Wolseley posted an expected hefty loss in its year-end earnings release, but overall we would characterise the results as relatively solid given the extended downturn in the construction sector. Sales dropped 16% on a constant-currency basis, though much of this decline was assuaged by a favorable currency translation effect because reported revenue fell only 2.5%. The firm's staggering net loss of nearly £1.2 billion resulted primarily from £1 billion in restructuring charges and goodwill impairments.
That said, Wolseley allayed our debt concerns for the time being and was able to generate cash from operations of around £1 billion because of strong working-capital management. The firm's March equity issuance and rights offering raised £1 billion, which the company used to pay down debt and avoid a covenant breach. The company's net debt/EBITDA ratio now stands at 1.4 times, down significantly from 2.7 during the year-ago period. This gives Wolseley more than £1 billion of cushion in regard to its credit-agreement covenant, which sets a maximum ratio of 3.5. The company is firmly planted in cash-conservation mode, as it has suspended its dividend and cut capital spending levels by 60% from 2007 to around £150 million, a level it expects to maintain in 2010. The firm also closed 653 branches and reduced head count by more than 10,000 during the year in order to better match its cost structure to lower levels of demand, and we think these two actions should prove beneficial during a normalised business environment. Although we think the short term will remain challenging for the company, we believe Wolseley has taken the necessary steps to ensure its survival. We've slightly tweaked our margin projections for 2010 to account for a better recovery as volumes rebound, resulting in a higher fair value estimate.
Anthony Dayrit is a Morningstar stock analyst based in the United States.
