Q&A: Wolseley CFO Steve Webster, on the company's prelims

For the first time in 10 years Wolseley has failed to record a record
profit. Could you begin by giving me a breakdown of the key numbers and explain
how the US housing starts have impacted your results.

Yes, it’s unusual for us, isn’t it? We are used to reporting record profits.
But this year, three things really have made life more difficult and more
challenging for us. They all relate to the USA.

One is the housing market. The second one is the lumber and panel prices that
have shown significant price deflation. And the third one is the currency, with
the dollar declining by 8%. So those three things have masked what is really a
very good performance elsewhere in the group.

Europe’s performance overall was very strong. We’re delighted with the DT
performance, coming to the Group for the first time and outperforming our
expectations.

The French performance was a really good team effort, and certainly over the
worst now and getting the benefits of that restructuring we did before. Some
very strong performances in Central and Eastern Europe.

And against the background of what was initially a difficult market and quite
a lot of the restructuring of the business, the UK produced some outstanding
top-line growth.
They got very close to double-digit organic growth compared to the market, which
only raised by 3%. So significantly outperformed the market. Profitability was
held back a little bit because of the restructuring charges that I just
mentioned.

Your gearing remains very high and interest rate cover is only 7x.
Are you comfortable with interest rate cover to this level in the current
climate?

Actually, I wouldn’t say the gearing is very high. I think 72% at the
year-end is a lot lower than it was a year ago, immediately post the DT
acquisition, when it was probably about twice that, in fact. So the gearing has
come down very well as we’ve generated a lot of cash.

A gearing of 50% to 75% is within our normal range of gearing. And interest
cover of 7 to 10x is within our normal range. From an EBITDA point of view, a
range of 1.5 to 2.3 is the one we want to operate in, and we’re about 2.2x at
the year-end.
So on all those counts, really, we’re bang in the range we want to be in.

You’ve spent a record £1,718m on 44 acquisitions. Have you grown too
fast? Can you sustain this rate of growth?

It sounds a big number, doesn’t it, £1.7bn? If you break it down, it’s nearly
£400m on bolt-on acquisition spending and just over £1.3bn on the DT Group deal.

The bolt-on acquisition spending, the average size of those deals is probably
less than £10m, so you can see they’re relatively small in relation to the size
of the group. That’s relatively easy to integrate. We continue to get very
significant benefits from the integration acquisitions.

The DT Group acquisition has exceeded our expectations. We’ve integrated the
business much quicker than we originally planned to do. The financial
performance is in excess of the expectations we had at the time of the
acquisition and the run rate of growth and profitability is outstanding.

So we feel, again, very comfortable with that level of acquisitions, very
comfortable that we continue to get the incremental returns from incremental
spending. For the next year, our priority will be on bolt-on acquisitions,
spending around £450m. That’s what we’re looking to do over the next year.

What does the pipeline look like?

It looks pretty good. We’ve completed some deals already, and spent just over
£80m for year-to-date.

I think it’s almost certain that difficult market conditions sometimes shake
out businesses for sale and we do have the financial capacity to pursue
acquisition opportunities wherever they may be, whether it’s in the US or
Europe.

And where exactly are you seeing those opportunities? And are you
focusing more on Europe and avoiding the US because of the macroeconomic
situation there?

We’re certainly not avoiding the US at all, actually. Remember, over the past
year, the repairs and remodelling market has been good and although it’s slowing
a little of late, there are still some great opportunities there.

The commercial/industrial market is very good. And there’s still some major
housing markets that we’re not in, which if businesses came up for sale at the
right time at the right price, we’d certainly consider.

Remember, this is only a cyclical downturn in the USA. It’s not a structural
shift in the US housing market or the US economy. So the US will remain a great
place to invest in.
Equally, Europe is a great place to invest in. we’ve seen that through DT.

We have done lots of bolt-on acquisitions that are adding value. We can get a
lot by adding critical mass in Central and Eastern Europe.

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