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Travis Perkins: board hunkers down

Travis Perkins, leading UK builders merchant, is likely to drop its final dividend.
In its interim management statement for the nine-month period since June 30 2008, the group says it expects to grow its business in 2008, largely a result of the network expansion activity in the first half.

However, it is now taking action to prepare in advance of the expected steeper decline in construction activity. These actions include a reduction in operating costs and measures aimed at further reducing debt.

Before the end of 2008, it expects to reduce costs by at least £65M. This means, after absorbing overhead cost inflation and the full year effect of network expansion of £35M, costs are expected to show a net £30M reduction in 2009 from 2008.

Cash flow continues to be in line with expectations, with gains in working capital and reductions in capital expenditure partly mitigating the difficult trading conditions. The group also maintained significant headroom against the new £1B five-year facility agreed in April.

However, Travis Perkins believes further action is necessary. It has cut plans for capital expenditure and expects to spend less than £140M this year (of which £102M was spent in the first half). Net capital expenditure for 2009, after disposal receipts, will not exceed £50M. To accelerate the reduction of debt, the board believes it is unlikely to recommend a final dividend for the current year.

Group turnover for the nine months to the end of September is up 3.3% compared with the equivalent period in 2007. However, in recent weeks, trading has been below earlier expectations with both the merchanting and retailing businesses experiencing more difficult conditions as sentiment in construction has reacted to the extraordinary turmoil in financial markets.

This, together with continuing negative trends in leading indicators, leads the company to expect a more rapid decline in market activity, although its view of the scale of the likely downturn has not materially changed.

It now expects profits before tax and non-recurring charges for 2008 to be at the low end of analysts' expectations.

For the first nine months of 2008, total turnover in the merchanting division is up by 3.1%. While like-for-like turnover per trading day for this period was down by 1.2%, the trend of like-for-like sales in both September and early October has deteriorated sharply to -10%.

Total turnover in the general merchanting business is up by 2.1% with like-for-like turnover per trading day down by 1.1%. For this period, the specialist merchanting business has total turnover up by 4.9% and like-for-like turnover per trading day down by 1.4%.

Despite more challenging conditions, the merchanting division continues to gain like-for-like market share. Product cost inflation has remained high and gross margins have held up well despite lower market volume available.

Wickes also continues to gain like-for-like market share. Total turnover for the 39 week trading period ended on September 27 was up 1.2%. For this period, like-for-like sales per trading day were down by 2.6% with core products down by 2.6% and showroom sales lower by 2.5%.

Wickes gross margins are slightly below last year, reflecting modest increases in promotional activity throughout the industry.

Since the end of 2007 Travis Perkins has added a net 82 new branches to its merchanting network and a net eight new Wickes stores representing retail space growth of 4.0%. The group now trades from 1,241 locations including 26 branches operated by its associate, Toolstation.

The group expects to continue to gain like-for-like market share, to manage gross margin actively and to apply cash generated to reduce borrowings. Nevertheless, it believes it is prudent to take early, more extensive action, in view of the steeper decline in construction activity that is now materialising. These actions are aimed at strengthening the group's financial and trading flexibility in more challenging markets.

16 October 2008


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