Wolseley Plc Disappoints, Axes Struggling Operations

Wolseley (LSE: WOS), the world's largest specialist trade distributor of plumbing and heating products, released half-year results today showing an increase in ongoing profits of 1.7% to £1,713m and a rise in ongoing trading profits of 7.6% to £301m with ongoing revenues up 0.1% to £6,269m. However, these core ongoing numbers mask a disappointing first six months of the year in which overall revenues fell 8% to £6,276m and profits before tax dropped 20% to £199m.

The main driver of the disparity was the French arm, which is now partly earmarked to be discontinued. Revenues dropped 10% and trading profits fell £15m to a £7m loss in deteriorating market conditions. In response the Reseau Pro Building Materials business is to dispose of 88 branches in return for a £36m convertible bond in the purchaser, Chausson Matériaux. A further 39 loss-making branches including 15 small specialist Cardor and Coverpro branches are to be closed. French restructuring contributed £63m to the £87m exceptional charges, which also included £10m for illegal external activity. Wolseley's French business made a number of unauthorised payments to a third party, which are currently under investigation.

The headline earnings per share improved 3.9% to 80.7p and the interim dividend also rose 10% to 22 pence per share. The dividend comes at a price though with net debt rising from £470m last year to £871m after £462m of dividends.

Ian Meakins, Chief Executive, commented:

"The highlight of these results is the strong performance across our US businesses with market share gains and productivity improvements. Canada and the UK have performed well in continued tough market conditions. We faced substantial headwinds in Europe, and are taking appropriate actions to protect profitability...

"We are in advanced negotiations relating to the proposed disposal of 88 Building Materials branches in the south of France, the potential closure of 24 loss making branches and detailed actions to simplify and refocus the remaining Building Materials business in France. We believe these proposals can create a strong regional player in northern France with a better proposition for our customers, a lower cost to serve and an efficient organisational structure."

With 40% of its loss-making French network on the way out and four profit-making acquisitions completed, have Wolseley put in place the turnaround required? The market reacted adversely this morning with a fall of 2.3% to 3,136p but the long-term growth prospects may be brighter following the restructuring.

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> Barry does not own shares in Wolseley.