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Wolseley's Woes

June 1, 2009
The downturn's force has fallen particularly hard on the markets served by Wolseley plc.

What a difference a couple of years can make. It was barely that long ago that Electrical Wholesaling was warning U.S. electrical distributors that Wolseley plc may be the next foreign giant to jump into the U.S. electrical market and build share by snapping up scores of independent distributors.

At the time, it made perfect sense. As the largest distributor of plumbing and heating supplies in the world, and one of the largest suppliers of building materials, the giant from Reading, UK, was flush with capital and could have made a nice mix of business by adding electrical to its U.S. holdings in plumbing and heating (Ferguson Enterprises) and building supplies (Stock Building Supply). Ferguson already had lighting showrooms in some locations, and was bold about growing through acquisitions, so the next step seemed obvious.

Now, it doesn't look like Wolseley will be buying much of anything for awhile. It's busy trying to stanch the bleeding in its existing core businesses. The worldwide downturn — residential construction in particular, but also commercial construction and industrial maintenance repair and operations (MRO) — has hammered Wolseley's balance sheet.

For the three fiscal quarters from August 31, 2008, to April 30, 2009, Wolseley reported a decline of 88 percent in pretax profits (in constant currency) and a 15 percent drop in revenues.

“Recent trading has proved extremely challenging and we continue to anticipate this will be the case until at least early 2010,” said Chip Hornsby, Wolseley's group chief executive, in a conference announcing the nine-month results. The company has been moving aggressively to reduce costs.

Hornsby said Wolseley will focus on tighter cost control and strong cash generation and sees more foreclosures and job cuts in the future.

Its biggest single move thus far came last month, when Wolseley transferred ownership in Stock Building Supply to a joint venture Wolseley formed with private equity firm Gores Group. The transaction gives Gores 51 percent ownership but Wolseley retains a 49 percent stake in the venture so it can benefit from growth potential once the residential market recovers.

Cutting out Stock reduced Wolseley's headcount by 5,317 people. The company has also cut a total of 8,429 people from its continuing operations, meaning the group now has 13,746 fewer people than last August.

Rest assured we haven't heard the last of Wolseley, regardless of what the housing market may have done to it. The company has revenues from continuing operations of £10.9 billion (about $18 billion), which is about the size of the three largest electrical distributors in the U.S. — International Electric Supply Corp. (Rexel/Gexpro), WESCO and Graybar — combined.

In addition to its sheer size, recent capital raising and a new round of debt facilities have put it in position to take care of its present market difficulties and to capitalize on the market recovery, once it comes, the company said.

Prior to transferring ownership of Stock Building Supply to the joint venture with Gores Group, Wolseley's revenues were split fairly evenly between its operations in North America and its operations in Europe. In North America, its remaining operations consist of Ferguson Enterprises and Wolseley Canada.

Ferguson has continued to gain market share over the past three quarters, but revenues in constant dollars have fallen 15 percent and profit is down 32 percent. This company is the largest distributor of plumbing supplies and pipe, valves and fittings (PVF), and the third-largest distributor of heating, ventilation and cooling (HVAC) products. As of January, it had over 19,000 employees working out of 1,338 branch locations and 10 distribution centers.

“Despite increasingly competitive market conditions the gross margin was only slightly lower, with the business focusing on higher margin activities including showrooms, private label and counter sales,” said Wolseley management in the nine-month report.

Wolseley Canada distributes a diverse mix of products including plumbing, heating and piping products, including HVAC, waterworks, refrigeration and fire protection products as well as industrial pipe, valve and fittings.