Annual Report 2008

RNS Number : 7224Q

Travis Perkins PLC

17 April 2009

ANNUAL REPORT 2008

Publication of the Annual Report

17th April 2009

Travis Perkins plc announces that its Annual Report for the year ended 31st December 2008, and the Notice of Annual General Meeting, are now available on the company's website - www.travisperkinsplc.com.

Printed copies of these documents will be posted to shareholders on or around 17th April 2009 and they will shortly be available for inspection at the UK Listing Authorities document viewing facility at 25 The North Colonnade, Canary Wharf, London E14 5HS.

In accordance with paragraph 6.3.5 of the Disclosure and Transparency Rules, we set out below the following extracts from the Annual Report in unedited full text. Accordingly, page references in the text below refer to page numbers in the Annual Report.

Financial Highlights
Chairman's Statement
Chief Executive's Review of the Year
Chief Operating Officer's Review of the Year
Finance Director's Review of the Year
Statement of Director's Responsibilities
Financial Statements
Selected Notes to the Financial Statements

Directors' responsibility statement.

We confirm to the best of our knowledge:

the financial statements, which have been prepared in accordance with International Financial Reporting Standards as adopted by the EU, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Group taken as a whole; and
the reports of the directors include a fair review of the development and performance of the business and the position of the Group taken as a whole, together with a description of the principal risks and uncertainties they face.

On behalf of the Board:

Geoff Cooper - Chief Executive
Paul Hamden Smith - Finance Director

The Annual General Meeting of the company will take place at 11.45 a.m. on Thursday, 21st May 2009 at Northampton Rugby Football Club, Franklin's Gardens, Weedon Road, Northampton NN5 5BG.

Enquiries:

Geoff Cooper

Chief Executive

Travis Perkins plc

Tel No: +44 (0)1604 683030

Paul Hampden Smith

Finance Director

Travis Perkins plc

Tel No: +44 (0)1604 683112

David Bick / Mark Longson

Square1 Consulting Ltd

Tel No: +44 (0)207 929 5599

FINANCIAL HIGHLIGHTS

For the year ended 31 December 2008

FINANCIAL HIGHLIGHTS
	FREE CASH FLOW* UP 43%
	GROSS OPERATING COST SAVINGS OF £73M (8%) ACHIEVED
	GROUP REVENUE MAINTAINED AT £3,179M
	ADJUSTED OPERATING PROFIT DOWN 15% to £272M
	ADJUSTED EPS DOWN 18% TO 123P
	BASIC EPS DOWN 43% AFTER EXCEPTIONAL ITEMS OF £56M
OPERATING HIGHLIGHTS
	LIKE-FOR-LIKE HEADCOUNT REDUCED BY 16%
	OPERATING FOCUS SHIFTED TO COST AND DEBT REDUCTION
	GAINS CONTINUE IN BOTH TOTAL AND LIKE-FOR-LIKE MARKET SHARE
	TRADE BUSINESSES RATED TOP AMONGST NATIONAL MERCHANTS
	Wickes RETAINS top SLOT IN consumer surveys of DIY stores

	2008		2007
	£m	%	£m

Revenue	3,178.6	(0.3)	3,186.7

Adjusted**:
Operating profit (note 5a)	271.5	(15.1)	319.9

Profit before taxation (note 5b)	202.5	(22.5)	261.4

Profit after taxation (note 5b)	143.9	(20.5)	181.1

Basic earnings per ordinary share (pence) (note 12)	123.0	(17.9)	149.8
Statutory:
Operating profit	215.3	(32.7)	319.9

Profit before taxation	146.3	(44.0)	261.4

Profit after taxation	101.9	(45.0)	185.3

Basic earnings per ordinary share (pence)	87.1	(43.2)	153.3

Total dividend declared per ordinary share (pence) (note 13)	14.5	(67.7)	44.9

* Note 35

** During 2008 the Group incurred an exceptional charge of £56.2m associated with the severe downturn in construction markets. During 2007 the Group recognised an exceptional deferred tax credit of £4.2m arising from the reduction in the corporation tax rate to 28% (note 11). Throughout these financial statements the term 'adjusted' has been used to signify that the effect of these exceptional items has been excluded from the disclosures being made.

CHAIRMAN'S STATEMENT

For the year ended 31 December 2008

The events in financial markets, and their effects on the wider economy, continued to dominate as 2008 progressed. Against this background, the Group's focus this year has been on the deployment of plans to deal with an increasingly severe market contraction.

RESULTS

Whilst at the interim stage the Group was able to report increases in sales, operating profit and earnings per share, the deteriorating market conditions in the second half created pressure on our overall financial performance.

Group revenue for 2008 was just below 2007, and adjusted profit before tax (i.e. on an underlying basis) declined by 22.5% and adjusted earnings per share was similarly down by 17.9%.

As a result of actions taken to deal with the reduction in construction activity the Group has incurred an exceptional charge of £56.2m. These actions include a restructuring of some businesses and functions, and a programme of headcount reduction across the Group. The cash element of re-organisation costs associated with these actions is £8.5m, with the remainder of the exceptional charge mainly representing increased provisions for future lease obligations and related costs. These increased provisions directly reflect the bleak outlook for construction and home improvement markets as the country faces the most severe economic conditions for some years.

The actions we have taken are aimed at reducing costs and conserving cash. Before the effect of exchange rates on that portion of our debt denominated in US dollars, against which the Group is any case fully hedged, we have reduced underlying net debt by £14.9m.

Virtually all new commitments for acquisitions and brownfield sites were suspended from early 2008, and the opening of new branches and stores almost dried up by the half-year. As at the end of the year our network comprised 1,223 branches. As we move in to 2009, we envisage restricting our new branch expansion plans to Tile Giant, where the cash payback from new branches continues to be very favourable, and, provided it meets its performance conditions, we will continue to fund the expansion of ToolStation under the terms of our buyout agreement.

DIVIDEND

In view of the continuing difficulties in our sector, the board is recommending a suspension of the final dividend. The interim dividend of 14.5 pence was paid to shareholders in November 2008. We expect to resume dividend payments once the prospects for our markets have improved.

BOARD OF DIRECTORS

Mike Dearden has been a non-executive director of the Group for 8 years, including the last three years as our senior independent non-executive director. Having been asked in 2006 to extend his appointment by a further 2 years, he retired from the board in November 2008. Mike made a very significant contribution to the board, bringing a wealth of experience of both business and corporate governance matters and we wish him well for the future. Activity is already underway to identify a non-executive director to replace Mike. Chris Bunker has taken over as senior independent director and the new non-executive director will be appointed in due course.

EMPLOYEES

Given the increased demands imposed on the Group from market challenges in 2008, I am sure all shareholders will join me in thanking all our people for their dedication and tenacity. I know from my visits to branches, stores, distribution centres and offices that the Group enjoys an extraordinary level of loyalty and commitment from the vast majority of its people. To those who have regrettably had to leave us as we reduced our headcount, we have provided support and wish them well for the future. To all the people who have worked in the Group, on behalf of shareholders, I offer my thanks for their efforts in 2008.

OUTLOOK

We expected the well-documented problems emanating from financial markets would adversely impact growth rates in our markets progressively over the year. However, the speed and scale of the impact of the turmoil emanating from the financial markets has been greater than the expectations of most commentators and 2009 is likely to prove a very tough year for all participants in the construction sector. As we have commented previously, we see little prospect of a return to market growth this year, and limited prospects for a return to growth in 2010.

It is reassuring to report that our businesses continue to outperform competitors. In 2008 our divisions grew market share on a like-for-like basis and continue to record leading operating margins in each segment of their markets - both key components of our strategy. Without underplaying the importance of absolute returns, these relative aspects of our performance are particularly important to our prospects at this juncture. This positioning significantly enhances our resilience as we manage the Group through this downturn, since it means we continue to enjoy the confidence of our customers and have a relative advantage in being able to withstand a given fall in market volume. A number of competitors have already closed branches and some have exited the sector altogether. We expect further rationalisation to take place over the next year, improving our prospects for further like-for-like market share gains from our estate.

However, outperforming competitors and enjoying the benefits of sector rationalisation will not, in themselves, be sufficient to safeguard shareholder returns. We have already taken decisive action, and stand ready to take further steps if necessary. Our actions are aimed at cutting costs and conserving cash to mitigate the effects of the difficult market and to protect the Group's capital structure whilst safeguarding the Group's core strengths. We believe this stance will produce the best outcome for shareholders in this unusually challenging economic environment.

Tim Stevenson

Chairman

18 February 2009

CHIEF EXECUTIVE'S REVIEW OF THE YEAR

For the year ended 31 December 2008

INTRODUCTION

In response to the remarkable worsening of economic conditions during 2008, the Group changed its operational plans and priorities very significantly. We had anticipated, and warned shareholders about, a probable downturn in construction markets and had prepared contingency plans from the latter part of 2007. However, the speed and severity of the change in conditions meant that we implemented those contingency plans more rapidly, and to a greater extent, than previously expected.

Our previous priorities - each successfully pursued - were to drive market-leading like-for-like ('LFL') sales growth and operating margin performance from each of our businesses; expand our branch networks; and to enter adjacent channels for the distribution of construction materials. These priorities evolved as construction markets slowed rapidly during 2008 to cost and debt reduction whilst maintaining our market leading LFL performance.

PERFORMANCE

The Group's financial results suffered in 2008 in comparison with the previous year.

Throughout this annual report, consistent with our approach last year, the term 'adjusted' has been used to signify that the effects of exceptional items have been excluded from the disclosures being made.

The Group incurred an exceptional charge of £56.2m in 2008 as a result of actions taken in response to the downturn in construction markets.

For 2008, Group revenue was down very slightly to £3,178.6m (2007: £3,186.7m), with adjusted operating profit down 15.1% to £271.5m (2007: £319.9m), adjusted profit before tax down 22.5% to £202.5m (2007: £261.4m), and adjusted earnings per share down by 17.9% to 123.0 pence (2007: 149.8 pence). The revenue decrease of 0.3% comprised a decline of 4.5% in like-for-like sales, with network expansion accounting for growth of 4.2%.

Adjusted group operating margin fell by 1.5% to 8.5% (2007: 10.0%) (note 5c). This primarily reflects a reduction in overhead recovery from declining LFL sales. Whilst variable costs have been cut back in line with falling activity levels, and some significant fixed costs have been eliminated, a proportion of the Group's costs - such as branch rents - are both unavoidable and fixed.

As 2008 progressed, our markets began to experience falling volume and, as expected, competition intensified, with a related deterioration in pricing conditions. Despite this, our work to protect gross margin, both by the optimisation of pricing and by sourcing benefits, meant the Group was able to more than offset the market pricing pressure. Gross margin for the Group increased by 0.2%, with gross margin in the merchanting division up by 0.3%, whilst in the retail division, it was down by 0.5%.

Our trade division continued its work to ensure we offer superior services and products to customers. Our research continues to indicate the success of this strategy, with our trade branch network rated as a preferred source of building materials in 12 out of the top 13 criteria used by customers when selecting a merchant. Although much new work in 2008 on continuous improvement of our trade offer was curtailed in view of the difficult market, we made good progress in improving product availability and service standards. This superior offer was used by our sales and marketing teams as a platform to launch targeted marketing initiatives, particularly in market segments that continued to grow in 2008, and we achieved good sales gains from new accounts without sacrificing gross margin.

Trade division sales fell by 0.7%, with sales from new branch openings contributing 3.5% and LFL sales falling by 4.2%. The latter comprised 6.4% of price inflation offset by a 10.6% decline in volume. Both general and specialist merchanting performed ahead of their respective markets, with LFL sales per working day down by 4.1% in general merchanting and 4.3% in specialist merchanting. We estimate that our trade businesses have continued to record sales some 2% ahead of market rates, with market share gains coming mainly from national competitors.

Our retail businesses also achieved creditable revenue performance, growing both like-for-like and total market share for much of the year. The Wickes and Tile Giant value-for-money positioning in the home improvement market has become more attractive as consumers have found their discretionary purchasing power eroded. This was reflected in Wickes' recent success in retaining its position in the annual Verdict retail consultancy survey as the nation's favourite DIY retailer. Whilst higher priced competitors have increasingly used advertising and promotions to boost customer perceptions of their price cutting credentials, we have maintained the more competitive price position of our product ranges, and continue to attract customers in greater numbers.

LFL sales for the full year of Wickes' core products were down by 4.8% and on the same basis showroom sales fell by 8.1%. Tile Giant LFL sales were up by 5.5%. Our showroom business was disrupted towards the end of the year by two significant events; stock liquidation from the administration and closure of a major kitchen and bathroom competitor; and the administration and closure of our supplier of conservatories. Overall LFL sales in the Retail Division were down 5.3% with 1.7% price inflation and a 7.0% volume decrease. Network expansion added 6.2% to retail sales which in total increased by 0.9%. Retail Division operating margin decreased by 156 basis points to 5.11% (note 5c) for 2008.

Group underlying net debt, used for covenant calculations fell by £14.9m (note 34), despite an outflow of £125.9m on capital expenditure. This reduction in net debt was boosted by an inflow of £23.1m from targeted working capital reductions from our supply chain projects.

The £125.9m net outflow on capital and acquisition expenditure, comprised £97.0m spent on expanding the Group and £43.8m on maintenance capital items less £14.9m of asset disposal proceeds. Since most work on new expansion opportunities was halted from early in the year, the majority of this expenditure related to deals agreed in late 2007 and early 2008 for which the related cash out flow mainly occurred in the first half-year.

Covenantable net debt is calculated after eliminating the £80.2m impact of exchange rate movement that is any event offset by an equal and opposite debit balance in fixed assets. The improvement in covenantable net debt was achieved despite very significant pressures on our customers at the year-end which caused a 3-day deterioration in outstanding debtor balances. Reported net debt was £1,017.4m.

More importantly, our average net debt position over the year was tightly controlled against daily targets. This helped us mitigate the impact on interest charges of the volatility in LIBOR rates experienced throughout the year. However with pressure on operating profit, interest cover for the year, as calculated for covenant purposes, was 4.3 times compared to 5.4 times in 2007. The net debt to EBITDA covenant, which is not affected by exchange rate movements was 2.8 times. In both cases our covenant test level is 3.5 times. We therefore remain in compliance with our lending agreements and expect to do so throughout 2009.

MARKETS

Having grown for longer than we expected through 2007, the trade market contracted in value terms from the second quarter of 2008. Market value in 2007 was supported by stronger than expected and rising inflation in building materials. Despite commodity and energy prices falling towards the end of the year, product cost and sales price inflation accelerated, ending the year at an annual rate of 7 to 8%. In volume terms, we estimate the construction material market, in which our trade businesses won market share, has been contracting since January 2008, and is now running at an annual rate of decline of around 20%.

The retail market followed a similar pattern and trend, with an early and poor Easter trading period, a small recovery in the second quarter, and 'steps' down in July and October. Although inflation in retail prices was more modest, at 1.7%, we estimate the retail market to be currently running at an annual rate of decline in volume terms of around 15%.

Whilst the long-term prospects for growth in our markets remain positive, the short and medium term outlook is sensitive to recessionary influences. Our revenue sources are well balanced with our businesses serving a diverse range of customers performing a wide variety of construction work, from infrastructure, new domestic, public sector and commercial construction, to repair maintenance and improvement ('RMI') works in all types of building. This downturn was first felt in the new housing segment of our market, where volumes to these customers fell in 2008 by 40% over the prior year. In contrast, activity levels in RMI - a sector where projects are often non-discretionary by nature - held up well for much of the year, and our general merchanting and retail businesses benefitted as a result. In addition, for public sector buildings, activity in new construction and RMI continued to grow, despite some signs of reduced availability of funding to some public sector sponsors.

We monitor about 20 criteria that indicate the likely strength of purchasing activity for construction materials, including indicators for housing (for example, mortgage approvals), commercial and public sector new build (architects' enquiries) and consumer markets (propensity to spend on 'big ticket' items). Generally, trends for spending in our markets react some 6 to 9 months after a change is detected amongst these criteria. The current downturn has followed this pattern, with market trends in the merchant and home improvement markets first reacting in the spring of 2008 to the significant shift in housing market activity which occurred from October 2007.

Most of the criteria we monitor showed a sharp fall in activity levels through the first 3 quarters of 2008, followed by some stabilisation of activity, albeit at a very low level. Were the established pattern of lag between these criteria and our markets to be repeated, our markets might be expected to see a similar stabilisation, again at a low level, by the middle of 2009. However, two significant reservations that must be applied to any forward view of our markets; firstly, the unprecedented nature of the current economic turmoil led by a sudden withdrawal of credit and now involving an increase in unemployment means that well established economic relationships are less reliable; and secondly the level at which our markets stabilise is difficult to forecast whilst we are currently experiencing a rapid fall in purchasing activity by customers.

Our early sales performance in 2009 reflects these trends, with, LFL sales per trading day in our merchanting division for January down by 15.8% and LFL sales for retail for the first five weeks of 2009, on a delivered basis, down by 12.2%. We are continuing to outperform our markets, aided in particular by competitor closures and the success of Wickes new marketing strategy, which uses TV and radio advertising rather than direct marketing. This has contributed to a strong start to the year for our showroom category sales through Wickes, and on an ordered basis Wickes' overall LFL sales are up by 1.5%. Meaningful interpretation of February sales trends has not been possible due to the effect of adverse weather conditions on construction activity.

We have now established a pattern of out-performing markets for over 2 years, and expect to continue to do so. For almost all of that period capacity has been added to our merchanting market by our competitors, and ourselves and the retail market has also seen a small capacity increase. However, the severity of the current downturn has significantly changed those trends. Branch closures by competitors accelerated towards the end of 2008, with around 300 closures now recorded across merchant and retail markets. Clearly, this improves the prospects for LFL sales in all remaining branches in the sector, including our own.

We monitor the profit and cash contribution of all branches on a continuous basis, compared to the alternative use value that could be derived from closure and possible disposal. In a 'normal' year we would expect to close around 5 to 10 branches as part of a continuous process of upgrading and improving our estate. In 2009 we do not expect to increase significantly that level, although it is clearly sensitive to the level at which our sales performance stabilises. Given our stronger operating margin we would expect our competitors to be more vulnerable to the market downturn than ourselves - as has been the case in recent months. In assessing potential closures, we allow for the support to future sales levels provided by actual and probable competitor closures.

MANAGING THROUGH THE DOWNTURN

Given the poor short and medium term outlook for our markets, as indicated by the analysis described above, we have taken action in 2008, across the Group, to deal with anticipated tough trading conditions continuing into 2009. We also retain a number of contingency plans should it be necessary to take further action in response to downside scenarios we have analysed.

Based on our analysis of previous recessions in our sector and our monitoring of lead indicators, we estimate that volumes purchased in our markets will fall by some 25% from a peak in early 2008, with the trough being reached by the third quarter of 2009. With inflation, market share gains, maturing performance from recently opened stores and full year effects, our annual revenues for 2009, compared to 2008, are expected to decline by less than our peak to trough estimated decline of 25%.

In this scenario, with cost reduction plans already in place, an expected net £20 million inflow from working capital, capital expenditure falling by £80 million, anticipated income from property realisations and lower interest rates, we are targeting a reduction in covenantable net debt by at least £125m in 2009. Should trading conditions worsen from our forecasts, we will implement more aggressive contingency plans to further reduce costs and release cash with the aim of achieving our target for debt reduction.

Led by John Carter, our Chief Operating Officer, the actions we have taken comprise; cost reduction; working capital efficiency; enhanced management focus; targeting market share gains; gross margin protection; property realisations; and reduced capital expenditure - all implemented while we maintain the motivation of our people.

Subject to these assumptions and contingency plans proving reliable, we have sufficient capital to manage the Group through the downturn, as described in the Finance Director's review of the year. However, given the increased economic volatility, we are closely monitoring trading trends, and are continuously updating plans for, and evaluation of, options for protecting the Group's capital position.

We believe that the most efficient companies will emerge from this severe downturn in a relatively stronger position. We fully intend to be one of those companies and to evaluate attractive market opportunities which might present themselves.

Management Focus We have now halted all non-capital development projects, such as technology developments, except those with an attractive short-term cash return. All management resources are now dedicated to 'the day job'. This has increased the time and attention available for developing sales, servicing customer requirements and maintaining our offer at the highest possible standards. It has also enabled us to reduce management resources, both in our central functions and in our businesses.

Market Share Gains The strength of our offer in all our businesses continues to drive LFL growth rates that are superior than each of their markets. This has been further supported by sales gains from competitor closures, the maturing of recently opened branches and the withdrawal of credit insurance from some merchant competitors. All these factors will remain in 2009, and we expect our overall trend of out-performing the market to continue.

We have also enjoyed considerable success in targeting contractors working in segments of the construction market that have continued to grow, and that show good medium-term prospects. In particular, many more social housing landlords and their contractors are seeking to outsource their stores operations and our public sector stores business continues to win the majority of bids it enters. Prospects for this and similar sectors have been further boosted by recent government announcements about investing in public sector buildings and infrastructure as part of its economic stimulus package. Our activities here, conducted by dedicated teams of managers, will continue to add to the market share gains we have made.

Gross Margin Protection As the contraction in our market has deepened, we have experienced the normal pressure on margins caused by some merchants delaying the introduction of price rises, and by some retailers seeking to support volumes through heavily advertised price promotions. Despite this we have been able to increase gross margins in 2008 by 0.2% through the organisation of our commercial relationships, the extension of our global sourcing activities, and the introduction of new IT based pricing tools in our trade branches.

These initiatives leave us well placed to compensate for the further market originated margin pressure we expect to experience in 2009. Our global sourcing activities are now capable of significant expansion following our investment in expanded central distribution facilities, and wider and better use of our pricing tools is planned. Falling commodity prices and intensifying competition amongst far eastern exporters are expected to compensate for Sterling weakness compared to 2008. Our relationship with key suppliers puts us in a good position to deal with what we expect to be continued high cost and price inflation, due in part to Sterling's recent weakness. We anticipate there will be some commodity categories where we may see some price deflation. In these cases we are in a strong position to benefit from any such reductions in price due to our tactical buying initiatives. However, the full year effect of strong cost and price inflation across our ranges seen in 2008 is likely to underpin continued overall high inflation in 2009.

Cost Reduction Action has already been taken to rein back discretionary costs, cut variable costs to a level capable of handling anticipated 2009 volumes (cuts here were deliberately timed with the lull in building activity over the winter months to enable us to take this early action without compromising service), and to streamline fixed elements of cost, such as management structures.

Variable costs comprise approximately 40% of our total cost base, with the largest elements being people and transport. During the first half of 2008 we were successful in not replacing leavers to enable us to achieve the required level of headcount reduction. This enabled us to maintain productivity ratios as LFL sales fell. However, the sharp steps down in activity we saw in the second half and our prediction of a continuing contraction of our markets in 2009 prompted us to set our staffing at a level consistent with lower expected revenues in 2009. Total headcount, has been reduced in both businesses and central functions and is now over 1900 full time equivalents (14%) lower than in January 2008. After allowing for an extra 600 people added in new branches, the LFL fall in headcount was 2,500, a reduction of 16%. Our transport fleet has also reduced by 14%, with over 300 vehicles eliminated. Some of these vehicles are available for redeployment, thereby reducing capital expenditure requirements in the next two years.

We will continue to manage our transport fleet and headcount on an active basis.

Working Capital Efficiency Management of our efficient working capital ratios became increasingly difficult in 2008 as both suppliers and customers sought to conserve cash. Despite this, we reduced working capital by £23m compared with the end of 2007 and also our total working capital to sales ratio at the end of 2008 was 4.2% compared to 5.3% at the end of 2007. Our supply chain projects delivered some £34m of cash savings in 2008 from stock reductions, whilst at the same time improving product availability. The work we have completed on working capital management has reduced the working capital investment we carry into 2009, which we expect to further improve by £20m as more projects complete.

Additional resources have been allocated to the collection of trade debts in an environment where an increased number of building contractors are struggling to survive. Whilst we have increased the attention given to this aspect of our business, improving co-ordination between our central credit control function and our business teams, we expect a further deterioration in both debtor days outstanding and our bad debt charge in 2009.

We enjoy very close and long-standing relationships with our suppliers and work actively to support development of their business plans. Whilst we are conscious of possible restrictions in the availability of trade credit insurance, we do not anticipate this impacting the terms on which we trade with our suppliers.

Taken together, the above actions are expected to enable us to maintain this ratio. With a falling market and sales volume, cash generation from working capital will significantly contribute to our target of a £125m reduction in covenantable net debt in 2009.

Property Realisations Since late 2005 we have pursued a programme of active management of our property portfolio to maximise value generated from each site. That programme has involved, on a site-by-site basis, sales of surplus land, relocations of trading sites to less valuable locations, establishment of a special purpose vehicle to raise capital from low capital growth properties via partial sale and leaseback, and the purchase of a limited number of freeholds to maintain the overall quality of our estate. Our portfolio retains excellent defensive characteristics as we manage through the downturn, comprising 351 freehold and 57 long leasehold properties in a total estate of 1,307 properties.

The current book value, established from a 1999 valuation exercise plus subsequent additions at cost, is £257m, an increase of £15m over the value at the end of 2007. At the same time as improving the quality of the estate, we have been able to generate £49.5m of cash and £28.7m contribution to operating profit over the last three years via 22 projects involving 56 properties.

We have 24 projects under active development covering 41 properties. Whilst the current restriction of funding to property developers has reduced our targets for 2009, we still remain optimistic we will exceed the average annual cash raised from the programme to date. A number of projects involve counterparties such as discount food retailers who, despite the economic conditions, have sustained expansion plans and available funds.

Reduced Capital Expenditure Clearly, our decision to halt almost all network expansion and withdraw from acquisition opportunities will considerably assist our debt reduction plans. In addition, we have eliminated all but the most essential capital projects and lengthened the replacement cycle for all classes of asset. This, together with our mothballing of delivery vehicles withdrawn from trade branches in 2008, will substantially reduce capital expenditure in 2009, which we have targeted at £37m. Expenditure at broadly this level is sustainable for two to three years, following which, with our depreciation charge at just over £60 million, an increase would be expected.

Further Cost and Cash Actions Whilst we have already taken sufficient actions to deal with our forecast for falling volumes into 2009 in both trade and retail markets, we retain the flexibility to take action in response to various alternative scenarios. We expect to be able to flex our variable costs in line with variations from forecast volumes handled. The inflation rate on fixed costs, particularly rents, is falling close to zero. We have also developed plans to reduce debt and fixed costs further should the need arise. In 2009 a number of projects will complete, including projects aimed at reducing fuel costs through vehicle tracking technology, waste costs through greater separation and recycling, and energy costs through improved management information and monitoring.

DEVELOPMENT

Over the last 3 years we have broadened our revenue sources, entered a few selected new adjacent markets and channels and also added 240 branches to our existing businesses. However, our stance on expansion changed significantly in early 2008. Apart from deals agreed in late 2007 or the first few weeks of 2008, most expansion activity has been halted. This meant we added 75 new branches in the first half-year, but only 23 new branches in the second half. We are continuing to expand our tile retail business since each new branch produces a very quick cash payback, and we will continue to provide funding to ToolStation to support its expansion, subject to it meeting performance conditions incorporated in our acquisition agreement. Aside from these developments, very few new branches will be added to our network in 2009.

Wickes Total retail selling space at Wickes expanded by 3.3% as a result of launching a net 8 new stores. At 31 December, we traded from 193 stores. The re-configuration programme, which involves reclaiming storage space for use as selling area and the construction of mezzanine floors in stores with very high sales densities, has been suspended to conserve cash.

Following the liquidation of our supplier of conservatories, and against a background of recent weakening demand for these products, we decided to exit this market. During 2009 we plan to re-lay our showrooms in Wickes stores to incorporate an expanded bathroom offer - a product category which continues to offer good growth and synergies across the Group, and yet where our retail market share has underperformed the rest of the retail business.

Outside Great Britain, we signed an agreement to develop a franchised chain of Wickes stores in Eire. The first store, at Limerick opened in October and, against a background of home improvement market conditions that are even worse than the UK, traded in 2008 in line with expectations. Our franchise partner will evaluate the performance of this store against the difficult market conditions in Eire before reviewing further expansion plans.

Travis Perkins We added a net 30 sites during the year to the Travis Perkins' branch network and traded from 611 sites at the year-end. Around 80% of new sites were brownfields, which have relatively attractive returns compared to acquisitions. We also added a gross 27 tool hire outlets taking our total to 191 in the Group.

Keyline Under the guidance of a new managing director, our heavyside merchant added 4 branches to its network, finishing the year with 83 branches. Over recent years we have sought to increase focus on both depth and breadth of specialist stock range and to concentrate on major civil engineering customers. This programme continued in 2008, with 18 branches being re-configured to take new ranges. Keyline performs strongly amongst groundwork contractors, who are amongst the first tradesmen on new housing sites, and have therefore been more severely affected in this recession. We expect to continue Keyline's branch expansion once housing market prospects are more positive.

City Plumbing Supplies. With a newly refined and better balanced business model serving plumbing contractors and the installed bathroom sector, CPS continues to offer good returns from expansion. Having added a net 7 new branches in 2008 CPS now trades from 196 locations. CPS is the smallest of 4 national businesses serving the plumbing heating and ventilation market, and we have significant scope for growth once market conditions become more favourable.

CCF Our dry-lining, screeding ceilings and insulation specialist had a very busy year, integrating the 9 new branches mainly added via acquisition in 2007. Having closed 1 branch in 2008 through planned rationalisation, the CCF business operated from 33 branches at the end of the year. CCF's market is now very largely held in the hands of major national or international distributors who have recently invested in the sector, and with only a few suppliers of the key products, competitive conditions remained very tight. Despite this, CCF's 'one-stop shop' offer to contractors means it enjoys a good reputation and new branches deliver good returns. Following promotion of the incumbent, a Travis Perkins regional director was appointed as the new managing director of CCF in June 2008.

Benchmarx A new managing director was appointed in late 2007 to Benchmarx, our specialist kitchen and joinery business for the trade which was launched in 2006. During 2008 the Benchmarx business model was refined to improve new branch breakeven volumes and cash payback profile, and 4 new branches were opened. The successful elements of this model are now being retrofitted to the entire estate. Benchmarx serves a market with attractive returns and growth characteristics and our offer has scored very highly with our new customers in this market. We plan further branch openings and we remain committed to creating a business with a significant market share in this sector.

Tile Giant We entered the retail tile market at the end of 2007 via the acquisition of Tile Giant, a 29-store chain operating mainly in the Midlands. This business has subsequently been expanded rapidly through 2 acquisitions and a number of brownfield openings. It traded from 78 stores at the year-end and we have a good pipeline of further opportunities to expand. The cash payback profile of new tile retail branches remains excellent despite the impact of a weaker consumer market.

ToolStation In April 2008, the Group acquired a 30% equity interest in ToolStation, a rapidly growing direct retailer of lightside products from its founding shareholders for £5 million. Since then the Group has provided an initial loan of £7 million to allow ToolStation to repay its outstanding early stage loan capital. The Group has the right to acquire the outstanding share capital of ToolStation through an earn-out formula in April 2012.

ToolStation sells a wide range of tools, fixings, hardware, electrical, plumbing and heating materials to retail and merchanting customers throughout the United Kingdom and through a franchised operation in the Netherlands. At the date of taking our interest, ToolStation traded from 11 branches. By the end of 2008, its network had expanded to 33 outlets, and it had also grown its sales on a LFL basis, joining the other businesses in the Group in taking LFL market share through a better offer. It plans to continue its successful strategy of branch network expansion, with the aim of operating from at least 80 trade counters within the next five years.

Travis Perkins will use its buying scale, global sourcing capabilities, supply chain facilities and property expertise with the aim of accelerating ToolStation's rate of growth. Through this investment Travis Perkins has also acquired the right to use ToolStation's ecommerce, warehousing and fulfilment software for direct selling of Travis Perkins' existing merchanting and retailing brands.

ORGANISATIONAL CAPABILITIES

Over the previous 3 years, we have supported the development and expansion of the Group with the implementation of a wide range of development projects and new initiatives, with a strengthening of our senior management team and the creation by consolidation of some new central functions - for example the creation of a new group IT function via the merger of the former Travis Perkins and Wickes IT functions. During 2008 our stance on these developments changed.

Most new development projects, except those with a rapid cash payback, have been postponed. Many new functions have been reduced in size and cost so they support only essential activity. One central function has been disbanded all together. Some external services have been in-sourced as a preferred alternative to making our people redundant and losing key skills. Some management teams in businesses and central functions have been reduced in size.

These changes have affected every business, department and level of the Group, including senior management. Starting 4 years ago we built on the Group's outstanding merchanting senior management capability via managers joining from acquired businesses, the addition of a number of external appointments, and internal promotions. A significant proportion of our management at every level have experienced a recession in our sector before, and are well equipped to take action as appropriate to manage their branches, departments and businesses.

This work also helped us build and strengthen our central management functions, which have been the source of many of the synergy benefits and initiatives that have enabled our business teams to deliver a market leading performance. The high quality and experienced senior management group were organised in 2007 in to 3 divisions (general merchanting, specialist merchanting and retailing), together with a streamlined senior management structure for central functions, to add focus to our continuous improvement programmes. To further strengthen our management arrangements, Robin Procter, our Supply Chain Director will join the Group's Executive Committee, following the considerable success of projects to improve supply chain performance, lower costs, and reduce working capital.

Throughout the Group, colleague retention and experience is monitored as a key target. We believe that a significant part of our superior performance in each market can be directly linked to the better retention and quality of our people and management at every level. The recession has caused an increased rate of senior management turnover amongst a number of our competitors, and our senior management have reported an increased frequency of approaches. Whilst it is not unusual for our managers to be sought after, this increased attention has meant that unusually in 2008 we experienced some undesirable turnover amongst this group, with 17 of our 110-strong senior management group leaving the business. Whilst 11 of these departures were linked to our cost saving programmes or retirements, 3 leavers joined competitors and 3 left for other reasons.

The action we have taken to deal with the contraction in our markets has increased the demands on our people. We are, as evidenced by our superior cost ratios and operating margins, an effective and efficient organisation. The effect of seeking to reduce fixed costs in line with sales trends whilst continuing to run a base level of service has manifested itself in an increased and more diverse workload for many of our people. They have responded magnificently. In 2008 I continued my programme of regular visits to our branches, stores, distribution centres and offices and by the end of the year had seen over 350 sites. I also continued to meet with all colleagues in our support functions over a rolling series of communication and feedback sessions during the year. I am continually impressed by the dedication and commitment of my colleagues and would like, on behalf of the Board, to express my thanks to all of them for all their hard work.

ENVIRONMENT

Summary In these tougher trading conditions we have refocused our environmental priorities on initiatives where environmental efficiency also generates rapid cost savings. However, despite this, we have retained our resolve to continue to effectively manage all the environmental impacts of our activities and to create commercial opportunities by providing superior environmental services to our customers.

We continue with 4 key objectives to reduce our environmental impact - to reduce our carbon emissions, reduce waste to landfill, increase certified timber purchases and prevent pollution.

We are committed to external certification of our performance and have renewed our certificates for well-managed timber chain of custody and continue to operate with an ISO 14001 certified environmental management system.

In 2008 we actively communicated with colleagues, customers, suppliers, regulators, government and civil society, recognising that a partnership and broad consensus across operators in the supply chain and those seeking to influence it is required for genuine reductions in environmental impact.

In particular, we:

Inaugurated our Non-Executive Environmental Advisory Panel;
Significantly increased our communications activities on environmental issues;
Continued to work with the Waste and Resources Action Programme (WRAP), the Energy Saving Trust and Carbon Trust;
Signed 2 agreements with the Green 500 organisation and the British Retail Consortium;
Continued our membership and participation in 4 environmental forums at the WWF, United Kingdom Forest and Trade Network (UKFTN), British Retail Consortium and Construction Products Association;
Received constructive feedback from 3 reports we produced on our environmental performance from the Carbon Disclosure Project, Business in the Community, WWF and UKFTN.

Environmental Improvement Plan We have again asked Lloyds Register of Quality Assurance to assure both the statements we make and the figures we report against our key performance indicators in this section of our annual report. A copy of their statement can be found in the environment section of the Travis Perkins web site.

Performance trends can be seen by examining the graphs which combine information from across the business converted into a common base. The final indicators are a combination of measured, averaged and estimated performance. Wherever possible we have used standardised data collection and reporting techniques and continue to work to improve the accuracy of the measures reported.

We had set ourselves interim targets for 2008 against which to judge our progress. The sections below outline how we have performed against those targets, provide some information about how we plan to ensure ongoing improvements and, despite against the trend performance in some areas in 2008, set out challenging future 5 year targets.

Whilst our objectives have been consistently pursued, environmental reporting is an immature and evolving discipline. From time to time it becomes necessary for us to refine the metric that we use to measure and communicate our progress.

This year;

In preparation for the likely UK Carbon Reduction Commitment regulations, and in response to changing government guidelines published in 2008, we have for the first time, distinguished between our carbon dioxide emission reductions achieved through the purchase of grid based renewable electricity from those achieved through other efficiencies;
We have made adjustments because of changes in guidelines on emission factors to apply to carbon dioxide emission calculations as well as including an estimate for plane, train and taxi emissions;
We have employed OECD standardised deflation rates back to the baseline year to ensure turnover acts as a valid representation of activity. We had been using our own measured rates that are particular to construction products but recognise that this makes comparison of performance between companies more difficult;
We have re -calculated our carbon dioxide and waste KPIs back to the baseline year and present both sets of figures for comparison;
As we indicated in our half year update, we have provided information to judge future progress against our new packaging and water reduction targets.

In future years:

We will use only the re-calculated KPIs to illustrate our performance trends;

We will simplify our measure of waste management by adopting a single KPI of reduced waste to landfill;
We will continue to listen to and have regard to stakeholder interest in the way which we communicate performance and in particular we will ensure that our targets continue to be in line with sector agreements and any signatory commitments to which we have committed, details of which can be found on our website.

Carbon Management In 2008 direct and indirect emissions of carbon dioxide were 111,070 tonnes, or 167,241 tonnes if discounts for grid based renewables are excluded. Whilst we can report a significant reduction in our emissions of CO2 from energy consumption (22%); this reduction is mainly from discounting grid renewable electricity which going forward we are unable to do. Moreover, the reduction is balanced by similar rises in emissions from transportation, as we continue to replace customer journeys with our own deliveries in the merchanting division.

The performance reflects;

Our cessation, in October 2008, of purchasing grid based renewables for most of our estate, since in the future we can no longer count these purchases as a reduction in our carbon emissions;
The ratio of delivered sales to total sales continuing to rise. Delivered sales accounted for 30% of turnover in the baseline year of 2005 and 33% of turnover in this last year.

Our performance trend with our revised KPIs - which take into account UK government changes in reporting guidelines and conversion standards, OECD standardised deflation, corrected energy invoice data from 2005/06, as well as including estimates for our taxi, train and plane business miles - shows a similar modest reduction in carbon dioxide emissions.

We continue to invest in projects aimed at energy efficiency improvements. Towards the end of the year we started installing improved heating controls in the Wickes estate. These controls offer a 25% minimum reduction in carbon dioxide emissions from gas consumption.

Our specialist Eco and renewable energy centres that were launched in 2008 have also generated much interest. Sales of our solutions for renewable energy, micro-renewables and water capture and storage equipment remain modest but we have seen growth in this sector over the year and see this as an important product group for the future.

Overall we have not succeeded in meeting our 10% reduction target by 2008. In current market conditions, a 2010 target of a 20% reduction now seems unlikely. Our plan to take over direct responsibility for more inbound shipments of products into our central warehouses, with the consequent rise in associated emissions, will make this target even harder to achieve.

Taking in to account the present economic conditions in construction markets, we feel that a 20% reduction in tonnes of carbon dioxide emitted per million pounds of sales by 2013 is appropriate and we will revise our 2010 target to a 15% reduction from the 2005 baseline year.

Waste Management In 2008 we diverted 7,499 tonnes or 14.5% of our waste away from landfill. Much of this reduction to landfill was achieved by recycling 14 % of our waste. Only 0.5 % of our waste was sent for incineration. Using our revised figures, which incorporate OECD deflation rates, we also reduced our waste to landfill arising, per million pounds of yard and core sales, by 6% over 2005 as part of a wider focus on cost savings by operational colleagues within the Group.

Our improvement plans on recycling are progressing well and by the end of 2008 we had more than 150 sites sending cardboard and plastic waste back to regional hubs for processing and onward sale. Once this is fully operational across all our distribution networks in early 2009 we expect to be achieving a recycling rate of 20%.

Even through we have reduced our landfill waste arising levels on a like-for-like basis, our target of a 10% decrease in intensity of waste has not been reached and our recycling target will not be met until 2009. Our challenge now is to adopt further segregation of waste to allow for recycling so that we can achieve a 50% reduction in waste to landfill from 2005 levels, by 2013.

Packaging & Water Management The amount of packaging that we pass on to our customers is also an area of attention. Earlier this year we set ourselves a 20% weight reduction target per million pounds of sales from the 2008 level by 2013. In 2008 an estimated 64,041 tonnes of packaging waste was generated for products sold to customers, equating to 22 tonnes per million pound of sales. Our immediate priority is to establish good practice guidance and communicate this with our suppliers.

Water, like our consumption of other utilities, has an indirect environmental impact when used. Water supply is likely to reduce in certain regions because of climate change so it is important that demand is controlled. Improving the efficiency with which we use water will be an important way to reduce this demand. We have set ourselves a target of a 5% reduction in water usage per million pounds of sales from 2008 levels by 2013. In 2008 we estimate that we used 403,779 litres equating to 140 litres per million pound of sales (based on OCED figures).

Timber Management In 2008 we have seen a growth in demand for certified well-managed timber products. We have undertaken a full review of our chain of custody procedures to ensure we maximise supplies of certified timber and timber products. In 2008 we estimate that we purchased 80% of our timber from certified well managed sources, taking us close to our 85% target.

Each incremental movement from this point gets progressively harder because of the availability of material needed for the 'awkward' product groups which remain largely uncertified. However, we recognise that it is important to keep the pressure on the timber supply chain to promote change in the source forests of the world.

In 2008 we have had notable success in plywood sourcing and are now bringing in new FSC sources from China and Malaysia. We have also replaced our American sourced joists with product manufactured in Germany from FSC sources.

In 2009 we will continue to influence and change our external supply chain. We will also develop our internal controls thereby strengthening the chain of custody for certified well-managed materials.

Whilst our 5-year ambition remains for full certification, we believe a target of 90% certified by value purchased is achievable by 2011.

Pollution Prevention We hold 12 Environmental Permits (PPC 'Part B' permits) for our timber cutting and timber treatment activities. We recorded no incidents or complaints about these installations.

Across our branch and store network we had 4 reportable incidents, including spillages of either diesel or paint. In each case the quantity was small and the established emergency procedures were used. There were no investigations by the Environment Agency.

We are pleased to report that we had no prosecutions for any environmental offences in 2008.

Complaints In 2008 we recorded 17 environmental complaints. Four were from the Vehicle Certification Agency (VCA), the regulator for some aspects of the Waste Electrical Electronic Equipment Regulations, over potential non-compliance with the consumer information requirements in these regulations. The VCA were satisfied with our responses and are not pursing the matter.

Two complaints were from neighbours about traffic, noise or lighting. Eight complaints were from customers, 7 of which were related to customer timber reporting and we continue to work to with these customers on the issue. Three complaints were from colleagues dissatisfied with aspects of delivery of our environmental services.

COMMUNITY RELATIONS

With an extensive national presence of over 1,233 places across Great Britain where we do business, and deeply embedded relationships in local communities, we actively manage our community relations and our charitable activities.

Our business raised more than £665,000 (2007: £885,000) for charities, including our three nationally supported charities, NCH (the Children's Charity), Mencap (and its sister charity ENABLE Scotland) and Leukaemia Research UK. This total raised includes direct donations by the Group amounting to £69,083 (2007: £153,656) and donations by our colleagues through our payroll giving scheme amounting to £76,672 (2007: £40,254).

In 2008, we continued our role as main sponsor of Northampton Saints rugby club and continued to involve our Northamptonshire colleagues in joint community activities.

INVESTOR RELATIONS

Our share price ended the year some 72% lower than at the beginning of the year compared to a decline in the FTSE 250 index of 40%. 2008 proved to be a trying year for shareholders, and there has naturally been much debate, internally and amongst our advisors, about the underlying causes of the disproportionate movement in our share price.

Regular feedback about investors' views is gathered after our scheduled meetings by brokers and occasionally by the Company Chairman. In addition, in 2008, we engaged an independent consultant to research investor's views and then reviewed the outcome of this research with the Board. From this work a number of clear views emerged, with shareholders very supportive of the Group's strategy, relative performance and management capabilities. Unfortunately, with the Group's activities involved in two currently unloved sectors - construction and retailing - and with a balance sheet that until the present crisis was regarded as suitably efficient, there has been little buying support for the shares, and hence the relative underperformance. The fall in the share price relative to the prospects for long-term generation of value for shareholders prompted a number of long-term 'value funds' to take a position in our stock. Many of these funds emanate from North America, and by the end of 2008 we estimate that 26% of the register was represented by institutional investors from that region.

In contrast, deepening poor economic forecasts for our sectors attracted the interest of short sellers, as indicated by the proportion of our stock on loan. This rose through 2008 from a previous long run average of around 3 to 4% to over 10% for much of the year. At the year-end stock on loan was 10%. Management's policy, as long term holders of Travis Perkins shares, is not to meet with any institution that is known to hold a short position in our equity. Unfortunately, information about short positions is difficult to find.

Responsibility for communications with shareholders and debt providers rests directly with me and Paul Hampden Smith, our Finance Director, with support and advice from the Company's brokers. We do not employ an investor relations manager. The Company Chairman and Senior Independent Director attend a selection of investor meetings throughout the year, and the Company Chairman attends the meetings at which we present the Group's interim and preliminary results to buy-side and sell-side analysts. In addition to these meetings, at least one day per month is set aside to meet investors and analysts.

This regular programme is supplemented with two trips per year to meet with investors in Eire, Canada and the USA, and we host a visit for analysts to a selection of our businesses once per year.

In 2008 we conducted nearly 200 meetings with investors. As part of each exercise to present interim and preliminary results, we typically meet shareholders representing around 60% of the shares outstanding. This includes a 'family lunch' where we meet with representatives of the Travis, Perkins and Fisher families.

STRATEGY

In last year's report to shareholders, we set out the progress we made on our strategic priorities. These priorities were set and selected to pursue our strategy of out-performing our markets on a like-for-like basis, expanding our networks and entering adjacent channels for the supply of building materials.

Whilst we have outperformed our markets and expect to continue to do so, we have, as noted above, suspended almost all our expansion activity and have postponed any further moves into adjacent channels. Given the conditions we face in our markets and in the wider economy, we believe our current strategy is very clear - maximise revenues from our existing assets, cut costs, and generate cash. This, together with the fall in interest rates, will enable us to reduce debt further and retain the support of our debt providers by maintaining the biggest possible margin of safety on our covenants. All our management and resources are focussed on these priorities.

Until we can see signs of a recovery in our markets, we do not think it worthwhile to comment on, or further develop, our longer-term strategies. There will come a time when such a review and report to shareholders will be appropriate, but that time is difficult to determine in present conditions.

Our businesses have strong brands, experienced management teams and market leading financial performance. Longer-term growth prospects for our markets remain positive. These strengths mean we remain confident of our ability to trade through the present difficult environment and to position the Group to take advantage of further opportunities we believe will arise when our sector returns to growth.

Geoff Cooper

Chief Executive

18 February 2009

CHIEF OPERATING OFFICER'S REVIEW OF THE YEAR

For the year ended 31 December 2008

INTRODUCTION

Although we went into 2008 with real concerns about a downturn in trading within the building sector, the pace and severity when it happened, was so much greater than we had anticipated. We had acted to not add new staff to the payroll, and not replace leavers wherever possible during the early part of the year, but had to instigate a much more proactive action plan during the second half of 2008. This involved dramatically reducing our headcount, and network expansion, cutting capital expenditure and managing the Group on a positive cash basis. Each business and functional department head across the Group played a vital and full part in positioning ourselves for this most difficult of trading conditions.

We are fortunate that the Group is blessed with the strongest and most stable senior operating team within our sector. They have the widest and deepest experience of both growing a business, and of defending its position during the hardest of times that we are now facing.

OUR PEOPLE

Our vision - to create a 'people first' environment that facilitates high performance, provides opportunity for career progression, and celebrates and rewards success, thereby encouraging all staff to play their part in making the Travis Perkins Group a great and safe place to work.

We recognise that our success depends upon our people and the relationships that are built at all levels of our business. Our people, and the environment in which they work drive the development of sustainable, profitable customer relationships. We believe that a high level of colleague engagement is financially rewarding for the Group, in that it directly contributes to healthy operating margins in all our businesses.

A proactive approach was taken early in 2008 to the management of our cost base through our people to prepare our business for an anticipated fall in sales across our sector. We accelerated this action in September in response to a more rapid decline in market prospects.

At the beginning of 2008, Travis Perkins employed over 17,500 people across more than 1,200 sites in the UK. As a result of these difficult market conditions, the actions we have taken have reduced the number of employees by over 1,900 full time equivalents - a reduction of 14% or 2,500 FTEs (16%) on a LFL basis.

A proactive stance was taken in order to limit the number of redundancies required to achieve this reduction. Early in 2008 we froze most recruitment activity and conducted a review to identify additional actions to manage the difficult trading environment confronting us.

The review involved examination of:

Activity impacts - identifying activities critical to drive additional business and sustain our added value. Activities with longer term benefits have been eliminated or reduced in scale;
Available opportunities - identifying opportunities to accelerate, through the prudent reallocation of resources and skills, the delivery of new revenue or profits.

The review identified a significant number of opportunities to reduce and re-align our resources through the active engagement of all managers and key colleagues in central functions and in the businesses. This holistic approach to reviewing our organisation and activities, combined with an early discussion to curtail costs, has been the key to ensuring we achieve our cost reduction targets whilst minimising redundancies.

We worked collaboratively with all of our businesses to put in place colleague support mechanisms wherever possible. This ensured that those colleagues whose positions were redundant were helped to make the transition into other roles both inside and outside the Group. We believe that this supportive approach for both those leaving and those remaining in the Group has helped maintain a higher level of morale and motivation than would normally be expected in these circumstances. This is particularly pleasing given that this is the first time for a number of years that our agenda has moved from growth to deceleration.

Our people have risen to this challenge and have supported all of our actions with the same intensity and vigour they showed when making our organisation the success it is today. In making these changes, many of our senior leaders were personally impacted financially, however, they have recognised the need for change if our business is to be protected for the longer term.

We are pleased that many of the people who have left our employment have secured positions externally.

Engagement - Building on our Success

We concluded an employee opinion survey in 2007 and, as a result, we now have consistent people metrics for our employer brand and employee engagement objectives. A number of operational and employee management practices have been changed in response to the feedback received.

In 2007, our colleagues told us what a great place Travis Perkins is to work, however, this message was not as strong in the wider job market. Early in 2008, work commenced to improve the impact of our 'employer brand'. This involved developing a new brand identity - 'Building People, Building Britain', which because we have identified pride as a key ingredient in driving employee engagement and motivation, focused on developing pride in our people our contribution as a supplier to the UK's Building and Construction industry.

A direct relationship exists between the level of engagement and colleague retention. Our own data is confirmed by external research, which shows that highly engaged employees are more than twice as likely to be top performers and will miss 40% fewer days of work due to illness. As a result, actions have been taken throughout the Group to impact critical improvement areas, including initiatives on reward, communications and training and development. Further improvements in these improvement areas will take place in response to our continuous monitoring of employee reaction.

Our next engagement survey will take place in 2009. Meanwhile, we are tracking the impact of initiatives we are taking as a result of the first survey.

We already have a high degree of loyalty to our brands from colleagues and for many we are considered to be the employer of choice in our industry. In Wickes our colleagues were proud to put their name to our brand, supporting our new TV advertising campaign. We work hard to ensure that every colleague related decision we make is aligned with being the employer of choice in our sector. It is this engagement which will see us though these tough times. Over 80% of our branch managers and regional directors, who are key to our success this year, have been promoted from within and have an expertise that cannot be matched elsewhere.

In Wickes we have strengthened our regional team with some external appointments to sustain continuous improvement in our customer offer. We are seeing increased performance levels as a result of this strategy evidenced by our growth in market share.

Training and Developing for Success

In reviewing our costs we have considered what training and development needs to be retained for immediate success. Other training plans, orientated towards our previous priorities for growth and expansion, have been postponed. Maintaining our very high standards of customer relationship management and sales delivery has been retained as a key priority.

Senior management development activity has been postponed, whilst our investment in improving our role specific training in sales has been maintained. We will continue to invest in other individual skills, in particular where we have developed a number of new products to meet the demands of the current trading climate. Managing in tough times for leaders who have not experienced a recession is at the forefront of this delivery. This follows a re-definition of a number of key roles to drive results, and to enable all activity to be aligned with the retention and development of current and new revenue streams. The impact of these new projects is being felt across the organisation, and feedback from our senior business leaders has confirmed that they match the needs of each business and that they have given our people the best possible start to the year. Each business has agreed target revenue increases by branch so that we can review the returns from this training investment and tailor any future training to improve sales further.

In seeking to continually improve our leadership capacity, we have reviewed our core management development programmes for assistant manager and branch manager levels. This work has also focussed on building the skills necessary to manage in tough markets.

We have realigned our training and development team to meet our vision for people and our three key business needs; operating management development and succession; sales improvement, and core skills. Programmes will be tailored to meet the nuances of the specific brands.

We chose to protect our management trainee scheme from our reorganisation as it remains a key building block for our future. Our investment in management trainees increased in 2008 and we now have a record 156 trainees employed across our brands.

In 2009, our key focus in Wickes retail management development will be to address the current trend of bringing in a high proportion of external deputy managers to meet a shortage of internal candidates. We anticipate this will impact on our people retention statistics favourably.

Rewarding Success

We have aligned all bonus plans for both businesses and individuals to reflect our priority of driving current results. Our focus is on delivery of key results within colleagues areas of accountability. Those that have exceeded expectations, and so have driven profitability and people retention, will be well rewarded.

As a result of our 'You Talk, We Listen' employee survey in 2007, we introduced an 'all colleague' bonus scheme in 2008 to reward employees not participating in any other scheme for their dedication to delivering and exceeding expectations.

The scheme rewards colleagues in branches that achieve a high set of standards when measured against key result areas ('KRAs'), which in turn measure performance against our 'Brand Bullseye' for each brand. This balanced scorecard approach ensures that there are appropriate measures across both financial and non financial performance. We are proud that 30% of qualifying employees earned a bonus payment under this scheme with a number qualifying for a 'super' bonus, having greatly exceeded expectations.

There is no doubt that this motivational tool ensured a keen focus on each business's KRAs and helped us to maintain our position as the top rated merchant in the UK. We are continuing the scheme in 2009, having made some improvements based on employee feedback.

This approach to reward ensures that our people are rewarded for their commitment and motivated to continue delivering against our high expectations.

In order to continuously improve our position in the DIY sector we will review our reward strategy in 2009, supporting Wickes, which continues to be the nation's favourite DIY retailer, by rewarding and recognising our store-based colleagues.

Communication and Recognising Success

In tough times, effective communication is key. We took a proactive approach to communication in 2008, ensuring that our people were consulted and advised ahead of the difficult actions we needed to take in our business to ensure profitability.

We continued to recognise great ideas and the contribution of colleagues to our success through our employee publication 'The Bridge' and also through our 'Building Britain' awards scheme. The latter saw many colleagues receiving awards through our 'Getting it Right' scheme by excelling in customer service or championing our values and also through our annual special achievement awards, where individuals are nominated by their peers for going that 'extra mile'. Travis Perkins employees Nathan Davies and Russell Shurmer were recognised for their quick actions to help the emergency services with equipment and manpower during the floods that decimated the South West of England in 2007; Buyer Asif Valiji proved his ability by saving the company more than £750,000 through his ideas for better sourcing; Jeff Eyre of City Plumbing Supplies was given an award for his outstanding commitment to branch performance, colleague development and his local community; and Kay Greatbatch (Tile Giant) and Marilyn James (Northampton Head Office) were honoured for their relentless hard work and dedication to their respective business areas despite both undergoing treatment for breast cancer.

When trading is tough it's up to everyone to dig in and help all of our businesses. We launched a new programme called 'Skip Spotters' in December 2008 to make it easier for non-sales employees to seek out new business opportunities and be rewarded for it. The programme is in its infancy, but progress so far has been encouraging.

We have improved two-way communications through employee consultation processes - a liaison group in retail and an employee representative group in our Northampton head office. This generated a great opportunity for our people to tell us what they thought we should be doing. Their feedback was included in our organisational effectiveness review which, in turn, supported our £73m cost saving initiative.

We have continued to develop our culture of open and honest communication with employees. Our business update meetings, hosted by an executive director and senior leaders are held monthly at our Northampton head office and our Wickes support centre, offer employees the opportunity to openly discuss business issues and voice their concerns. The key points of these discussions are then cascaded to employees across the Group. In addition, senior leaders in our retail division continue to drive engagement with monthly 'Big Breakfasts', at which regional store management discuss business issues raised by their teams. Within Wickes stores, a new communication event, 'Team 5' has been introduced, ensuring that branch management communicate daily with our colleagues, driving engagement and delivery of priorities.

Employer of Choice - Sharing in our Success

Our SAYE scheme had a record number of applicants in 2008 as did our salary sacrifice scheme. We negotiated and launched a new reward gateway scheme, which enables employees to take advantage of a number of voluntary benefits together with discounts on everyday items from high street stores and assistance with their household finances. We believe that our approach to reward maintains and enhances our position as an employer of choice with a range of core benefits:

Staff discount - Reward Gateway and TP Group brands;
Pension (including death in service benefit);
Private health care;
Salary exchange scheme - childcare vouchers, cycle2Work, Give As You Earn, Small Change Big Difference;
Annual leave;
Employee assistance programme;
Flexible working options;
Share save option scheme;
Loyalty awards;
Recognition Awards - Getting It Right, Branch/Store Manager of the Year in each business unit, Management Trainee of the Year, Special Achievement Awards, and CEO Award for Manager of the Year.

We will continue to align our people management activity to our business objectives and to our people vision in order to maintain and improve our position of employer of choice in our sector. Our people are among the best in our industry and it is through them that we deliver our sales and profit targets, finding more flexible ways to work in order that we can respond quickly as market conditions improve. We are confident that we are in great shape to deal with the uncertainties of the current climate and have the agility to move quickly as these market conditions improve.

HEALTH AND SAFETY

Such is the profile and importance of health and safety throughout the Group we established a Health & Safety Committee of the Board in November 2007, and a separate report from this committee covering all our H&S developments and performance is provided on pages 47 and 48.

On a personal note, I and my senior operating team remain absolutely committed to the quest of making every facility that we operate in a safer environment and everything we do a safer practice for our people, customers and suppliers. We made great strides forward in 2008 with the appointment of a world class health and safety consultant, who is very much helping us generate a greater level of engagement of our staff at every level.

GENERAL MERCHANTING

The Travis Perkins brand remains the cornerstone of the Group's activities and comprises 4 discreet business units, namely South East, South West, Midlands, and Northern, each with its own managing director and management team. It is a generalist mixed merchant, trading across the main product groups, offering a 'best in class' service to a wide range of customer types across many segments of the building sector.

In 2008 the number of trading branches was increased by 30 to 611 with 80% of the new outlets being brownfield developments. We also managed 19 stores in partnership with local authorities or their contractors.

In line with our Brand Bullseye principles we continued our drive for further improvement on product availability, customer service, and a more consistently managed pricing approach. A mandated stock range was introduced in 2007 and fully implemented in 2008 which significantly enhanced availability levels. The rollout of our customer service package was completed and we introduced new software to our business that greatly assisted pricing methods at trade counters.

Assisted by the supply chain team, we made good progress on reducing the level of slow moving stock in branches, releasing cash back into the business and opened a stock clearance centre in Leicester with good success.

As market conditions weakened, a comprehensive programme of cost reduction was put in place by the business units. At the end of the year our workforce had been reduced by 13% on a like-for-like basis and distribution capacity reduced by 18%. This action included the removal of our oldest vehicles from the fleet. By concentrating our efforts on administrative and support functions, in the main, and reviewing our working practices, we were able to preserve our customer service focus at the 'front end'. This action and a review of all other cost areas enabled us to make annualised savings of over £20m in the Travis Perkins businesses.

Although not a separate business unit in its own right, tool hire, and its management, under the strong leadership of Richard Dey, achieved another worthy year of growth and improved performance. We added a further 27 new outlets within the year, taking our total trading outlets to 191.

The national repair centre in Northampton became increasingly important, providing an enhanced service to our outlets and ultimately our customers. It improved our tool utilisation, allowed us to reduce repair costs through more efficient practices and greatly assisted us in obtaining better control which will reduce capital expenditure going forward.

SPECIALIST MERCHANTING

In our specialist division, trading in the first half was in line with 2007. However, trading in the second half deteriorated quickly. Sales from new housing fell steeply, although opportunities in infrastructure, hospitals, schools and RMI remained, but with increasing pressure on gross margin. Business unit management teams across the division responded by focusing on conserving cash, reducing costs, enhancing customer service, improving stock availability and on maintaining staff morale.

Across the division, capital expenditure, both for replacement and development, was cancelled unless health & safety related. Surplus stock reduction targets to release cash were achieved alongside improving our stock availability levels. Headcount was reduced by 11% and our transport fleet by 14%, with surplus vehicles either disposed of or redeployed to reduce the average age of the remaining fleet. Senior operating management was re-organised to reduce costs and to improve effectiveness and visibility, both in branches and with customers. Credit management teams actively responded to the prospect of more difficult credit conditions.

Benchmarx, our 29 branch kitchen & joinery specialist, opened 4 branches in the first half. The investment in these 4 branches was based on the successful lower-cost footprint developed in 2007. During the year, the business increased both its market share and trading margins and generally traded ahead of our expectations.

CCF, our 33 branch interiors, drywall, ceilings and insulation specialist benefited from continued growth in hospital and school projects although some branches felt the impact of decline in new housing. Margins came under pressure in the second half but the business successfully responded by expanding its product range and by reducing costs and improving productivity. This included merging two of its three branches in Leeds.

Keyline, our heavy building materials and civils and drainage specialist, added 4 branches in the early part of the year, ending it with 83. The decline in new housing starts heavily impacted the business and particularly affected its lower margin 'direct to site' sales. However, the business was able to largely protect its trading margin year-on-year. Having made changes to its senior management team in the first half of the year, it further responded by increasing its focus on infrastructure projects through flexing its product range, where it achieved good success, and by reducing costs across the business.

City Plumbing Supplies opened 8 new branches and as part of its cost reduction programme reduced 1 by merger. The business lost some sales volume from its new housing related contractor base, but further investment in stock availability and customer loyalty programmes all helped retain sales from jobbing plumbers and heating engineers. As a result, the business grew its trading margin. During the second half of 2008 the business also re-organised its senior management team and improved productivity.

RETAIL DIVISION

Wickes The first indications of the market downturn became visible in the second quarter when market growth rates stalled. This coincided with a spell of poor weather at Easter at which point our cost reduction activities started. By the half year it was clear from lead indicators, such as house prices and housing transactions, that events in the global economy would impact strongly on our business and that it would not be a short term issue. We took decisive action at that point to reduce our cost base and working capital to a level commensurate with our forecast. All these changes, which were in place by the year end, were done in a way which protected our sales effort and our share of the 'Sheds' DIY market, which grew by 0.7% in the year.

The sector became more competitive as the market tightened in the second half. Price led promotional activity from competitors put retail prices under pressure whilst inflation from the weakness of sterling put upward pressure on costs. Despite these pressures, careful management minimised gross margin losses as we were able to pass on much of the inflation into the market.

Network expansion was limited to those sites which we were contracted to take. Other site opportunities have been deferred and two loss making stores were closed. Of the ten new stores, seven were acquired and converted from a struggling competitor chain and three were brownfield developments. The average size of the new stores was approximately 24,000 sq ft compared with the 30,000 sq ft average of recent years, reflecting the Company's view that the lower fixed costs of smaller stores with smarter supply chains are right for the future.

We continued to invest in new products and new formats. Three new mezzanine floors were fitted and a new showroom format was trialled for kitchens and bathrooms which will be extended more widely in 2009. There was significant investment in new kitchens during the year leaving the business well placed to benefit from capacity reduction in the sector.

The first franchised Wickes store opened in the Republic of Ireland towards the end of the year - the store is operated by the Moritz group. Although there are no immediate plans to open more stores, this has given us the experience, systems and capability to consider franchise operations elsewhere in the future. Further openings will be evaluated by Moritz in the light of the current difficult market.

Our online business continued to grow faster than the core business, reflecting the retail industry trend for distance shopping. We also ran a successful trial of a home catalogue which will be rolled out nationally in 2009.

We believe that our historic strength of getting the right balance between quality, value and service puts us in a very strong position as we enter a period of market decline; customers will be increasingly attracted to our market leading quality and the lowest prices in our sector. This is evidenced by the retention of our title as 'Britain's Favourite DIY Store', voted for the second year running by customers in the much respected Verdict report.

We believe that our business has the best management in the sector and one of the strongest and most resilient brands. For these reasons we are certain that we are very well placed to outperform a consolidating industry, despite the economic conditions.

Tile Giant Tile Giant has grown rapidly during the year to become the clear number 2 in the ceramic and stone tile market, and is performing ahead of expectations.

Starting the year with 32 sites, we added 46 new stores including 17 from the acquisition of Tile Magic, 16 from Tile It All and 13 brownfield openings, to finish 2008 with 78 stores across the UK. Of the 17 Tile Magic stores acquired in London and the South East, 15 have now been rebranded as Tile Giant. Tile It All continues to trade under its existing name in the North East and Scotland.

During the year all three tile businesses have been fully integrated with each other and with the Group in terms of IT and accounting systems and most central functions. The management teams have been effectively combined, and strengthened with the addition of certain key roles.

The product range has been enhanced by taking the best from each of the three businesses. The buying of key commodity items such as adhesives and grouts has been moved to a single supplier, and significant buying gains have also been achieved within Wickes' tiles category.

At the end of 2008 our three existing tile warehouses were closed and the operations centralised into our new group facility in Northampton, creating cost savings and also providing a platform for further expansion.

NATIONAL SALES AND MANAGED SERVICES

The Group's dedicated national sales team manages relationships with major house builders and construction customers, as well as a number of other organisations with significant geographic coverage. During 2008 the structure of the team was changed in order to focus on the most active market sectors, whilst retaining an appropriate level of attention on all of the Group's major customers. This strategy has seen significant growth in business derived from contractors working in markets such as infrastructure, health and education, facilities management and repair and maintenance of social housing stock, which has offset a large proportion of the reduction in sales to major house builder customers.

During 2009 we will continue this targeted customer approach and further development of long-term framework agreements, with the primary objective of continued expansion through each of our merchant and specialist brands. Supported by our national sales office and our design and estimating teams we are well positioned to sustain and develop this business and to provide our major customers with the service they require during 2009 and beyond.

Our managed services team actively targets the affordable housing RMI sector, and is responsible for the development, delivery and ongoing management of bespoke supply chain solutions to organisations and their partners within the social housing market, a sector which has shown considerable resilience in this downturn. Typically clients are local authorities, housing associations and contractors working within the social housing sector. Our solutions can involve:

the adaptation of a client's existing store to provide a dedicated facility;
the identification of a new location for a dedicated store and/or Travis Perkins trading branch;
the adaptation of an existing branch to provide dedicated services;
the utilisation of a number of branches to provide a multi site solution for national or regional agreements.

These partnerships are complimentary to the Government's efficiency drive and are predominantly based upon Travis Perkins' core competencies of service, purchasing, stock management, distribution, cost control and administration.

Our strong focus on continuous improvement has enabled housing organisations, along with their own labour workforce or appointed contractors, to work in partnership with the objective of delivering an improved service for their tenants.

Stores exclusively supplying local authorities, housing associations, and contractors increased from 11 in 2007 to 19 during 2008, and we enjoyed strong sales growth as a result. Additionally, the Group is servicing in excess of 40 other projects through existing branches.

In May of 2008, we were awarded Supplier of the Year at the Housing Excellence Awards, organised by Northern, Midlands and Southern Housing magazines, in recognition of our work with social housing providers and their contractors.

CUSTOMER SERVICE AND INSIGHT

The Group's various businesses have increasingly become more customer focused in recent years, and to this end we have an established customer insight department which works across all brands within the Group.

Customer Insight provides our businesses with the independent customer views that are the bedrock of our Brand Bullseyes, and become incorporated into the companies' plans. This ensures that the customer is the central focus of our business activity. Last year they collected over 20,000 customer opinions at various points in the purchase process. This enables us to pin-point and assemble their desires and requirements as to where we can and should make improvements in our service proposition.

So that the Group remains customer focused, each business has a customer target to aim towards, which we call the a 'Brand Bullseye'. Brand Bullseyes encompass all the elements of the customer experience - product and range, availability, price and service and these have been built into the day-to-day activity of each business within the Group.

To ensure day-to-day continuous improvements for all our customers, all the Bullseye elements are incorporated into our best practice programmes, which have received significant time and investment over the past 3 years.

Independent customer research shows that over the last three years, our customer satisfaction levels for both the TP builders merchant and Wickes retail outlets have substantially improved, which is a testament to our commitment to the customer and the total customer experience at all of our brands and businesses.

SUPPLY CHAIN

Customers and our brands are benefiting from the Group's well timed investment in supply chain development. In a challenging market we have managed to significantly reduce our over-stocks whilst still driving forward our product availability to the highest levels in our respective markets. The supply chain team have taken a low investment approach, focused on engaging colleagues through simple targeted reporting, building on our mandated ranging success of 2007 and our excellent branch KRA ('Key Result Area') system. An example of this is the use of a monthly Top 30 'lost sales' analysis by branch, which has driven significant improvements in sales, through linking availability measures to their true consequences in lost sales. We now target driving down lost sales rather than percentage availability improvement. Reducing lost sales helps our customers and allows visibility of how our efforts are improving the sales line.

Suppliers also benefit. Although we hear much talk of collaboration in many markets, little action is evident. We believe the key to this is personal relationships, strengthened through the common goal of driving out lost sales and generating profits. We present lost sales information to our suppliers through a now improved supplier KRA solution and will begin sending direct 'lost sales' text messages to their senior managers and managing directors in early 2009. Our supplier teams can see first hand the challenges of product availability and work proactively to resolve any issues with Travis Perkins Group often before our internal team are aware of them.

Infrastructure has also improved. 2008 saw the successful start up of a 500,000 sq ft multi-brand warehouse providing reliable access to a wider set of products, which in turn drives up our branch product availability. Even in the tough market conditions of 2008 this has proved an excellent tactical and strategic decision, suppliers being very keen to get access to our leverage and scale of distribution, with the resulting benefits for them in additional sales and reduced costs. This solution improves availability, improves margin and reduces our impact on the environment by consolidation of multiple supplier deliveries into single vehicle loads to branches. The facility also provides storage for the Tile Giant business following the closure of its three sites alongside additional storage space for our growing portfolio of globally sourced own label products.

A complex programme of consolidating our timber supply centres (Kings Lynn, Aylesford, Ferndown and Cardiff) from four sites to three was completed in August improving efficiency and cost while providing a strong operating platform for future growth in the timber business.

In our branches, local distribution is a key requirement of our business model and a significant cost to the business. We reacted quickly to reducing volume in 2008 by removing 306 vehicles from our 2,256 strong trade fleet. This is just the start of a programme of efficiency improvements in this function. Following a successful trial, we implemented vehicle tracking and utilisation technology in all our CCF brand vehicles. The move has proved a significant asset to this business, reducing costs and environmental impacts through improved utilisation. This programme will be rolled out to our other merchant businesses during 2009 and once utilisation has improved, we will then focus on the customer service benefits that we know this technology can provide.

The supply chain platform we are creating for our brands enhances customer service, improves efficiency, leverages group scale, supports margin and working capital improvement whilst significantly reducing our operational impact on the environment. This will continue to evolve into an efficient high service model, supporting our brands to meet the ever increasing demands of our customers and helping them to remaining leaders in their respective markets.

Quality Assurance (QA) and Corporate Social Responsibility (CSR)

The prime responsibility of the group quality assurance department is to protect all of the group brands with two key objectives:

Firstly, to ensure that Travis Perkins companies only use suppliers who have acceptable control of their manufacturing, environmental, ethical and health & safety processes;
And secondly, to ensure that Travis Perkins companies only stock product that conforms to national and international regulations, is safe, fit-for-purpose and conforms to required specifications.

As our business has grown so has the challenge of QA. At the end of 2008 the number of primary suppliers to the Group was in the order of 600, supplying in excess of 130,000 product lines. As a result we have continued to invest in the QA department during 2008 whilst also improving the efficiency of its operations.

Within the supplier base there are 1,341 known manufacturing sites of own brand/label products, of which 545 are based in Asia. These figures represent an increase of 13% and 16% respectively against 2007, mainly as a result of our increased global sourcing activities. We rank all our manufacturing sites through site audits and will shut operations down if they do not meet our exacting criteria. We consider all Asian operations to be 'high risk' and will not commit to supply until our team have audited a site. We continue to maintain a Group QA Asia office based in Shenzhen, southern China, to fully support the Asian supplier base, in addition to the Group QA UK offices in the merchant and retail divisions.

Own brand is a key focus for our QA teams, however, 2008 saw an extension of our primary supplier assessment programme covering branded suppliers and major distributors. We audit the QA processes of our primary suppliers to ensure they are following our rules when supplying to the Group. A further 48 suppliers had audits during the year bringing the total to 105 suppliers assessed at primary level.

In addition we have enhanced our product approval and product technical data bases to take account of our responsibilities in respect of 'REACH' ('Registration, Evaluation and Restrictions of Chemical Substances') which came into force during the year.

Objectives for 2009 include greater focus on product failure and customer returns through direct feedback from customers via our website business customer reviews, with further development of the strategic supplier development programme for own brand suppliers. We will also further extend our Asian operation and skills to support our environment and ethical obligations as our sourcing geography grows.

Suppliers and Global Sourcing

Manufacturers and suppliers are vital stakeholders to all brands and businesses within the Group, and we remain fully committed to establishing long term and collaborative relationships with all our major suppliers, whether UK based or International.

Within the merchanting businesses we primarily support manufacturers that develop and produce products that have high and tangible brand equity, are of the utmost high quality and utilise leading technology. We do however also have a substantial requirement for own brand and own label products throughout the Group to meet our customers' expectations and requirements, most notably within Wickes. Wickes is largely an own label, limited assortment retailer, where customers rely on our sourcing teams to find and present the best value products pitched at brand leader quality for each product type.

We continue to invest and strengthen our direct sourcing capability and have enjoyed an increase in volumes and margin benefits as a result of this activity. We very much take our responsibilities and overall business risk extremely seriously and continue to strengthen and enhance every aspect of the process of globally sourcing.

Due the differences in models between Wickes and the other businesses within the Group, we have expressed separately below the number of product suppliers and the percentage the top 50 suppliers represent in each channel:

Trade Business (including Tile Giant)
	2008	2007
Number of product Suppliers	7,050	6,750
Top 50 representation of total purchases	59%	58%
Wickes
Number of product Suppliers	228	245
Top 50 representation of total purchases	86%	84%

I would like to place on record our genuine thanks to all our major suppliers, for their fabulous and continued support and efforts throughout 2008.

MARKETING

In 2008, as we moved into more difficult trading conditions, we increased our trade marketing focus on retaining our customers and growing our share of their spend, driving footfall into our branches and increasing our number of trading accounts.

We continue to support our trade businesses in increasing their market and customer focus. Our Brand Bullseyes guide everything that we do and ensure that we are focusing our activity in the areas that matter most to our customers. We ensure that each of our businesses is communicating in a way that is targeted and relevant to their market, so ensuring we get the best returns on our marketing investment.

We are giving priority to improving the quality of our customer data, allowing us increasingly to segment and analyse our customers, identifying those who offer us the most potential and making sure we put together offers and activity to meet their needs. We have developed marketing plans to cover all stages of the customer journey, from acquiring and welcoming new customers through to reactivating dormant accounts. The programme has successfully delivered additional business to our branches, and we continue to measure and refine the activity to generate profitable sales.

It is becoming increasingly important for our branches to be able to promote themselves locally. We have set up a fast and cost effective system to allow branches to order personalised advertising materials via our intranet. This ensures we produce consistent materials that meet our brand guidelines and comply legally.

In order to offer our customers better value and increase our buying and marketing efficiencies, we are also concentrating on developing our own brand offering. '4Trade' is being developed as a good quality range of trade products sold across all merchant businesses, replacing individual private label products, so significantly reducing SKUs. 'Iflo' is our range of bathroom components, offering bathroom installers and plumbers guaranteed good quality products at competitive prices. We remain fully committed to offering our customers a full range of manufacturers brands.

In 2008 we moved our in-house design, print and distribution ('DPD') facility to new premises, allowing us to work more efficiently and take on additional work for the Travis Perkins Group. We have moved a significant proportion of our literature and point of sale design and production to DPD, and have already achieved annualised savings of £600k, with the additional benefit of cash flow improvement by moving work from outside suppliers to sit within the Group. A significant cost saving has been achieved by distributing printed materials to our branches using our existing distribution network. We expect to continue to deliver additional savings whilst maintaining or improving the quality of our service.

In 2008, The Travis Perkins Group confirmed a three-year agreement to become title sponsor of the Travis Perkins plc Senior Masters at Woburn Golf Club. The tournament will be played over the world-famous Duke's Course up to and including the tenth anniversary of the tournament in 2010. Supported by five of our key suppliers - DeLonghi, Expamet, Knauf, Vaillant and Wavin - the 2008 event helped us to build customer relationships through hospitality, build awareness for our corporate and business brands and promote our product and service offering to current and potential customers. The event was a great success with record attendance levels and many opportunities to get closer to our customers and suppliers. We look forward to the 2009 and 2010 events producing even better results.

AND FINALLY

2008 as predicted, proved to be a most demanding year within and across all the operational and support functions within the Group. However, it was the manner and the exceptional spirit of every single person, in each team, in each business, in each division and in each department, that rose to the challenges we faced, that proved to be the most impressive feature of the year.

We know markets and trading will remain extremely difficult for the foreseeable future, but we are so fortunate to have such a highly talented, and highly motivated group of people within the Travis Perkins Group. I express my sincere thanks for their outstanding contributions and efforts during last year.

John Carter

Chief Operating Officer

18 February 2009

FINANCE DIRECTOR'S REVIEW OF THE YEAR

For the year ended 31 December 2008

INTRODUCTION

This report provides a commentary on how the business performed during 2008 in comparison to the Group's financial objectives, which are set out below, together with details of the financial aspects of the Group's strategy, risk management procedures and operating policies.

FINANCIAL OBJECTIVES

The Directors of the Group remain committed to the long-term creation of shareholder value, which they believe is achieved through:

Increasing the Group's market share via a combination of like-for-like sales growth and targeted expansion through acquisitions, brown field openings and in-store development;
Improving profitability with a medium term target for profit growth in percentage terms exceeding that for sales;
Investing in projects and acquisitions where the pre-tax return on capital employed exceeds the weighted average cost of capital of the Group by a minimum of 4%;
Generating sufficient free cash flow to enable the Group to expand its operations whilst funding attractive returns to shareholders, reducing its debt and pension deficit;
Operating an efficient balance sheet, by structuring sources of capital to minimise the Group's weighted average cost of capital consistent with maintaining an investment grade financial profile with interest cover between four and six times EBITA;
Maintaining long-term dividend cover at between two and a half and three and a half times earnings.

Whilst the above are appropriate long-term objectives, our short-term objectives give priority to maximising cash generation. This has involved curtailing business expansion and development and suspending dividend payments in order to reduce net debt more quickly.

FINANCIAL REVIEW

To ensure the business is focused upon achievement of appropriate targets, a series of key financial performance indicators are monitored throughout the business. These are shown in the table below. For 2008, where indicated, these measures are stated on an adjusted basis stripping out the effects of the exceptional reorganisation costs and in 2007, where indicated, the exceptional deferred tax credit.

Results

	2008	2007	2006	2005
Revenue (decline) / growth	(0.3)%	11.9%	7.9%	44.4%
Like-for-like revenue (decline) / growth	(4.5)%	8.1%	1.4%	(0.9)%
Adjusted operating profit to sales ratio	8.5%	10.0%	9.8%	10.1%
Profit before tax (decline) / growth	(44.0)%	12.7%	12.2%	0.1%
Adjusted profit before tax (decline) / growth	(22.5)%	18.7%	6.6%	0.1%
Net debt to adjusted EDITDA	2.8x	2.5x	2.4x	2.9x
Adjusted interest cover (note 10)	4.3x	5.4x	4.9x	4.9x
Adjusted return on capital (note 36)	12.9%	15.9%	14.6%	14.8%
Adjusted free cash flow (note 35)	£185.3m	£157.8m	£216.6m	£226.1m
Adjusted dividend cover (note 13)	8.5x	3.3x	3.4x	3.4x

As a result of the economic downturn the Group has taken steps to reduce its overhead base by challenging all areas of expenditure. A combination of reducing headcount, virtually stopping business expansion, eliminating marginal activities and challenging suppliers to be more cost effective has been successful, but it has resulted in the Group incurring some significant one-off charges. In addition, the slowdown in the property market means that there is considerably less opportunity to sublet the Group's empty trading properties, a situation which may exist for many years. Accordingly it is likely that the Group will have to pay significant property running costs in respect of these properties for longer than previously anticipated.

Therefore, to enable readers of the financial statements to obtain a clear understanding of underlying trading, the Directors have shown separately the exceptional level of spend in the group income statement. The total charge of £56.2m includes a cost of redundancy and re-organisation (£10.5m), onerous property lease provisions (£39.5m) and asset write offs (£6.2m).

Adjusted earnings before interest, tax, depreciation and amortisation ('EBITDA') (note 37) were £330.3m (2007: £373.0m), a decrease of 11.4%.

With turmoil in the financial markets pushing 6 month LIBOR rates up as high as 6.40% during the year and causing the margin on the Company's new £1bn facility to be more than double that on the previous facility, it is not surprising that total net interest expense, before other finance income of £4.8m (2007: £3.3m) and £6.3m of derivative mark to market losses (2007: £0.3m gains), was £5.4m higher than last year at £67.5m (2007: £62.1m). Adjusted interest cover (note 10), is approximately 4.3 times (2007: 5.4 times).

Adjusted group profit before tax (note 5b) was £58.9m or 22.5% lower than last year at £202.5m (2007: £261.4m).

The adjusted tax charge was £58.6m (28.9%) compared with £80.3m (before tax in respect of the exceptional items credit) (30.7%) in 2007. The rate is higher than the UK corporation tax rate principally because of non-qualifying property expenditure and other items, which are not allowable for tax.

Profit after tax was £101.9m a decrease of 45.0%. Adjusted profit after tax (note 5b) was £143.9m, a decrease of £37.2m (20.5%) compared to 2007.

Basic earnings per share was 87.1 pence. Adjusted basic earnings per share (note 12b) was 17.9% lower at 123.0 pence, compared with 149.8 pence in 2007.

Cash Flow

Despite recording lower adjusted operating profits, good working capital control has resulted in the Group generating £337.6m of adjusted cash from operations (2007: £331.9m, after adjustment for week 53 supplier payments of £28m), an increase of 1.7%. Adjusted free cash flow, (calculated before, expansionary capital expenditure, special pension contributions, exceptional reorganisation costs and dividends) was £185.3m (note 35), 17.4% higher than for 2007 (after adding back the 53rd week extra supplier payment run made in 2007).

The free cash generated by the Group was used in part to fund expansion capital expenditure of £53.5m (2007: £82.2m) in the existing business, new acquisitions of £22.5m (2007: £47.2m before loan notes issued of £8m), investments of £0.3m (2007: £nil) and interests in associates of £20.7m (2007: £nil).

Pensions

At 31 December 2008, the gross deficit of the pension scheme was £69.9m (31 December 2007: gross deficit £16.0m). The net deficit after allowing for deferred tax was £50.4m (2007: net deficit £11.5m).

As equity markets fell during 2008, asset values reduced and so by the year-end the scheme deficit increased by £121m. The deficit was increased by a further £19m due to the net effect of interest on scheme liabilities and scheme experience gains. However, the yield on the index of AA corporate bonds with a maturity greater than 15 years had risen by 40 basis points by 31 December 2008, increasing the liability discount rate to 6.20% and so reducing the value of scheme liabilities, and the deficit, by £44m. The deficit also fell due to a £30m benefit from a 0.4% lower inflation assumption and also due to £12m of company funding in excess of the current pension service cost.

The scheme is now 86% funded (2007: 97%) with the net deficit representing approximately 12% (2007: 1%) of the Company's market capitalisation at 31 December 2008.

The triennial actuarial valuation of the scheme, due as at 30 September 2008, is in progress. The directors are currently discussing the Actuary's initial findings with the Trustees of the scheme.

Equity

Total equity, at 31 December 2008, was £1,018.2m. The decrease of £18.7m compared to 31 December 2007 was the result of retained profits for the year being lower than the aggregate of actuarial losses in the pension scheme and losses incurred on cash flow hedges as a result of interest rate movements.

The Group's adjusted return on capital in 2008 (note 36) was 12.9% (2007: 15.9%), which remains higher than the Group's weighted average cost of capital.

At the year-end the share price was 340 pence (2007: 1,204 pence) and the market capitalisation £0.4bn (2007: £1.5bn), representing 0.4 times (2007: 1.4 times) shareholders' funds. During the year, the daily closing share price ranged from 1,191 pence to 223 pence.

Properties

At 31 December 2008, the carrying value of the Group's 351 freehold and 57 long leasehold property portfolio, which was last revalued in 1999 on an existing use basis, is £257m.

Goodwill and Other Intangibles

At the year-end, a series of tests were undertaken to determine whether there had been any impairment to the balance sheet carrying values of goodwill and other intangible assets. The key assumptions behind the calculations are as follows:

cash flow forecasts, were derived from the most recent financial budgets and plans for the three years ending 2011, which were approved by the directors, Cash flows for the following two years were extrapolated from cash flows for 2011 using similar assumptions to those applied to 2011projections based on management approved budgets for 2009 and four-year plan for 2010 to 2013;
the weighted average cost of capital ('WACC') of the Group of 7.52%;
long-term forecast growth rates of 2.5% in line with the average long-term GDP growth trend applied from 2014 onwards.

In summary, the tests indicated that, despite the weak markets currently being experienced, the value of discounted future cash flows meant it remained appropriate not to write off any of the goodwill previously acquired by the Group.

Approximately 55% of the carrying value of the Group's goodwill and intangible assets is allocated to the Wickes cash-generating unit. On the basis of the assumptions stated above, the calculations show that for there to be no impairment, the minimum profit in 2013 would need to be £41m, which compares to £46m for 2008.

Whilst the Directors consider that their assumptions are realistic, it is possible an impairment would be identified if any of the above key assumptions were changed significantly.

After additions of £21.7m during the year, the net book value of goodwill and other intangibles in the balance sheet is £1,513.9m (2007: £1,492.2m).

PRINCIPAL RISKS AND UNCERTAINTIES

Going Concern

A review of the Group's business activities, together with the factors likely to affect its future development, performance and position are set out on pages 10 to 21 of the Chief Executives review of the year. The financial position of the group, its cash flows, liquidity position and borrowing facilities are shown in the balance sheet, cash flow statement and accompanying notes in the financial statements. Further information concerning the group's objectives, policies and processes for managing its capital; its financial risk management objectives; details of its financial instruments and hedging activities; and its exposures to credit risk and liquidity risk can be found below.

The Directors, in their consideration of going concern, have reviewed the Group's future cash forecasts and revenue projections, which they believe are based on prudent market data and past experience and believe, based on those forecasts and projections, that it is appropriate to prepare the financial statements of the Group on the going concern basis.

Management is currently of the opinion that the Group's forecasts and projections, taking account of reasonably possible changes in trading performance, show that the Group should be able to operate within its current facilities and comply with its banking covenants. In arriving at their conclusion that the Group has adequate financial resources, the Directors were mindful that the Group has a robust policy towards liquidity and cash flow management and that it is financed through £1.2bn of facilities committed to 2013.

A breach of the one or more of the Group's banking covenants could result in the Group's debt becoming immediately repayable. Whilst this circumstance is currently not envisaged, the Group is subject to a number of significant risks and uncertainties, which arise as a result of the current economic environment. These risks are discussed below in the following sections: Liquidity and Net Debt; Interest Rate and Currency Derivatives; Credit Risk; Market Conditions and Competitive Pressures; Product Availability and Product Prices and Pensions.

Should a covenant breach become likely, the Group would enter into negotiations with its debt providers which could result in it accepting higher financing costs or being forced into actions, such as raising equity, or a significant sale and leaseback, which ordinarily it would not contemplate. It is the current expectation of the Directors that this would be achievable.

The Directors believe that the Group is adequately placed to manage its business risks successfully despite the current uncertain economic outlook and challenging macro economic conditions. As noted on pages 12 to 14 of the 'Managing Through the Downturn' section of the Chief Executive's review of the year, during 2008 additional measures have been taken to safeguard cash and cost reduction programs and working capital arrangement policies have been put in place which will continue in 2009. The Directors consider that the Group has the flexibility to react to changing market conditions as a substantial proportion of the Group's costs are variable or discretionary and can be reduced or increased in line with the needs of the business. Actions available to management include further headcount reductions, supply chain improvements and additional working capital savings.

After making enquiries, the Directors have formed a judgement at the time of approving the financial statements, that there is a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future. For this reason, they continue to adopt the going concern basis in preparing the financial statements.

Financial Risk Management

Financial risk management is an integral part of the way the Group is managed. In the course of its business, the Group is exposed primarily to liquidity risk, interest rate risk, foreign exchange risk, credit risk, capital risk and tax risk. The overall aim of the Group's financial risk management policies is to minimise potential adverse effects on financial performance and net assets. The Group manages the principal financial risks within policies and operating parameters approved by the Board of Directors and does not enter into speculative transactions.

Treasury activities, which fall under the day-to-day responsibility of me as Finance Director, are managed centrally under a framework of policies and procedures approved by and monitored by the Board. The policies in respect of interest and currency hedging, the investment of surplus funds and the quality and acceptability of financial counterparties were reviewed and re-approved by the Board during the year.

The treasury department is not a profit centre. Its objectives are to protect the assets of the Group and to identify and then manage financial risk. In applying these policies, the Group will utilise derivative instruments, but only for risk management purposes.

The Board receives monthly reports on cash flows, debt levels and covenant compliance with comparisons to budgets and forecasts. In addition, all derivative related activity is reported to the Board at the next board meeting. As described in the Corporate Governance Report on page 43, the Board receives regular reports on specific areas of risk. As part of these risk reviews papers are presented on areas such as budgeting and planning, debt strategy (including derivative policy) and banking relations and working capital control.

Liquidity and Net Debt (Note 24)

Liquidity Risk

The Group's policy on liquidity risk is to ensure that sufficient cash is available to fund on-going operations. The Board manages exposure to liquidity risk by maintaining adequate facilities to meet the future needs of the business. Those needs are determined by continuously monitoring forecast and actual cash flows taking into account the maturity of financial assets and liabilities included in the balance sheet.

The Group's principal borrowing facilities are provided by a group of core relationship banks in the form of a term loan and a revolving credit facility and by US institutions in the form of US$ denominated notes. The quantum of committed borrowing facilities available to the Group is reviewed regularly and is designed to comfortably exceed forecast peak gross debt levels.

Liquidity Management

The Group's treasury team are responsible for monitoring the Group's short and medium term liquidity requirements using a combination of annual budgets which have been analysed on a daily basis using historic trends, quarterly trading and cash flow re-forecasts and short term forecasts adjusted for actual events as they occur. They are then charged with drawing down sufficient funds to meet those needs whilst minimising borrowing costs and reducing the incidences of investing surplus funds.

Medium term borrowing and hedging requirements (up to 5 years) are determined from the Group's annual budget and three-year plan. These, which are prepared to show monthly trading, cash flows and debt requirements for the entire period, are updated and approved by the Board each year.

To ensure the Board continues to take pre-emptive action the Group re-forecasts profits and cash flows on a quarterly basis.

Facilities

Liquidity headroom was increased during 2008 through a refinancing of the Group's UK bank debt, which secured a new committed £1bn, 5-year facility in April. Strong cash generation and plans to continue conserving cash have reduced management's estimate of the Group's future borrowing requirements. There are currently 16 banks in the new syndicate, with approximately 80% of the facility being advanced by half of them.

Prevailing market conditions at the time of the refinancing resulted in the margin over LIBOR, applied to the Group's borrowings by the syndicate banks, more than doubling. Additionally, the Group had to pay £14.7m in facility arrangement fees to the banks, which are being amortised through finance charges over the period the facility is available.

Of the £1bn syndicated credit facility, £525m is represented by a fully drawn amortising term loan and the remainder a revolving credit facility, which can be drawn down as required. In addition the Group had access to a £50m uncommitted overdraft facility at 31 December 2008, although since the year-end this has been reduced to £40m as it was not being fully utilised.

Liquidity headroom is expected to remain high with the term loan due to be repaid in six £35m tranches each half year, commencing April 2010, with the balance falling due in April 2013. The revolving credit facility is available to the Group until April 2013.

Tranches of the syndicated facility can be drawn down for weekly, monthly, three monthly and six monthly terms, with the actual duration of draw downs being dependent upon management's interest rate expectations. For all of 2008, due to the high differential between 6 Month LIBOR and weekly and monthly LIBOR the Group has drawn funds on a weekly or monthly basis.

In early 2006 the Group issued $400m fixed rate guaranteed unsecured notes (the 'Notes') with a broad range of US financial institutions. The debt comprises $200m of Notes repayable in 2013 and the remainder in 2016. At inception, the fixed interest rate net proceeds were swapped into Sterling 6-month LIBOR determined variable rate debt.

Debt

As at 31 December 2008 the Group had net debt of £1,017m (2007: £941m) (note 33). However, if the £109m movement in debt caused by the falling Sterling US dollar exchange rates is eliminated debt at 31 December would have been £909m a reduction of £32m over the year. The Notes are fully hedged and so by the dates they are redeemable in 2013 or 2016, the exchange effects will have fully reversed.

The peak level of daily borrowings on a cleared basis during the year ended 31 December 2008 was £1,112m (2007: £1,022m). The maximum month end cleared borrowings were £1,043m (2007: £984m). At 31 December 2008 the Group had undrawn facilities of £332m (2007: £215m).

Operating Leases

Note 30 gives details about the Group's operating lease commitments, most of which relate to properties occupied by the Group for trading purposes.

Covenant Compliance

The Group's borrowings are subject to covenants set by the lenders. Covenant compliance is measured semi-annually using financial results prepared under IFRS extant at 31 December 2007.

The key financial covenants are the ratio of net debt to earnings before interest tax, depreciation and amortisation 'EBITDA' which must be less than 3.5 times, and the ratio of earnings before interest, tax and amortisation 'EBITA' to net interest which must be above 3.5 times. At 31 December 2008 the Group achieved net debt to EBITDA of 2.8x (note 37) and interest cover of 4.3x (note 10).

In addition to these financial covenants the Group's borrowing agreements include general covenants and potential events of default. At the date of this report there had been no breaches of the financial covenants and the Group had complied in all other respects with the terms of its borrowing agreements.

Interest Rate and Currency Derivatives (Note 25)

Interest rate risk

One of the principal risks facing the Group is an exposure to interest rate fluctuations. The Group has borrowed in Sterling at floating rates, whilst its US$ denominated Notes have fixed rates of interest.

The Group's hedging policy is to generate its preferred interest rate profile, and so manage its exposure to interest rate fluctuations, through the use of interest rate derivatives. Currently the policy is to maintain the profile of borrowings in the approximate ratio of 33% to 75% at fixed interest rates and the remainder at variable rates.

The Group has entered into a number of interest rate derivatives designed to protect it from fluctuating interest and exchange rates on its borrowings. At the year-end, the Group had nine interest rate derivatives fixing interest rates on approximately 70% of the Group's cleared debt. The maturity of the Group's derivatives is as follows;

	Maturity	Notional Value
Vanilla interest rate swaps	February 2010	£237m
Vanilla interest rate swaps	February 2013	£100m
Vanilla interest rate swaps	April 2013	£100m
Cancellable swaps	October 2013	£100m
Cap and collar	February 2010	£118m

Currency risk

Having taken out 4 cross currency swaps, to protect it from exchange rate fluctuations, in respect of its $400m fixed rate guaranteed unsecured notes, the Group is not exposed to significant foreign exchange risk.

Whilst the majority of purchases of goods and services are invoiced in Sterling, goods acquired from overseas either directly from manufacturers or through UK based distributors continue to increase. Overseas originated purchases currently approximate to 40% of group purchases and so adverse movements in Sterling, could, to the extent they cannot be passed on to customers, affect profitability.

The Group settles its currency related trading obligations using a combination of currency purchased at spot rates and currency bought in advance on forward contracts. Its policy is to purchase forward contracts for between 30% and 70% of its anticipated requirements twelve months forward. At 31 December 2008 the nominal value of currency contracts, most of which were $US denominated, was $46m and €2M. At 31 December 2008, based upon forecast currency requirements for 2009, a US$10c change in the exchange rate would impact costs, before any corresponding selling price amendment, by approximately £1m.

Credit Risk

Financing

Credit risk refers to the risk that a counterparty will default on its contracted obligations resulting in loss to the Group. It arises on financial instruments such as trade receivables, short-term bank deposits, banking facilities, interest rate derivatives and foreign currency hedging transactions. To reduce the risk of loss arising from counterparty default, the Group has a policy of dealing with credit-worthy counterparties. The Group has policies and procedures to ensure that customers have an appropriate credit history and that account customers are given credit limits appropriate to their circumstances, which are regularly monitored.

The Group does not have any significant credit risk exposure to any single counterparty or any group of counterparties having similar characteristics (other than banks providing banking facilities, interest rate derivatives and cross currency swaps). The Group defines counterparties as having similar characteristics if they are connected entities. The credit risk in liquid funds and derivative financial instruments is limited because the counterparties used are banks with high credit-ratings assigned by international credit-rating agencies.

At the year-end, the Group had open currency hedging contracts with four banks, open interest rate derivative contracts with 6 banks and had 16 banks within its banking syndicate. There were 19 companies holding the Group's US$ denominated Notes, of which the largest held 21% by value. The Group has entered into only one currency hedging contract and no swaps with a counterparty that is not a current member of its banking syndicate. On 18th February 2009, the Group's banking counterparties had ratings of:

Rating	Number of Banks	Amount of UK Bank Facilities	Notional Value of Interest Rate Derivatives	Notional Value of Cross Currency Swaps
	No.	£m	£m	$m
AA+ to AA-	9	528	337	150
A+ to A-	8	472	318	250

Customer Credit

Within the Group's trade businesses, one of the key aspects of service is the provision of credit to customers, with the Group carrying the associated credit risk.

Trade receivables consist of a large number of customers, none of which represents more than 0.5% of sales, spread across diverse industries and geographical areas. However, the nature of the industry is such that there is a risk that some of these customers will be unable to pay outstanding balances.

Ongoing evaluation of the financial condition of accounts receivable and reviews of the total credit exposure to all customers is performed monthly, using external credit risk services where necessary. Increased credit levels are approved by both operational and financial management with personal guarantees being obtained, where appropriate, before credit is advanced. Whilst day-to-day credit control is the responsibility of the centrally based teams, the Group also operates an in-house debt recovery team, headed by a qualified solicitor, that is responsible for recovering debt that remains unpaid. The Group does not have credit guarantee insurance.

During the recession of 1990/91, the Group experienced bad debt levels of up to 1.35% of credit sales. Over the past 10 years, the bad debt charge has averaged below 0.5%, however, during the latter part of 2008, the Group experienced an increasing level of bad debts, with the bad debt charge for the year reaching 0.9% of credit sales (2007: 0.4%).

Debtor days at 31 December 2008 were 59 days (2007: 56 days). An increase in one debtor day at 31 December would have reduced cash flow by approximately £5m.

Capital Risk

The Group manages its capital risk by ensuring it has a capital structure appropriate to the ongoing needs of the business that ensures it remains within the covenant limits that apply to its banking arrangements. The capital structure of the Group consists of debt, which includes the borrowings disclosed in note 24, cash and cash equivalents and equity attributable to equity holders of the parent, comprising issued capital, reserves and retained earnings as disclosed in notes 21 to 23.

The capital structure is formally reviewed by the Board as part of its annual strategy review, but it is kept under review by me throughout the year. As necessary, the Company will rebalance its capital structure through raising or repaying debt, issuing equity or paying dividends.

Tax Risk

The Group seeks to efficiently manage its tax affairs whilst at the same time complying with the relevant laws and disclosure obligations placed upon it. However, the complexity of tax legislation means that there will always be an element of uncertainty when determining its tax liabilities.

To minimise compliance risk the Group utilises qualified in-house expertise and takes external advice when making judgements about the amount of tax to be paid and the level of provisions required.

Future tax charges and payments could be affected by changes in legislation and accounting standards beyond the control of the Group.

Market Conditions and Competitive Pressures

The Group's products are sold to tradesmen and retail customers for a broad range of end uses in the built environment. The performance of the market is affected by general economic conditions and a number of specific drivers of construction activity, including housing transactions, house price inflation, consumer confidence, interest rates and unemployment. The Board conducts an annual review of strategy, which includes an assessment of likely competitor activity, market forecasts and possible future trends in products, channels of distribution and customer behaviour. Significant events including those in the supply chain that may affect the Group are monitored by the Executive Committee and reported to the Board monthly by the Group CEO. Market trends and competitor performance are also tracked on an ongoing basis and reported to the Board each month.

Whilst the Directors have considered reasonable changes in market conditions and competitive pressures, in the current environment a further significant downturn could impact group sales and margins to a greater extent than they have currently envisaged in their consideration of future trading for the purposes of the going concern statement above.

Product Availability and Product Prices

Security of supply of products and product quality are monitored by product category directors in the trade and retail businesses. Supplier financial strength, product quality and service levels are monitored on a continuous basis. An annual risk assessment with recovery plans is prepared for the major suppliers across the Group. The Group is not significantly exposed to one supplier or product type with no supplier accounting for more than 7% of total goods purchased in 2008. An established QA process is in place throughout the business.

However, the ability to pass on price increases to customers is affected by competitor activity and the economic climate. An inability to raise selling prices could reduce margins.

The market price of products distributed by the Group, particularly commodity products, can vary significantly and affect operating results. The Group's businesses actively take steps to protect themselves from anticipated price rises.

Any restrictions on third party credit insurance available to suppliers could result in them reducing their own credit exposure to the Group. If this were to occur, it could adversely impact the Group's working capital and therefore it's debt levels.

Acquisitions and Other Expansion

Growth by acquisition continues to be an important part of the strategy of the Group. Significant risk can arise from acquisitions in terms of the initial valuation, the integration programme and the ongoing management of the acquisition. Detailed internal analysis of the market position of major acquisition targets is undertaken and valuations are completed using discounted cash flow financial models. Independent advisors are used to comment on the strategic implications and the assumptions in valuation models for larger acquisitions. A rolling programme of post acquisition audits is completed and reviewed by the Board each year.

Human Resources

The ability to recruit and retain staff at all levels of the Group is an important driver of our overall performance. Salaries and other benefits are benchmarked annually to ensure that the Group remains competitive. A recruitment toolkit is available for both trade and retail outlets. A wide-range of training programmes are in place to encourage staff development and management development programmes are used to assist those identified for more senior positions. The Group Human Resources Director monitors staff turnover by job type and reports to the Board annually. Succession plans are established for the most senior positions within the Group and these are reviewed annually.

Information Technology and Business Continuity

The operations of the Group depend on a wide range of IT systems to operate efficiently. An IT strategy committee reviews performance levels of the key systems and prioritises development work. Maintenance is undertaken on an ongoing basis to ensure the resilience of group systems and escalation procedures are in place to resolve any performance issues at an early stage. Our two new data centres mirror each other with data processing switched from one to the other on a regular basis. An IT disaster recovery plan exists and is tested regularly together with the business continuity plan with arrangements in place for alternative data sites for both trade and retail businesses. Off-site back-up routines are in place.

The Group distributes products from five major warehouses in Great Britain. The loss of any single warehouse through fire or other major incident could have a material effect on the availability of product in the trade and retail outlets. Each warehouse has fire detection and alarm systems and a business continuity plan.

Legislation

The Group is affected, both positively and negatively, by the legislative environment within which it operates. Planning and building legislation impacts its customers, and consequently the Group, whilst health and safety, employment, environmental and competition laws together with the rules of the Financial Services Authority and the Listing Rules influence its day to day operations.

The Group has an in-house legal team headed by the Group Company Secretary, health and safety and environmental experts that monitor changes in legislation that affect the Group and enable it to take timely action to ensure any impacts are reduced.

Environmental

Failure to operate within the highest environmental standards may reduce the Group's profitability if such action causes it to come into conflict with legislative requirements. Furthermore, with heightened environmental awareness, companies that fail to meet environmental standards may find their ability to trade or gain access to capital markets reduced.

The Group has accreditation for its environmental management system to the ISO 14001 standard. Further details of the Group's environmental policies and performance are given in the Chief Executive's review of the year. However, to mitigate the potential environmental risks, the Group undertakes comprehensive reviews across all its businesses involving independent external advisers. External verification of environmental performance is undertaken and repeated on an annual basis.

Pensions

The risks in this area relate to the potential for contributions required to meet the benefits promised in the final salary scheme rising to a level that restricts other corporate activity. The Scheme Trustees and the Group obtain independent actuarial advice and formal valuations are carried out at least every three years. The Trustees receive reports on the investment performance quarterly. The Travis Perkins' final salary scheme was closed to all new members in April 2006.

The accounting deficit at 31 December 2008 is £70m. The Group currently has arrangements in place to eliminate the deficit over a period of 8 years. Any deterioration in the scheme's funding position could impact the Group's liquidity.

Paul Hampden Smith

Finance Director

18 February 2009

STATEMENT OF DIRECTORS' RESPONSIBILITIES

For the year ended 31 December 2008

The Directors are responsible for preparing the Annual Report, Directors' Remuneration Report and the financial statements in accordance with applicable law and regulations.

Company law requires the Directors to prepare financial statements for each financial year. The Directors are required by the IAS Regulation to prepare the group financial statements under International Financial Reporting Standards ('IFRS') as adopted by the European Union and have also elected to prepare the Parent Company financial statements in accordance with IFRS as adopted by the European Union. The financial statements are also required by law to be properly prepared in accordance with the Companies Act 1985 and Article 4 of the IAS Regulations.

International Accounting Standard 1 requires that financial statements present fairly for each financial year the Company's financial position, financial performance and cash flows. This requires the faithful representation of the effects of transactions, other events and conditions in accordance with the definitions and recognition criteria for assets, liabilities, income and expenses set out in the International Accounting Standards Board's 'Framework for the preparation and presentation of Financial Statements'. In virtually all circumstances, a fair presentation will be achieved by compliance with all applicable International Financial Reporting Standards. Directors are also required to:

Properly select and apply accounting policies;
Present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information; and
Provide additional disclosures when compliance with the specific requirements in IFRS is insufficient to enable users to understand the impact of particular transactions, other events and conditions in the entity's financial position and financial performance.

The Directors are responsible for keeping proper accounting records that disclose with reasonable accuracy at any time the financial position of the Company, for safeguarding the assets, for taking reasonable steps for the prevention and detection of fraud and other irregularities and for the preparation of a directors' report and directors' remuneration report and enhanced business review that comply with the requirements of the Companies Act 1985.

The Directors are responsible for the maintenance and integrity of the Company website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

Consolidated income statement

For the year ended 31 December 2008

		2008	2008	2008	2007	2007	2007
		£m	£m	£m	£m	£m	£m
		Pre- exceptional items	Exceptional items (Note 6)	Total	Pre- exceptional items	Exceptional items (Note 8)	Total
Revenue		3,178.6	-	3,178.6	3,186.7	-	3,186.7
Operating profit	6	271.5	(56.2)	215.3	319.9	-	319.9
Finance income	7	7.7	-	7.7	3.7	-	3.7
Finance costs	7	(76.7)	-	(76.7)	(62.2)	-	(62.2)
Profit / (loss) before tax		202.5	(56.2)	146.3	261.4	-	261.4
Tax	8	(58.6)	14.2	(44.4)	(80.3)	4.2	(76.1)
Profit / (loss) for the year		143.9	(42.0)	101.9	181.1	4.2	185.3
Earnings per ordinary share	9
Basic				87.1p			153.3p
Diluted				86.1p			151.9p
Total dividend declared per ordinary share	10			14.5p			44.9p

All results relate to continuing operations.

Consolidated statement of recognised income and expense

For the year ended 31 December 2008


	2008 £m	2007 £m
Actuarial gains and losses on defined benefit pension scheme	(70.3)	51.9
Gains on cash flow hedges	(17.1)	0.4
Tax on items taken to equity	19.6	(15.7)
Net (expense) / income recognised directly in equity	(67.8)	36.6
Transferred to income statement on cash flow hedges	(3.6)	(1.4)
Tax on items transferred from equity	-	0.4
Profit for the year	101.9	185.3
Total recognised income and expense for the year	30.5	220.9

Consolidated movement in equity

For the year ended 31 December 2008


	2008 £m	2007 £m
Opening equity	1,036.9	933.1
Shares issued	0.6	6.8
Own shares	-	(76.0)
Total recognised income and expense for the year	30.5	220.9
Share options	2.7	0.2
Dividends paid	(52.5)	(48.1)
Closing equity	1,018.2	1,036.9

Consolidated balance sheet As at 31 December 2008


	2008 £m	2007 £m
ASSETS
Non-current assets
Property, plant and equipment	534.5	505.0
Goodwill	1,351.4	1,329.7
Other intangible assets	162.5	162.5
Interests in associates	19.6	-
Derivative financial instruments	80.3	3.0
Investment property	3.4	3.5
Available-for-sale investments	2.0	2.0
Deferred tax asset	19.5	4.5
Total non-current assets	2,173.2	2,010.2

Current assets
Inventories	321.9	330.2
Trade and other receivables	386.2	421.9
Derivative financial instruments	2.4	0.7
Cash and cash equivalents	7.7	26.3
Total current assets	718.2	779.1
Total assets	2,891.4	2,789.3

Consolidated balance sheet (continued) As at 31 December 2008


	2008 £m	2007 £m
EQUITY AND LIABILITIES
Capital and reserves
Issued capital	12.3	12.3
Share premium account	179.5	178.9
Other reserve	23.8	24.2
Hedging reserve	(17.8)	2.9
Own shares	(83.7)	(83.9)
Accumulated profits	904.1	902.5
Total equity	1,018.2	1,036.9
Non-current liabilities
Interest bearing loans and borrowings	1,007.3	863.9
Derivative financial instruments	25.8	29.8
Retirement benefit obligation	69.9	16.0
Long-term provisions	47.8	13.7
Deferred tax liabilities	74.7	75.3
Total non-current liabilities	1,225.5	998.7
Current liabilities
Interest bearing loans and borrowings	13.9	88.0
Unsecured loan notes	3.9	15.4
Trade and other payables	582.2	585.0
Tax liabilities	9.1	32.3
Short-term provisions	38.6	33.0
Total current liabilities	647.7	753.7
Total liabilities	1,873.2	1,752.4

Total equity and liabilities	2,891.4	2,789.3

The financial statements were approved by the Board of Directors on 18 February 2009 and signed on its behalf by:

G. I. Cooper	)
P. N. Hampden Smith	) Directors

Consolidated cash flow statement For the year ended 31 December 2008

	2008	2007
	£m	£m
Operating profit	271.5	319.9
Adjustments for:
Depreciation and impairment of property, plant and equipment	63.0	56.3
Other non cash movements	4.6	3.7
Losses of associate	1.4	-
Gain on disposal of property, plant and equipment	(6.0)	(7.6)
Operating cash flows before movements in working capital	334.5	372.3
Decrease / (increase) in inventories	13.3	(30.1)
Decrease / (increase) in receivables	32.3	(39.8)
(Decrease) / increase in payables	(22.5)	11.1
Cash payments on exceptional items	(8.5)	-
Cash payments to the pension scheme in excess of the charge to profits	(11.5)	(9.6)
Cash generated from operations	337.6	303.9
Interest paid	(63.0)	(72.7)
Income taxes paid	(66.0)	(74.5)
Net cash from operating activities	208.6	156.7
Cash flows from investing activities
Interest received	0.3	0.2
Acquisition of shares in unit trust	(0.3)	-
Proceeds on disposal of property, plant and equipment	14.9	4.8
Interest in associate	(20.7)	-
Purchases of property, plant and equipment	(97.3)	(123.7)
Acquisition of businesses net of cash acquired	(22.5)	(47.2)
Net cash used in investing activities	(125.6)	(165.9)
Financing activities
Proceeds from the issue of share capital	0.6	6.8
Purchase of own shares	-	(76.0)
Bank facility finance charges	(14.7)	-
Payment of finance leases liabilities	(2.1)	(1.9)
Repayment of unsecured loan notes	(11.5)	(0.2)
(Decrease) / increase in bank loans	(33.7)	98.6
Dividends paid	(52.5)	(48.1)
Net cash from financing activities	(113.9)	(20.8)
Net decrease in cash and cash equivalents	(30.9)	(30.0)
Cash and cash equivalents at beginning of year	26.3	56.3
Cash and cash equivalents at end of year	(4.6)	26.3

Notes

The Group's principal accounting policies, as set out in the 2007 annual report, which is available on the Company's website www.travisperkinsplc.com, have been applied consistently.

The proposed final dividend is nil pence (2007: 30.4 pence).

The financial information above does not constitute the Company's statutory accounts. Statutory accounts for the years ended 31 December 2008 and 31 December 2007 have been reported on without qualification or drawing attention to any matters by way of emphasis by the Company's auditors and without reference to S237 (2) or (3) of the Companies Act 1985. Statutory accounts for the year ended 31 December 2007 have been delivered to the Registrar of Companies. Whilst the financial information included in this preliminary announcement has been computed in accordance with International Financial Reporting Standards ('IFRS') this announcement does not itself contain sufficient information to comply with IFRS. The statutory accounts for the year ended 31 December 2008, prepared under IFRS will be delivered to the Registrar in due course.

This announcement was approved by the Board of Directors on 18 February 2009.

It is intended to post the annual report to shareholders on 17 April 2009 and to hold the Annual General Meeting on 21st May 2009. Copies of the annual report prepared in accordance with IFRS will be available from the Company Secretary, Travis Perkins plc, Lodge Way House, Harlestone Road, Northampton NN5 7UG from 17 April 2009 or will be available through the internet on our website at www.travisperkinsplc.com

Profit

(a) Operating profit

	2008	2007
	£m	£m
Revenue	3,178.6	3,186.7
Cost of sales	(2,080.3)	(2,087.3)
Gross profit	1,098.3	1,099.4
Selling and distribution costs	(728.1)	(649.1)
Administrative expenses	(164.7)	(141.8)
Share of losses of associate	(1.4)	-
Other operating income	11.2	11.4
Operating profit	215.3	319.9
Exceptional items	56.2	-
Adjusted operating profit	271.5	319.9

Profit (continued)

Therefore, to enable readers of the financial statements to obtain a clear understanding of underlying trading, the Directors have shown separately the exceptional level of spend in the Group income statement. The total charge of £56.2m includes a cost of redundancy and re-organisation (£10.5m), onerous property lease provisions (£39.5m) and asset write offs (£6.2m).

(b) Adjusted profit before and after tax

	2008	2007
	£m	£m
Profit before tax	146.3	261.4
Exceptional items	56.2	-
Adjusted profit before tax	202.5	261.4

	2008	2007
	£m	£m
Profit after tax	101.9	185.3
Exceptional items	56.2	-
Tax effect of exceptional items	(14.2)	-
Exceptional deferred tax credit	-	(4.2)
Adjusted profit after tax	143.9	181.1

	Merchanting		Retail		Group
	£m	£m	£m	£m	£m	£m
	2008	2007	2008	2007	2008	2007
Revenue	2,237.9	2,254.2	940.7	932.5	3,178.6	3,186.7

Operating profit	206.5	257.7	10.2	62.2	216.7	319.9
Share of associate losses	-	-	-	-	(1.4)	-
Exceptional items	18.3	-	37.9	-	56.2	-

Adjusted segment result	224.8	257.7	48.1	62.2	271.5	319.9

Adjusted operating margin	10.05%	11.43%	5.11%	6.67%	8.54%	10.04%

The segmental results for merchanting and retail are shown in note 11.

Net finance costs

	2008	2007
	£m	£m
Interest on bank loans and overdrafts*	(64.6)	(58.6)
Interest on unsecured loans	(0.2)	(0.5)
Interest on obligations under finance leases	(1.6)	(1.9)
Unwinding of discounts in provisions	(1.6)	(1.2)
Net loss on re-measurement of derivatives at fair value	(8.7)	-
Finance costs	(76.7)	(62.2)
Net gain on re-measurement of derivatives at fair value	2.4	0.3
Other finance income - pension scheme	4.8	3.3
Interest on bank deposits	0.5	0.1
Finance income	7.7	3.7
Net finance costs	(69.0)	(58.5)
Adjusted interest cover	4.3x	5.4x

*Includes £2.2m (2007 £1.7m) of amortised bank finance charges.

Adjusted interest cover is calculated by dividing adjusted operating profit of £268.7m (operating profit of £271.5m less £3.8m of IFRS adjustments) by the combined value of interest on bank loans and overdrafts (excluding amortised bank finance charges), unsecured loans, and interest on bank deposits, which total £62.1m. The comparative for interest cover is calculated using the calculation set out in the previous loan facility agreement. The calculation set out in the new facility agreement would give a comparative adjusted interest total of £57.3m, adjusted operating profit of £319.9m, and consequently cover of 5.6x.

Tax

On 26 June 2007 the House of Commons approved the Finance Bill which reduced the UK standard rate of Corporation tax from 30% to 28% with effect from 1 April 2008. The reduction in rate resulted in an exceptional deferred tax credit of £4.2m in the 2007 current year charge.

Earnings per share

(a) Basic and diluted earnings per share

	2008	2007
	£m	£m
Earnings
Earnings for the purposes of basic and diluted earnings per share being net profit attributable to equity holders of the parent	101.9	185.3
Number of shares	No.	No.
Weighted average number of ordinary shares for the purposes of basic earnings per share	117,004,114	120,839,499
Dilutive effect of share options on potential ordinary shares	1,352,096	1,109,765
Weighted average number of ordinary shares for the purposes of diluted earnings per share	118,356,210	121,949,264

At 31 December 2008, 4,680,005 (2007: 3,254,859) share options had an exercise price in excess of the market value of the shares on that day. As a result, for 2008 these share options were excluded from the calculation of diluted earnings per share.

(b) Adjusted earnings per share

Adjusted earnings per share are calculated by excluding the effect of the exceptional items shown below.

	2008	2007
	£m	£m
Earnings for the purposes of basic and diluted earnings per share being net profit attributable to equity holders of the parent	101.9	185.3
Exceptional items	56.2	-
Tax on exceptional items	(14.2)	-
Exceptional deferred tax credit	-	(4.2)
Earnings for adjusted earnings per share	143.9	181.1

Adjusted basic earnings per share	123.0p	149.8p

Adjusted diluted earnings per share	121.6p	148.4p

10.

Dividend

Amounts were recognised in the financial statements as distributions to equity shareholders as follows:

	2008	2007
	£m	£m
Final dividend for the year ended 31 December 2007 of 30.4p (2006: 25.3p) per ordinary share	35.5	30.8
Interim dividend for the year ended 31 December 2008 of 14.5p (2007: 14.5p) per ordinary share	17.0	17.3
Total dividends recognised during the year	52.5	48.1

The dividend for 2008 at 31 December 2008 and for 2007 at 31 December 2007 were as follows:

	2008	2007
	Pence	Pence
Interim paid	14.5	14.5
Final proposed	-	30.4
Total dividend for the year	14.5	44.9

The proposed final dividend of nil p per ordinary share in respect of the year ending 31 December 2008 was approved by the board on 18 February 2009.

Adjusted dividend cover of 8.5x (2007: 3.3x) is calculated by dividing adjusted basic earnings per share (note 9) of 123.0p (2007: 149.8p) by the total dividends for the year of 14.5p (2007: 44.9p).

11.

Business and geographical segments

For management purposes, the Group is currently organised into two operating divisions - Builders Merchanting and DIY Retailing, both of which operate entirely in the United Kingdom. These divisions are the basis on which the Group reports its primary segment information. As the Group's operations are entirely UK based, the Group does not present any secondary segmental information. Segment results, assets and liabilities include items directly attributable to segments as well as those that can be allocated on a reasonable basis. Unallocated items comprise mainly interest bearing loans, borrowings and expenses and corporate assets and expenses. There are no inter-segment sales.

	Builders Merchanting	Retail	Consolidated
	2008	2008	2008
	£m	£m	£m
Revenue	2,237.9	940.7	3,178.6
Result
Segment result	206.5	10.2	216.7

Share of associate losses			(1.4)
Net finance costs			(69.0)
Profit before taxation			146.3
Taxation			(44.4)
Profit for the year			101.9

Segment assets	1,298.5	1,345.6	2,644.1
Unallocated corporate assets			247.3
Consolidated total assets			2,891.4
Segment liabilities	(546.8)	(185.9)	(732.7)
Unallocated corporate liabilities			(1,140.5)
Consolidated total liabilities			(1,873.2)
Consolidated net assets	751.7	1,159.7
Capital expenditure	82.6	15.9	98.5
Depreciation	47.4	15.6	63.0

11.

Business and geographical segments (continued)

	Builders Merchanting	Retail	Consolidated
	2007	2007	2007
	£m	£m	£m
Revenue	2,254.2	932.5	3,186.7
Result
Segment result	257.7	62.2	319.9

Net finance costs			(58.5)
Profit before taxation			261.4
Taxation			(76.1)
Profit for the year			185.3

Segment assets	1,382.6	1,305.9	2,688.5
Unallocated corporate assets			100.8
Consolidated total assets			2,789.3
Segment liabilities	(435.7)	(242.0)	(677.7)
Unallocated corporate liabilities			(1,074.7)
Consolidated total liabilities			(1,752.4)
Consolidated net assets	946.9	1,063.9
Capital expenditure	115.5	24.1	139.6
Depreciation	40.7	15.6	56.3

12.

Adjusted return on capital

	2008	2007
	£m	£m
Operating profit	215.3	319.9
Exceptional items	56.2	-
Adjusted operating profit	271.5	319.9

Opening net assets	1,036.9	920.3
Goodwill written off	92.7	92.7
Net borrowings	941.0	804.4
Exchange adjustment	27.9	30.3
Pension deficit	11.5	56.6
Opening capital employed	2,110.0	1,904.3

Closing net assets	1,018.2	1,036.9
Goodwill written off	92.7	92.7
Net borrowings	1,017.4	941.0
Exchange adjustment	(80.2)	27.9
Pension deficit	50.4	11.5
Closing capital employed	2,098.5	2,110.0

Average capital employed	2,104.2	2,007.2

Adjusted return on capital	12.9%	15.9%

The calculation of capital employed has been amended to exclude exchange adjustments arising on debt with a result that the return on capital employed for 2007 has been restated.

13.

Adjusted earnings before interest, tax and depreciation

	2008	2007
	£m	£m
Profit before taxation	146.3	261.4
Net finance costs	69.0	58.5
Depreciation and impairments	63.0	56.3
EBITDA under IFRS	278.3	376.2
Exceptional items	56.2	-
Reversal of IRFS effect	(4.2)	2.8
Adjusted EBITDA under covenant calculations	330.3	379.0

Net debt under covenant calculations	925.2	940.1

Adjusted net debt to EBITDA	2.80x	2.48x

The comparative for net debt to EBITDA is calculated using the calculation set out in the previous loan facility agreement. The calculation set out in the new facility agreement would give a comparative adjusted EBITDA of £373.0m and consequently a ratio of 2.52x.

14.

Net debt

	2008	2007
	£m	£m
Net debt at 1 January	(941.0)	(804.4)
Decrease in cash and cash equivalents	(30.9)	(30.0)
Cash flows from debt	47.3	(96.5)
Increase in fair value of debt	(108.2)	(2.3)
Lease surrender	2.9	1.6
Finance charges netted off bank debt	12.5	(1.7)
Loan notes issued	-	(7.7)
Actual net debt 31 December	(1,017.4)	(941.0)
IAS 17 finance leases	24.5	28.8
Fair value adjustments to debt	80.2	(27.9)
Finance charges netted off debt	(12.5)	-
Net debt under covenant calculations	(925.2)	(940.1)

15.

Adjusted free cash flow

	2008	2007
	£m	£m
Net debt at 1 January	(941.0)	(804.4)
Net debt at 31 December	(1,017.4)	(941.0)
Increase in net debt	(76.4)	(136.6)
Dividends	52.5	48.1
Net cash outflow for expansion capital expenditure	53.5	82.2
Net cash outflow for acquisitions	22.5	47.2
Net cash outflow for acquisition of investments	0.3	-
Own shares purchased	-	76.0
Cash impact of exceptional items	8.5	-
Interest in associate	20.7	-
Shares issued	(0.6)	(6.8)
Movement in fair value of debt	108.2	2.4
Movement in finance charges netted off bank debt	(12.5)	1.6
Loan note issued	-	7.7
Lease surrendered	(2.9)	(1.6)
Special pension contributions	11.5	9.6
Free cash flow	185.3	129.8
Additional payment run on 53rd Monday	-	28.0
Adjusted free cash flow	185.3	157.8

16. Related party transactions

The Group has a related party relationship with its subsidiaries and with its directors. Transactions between group companies, which are related parties, have been eliminated on consolidation and are not disclosed in this note. Transactions between the Company and its subsidiaries are disclosed below. In addition the remuneration, and the details of interests in the share capital of the Company, of the Directors, are provided in the audited part of the remuneration report on pages 52 to 57.

The remuneration of the key management personnel of the Group is set out below in aggregate for each of the categories specified in IAS 24 Related Party Disclosures.

	2008 £m	2007 £m
Short term employee benefits	4.8	5.3
Share based payments	2.4	1.0
	7.2	6.3

The Company undertakes the following transactions with its active subsidiaries:

· Providing day-to-day funding from its UK banking facilities;

· Levying an annual management charge to cover services provided to members of the Group of £7.3m (2007: £7.0m);

· Receiving annual dividends totalling £47.8m (2007: £118.3m).

Details of balances outstanding with subsidiary companies are shown in note 19 and on the Balance Sheet on page 69.

There have been no material related party transactions with directors.

Details of transactions with the Group's Associate Company ToolStation are shown in note 15. Operating transactions with ToolStation during the year were not significant.

This information is provided by RNS

The company news service from the London Stock Exchange

END

FR BIGDSLBBGGCL

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