Wolseley Annual Report 2009
KPIs
Key performance indicators (“KPIs”)
The Group has used the following indicators of performance to assess its development against its strategy and financial objectives during the year ended 31 July 2009. Growth in like-for-like revenue and cash-to-cash days are KPIs which have been given prominence in the last two years because of the more difficult markets within which the Group was operating, therefore the Group does not have the historical information to give a five-year record for these measures. Trading margin and return on gross capital employed are both based on trading profit, which excludes exceptional items.
Previous years have been restated to exclude discontinued operations.
Change in like-for-like revenue
Key performance indicator and definition
The total increase or decrease in revenue for the year, excluding the effect of currency exchange, sales days, new acquisitions, branch openings or branch closures in the year, and the incremental effect of acquisitions, branch openings and branch closures in the prior year. The Group expects changes in like-for-like revenue in each of its markets to exceed changes in the overall level of economic activity in those markets.
Review of performance
Group like-for-like revenue reduced by 13.9 per cent during the year, compared to a reduction of 2.3 per cent in the previous year. The sharpest reductions were in the Nordic region, by 17.9 per cent, and in the United States by 16.4 per cent. The contraction in Canada was 3.4 per cent and in Central and Eastern Europe 5.4 per cent.
Performance table
Change in organic revenue
Key performance indicator and definition
The increase or decrease in like-for-like revenue and in revenue derived from branch openings or closure in the year and the incremental effect of branch openings and closures in the prior year. In the past, the Group has sought to achieve, on average, double-digit growth in revenue both through organic growth and through acquisitions. Over the economic cycle the Group has seen growth come broadly evenly from both sources. The impact of the current severe downturn on the Group’s markets is currently being assessed and it may be appropriate to revise the growth target. It is likely that acquisitions will constitute a smaller percentage of the Group’s revenue in the future.
Review of performance
Group organic revenue reduced by 16.4 per cent during the year with the net branch closures reducing revenue by a further 2.1 per cent in addition to the reduction in like-for-like revenue.
Performance table
Trading margin
Key performance indicator and definition
The ratio of trading profit to revenue expressed as a percentage. Over the cycle, the Group seeks to achieve a growth in trading profit higher than the growth in revenue through year-on-year improvements in trading margin as a result of continuous improvement in operations and the benefits of its international scale and leverage.
Review of performance
Group trading margin overall fell from 5.3 per cent to 3.1 per cent. The sharpest falls were in the UK and Ireland, from 5.5 per cent to 2.0 per cent, and France from 4.9 per cent to 1.5 per cent. Central and Eastern Europe broke even again. The US Plumbing and Heating business segment contributed 5.4 per cent compared to 7.1 per cent the previous year and the Nordic cluster delivered 4.6 per cent compared to 6.9 per cent the previous year.
Performance table
Cash flow performance
Key performance indicator and definition
The Group monitors cash-to-cash days, which are defined as the average number of days from payment for items of inventory to receipt of cash from customers. The Group also monitors the cash conversion ratio, which is operating cash flow divided by trading profit.
Review of performance
Cash-to-cash days, measured with spot exchange rates, was 28 at 31 July 2009, compared to 44 at 31 July 2008. The reduction reflected improved working capital management.
Cash conversion was 364 per cent, compared to 185 per cent in the prior year.
Performance table
Free cash flow
Key performance indicator and definition
Free cash flow represents cash flow from operating activities less maintenance capital expenditure, tax, dividends and interest. The Group seeks to generate sufficient free cash flow over the business cycle to fund normal bolt-on acquisitions and expansion capital expenditure.
Review of performance
Free cash flow increased by £280 million from £571 million in 2008 to £851 million in 2009, despite a reduction of £340 million in trading profit, as a result of a reduction of £846 million in working capital.
Performance table
Return on gross capital employed
Key performance indicator and definition
The ratio of trading profit to the aggregate of the monthly average of shareholders’ funds, minority interests, net debt and cumulative goodwill and acquired intangibles written off. The Group has previously targeted to deliver an incremental return on gross capital employed at least 4 per cent in excess of the pre-tax weighted average cost of capital. A major driver of decisions relating to acquisitions and capital expenditure has been the incremental return on capital generated by those investments. The Group is currently assessing whether this return on capital target continues to be appropriate.
Review of performance
Return on gross capital employed decreased from 12.7 per cent to 6.9 per cent reflecting the reduced trading margins in all the Group’s businesses and the increased level of capital employed after the rights issue. This return was below the Group’s estimated pre-tax weighted average cost of capital of 9.7 per cent.
Performance table
Other performance indicators
The Group also uses a variety of other financial and non-financial measures to monitor performance against the targets and objectives set by the Board.
Human resources
The safety of Wolseley’s people is regarded as paramount and lost time incident rates are monitored closely in each of the major businesses.
Wolseley’s staff provide key competitive advantages, as customer relationships are maintained by branch personnel or members of the sales force. Staff turnover rates are considered an important indicator and are reviewed regularly. The overall turnover rate for 2009 of 26 per cent (2008: 31 per cent) and the 2009 turnover rate of 16 per cent at management level (2008: 17 per cent), reflect the extensive restructuring carried out during the year, which has resulted in business disposals, branch closures and reductions in staffing levels both at remaining branches and in management. Further staff reduction measures may be required in 2009/10.
Restructuring costs and benefits
Since the downturn spread from the US residential market in the second half of 2008 and began affecting the remainder of the Group’s markets, management has implemented an aggressive restructuring programme across the Group’s businesses to preserve cash and reduce costs. Between 31 July 2007 and 31 July 2009 the Group closed or disposed of 902 branches, disposed of six non-core businesses, reduced headcount by 28,000 and took measures to preserve cash, such as suspending the payment of dividends and reducing planned capital expenditure. In relation to the restructuring of continuing operations, the Group has recorded exceptional charges of £70 million in the year ended 31 July 2008 and £346 million in the year ended 31 July 2009.
Cost-benefit analyses of each restructuring action are prepared locally and submitted to the Group head office for review and challenge. If actions are approved, each business reports monthly on the costs incurred and the benefits realised to date and forecast to be realised in the current and subsequent financial year.
Supply chain
There are diverse supply chain initiatives around the Group; their performance is monitored by both financial measures, such as annualised savings in transportation costs, and also by non-financial measures, such as inventory turns and, for the Group’s network of distribution centres ("DCs"), the fill rate achieved, which is the proportion of orders that can be fulfilled from inventory on hand at the time of the order.
Sourcing
The Group has financial measures for the progress of its global sourcing programmes. These are primarily annual targets for the margin benefit from new supplier rebate agreements and improvements to existing rebate schemes. The Group also measures the impact on cash flow, such as through improved payment terms.
Environmental
The Group’s approach to environmental measures is set out in the Corporate responsibility report. In accordance with the reporting guidelines suggested by the UK Government’s Department for Environment, Food and Rural Affairs, the Group has tracked performance applying a range of environmental measures, including those relating to carbon dioxide emissions, waste management and water use which are disclosed in the Corporate responsibility report.
Private label
Most of the Group’s businesses aim to increase the proportion of sales of private label products, as these generally command higher margins. Overall the percentage of the Group’s revenue attributable to private label products has increased from 6.0 per cent in 2007 to 7.7 per cent in 2009, and initiatives to increase this further are tailored to the opportunities and circumstances of each business.
Business Change Programme
The Group’s Business Change Programme has a range of objectives, including increasing productivity, enhancing margins and driving like-for-like sales growth. Another objective is to improve the resilience and security of the Group’s information technology infrastructure while reducing its operating cost. In advance of the large-scale deployment of new applications, the Group’s Global Service Delivery IT organisation has begun operating, and has taken responsibility for supporting and maintaining networks and legacy business applications in a number of regions. The organisation has service level agreements with each operating company it supports and reports its performance against these agreements monthly to the IT Executive. The key measures are the percentage of time for which systems are available, the number of service calls created, closed and outstanding for each service desk, and the number and percentage of identified vulnerabilities that have been cleared.
Stephen P Webster
Chief Financial Officer