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Performance review
Company overview and performance monitoring
Company overviewWolseley’s business is the distribution of construction materials and the provision of related services primarily to a specialist market of professional contractors. The Group is the world’s number one distributor of heating and plumbing products to professional contractors and a leading supplier of building materials to the professional market. The Group is an international business, operating 5,296 branches in 28 countries and employing around 79,000 people.
Wolseley plc is the parent company of the Group and its subsidiaries are organised into two geographic divisions – Europe and North America. Divisional management are primarily responsible for the profits of the operating companies they oversee and for driving organic growth, which includes additional sales from existing branches, new branch openings and expansion into new geographies, new customer types and product areas.
The divisional teams are supported by global functional teams such as acquisitions, sourcing, supply chain, business improvement, finance and human resource development. This structure allows the Group to focus on the key competencies by which the business is driven forward. These key competencies and the business model are described in the Group Chief Executive's review.
The principal activities of the Group are:
- the distribution of plumbing, heating and air conditioning equipment within Europe and North America;
- the distribution of building materials in the UK, Ireland, France, the Nordic region, Eastern Europe and the USA;
- the distribution of electrical components and supplies primarily in the UK, Ireland and France;
- the distribution of pipes, valves, fittings and waterworks in Europe and North America;
- the provision of construction and installation services in the USA and equipment hire in the UK, Austria and France.
Wolseley’s productsThe Group supplies materials used in the construction industry. The range of products used in construction is broad and the Group continually seeks opportunities to widen that choice for its customers. The main product categories supplied to customers are set out below.
Wolseley’s customersThe Group has a wide range of customers operating in different industry sectors that range from the individual plumber or builder through to national contractor chains and house builders, and include large industrial and commercial organisations. Wolseley’s primary customer focus is on professional contractors. These contractors work with households, governments, property developers and industrial companies in the construction of new homes, offices and industrial buildings or in the repair and maintenance of existing premises. Increasingly, the Group has structured around core business groups or brands allowing its local companies to put real focus on these sectors, whilst enhancing customer service and developing further product expertise.
Competitive environmentThe Group aims to be a leading distributor in each of the markets in which it operates. The markets where the Group operates are typically fragmented with a few large players and a significant portion of the market supplied by small local operations. In certain markets the Group competes with the large DIY chains which have increased their offerings to professional contractors.
The opportunities for organic and acquisitive growth in these fragmented markets are substantial. The environment for acquisitions has become marginally more competitive over the last few years in certain markets and the competition for large acquisitions from private equity investors has also increased. However, for the majority of acquisitions which are smaller businesses, financial purchasers are few (the main competition in this area is from other trade purchasers) and there has been no significant change in the competition for these acquisitions.
Other market factorsThe changing demographics of the European and North American markets, with a generally ageing population and increasing immigration, suggests that demand for new housing will continue at relatively high levels over the long-term, although short term weaknesses in demand may be experienced from time to time, as is currently the case in the USA. As the housing stock ages, it will increase demand in the repair and remodelling sector. Activity in the commercial and industrial sector, which has been strong over the past year, varies according to the level of business investment, government spending and commercial property yields. The Group’s business model gives it the flexibility and agility to respond to changes in the market place across many different business cycles. The diversity of the Group’s business provides further resilience in performance.
While the Group does not operate in a regulated industry, the performance of the Group can be impacted by Government legislation. The key regulatory influences centre on environmental legislation and stipulations imposed when building or remodelling buildings. Such changes in legislation present an opportunity for growth in response to increasing demand as customers or end users respond by changing their buying habits. For example, the UK business is currently building a sustainable energy centre to provide a shop window for energy efficient products increasingly required by regulation and in response to increased environmental awareness of customers.
Performance monitoringThe Group employs a rigorous performance management framework to plan, monitor and review the activities of its businesses. A strategic plan is produced annually by all businesses which 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 (‘KPIs’) to measure the overall progress of the Group against its business objectives.
The KPIs used by the Group to monitor its performance are currently being reassessed in light of the recently launched ‘Earn, Turn, Grow’ initiative described in the Group Chief Executive's review. This review is likely to result in the replacement or redefinition of some of the financial KPIs detailed in the next section for monitoring performance in the year ending 31 July 2008, with more emphasis being placed on measures such as like-for-like growth and cash-to-cash days which are integral to the ‘Earn, Turn, Grow’ initiative.
Wolseley’s products
| Plumbing, heating and air conditioning | |
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| Building materials | |
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| Electrical | |
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| Civils/waterworks, industrial and commercial | |
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In North America, the Group also provides construction services to house builders. This consists of the provision of labour to assist with house construction and commercial lending to house builders secured on properties under construction or completed homes.
Key Performance IndicatorsThe Group has utilised the following indicators of performance to assess its development against its strategy and financial objectives during the year ended 31 July 2007.
| 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 both through organic growth and through acquisitions. Over the economic cycle the Group would expect growth to come broadly evenly from both sources. |
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| 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 year’s acquisitions. |
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| 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 and the benefits of its international scale and leverage. |
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| 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. |
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| 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 per cent in excess of the pre-tax weighted average cost of capital. A major driver of decisions relating to acquisitions and capital expenditure is the incremental return on capital generated by those investments. |
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A summary of the Group’s performance over the last five years is as follows:
| 2007 | 2006 | 2005 | 2004 | 2003 | |
|---|---|---|---|---|---|
| Growth in organic revenue | 0.5% | 10.9% | 8.7% | 13.1% | 1.3% |
| Growth in acquired revenue | 20.7% | 11.9% | 5.5% | 16.4% | 7.2% |
| Trading margin | 5.4% | 6.2% | 6.3% | 6.1% | 5.8% |
| Free cash flow after dividends (£ million) | 626 | 285 | 321 | (60) | 269 |
| Return on gross capital employed | 13.7% | 18.8% | 19.1% | 18.4% | 16.7% |
Note: 2007, 2006 and 2005 figures prepared under IFRS. 2004 and 2003 figures prepared under UK GAAP.
Human resource development performance indicators Wolseley’s 79,000 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 sales force, staff turnover rates are considered an important indicator and these are reviewed as part of the monthly reporting.
The overall turnover rate for 2007 was 24 per cent (2006: 22 per cent), which reflects a number of branch closures and restructuring activities at Stock and Wolseley UK. Excluding these one-off items, the underlying turnover rate improved compared with the prior year and is in line with industry standards. Turnover in 2007 at the management level of staff was at much lower rates.
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 and also the effectiveness of the handling of each absence and return to work programmes.
Other performance areasIn 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 diversityA 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.
| 2007 | 2006 | 2005 | 2004 | 2003 | |
|---|---|---|---|---|---|
| Europe | 3,311 | 2,861 | 2,486 | 2,393 | 2,266 |
| North America | 1,985 | 1,797 | 1,434 | 1,244 | 1,183 |
| Total | 5,296 | 4,658 | 3,920 | 3,637 | 3,449 |
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 geographical diversity significantly, entering eight new countries, by acquiring DT Group, which has operations in Denmark, Sweden, Finland, Norway and Greenland, and Woodcote which has operations in the Czech Republic, Hungary, Slovak Republic, Poland, Romania and Croatia. In North America, Stock expanded operations into the state of Arizona.
The Group has continued its strategy of moving into new market segments within the construction materials and services industry. Ferguson acquired Improvement Direct, an ecommerce business with a network of online stores, providing immediate entry into the home improvement segment, a key strategic move for North America. In addition, most recent Stock acquisitions have been in the non-residential housing market which is part of the Group’s strategy to diversify the product offering at Stock into the repairs, maintenance and improvement (‘RMI’) and industrial and commercial sectors and reduce exposure to the new residential housing market.
In Europe, eight bolt-on acquisitions have been completed by DT Group to further expand its footprint in the Nordic region. Additional acquisitions have been made in Central and Eastern Europe in line with the strategy to expand the Group’s critical mass in that region, while in France acquisitions have expanded the Group’s presence in the new residential market. The Group’s electrical distribution activities have been expanded through an acquisition in Ireland.
EnvironmentalWolseley is taking an active role in the sourcing and supply of renewable and sustainable building materials. Wolseley UK’s Sustainable Building Centre (‘SBC’), a 6,800 square foot, interactive showcase for renewable and sustainable building materials, is presently under construction and is scheduled to be fully operational by April 2008. The building features the best available sustainable construction products selected from a bespoke range provided through Wolseley UK trading brands. The range, which has been established since the beginning of 2007, is already proving attractive to many Wolseley customers in a diverse range of business segments. Wolseley UK intends that the SBC will become the leading UK industry resource for sustainable building products and supporting information, promoting sustainable building best practices.
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 has developed a range of environmental measures, including those in the areas of carbon dioxide emissions, waste management and water use.