Reece Limited (REH.AX) Earnings Call Transcript & Summary

Good day, and welcome to the Reece Limited Full Year 2024 Results Call. [Operator Instructions] And finally, I would like to advise all participants that this call is being recorded. Thank you. I would now like to welcome Peter Wilson, CEO, to begin the conference. Peter, over to you.

Good morning, and thank you for joining us for our full year 2024 results call. Today, I'll cover an overview of our results, strategy and operational highlights and will then pass to Andy Young, our CFO, who will take us through the result for the year in more detail. I'll finish with a summary before opening to Q&A. And before we begin, please note that all results are in Australian dollars unless otherwise stated. Turning now to an overview of FY '24. Our result for the year reflects disciplined execution as we continue to navigate challenging markets. Group sales were up 3% to $9.1 billion. ANZ sales were flat at $3.8 billion with housing market softening further as we indicated at the half. U.S. sales were up 3% in U.S. dollars to USD 3.5 billion with mixed demand across end markets during the year. The U.S. saw a softer first half having entered the cycle around 6 to 12 months earlier than ANZ. ANZ saw a slower second half as we flagged in February. Across the group, we remain disciplined on operating costs while continuing to invest to build a better business for the long-term. We delivered adjusted EBIT of $681 million up 2% and adjusted NPAT of $416 million which is up 3% on the prior year. The Board has declared a final dividend of $0.1775 per share, bringing the total dividend for the full year to $0.2575. Now turning to recap on our strategy. Our Blueprint guides everything we do. We are a purpose and values led organization, which we call The Reece Way. Our 2030 vision is to be our trade's most valuable partner. We're bringing this to life through our 3 strategic priorities. The first, operational excellence, focuses on the fundamentals of trade distribution and we cannot achieve our vision unless we are the best at the basics. The second is staying ahead of our customers' needs through innovation. And finally, investing for profitable growth so we can build a stronger business for the long-term. These 3 strategic priorities come together to help us deliver on our customer promise. As I've just outlined, The Reece Way is a foundation of our success. It guides everything we do and is so important to our culture at all levels of the business. We've adapted The Reece Way over recent decades and we've just completed our latest refresh to coincide with the Reece brand rollout in the U.S. Our new purpose is building a better world for our customers by being the best. Another important change was to bring back the value of entrepreneurial spirit. This was a value that contributed to our success in the past and is important to retain as we grow in complexity. Now turning to our operational review. Looking at the 3 pillars of our strategy, we have made good progress in FY '24. As we faced into a softer trading environment, we intentionally set out to refocus on operational excellence. We also kept investing in our team and strengthening our culture, helping us to deliver on our service standards. In the innovation space, we continue to execute on an insight led approach that will allow us to stay one step ahead of our customers and help make their lives easier. And finally, we continue to expand and enhance our network to ensure we are where our customers need us. Turning now to look at our activity this year starting with ANZ. Our network density ANZ enables our market leading position and helps us deliver our customer promise. We've continued to enhance and optimize the network during the year with 15 refurbishments, 10 relocations and 6 new stores. In April this year, we also opened a new distribution center in New Zealand, which enhances our capacity and provides us with further flexibility to scale. It has enabled us to streamline our supply chain to ensure the leanest path to market for our kiwi customers. Turning to innovation, we continue to focus on staying ahead of future trends. An in-person relationship is still very important to our customers and they are also very interested in digital tools that make their lives easier. Post year-end, we invested in a small acquisition, Shadowboxer, an Australian digital startup focusing on building and growing disruptive technology. Shadowboxer will enhance Reece's digital and innovation capabilities and will bring some great talent in-house. Turning now to the U.S. region. We continue to make strong progress in the expansion and upgrade of our U.S. network with 15 new branches and 4 refurbishments this year. The team has put a huge amount of work into the rebrand project with around 80% of targeted branches now trading as Reece across the U.S. This is a symbolic milestone for the team and it's having a great impact on culture. The project is likely to be wrapped up by the end of this calendar year with the exception of Fortiline, which retains brand value and market. Looking ahead, we continue to see a sustainable rate of organic new store openings in the 10 to 15 a year range. Staying on the U.S. network, we also opened a new distribution center in Texas, our first in the U.S. The DC will support our growing network of branches to meet our service promise for customers. Supporting the growth of our U.S. network, we continue to focus on investing in our people during the year. Embedding our culture and developing the team is critical to our success. Example this year include the launch of our new leadership program for branch managers and the development of career road map plans for critical roles across the organization. Our existing programs, which have now been up and running for some time, are delivering great results. I'll now hand over to Andy to run through the financial review.

Thank you, Peter, and good morning, everyone. Overall, the Group has delivered a solid result in a challenging trading environment in both regions. As Peter mentioned, sales revenue for the group was up 3% to $9.1 billion partly supported by favorable foreign exchange movements. On a constant currency basis, sales were up 3% -- 2%. Adjusted EBITDA was up 5% for the year to $1 billion with growth across both regions. Adjusted EBIT increased by 2% to $681 million, and within this result, group costs excluding depreciation and amortization grew at 2.5%, principally driven by year-on-year labor cost increases. Including depreciation and amortization, overall group cost increased by 4.1% for the year, reflecting ongoing investment in our network and core capabilities, capital spend associated with our U.S. rebranding activities and amortization of intangibles associated with recent bolt-on acquisitions. Adjusted net profit after tax was up 3% to $416 million with consistent growth in adjusted earnings per share, which was $0.64 the FY '24 period. Moving to the next slide. Over the past 5 years, the group has delivered significant growth in sales, earnings and return on capital. FY '24 has seen our growth rates moderate as housing end markets have softened. Despite the slowdown, we have continued to focus on our long-term investment strategy and disciplined approach to capital management. Continuing to invest through the cycle will ensure we are well placed to support customers as the market recovers and deliver long-term growth for our shareholders. Now on to the ANZ region. The ANZ business has navigated a challenging trading environment in FY '24 as the housing market continued to soften. Annual sales revenue was flat at $3.9 billion with inflation driven first half sales growth offset by more challenging demand settings in half 2. As foreshadowed at the half year, we have seen further softening in the housing market over the past 6 months. Backlog activity has largely been worked through and product inflation had a broadly neutral impact on performance in the second half. Adjusted EBITDA was up 1% to $560 million and our adjusted EBITDA margin increased by 10 basis points, driven by focused execution on the fundamentals of our business coupled with a disciplined approach to cost to offset ongoing inflationary pressure. Adjusted EBIT was down 3% to $410 million reflecting the impact of softening sales, cost inflation and increased depreciation and amortization from ongoing investment in our network and core capabilities. And finally, I wanted to touch briefly on the delta between adjusted EBIT and statutory EBIT. This is primarily due to the goodwill impairment of $29 million relating to our Metalflex business, which we recognized in the first half of last year. There are no differences between statutory and adjusted earnings for the current year. Now on to the U.S. region. Our U.S. business performed well in FY '24. However, demand settings within end markets remain mixed. On a U.S. dollar basis, sales were up 3% to $3.5 billion driven by an uplift in volumes in the second half. Deflation in select categories continues to be reflected in headline sales. However, the impact has moderated across the year. Adjusted EBITDA was up 9% to $293 million with a 44 basis point increase in our adjusted EBITDA margin. This result reflects strong cost management and a disciplined approach to embedding the fundamentals of the Reece model across our U.S. business. Adjusted EBIT increased 7% to $178 million, once again reflecting some elevated depreciation costs associated with network expansion and rebranding activity. The group sales and EBIT results have benefited from a favorable foreign exchange movement on translation of our U.S. earnings, with sales in AUD up 5% and adjusted EBIT up 10% for the year to steady churn. Turning now to the group's cash flow position. The group generated strong operating cash inflows of $751 million for FY '24. Capital expenditure was up by $81 million driven by network expansion, branch refurbishment costs and the Reece rebrand in the U.S. CapEx to sales increased to 2.8%, up from 2% in FY '23. Net borrowings, inclusive of leases, reduced by $378 million during the year, in line with our capital management priorities, which I will touch on shortly. Net finance cost was slightly up year-on-year, the impact of increased interest rates on our variable drawn balance largely offset by savings from debt paydown. Gross interest expense for the year was $69 million and based on current drawn debt, we anticipate gross interest in the range of $53 million to $63 million for FY '25. The group's overall effective tax rate was 28.9% for FY '24, inclusive of the $3 million benefit from annual LIFO adjustments per U.S. tax expense. Excluding this, the effective tax rate for FY '24 for the group was 29.4%. Now looking at the next slide. The group closed the year with a very strong balance sheet, which supports our long-term growth approach and continues to provide flexibility as we trade through the cycle. Our net working capital to sales ratio reduced to 18%, driven by disciplined management of inventory in a subdued volume environment. Net debt reduced to $518 million with the group's net leverage ratio sitting at 0.6x. As noted in our half year results, we completed a USD 300 million unsecured notes issuance in the U.S. Private Placement market during the year. The notes have enabled us to diversify our funding sources, reduce our variable interest rate exposure and increase the group's overall debt maturity profile. Before I close, I wanted to take a moment to revisit our approach to capital management. As previously communicated at the half, the group has a defined framework which guides the allocation and deployment of group capital to ensure we achieve our primary goal of enabling the sustainable long-term growth of the business. Our first priority is to invest in organic growth and strategic bolt-on M&A to support the ongoing expansion of the group. Second, to maintain a strong balance sheet by paying down debt and maintaining flexibility for growth. And thirdly, to provide returns to shareholders through the payment of ordinary dividends and where surplus free cash flow exists, special dividends or share buybacks. I will now hand back to Peter to discuss the [ outlook ].

Thanks, Andy. And starting with the lead indicators in ANZ, housing commencements and approvals are still well down from the COVID peak and a significant backlog of activity has now largely been worked through. Housing completions that have been consistently resilient are now trending downwards. Alterations and additions are also softening. Overall, we are anticipating the near-term to remain challenging with a period of softer activity to play out. Turning to the U.S, we expect the near-term to remain challenging, but note that the U.S. is at a different point in the cycle. While there have been green shoots in some lead indicators, we are cautious about how this trend develops as end markets remain mixed. The economic and political picture in the U.S. is complex with interest rates and affordability continuing to provide headwinds in our sector. I've just returned from a trip to the U.S. Consumers on the ground are telling us that macro uncertainty is driving some softness and they're seeing end consumers holding off on projects. It takes time for improvements in lead indicators to drive higher activity levels for our business. In summary, despite short-term challenges, our long-term approach remains unchanged. We are focusing on the fundamentals of trade distribution and delivering our customer proposition. We are a diversified business by customer and end market, and we are well placed to face into a softer trading environment. The medium to long-term fundamentals in our sector remain positive, particularly the housing underbuild, population growth and the ongoing need for infrastructure in both regions. Thank you. And I'll now open the line for questions.

[Operator Instructions] And your first question comes from the line of Peter Steyn from Macquarie.

Peter, may I ask, could you give us a bit of a delineation of how you're seeing new construction activity versus the alteration and addition segment in ANZ. You spoke about them both being weaker. But is there a sense that alts and adds could be meaningfully more resilient and help you through this patch?

Peter, look, traditionally that has been the case obviously through different cycles. The alteration and additions are normally resilient and that's why we built the business in Australia around that part. So that's what has traditionally happened. In terms of where we're seeing it now, there's definitely softness in housing. And we are also seeing softness in the renovation space as well. So I think it's all just with where interest rates are, the affordability part. So there's definitely some cautiousness that we haven't seen for a few years. So we're very cautious on the housing and somewhat cautious on the R&R.

Got you. Thanks, Peter. And if I, it's a bit of a bow, but as a follow-up to Andy, from a working capital point of view, as the market softens, do you think that your working capital investment was at least the ratios could continue to fall from here?

Good question. Look, I think we're pretty comfortable with where we sit. We've said in the presentation that we've managed it really well in a benign volume environment, which has certainly been the case. But you know it is something we can manage pretty tightly when inventory has been sort of sitting at the level it is today. So I think it's probably as low as we see it going and we'll just manage that cautiously as those lead demand indicators start to improve.

And so -- and Peter, just to build on that, look, it's -- this obviously, this next cycle -- there's a lot of new people on the call, so they haven't been following us for a while. So part of our model is to be consistent is to continue to invest and a big part of our service proposition is working capital. So in past downturns we've really invested through this and it always pays off dividends. So we're going to continue to do the same approach.

Your next question is from Andrew Scott, Morgan Stanley.

Can we just start with a discussion around the audit? So the accounts are currently unaudited. Anything you can add some color there?

Yes, Andrew. I'll pick that up. We'll release the audited financials later in the week. The reason for that was simply that we just had a little bit earlier this year than we have been. So just a cautious note just to make sure everyone's aware that they aren't accompanied by audited financials at this point, but that will be out later in the week.

Okay. And then obviously you will have seen the announcements already, a change of ownership at Tradelink. Interested in any expectations about the change there, but perhaps more so, I mean, this brings a combo of a company that will have plumbing and electrical distribution. Is there any sort of view that, that could be an attractive avenue for you in the future to add that sort of second trade focus exposure here in Australia?

Andrew, it's Peter. Look, with the change of ownership, definitely, I know personally the new owners really well, over a period of about 25 years. So look, it's -- if you look at how we're seeing it, definitely the -- our sector has always -- well, we've always thought it's been competitive. So we started as a small guy and obviously through our strategy and being focused on that is we've got to our position. So we will continue to do the same thing, just focusing on our own sort of game plan. It's actually hard enough to control your own game plan without getting obsessed with competition. So that definitely will change things into the future. And I mean, we've -- we know their model really well. So we do know what we're up against. In terms of the electrical part, look, we -- from an M&A perspective, are always looking at new segments, new market segments, different verticals. The electrical part is pretty -- I mean, they are #1 in the electrical, and then you've got some big French conglomerates that are 2 and 3 and a couple of family businesses. So it's pretty tied up. So you never say never. It definitely is a logical next vertical, but I think it's unlikely at this point, given the discussions that we've had over the past decade or so.

Your next question is from Harry Saunders of E&P.

Firstly, just wondering how you're thinking about ANZ margins in FY '25 given you're carrying that investment you made more recently and a softening demand environment potentially? And so how much of that margin hit in the second half was from that investment versus macro? And I mean, perhaps just what is the peak-to-trough margin in that ANZ business now in your view?

Yes. It's Peter again. Look, as -- I mean, I know there's a lot of -- we got a lot of new analysts covering us, but we certainly aren't going to give guidance on a whole lot of fact on a whole lot of areas. Definitely, this is one. So it's -- definitely it's fair to say, and Andy will probably build on this, in Australia, the second half, as it got softer, has got more challenging. Some of that contraction needs to do with the investment, so we will manage that closely. So in terms of -- in the past [indiscernible] to try, it's really -- it's hard to predict. It just depends how soft it really gets. And normally in a -- definitely in a softer environment, the marketplace does get more challenging, more competitive, more contested. So you have to navigate all that. But we have had a good experience. Our model is set up to be able to flex. So from a cost perspective, again, to protect the service proposition, we -- if it gets to a much stronger -- if the downturn becomes bigger than we're anticipating, then we have the ability to flex with our staff turnover natural attrition. That's normally how we approach it to preserve our model and our strategy. So I don't know, Andy, if you've got anything to add.

No, very little to build on that, Peter. I think the only thing I'd probably add, Harry, just a bit of reminder, if you're looking at the margin across the half is obviously the second half has the full impact of the annual selling wage increase rolled through it. So that would be just something to keep in mind as well.

And just in terms of a follow-up, what's the contribution from that ReFire acquisition you made recently in July? And what is the size of the opportunity in that fire market more broadly?

Harry, the ReFire acquisition actually isn't effective from -- in FY '24. So there's really nothing reflected in the results for that at the moment. And look, it's a very small component of the business. We don't break them out for that reason because they are tiny bolt-ons. And I think as we said in the announcement when we actually acquired ReFire, we're at about 12 branches across fire. So it's a pretty small component of the overall ANZ business, but something that we continue to see some opportunity in.

Yes. So it's just small -- we're just experimenting. So we can't -- it's not -- it's just -- it's what we've done historically with how we've segmented the business over the years. So excuse me. I managed to catch COVID on the way back from the U.S. So just fortunately tested negative today for the first time. So just to add a bit more color to the challenges of all this travel.

Your next question is from the line of Keith Chau from MST Marquee.

So first question, Peter. I know maybe this is a bit nuanced, but the expectations in Aussie, obviously, fairly cautious. But do you think conditions are worsening? Or are we just tracking along the bottom now and waiting for a bit of an upturn?

No. I actually think it is continuing to soften. So I don't -- with as the financial year progressed, it was getting softer, yes, marginally. And obviously, we'll wait for the AGM period, but it's -- all of the lead indicators are definitely showing further signs of softening. And in some of our business segments where -- which are the lead ones, there's definitely softer signs coming. So we're always -- everyone knows we're cautious and we're conservative and so on. But we are definitely preparing for the at least the next 12 months to be in a softer period. It could even be a bit longer. It really just depends, I guess, what -- I mean, there's a lot of events that happen, but really, it will -- if interest rates do change, that will signal a point where things might -- the psychology might start to change. And obviously, that probably is going to happen in the U.S. before Australia.

And then just a follow-on in the U.S. I'm certainly one of those analysts that haven't been covering Reece for a long time, but as it looks at least whilst, the sales of the store, sales velocity seems to be doing pretty good, at the moment. Just wondering if you can give us a sense of what your thoughts are on the progression of the strategy in the U.S, Peter? And also, whether that distribution center in Dallas has made a difference to your service proposition, or will you see benefits from that today?

Yes. The -- if I start with the distribution center first, look, it's really, it's early days. It's just opened, and I had a look at it. It's been set up really well. It's there as a service proposition to support our branch network. So it's not a private label play, so that's a big, big difference. Just wanted to make sure everyone's clear on that. In terms of progress, you know it is about this time 6 years ago. So yes, overall, I'm definitely -- I mean, I've just come back, and I've seen a lot of the stores. Yes, I'm really, I'm pleased with the progress of the standards of what we've done, the reinvestment into the stores, we have put a lot of effort into the whole foundations, the culture piece. There's a lot of training, and it is unrecognizable since when we bought it. So it's funny. One of the first stores I went to in Texas, mystery shop, before we did the deal, and then we've just referred it now, and the transformation you know is really impressive. So it's a big store. It's not -- it's in the commercial space, but I was really impressed. So that overall, yes, I am pleased with the progress. But I still got to point out, because I keep saying this to everybody, Sasha and the team, we're only 5 -- we're 5 years in, and we have to build capabilities to allow us to have a winning proposition. And at the moment, we're just building that. So you've got -- you've still got all these big competitors that we call gorillas that have really dominant positions, and we're just -- we're certainly working our way through it, and we think we've got a clear proposition that it's still really early days. But, yes, it's a longwinded answer, but I'm definitely happy with how we're progressing in the U.S.

Your next question is from the line of Sam Seow from Citi.

The last couple of years, you've provided volume and price split. Apologies if I missed it in the result, but any chance you can talk to those splits by segments or directionally high level, what they were?

Sam, thanks for the question. Look, a couple of things. We mentioned at the half actually that we'd stopped breaking it out. And the reason for that really is it doesn't have a material impact inflation anyway on the overall performance any longer. But in terms of bit of color, very similar to what we said at the half. We had a little bit of inflation in the ANZ portfolio and that moderated through the year. So it drove sales result in the first half. It's been pretty much neutral in the second. And in the U.S. for the first half, we said we had a little bit of moderate deflation. We've seen that again in the second half, but once again that's moderated as well. So overall, not a material impact of inflation/deflation for the year.

Yes, Sam, I reckon you could say now, like I do feel I know this is a statement, but really the whole, the inflation story is really in the rearview mirror now. I reckon there's not inflation in our -- not in our business and not in our sector. So it's definitely Australia was a bit slower, so it's probably following where we are with the economy as well. So it's definitely not an issue in the U.S. There's some categories that have some deflation in them. So yes, so that's the main reason why there's no point to share because it's not really relevant now.

That's helpful. And just maybe looking at the second half in the U.S., you've got some pretty good growth there in your results and your peers are probably pointing to a pretty positive last quarter. Just noting your comments on more challenging conditions. And, yes, I guess, wondering with your comments, which seems a bit more conservative given your exit rate, if you could extrapolate on that further. And then maybe even to, like, within your business in the U.S., if you could kind of talk to your small project exposure versus, I guess, your larger type stuff.

Well, If you -- look, I think if you look at the U.S., it's, like the -- I think everybody's looking at it. It's pretty -- I mean, it is mixed. It's -- I've got the word, it's a bit noisy. There's good and bad things happening. So how we sort of look at it, I mean, in the U.S., the economy is still pretty resilient. It's still got small growth. The labor market is cooling, but it's not contracting. So you say it's resilient. But in terms of our sector, the way we're using it, it's stuck. We're sort of all waiting for that interest rate cut because, really, the 30-year mortgage rates are -- they're really high. And so until, I was watching a program on the weekend where they're saying they really are going to need to get a [indiscernible] before actually people start moving. So that has a big impact on new housing and renovations. So certainly, in the U.S., single family, there's green shoots there. The multifamily part's going to really come off. So we're relatively new. I mean, we haven't done this cycle. It's all learning for us in the U.S., but it does feel like we're waiting for the -- for whenever that interest rate cuts happen. And then that will probably change the psychology of it. And then, I mean, there'll be delay after that. So that's sort of how we see the U.S., Sam.

Your next question is from the line of Brook Campbell-Crawford from Barrenjoey.

I'd like just to ask one on the U.S. business. The numbers provided in the materials imply about 3 net new store adds in the second half. Do you mind just commenting on sort of the gross store adds and maybe there's some closures in there, which brings the net down to 3? And then I guess as you look forward, it's an uncertain environment. You're talking about it being noisy. Does that influence your plans over the next 12 months in terms of the number of stores you'd like to roll out? Do you think it will be sort of in line with that 10 to 15? Is it going to be lower? Is it going to be higher? So I guess those 2 questions would be great.

Brook, I'll do one with the question. We definitely, are setting up to roll out 10 to 15 a year. So that's part of the sustainable rate that we think we can go at with finding the right sites and then obviously developing the people for them. So yes, that's -- we did open 15 sites for the year, and I think sometimes there's -- it can move from one period to the next depending on getting the permit to actually open the store. So there's a whole lot of factors that play into it. And Andy, anything to add?

Yes. No. I think that's right. So the number that you've got there, Brook, 15 is the new stores. There was a couple of closures, the net is 12. So that's the number.

Just a follow-up on the ANZ business. I know you've got a few segments there. Do you mind providing some commentary about how sales trends compared across plumbing and showrooms versus pools, for example? Great, just to get any color there on how sales trends have kind of varied across those different segments. And if possible, great to sort of rank those if you have appetite to provide that sort of detail.

Brook, no. No, I don't have the appetite to provide that detail and won't be ranking them. But look, for the most part, it's that most of the segments are -- the trade parts are pretty consistent with where they're signaling. The one that's got more exposure to the discretionary consumer, which is the bathroom part, that is feeling more of the -- that's definitely feeling more of the pressure. So that's one of the lead ones and there's other parts of the business where we know that, that's where the house starts. So yes, we definitely are seeing it across the board, Brook. So I haven't shared too much there except that the bathroom part is the one with the most discretionary part and is probably being impacted the most so far.

Your next question is from the line of Shaurya Visen from Bank of America.

Congrats on the results. Just wanted to spend some time on your U.S. margins, Peter. And look, they continue to improve and impress, right? So if I think about second half margins of 8.5% EBITDA. And look, that's despite what you call a tough market. So and look, I appreciate you won't give us a number. I'm not expecting that. But if you think about, let's say, medium-term, right, how should we be thinking about the U.S. margins directionally? And more importantly, if you could help us think through, you know, what would be the key drivers of that sort of margin expansion?

Yes. Sure. I think what we -- 5 years ago, we set out to say we've got this opportunity in the U.S., and we obviously have to build capability to get the foundations right. And we honestly -- I mean, we do see this as an opportunity for growth. And we're not in our -- if you look -- if we were to share our 5 year sort of forecast, we're not banking on margin improvement because there's so much investment still to be done, so it's just this balance and so I don't know if that helps. We certainly -- I think the team has executed pretty well with what we've invested, the growth we've got, and Sasha and the team have managed the cost part pretty well with all that. So I have faith that they're going to be able to keep doing that, but we still got a lot of -- yes we've got a -- we're only just getting started. So we're in a -- I think we're in a slightly better position than I really expected, but we're not anticipating in any of our forecast or budgets margin improvement. So this is still all about rolling out stores and scale. So hopefully that helps answer some of your questions.

Super helpful, Peter. Quick one, a quick follow-up. Look, I think correct me if I'm wrong, but did you mention that you're seeing green shoots in U.S. reconstruction? I mean, I'm sort of a bit confused, like, most recent data points are actually pointing to the softening. Like, is it based on your conversations with your, say, yes, with your customers? Is that what you're…

No. That's I think -- we're definitely talking in there on the residential part of the single family. So there's definitely some -- I think if you look at the commentary around the -- if you look at the commencement approvals, there's definitely green shoots in that single family. Offsetting that is that it looks like the other way with multifamily, and then the R&R part, not that it's a big part for our business yet, but that seems -- that's challenged because of where interest rates are in this whole mortgage business part. So that's the green shoots in the single family. And then it just -- it really just depends where you visit. So there's I mean, each state is different. It depends. But you can visit good customers that are busy, and then you've got some that are not as busy. So yes, I think, look, the U.S. is all it's -- I think it's poised. So everyone is, as I said, stuck. Everyone's sort of waiting, but if you go long-term, the fundamentals are all excellent. Population growth is an under build. So it's, like what we always do, we run this thing for the long-term. The single -- if you want to look at the data, it's a single family.

And your next question comes from the line of Lee Power from UBS.

Peter, just your comments around Australia and that balance between cost control to support margin and investing through the cycle. In a slowing market, is there anything specific that you target like monthly sales rates or DIFOT or something around competition that kind of guide you as to whether to go harder on cost or whether to continue to invest? I'm just trying to think about that preference and obviously the margin outcomes.

Yes. We do. There's always indicators, and that then impacts just at the margin what we do. So when -- so if activity does look like it's fine, which it does. You know that we've got our areas where we need to invest for the future in tech and digital. And then -- but there'll be these areas that we will naturally tighten up on and I mean, we still -- this industry still gets -- has a high level of staff turnover or natural attrition. So we can get a handle on it pretty quickly. So it's just really managing it much more tightly than when -- obviously, when you've got growth conditions. So yes, we definitely -- Andy and the team, we definitely got our plan set up for managing this -- the next part. So look, that's what Sasha and the team did that really well because they went a bit soft in the U.S., and I think that they pivoted pretty well given they were still rolling out stores and still happy to invest.

And then on that U.S. rollout, like I mean you're still targeting that 10 to 15 stores, you've been on the journey for a while now. What do you think the last few years has taught you around the mix of organic versus bolt-ons in the medium-term and kind of how that impacts the pace of getting these stores up to target sales and margins?

Yes. Well, to be honest, the strategy is both. So we're really comfortable with both. Yes. Organic's a lot slower and somewhat harder, but probably better for the culture because you control it from the start. And bolt-ons give you the business straight away, and then you've got all that integration challenge and cultural fit that, so we actually like both. So it just really, depends where the market is, where the opportunity is. It could be an opening with segment or customer. So, yes, I think we're in a good spot. So we just if we missed out on a few of these acquisitions because they are getting expensive, it's like we just double down and just say, well, we go organically. So we're fortunate we can go both ways. And you know, it's funny, historically, we grew up, I grew up with a preference for organic because that's what we did for a big period of time, but our model is set up to handle, M&A as well. So we're very comfortable doing both. We just got to make sure what makes sense and we stay disciplined because it's -- the valuations are getting quite expensive in the U.S. even for smaller.

And your next question is from the line of James Casey from Ord Minnett.

Just a question with regards to the balance sheet and your capital management priorities. The net debt you showed today was $518 million given you a strong cash flow generation and your current guidance on CapEx, that will likely to be -- the net debt will be extinguished in the near-term. Do you have a targeted leverage ratio which you kind of plan to work towards? And then just maybe a follow-up on where share buybacks may sit within that discussion?

Look, James, we've got a broad sort of between 1x and 2x. I mean, it's well below that, and clearly, we've got to over 3x when we did the deal. So historically, we haven't -- the business has not been built around that, but we've shown that we've got our -- we've got comfortable up around 3x. So -- but between 1x and 2x, it is probably ideal where we're at. We're in a strong spot now for this part. So I think the good thing is that we've got flexibility. So something transformative came up again. We've done that once, you can do it again, but it comes risk with that. So the safer way is what we're doing. So our balance sheet definitely is in a strong spot. So on the second part of the question, do you want to handle that, Andy?

Yes. Look, I think, James, you see it in the capital slide we put into the investor presentation. Some of the share buybacks certainly comes later in our capital allocation framework and really depends on what materializes around growth opportunities, but it's certainly part of the framework and we continue to have those conversations as a management team with the Board when the right times sort of pop up. But in the toolkit, but depends really on what plays out.

And that concludes our Q&A session for today. I would like to turn the call back over to Peter for closing remarks.

Yes. Thanks, everyone for dialing in today. I'll finish up by saying a big thank you to our team for everything they do. And everyone on the call, thank you for your support. We look forward to catching up with you all again next time. Thank you.

This concludes today's conference call. Enjoy the rest of your day. You may now disconnect.