Financial review

After taking account of currency translation, Group revenue from continuing operations decreased by 2.5 per cent from £14,814 million to £14,441 million.

Operating result from continuing operations decreased by 209 per cent from a profit of £555 million to a loss of £606 million, after charging exceptional items of £458 million. Trading profit from continuing operations decreased by 43 per cent from £787 million to £447 million, before deducting amortisation and impairment of acquired intangibles of £595 million (2008: £162 million) and exceptional items of £458 million (2008: £70 million).

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Currency translation increased Group revenue from continuing operations by £2,439 million (16.5 per cent) and Group trading profit from continuing operations by £147 million (18.9 per cent) compared with 2008.

The effect of US dollar appreciation has been to increase translated US trading profit by £100 million (27 per cent) compared with 2008. US dollar denominated profits account for 64 per cent of the Group’s trading profit from continuing operations.

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Exceptional items comprise £346 million of restructuring costs, £41 million relating to the impairment of software assets under construction, £40 million relating to losses on disposal of businesses and revaluations of disposal groups, and £31 million relating to the impairment of construction loan receivables.

Within continuing operations, the Group disposed of four businesses in the year, for proceeds of £17 million, resulting in a loss on disposal of £12 million. A further three businesses have been classified as held for disposal at 31 July 2009: their net assets are stated at nil after a charge of £28 million to reduce their carrying value to estimated sales proceeds net of costs.

The restructuring costs, and the benefits estimated to be realised in the year ended 31 July 2009 and in a full financial year, can be further analysed as the table below shows:

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Net finance costs for continuing operations of £145 million (2008: £156 million, including a one-off charge of £22 million in respect of the impairment of an available-for-sale investment), reflect high debt levels for most of the year and the effect of a net increase of £13 million in the net pension interest cost and an incremental £12 million in respect of discount charges on receivables funding arrangements. Net interest receivable on construction loans amounted to £8 million (2008: £12 million). Interest cover for continuing operations was three times (2008: six times).

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The effective tax rate for continuing operations, being tax payable on profit from continuing operations before tax, exceptional items and amortisation and impairment of acquired intangibles, was virtually unchanged at 31.8 per cent (2008 restated: 31.1 per cent).

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The loss from discontinued operations of £441 million (2008: £168 million) relates to Stock, and represents after-tax losses of £360 million for the period up to 5 May 2009, and an exceptional loss on disposal of £81 million incurred on 5 May 2009 when the Group disposed of the majority of its interest in the business and ceased to consolidate it.

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Before discontinued operations, exceptional items and the amortisation and impairment of acquired intangibles, and after adjusting for the effects of the share placing and rights issue, earnings per share decreased by 60.2 per cent from 240.3 pence to 95.6 pence. Basic loss per share including discontinued operations was 558.0 pence (2008: earnings per share of 41.0 pence). The average number of shares in issue during the year was 210 million (2008 restated: 181 million).

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In light of current market conditions, the Board is recommending no final dividend (2008: nil). The Group is committed to a progressive dividend policy and will revert to paying a dividend as soon as it is prudent to do so.

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Shareholders’ funds increased by £17 million from £3,359 million to £3,376 million. The net increase comprised the following elements:

During April 2009 the Group raised £994 million by a share placing and a rights issue net of £52 million of costs and £5 million of shares purchased by the Group’s Employees Benefit Trusts.

Net debt, excluding construction loan borrowings, at 31 July 2009 amounted to £959 million compared to £2,469 million at 31 July 2008, giving a gearing of 28.4 per cent compared with 73.2 per cent at the previous year end.

Return on gross capital employed (“ROGCE”) from continuing operations decreased from 12.7 per cent to 6.9 per cent as a result of reduced profitability and the increased capital base. The ROGCE for 2009 was below the Group’s weighted average cost of capital.

The unamortised balance of goodwill and other acquired intangibles in the balance sheet as at 31 July 2009 is £2,051 million (2008: £2,681 million) with the reduction resulting from goodwill impairments of Stock, DT Group, Wolseley UK and Benelux. The Group did not recognise any acquired intangibles in the year (2008: £64 million, principally representing customer relationships and brand names), as no acquisitions were made in the year (2008: investment of £249 million, including deferred consideration and net debt).

The balance of property, plant and equipment has reduced from £1,842 million at 31 July 2008 to £1,593 million at 31 July 2009, as depreciation and impairment charges of £286 million have exceeded additions of £94 million, and disposals of £257 million have offset exchange gains of £200 million.

The Group has recognised an investment in associate of £53 million (2008: £nil) representing the Group’s remaining 44 per cent share of the net assets of Stock.

In the US, construction loan receivables, financed by an equivalent amount of construction loan borrowings, were £163 million (2008: £237 million). The decrease reflects reduced loan originations and loan impairments as the business has withdrawn from a number of markets.

Provisions have increased from £178 million to £366 million, reflecting a net increase of £152 million in the restructuring provision, which mainly related to onerous lease commitments on branches that have been or will be closed.

The Group’s retirement benefit obligations have increased from £236 million to £341 million, largely due to a reduction of £86 million in the market value of assets held in the main UK defined benefit pension scheme. Full details of the pension schemes operated by the Group are set out in note 32 to the financial statements.

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The cash flow performance of the Group over the last five years is summarised below.

Net cash flow from operating activities decreased by only £62 million from £1,262 million in the year ended 31 July 2008 to £1,200 million in the year ended 31 July 2009, despite the reduction in trading profit, as the Group has reduced working capital by £846 million. Free cash flow was £851 million (2008: £571 million).

Capital expenditure decreased from £316 million to £157 million, as all spend across the Group was carefully scrutinised and non-essential projects were postponed.

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The Group monitors relative Total Shareholder Return ("TSR") for incentive purposes (as set out within the Remuneration report) and for assessing relative financial performance.

For the year ended 31 July 2009, Wolseley achieved an annualised TSR of minus 38 per cent, which put it in 56th position against the monitored peer group of 68 companies drawn from the FTSE 100 and the building materials and construction sectors utilised for the latest award under the long-term incentive plan. Details of TSR performance since 2004 and the composition of the peer group are set out in the Remuneration report. At the close of business on the date of the Directors’ report, the value of an ordinary share as quoted in the Financial Times newspaper was 1455 pence per share (2008: 1960 pence, as adjusted), a decrease of 25.7 per cent. The market capitalisation of the Group at the date of this Report was £4,130 million (2008: £3,111 million). No dividend has been paid this year.

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