£396m
Capital expenditure
invested in the year
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Performance review
Financial review
Revenue and operating profitAfter taking account of currency translation, Group revenue increased by 14.6 per cent from £14,158 million to £16,221 million.
Operating profit decreased by 9.7 per cent from £834 million to £753 million. Trading profit decreased by 0.6 per cent from £882 million to £877 million, before deducting amortisation and impairment of acquired intangibles of £124 million (2006: £48 million).
Currency translationCurrency translation decreased Group revenue by £776 million (5.5 per cent) and Group trading profit by £51 million (5.8 per cent) compared with 2006. Over the past five years the constant currency growth of the Group is as follows:
| Annual growth in constant currency | % 2007 |
% 2006 |
% 2005 |
% 2004 |
% 2003 |
|---|---|---|---|---|---|
| Revenue growth | 21.2 | 22.8 | 14.2 | 29.5 | 8.5 |
| Trading profit growth | 5.5 | 21.6 | 19.7 | 37.2 | 6.9 |
Note: 2007, 2006 and 2005 figures prepared under IFRS. 2004 and 2003 figures prepared under UK GAAP.
The effect of US dollar depreciation has been to decrease translated US profits by £46 million (8.2 per cent) compared with 2006. US dollar denominated profits account for 50.7 per cent of the Group’s trading profit.
There has been a less significant reduction in the Euro translation rate which has decreased Euro trading profits by £2 million (1.7 per cent) compared with 2006. Euro denominated profits accounted for 17.8 per cent of Group trading profit in 2007. If the results of the Group are translated into dollars at the average rate for the respective year the results of the Group are as follows:
| US$ million | 2007 | 2006 | 2005 | 2004 | 2003 |
|---|---|---|---|---|---|
| Revenue in US$ | 31,610 | 25,322 | 20,839 | 17,746 | 13,113 |
| Trading profit in US$ | 1,709 | 1,577 | 1,311 | 1,085 | 754 |
| Operating profit in US$ | 1,467 | 1,491 | 1,300 | 1,017 | 706 |
Note: 2007, 2006 and 2005 figures prepared under IFRS. 2004 and 2003 figures prepared under UK GAAP.
Further US$ figures and the basis of computation of the above figures can be found within the Information in US dollars section in Pro forma information in United States dollars.
Finance costsNet finance costs of £119 million (2006: £65 million) reflect an increase in Group debt as a result of the acquisition of DT Group and other acquisitions and an increase in interest rates, partly offset by the effect of strong operating cash flow. Net interest receivable on construction loans amounted to £11 million (2006: £12 million). Interest cover was 7 times (2006: 14 times).
TaxThe effective tax rate, being tax payable on profit before tax and amortisation and impairment of acquired intangibles, decreased from 28.4 per cent to 25.4 per cent. This is due to a higher proportion of the Group’s profits coming from lower tax jurisdictions in Europe following the DT Group acquisition, the reduction in tax rates in some companies and the impact of deferred tax on share options.
Free cash flow
£m
£m
Group return on gross capital
employed
Earnings per shareBefore the amortisation and impairment of acquired intangibles, earnings per share decreased by 11.2 per cent from 98.90 pence to 87.80 pence. Basic earnings per share were down by 19.0 per cent to 73.52 pence (2006: 90.77 pence). The average number of shares in issue during the year was 644 million (2005: 592 million).
DividendsThe Board is recommending a final dividend of 21.55 pence per share (2006: 19.55 pence per share) to be paid on 30 November 2007 to shareholders registered on 5 October 2007. The total dividend for the year of 32.40 pence per share is an increase of 10.2 per cent on last year’s 29.40 pence. Dividend cover is 2.3 times (2006: 3.1 times). The increase in dividend for the year reflects the Board’s confidence in the future prospects of the Group and its strong financial position. The dividend reinvestment plan will continue to be available to eligible shareholders.
Financial positionShareholders’ funds increased by £859 million from £2,592 million to £3,451 million. The net increase comprised the following elements:
| 2007 £m |
2006 £m |
|
|---|---|---|
| Retained profits | 474 | 537 |
| Dividends | (198) | (162) |
| New share capital subscribed | ||
| (share placing and exercise of share options) | 673 | 31 |
| Purchase of own shares by ESOP trusts | (27) | (27) |
| Exchange translation (including related taxes) | (132) | (131) |
| Share-based payments (including related taxes) | 22 | 34 |
| Other | 47 | 9 |
| Increase in shareholders’ funds | 859 | 291 |
During the year the Group entered into certain foreign exchange transactions to hedge the Group’s foreign currency net assets. Gains and losses on these transactions were taken to reserves. The gains and losses are subject to taxation and accordingly the taxation arising has been charged to reserves.
On 25 September 2006, a placing of approximately 10 per cent of Wolseley plc’s issued ordinary share capital raised £655 million before issue costs of £9 million to restore the Group’s financial flexibility and enable it to continue to pursue its strategy of organic and acquisitive growth.
The Group’s employee benefit trusts purchased 2.6 million shares for £27 million, including dealing costs, during the period in order to allow greater flexibility in the settlement of long-term employee incentives.
Net debt, excluding construction loan borrowings, at 31 July 2007 amounted to £2,467 million compared to £1,950 million at 31 July 2006, giving gearing of 71.5 per cent compared with 75.2 per cent at the previous year end and down from 89.6 per cent at the half year. The movement of sterling against overseas currencies, particularly the US dollar, resulted in a translation difference of £86 million which decreased net debt on the balance sheet.
The Group seeks to maintain a level of gearing, generally in the range of 40 to 100 per cent, to strike an appropriate balance between maintaining an efficient capital structure and having sufficient flexibility to fund further acquisitions. Interest cover for the year was 7 times (2006: 14 times). The Group is content to see interest cover in the 7–10 times range over a number of years but would allow the cover to reduce to 5 times in appropriate circumstances.
In the US, construction loan receivables, financed by an equivalent amount of construction loan borrowings, were £286 million (2006: £313 million). The decrease reflects a more cautious approach to lending following the decline in the US new housing market and the decline in the US dollar.
Return on gross capital employed (‘ROGCE’) decreased from 18.8 per cent to 13.7 per cent as a result of the significant reduction in profit at Stock and higher acquisition spend, partly offset by some organic growth and tighter control over working capital. The ROGCE remains above the Group’s weighted average cost of capital.
The unamortised balance of acquisition goodwill in the balance sheet as at 31 July 2007 is £1,890 million (2006: £1,173 million) with the increase being due to the goodwill arising on acquisitions in the year offset by a small amount of goodwill impairment in Stock. As set out in note 12 to the accounts, the Group recognised, in accordance with IAS 38, acquired intangibles of £549 million (2006: £251 million). These represent, principally, customer relationships and brand names.
Provisions in the balance sheet in (Note 26) include the estimated liability for asbestos claims on a discounted basis. This liability has been determined by independent professional actuarial advisers. The asbestos related litigation is fully covered by insurance and accordingly an equivalent insurance receivable has been included in receivables. The level of insurance cover available significantly exceeds the expected level of future claims and no profit or cash flow impact is therefore expected to arise in the foreseeable future. There were 320 claims outstanding at 31 July 2007 (2006: 246).
The Group’s retirement benefit obligations have decreased from £189 million to £111 million, largely due to an actuarial gain of £67 million on the main UK defined benefit pension scheme. Full details of the pension schemes operated by the Group are set out in note 27 to the accounts.
Acquisitions spend
£m
£m
Cash flowThe cash flow performance of the Group over the last five years is summarised below.
| 2007 £m |
2006 £m |
2005 £m |
2004 £m |
2003 £m |
|
|---|---|---|---|---|---|
| Cash flow from operating activities | 1,299 | 850 | 765 | 325 | 608 |
| Maintenance capex(1) | (191) | (140) | (117) | (108) | (93) |
| Tax | (167) | (206) | (151) | (128) | (108) |
| Dividends | (198) | (162) | (145) | (136) | (113) |
| Interest | (117) | (57) | (31) | (13) | (25) |
| Free cash flow | 626 | 285 | 321 | (60) | 269 |
| Acquisitions less disposals(2) | (1,346) | (820) | (401) | (123) | (504) |
| Expansion capex | (205) | (206) | (122) | (28) | (15) |
| Other | 408 | (38) | 1 | 96 | (31) |
| Movement in debt | (517) | (779) | (201) | (115) | (281) |
Note: 2007, 2006 and 2005 figures prepared under IFRS. 2004 and 2003 figures prepared under UK GAAP.
(1) Maintenance capex is considered as equivalent to depreciation.
(2) Excluding debt acquired.
Net cash flow from operating activities increased from £850 million to £1,299 million, despite the reduction in trading profit as the Group has improved its management of working capital. Free cash flow after dividends was £626 million (2006: £285 million).
Capital expenditure increased from £346 million to £396 million, reflecting continued investment in the business. During the period the distribution centre and branch network in the US was expanded, investment continued in distribution centres in France and Italy and further expenditure was incurred on the common IT platform. Capital expenditure is expected to remain at a relatively high level over the next few years with further investments in distribution centres, new branch openings and IT as the Group continues to put in place the infrastructure required to support substantial growth and improved margins.
Investments in acquisitions completed during the year, including any deferred consideration and net debt, amounted to £1,718 million (2006: £914 million) with £1,339 million invested in DT Group and £379 million invested in 43 bolt-on acquisitions. These 43 acquisitions are expected to add around £671 million per annum of incremental revenues in a full year. Further details regarding acquisitions are included in note 31 to the accounts.
Shareholder returnThe Group monitors relative Total Shareholder Return (‘TSR’) for incentive purposes (as set out within the Remuneration report) and for assessing relative financial performance.
For the year ended 31 July 2007, Wolseley achieved an annualised TSR of 5.96 per cent based on the average closing price achieved during July 2007, which put it in 57th position against the monitored peer group of 65 companies drawn from the FTSE 100 and the building materials and construction sectors utilised for the latest award under the long-term incentive plan. Details of TSR performance since 2003 and the composition of the peer group are set out in the Remuneration report. We continue to monitor return on capital including goodwill, throughout the Group, as one of the key measures of business performance. ROGCE (as defined in the Five year summary) was 13.7 per cent (2006: 18.8 per cent), ahead of the Group’s weighted average cost of capital. At the close of business on the date of the Report of the Directors, the value of an ordinary share as quoted in the Financial Times was 807.5 pence per share (2006: 1094.0 pence), a decline of 26.2 per cent. The decrease primarily reflects adverse market sentiment relating to the Group’s exposure to the weak US housing market. The market capitalisation of the Group at the date of this Report was £5,339 million (2006: £7,190 million). The total dividend of 32.40 pence per share in respect of the financial year gives a yield of 4.0 per cent.