Wolseley PLC Earnings Call Nuggets: Blended Branches Details and United Kingdom Fronts
Wolseley PLC (WOS) recently reported its fourth quarter earnings and discussed the following topics in its earnings conference call.
Blended Branches Details
Ian Meakins – Group Chief Executive: Yeah, the market numbers that we’ve given you were for the Blended Branches, (roughly) that’s two-thirds of our business. So it’s a big chunk of the work. I think what we are seeing at the moment is a good steady U.S. market growth of around about 5 percentage points mark, and it’s being steady now for going back of a nearly 10 sort of quarters. So there is a really good track here, point one. Point two, in terms of what we also do as well, we monitor and measure and survey our customers and ask them how do they see the market, what’s their order book looking like and that again is being pretty steady, i.e., sort of 4%, 5% growth over time. Thirdly, only about 10% of our business is contracted looking forward, and again, that looks pretty healthy at the moment and again supporting good steady growth. I think our outperformance to the market, I mean, bluntly we are pleased. It’s now being out before we’ve been outperforming the market for nearly three years steadily. It absolutely is driven by the same factors we’ve talked so often in these sorts of meetings, product availability, customer service having the right people in the branches at the right time. I think we’re finding that our ecommerce platforms in the States are better than our local competitors, and that I think is beginning to give us a bit of an advantage as well. So, look at the moment, the market looks good and steady at about 5% and we believe we can continue to outperform it.
Howard Seymour – Numis Securities: The second question really, John just on tax, because obviously you mentioned the tax charge (you can opt) because of mix. From everything you said in that, it looked like the U.S. profits go up again as a percentage of profits this year relative to Europe. So why would the tax charge not go up again as an increment?
John Martin – CFO: Well, I think our guidance overall is 28.5% to 29% and that takes into account all the mix factors under the smaller factors around the Group.
Olivia Peters – RBC: It’s Olivia Peters from RBC. Just two questions, please. Firstly, on your dividend policy. I was wondering if you would reconsider maybe rebasing your dividend. This is now the second special dividend we’ve had in a row, and although I understand that you won’t to be able to pay a dividend throughout the cycle, if a market is largely expecting a special dividend every year, then cut – but not paying a special dividend is equivalent to cutting a dividend. So I’m just wondering if you would reconsider that policy…
John Martin – CFO: Firstly, because we have a few of our fellow directors here as well today. So they’ve (heard that, and thank you). We have considered it very carefully when we rebased it, but if I came back to our priorities, the first one is funding organic growth. We said today, we are going to sort of step up and do a little bit more. The second is the sustainable ongoing dividends with the sustainable growth rates. Just on that point, I think it’s very easy to take a point when you’re somewhere in the cycle and none of us know where we are in the cycle. So is that science? Is there a bit of judgment in it or is it a bit of both. Third priority was as bolt-on M&A where we can add value to it, true, I think we’ve stayed of course very disciplined on that. We’re not going to do, we’re certainly going to try and avoid doing any deals at which you just pull for shareholders, but possibly we will see more of those transactions and that’s the big sort of swing factor in all of that. Thereafter we said, we’re not going to stockpile cash for some rainy day, there is no purpose to do that. So we got the surplus cash back to shareholders. I don’t think it’s appropriate and it’s certainly not the way that the Board were thinking about, they has to think of the special dividend as a recurring every year, it will really depend on that M&A. So we’ve said without having M&A targets, we might do a couple GBP100 million a year, if we done another sort of GBP150 million in the year just gone, there probably wouldn’t be any special dividend. So that’s the sort of thinking and thinking behind it. So I think from our perspective the most important thing is the final bet, we’re not going to sit there stockpiling cash and having inefficient balance sheet. We will get surplus cash back to shareholders reasonably probably, but we would like to maintain that flexibility to pursue those are the priorities when the right things come up.
Olivia Peters – RBC: Just on my next question. I mean, the U.S. and the U.K. are now growing quite nicely, obviously, Europe sort of a bit drag. Just from a pricing environment, do you expect an improvement this year given that those markets have returned to growth?
Ian Meakins – Group Chief Executive: I bluntly no, I don’t think we will see much uptick in the pricing environment. Ever since I joined the business, maybe just over four years ago, it has being very competitive. I think it will remain that way. I think several factors in there. One, clearly, as people begin to see a bit of hope in the longer-term they are bound to get a little bit more competitive. Secondly, as new build comes back a little bit that is all contracted out work. So it’s not emergency repairs, which sometimes does not get tended. So the mix of business will be proportionally higher contracted versus non-contracted. I think thirdly, there is no doubt in the last three, four years we’ve seen the transparency of pricing via the Internet. Everybody knows pricing now. That’s well and truly there. So I don’t think there is going to be a lot that will help the pricing environment. Clearly, it’s absolutely up to us to continue to work all of those (menu) of profit levers that we have talked about in the past in terms of the custom mix, product mix, own label. So I think we can still see ways in which we will be able to just gradually eek up our gross margin over time, but I don’t think it is going to be coming from pricing…
Charlie Campbell – Liberum Capital: It’s Charlie Campbell from Liberum. I had a couple of questions really. I just wondered if I take you back to Slide 25 where you talked about the conversions from gross profit to operating profit. I think you said at that time that 20% was moving towards a respectable level. I’m just wondering what you might (class) a respectable level and what might be a good level? Also, where that level in some of the best businesses? Then also, second question, turning to the U.S. Nonresidential particularly sort of, my understanding is you’ve not really seen that will start to pick up at least yet. I’m just wondering when you might expect that cycle to start picking up and contributing to those growth rates?
John Martin – CFO: Our best businesses do quite a lot better than 20%, first thing. How we (got a lot to aim) for, yes, our best business is, we’ve got some businesses north of 25% conversion. I think that is pretty good given the state of the business and the state of our markets at the moment. I think the peak or the peak for the Group was between 22% and 23%. So, to Ian point about us getting back to former peak trading margins, we will have to get back to better conversion of gross profit into trading profit in order to get back to those levels. We will need I think 22%, 22.5% to get back to former peak trading margins overall. There is a strong expectation around the business that we can get back to former peak margins. It’s not in everybody’s lips in Europe at the moment, they would like to get back to last year’s margin, so last year’s margins first. So I hope that gives you a sense. There is nothing here that’s changed that we can see since when the Group managed to do sort of nearly 23% on that conversion rate. There is nothing fundamental that’s pour about the market in which we are competing.
Ian Meakins – Group Chief Executive: I think John is absolutely right. What we do need though is a little bit of wind in the sales from Europe. We’re going need these sort of two or three years now of European growth to get back to those peak margins. In terms of U.S. residential, you guys see all the stats as well. Housing starts actually, they’re just – well, they peaked to just over 1 million and now they sit back a little bit in the past couple of months. Sales prices continue to increase. All of the other stats are still looking positive, but the very rapid percentage of changes we’ve been seeing six months, 12 months ago, clearly, are beginning to level off a little bit now. I think for our business, just remember in the States, new residential is only 14% of our total business. So we need the RMI market to continue to pick up and that is continuing to do well, but I think what we are seeing at the moment is a good steady growth of sort of 5%. We are not seeing an acceleration in the U.S. market growth at the moment.
Charlie Campbell – Liberum Capital: Sorry, just to be clear, the question was on the non-residential side, and when that might start to pick up to contribute to the demand across…?
Ian Meakins – Group Chief Executive: On non-res, what we’re seeing now certainly a pickup in the commercial sector in the States. We have a small business of foreign fabrication business that services all of the fastest for new build and that is actually beginning to pick up quite nicely in sort of good single digit top line growth. So there is some growth coming back in that sector now.
United Kingdom Fronts
Yassine Touahri – Exane BNP Paribas: Yassine Touahri from Exane BNP Paribas. Couple of question on the U.K. fronts and gross margin; first on the United Kingdom, could you give us a bit more color about the evolution of like-for-like growth? Has that accelerated a bit versus the last quarter? Do you think that organic growth will continue to accelerate? Could you give us a bit more color on the different market? Is that coming from housing, non-residential, new or renovation? My second question would be on France. You posted GBP10 million trading profit this year. You are expecting a small loss next year. What would you expect next year excluding all restructuring charges? If we look at the underlying business excluding restructuring, would you expect an improvement or stability? Then my last question is on gross margin, could you give us a bit more of an outlook market-by-market in Europe in terms of what you expect for 2014? You mentioned that in the U.K. you hope to improve gross margin. Is it the same in some other country in Europe?
Ian Meakins – Group Chief Executive: Sure. Well, if I do the first on (lost) and John you could do France. In terms of the U.K. again, we’ve seen a bit of a pickup in terms of consumer confidence. It’s still negative, about negative 10, but it was negative 30 going back about nine, 12 months ago. Housing transactions have picked up again in the last sort of six months about 5% and you can see a recovery in house pricing as well. Housing starts again, have ticked up a little bit back to sort of more – I guess a more historic level about 120,000 starts a year. So yeah, we think the U.K. market is definitely coming back a little bit now. In our business, we think the market is growing between 0% and 1% and we are gaining about 3 points above that in terms of market share. Clearly, there are two other areas that are helping our markets, specifically and potentially longer term the Green Deal; there has been 58,000 assessments done so far, but only 419 actual Green Deals have been struck. So, clearly, it’s not having much effect on the U.K. market at the moment. I think as we told last time, the financing for a consumer for the Green Deal is pretty complex. Whereas we are seeing some pickup those in the Eco spend particularly in the Affordable Warmth market. There were 150 installations and 30,000 of those were boilers and we look forward over the next sort of two, three years, we anticipate about 250,000 boilers going through the scheme, which will deliver about 3%, 4% additional growth to our market. So from our sort of like-for-like market growth point of view, the U.K. now is looking more positive, but I mean we are outperforming the market by about 3 points…
Yassine Touahri – Exane BNP Paribas: France?
John Martin – CFO: Yeah. So, when we’ve done the restructuring, the whole set of strategic review in France that we talked about back at Interim, we will be left in the BM business in France, which is what you see in the French segmental here, with about GBP600 million of turnover. Clearly after all the work that we’ve done, we expect it to be profitable. I think it will take some time to rebuild profitability in that business. If you look now, there was an article in (Lasaco) last week, sales of new single-family homes are lowest for 20 years. It’s clearly a tough environment. New housing starts on a 12-month basis and down until 25% from peaks. That’s a big part of our business in France. I think the other thing is going to France at a relatively frequently, I just sense there is still a drag on sort of confidence in France. So I think that’s what needs to come back into play there, but we are going to spend this year completing the transfers of the businesses that we are selling, closing the ones that we’re closing and rightsizing the central costs to make sure the business is in a great shape going forward. I’m sure in FY’15 we certainly don’t expect (to be) still generating losses in France.
Yassine Touahri – Exane BNP Paribas: (indiscernible) losses?
John Martin – CFO: No, we would not expect to see losses in FY’15. We would expect today to make a profit in FY’15.
Yassine Touahri – Exane BNP Paribas: Excluding restructuring charges in 2014? Would you expect the business to be profitable – to be slightly profitable?
John Martin – CFO: It maybe, but we are still declining fairly sharply in France, even the July numbers were down. Now, if you look at the July market numbers, individual new-build 16% down. It’s a tough market.
Ian Meakins – Group Chief Executive: In terms of gross margins, if I just pick on the three big classes. I guess, in States, as you can see, we had a good year on gross margin in the year just finished. I think the guys in the team, Frank and the team they have done a very good job of really managing the mix of their better. They did a good job on sourcing. They got faster growth in the showroom business, faster growth in the counter business, which is higher margin business for us and actually I think they did a good job as well in terms of managing pricing. There was a greater compliance with the pricing matrices that we’ve talked about in the past whereby we do less manual intervention in the branch. We know whenever we get into a negotiation with someone, clearly we lose margin. I think, again, there is more we can go out in the state. So, again, we’d expect 5, 10, 15 basis points of improvement across the Group. I think in the States, we can probably do a little bit better than that, but that’s the sort of order of magnitude at a Group level. Look, the U.K. gross margin last year was disappointing driven really by, firstly, a change in the mix or an increased mix of boiler sales. We gained share of some of our major customers who are big boiler sales customers. Boilers are significantly lower margin for our business, okay, but it was disappointing to see that. I don’t think we did a fantastic job at managing the detail of discount management with our customers as well as we could have done. Now, we worked hard, as I said, hard in the second half of the year. We have already turned around the boiler margin; that is getting better and we have all the data in controls. We now need to manage absolutely down to a customer product level are discount management and we are seeing a better performance. Its early days, but we would expect that to improve back to sort of levels we achieve historically. I would point out that actually, our levels of last year was still well ahead of ’09, ’10 and ’11, so we have made progress over last four years. But don’t want to disguise it. U.K. performance was disappointing on a gross margin basis, good under market share basis. I think in the Nordics, you guys did a good job last year, really protecting the business, John made the point about taking the cost out and I think they got better at managing again, sourcing and the pricing matrices we drove on label a bit harder in the Nordics and made good progress. So again, we’d expect to see 5, 10, 15 basis points progress there as well. So again, at the moment we don’t say any reason why we can’t continue to make incremental progress on a group basis. Does that answer your question. Let’s go backwards, so I’ll go straight behind, and then…