Ferguson Enterprises Inc (FERG) 2009 Q2 法說會逐字稿

Okay. Good morning, ladies and gentlemen. Welcome to those of you in this room, and also to those of you who are listening on the webcast. My name is John Whybrow. I'm Chairman of Wolseley. And with me today are Chip Hornsby our CEO, and Steve Webster our CFO. Our thanks to you all for coming today.

This morning we announced in conjunction with the half year results a number of measures which we wanted to bring to your attention as soon as possible. These measures include a proposed firm placing, and fully underwritten rights issue of approximately GBP1 billion, additional new committed two-year debt facility of EUR1 billion available from August 2011; and last but perhaps not least, a clear strategy, focusing on our core businesses, which we believe will position the Group strongly for the future. This also includes the exit from our Stock Lumber business.

As you will have seen from our half year numbers, the worsening macroeconomic conditions continue to have a material impact on Wolseley's markets, both in North America and in Europe, and consequently on the trading performance and financial results.

Within this harsh environment, the Management Team's continued to take action to ameliorate the impact of Group's results by reducing costs and continuing to drive out cash in the balance sheet. You've been seeing that for some time now.

Regarding the USA, however, the level of housing starts continues to decline. If you go back to October, we were looking at housing starts then in the order of 750,000 per annum. We announced then another significant restructuring of Stock Lumber. Today, the housing starts are running at something around 460,000 starts per annum. Today, we announce our exit from that business. I think, ladies and gentlemen, enough is enough. We cannot go on with markets deteriorating like that.

Ferguson, by the way, is very different. It's not so dependent upon the housing starts and is doing extremely well indeed.

So given the severity of the global economic crisis, the Board has determined it's now appropriate that Wolseley should recapitalize its business through issue of equity to strengthen the Group's capital base. We also believe that combining this with a forward start debt facility, the EUR1 billion arranged with our largest lending banks, not only significantly reduces our financing risk up to 2013, but also demonstrates their strong support for us going forward.

However, our future strategy also recognizes that Wolseley needs to prioritize its resources and focus on fewer core markets, those where we have leading market positions.

As Chip will outline in a moment, Wolseley is fortunate to have some really outstanding businesses. They have strong brands and very strong market penetration, albeit sometimes a low market share, but nevertheless, the biggest in that marketplace.

The Board is cognizant that future capital allocation for investment and growth must go where we can get the necessary financial returns. The core businesses going forward are Ferguson North America, DT Group in Scandinavia, UK and France. And those latter two, UK and France have the task to significantly improve their financial return in the short to medium run.

I'd also like to make a few brief comments on the placing and rights issue itself. You can imagine we've looked at a number of options regarding strengthening our balance sheet. We concluded a bit ago that we should go for a rights issue, giving shareholders 100% pre-emption rights, and that would be the right way forward.

Over the last few days, whilst it's clear we had extremely strong support from our shareholders, it also became increasingly apparent there are significant issues regarding capacity, particularly that of sub-underwriting in the London market.

This issue is compounded for us because 32% of our shareholders are in the States. There, we cannot underwrite. So the capacity we need is somewhat larger than one would normally expect for a company who is UK centric.

It also became clear, however, that a number of our investors and other investors were interested in joining us in investing in our Company, and we decided, therefore, to go for the placing combined with the rights issue which we announced today.

We are cognizant of the dilutive impact on the smaller shareholders. We don't make this decision lightly, but we live in extraordinary times and the Board felt that the decision, decisive action to move forward on this front and secure that GBP1 billion going forward is exactly the right thing to do.

Before I hand across to Chip, a couple of personal comments, if I may. The markets across the world are particularly difficult. You know that; we all know it. In our sector, they've been difficult for a while. They're likely to deteriorate a bit more. Some I suspect actually won't deteriorate much more. I don't know; I don't know that future.

What's for sure, I think, is that they will not improve in the short run, and we have to plan for that, and we have done. We've taken out cost, we've generated cash, we will exit Stock Lumber. When we complete the placing and the rights issue, we'll have a strong balance sheet. None of that means we can relax, none of it.

We have to continue to aggressively take out cost and cash generation as appropriate. We will take the necessary mitigating actions to offset further market deterioration where it may happen. We will improve the operations where they're under-performing. And to be absolutely clear, there will be no sacred cows going forward.

We will return this business to one which is more focused, higher net margins, a strong return on capital. In short, we'll return this business to a high performing, value creating company, one which you would expect it to be.

That's me done. I'll pass across to Chip. Thank you.

Thanks, John, and good morning, everyone. As John has outlined, today's presentation is to take you through the package of measures that we've announced today, that we have the objective of removing the balance sheet risk. But equally as important, positioning the Group strongly for the future through the greater focus on our core operations. This is fundamentally a different approach to the business.

We plan to be well positioned to trade through the tough environment and come out the other side in a winning environment, in a winning situation and a very strong position. I'm very confident this transaction we've announced today will do exactly that.

Over the last several days during the pre-marketing announcement, we've had a very good reception from our shareholders. The areas that they've really embraced is the strength of the business, with the refined format which I will describe to you shortly.

In a moment I'll take you through the key elements of the strategy we've announced today, and remind you as well of the actions we've taken in the last 18 months to create a leaner and fitter business.

I will also give you a quick update on the recent actions with regards to restructuring during the first half. Following that, Steve will give you a full overview of the rights issue itself, as well as a quick summary of the half year results which we brought forward from May 23 -- March 23 to today.

Finally, I'm sure many of you will want to ask your questions about today's announcements and we'll take those at the end.

What we're describing today is refining the Wolseley portfolio. However, I want to be clear; it's not a change to the business model. In our view, success and distribution comes from one specific attribute, scale and efficiency, which creates a higher level of service to our customers and ultimately will lead to superior returns. I plan to discuss in great detail this morning about scale and efficiency and how that's measured against our businesses.

As you look at the chart here, I want to point out that Wolseley's return over the last 25 years has averaged 18%. Certainly, that has not been the case the last couple of years. Our plan going forward is to return to those levels as quickly as possible, taking into consideration the current business environment. This is a comprehensive package with a clear strategic focus, much less complexity than what we've had in the past. And again those returns are how we're been driven forward.

As you look at the Group strategy, we as a Board took a cold hard look at the business and determined that our core businesses where we have critical mass, scale and efficiency was how we would proceed forward. As John indicated, we've narrowed this down to four key pillars, two of which are in excellent shape; Ferguson and DT, and I'll give you more specifics in just a few minutes. The other two will require re-positioning, which is already underway in both the UK and France.

Where Central and Eastern Europe is concerned, we have announced we're doing a strategic review by the end of this financial year. The intent several years ago was to create critical mass through acquisitions and new branch openings, and unfortunately, that capital is not available today, as well as markets that we see beginning to deteriorate. The only transaction that we've completed so far is we did sell the Hungarian business last month to management, however, realized it was only EUR30 million in total. The balance of that evaluation will continue between now and the end of July.

Moving on to the businesses; in particular, North American plumbing. This is made up of Ferguson and Canada; extremely high quality business with impressive performance. They've got the highest return on capital in the Group, and represents now nearly half of the Group's total revenues. They are definitely the benchmark for scale and efficiency. Scale, they're the largest player in the US. However, they only had 10% market share, which is indicative of how fragmented the market is.

From an efficiency standpoint they've matured a distribution center that has truly become a competitive advantage that no-one else to date has been able to duplicate.

Tied into efficiency is working capital. They've made dramatic improvements in the last two years. An example of this is they've reduced their inventory by 25% in days, yet they've improved their fill rates to customers; again, the magnitude, the scale and the overall efficiency of that distribution network.

Canada, the integration with Ferguson is going very well, and the plan is to take advantage of the infrastructure as well as that DC network. Realize that the opportunity is there for Canada in the area of non-residential where they have very little presence today. And many of Ferguson's top sales force are moving into the Canadian operation to position us accordingly. They also have opportunities to improve their gross margins which today run about 200 basis points below Ferguson, and our intent is to close that gap over time through again the scale that we have in sourcing. Bottom line is in North America, there's nothing to fix, but there is huge opportunity for upward potential.

Moving on to the UK and Ireland. Certainly, the Irish market has been extremely difficult over the last 18 months. We've moved from positive earnings to a loss making situation, most of which has occurred in the heavyside. We had a clear objective to return that business to the historic levels of profit of 7% or better. The key thing that we'll build off again is scale. They have a leading market position in lightside, with the best net margins in the industry in the UK. Lightside totals about 40% of the total UK operations.

We will plan, however, to refine the portfolio, to review our business positions in markets such as -- or areas such as heavyside, electrical, [parts] center to be certain that we can improve our performance. From an efficiency standpoint, I'm also very pleased with how much progress they've made again in the area of working capital, which is demonstrated in our total results.

Moving on to France, we've looked at this very closely as a Board. And the reason that France continues to be part of our portfolio is primarily in the area of scale. It's the second largest market in Europe, and we have leading positions in both heavyside and lightside, being number two in each. We can certainly appreciate how difficult the French market is from a flexibility standpoint, but our Management Team has been working aggressively to reduce cost over the last 12 months, but we've got a long way to go. We're committed to improving that performance; however, realize we have no plans for future expansion CapEx until this is corrected. And I will remind you, as you can see on the chart, France is a relatively small portion of the Wolseley Group going forward; less than 15%.

Moving on to the Nordic area, we certainly acquired a quality business two years ago in DT. They've demonstrated this by growing their profits faster than sales. They do have scale. They're the largest in the region, only 10% market share, which again is indicative of the opportunities that are presented to us in the future.

From an efficiency standpoint they're very tight operationally. They're best in class and working capital with single-digit working capital ratios, probably some of the best in the industry, and certainly a continued benchmark for us internally. The downturn in the Nordic area has been brutal, but I have been pleased with how our Management Team has responded so quickly.

Now moving on to Stock. Comparing this business to our objective of building scale and efficiency, there are very unattractive characteristics to the balance of the Group. Why? Because of the exposure to a single commodity. Over 40% of their revenue comes from Lumber, as well as a single business sector, 70% from the residential -- new residential housing. And despite the aggressive cost reductions we've taken, reducing staff by over 50% in the last couple of years, we still lost $123 million in the first half.

This business continues to bleed cash at about $200 million annually. And the outlook unfortunately is not a lot better, where it's not expected to return to a 1 million housing starts -- again, that's comparable to 2.2 million just three years ago -- for three more years. Therefore, as John indicated, we are determined that we will exit this business by August 1 this year.

Now we do have interested third parties. We're well in discussions with them, and our preference would certainly be to do a joint venture. But we are being clear. Our plan is to exit that business by the end of this financial year.

To do a quick recap on the management actions that we've taken, as you can see by the chart, we've taking decisive action at reducing our cost, and that will continue. We've focused on working capital and it's had an enormous impact on our cash generation. We've taken our CapEx and cut it in half. And we will continue to take these actions for the balance of this cycle. Again, we reiterate we see that this whole setup that we've announced today in the circumstances is that we will continue to take the actions necessary.

Now I'd like to turn it over to Steve to go over the financial aspects of what we've announced today, as well as the half year results.

Good morning. I'd like to start first of all with the equity issue announced this morning. Let's just remind ourselves of the key reasons for the equity issue. The net proceeds will enable the Group to substantially strengthen the balance sheet and overall financial position of the Group; secondly, to focus investment on the core businesses that Chip's just describe; thirdly, return to a profitable focused growth strategy as the markets recover; and finally to improve future access to sources of capital, and I'll come back to that in a minute.

As John's indicated already, the Board did consider a range of alternatives, as well as the equity path we chose. Those options included renegotiating existing facilities, which we felt not only would be an expensive option, but may impose additional constraints on the business which may not be in shareholders' interests.

I'll now take you through the key points of the proposed equity issue. Through a combination of the placing and rights issue structure, we hoping to raise gross proceeds of GBP1.05 billion, which we'll use to repay indebtedness. As far as the placing is concerned, we expect to raise GBP270 million in a firm placing of 120p per share. The places will have the right to participate in the rights issue. We're expecting to raise GBP780 million in a fully underwritten rights issue, 11 for 5 at 40p per share. And that's before the 10 for 1 share consolidation which we're also proposing. The firm placing of the rights issue are inter-conditional, and do require approval at the forthcoming general meeting.

Let's have a brief look at the rest of the timetable for the issue; fairly self-explanatory. As you can see today, we've accelerated our interim results to coincide with the rights issue announcements. The general meeting will take place on April 1, 2009. Dealing in new shares nil paid will commence on April 4, 2009. And new shares fully paid will commence trading on April 24, 2009.

This next slide shows the pro forma position assuming we do apply the GBP1 billion net proceeds to pay down debt, which is the intention. As you can see, the balance sheet is significantly strengthened by the transaction. The net debt to EBITDA ratio of 3.1 times at January 31, 2009, forced a 1.9 times on a pro forma basis after the rights issue proceeds. We're confident that gives us significant headroom to ensure continued covenant compliance right through this cycle.

In addition, our gearing ratio is also reduced on a pro forma basis to 36%. In addition to strengthening the balance sheet by raising just over GBP1 billion relating to the equity issue, we also put in place a forward start facility, which gives us an additional EUR1 billion of bank facilities for two years commencing August 1, 2011. One important point to make right up front is there is no change to our existing debt facilities.

The purpose behind this forward start facility is to be proactive in significantly reducing the refinancing risk in the period running up to July 2011, when our main EUR2.5 billion facility expires. We're delighted with the support we've received from our five core relationship banks, and thank you for those in the audience that are representing those banks. Much appreciated.

Provides an even greater degree of certainty relating to the Group's liquidity position right through to August 2013. We recognize the importance of having the appropriate capital structure going forward, and intend to achieve an investment grade credit rating by January 31, 2010. In relation to our future hedging strategy, we propose to rebalance the currency denomination of our debt in line with the EBITDA to -- net debt to EBITDA ratio for the Group as a whole.

So in summary, we've significantly strengthened our financial position by way of the GBP1 billion rights issue, and equity issue, by dealing with the refinancing risk in 2011 and creating a very strong liquidity position right through to 2013.

Now on the results very briefly. This slide as usual summarizes the key financial metrics for the Group. As you'll know, currency translation has a beneficial impact on the P&L but, of course, an adverse effect on the debt as at January 31, 2009. So for that reason, what I'm going to do is just concentrate on the constant currency numbers on this slide, which are more indicative of the true run rate and change on revenue and profitability.

So on that basis, the revenue was down by just over 12%, trading profit down by just over 51%, and profit before tax and before exceptional items and amortization impairment of acquired intangibles, quite a mouthful, by 65%. I'll come back to the GBP262 million of exceptional costs in a second.

Most of the GBP800 million you see there for impairment relates to goodwill impairment provisions we've made at January 31, 2009, and they total GBP735 million. The GBP735 million comprises of writing off the remaining goodwill relating to the Stock business, and that's GBP277 million, and that's obviously reflecting the decision we've made to exit the business by August 1, 2011.

It also includes a write-off of GBP349 million relating to DT Group, GBP88 million relating to the UK, and GBP21 million relating to the Benelux Cluster. You'll see my reference to two bottom lines on this slide. The very strong cash flow performance that both John and Chip have already referred to, and I'll come on to that now.

Cash flow from operating activities increased from last year's half -- last half year's number GBP367 million to GBP573 million. This reflects a very strong working capital performance where we've generated GBP383 million of cash and improved our cash-to-cash working capital days by 17% over the last year. This keeps us well on track for achieving a minimum 10% improvement in the working capital cash-to-cash days during this current financial year.

The low CapEx reflects the decision to curtail expenditure and is in line with our target spend of around GBP108 million -- [to] GBP80 million for this current financial year. The other line, two thirds of the way down, principally relates to the adverse currency translation effect of just over GBP400 million relating to the translation of the foreign currency gap at January 31, 2009.

This slide I think you'll be familiar with from previous results announcement. It takes you through the detail of the Group's debt covenant calculation for the 12 months ended January 31, 2009. We've already seen the net debt to EBITDA ratio at that date is 3.1 times against the covenant limit of 3.5 times, so we're well within our covenants at the end of the first half. And that does reflect the continued success and focus on the cost reduction and the cash maximization measures, despite those adverse currency movements that I've just referred to.

I thought it would be helpful on this next slide to give you a summary of the exceptional costs we've incurred in the six months to January 31, 2009, which also takes into account the movements on foreign exchange in the period. So in total, we've charged exceptional restructuring costs of GBP262 million. That is in relation to headcount reductions of just over GBP10,000, and annualized savings of just under GBP400 million.

Since the half year, we've continued to take action as appropriate, and this has included action to close 74 locations in Ferguson, which is mainly in the smaller footprint stores, the closure of Silvan, Sweden, the DIY business, and further action to address the downturn in the Irish market as well.

So finally on the outlook; we're confident that the measures announced today represent a comprehensive package to strengthen the balance sheet, and strongly position the Group for the future. We believe the downturn in the UK, Irish and the Nordic economies is likely to be more severe than experienced in the rest of Continental Europe. If markets do deteriorate further than anticipated, we will ensure further actions will be taken to mitigate the resulting impact. Whilst actions will continue in our core businesses to reduce costs and generate cash, there will be a clear focus on margin management, serving the customer base, and developing market opportunities.

I'll now hand back to Chip.

Well, that was indicated this morning. This is definitely a comprehensive package to try to cover every component of Wolseley's future. As Steve just reviewed, the financial restructuring removes the balance sheet risk and gives us the healthy liquidity. I've stated our objective of building scale and efficiency pertaining to each of our businesses. We've also redefined our future business structure, each of the four core businesses, and we've stated our objective to return to the higher levels of return in the past. We will continue to reduce cost and generate cash through the balance of this cycle.

But what's most important, more important than anything else, is that we will be better capitalized, and not only survive the balance of this downturn, but gain share from our weaker competitors as they suffer through the same consequences. Again, we're confident that we're well positioned to move forward.

So in closing, I can sincerely tell you that as a result of the actions we're taking today, my confidence in the future of the Group is stronger than ever.

We thank you for your time this morning. We're certainly available for questions. We'd ask that you please state your name and try to limit it to two questions if at all possible.

Thank you. Good morning. Nicolas Godet from Exane BNP Paribas. One question for you. If you have to close Stock, which I understand is not your preferred solution, even if you have to close it, who can do this business profitably? There's still a need for this business in the US I guess, and even now in the downturn. So who do you think will do this business if even you exit this activity?

I think first off, you've got to realize is, even if you look out three years, if we get back to 1 million housing starts, you've got a capacity that's half of what it was, or 25% to 35% below what -- maybe the averages of GBP1.5 million.

To our knowledge, virtually everyone in that industry is struggling because of the overcapacity and because of the -- I think the key component is, is trying to sell something that at one point was worth $400 per thousand, but now worth $200, but I haven't seen anybody that's clearly demonstrated that. I think it's a combination of continuing to downsize the footprint because it is going to be smaller. I think you've got to wait for competitors to exit the market and position it accordingly.

So bottom line is that's why we just don't feel longer term, even when it improves, it fits our objectives again of building scale and efficiency with the rest of the model.

Let's imagine that between now and August 1, you see a big number of your competitors just doing the same thing, saying enough is enough, we're closing that business. Will that lead you -- could that lead you to change your point of view and keep Stock because you're saying, well, there's huge capacity closure so let's save this business?

The only influence it would have is if we go down the path of doing a joint venture. But again, I think there's still so much capacity that still -- that has to come out of the market, and that will --. It hasn't occurred to date. This has been going on for three years. So no, it wouldn't change our position. It may change the opportunity that we would have to participate in the uplift sooner, even at just 1 million housing starts. But again, we're determined to exit that business.

Okay, and my second question is any other business, I'm not talking about a country, but any other business that you think you could close as well as Stock if the market continues on this path?

Again, I think the unique thing that we're trying to describe with Stock is because of the -- how narrowly focused it is with the US new residential market and that commodity. So to answer your question, no, there's [nobody] to compare to that, but we will re-evaluate different components of the business to reposition them to be certain they can meet our return objectives.

Yes, Mark?

Mark Stockdale, UBS. Just one on France. Obviously, it's been poor CAGR and EBIT. I just wonder if you could just elaborate at all about the extent and depth of restructuring that you're planning there, and if possible the cash costs it involves. I presume it's some quite material restructuring that's actually going to go on, and I don't know whether you can share with us your plans at this stage.

Sure. Let me tell you that what we've done over the last 12 months operationally, and then Steve can make some comments as it relates to the impact on the financial aspect.

A little over a year ago, we determined that we had to begin to get our costs under control. They're far and away the highest that we have within the Group. We announced restructuring plans. We had approval through the social committees, the administration down there, if you will, to take 400 people out. We've accomplished that. I want to indicate that we've accomplished a lot more than that, but I've got to be cautious as to how we approach that.

Our intent is to continue down that path. We've also begun the restructuring last summer of the lightside business to get away from the fossil fuel boiler component that we've been successful with in the past but the industry has moved on. We're much more focused on a renewables aspect to that, and that's -- our people are being trained and positioned to be able to be a factor there. And we're going to have a much higher degree of emphasis on sanitary or plumbing, particularly through our showrooms.

The footprint has got to be smaller. We've got to consolidate to be able to take costs out of, not only the overhead from a labor standpoint, but also our facilities, etc. And that will be ongoing over the next couple of years. And quite honestly, we need to see a lot of progress as we go forward.

I still have a high degree of confidence in the Management Team that we have down there, but it is a very slow process. It requires patient pills on an ongoing basis, but I am pleased that we've made the progress that we have in the last 12 months, but we've got a lot further to go.

Steve, do you want comment on anything? We don't have any plans for expansion CapEx. Maybe some restructuring components that will take costs out of one area, three branches down to one or three branches down to two.

Based on what we know now, Mark, we wouldn't expect any material additional cash outflow. What would expect is an improved working capital performance actually from France, particularly inventory improvements, so there should be some cash coming in there. But based on today's knowledge, no material additional cash costs.

I think also, Chip, just a comment here, it's not just a simple restructuring here. We're not just hoping to costs out. I know you fear is that suddenly there's more and more exceptionals come in. It's about efficiency, working capital, which doesn't cost a lot, efficiency, and also repositioning. It's about getting ourselves to address the market as it has developed, and we need to see how successful that is in conjunction with the normal efficiency measures and doing, as Chip says, to get cost out.

And ,y second one was on working capital, Steve, which a tremendous performance first half. I just want to come back on what you said that you had 17% increase in like-for-like days and that put you well on target for 10%. Were you meaning by that that you recognized you've overachieved and that's going to unwind in the second half? Or should we think that you'll repeat 17% and you've raised the bar.

Well, it's why I cleverly inserted the word minimum 10%. Mark (inaudible) to be higher than that.

No, we've had a great performance, no doubt about that. There's also been quite a bit push around January and delighted incidentally with the receivables performance, which has gone down against the current market conditions, as well as the inventory and the payables side.

We're not going to give that away. We're going to build on that. We're going to improve still further. We still think we have further improvement to go, not just in this year but beyond that. So we expect to maintain that and improve upon it.

Thank you.

Howard Seymour from Numis. Question on Stock, and not surprisingly I suspect. We do, obviously, have element of yardstick of how much it can cost you to close parts of the business because you've obviously closed down 28% to date at a cost. You probably don't want to give a figure out, but I can ask in general terms, would you regard the costs of closing the rest of the business down comparable to those costs that happened effectively in the first quarter of the business?

Quite right, Howard, first of all, that we won't give you a figure, partly because we haven't made that decision. We obviously have that figure in our minds, but what we don't want to do for reasons I'm sure you'll appreciate is impair the disposal process right now in any way, so that's why we're being a little bit coy.

You can certainly make some guesstimates based upon the cost we've incurred so far, the exceptional costs we've incurred in relation to headcount reductions and branch closures. Inevitably, it's not quite as simple as pro rata-ing the thing up. Remember, we've written off all the goodwill and the intangibles now, so that there's nothing left there.

And I know a lot of you will be interested in the cash flows and, again, I can't give you numbers for the same reason. But what I can tell you is that -- if we assume the worst case by the way, this is the worst case scenario and we have to close the business, what would happen in practice is there would be some relatively small cash costs in the period around July 31, '09.

You will then probably have an inflow of cash relating to the realization of assets and selective disposals of certain parts of the business. Then, of course, the remaining cash obligation really relates to lease obligations, which are five to seven year average remaining lives. So in normal circumstances, you'll be paying that cash out over that period, whereas of course in practice, we would probably come to an arrangement with the landlords and disturb that arrangement in some way that will be mutually beneficial.

So that probably gives you a bit of an idea of the flows, but what I can't give you is any further idea of the quantum right now.

But to reiterate, Howard, I think the key thing, as Steve indicated, is about 20% plus of that business is still very profitable today because it's in the non-residential sector and it sells steel doors and windows, or one component is roofing, which is again is 90% replacement. So there is some real value there.

That relates to my second question, Chip, which you mentioned interested parties. Now, obviously, you might have been going through a long period of concern, etc., but are you seeing more interest coming in on Stock than previously? Because, obviously, Stock has been debated for quite a long time internally and, therefore, you've seen the machinations of this.

More in the way of number of parties, we do have a competitive process going. What we didn't have last fall was we were with a single player and the financing fell away because of the credit crisis, if you will. So yes, we have more players involved, at least to date, and we're working that. We begin due diligence next week. The intent we'd have this completed by the end of April is where we're headed to try to accelerate this as much as possible.

The initial offers or, whatever it is, are certainly intriguing, but we'll see what it involves.

Yes, okay.

Thank you, Tom?

Good morning. It's Tom Sykes from Deutsche Bank. I wondered if you could just give some comments about the movement, if you can, in the net debt since January 31. Obviously, there was a push in the period in the run-up to that, and just your view on perhaps guidance for net debt for the year-end, or at least a view on whether it's higher or lower now.

And maybe if you could give some comments on current trading since January 31, in particular the run rates in organic growth; that's including and excluding the Stock business, please.

Shall I comment on the debt, Chip, and you pick up the trading?

Yes, then I'll do the trading.

Okay. Yes, as far as the debt movement goes between December 31 and January 31, there was a GBP0.5 billion reduction. And there were three things going on there. First of all, the seasonally -- December 31 is the seasonal peak of the debt, so it's normally comes down from January through to June, so there's a seasonal element. Secondly, the foreign exchange impact was different. The exchange rate has improved marginally, so there was GB100 million reduction in debt related to ForEx. The rest of it was really working capital reduction and we said in the trading statement in January, we expected a very strong cash flow performance for those reasons and we delivered it.

And it was every area, actually, inventory came down very strongly. The receivables, as I commented a second ago, there was a great push to collect those, not just to help the cash flow performance, but to minimize the risk on bad debts. I think, obviously, the more proactive you are with customers, the more you get cash in, the less you have to worry about the receivables provisioning side.

And on the payables side, we have over the past six months or so entered into new term arrangements with suppliers. Some of those terms have kicked in before, some of those new terms kick in at January 31 as well.

So really, that strong cash flow performance was across the board in terms inventory, receivables and payables, but does reflect some seasonality. We would expect that there to be further reduction in debt over the course of this year.

From a trading standpoint, obviously, it's the first week of the month, so we haven't really closed out the month of February yet. Just to indicate that it's probably pretty much on track with what we've forecasting; again, not a dramatic change one way or the other. On average, I'd say the US, mainly Ferguson, was above forecast and maybe Europe was slightly off. But in general terms, based on what we expected, we were pretty close, at least from what I can see in a revenue standpoint.

Sorry, just a follow-up on the potential reduction in the net debt. What cash restructuring costs have you got to come through that you already know about in the second half of the year?

There's about another GBP30 million or GBP40 million still to come through, obviously, subject to any further decisions we might make.

Thank you.

Over here, Clyde.

Thanks, Chip. Clyde Lewis at Citi. I'm going to try for three if I may.

Okay this morning.

On Ferguson, can you just say a little bit more about where you've positioned the business now, in terms of what you're expecting to see in terms of market conditions? Obviously, the focus has been on Stock this morning.

But linked in with Ferguson, obviously Stock does overlap in some areas, particularly in the renovation type market. Can you say a little bit about how that relationship (multiple speakers)

Why don't we answer them one at a time just so I can really focus on -- and I'll promise I'll give you three. Where they're positioned, you can certainly the strain that has occurred with our competition since the October, late fall timeframe. Obviously, the world's moved on with where unemployment has occurred, etc., and certainly Ferguson hasn't been exempt from that.

The key component is that they're definitely gaining share. Their results are down 10% or 12% in the markets off whatever number you want to use, 20% plus depending upon the component, along those lines.

I think they're well positioned and are actually gaining share. The key component I think we've seen differently, and again, realize that most of the competition they have are small players, GBP50 million in revenue or below, and a lot below. So the revenues have dropped, their earnings have dropped or maybe fallen off totally, and now they've got to deal with a small thing called these commercial banks and their financing.

We're seeing enormous strain. We're getting a lot of phone calls from people wanting to have some conversations. It's certainly not a format that we're looking at today.

Quite honestly, I think the growth that they're going to have over the next couple of years is going to come from organic.

What they're capable of doing with that distribution center is hard to express until you've actually seen it. They're now in a position where they can ship directly to customers from that DC because, one, it's so much more efficient, two, they've reduced the inventory levels they're turning it so quickly, and they've got the capacity they didn't have when they were much busier a year and a half ago.

So I think they're well positioned. I think there's going to be great gains in market. They put this to rest, the whole issue around the balance sheet risk, again, I want to indicate that we're not going to continue to do the things we're doing, but to be able to have this set to the side where most of the people that we're competing with are still going to be dealing with their individual circumstances will be a huge benefit.

At some point, 12, 18, 24 months from now, there's going to be some substantial, and when I say substantial, maybe $100 million opportunities or whatever is, at deeply discounted ratios to acquire some business that we will likely consider.

There's really no one else in the industry, with the exception of maybe Hajoca that's of a significant size or scale to be able to participate in that. The last time this occurred was in the early 90s. Hughes was certainly a component, they were building up there their capacity, and there's no more Hughes because they went to Home Depot, and now it's Home Depot supply and private equity, and it's a completely different set of circumstances.

Does that answer your question?

Yes, thanks very much. Linked in there with Stock, as you've rightly highlighted, 20% of it's pretty profitable, and 30%, or just a bit shy, is non-housing or non-new housing. Presumably that's the bit that you want to keep, or you want to keep some sort of involvement in.

For Stock?

Within Stock yes, given again the overlap with the plumbing renovation, the kitchens, the (multiple speakers).

I'm not so sure that we'd fit in. That may be an option that we would consider, but right now retaining any portion of Stock is not at the forefront from that aspect.

The overlap that you're indicating, there is some. Realize Ferguson, even with these results, has written its residential market down just like Stock has. It just has different characteristics that they're able to not be so dependent on a single commodity.

And as you and I have discussed, or all of us have discussed, between copper, steel and plastic, the three biggest commodities, it doesn't add up to more than 15%. They wrote that up that we had the benefit of in '04 and '05. They've written it right back down in the second half of '08 with copper dropping GBP3.50 a pound, $1.35, etc.

So -- but our plan right now would be to go through the full disposal process of Stock. That may be an option that we consider after we get further into the thing when we've done some of the due diligence and see where we are. But right now, there's really -- the overlap is very limited. The only overlap that we have between the two businesses today is probably in the areas of medical care, the cost if you will, and we've been able to go out and leverage that.

The last one was on the UK. Again, like France, you flagged it up as a problem area. You've been losing a bit of market share in a couple of categories for a couple of years. Ireland's a loss maker now. Have you made management changes as well as operational changes and cost cutting? Can you maybe talk a little bit more about that?

Sure, we have brought back in Keith Jones, who we had in Zurich to do Central and Eastern Europe back last summer in the lightside. We can already see the momentum shift. Again, it is the biggest portion of the Group, the UK Group. We're confident that we are now re-establishing ourselves and turn that share, momentum in the other direction.

Based on conversations that we had at the end of the year with many of our suppliers, we're certainly beginning to go in the right direction from that aspect. Don't discount still how profitable that component of the business is, and I would envision that will continue.

The balance of the UK is really where we're focusing, and by the way, that distribution center, we've got a good way to go with it, but it has become a competitive advantage for them, because we've been able to go out and get contracts on a national footprint basis with British Gas and other subsidiaries that we're shipping it directly out of DC. And based on our meetings with them, our proficiency as far as fill rates is the highest, so that's a benefit.

Going back, we've got to look at the other components of the business. Heavyside, we are a distant fourth or fifth player. We're not going to position ourselves to be number one or number two any time in the near future. We've got to figure out what niche we're going to carve and how we're going to position that business to meet our objectives. We've got to determine what we're going to -- our path forward with Hire, exactly how profitable and what we can do to position electrical business to be -- meet the objectives that we have.

And certainly, the Lumber Timber business, the heavyside in Ireland is very challenging because the market's essentially gone and probably will be for quite some time. However the lightside, the heat merchants, tubs and tiles is still doing reasonably well in a very, very challenging market.

Let's go over here to John, and we'll come right back to you. I'm sorry.

Thanks. John Messenger, ABN. I'm sorry, Chip, but if Clyde can have three, I'm going to try it as well. He's set a precedent.

I promise you, we'll come back to you at the back there.

First one was, clearly in the last 18 months, working capital has been a critical component given the balance sheet structure. You mentioned there obviously the comments around further improvements in working capital, but can we just have some assurance that there won't be a trade-off here in terms of margin and profitability for working capital and that --? I think for some customers, you have given them some pretty sizable invoice discounts to pay early. Can we be assured that actually, given that you're going to have the balance sheet in a far better shape, the cost of debt is still cheap for the Group, but there'll be a focus brutally more on profitability rather than working capital?

I can assure you it's a discipline that we've instilled the last two years that will stick with us for a long time. I think we're much further along the perspectum (sic) if you look at it as to where we are; it's part of our DNA, if you will.

Certainly, we'll have different components that are challenging. I wouldn't want to discount that the accounts receivable side will be any easier in the next 12 months than what we've seen. I think honestly it will be more difficult. But the area and supply chain, again, it goes back to the scale that we have, but we can truly leverage that. We'll continue certainly working with our suppliers has been a key component. I think any concerns again around a liquidity position with what we've announced today we'll take care of that.

So to answer your question, yes, will we have changes or challenges that will be thrown at us that we haven't dealt with yet? Likely, but we're well prepared to take care of that.

But things like debtor factoring will be removed now, I assume?

It can't be removed immediately. We've got to sit back and discuss it because we do have, what, 12 to 24 months? I don't know exactly the timelines, but I think that's pretty accurate that we've got to --. But I would envision over a period of time the answer to that, John, is yes, but it won't be immediate.

John, just coming back to one of the points you made. We're confident we haven't traded off profitability for working capital improvement. There's no significant effect there, so there are always terms that you agree with with customers, but there definitely is no significant trade-off of profitability to get an improved working capital performance.

We certainly put, obviously, as we indicated in January, a full push to be certain that we met and we're compliant, and had our debt where we expected it to be at the end of January, so --

The second one was just, when we're thinking about the acquisitions and, obviously, the four divisions that are highlighted going forward, the Group's always had a return on gross capital employed as a key target and a return above WACC. Now the Group has been 4% ahead of WACC, acquisitions plus 5%. Can I just --? Because we're all going to go away from this, I think, and be trying to say, okay, we're through the worst in terms of the balance sheet risks, what can this Group do potentially long term? And people have been on the phone on that very point already today.

So when we're looking at the number we should be basing off, should we be using gross capital employed after these write-downs, certainly taking Stock out, or should we be thinking of those write-downs as being effectively an impairment that won't allow profit to recover back up to that kind of level?

Well, I'll let Steve comment, but acquisitions are not anything in the forefront for -- in the immediate future.

Sorry, no. I'm meaning the back of -- if you think of DT, because you had a plus 5%. Should we think that's plus 4% now in the world we're in? And should it be plus 4% on the old capital employed, as in adding back the goodwill, because you've always historically added that back into your capital employed number for the Group, whether you've impaired it, written it off or whatever. Is that --?

We haven't changed our internal rules. Obviously, that would be something we'd probably discuss if we do with -- for the Board. But Steve, do you want to comment?

Yes. I think the way we look at it on an ongoing basis, John, is if we've paid cash out to acquire a business, that is the figure on which we need to earn return, so from a performance point of view and targeting point of view, that's what we're looking for. But I think Chip indicated on his slides that the Group's historically earned around the 18%, and when you put all this together, what we're looking to do is get somewhere near towards that number.

Okay. And final one was just in terms of how you manage the business operation. Obviously, we've got this country focus here. Does that -- will it bring a change in the way you're going to manage in terms of pushing people more as the primary responsibility being at the UK level? I'm just thinking, you mentioned there, you've still got lightside parts.

Yes.

Is there going to someone who will ultimately now be responsible for improving that 1.4% out of the UK in the first half?

The accountability will be essentially focused at the country level or the -- what we call OpCo level. So the answer is, yes. So in France it would be a combination of both heavyside and lightside. In the UK it's the whole category I went to. Ferguson would be limited to just Ferguson in Canada. DT would be the entire Group, so --

And from the point of view of when we look at history, the Group has often invested for growth. Operational gearing has been obviously dramatic on the way down. It should be good on the way back up.

Absolutely.

Again, has the -- in terms of your suppression of costs, even when the markets start to turn, to actually get your margins back to where investors expect to see them, is that a priority rather than putting a lot of cost back in quickly?

Again, I go back to our scale and efficiency. We will be leaner, we will be in a position to be -- continue to gain through the course of this whole cycle improvements in productivity, and that's something that we intend to keep.

Thanks, Chip.

Let's go over here, and we'll come back to you, Tobias.

It's Joel Spungin from Merrill Lynch. Just two questions. The first is just with regards to the closure of Stock. Could you just talk a little bit more about your preference for the JV structures and exit routes opposed to just a straight closure?

And the second question is, could you just elaborate the Board's thinking since you announced that you were closing, whatever it was, 25% of Stock back in October; how your thinking developed to the points that you've reached today, and at what point you decided that you had no option other than to throw the towel in for Stock?

In answer to your first one, certainly a joint venture is our preference, obviously, to retain as much of that business as possible, particularly for the people that work there. We're certainly compassionate to that. As indicated earlier, there will be opportunities; something will be sold for US housing. Again, the market is just still in a situation with a lot of over capacity.

From a Board perspective, we've reviewed this obviously very thoroughly, we had given serious consideration to selling the business during all of '08. As we've indicated in the past, we were close to having a closure or completement -- completion on that, I should say, in the early fall. Obviously, the financing fell away with the whole credit situation.

I think the thing that has changed since then is that the market has fallen from at that point in time roughly 800,000 housing starts; Lumber in the 260,000 range, now you're below 0.5 million, and you're in a situation where it's fallen below $200 per 1000 [board] foot.

The key component is just the outlook. There's just so much over-supply there, and if it's going to take another three years to get back to 1 million starts, which is not all that exciting, certainly at that point in time the capacity would have worked its way through, it's just hard to sit back and look at going through $200 million a year or even if we can cut that to half or two thirds of that. It takes away from our ability to invest in the balance of the business, to be able to give the greatest returns, but we know we have strengths.

Thank you.

Tobias.

Tobias Woerner from MF Global. Two questions, if I may. You have announced today as well that your Central Eastern European business is under review as well, and I think there is good value to be attributed to it, although it doesn't make any earnings. Clearly, we're in a very difficult environment in terms of selling assets. [The review], does that clearly mean that this disposal is perceived as well, or how should we see this, or should we see this as --?

I think the first thing, Tobias, is to be clear that we don't plan to spend any expansion CapEx down there during this process. We have just begun the review. We have some businesses that have performed extremely well, and one of those being Switzerland. Unfortunately, it's just not big enough, but they have some of the highest net margins within the Group. They've gone through an SAP conversion and done so successfully.

We have other very small components that again are very similar in size, if you will, to Hungary. So I think we'll go through country-by-country and evaluate. I'm not indicating that we're exiting Central and Eastern Europe today. That's a process that we'll go through with the balance of the Board. We really haven't begun that, and we'll determine at that point going forward.

So to answer your question, it's still go to be -- we've still got to do a full review of that and we'll do so probably in the next 60 to days.

Chip, if I may, just a couple of strategic points to both of the last two questions actually. Central and Eastern Europe, you'll find we have businesses there which are relatively small. There are some which have a good market position in their country, Switzerland is one of them and performs well. There's other businesses there which are small.

So that begs the question, should we be in them, given our strategy is -- which is to be in those regions where we have a strong market presence and an economy of scale. So there's a strategic issue there as well as the operational issue of what their performance is within that market.

And that takes me back to the Stock question. Over the last few months, yes, things deteriorate, the market deteriorates, but also we've decided and got that clarity that we do not want to be in a business which is so exposed to one particular market and so exposed to one particular commodity. We want to be in businesses which are more rounded. Does that help?

Yes, it does. If I may follow up with a second question relating to that. And you clearly stated your core markets today, but within your core markets, I suspect you have standalone units which are loss-making I suspect or might not be loss-making. But if there are any, could you let us know what are your plans with those? Are you going to let them continue the way they work, or are you going to close them down?

Most of the operations that we have closed, I think 700 over the last two years, have been either loss-making businesses. Now again, they've not been -- I shouldn't say businesses, locations from that end. There are other components that are not sizable enough to even draw attention to, that we may need to evaluate, but I think each of the operating companies are going through and evaluating the various aspects of their businesses and sitting back and saying, we didn't do well here, let's go away and make a decision, let's consolidate, etc.

But I can't think of anything, can you Steve, that we're looking -- we're targeting, other than stock for obvious reasons, and review of Central and Eastern Europe?

I think having said that, Chip, obviously we won't tolerate underperformance, so all the business units have to earn their corn and have to meet the Group's financial criteria.

And again, the level of accountability is at the operating Company level, and they need to go back, if they've got a EUR7,000 business, whatever else it is, that's doing fasteners or something and it's not profitable, make the decision and get on with it. It's probably not big enough to sell. We've done some of the disposals that we've indicated, whether it be in France or some of the other areas that have been outside of the core business, and we've moved accordingly.

If I may push my luck with a third question as well.

Sure.

Ferguson is obviously an important business for you and is doing reasonably well in a very, very tough market.

Right.

Now clearly, behind that is a lot of non-residential demand. Can you just share your thoughts with us; what worst case you could see with the non-res market? The '01/'02 decline was obviously quite bad, 20%/30% in terms of output.

I wish I could share the percentages with you because I definitely have them, but we're not allowed to. I will tell you that that market has certainly become much more challenging since the fall timeframe. It is -- you see it in Ferguson's results. They responded accordingly.

I guess the only bit, and again, most of that is not at this time like we've had in previous recessions from over-supply. We already had a recession in the non-residential sector in the US in the first part of this decade. After the dot.com bubble burst, things dropped 2000/2001/2002, began to came back a little bit in '03. So you only had several years instead of a decade to build back up.

I think the key component we're dealing with this time is the financial aspect of things, where jobs are under construction, banks are in a different position to where they've been in the past and they've had to pull the funding.

What I have found encouraging, Tobias, though is that the injection of what they're doing out of the new administration, particularly throwing that money into the States appears to already beginning to have an impact. I can only give you one example but I'm rector of a university in Virginia. We had our budgets cut dramatically. It has been, as of Tuesday night, it's almost been totally re-established, and we're getting ready to start construction of a science building that I would have never envisaged us being able to do.

How all this filters through it's way too early to tell, but I do think that the -- we'll go through probably a very challenging calendar year '09 for non-residential, and then I think we'll begin to at least stabilize and move in the right direction.

Again, realize that there are other components, the civil or the waterworks that they're involved in, the industrial that they're involved in, the air conditioning. 70% of that's sold in the equipment areas is replacement, I don't care what housing starts are.

So their diversification and their ability to flex that -- their position because of distribution center gives them a very viable position. And don't discount the tremendous training they've done for decades and the local knowledge and the expertise they have to connect to customers as well.

Thank you.

Back here in the back and then -- okay.

Thanks. Andy Brown at Panmure's. Just in terms of the additional EUR1 billion of funding, I think a slide you mentioned there's GBP20 million additional interest costs. Does that include all the costs of arrangements? Does that include everything in terms of arranging that facility?

Yes, that's the incremental P&L cost, so it does include the amortization of the up-front fees. That's total, all-in cost, and it does commence immediately, by the way, rather than waiting 'til 2011.

Okay, right thanks. And the second one, I don't know whether you will comment on this, but is it possible to give us a feel as to how well accepted the sub-underwriting has been, the --?

Very well. We've seen dozens of -- the whole equity aspect of things, we've gone out and seen dozens and dozens of our bigger shareholders. The reception has been very positive, particularly support for the business. Obviously, they helped us design the package that we came back with, and I'm very encouraged.

Okay, thanks.

Let's go over here, and then we'll get Charlie and we probably need to wrap it up.

Morning, it's Paul Checketts at Oriel. Can you tell us of that GBP270 million, how much is existing shareholders that are taking that up?

I don't think we're --

No, we can help you by saying mostly it's existing shareholders. The vast majority of it is.

Okay. And secondly, on the profit performance, across Europe, you really have underperformed most of the competitors that we have visibility of. What is it today with what's announced that allows you to reverse that?

I think the key thing is again is we're setting a priority for the businesses that we will continue to be involved with going forward. The focus will be there and we'll be driving those objectives very hard through the -- each of those operating companies. The accountability will be there and confident that they can perform.

And -- sorry.

Sorry, I was -- I think when you look at DT, there's no doubt that has outperformed the competition; no doubt about that. No doubt the lightside business, the UK has outperformed the competition. So there are significant areas of outperformance.

Yes, again, when you look at how broad you paint all of Europe or whatever else it is, I think what we're indicating today is that we're refining the portfolio where we feel like we have the strength to build off of.

And lastly, you've talked about you're going to make more significant cuts or changes to decisions. If things get worse from now, what are your forecasts at the moment for these markets and what would trigger something a bit more --?

Again, we've done more forecasting and more evaluation in this business in the last six weeks than I could have ever imagined through this process. Unfortunately, we've been told that you'll have to read the prospectus to get all the details that are in there.

Again, we've tested everything very thoroughly. We wanted to be absolutely certain that this was the right quantum is related to that, and we're confident that it is.

I think, Paul, as also said, if things do get worse than we expect, we'll take the mitigating actions to alleviate that effect.

And we do anticipate the market will continue to decline as we go through '09.

So just to be slightly more precise, say Ferguson -- that's been a great performance, but you look at the chart and that private non-res market is really going to come under a lot of stress. What was the --? What sort of margins are you thinking we're going to trough out at?

Love to share it with you, but that's not an option today.

What were the trough margins in the past?

I'm sorry?

What were the trough margins historically?

The last time that we had a recession at all was in the early '90s, and I think we were somewhere 3.5%, but I don't -- we'd have to go back. It's in the -- I think it's probably in your packet there. It was a different set-up then. They didn't -- it was three businesses because you've got -- you had Ferguson, you had Vermillion and you had Vermillion Northwest. They've now all been integrated and certainly that distribution network did not exist.

Thanks.

Okay. Charlie, and then we'll wrap it up here.

Thanks a lot. It's Charlie Campbell from Liberum Capital. Just two quick questions really. First of all, on the freehold property, there was a thought I guess that you might sell some freeholds to raise capital. That doesn't appear to have happened. Should we rule that out forever now?

No, we still expect some selected disposals, Charlie. I think we all said before, it wouldn't be whole scale, widespread things, it would be selective. And the market is still there actually in certain areas for both sale and leaseback and straight freehold disposals. So don't rule it out, but don't expect huge amounts to come in.

Thank you. And then just one point of detail. I just wonder if you could give us Stock's depreciation charge.

It's about $60 million in a full year.

Thank you.

All right. Thank you very much for attending today. We appreciate your interest in Wolseley, and we'll look forward to seeing you again the future.