Performance monitoring

Customer mix - Group

The Group employs a rigorous performance management framework to plan, monitor and review the activities of the businesses. An annual long term rolling plan is produced by all businesses and this sets out business plans and resource requirements. Linked to this is the annual budget process, which is core to the target setting process. The form and components of the budget are in general cascaded down to branch level within the businesses.

Each month, the businesses submit their results, which also include a forecast for the remainder of the financial year. Performance against both budget and prior month forecast is reviewed with the businesses by continental and Group management. Corrective actions or additional resource deployments are discussed with the benefit of such information.

The Board of Wolseley plc meets regularly to discuss trading results and uses a set of Key Performance Indicators to measure overall progress of the Group against its business objectives.

Key Performance Indicators

The Group utilises the following indicators of performance to assess its development against its strategy and financial objectives.

Key Performance Indicator and definition	Review of performance
Growth in organic revenue
The total increase or decrease in revenue for the year adjusted for the impact of currency exchange, new acquisitions in the year and the incremental impact of acquisitions in the prior year. The Group seeks to achieve, on average, double-digit growth in revenue through both organic growth and through acquisitions. Over the economic cycle the Group would expect growth to come evenly from both sources.	Organic revenue increased in the year by 10.9%. Ferguson achieved organic revenue growth of 24.3% whilst Stock Building Supply also achieved organic growth of 4.1%. The UK business outperformed the market and achieved 2.1% organic growth. Each of the Italian, Swiss and Dutch businesses achieved double-digit organic growth. Over the past five years the Group has delivered average organic revenue growth of 7.0%.
Growth in acquired revenue
The growth in revenue from businesses that the Group has acquired during the financial year and the incremental effect of the prior years' acquisitions.	A total of 53 acquisitions were completed during the year. Acquisitions made in 2006 contributed £862 million to revenue in the year or 6.1%. Over the past five years the Group has delivered average acquired revenue growth of 10.4% with 11.9% in the last year, both exceeding target.
Trading margin
The ratio of trading profit to revenue expressed as a percentage. The Group seeks to achieve a growth in trading profits higher than the growth in revenue through year on year improvements in trading margin as a result of continuous improvement in operations.	Trading margin improvement was achieved in North America although the European trading margin reduced due to lower trading margins in Brossette, Austria and the UK. Overall, Group trading margin fell from 6.3% in 2005 to 6.2% in 2006 as a result of investments in people and infrastructure. Over the past five years the Group's trading margin has increased from 5.8% to 6.2%.
Free cash flow
Free cash flow represents cash flow from operating activities less maintenance capital expenditure, tax, dividends and interest. The Group seeks to generate sufficient free cash flow over the business cycle to fund normal "bolt on" acquisitions and expansion capital expenditure.	Free cash flow decreased from £321 million in 2005 to £285 million, down by 11.2% as a result of higher working capital demands due to organic growth. Over the past five years after dividends, average free cash flow is £213 million.
Return on gross capital employed
The ratio of trading profit to the aggregate of the monthly average of shareholders' funds, minority interests, net debt and cumulative goodwill and acquired intangibles written off. The Group targets to deliver an incremental return on gross capital employed at least 4% in excess of the pre-tax weighted average cost of capital.	Return on gross capital employed in 2006 decreased from 19.1% to 18.8% due to higher acquisition spend in the year, but was 7.5% ahead of the estimated pre-tax weighted average cost of capital of 11.3%. Average return on gross capital employed over the past five years was 17.9%. Return on gross capital employed in Europe was 16.2% (2005: 19.9%) and in North America 21.9% (2005: 20.3%).

A summary of the Group's performance over the last five years is as follows:

Note: 2006 and 2005 figures prepared under IFRS. 2004, 2003 and 2002 figures prepared under UK GAAP.

People performance indicators

Wolseley's 70,000 plus people are the cornerstone of providing service to its customers and are one of its key competitive advantages. As much of the customer experience is generated through ongoing relationships with the Group's branch personnel or outside sales force, staff turnover rates are considered an important indicator and these are reviewed as part of the monthly reporting.

The overall summary turnover rate for 2006 was 22% (2005: 27%), reflecting an improved performance and a rate management considers to be in line with industry standards. Turnover in 2006 at the management level of staff is estimated to be at much lower rates. Enhanced measures and information collection mechanisms are being designed as part of the Group's new human resources management system.

The safety of Wolseley's people is also regarded as paramount and lost time incident rates are monitored closely by health and safety committees established in each of the major businesses. The lost day incident rate used is affected both by the severity of the cause of the absence from work but also the effectiveness of the handling of each absence and return to work programmes.

Incidence rates are quoted per 200,000 work hours (approximating to 100 people working for a year), an internationally used standard. The estimated incidence rate for 2006, using submissions from companies representing 80% of the Group in terms of total work days, was 35 (2005: 41).

Average Group employee numbers

Other performance areas

In order to measure the success of its strategy execution, the Group uses a variety of non-financial performance indicators which continue to be refined and developed.

Business diversity

A key element of the Group's growth strategy is the enhancement of business diversity, which has a number of elements. The Group is continuously seeking to enhance its branch network to provide improved service and a wider product offering to new and existing customers. The expansion of the branch network is detailed in the table below.

Branch numbers

The Group also aims to increase its geographic footprint in its chosen areas of operation, Europe and North America. During the year, the Group expanded its geographic diversity by acquiring a business in Belgium, Centratec, which contributed revenue for the year of €35 million. In addition, in North America, Stock Building Supply expanded operations into the states of Alabama, Louisiana and New Jersey.

Wolseley has continued its strategy of moving into new market segments within the construction materials and services industry. Wolseley UK acquired William Wilson and AC Electrical, which established a presence in the electrical distribution sector, while the acquisitions of Brandon Hire and Encon significantly expanded its presence in the plant hire and insulation distribution sectors respectively.

Another key element is the transfer of knowledge and expertise across the Group in order that local companies can establish operations in new market segments or channels. Examples during the past year include:

• The "XpressNet" network established by Ferguson in the USA, which mirrors Wolseley UK's Plumb CenterExpress model. By the 2006 year end, 124 locations had been established, with 64 added during 2006.
• The Wolseley UK Hire Center model is being rolled out to PBM in France and ÖAG in Austria, with further progress expected in the coming year.
• The Distribution Centre concept first developed by Ferguson is being expanded in Europe. In the UK, the National Distribution Centre has just opened with the Italian Distribution Centre expected to come on stream before the end of 2006.
• The blended branch concept where offerings from different brands or business groups are co-located to allow customers more convenience and choice is now in use in the UK, USA, Ireland and France.

Environmental

The Group's approach to environmental measures is set out in the Corporate social responsibility report.In accordance with the reporting guidelines suggested by the UK Government's Department for Environment, Food and Rural Affairs, the Group is developing a range of environmental measures, principally in the areas of carbon dioxide emissions and volume of waste sent to landfill. The Group is establishing mechanisms to capture and monitor this information for use in subsequent reporting.