Wolseley Survives by Cutting Debt and Costs

Wolseley, the plumbing and building products supplier, has provided investors with a comprehensive update ahead of its 31st July year end. Of all the companies reviewed in this column over the past 6 months, Wolseley, at first glance is uniquely vulnerable with extensive debt on the balance sheet and a perceived collapse in demand for its merchandise. The firm indeed has faced a mountain of challenges but entered the recession strong and adaptable and will therefore survive, albeit beaten-up and smaller. Many other building product suppliers have collapsed under the financial stress and fall in demand.

A brief look at the financials sums up Wolseley’s predicament. Revenue from continuing operations is thought to be 16% lower, year on year. Trading profit is likely to be 56% weaker than the prior year. Profit before tax, amortisation and impairment charges is to slide a painful 60% (continuing operations).

In response the firm has cut costs vigorously, £200m in the current year and £392 in annualised savings. Further efforts to de-leverage the balance sheet has also seen net debt fall £108m to £1,426m since April 30th and from £2,711m a year ago.

Strategically Wolseley has also cut a swathe through its non-core markets. Its interests in Belgium, the Czech Republic and Slovakia are to be sold. The firm has lost market share in France whilst management, distracted, grappled with onerous local employment law in an effort to cut the cost base. The Irish business is to be down-sized, possibly permanently, with the firm viewing the market as “unlikely to return to the levels of activity experienced in the past decade”.

Key markets remain grim also. The UK offers promise but a return to strong growth is unlikely before 2011. Their US operations remain strained suffering from weak demand and intense competition.

The management are committed to cutting costs further and focusing on improving their competitive advantage by “enhancing customer service”. Watching Wolseley fight the competition in an attempt to secure a larger share of a shrinking market sometimes feels like observing bald men fight over a comb, but 2009 isn’t about winning, it’s about surviving and Wolseley look set to achieve that objective through its effective and ongoing strategic review, debt reduction and cost controls.

Wolseley will probably never experience such challenging markets again.