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Group Chief Executive's review
Group Chief ExecutiveChip
Hornsby
The new housing market in the US has been tough, but our results demonstrate the benefits of our diversity. We have continued to invest for future growth, made acquisitions and restructured our operations to reduce costs and improve margins going forward.
My first year as Wolseley’s Group Chief Executive has presented us with challenges in the US housing market, lumber price deflation and a weaker dollar but I am encouraged by how our businesses and people have responded and by what the Group has achieved. The results demonstrate the benefits of the Group’s diversity and its ability to react swiftly to changing market conditions. We have continued to invest in the business for future growth, made acquisitions that further increase diversity and restructured our operations to reduce costs and improve margins going forward.
In North America, our businesses were impacted by the sudden and rapid slowdown in the US new housing market. Our building materials business, Stock Building Supply (‘Stock’), was most affected as more than 80 per cent of its revenues have historically been generated from customers who are house builders. It also faced significant price deflation to add to the volume decline with around 45 per cent of the products it sells being commodity lumber and panels. As a result, Stock’s local currency revenue fell 13.4 per cent and its trading profit fell 74.9 per cent. In response to the poor market conditions, headcount was reduced in Stock by around 20 per cent with some 46 branches being closed. Stock’s branch network going forward will comprise 287 branches in 33 states. The measures taken to restructure the Stock business should show increasing benefits as the US housing market improves.
Our US plumbing and heating business, Ferguson Enterprises (‘Ferguson’), has performed very well with the growth in the industrial, commercial, utilities and residential remodelling sectors more than offsetting the effect of the decline in new housing. Ferguson’s local currency revenue grew 14.8 per cent, including 5.5 per cent organic growth, and trading profit increased 18.4 per cent. Our market outperformance, once again, demonstrated the benefits of our business diversity, specialist product offering, investment in high calibre people, our unique distribution centre network and a focus on cost efficiency.
Wolseley Canada achieved local currency revenue growth of 2.1 per cent and trading profit increased 0.7 per cent, as it continued to align its operations with the US business structure. Since 1 August 2007, Wolseley Canada has been integrated into Ferguson, which will enable further synergies, sharing of best practice and a consistent approach to broadening the customer base. Increasing synergies are being realised across our North American operations as roles in areas such as IT, HR, indirect spend and property management are performed at the continental level, reducing the need to duplicate activities in the three businesses.
In Europe, we continued to grow, expanding the number of countries we operate in from 13 to 21 as well as making good progress across our established businesses.
In the UK, the restructuring continued whilst also achieving good levels of organic revenue growth. Acquisitions made in the past few years, such as Brandon Hire (tool hire), Encon (insulation) and Neville Long (insulation and ceilings), are now well established alongside our traditional brands. In addition, the electrical distribution businesses of William Wilson and AC Electrical, have been merged and rebranded as Electric Center, providing a good base on which to derive future growth in that new product area. Revenues in the UK were up 17.9 per cent including 9.9 per cent organic growth, well ahead of the market generally. Trading profit rose a more modest 5.0 per cent, reflecting the £13 million of one-off restructuring costs relating to 40 branch closures and rationalisation of head office. Branch numbers grew overall by 74 to 1,917 and deliveries commenced from the new 330,000 square foot National Distribution Centre, which is located alongside Wolseley UK’s head office in Leamington Spa.
In France, the three businesses – plumbing and heating, building materials and timber import and solutions – now report into one management team following a period of major restructuring, particularly in Brossette, the plumbing and heating business. It was encouraging to see good organic growth of 5.9 per cent in France with total local currency revenue up by 10.3 per cent and trading profit up by 13.1 per cent. A national distribution centre was opened in France during the year in Orléans with 210,000 square feet of space.
In Central and Eastern Europe we achieved a strong performance with revenue up 22.4 per cent and trading profit up 9.6 per cent with particularly good results in Switzerland, the Netherlands, Austria and Luxembourg. We also continued our geographic expansion with the acquisition in October 2006 of Woodcote, a general builders’ merchant. This acquisition has taken us into the new geographic areas of the Slovak Republic, Poland, Romania and Croatia and has also extended our reach in the Czech Republic and Hungary. The businesses we already had in the Czech Republic and Hungary have been integrated into Woodcote giving us more critical mass and a strong management team which is now integral to our Central and Eastern European team.
Our ability to identify and integrate acquisitions has been a key feature of Wolseley’s growth and success for many years and last year was no exception. In fact it was a record year for the Group with £1,718 million being spent on acquisitions. The biggest by far was the acquisition of DT Group, the number one building materials distributor in the Nordic region, for £1,339 million in September 2006. We have been very pleased with how quickly DT Group has been integrated into Wolseley and also by the quality of its ongoing performance. It has an excellent management team which has been very focused on driving efficiencies, cost control and cash flow and is now pursuing our aggressive growth objectives.
We invested £1,718 million on a total of 44 acquisitions in 17 countries during the year, as follows:
| Number of Acquisitions | Spend £m | |
|---|---|---|
| Europe | 22 | 1,445 |
| North America | 22 | 273 |
Historically, acquisitions have delivered around half of our annual growth and this is an area where we have considerable expertise. We follow a rigorous assessment process before an acquisition is made and then carefully integrate the business into the Group. By monitoring the performance of our acquired businesses we ensure that they perform to expectations and our track record demonstrates that they deliver significant shareholder value.
A simple business modelWolseley does not have a complicated business model – we buy products well, add value for our customers, sell them at healthy margins and create profitable growth and good returns for our shareholders. We have demonstrated for many years that we are good at growing our business, taking advantage of our strong market positions and using our experience to ensure that we outperform our markets. We are not going to radically change the way we do business, but we must remain alert to changing customer requirements and the behaviour of our competitors. With around £708 billion of construction products distributed annually across Europe and North America, we have enormous growth opportunities available to us and it is vital that we continue to invest and to make our competitive advantages really count for the benefit of our customers, employees and shareholders alike.
The impact that the weak US housing market has had on the Group’s short-term profitability is clear. As a result, we have had to take some difficult decisions to reduce our cost base in order to maintain an acceptable level of profitability. This slowdown has, however, created an opportunity for us to consider how we want the Group to evolve over the next stage of its development and to put in place initiatives to enhance future performance. We are determined to create a truly world class company.
Historically, Wolseley has an excellent track record of revenue and profit growth, typically in excess of 10 per cent per annum. In the last two years, however, as we have invested significantly in our businesses, the rate of profit growth has been lower than that for revenue and we have seen our trading margin slightly reduced. The initiatives we are putting in place are designed to reverse this trend with the target of reaching a minimum 7 per cent trading margin by 2011.
Our objective is to continue to achieve an average of double-digit growth year on year and to ensure that our profits increase more rapidly than our sales. We also aim to generate the cash required to continue to invest in the business to sustain further growth. To achieve that aim, we have been putting increased focus on improving our working capital performance. The results of this increased focus were clear from the impressive improvement in free cash flow generation delivered in the past year.
Margin enhancement, strong cash flow generation and growth are key attributes of world class performance. Within the Group we have started to communicate the ‘Earn, Turn, Grow’ initiative, as these are the priorities that we wish each of our operations to emphasise in their activities. A number of specific initiatives have been launched across the Group to drive improved performance in these areas.
EarnThe ‘Earn’ focus means achieving profit growth in excess of revenue growth, resulting in an improved margin, far in excess of anything we have achieved to date. This means increased cost efficiency to generate productivity improvements, making the most of all the investment that has been made in the past and those to come through the business change programme. Further rewards will be achieved from the distribution centres, supply chain and sourcing strategy.
Part of our sourcing strategy is to leverage our size and buying power in order to enhance our gross margin. With around 5,300 locations to service our customers, we are a great route to market for our suppliers. With cost of goods sold of around £12 billion last year, there is significant opportunity to improve our margins, particularly as we develop Wolseley’s private label product offering which will underpin and enhance our reputation for quality and high customer service.
TurnWe will continue to focus on cash flow and working capital to ensure that we have sufficient cash to enable us to continue to invest in the business and to fund our bolt-on acquisitions. The three components of inventory days, receivables and payables are being closely monitored in each business to target improvement: turning our inventory more quickly, collecting receivables efficiently and as fast as possible, and extending our payables terms with the agreement of our suppliers. Cash is what drives a business and it will support our growth ambitions.
GrowWe want to continue to grow and double in size every five to seven years. In the short term there needs to be more emphasis on our organic growth, ‘sweating the assets’ by putting more volume through our existing locations and taking advantage of past investments. We will be putting a great deal of emphasis on improving our like-for-like sales growth in every branch. In addition, acquisitions will continue to be a key part of our strategy, building on our ability to seek out good quality companies that are successfully integrated into Wolseley and then grown within our ownership.
We are a Group with a real understanding of our markets and customers, an absolute grip on the basics of what differentiates us from our competitors and a clear desire to continue to grow and deliver even better overall business performance.
With the ‘Earn, Turn, Grow’ priorities clearly communicated across the business units, we have identified five key areas that we will focus on as a Group which will differentiate us from our competition and which will support our objectives. These include:
- people development
- sourcing
- supply chain
- growth
- business improvement
These are discussed in further detail in our five key focus areas section.
I am excited by the opportunities that we have as a Group. We operate in very fragmented markets, so there is plenty of scope for growing our business and our market share further. We have a business model where size really does make a difference and the scale of our operation gives purchasing benefits and sourcing opportunities which smaller competitors cannot achieve. Our continued investment in the logistics network and distribution centres gives competitive advantages that become ever greater as the business grows. We are currently in 28 countries with a total of 5,296 branches, employing around 79,000 highly talented people, I believe this is only the beginning. I am confident that our priorities and focus will help make Wolseley a better, more effective, world class company. Our goals are within our reach as long as we continue to focus on our priorities, manage our growth and increase the emphasis on margin enhancement and cash flow. We have been through a difficult year with market conditions continuing to be tough in the new US residential housing market but I am confident that we will come through this as a leaner, stronger organisation, eager and able to achieve world class status.
Chip Hornsby
Group Chief Executive