Reduced building capacity urged

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THE building industry needs to cut 20 per cent of its capacity to reflect lower demand, according to Tim Perkins, deputy chairman of Travis Perkins.

He estimates that demand is running at about the average for the 10 years to 1985, before the building boom took off. And he believes that all sectors of the industry need to cut capacity by a fifth from its 1988 peak.

Travis Perkins, like others in the sector, is already close to that target. It has shed a third of its staff since a peak of 4,650 and closed 30 branches. A further five are earmarked for closure, leaving it with 145 by the year-end.

That cost-cutting helped it to limit the decline in pre-tax profits to 3.8 per cent in the first half of the year. It made pounds 5.3m profit before tax, down from pounds 5.5m last time, on sales down pounds 4.5m at pounds 151.6m. Earnings per share fell from 3.8p to 3.6p but the interim dividend was held at 2.5p. The shares rose 11p to 144p.

Pressure on prices meant that gross margins fell one percentage point, but a reduction in overheads meant it managed to maintain operating margins at 3.2 per cent. At their peak, operating margins were 10 per cent and Mr Perkins estimates that the average in the last 15 years has been about 7 per cent.

The group managed to limit bad debts on its credit sales, which account for 80 per cent of turnover. These cost 1.1 per cent of sales in the first half compared with 1.4 per cent in the comparable period.

Tony Travis, chairman, said profits in the second half were likely to be lower than in the first, partly because the branch closures would increase overheads. Profits on disposals of the surplus properties, which contributed pounds 5.8m to the pounds 14m achieved in 1991, are likely to fall to about pounds 2m this year. In the first half, they were pounds 724,000 (598,000).

He said there was no sign of recovery, and that it was too early to say whether leaving the exchange rate mechanism would help.