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Wolseley special divi within the expected range

Date: Tuesday 02 Oct 2012

Wolseley special divi within the expected range

The transformation of Wolseley from a company in danger of collapsing under the weight of its own debt to one on a sustainable growth path looks complete after the company announced its intention to pay a special dividend.

The plumbers' merchant has paid a full year dividend of 60p, which is already a third higher than the 45p it paid last year, but on top of that it will pay a one-off special dividend.

The financial year to the end of July saw the group wipe out its £523m debt to end cash positive with net cash of £45m, paving the way for the special divi, which, along with a share consolidation, will cost the company £350m. Broker Jefferies Hoare Govett says the proposed shareholder return of £350m is within the expected range of £250m-£500m.

Cash on tap

"Wolseley continues to be highly cash generative and we have adequate resources to fund future investment in the business alongside growth in ordinary dividends," said Ian Meakins, the group's Chief Executive.

Revenue from continuing businesses in the year rose 5.4%, or 3.8% on a like-for-like (LFL) basis, to £12,716m from £12,061m the year before.

Trading profit from ongoing businesses jumped 10.4% to £658m from £596m the year before, but goodwill impairment of £353m relating to acquisitions made in its debt-fuelled acquisition spree in 2003 to 2007 put a dent in reported profit before tax, which fell to £198m from £391m last year.

The trading margin for the ongoing business was 5.2%, 0.3 percentage points higher than the previous year. The gross margin in the ongoing business was slightly lower at 27.5% (2011: 27.7%) as a result of very competitive market conditions, price deflation in some product categories and the supplier settlement noted in the first half.

Headline earnings per share rose 17.8% to 168.4p from 142.9p the previous year.

"Demand across our markets remains mixed and the economic outlook continues to be uncertain. Revenue growth rates in the new financial year have been similar to the fourth quarter of last year," Meakins revealed.

"Whilst we remain cautious about the outlook for our markets, we are confident that Wolseley will make good progress in the year ahead," he added.

In light of market conditions in Continental Europe the group anticipates it will incur further restructuring charges of up to £25m this year, which are expected to be charged to trading profit.

Fourth quarter performance

North America continued to be the star of the show in the fourth quarter with the USA seeing 6.7% year-on-year (y/y) like-for-like (LFL) revenue growth, while Canada's LFL revenue was up 4.5% y/y.

The repair, maintenance and improvement (RMI) market remained resilient in the USA while the group enjoyed a boost from the slight increase in new residential construction. In Canada, new residential markets remained buoyant while infrastructure spending continued to grow.

The UK, which accounts for 13% of group revenue, saw LFL revenue growth of 3.5% y/y, and Central Europe also grew, with LFL sales up 0.7%.

Demand in the UK heating market declined throughout the year, although demand for other product categories performed better, the company revealed. "There is no evidence yet of improving market conditions and therefore growth will only come from market share gains in the short term," the group said.

The Nordic countries and France let the side down, however, with the former seeing a 2.9% decline in LFL sales while France's LFL sales were down 5.6%.

Weak consumer confidence affected the RMI market in the Nordics, and margins came under pressure in the second half of the year.

In France, new construction markets weakened substantially in the second half. Government incentives put in place in the last two years are ending and demand is expected to continue to decline in the current year.

Share price reaction to the results was negative. The special dividend payment was not unexpected, and, as broker Charles Stanley noted: "Wolseley’s markets are becoming more difficult and this can be seen in the quarterly progression of revenues."

"In Q4 [fourth quarter], LFL revenue of the ongoing operations improved by 2.9% compared to Q3 (+3.8%), Q2 (5%) and Q1 (4.8%). Also, markets are very competitive and in 2012, the gross margin slipped 0.2% to 27.5%. Nevertheless, overall, the group expects to make 'good progress in the year ahead' and it was pleasing to see the special dividend," Charles Stanley said.

The broker has downgraded the stock from "accumulate" to "hold", as it believes the share price, which has risen by about two-thirds over the last 12 months, is now "well up with events".


JH

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