Wolseley Earnings Call Insights: Strategic Options in France

Wolseley  (WOS.L) recently reported its second quarter earnings and discussed the following topics in its earnings conference call.

Strategic Options in France

Gareth Davis – Chairman: Let me touch on that one and you can keep the microphones. Look, Mrs. Martin was happy for the special dividend as well, so I think a couple of things. The larger cash outflows, there have been some larger one-off cash outflows, for example employee share schemes, now they are low populated with the shares for all of the outstanding LTIP share options in the ordinary share plan for our staff, so those were sort of very much off. So, we are expecting good cash generation. The underlying cash generation as I said the cash to cash days in the business is our ongoing measures, slightly better than last year, that’s the single most important thing that we say control of cash as an operating level. There is no change in the culture and discipline and what we’ve done, so absolutely, we intend to going forward to be just as cash generative as we always have been and more so. In terms of sort of availability for future returns to shareholders, we set out our capital structure priorities before. I think we’ve been sort of fairly boring about reiterating them, but I’ll try one last time. Organic growth clearly – that’s the single place parity; dividends, that’s what good companies do, we want to progress the dividend policy, we want to grow that over time; acquisitions, actually the pipeline acquisition is no more less than it has been over the last year of so, and then fourthly we’ll return surplus cash to shareholder if we get the opportunity. I would like to sort of preclude all discussions on those things in sort of 12 months’ time. We’ll definitely see where (we will get to).

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Ian Osburn – Cantor Fitzgerald: Also on the French restructuring that we saw announced today, I believe there is 230 Reseau Pro branches and about 80 Wood Solutions or Silverwood. It seems the 80 are going to be kept, of the rest that you’ve announced; there is obviously still quite a large ramp there. Do you see that as strategically important and you’re building up a viable business in the north. Could we continued — obviously you can’t announce restructuring in that business, but whether you say for the long-term strategically important and the fact that you’re only announcing (88) store if you want to predict like that. Does it mean that buyer environment is not particularly great in the France at the moment?

Gareth Davis – Chairman: Certainly to the last point, the buyer environment is not great at the moment in France. I think point two, I think as you can all imagine, we explored all the sources, strategic options in France. I think we signaled it very clearly in July last year that we’re going to have a thorough review which is what we’ve done. We judge that where we got to at the moment is the right outcome in terms of creating shareholder wealth for the long-term. You are obviously right. Our plans are to retain all our businesses that we’ve described in France, so the Wood Solutions business, which is a good business. It’s profitable cash generative. Clearly, is struggling at the moment and our new build housing market down 20% but is still profitable. Then of the businesses that we have left, it will be a northern focused; those merchant emerging business. I think as we’ve highlighted in the past, our national market share was always about significantly lower than (indiscernible), we were about 8% nationally, they are about 33% nationally. Actually in the north of the country our relative market share compared to (indiscernible) were about 0.7, 0.8 times. So we are far stronger in the north of the country and hence retaining the 144 branches is absolutely the right thing to do for the north of the country. I think that’s why selling the 88 branches to Chausson but also we announced this morning our intention to do a joint venture sourcing partnership with Chausson. Actually if we put the two businesses together; we end up with revenue of about EUR1.7 billion. That is actually far bigger in scale terms than we were on our own. So our proposal, we think addresses our strategic weakness in the South and gives us more strategic strength in terms of the buying opportunity in France. So now look, it’s all subject to employee consultation and clearly competition clearance, clearly we wouldn’t be proposing these changes unless we felt we had a good chance, a very good chance of getting these through, but we have to go through the process, but then we’ll keep the business for the foreseeable future. Our job is to turn the performance around and then see where we want to go from there.

Ian Osburn – Cantor Fitzgerald: Just a very quick third one, you obviously came in, in 2009, I think it was to restructure Wolseley, is this the last step? Would you consider and you as well, John, would you see this is more getting (neat) job done or there is a lot more for you to do

John Martin – CFO: (indiscernible).

Ian Osburn – Cantor Fitzgerald: I wouldn’t be that obviously, but no (indiscernible)…

John Martin – CFO: We certainly would signify it (indiscernible). That’s for Gareth to do, not me. Genuinely, absolutely, we’ve got miles to go. I mean we have got miles and miles to go, that’s the great thing about this job. Every time we pick up something, we find we can improve it and make it better and I think as we try to (cross the outline), it doesn’t yield to grand gestures. It is a grind out business, but actually for people like ourselves, we love data, we love getting into the weeds of things. It’s absolutely (fascinating), there is still so much more to go out. Where are we on the journey, I don’t know. Four out of 10, five out of 10, but we still got actually miles to go.

Olivia Peters – RBC Capital Markets: (Olivia Peters, RBC). Ian, when you first begun speaking, you said you’ll give us more details on future cost-cutting program or plans and unless I completely missed, I don’t think you actually quantified it or already gave us a target. Second question if you could tell us what your market share gains were in the U.S. compared to rest of the market? Also I just wanted to get a sense of there is a new buy to let lower in France, what the uptake of asset is looking like whether, I mean the (indiscernible) is obviously very successful, how that’s comparing under the new government? That’s it.

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Ian Meakins – Group Chief Executive: Look, just in terms of market share gains in the States at the moment continue to outperform the market by sort of just over 3%, which is a pretty consistent trajectory we’ve had for the last, I don’t know, five halves actually. So that continues. You’re right, in terms of target cost reduction, I haven’t given the target out there. Look, it depends on the markets. All I can say is that we absolutely are as you would rightly expect to do we’re putting contingency plans in place. We will take appropriate action to protect our business clearly in Europe where the markets are toughest and obviously we’ve announced all of our plans in France that’s very transparent. We’ll continue to look at our cost base in the Nordics and in Central Europe. In terms of the buy to let lower, I don’t think – are you talking there about the recent announcements initially this week.

Olivia Peters – RBC Capital Markets: I think it’s (indiscernible) something like that.

Ian Meakins – Group Chief Executive: I mean Blandi, we’re seeing what we’re seeing and as John highlighted, we are seeing a new build market down 20% on an annualized basis. So it clearly isn’t having a great deal of impact. (indiscernible) some more measures this week, but Blandi I think they are pretty small. They’re not going to make much difference. It’s going to be tough.

John Martin – CFO: Yeah, I mean I think just on that point. There were 20 measures announced on (indiscernible), 20 emergency measures that’s what they call. I think the French market has been sharing a lot more sort of disappointment and satisfaction in those announcements. That are held for renovation works where you get a subsidy on installation, that’s one of the EUR13, 00 subsidy on installations markets. It’s not unwelcome, but it remains to be seen what the advantage is. VAT on social housing has been reduced from 7.5% to 5%. So there are a number of measures. I think it’s a clear sign of just how concerned they are and how far the market has fallen. They have brought in 20 specific measures. I think certainly one of the commentators that we have seen has referred to the lack of an aftershock. The lack of sort of real enthusiasm that, yes, there is one thing that really makes a difference to builders or to distributors or manufacturers. So at the moment, yes, 20 measures, there has to be something. We are trying to do something positive from 20 measures, but nevertheless, some of them are pretty detailed. So far all of the talk about simulating the marketing fronts has not offset of what’s been 20% reduction in (indiscernible).

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Howard Seymour – Numis: Howard Seymour from Numis. Two for me. First one, just to follow around from Olivia’s question on market share gains in U.S. As you see the market genuinely get better in the U.S. Would you expect and anticipate to be able to maintain around (73%) market share gains?

John Martin – CFO: Yes, I mean we do expect that. I think this is we are beginning to separate now from the certainly the smaller competitors with the sort of service performance that we are doing – we are keeping cracking that up. It does get better and better. We have a net promoter score 64, that’s great, but there are in other industries people are net promoter scores of 75. So I see no reason why we can’t push on and gain share, I think it’s still the case of that the small companies are struggling in terms of financing their business. So we would expect that to continue. I think for us though the critical thing was pleasing those, but we’ve also seen an expansion in the gross margin and making sure that we get the right balance between top line growth and a profitable top line growth is very important to us. So we can hold it at 3% that is fine I certainly wouldn’t anticipate gaining any more share in the U.S. because I think again, we want to make sure we protect our margins.

Howard Seymour – Numis: Second question is on Europe, sorry just slightly more downgraded and really the question is how you see the delta going forward, because obviously we saw a deceleration of acceleration in the decline, would you expect that to continue in the Nordics French markets or do you think they will sort of – I mean it is delta sort of remains where we are at the moment in terms of like-for-like declines?

John Martin – CFO: It’s very, very difficult to call at the moment. I mean again we were just talking before and in a year ago we were looking at 6% like-for-like growth in the Nordics and bluntly I don’t think we saw we’d be looking at 8% declines now. So it is very difficult to call at the moment. Trends since the end of January have continued pretty much in line with the quarter June performance so there has been no material change there at all. I think these declines are going to continue (indiscernible) until basically consumer confidence does begin to return to the marketplace and that is just going to be anytime soon. So I think it’s going to high.

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Tom Sykes – Deutsche Bank: Tom Sykes from Deutsche Bank. Just on your changes to the channel and you’re the delivery mechanism. So first of all, in Build.com what’s the operational leverage that you are actually generating on that 30% growth and where you are shifting towards e-commerce, what level of marketing spend increases you’re having to see and would you expect to see as you shift more towards that channel. And then you’ve outlined, fairly fundamental change perhaps to the business on the sort of second or third last slide. Do you expect any of those to be disruptive at all in terms of obviously changing some of the functions of the branch, probably changing some of the managerial responsibility, how should we think about the progress towards where you’re trying to get to please?

John Martin – CFO: On the economics of the B2C business at the moment, actually the economics are pretty much in line with the rest of our business. The cost base is quite different because as you say Tom, the marketing expenditure is much higher. But of course, what we don’t have — is we don’t have we’re going to have expensive branches and showrooms, so it’s really marketing costs are higher, delivery costs are higher because it’s all delivered from DC. But the flow through to the bottom-line at the moment is pretty good and in line with the rest of the business. I mentioned – I referenced couple of times, we have made some more investments this year, strategically we wants to be in an area where (indiscernible) this but a more value-added area of internet retailing in the U.S.. So for example about half of all orders are placed while someone is on the phone to our call center. That’s not just because our website is difficult to (maneuver) or whatever else that is because people want advise with products, will this product fit my, will this type fit my sink – do these products go together, how do I fit it and similarly on the internet, if you go to Build.com, you’ll see we have literally 100s of sort of how to videos, so that we are showing people how to actually install a product, use a product and also for example, if you look at PED, we are advising on what is the most appropriate product for you. Are you a professional user, an interim user or actually you’re just going to be using this thing once or twice, so that we direct people to the right product, so there is quite a lot of investment in that. If you look at the size and you’ll see. So, we absolutely want to keep the growth rate up; we absolutely what to be able to convert sales with good economics in that business. We want to grow the business that we want to at the end of it, rather than just invest.

Tom Sykes – Deutsche Bank: So, if you are growing say the 30%, you wouldn’t see the needs to generate huge amount of operational gearing at the moment because you’re try to get to a critical mass and size?

Gareth Davis – Chairman: Certainly in these numbers, this year, we’ve got this 5 million in the U.S., couple million elsewhere of net investments. So that has dragged on profitability. So absolutely we’ve got the increased profitability, but we reinvested in this period, but we need to see the returns on that investment like any other.

Tom Sykes – Deutsche Bank: And the gross margin again on build and PED relative to the rest of the U.S. and maybe rest of the year…?

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Gareth Davis – Chairman: Yes, very similar. In terms of your second question about the change in the business model, I think will these changes have an impact on us, obviously yes. But I think most importantly, it will be an evolution. Okay. I put up a slide early on that say you know our customers sill massively value of the branch. As I have done and we’ve all done spend a lot of time working with plumbers, they can predict that date. They don’t know whether it’s a (indiscernible) going to breakdown, they are going to go and get one to pick it up from the branch and install it that day. So even 10 years, 20 years from now, do I think there will still be branches, absolutely, yes, but I think what will be done in a branch versus what will be done above a branch that will change, okay. So if you imagine now a lot of pricing negotiation by closing some of our branches, increasingly and by gradual evolution we will reduce the amount of pricing flexibility in a branch. So branches still have the ability to source products locally. Increasingly, we want to reduce that flexibility so we get the real benefits of scale that will come to us. So is there anything that we see at the moment that is massively disrupted to us? No, but 10 years from now will a lot more be happening on the Internet? Of course it will be, but that’s why I think we are investing hard to get ahead of that game both in our B2B and in our B2C business, but there is nothing at the movement we see massively disruptive, (Amazon Trade) launched last year in the states in April, quite a flurry of excitement; actually their traffic has dropped off enormously in the last 10 months. It’s not easy to get into our sector as John has made the point, you do need to have a lot of people, associates who know a lot about the business.

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