Exchange rates push Wolseley Q3 results through deflation headwinds

Favourable currency movements helped third quarter results at heating and plumbing distributor Wolseley with revenue up 5.9% at constant exchange rates to £3.6bn and trading profit up 12.2% to £230m.

One extra trading day increased trading profit by £6m. Exchange rate movements increased revenue by £153m and trading profit by £11m.

"The commercial and residential markets in the US held up well and we achieved good volume growth, though this continued to be partly offset by weaker Industrial markets and the ongoing impact of commodity price deflation which reduced the US growth rate by 2.3%,” the company said.

“The UK heating market continued to be challenging and we continue to take actions to protect profitability. In the Nordics, after an encouraging first half, construction markets were more challenging in the third quarter.”

“Recent revenue growth trends have been weaker and we have continued to manage costs and productivity very carefully while driving better customer service and strong cash conversion."

Nine-month revenue rose to £10.4bn from £9.7bn with trading profits up to £640m from £584m.

Wolseley said demand in several of the group's markets remained subdued and it continued to experience the adverse impact of commodity deflation, particularly in the US.

Like-for-like revenue growth in the weeks since the end of the quarter was 1% and full year restructuring costs in the UK and Europe will be around £20m.

“We expect trading profits for the full year, before restructuring costs, to be in line with analyst expectations at current exchange rates,” the company said.

Societe Generale said the third quarter results were "decent" with revenue and trading profit slightly ahead of consensus.

"We were positively surprised by the strong +70 basis point year-on-year margin expansion in US business. This is despite the greater price deflation of 2.3% in Q3 2016 (vs 2.0% in H1 2016); which clearly implies that the
underlying improvement in the US gross margin on a year on year remains very strong," the broker said.

"However, these good Q3 results were overshadowed by management’s commentary that they have witnessed sharply lower like-for-like sales trends at 1% year on year growth in the weeks post the third quarter results."

"The stock has already done well recently due to strong results for peer Home Depot and Lowe. Despite the strong Q3 results; weak trading trends witnessed in the weeks post the third quarter growth could weigh negatively on the stock price today."

"However, we would highlight that margin expansion in the, the group’s largest business, is very positive and, also, the valuation is still cheap at 14.2x on 2017 estimated earnings – an 18% discount to US distributor peers. The 2017 estimated dividend yield is 2.8% with a 40% payout ratio and still some left for buybacks/bolt-on acquisition."