Stock Building Supply Closures

10/23/2008

23/10/2008 - 09:36

Wolseley plc, the world’s largest specialist trade distributor of plumbing and heating products to professional contractors and a leading supplier of building materials, today, October 23, 2008 announces plans for a significant restructuring of its US Building Materials Business, Stock Building Supply (“Stock”), following the conclusion of the Board’s fundamental review of the business.

Background

Stock is one of the leading distributors of building materials in the USA, with operations in 33 states. It generates more than 70% of its revenues from new residential construction and has consistently outperformed the markets in which it operates. However, US housing starts have fallen 64% from an annual rate of 2.3 million in January 2006 to an annualised 817,000 in September 2008. Despite cutting headcount by around 40% and closing 70 branches since the market peak in January 2006, Stock reported a trading loss of $246 million (£123 million) in the year ended 31 July 2008, on revenues of $3,471 million (£1,735 million). Consequently, on 22 September 2008, the Group announced that a fundamental review of the Stock business was to be undertaken.

Conclusions of the review

The Board believes that for the foreseeable future there is likely to remain significant over-capacity in the building materials distribution segment, in which Stock operates. Despite this, the Board concluded that there remains significant potential to create long term value in the business. Over the last six months, the Board has explored four principal options, including outright disposal, a joint venture with another party, complete closure and a significant restructuring of the business. Given the current unprecedented conditions in the global financial markets, concluding a transaction with a third party that recognises this long term value and that is financeable, has not proved possible. In addition, it was decided that closing the operations entirely is not an appropriate strategy, since it would be highly destructive of shareholder value, by depriving shareholders of the opportunity to benefit from a market recovery.

Accordingly, the Group has decided to carry out a fundamental restructuring of Stock to further downsize its operations in line with the deteriorating market conditions. It will focus on maintaining a presence in those markets where it is a leading player and where it will benefit most from any market recovery. For example, Stock will remain in its top states, namely North Carolina, Florida, Texas, California, Utah and South Carolina, but will exit Louisiana, where it does not have a significant presence.

The Board will keep an open mind on any future options it may choose to maximise long term value creation. The restructuring of the business will involve:

• closure of 86 branches, taking the branch numbers to 209
• exiting of 16 markets in 6 states, leaving a presence in 27 states
• further headcount reductions of around 3,000 to leave around 8,700 employees, bringing the cumulative reductions since the peak in 2006 to 55%, or 10,600.

Based on average annual housing starts of 750,000 and lumber prices of $240, these actions are expected to reduce the annualised run rate of losses by around $100 million and result in losses of less than $200 million, for Stock, in the year ending 31 July 2009. Exceptional restructuring costs of around $225 million are expected to be incurred before 31 January 2009, in relation to provisions for leasehold termination costs and headcount reductions. Included in this figure are the associated cash costs that are estimated to be around $20 million. This cash impact is expected to be more than offset by cost savings and working capital reductions, in the six months ended 31 January 2009. In addition, there is likely to be a further impairment of more than $100 million in the carrying value of Stock’s goodwill and acquired intangible assets.

The 86 branches to be closed represent around 25% of Stock’s revenue and 28% of its headcount.

Chip Hornsby, Group Chief Executive of Wolseley, said:"With the on-going decline in US new residential construction, significant over-capacity in the industry and the consequential negative impact that Stock is having on the Group’s results, it is imperative that we take further action to restructure this business. The measures we are taking will move us back towards profitability, while still keeping a presence in key districts for when the market recovers."

Online article