Group Chief Executive’s review

As this is my first review for Wolseley shareholders, I should open by saying how aware I am of the responsibility for leading this Company into better times. Wolseley has a great importance to thousands of customers, to many corporations worldwide, to our shareholders and to all those in the communities we serve. In common with many businesses, we are facing tough times and the downturn in our markets and the wider economies of the world shows little sign of abating. A key short-term priority will be to steer the business through this, to support our customers while working steadfastly to restore Wolseley to profitable growth in the future.

Over the past few weeks since joining Wolseley and visiting many of our operations, I have seen at first hand the inherent strengths of our businesses. We have leading market positions in many of the segments in which we operate, the quality and dedication to our customers of our front line people is impressive, and the business model is fundamentally sound. Wolseley operates in an attractive industry sector where the long-term drivers for construction materials distribution are positive in all the geographic regions where we operate. Ageing housing stock and demand for new housing and remodelling should remain strong over the long term and the vast majority of the businesses have excellent customer franchises and operate in highly fragmented markets. There is lots of growth and market share to go for.

However, the recession and its recent impact on Wolseley‘s financial results highlight the cyclicality of the business. While a downturn was anticipated, no one could have foretold the unprecedented market disruption and global economic downturn of the last 12 months. With roots in economic imbalances across many countries, the downturn has weakened many and the path to recovery is far from certain. In a number of ways the recent economic turmoil has redrawn the map in terms of future trajectories of our markets and consequently will require Wolseley to adapt to these harsh new conditions.

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With this call to action as a backdrop, in the current environment we will remain focused on driving operational performance. We will continue to lower the cost base, but without losing sight of the need to position Wolseley strongly for the upturn. We will do this prudently and according to the markets we serve. At the same time we will sustain our businesses that continue to operate through unprecedented pressures, challenges and change. What the last 12 months has shown is that actual conditions have proven to be far worse than anyone expected, so we cannot be complacent about what the coming months might bring.

Alongside profitability, the delivery of strong cash flow is also extremely important. Our aim will be to deliver this through revenue growth and operating efficiency, supported by disciplined use of capital expenditure and working capital. The delivery of strong cash flow provides us with the opportunity to reinvest that cash to grow the business and to reward shareholders. It is encouraging that during 2009 challenging targets for working capital have been exceeded and across both continents actions have been taken to reduce capital expenditure and dispose of non-core assets and businesses. We will continue to keep the organisation focused on driving sustained working capital improvements and keeping up the momentum.

Finally, we will continue to place a huge degree of emphasis on improving customer service at the local level so we beat the competition where it counts – at the front line. Very often Wolseley‘s businesses compete close to where our customers operate their businesses. This makes it particularly important that we are better than the competition, especially in terms of product availability, competitive pricing, advice, correct billing and collections, as well as on-time in full delivery. To achieve this we need motivated and skilled people at the front line, supported by accountable local management. I passionately believe that excellent customer service is the heart of every successful business and an area where we can always improve.

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While managing short-term performance remains critical, we must also prepare the Company for when our markets recover. The geographic markets which Wolseley operates in, whilst vast in terms of overall size, are also fragmented. What is more, each business has different characteristics in terms of mix of new residential construction and repairs, maintenance and improvement business, the degree of supplier or customer consolidation, the customer mix and product mix – all therefore have different gross margins and returns on capital.

In the current market conditions we have to be far more rigorous in where we choose to compete and win as well as make sure that the businesses are capable of the best performance and get the resources needed. To be successful we must focus on enduring customer franchises, with top tier competitive positions where we choose to compete – we must also focus on where we can achieve the best financial returns. Equally, we need to have a clear understanding of the best way to develop our most attractive businesses to be even more successful in the future. Consequently, to identify and prioritise where and how we want to win, I have recently initiated a review to assess Wolseley‘s portfolio in each geography and we will share the outcomes with shareholders later in the financial year.

In management style we want to be purposeful, to “make it happen” for our customers and then for our shareholders. We will anchor our efforts in securing a strategic understanding of the businesses, focusing on long-term, high quality profitability and delivering customer satisfaction. In doing this we will ensure that when the markets turn and we get back to growth, we will do so by developing and building on Wolseley‘s strengths and the most attractive businesses to get the best returns for our shareholders.

Despite the challenging outlook, our businesses all around the world are inherently sound and fully engaged in sustaining as robust a performance as the environment permits. And the restructuring we have embarked on will continue to see high levels of activity designed to reposition Wolseley successfully. My special thanks go to all my colleagues around the world serving our customers every day, and I look forward to working with them in redoubling our efforts to move Wolseley forward again and delivering profitable growth.

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