UPDATE 2-Travis Perkins warns on weakening market conditions

(recasts, adds FD, analyst comment, updates share price)

By Matthew Scuffham

LONDON, July 30 (Reuters) - British building materials group Travis Perkins (TPK.L: Quote, Profile, Research) said market conditions have become more challenging and are expected to weaken further in 2008, sending its shares lower on Wednesday.

The warning overshadowed first half profits which beat consensus market expectations.

Shares in the group were down 3.2 percent at 556 pence at 1046 GMT. They have underperformed the FTSE 250 midcap index .FTMC by nearly 40 percent since the start of the year on concerns over a slowdown in construction activity. This fell at its sharpest rate in at least 11 years in June, according to a survey by the Chartered Institute of Purchasing and Supply. Travis Perkins Chief Executive Geoff Cooper said 2008 "has become a more challenging market and we expect our markets to weaken further as the year progresses". However, Travis Perkins said it had gained market share in both its merchanting and retail divisions, enabling it to achieve good progress against a backdrop of weakening markets. Like-for-like sales grew by 0.8 percent during the period.

Cooper said the group expects to continue to gain market share across its merchanting and retail brands in the remainder of the year which will "partially compensate for lower market activity".

"Whilst the outlook is more challenging than we have experienced for some years, we have the management and resources to deal with these difficulties and position the group for further growth when more favourable conditions occur," he said.

Cooper also said Travis intends to reduce net debt through a combination of lowering overheads and reducing working capital and capital expenditure. In the first half, net debt was reduced by 30 million pounds to 911 million.

Finance Director Paul Hampden Smith told Reuters the proportion of bad debt written off by the group is set to rise, while it is also guiding down analysts who are at the top end of the range of 2009 earnings forecasts.