and assessed emerging risks, and worked with stakeholders to evaluate the impact of such risks to the business. Although none of these risks are deemed to be significant and are consequently not listed as one of the Group’s principal risks, they are tracked in case they evolve to become more significant. One such risk relates to the geographical composition of the Group’s shareholder register. If shareholders resident in the USA exceeds 50% of the total, the Group would be subject to additional US regulatory requirements, most notably SEC registration and reporting and Sarbanes Oxley compliance. A detailed beneficial ownership study is conducted on an annual basis to ensure compliance. Another emerging risk is climate change and the impact of this on our business. During the year, the Group commenced a project to get more clarity on the risk climate changes presents. During the year, the Group has convened subject matter experts from across our businesses to examine the specific risks and opportunities to the Group posed by climate change. 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 page 25. Ferguson plc 50 Annual Report and Accounts 2019 Principal risks and their management (continued)

Risks to the drivers of proﬁtable growth The symbols shown at the bottom of this page are displayed alongside each risk on the following pages to indicate which of the strategic drivers of growth are most threatened by that risk.

A New competitors and technology Risk is unchanged Inherent risk level Deﬁnition and impact Changes during the year Mitigation High Wholesale and distribution Ferguson Ventures has continued its The Group develops and invests businesses in other industry sectors partnerships with, and investments in new business models, including Trend have been disrupted by the arrival in, a range of technology companies e-commerce, to respond to No change of new competitors with lower-cost that are operating in our markets changing customer and consumer Strategic priorities transactional business models or and solving industry problems, needs. This will allow the Group to new technologies to aggregate and participating in new business accelerate the time to market for new Operating model and e-commerce demand away from incumbents. models. During the year, we set up revenue streams and gain insight development The Board is attuned to both the the Ferguson Ventures Innovation on new disruptive technologies risks and opportunities presented Lab (based in Atlanta, Georgia), and trends. by these changes and is actively which is focused on exploring areas The Group remains vigilant to the engaged as the Group takes action of innovation and disruption by threats and opportunities in this to respond. evaluating consumer and industry space. The development of new evolution in technology and business models in our market service design. place is closely evaluated – both In addition, during the year, our for investment potential and threats. businesses have adopted next generation technology and the latest digital tools in order to improve customer service and effective information sharing (for example, the Group’s deployment of Microsoft’s Teams platform and a shift to channel- based communications).

B Market conditions Risk is higher Inherent risk level Definition and impact Changes during the year Mitigation High This risk relates to the Group’s This risk has increased during The Group cannot control exposure to short-term the year as US market growth market conditions but believes Trend macroeconomic conditions moderated in the second half. it has effective measures in Higher and market cycles in our sector The Group has maintained a strong place to respond to changes. Strategic priorities (i.e. periodic market downturns). balance sheet throughout the year Ferguson continues to reinforce existing measures in place, including: Organic Some of the factors driving market and other measures have been expansion growth are beyond the Group’s taken to manage the cost base – the development of our Pricing control and are difficult to forecast. in line with forecast growth. business model; discipline Further information on the market The Group has again tested its – cost control, pricing and trends can be found in our regional financial forecasts, including cash gross margin management reviews on pages 11 and 26 to 41. flow projections, against the impact initiatives, including a focus of a severe market downturn, see on customer service and pages 48 and 49. productivity improvement; The UK’s withdrawal from the – resource allocation processes; European Union continues to create and a level of uncertainty affecting the – capital expenditure controls UK economy, although this is not and procedures. expected to have a material impact on the Group (see page 49). Ferguson plc 51 Annual Report and Accounts 2019 Strategic report GovernanceFinancials Other information

Risk is unchanged C Pressure on margins Inherent risk level Definition and impact Changes during the year Mitigation High The Group’s ability to maintain Pressure on margins remained high The Group’s strategy for tackling attractive profit margins can be during the year, primarily due to this issue remains unchanged. Trend affected by a range of factors. levels of competition. This includes continuous No change These include levels of demand In response, the Group has improvements in customer service, Strategic priorities and competition in our markets, the continued to manage its cost base product availability and inventory arrival of new competitors with new management. Revenues from Organic in line with changes in expected expansion business models, the flexibility of growth rates. Business unit e-commerce, own brand, and other Operating model the Group’s cost base, changes in performance, including margins growth sectors continue to grow and and e-commerce the cost of commodities or goods the Group has made acquisitions in development achieved, were monitored on a purchased, customer or supplier these areas during 2018/19. Refer to Pricing monthly basis throughout the year. discipline consolidation or manufacturers pages 10 and 146 and 147 for more shipping directly to customers. Ongoing gross margin was 10 basis information on acquisitions during points ahead in 2018/19 with growth the year. There is a risk that the Group may driven by improved product mix and not identify or respond effectively procurement efficiencies. The performance of each to changes in these factors. If it business unit is closely monitored fails to do so, the amount of profit and corrective action taken generated by the Group could be when appropriate. significantly reduced. Resource allocation processes invest capital in those businesses capable of generating the best returns.

D Information Technology (“IT”) Risk is unchanged Inherent risk level Definition and impact Changes during the year Mitigation High Technology systems and data are IT risks have remained material and Business leadership is implementing fundamental to the day-to-day are being closely monitored as we a comprehensive change Trend operations and future growth and implement the clearly defined global management programme designed Unchanged success of the Group. The Group technology strategy and roadmap to transition current business Strategic priorities is increasingly dependent on (see page 19). practices and norms to adopt new sophisticated information business capabilities. Operating model Under the management of the and e-commerce technology and infrastructure. development Chief Information Officer, the Group A Business Technology Centre IT risks are categorised as strategic has made progress in implementing of Excellence is in place to drive and operational. its technology strategy and organisational discipline around the Strategic risks are threats that could roadmap, including commencing prioritisation of business projects to prevent execution of the IT strategic significant upgrades to its enterprise- ensure alignment with Ferguson’s plan such as inadequate leadership, wide resources planning systems. strategic framework. poor allocation/management of IT General Controls were Implemented a rolling three-year resources and/or poor execution independently tested by Internal roadmap of investments in processes, of the organisational change of Audit and findings reported to the resources and technical defences management necessary to adopt Audit Committee. This process now necessary to continuously address and apply new business processes. falls under the normal Internal Audit emerging security threats. Operational risks include business Committee reporting throughout Group-level compliance processes disruption resulting from system the year. continue to remain in place. failures, fraud or criminal activity. Briefings on the status of the Group’s Disaster recovery systems, This includes security threats IT strategy, and its implementation and/or failures in the ability of the secondary data centres, resources have been provided to the Board, and processes have been organisation to operate, recover the Audit Committee and the and restore operations after such implemented to ensure business Executive Committee throughout critical systems are recoverable disruptions. While cyber security the year. threats have resulted in minimal in the event of a major disaster. impact to date, this risk continues Regular Board update checkpoints Testing of critical infrastructure to persist and evolve. have been established to provide and application systems are in monitoring and oversight of place and have been consistently execution of the IT strategic plan. executed across the Group. Insurance coverage is in place, including data protection and cyber liability. Ferguson plc 52 Annual Report and Accounts 2019 Principal risks and their management (continued)

E Health and safety Risk is unchanged Inherent risk level Definition and impact Changes during the year Mitigation Medium The nature of Ferguson’s operations The Group’s strategic plan is Health and safety is a fundamental can expose its associates, focused on the elimination and value in our organisation. Trend contractors, customers, suppliers control of risks causing disabling Our leaders have specific roles to No change and other individuals to health injuries, improving our safety culture play and are required to actively Strategic priorities and safety risks. and closing the safety, health and engage with our associates in environmental knowledge gap ensuring a healthier and safer Engaged Health and safety incidents can lead associates to loss of life or severe injuries. among our associates. The hiring workplace. Our performance is Excellent and deploying of health and safety reported and discussed at both service ethic professionals in the field provides the Executive Committee and businesses with technical resources Board meetings. to more effectively mitigate risk. The Group maintains a health Our efforts in these areas have and safety policy, with detailed improved the overall performance minimum standards, and standard of the Group, see pages 42 and 43 operating procedures which sets for more information. out requirements for all businesses. Branches are audited against these standards and businesses are implementing fundamental changes to transform our culture. For more detail see pages 42 and 43.

F Regulations Risk is lower Inherent risk level Definition and impact Changes during the year Mitigation High The Group’s operations are affected There has been no major change The Group monitors the law by various statutes, regulations in the level of regulation applying to across its markets to ensure the Trend and standards in the countries the Group this year. Following the effects of changes are minimised Lower and markets in which it operates. adoption of GDPR, the procedures and the Group complies with all Strategic priorities The amount of such regulation and controls implemented by the applicable laws. and the penalties can vary. relevant businesses within the Group Organic The Group aligns Company-wide expansion While the Group is not engaged in a to ensure compliance were reviewed policies and procedures with its Own brand highly regulated industry, it is subject and improvement measures put key compliance requirements and penetration to the laws governing businesses in place. monitors their implementation. generally, including laws relating to The Group’s Code of Conduct was Briefings and training on mandatory competition, product safety, data updated during the year and is topics and compliance requirements protection, labour and employment focused at clearly setting out the including anti-trust, anti-bribery and practices, accounting and tax standards that are expected from corruption are undertaken. standards, international trade, fraud, our associates. This includes the bribery and corruption, land usage, commitment to strict compliance the environment, health and safety, with the various laws and transportation and other matters. regulations that apply wherever Violations of certain laws and the Group operates. regulations may result in significant Further information on the Group’s fines and penalties and damage to ethics and compliance programme the Group’s reputation. can be found on pages 18 and 46. Ferguson plc 53 Annual Report and Accounts 2019 Strategic report GovernanceFinancials Other information

G Talent management and retention Risk is unchanged Inherent risk level Deﬁnition and impact Changes during the year Mitigation Medium As the Group develops new There has been no material change All of the Group’s businesses business models and new ways in the level of associate turnover have established performance Trend of working, it needs to develop during the year. management and succession No change suitable skillsets. Kevin Murphy, the US CEO, will planning procedures. Strategic priorities Furthermore, as the Group continues succeed John Martin as Group Chief Reward packages for associates All 10 of our to execute a number of strategic Executive on 19 November 2019. are designed to attract and retain All priorities driving performance change programmes, it is important For further information, see pages the best talent. that existing skillsets and talent 2 and 3, 10, and 72 to 75. A new talent review process are retained. Talent management procedures was launched across the Failure to do so could delay the were reviewed during the year Group to be aligned with our execution of strategic change (see page 17 for further information). organisational strategy. programmes, result in a loss of The Group continues to invest “corporate memory” and reduce the in associate development. Group’s supply of future leaders.

H Macro political tax risk Risk is unchanged Inherent risk level Definition and impact Changes during the year Mitigation High The wider macro political and The Group’s headquarters were The Group is engaged with the economic situation is uncertain relocated from Switzerland to the relevant tax authorities to proactively Trend in some of the territories in which UK which facilitated the continued assess any proposed changes in No change Ferguson operates and changes simplification of the Group’s tax policy. could adversely impact the Group’s corporate structure in line with Once policy changes are fully business as well as the Group’s its strategy. assessed the Group will ensure any future tax rate. A combination of Group Tax continues to allocate changes are reflected in Ferguson’s growing international trade pressures, resources to ensure the macro tax strategy. including trade-related actions taken political uncertainties are being The Group assesses, and takes by the USA and China and rising appropriately monitored and debt levels, is creating political and appropriate action to respond to, mitigation plans updated when the impact of the introduction of, regulatory uncertainty which could the need arises. lead to changes in the prevailing tax and/or change to, customs duties regime and adversely impact the and tariffs on imported products. Group’s results.

The Strategic report has been approved by the Board and signed on its behalf by:

John Martin Group Chief Executive