Wolseley PLC Executive Insights: U.S. Sustainability, French Trends

On Tuesday, Wolseley PLC (OTC:WOSYY.PK) reported its third quarter earnings and discussed the following topics in its earnings conference call. Take a look.

U.S. Sustainability

Ian Osburn – ING: Thanks a lot for that. I guess the first question is on the U.S., how much of the 9% gain do you think was taking market share and how sustainable do you think that is? If you can just give something, how you see the underlying market performing, now we are more into the building season? You also mentioned conversion to cash. Is it still the target that you expect to be in the net cash position by October of this year? I think Ian Meakins, mentioned that a while ago now and just wondered that haven’t changed, and your latest builds given the current uncertainty, what is the optimal gearing for Wolseley? Where will you look to keep the net debt? I mean what I’m trying to get to is when we might think about paying special dividend, if you’re carrying too much cash on the balance sheet?

John Martin – CFO: Ian, thank you very much. Let me see if I can take into those in turn and you pull me up if the answers aren’t right. The sustainability in the U.S., I think firstly, we think that there is a little bit of volume growth in the U.S. markets, perhaps 2% or 3% with a little bit of inflation, probably a couple. So the rest of that is market share gains. Just been over with the U.S. team doing the three-year strategic plan which precedes our budgets, they are absolutely focused on maintaining those share gains with no sense of – certainly no sense of complacency but also plenty of confidence about the desire to keep that going to make sure that we continue to provide just a better service than our local competition. That’s the reason that you take market share. So, no sense of any pessimism that we can continue to do that. Your second question on the building season, just to remind that we are hugely RMI focused in our business. Now I think only 14% is coming from new – turnover is coming from new residential in the U.S., and I think it’s unlikely that we will switch our focus away from that in the foreseeable future even if new build comes back more strongly. We’re going to stay focused on the markets that we can service well, we know best, we don’t want to conceive market share, that’s for sure in those markets. Clearly, sentiment-wise and also for a bit of – for the bit that we do, having a better new construction market would be good. Your third point about sort of conversion into net cash flow, because Ian said we’re going to be debt-free by October then I wouldn’t want to change his targets there. I think that’s still sort of quite likely pre-M&A that we would be heading towards being debt-free by the end of this calendar year. In terms of the gearing net debt position, I think we talked about this sort of a year, a year or so ago, and we talked about our priorities. Our priorities in that order remain exactly the same, and therefore the only question really is what resources will we need for M&A if we can find the right transactions to do. Just a reiteration, we will not sit on surplus cash flow any prolonged period, that shareholders money and if we don’t have the opportunities available to any length of time in the business, we will get that back to shareholders. I think we should cover that more comprehensively though in September at the full year results.

Ian Osburn – ING: As things are at the moment then, I mean I presume you’re not going to tell us, but perhaps it seems to point to some form of return to shareholders next year, if we carried on the current path?

John Martin – CFO: That’s definitely right. I’m not going to tell you. I think this is clearly a Trading Update Day and that’s something for the Boards to consider more comprehensively and in the fullness of time. So I’m very happy to just reiterate what our priorities are, funding organic investment, where we can do that profitably and properly, that’s the first priority. Second is making sure that we have a sustainable and growing dividend over time. The third is M&A, bolt-on M&A to existing businesses in existing geographies, where we can truly add volume and pick it up at the right price and integrate it and generate synergies. Then, finally, we will return surplus cash to shareholders in the appropriate way at that time.

Ian Osburn – ING: Could I just get a very quick comment on the Nordics, given it’s so important that why you think it started the build season, it started late there. I’m not aware of any weather effects particularly?

John Martin – CFO: Well, I think they are helping weather effects. I mean I don’t like to talk about weather, as you know I have avoided it for the last two and half years. I think though if you look in these numbers clearly, the building season have started late throughout the region this year and actually it’s quite sensitive too. I mean it’s still (a little) observation, but if you look we have a DIY business in Denmark. If they have a poor Easter break as it happens of weather, it trashes the April numbers, that’s actually what you see reflected in these numbers. They have had a – they did have a difficult April. So, I would say it is too difficult to call. On the flipside of that is the overall construction start around the region have been weak. We don’t know yet what’s the relationship between our number, weakness in construction and just having a (dual) trading period in April. Just to reiterate, this is a very seasonal business, so now through end of September that’s when you make all the money in Northern Europe. So that’s an important trading period for us. We will move (forward) no doubt by the end of September.

French Trends

Paul Roger – Exane BNP Paribas: Couple of questions then. Actually the first one is very similar to Ian’s question on the Nordics. I (want to listen) a little bit more about France and in particularly how the trends actually developed month from month? Really, what I am trying to get to is there, clearly, the weather had an impact in February but just trying to understand what happened with underlying demand, and whether that actually got even worse in April? The second one is actually on your guidance that you have previously given on your flow-through for the second half. I think you’ve previously said you expected a double-digit flow-through in the second half. It looks as if your flow-through on the third quarter is about 9%. So, clearly, to get to that second half incremental margin you need a bit of a pickup in the first quarter. I mean is that math right? If so, what do you think is going to drive that improvement? Then maybe if I can have a quick follow-up on M&A and some of the comments you just made. I mean you’ve said before the pipeline is improving. We’ve seen recently that one or two of your competitors have also talked about that. I mean did you see scope for deal flow-through increase on a relatively quickly as might have been interest to you?

John Martin – CFO: Thanks Paul. France, yes, February was – look, we had 10 days in February that were very full. If you Google bad weather, France, February, (like you saw carefully interesting) results, it was really – it was cold in February, actually it was better in March and April as it happens. So those numbers that you see are absolutely driven by 10 days in February. It might a weather (winged) I apologize for that. It is – look, I still think France is going to remain challenging. So don’t assume that we are going to sort of swing back into double-digit growth, and I don’t expect that frankly in the foreseeable future, but that is the pattern in France. In terms of double-digit flow-through, clearly, 9% wouldn’t quite be there. I would still like to see it will go to double-digit flow, but clearly the most important thing is to generate the profit in the remainder of the year. Clearly, there is some tailwinds and some headwinds, as the U.S. keeps on growing strongly that Canada, the U.K. performance I think has shown a lot of improvement, than those real positive things and is clearly, I’m more cautious about Europe. And having that mix of earnings, ideally from an accounting perspective, look this is a stupid comment, but I’ll make it anyway. Ideally, it had fairly consistent performance across the board in terms of flow-through, it won’t be that’s fine, we get paid to deal with (actively well). You said, do I expect double-digit flow through in the last quarter, I certainly and I said so at the half year, I think these numbers are broadly in line. And that’s what I expect for the second half and you’re right, we’ve got a bit of a further way to go to get that. Paul, just on M&A, I said it last year the pipeline was a little bit more full and it has been a bit more full. There was a couple in that that we would expect to convert, they are not huge Paul, at all, but nevertheless, there are couple of nice transactions in there. Just to reiterate, we have no embarrassment about doing no M&A. There is no reason, we have some great businesses, great market positions, these businesses yield to close and attentive management focus on customer service and we don’t need M&A. M&A is a, yes, if we can add volume to shareholders we’ll do it and if we can’t we won’t. Interestingly, I don’t think we’ve passed on any deal that we would have wanted to do. So in that sense we’re not missing opportunities. That still isn’t’ a lot of – there aren’t a lot of transactions out there, but all I want to say that we’d quite like to do. I would encourage you to differentiate entirely between M&A and the use of capital in the sense that I see them as two totally dissimilar matters. We will only invest in M&A if it’s appropriate and then if there are surplus funds available as we showed and that’s priority (indiscernible) we will be get them back to shareholders.

Paul Roger – Exane BNP Paribas: That’s likely. Just one quick follow-up. Can you just confirm that whether like-for-likes in France in April were positive?

John Martin – CFO: No, they weren’t. They were slightly negative.