June 20, 2017 / 8:47 AM / 6 months ago

Cost pressure dents Wolseley's U.S. business margins

(Reuters) - Heating and plumbing products supplier Wolseley WOS.L forecast full-year trading profit in line with consensus, but its shares fell as much as 4.5 percent on Tuesday as higher costs dragged down margins in its largest market, the United States.

Wolseley, which is set to change its name next month to match its U.S. brand Ferguson, said margins in the business fell 90 basis points to 8.5 percent over the three months ended April 30.

The news disappointed the market as Wolseley had earlier said it expected cost growth to moderate over the quarter, raising hopes of greater profit contributions from the U.S. business that accounts for 84 percent of its trading profit.

“The drop-through margin in the U.S. has been disappointing ... and improvement is clearly needed,” Davy analysts wrote.

Wolseley shares recovered some of their lost ground and were down 0.8 percent at 4,847 pence by 0943 GMT.

Chief Executive John Martin said the costs were related to the addition of 400-500 associates to grow Wolseley’s existing U.S. network of 25,000.

“Now (we‘re) exactly where we wanted to be and therefore our flow through to profit, we expect, should be better in the final quarter of the year and in a good place going into our new year,” he told Reuters.

Martin said Wolseley would see increased U.S. revenue growth as it benefited from investments, recent bolt-ons and the fading cost impact. Quarterly like-for-like U.S. revenue growth rose to 8.5 percent from 6.7 percent in the prior quarter.

The company has increasingly banked on growth in its U.S. business to drive results, against challenging market conditions in its UK business and parts of its European business, which has most recently led it to promise an exit from the Nordic region.

Martin said Wolseley expected to launch an auction for the sale of its Nordic business in the summer, after noting strong interest from “strategics” and potential private equity buyers.

The firm would use proceeds for bolt-on U.S. deals, but would make investor returns if it failed to deploy cash, he said, declining to comment on the potential sale price.

Wolseley forecast it would meet full-year trading profit consensus of about 1.102 billion pounds, as since the start of the new quarter revenue growth had been broadly in line with the third quarter, while gross margins and cost controls had been “good”.

($1 = 0.7848 pounds)

Reporting by Esha Vaish in Bengaluru; Editing by Amrutha Gayathri and Gopakumar Warrier

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