Ferguson Enterprises Inc (FERG) 2008 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Wolseley U.S. Investor conference call. For your information, today's call is being recorded. At this time, I would like to turn the call over to your host today, Mr. Chip Hornsby. Please go ahead, sir.

Thank you. Good morning, and thank you for joining the call today. I'm Chip Hornsby, CEO of Wolseley, and with me I have Steve Webster, our Chief Financial Officer. I hope you've seen our interim results announcement this morning. Let's start by looking at the headline numbers.

Group revenue was up by 2% to GBP8m. Trading profit reduced by around 23% to GBP300m, and the Group's trading margin fell from 5% to 3.7%, predominantly due to loss reported by stock. Profit before tax, before amortization of the intangibles, was lower by 29.4%, at GBP233m. Earnings per share decreased by 31.1% to GPB0.2669, reflecting a lower level of profitability.

The business continues to be strong and cash generative, with cash conversion improving from 115% to 122%. Operating cash flow, however --- operating cash flow was, however, lower, at GBP367m, due to the Group's lower trading profit.

After careful consideration, the Board has decided to increase its interim dividend by 3.7%, to GBP0.1125 per share. We believe that strikes an imperfect balance between its undiminished confidence in the longer-term fundamental strength of the Group and its short-term market uncertainties.

In constant currency, revenue was up by 3.1%, and trading profit is down by 22.1%. Since our last update in January, our markets have continued to weaken. U.S. housing, in particular, is still declining against the backdrop of global credit squeeze, which is affecting consumer confidence in many of our markets, including Europe.

Our results today reflect these increasingly difficult trading conditions and the continuing action we're taking to reduce our cost base and maximize our cash flow.

Looking, first, at our main operational areas, our North American division was significantly impacted by a further slowdown in new housing sector. However, it enhanced its position as the leading distributor of construction products to the professional contractor.

For me, one of the outstanding performances of the first half was Ferguson, our U.S. Plumbing and Heating business. Despite the slowdown in RMI in new housing, this showed a strong [end] performance, increasing both trading profit and margin.

Stock, our U.S. Building Materials business, continued to be affected by the slowdown in the new residential market, and recorded a trading loss of GBP44m.

However, revenues were down less than the market, as it continued to take market share from competitors and made progress, diversifying away from such heavy reliance on the new housing market.

In Europe, our major markets generally held up well. Operational improvement continued to deliver benefits in Wolseley UK, with good performances from Plumb Center and Bathstore, although the results were impacted by weakness in the Irish housing market. In addition, our acquisition of DT Group in the Nordic region continued to bear fruit, with a strong overall performance.

In France, although the performance of the business improved during the period as a result of better market focus and cost control, the overall trading profit was down due to the weaker business environment. So, what have we done to respond to market conditions?

First, we've taken a number of decisive actions to lower our cost base. Over the last 18 months we have reduced headcount by about 10,000 people across the Group. The majority have been in the U.S., where market conditions have been most severe. In Europe, more modest headcount reduction has been implemented, in line with local conditions. A headcount freeze is now in place and we expect to significantly reduce costs in the second half.

Second, cash flow remains a significant focus and we continue to drive aggressive improvement targets for each business's inventory, receivables and payables.

Third, during the first half we've reduced the amount of discretionary revenue and capital spend in order to preserve cash and to focus on gaining benefits for prior year investments. Following a recent review, we will also be reducing some of the IT spend in the Business Change Programme, and we'll be taking an increasingly selective approach to acquisitions.

I am conscious that many of you are taking a closer look at Wolseley's debt covenant position, with the recent decline in our EBITDA. I want to stress, the Group is fully in compliance with its borrowing covenants to January 31, 2008, and we're confident that this will remain the case. We have committed and un-drawn banking facilities of around GBP1b at the end of January 2008.

The majority of the Group's covenants are set for debt to be less than 3.5 times annualized EBITDA, although there are two facilities totaling GBP270m requiring net debt to be less than three times EBITDA. These two facilities can be repaid from existing committed facilities, when appropriate.

At January 31, 2008, the ratio of net debt to annualized EBITDA was 2.85 times. The Group has a number of plans in place to ensure continued compliance with its covenants, should markets deteriorate by more than we anticipated.

Moving on to the Group's strategy, I want to confirm that this is unchanged. We will continue to invest in our business and work to increase our competitive advantage. Particular emphasis will be in the areas of purchasing and supply chain going forward. We're already benefiting from our drive to grow private label sales, which will enhance our margins.

In addition, we have a number of new initiatives to improve selling prices and customer service through focusing on growing market share. Looking forward, we're still not prepared to call a bottom to the market, and we'll take further action to adjust our cost base as necessary. We're fortunate Wolseley has a flexible business model which allows us to adapt our cost base quickly to changing conditions.

The long-term fundamentals of Wolseley remain sound, and the market opportunity is huge. Having worked through downturns before, one thing is for sure, that is, when the markets return we will be well positioned. When they do, we'll be fighting fit, with added market share, a lower cost base and a more streamlined supply chain than ever before. Thank you for your time this morning. Steve and I are now happy to take your questions.

(OPERATOR INSTRUCTIONS). Our first question comes from Will Robins with Numis. Please go ahead.

Yes. Hello, gentlemen, good morning to you. Can you please expand on the quote that the Group has a number of plans in place to ensure continued compliance with your covenants, should not deteriorate? What do you actually mean by that?

Well, obviously, predicting --- this is Chip. Obviously, predicting what's going to happen next, particularly with the credit crisis and the things we're seeing in banking, and these are becoming more difficult.

I'll let -- ask Steve to elaborate on the details of exactly what our plans are but, again, we're looking at many downside scenarios and risks that are involved in the marketplace, looking beyond where we are currently, and being certain, and we're quite well prepared to begin to anticipate what we need to do next. So, Steve will take it from there.

Yes, just a few facts, first of all, Will. January 31, you probably know that most of our borrowing covenants [hit 1.5] times EBITDA. We have a couple of covenants that are at 3 times EBITDA. They total GBP275m, and we have GBP1b worth of spare, but committed, facilities at the end of January.

So if we want to, the first thing we do is repay the borrowings with the 3 times EBITDA covenants to give us a bit more headroom. We're not planning on doing that now, but that is obviously one of the things we can do. You've probably picked up from the statement the whole variety of cost reduction measures we've taken in the first half, which obviously benefit the EBITDA in the second half and into '09 as well.

You've probably seen that we are cutting back on the CapEx spend, the way we're coming in below our original target of GBP400m, probably by GBP75m or GBP80m. You've probably read that we're raising the bar on acquisition spend. So, obviously, there are measures there that will both benefit the EBITDA, and further measures will be taken in the second half to reduce the cost base of the Group, which will further benefit the EBITDA.

And then, of course, on the debt side, we'll continue to drive for working capital improvement. You may have seen the slide that I showed this morning where it improved the working capital cash, cash days, by 25% over the last two years, so we'll continue the emphasis on the cash flow generation.

Then, of course, the other things we can do if we need to in terms of the levers, there are things like asset disposals. We're always selling property as a normal part of our business and, if need be, we could accelerate some of those sales.

There are other things we can do. If we want to go and get additional facilities, we can do that as well. We have an eminently bankable balance sheet, a very sound balance sheet.

So you can probably tell, there's a whole load of things that we can do, and we've done quite a lot of scenario planning, looking at the downside risks of what may occur, and we can't see any credible scenario that will breach our covenants. So for all those reasons and many more, we are confident that we'll remain in compliance of those covenants going forward.

[Certainly, Will], the key thing is, is we're trying to anticipate what the overall markets are going to do and be prepared for that ahead of time.

You've got it, thanks.

Thank you.

We'll now move to [Levan Von Reedon] with HOC Capital. Please go ahead.

Good morning, guys. Maybe you can help us just give a brief -- your thoughts on globally or on a geographic basis, to get some sense from an economic standpoint what you're seeing in the United States, in Ireland, Spain, get some sense for where you see the world headed? Obviously, you're preparing yourselves for a much more difficult environment. Maybe you can give us a little bit more color as to what you see and where?

Okay. I spent the majority of January and February in the U.K. and in Europe, but I did return home for about 10 days, and I did see a marked difference in the overall attitudes and views of people as it relates to the economy since Christmas.

Obviously, there have been a lot of things that have occurred. I would say, outside of what's going on in the banking industry, the economic news seems to have taken the front page headlines much more so than the war in Iraq. I think the other key thing is that the attention has been drawn, particularly to job losses in the U.S. is drawing more and more attention, about 25,000 jobs in January, about 65,000 jobs in February.

The real debate is, are we in a recession, etc. So the U.S. is, in my view, is going to get worse before it gets better, particularly for our industry. The enormous amount of inventory that we have today in housing, particularly in markets like Florida, or Arizona, or California and Nevada, are of a huge concern.

As you put -- really go into Canada, a more stable set of circumstances, but certainly a concern as to what's going to trip over from over the border from the U.S., and the impact that that will have. The energy sector up there is nowhere near as vibrant as people would envision it be out of the oil sands a year ago, even with higher oil prices.

As you push over to Europe, you mentioned Ireland; Ireland right now is just one of the most challenging markets that we have in Europe. Housing starts are down about 50% so, again, that's a concern. You also mentioned Spain. Fortunately, we don't have a presence in Spain, but it's a very similar set of circumstances there where you've got a high degree of over-building. The balance of Europe, though fragile, I think it's still much more stable than what you have in the U.S.

As you look at the U.K. in particular, certainly some startling aspect of what's gone on with Northern Rock and the attention that that's drawn since last fall, but overall the economies are softening. It's still relatively stable. The question is what's going to happen next.

As you get into Mainland Europe, we did see some softness in the French market. Hopefully, that will begin to stabilize. The Nordic area, again, solid -- although Denmark has certainly softened, it seems to be offset by what we had going on in Finland, Sweden and Norway.

And then you get into Central and Eastern Europe. You really do have some great opportunities for growth there, as it relates to evolving markets, or emerging markets, if you will, particularly where construction is concerned.

So it isn't all black and white. The real issue that we have today is specifically with the over-supply that we have in the housing market, and until that inventory's worked down, there's really no room for improvement where the results are involved, until we begin to work through that inventory. So, I think we've moved recently from an over-supply in housing to much more of a macroeconomic issue that we've just got to continue to evaluate.

And I know it's a silly question to ask, but to the extent that you have any color or thoughts as to when you think some of the over-supply is soaked up and we get more to an equilibrium, so to speak? I'd love to hear your thoughts as well.

Well, I tell you, I'm sitting here and I'm trying to figure out what the Fed knows that we don't know yet. But if it involves moves that have occurred since January, he's done a pretty dramatic reversal since prior to Christmas, on interest rates, on money supplies. Now there's the thing with Bear Stearns. I'm trying to interpret exactly what he's envisioning, for such a rough change. It's exactly opposite over here with the ECB, where his plan right now, or their plan right now is to be an inflation [cracker]. So after doing this for nearly 30 years, this is as complex as any time I can remember.

Okay, thank you.

Sorry I can't be clearer, but that's as up-to-date as I can give you right now.

No, any data points that we can get are always helpful.

Sure.

As we have no further questions, I would like to turn the call back over to your host for any additional or closing remarks.

Steve and myself certainly appreciate your interest in Wolseley and, hopefully, that will continue. Have we got one more?

Yes, we have one more.

We have one more question, excuse me.

We'll take now a question from Craig Schissler with Basswood. Please go ahead.

Yes, good afternoon, guys. Just to discuss, I know you've been very clear on all of the things you're doing to make sure your covenants stay not breached, but can you just talk about the gives and takes of deciding to increase the dividend despite what obviously, I guess, the market seems quite concerned about, the debt covenants, and so considering no one can quite know how bad things are going to get, maybe having that extra couple of million pounds around would have --- would be useful down the road? Could you just discuss that a little bit?

Yes, well, it's a question of balance, really, Craig. You probably know that we've had a consistently high dividend policy for many years, but it really calls for a 10% to 12% dividend increase over the cycle. And if you look back, we've had a compound growth rate of dividend at around 11%, so we've been bang in that range in recent years, including last year, when our profits were down. We gave an increase in the 10% to 11% range.

So, on the one hand, you have regard to the dividend policy. On the other hand, we have to acknowledge we're all seeing, very forcibly, we live in very uncertain times, and so a degree of prudence is appropriate. But a lot of our shareholders, particularly in Europe and the U.K., the dividends are very, very important to them. So we try to weigh up all those conflicting things in many ways, and we felt that giving a dividend increase was the right thing to do. Having a zero increase or cutting the dividend was the wrong thing to do.

Probably in this particular climate, paying a 10% to 12% dividend increase was also not quite the right thing to do. So we've taken all those things into account. The balance we concluded upon was a dividend increase of 3.7%, to reward shareholders, if you like, that do value the dividend.

Then to be honest, the covenanting issue wasn't a big factor of the dividend increase because, for the year as a whole, the difference between a 10% dividend increase and, say, a 4% dividend increase is only about GBP15m or GBP16m. And taking your point, it's worth having, but it doesn't make a whole bunch of difference when you've got GBP1b of spare facilities. So the decision to reduce the rate of dividend growth was more balancing out those factors I referred to earlier rather than (multiple speakers) my concerns over the convenants.

Understood, yes. I guess what I was implying was no dividend growth would have even been more our preference, but I guess, like you're saying, you're balancing that versus your other shareholders who might have different views on the importance of a dividend.

Exactly. It's a judgment call and, hopefully, we've struck the balance just about right.

Right, okay. All right. Well, thanks guys, very much.

Thank you.

At this point we have no further questions.

Okay, thank you. As we wrap this up, Steve and I are very appreciative of you taking the time and your interest in Wolseley. I guess we just want to leave you with these thoughts.

Obviously, we're faced with some very challenging decisions. As we've demonstrated in the past, we'll continue to put emphasis on reducing our costs. We certainly have even more emphasis in the area of steady cash flow generation, and we'll be accelerating that, as well as continuing to restructure the business, based on the local economies of where we operate in all 5,000 plus locations.

So, again, thank you very much for your interest in Wolseley, and I wish you a good day.

Ladies and gentlemen, you may now disconnect.