Financial review

Revenue and operating profit

Group Trading profit

Group Revenue

After taking account of currency translation, Group revenue increased by 25.8% from £11,256 million to £14,158 million.

Operating profit increased by 18.8% from £702 million to £834 million. Trading profit rose by 24.7% from £708 million to £882 million, before deducting amortisation of acquired intangibles of £48 million (2005: £6 million).

Currency translation

Currency translation increased Group revenue by £274 million (2.4%) and Group trading profit by £18 million (2.5%). Over the past five years the constant currency growth of the Group is as follows:

Note: 2006 and 2005 figures prepared under IFRS. 2004, 2003 and 2002 figures prepared under UK GAAP.

The effect of US dollar appreciation has been to increase translated US profits by £14 million (2.5%) compared to 2005. US dollar denominated profits account for 63.3% of the Group's trading profit.

There has been little movement in the Euro translation rate. Euro denominated profits accounted for 15.2% of Group trading profit in 2006. If the results of the Group are translated into dollars at the average rate for the respective year the results of the Group are as follows:

Note: 2006 and 2005 figures prepared under IFRS. 2004, 2003 and 2002 figures prepared under UK GAAP.

Further US$ figures and the basis of computation of the above figures can be found within the Information in US dollars section.

Finance costs

Net finance costs of £65 million (2005: £37 million) reflect an increase in Group debt as a result of acquisitions and an increase in interest rates, partly offset by strong operating cashflow and €5 million (£3 million) of interest received on the previously announced French wood tax refund. Net interest receivable on construction loans amounted to £12 million (2005: £9 million). Interest cover was 14 times (2005: 23 times).

Tax

The effective tax rate, being tax payable on profit before tax and amortisation of acquired intangibles, increased marginally from 27.7% to 28.4%.

Earnings per share

Before the amortisation of acquired intangibles, earnings per share increased by 19.7% from 82.60 pence to 98.90 pence. Basic earnings per share were up by 11.2% to 90.77 pence (2005: 81.61 pence). The average number of shares in issue during the year was 592 million (2005: 587 million).

Dividends

The Board is recommending a final dividend of 19.55 pence per share (2005: 17.60 pence per share) to be paid on 30 November 2006 to shareholders registered on 6 October 2006. The total dividend for the year of 29.40 pence per share is an increase of 11.4% on last year's 26.40 pence. Dividend cover is 3.1 times (2005: 3.1 times). The increase in dividend for the year reflects the Board's confidence in the future prospects of the Group and its strong financial position. The dividend reinvestment plan will continue to be available to eligible shareholders.

Financial position

Shareholders' funds increased by £291 million from £2,301 million to £2,592 million. The net increase comprised the following elements:

During the year the Group entered into certain foreign exchange transactions to hedge the Group's foreign currency net assets. Gains and losses on these transactions were taken to reserves. The gains and losses are subject to taxation and accordingly the taxation arising has been charged to reserves.

The Group's employee benefit trusts purchased 2 million shares for £27 million, including dealing costs, during the period in order to allow greater flexibility in the settlement of long-term employee incentives.

Net debt, excluding construction loan borrowings, at 31 July 2006 amounted to £1,950 million compared to £1,171 million at 31 July 2005, giving gearing of 75.2% compared with 50.9% at the previous year end and up from 68.1% at the half year. The movement of sterling against overseas currencies, particularly the US dollar, resulted in a translation difference of £22 million which decreased borrowings on the balance sheet.

The Group seeks to maintain a level of gearing, generally in the range of 40% to 100%, to strike an appropriate balance between maintaining an efficient capital structure and having sufficient flexibility to fund further acquisitions. Interest cover for the year was 14 times (2005: 23 times). The Group is content to see interest cover in the 7-10 times range over a number of years but would allow the cover to reduce to 5 times in appropriate circumstances.

In the USA, construction loan receivables, financed by an equivalent amount of construction loan borrowings, were £313 million (2005: £262 million). The increase is due to an expanding loan book and additional business generated from the opening of five new construction lending offices.

Return on gross capital employed ("ROGCE") decreased slightly from 19.1% to 18.8% as a result of acquisitions, partly offset by the significant organic growth. The ROGCE remains well above the Group's weighted average cost of capital, demonstrating significant shareholder value creation.

The unamortised balance of acquisition goodwill in the balance sheet as at 31 July 2006 is £1,173 million (2005: £815 million) with the increase being due to the goodwill arising on acquisitions in the year. As set out in note 12, the Group recognised, in accordance with IAS 38, acquired intangibles of £251 million. These represent principally customer relationships and brand names.

Provisions in the balance sheet (note 26) include the estimated liability for asbestos claims on a discounted basis. This liability has been determined by independent professional actuarial advisers. The asbestos related litigation is fully covered by insurance and accordingly an equivalent insurance receivable has been included in receivables. The level of insurance cover available significantly exceeds the expected level of future claims and no profit or cash flow impact is therefore expected to arise in the foreseeable future. There were 246 claims outstanding at 31 July 2006 (2005: 235).

Details of the pension schemes operated by the Group are set out in note 27 to the accounts.

Cash flow

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

Note: 2006 and 2005 figures prepared under IFRS. 2004, 2003 and 2002 figures prepared under UK GAAP.
*Maintenance capex is considered as equivalent to depreciation

Net cash flow from operating activities increased from £765 million to £850 million, despite the increase in working capital required to support higher organic growth in the USA. Free cash flow after dividends was £285 million (2005: £321 million).

Capital expenditure increased from £239 million to £346 million reflecting continued investment in the business. During the period the DC and branch network in the USA was expanded, investment continued in DCs in UK and Italy and further expenditure was incurred on the common IT platform. Capital expenditure is expected to remain at a relatively high level over the next few years with further investments in DCs, new branch openings and IT as the Group continues to put in place the infrastructure required to support substantial growth and improved margins.

Investments in acquisitions completed during the year, including any deferred consideration and net debt, amounted to £914 million (2005: £431 million). These 53 acquisitions are expected to add around £1,418 million per annum of incremental revenues in a full year. Further details regarding acquisitions are included in note 31.

Shareholder return

The Group monitors relative Total Shareholder Return ("TSR") for incentive purposes (as set out within the Remuneration report on pages 64 and 65) and for assessing relative financial performance.

For the year ended 31 July 2006, Wolseley achieved an annualised TSR of 7.4% based on the average closing price achieved during July 2006, which put it in 54th position against the monitored peer group of 71 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 2002 and the composition of the peer group are set out in the Remuneration report. We continue to monitor return on capital including goodwill, throughout the Group, as one of the key measures of business performance. Return on gross capital employed (as defined in the Five year summary) was 18.8% (2005: 19.1%), well ahead of the Group's weighted average cost of capital, thereby generating shareholder value. At the close of business on the date of the Report of the Directors, the value of an ordinary share as quoted in the Financial Times was 1094.0 pence per share (2005: 1156.0 pence) a decline of 5.4%. The decrease primarily reflects adverse market sentiment relating to the Group's exposure to the slowing US housing market. The market capitalisation of the Group at the date of this Report was £7,190 million (2005: £6,845 million) reflecting the placing of 59.5 million shares on 25 September 2006. The total dividend of 29.4 pence per share in respect of the financial year gives a yield of 2.7%.

Post balance sheet events

Acquisitions spend

Acquisition of DT Group

On 24 July 2006 Wolseley entered into an agreement, conditional on regulatory approval, to acquire DT Group, the Nordic region's leading distributor of building materials for cash consideration of €1,498 million together with the assumption of the indebtedness of DT Group. Regulatory approval has now been received and it is anticipated that the acquisition will complete on 25 September 2006.

Placing

On 25 September 2006, a placing of approximately 10% of the issued ordinary share capital was undertaken to raise approximately £650 million. The placing will reduce the debt which has built up as a result of the £914 million of acquisitions in 2006 and the £1.35 billion acquisition of DT Group. The placing will also restore the Group's financial flexibility to enable it to continue to pursue its strategy of organic and acquisitive growth.

Pro forma gearing, following the acquisition of DT Group and the expected net proceeds from the placing, is 79.1% whilst pro forma interest cover is 14 times.

Other post balance sheet events

There have been no other significant post balance sheet events.