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

My name is Rikki-lee, and I'm proud to be standing here today on the land of the Wurundjeri people, also known as the Manna Gum people, the First Peoples to care for country. Our culture is rich with stories and tradition. It's one I'm proud of, not just because it's the story of my ancestors, but because it's our story, all Australians. I'd like to acknowledge everyone who has joined the Reece AGM. Reece is an organization built on its values and our purpose to build a better world for our customers and to make it better every day. I'm proud to share that through our reconciliation commitment, we've continued to build genuine, long-lasting relationships with First Nations' communities. A personal highlight for me, we're seeing the Reece foundation complete their first clean water and sanitation project in a First Nations' community at the Mimal Ranger Base in Central Arnhem Land, working alongside community and listening to their needs. I'm looking forward to seeing us continue to do more in the year ahead. I'd like to finish up by acknowledging and paying my deep respect to my ancestors and the traditional owners of the land we meet on across the nation today. And I extend that to elders past and present.

Good morning, everyone. My name is Tim Poole, and I'm the Chair of the Reece Limited Board. Thank you, Rikki-lee, for sharing your acknowledgment of the country. Rikki-lee has been with Reece for over a decade and is a valued member of our team, including as the Lead of our First Nations' working group. Thanks for being part of our AGM today. I'd also like to acknowledge that the Board and I are joining you today on the lands of the Wurundjeri peoples of the Kulin nation, and I'd like to pay my respects to their elders past and present and extend my respect to Aboriginal and Torres Strait Islanders peoples joining us today. I'm advised a quorum of members is present, and I declare the 2024 Reece Annual General Meeting open. I will now introduce the members of our Board. Our Directors: Alan Wilson, Bruce Wilson, Megan Quinn, Andrew Wilson, Sasha Nikolic, and they are joined by our Group CFO, Andy Young. In the studio with me are our incoming Lead Independent Director, Ross McEwan, our CEO and incoming Executive Chairman, Peter Wilson; and our Company Secretary, Chantelle Duffy. I'd also like to welcome our audit partners from KPMG, Julie Carey and Simone Dubois, who are available to answer questions on the audit of the company's 2024 financial report or the content of the audit report. I'll now take you through the procedural matters for today. Our AGM is online and the instructions to access and use the online platform are contained in the Notice of Meeting, which is available on our website. The Notice of Meeting also sets out the agenda for today and the explanatory notes. The resolutions before today's AGM will be decided by a poll. Mr. Peter Renda from Computershare is the returning officer for this meeting. I now declare voting on all items of business open. If you are eligible to vote, press the vote icon and all resolutions will be activated. To cast your vote, select an option, either for, against or abstain. You will receive a confirmation notification on your screen. You can vote on all resolutions or change your vote at any time during the proceedings until I declare that voting is closed. Questions can be submitted at any time and we will address them after tabling all resolutions and before voting closes. To ask a question, select the Q&A icon and type your question into the text box. Once you have finished typing, please click on the arrow symbol to submit the question. Questions can be asked verbally by following the instructions in the platform where our telephone number will be provided. Please note, if we receive multiple questions on 1 topic, we may consolidate them. If you have any difficulties voting or submitting questions, please consult the online meeting guide or call the number on the screen, which can be found in the platform or refer to the Notice of Meeting or the Reece Group Investor website. I'm delighted to address you today and share more about our performance and activities over the last 12 months. Reece had another positive year in the 2024 financial year, delivering on its long-term growth strategy and navigating challenging markets to deliver a solid result. Sales revenue was up 3% to $9.1 billion. Adjusted EBIT was up 2% to $681 million, and adjusted NPAT was up 3% to $416 million. The Board declared a total dividend for the year of $0.2575 per share fully franked. I'd like to thank our leadership team and Reece's wider team throughout Australia, New Zealand and the U.S. for their hard work in delivering this result, particularly as we saw markets we operate in soften over the course of the year following multiple years of record growth. Reece always focuses on what is best for the business over the long term. And during the past year, I'm pleased we have been able to continue evolving the Reece Board and senior leadership team in a way that I believe will benefit Reece for many years to come. To summarize these changes, we're delighted to welcome Ross McEwan to the Board, and we look forward to welcoming Angela Mentis from mid-November. Both Ross and Angie will bring significant external expertise, complementing the contributions of the Wilson family. Succession is an ongoing process, and we will continue focusing on increasing the diversity of skills, experience, background and gender on our Board. We have prepared for Peter's transition to Executive Chairman by ensuring a strong management transition plan with the appointment of Sasha Nikolic as Group President and Managing Director. Sasha has been instrumental in the success of our U.S. business since acquisition and is already having a positive impact in his new group role. We're also delighted he has joined the Reece Group Board. Peter will transition to his new role as Chairman and CEO at the beginning of November. Peter's contribution to this business over more than 30 years has seen Reece transform into a successful international business with more than 9,000 team members and over 900 branches. I'm certain that the next stage of his leadership will bring many more successes. I will remain on the board until the end of the year and then retire as a Director. The culture of Reece is foundational to its customer-centric focus and its complete dedication to keeping things simple. Over the past 8.5 years, it has been a privilege to serve on the Board, and I wish Reece and everyone involved the very best as the next chapters are written. I will now hand over to our CEO and incoming Chairman, Peter Wilson, who will take you through a short presentation.

Good morning, and thank you for joining us for our 2024 AGM. Today, I'll give you a recap on our strategy, talk through our operational highlights and financial highlights for FY '24 and share first quarter sales for FY '25. Turning first to 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 favorable partner. And we are bringing this to life through 3 strategic priorities of operational excellence, accelerating innovation and investing for profitable growth. These strategic priorities help us deliver on our customer promise. This year, we refreshed our purpose and values, which are core to our culture and in success as a business. Our new purpose is building a better world for our customers by being the best. An important change was to bring back the value of entrepreneurial spirit. This was a value that enabled our past success, and it's important to retain as we grow in complexity. We will now play a short video we prepared for the launch of our new purpose and values. [Presentation]

Let's look at the progress we've made in FY '24 on our strategic priorities. As we face into softer trading environment, we intentionally set out to refocus on operational excellence. We've also kept investing in our team in strengthening our culture, helping us to deliver our service standards. In the innovation space, we continue to focus on staying 1 step ahead of our customers' needs and helping make their lives easier. And finally, we've continued to expand and enhance our network to ensure we are where our customers need us. Turning to our network. We now have over 900 branches across 3 countries. In ANZ, our network density remains a competitive advantage, enabling our market-leading position and helping us deliver on our customer promise. We've invested in the network during the year with 15 refurbishments, 10 relocations and a net 6 new stores. In the U.S., we continue to make strong progress in the expansion and upgrade of our network with 15 new branches and 4 refurbishments this year. The team have put a huge amount of work into the rebrand project with around 80% of targeted branches now trading as Reece across the U.S. We are passionate about staying 1 step ahead of our customers' needs. We continually challenge ourselves to find new ways to be their most favorable partner. Post year-end, we invested in a small acquisition, Shadowboxer. It's an Australian digital start-up focused on building and growing disruptive technology. Shadowboxer will enhance Reece's digital and innovation capabilities and bring some great talent in-house, enabling us to continue to build new tools to make our customers' lives easier. Turning now to an overview of FY '24. Our results for the year reflected 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 markets softening during the year. U.S. sales were up 3% in U.S. dollars to $3.5 billion with mixed demand across end markets. The U.S. saw a softer first half, having entered the cycle around 6 to 12 months earlier than ANZ, and ANZ saw a slower second half. We delivered adjusted EBIT of $681 million, up 2%, and adjusted NPAT of $416 million, up 3%. The Board declared a final dividend of $0.1775 per share, bringing the total dividend for the full year to $0.2575. Over the past 5 years, we've 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've continued to focus on our long-term investment strategy and disciplined approach to capital management. Continuing to invest through the cycle, we will ensure we are well placed to support customers as the markets recover and deliver long-term growth for our shareholders. Our ANZ business navigated a challenging trading environment in FY '24 as the housing market softened. Sales were flat at $3.9 billion, with first half sales growth offset by demand softening in the second half. Adjusted EBITDA was up 1% to $560 million. Adjusted EBITDA margin increased by 10 basis points, driven by focused execution on the fundamentals of our business. Adjusted EBIT was down 3% to $410 million, reflecting increased depreciation and amortization. Turning to the U.S. region. Our U.S. business performed well in FY '24, but demand in end markets was mixed. On a U.S. dollar basis, sales were up 3% to $3.5 billion, with an uplift in volumes in the second half. 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. Turning now to capital allocation. We do have a framework, a clear framework to enable the sustainable long-term growth of Reece. Our first priority is to invest in organic growth and strategic bolt-on M&A. Our second priority is to maintain a strong balance sheet by paying down debt and maintaining flexibility to grow. And finally, we aim to provide returns to shareholders through ordinary dividends and if surplus free cash flow exists, share buybacks. Turning now to a look at the first quarter of FY '25 financial year. Q1 sales for the group were down 5% to $2.2 billion. ANZ sales were flat, supported by recent bolt-on M&A activity in the region with underlying volume softening on the last year. U.S. sales were down 6.5% in U.S. dollars, driven by deflation in selected categories, adverse weather conditions, and softer volumes. As we indicated at the full year, lead indicators in housing across our regions are challenging. The U.S. has now seen a 50 basis point rate cut, but this is taking time to work through the system. As a result, we are expecting EBIT for the first half in the range of $300 million to $320 million. Our focus remains on the long term and delivering on our customer promise. In summary, despite short-term challenges, our long-term approach remains unchanged. We are a diversified business by customer and end market, and we are well placed to face into softer trading environment. The medium- to long-term fundamentals in our sector remain positive, particularly with the housing underbuild, population growth and the ongoing need for infrastructure in both regions. Before I hand back to Tim, I would like to acknowledge Tim's departure from the Board at the end of the year. Tim has made a big contribution in enabling our aspirations as a business and in supporting me and the Board over the past 8 years. Thank you, Tim, for everything you've done at Reece. I'm also looking forward to taking on the role of Chair and CEO for the Group. And finally, I'd like to thank all our team for their hard work they do to deliver for our customers every single day. I'll now hand back for us to conduct the formal business of our meeting after short video demonstrating some of the work we did in our bathrooms business this year. Thank you. [Presentation]

Thanks, Peter. As I mentioned at the start of the meeting, voting on the resolutions is currently open, and you can vote at any time until voting is declared closed. And a reminder that only shareholders, proxy holders or authorized shareholder representatives may vote. Where shareholders have nominated the Chair of the meeting as proxy, I will direct all open usable votes in favor of the resolutions today. Please note voting exclusions apply to some of the resolutions today, which have been outlined in the notice of meeting. We will now move to the formal business of the meeting. The first item of business is to receive and consider the financial statements for the company and its controlled entities, together with the director's report and independent auditor's report for the year ended June 30, 2024. These statements and reports are now tabled. There is no resolutions from shareholders required for this item. The second item of business is to elect Sasha Nikolic as a Director. I'll now hand over to Sasha to say a few words.

Thank you, Tim, and a warm welcome to everybody joining us online. I'm honored to share a bit about my background and the value I hope to bring to the Reece Group Board. I began my journey with Reece in 2009 stepping in as a finance leader. From there, I moved on to lead actor role, 1 of our HVAC businesses before taking on the role of CFO of Reece ANZ. In 2018, following the acquisition of MORSCO, I transitioned to Texas to help transform and grow our U.S. operations, which I was lucky enough to lead from 2019 to 2024. From my very first day at Reece, 2 things stood out about our business that remains central to who we are. First, it's our people. The pride they take in their work and the way they live out our purpose and value is truly extraordinary. Reece team doesn't just get to the job done. They elevate the ordinary into something remarkable every single day. Second, it's our unwavering commitment to place the customer at the heart of everything we do. That focus has driven our success and continues to shape our future. It's been a privilege to play a part in the growth of such an iconic Australian company. While there is still much to do and ground to cover, I'm proud of the foundations we have continued to build to ensure sustained success for the decades to come. As leaders at Reece, we know it's our responsibility to think long term, ensuring we preserve the essence of what makes this business great. I look forward to contributing my experience and insights to the Reece Group Board should the shareholders choose to approve my appointment.

Thank you, Sasha. Displayed on the screen are the details of the proxies received in relation to this item. The Board is supportive of Sasha's election. All open usable votes will be directed in favor of this resolution. Ross McEwan is also standing for election today, which is Item 3. I'll now hand over to Ross to say a few words.

Good morning, everyone. I'm happy to be here today and to be sharing more about my experience and how I can add value to Reece and to the Board. I'll talk about both begin by sharing what attracted me to Reece after a career in banking and financial services. Reece is a very special company. It is over 100 years old and still has the ethos of a family business. It keeps things simple by focusing on customers and has a clarity of vision that I find very inspiring. I was delighted to be asked to join the Board. The Wilson family are absolutely committed to this company, and they haven't sold a single share since gaining control. My role on the Board will be to support the management team to further success in the future by providing input on strategic matters. This is the time of transition for Reece as Peter steps into this new role as Chairman and CEO. I will walk closely with Peter as we continue to evolve the Board, balancing the right skills, diversity and independent representation of directors to ensure Reece's success for many decades to come. As Lead Independent Director, I will also help to represent the views of minority shareholders and ensure appropriate governance while doing what is best for Reece over the long term. I believe I am well credentialed and have the capacity to serve shareholders on the board having been the CEO of National Australia Bank for 4.5 years. Prior to that, I was the CEO of Royal Bank of Scotland. I am passionate about keeping things simple, letting the business focus on the right matters and being a sounding board for people in this new role as Chairman and CEO. I hope with your support, I will be able to bring my experience and perspectives to the Board, subject to the approval of the shareholders.

Thank you, Ross. Displayed on the screen are the details of the proxies received in relation to this item. The Board is supportive of Ross' election. The fourth item on the agenda is the reelection of Andrew Wilson as a director. Andrew retires by rotation in accordance with the company's constitution and being eligible offers himself for reelection. I'll now hand over to Andrew to say a few words.

Thank you, Tim. Good morning, and thank you for giving me the opportunity to address the meeting today. It is a privilege to stand before you as I seek reelection to the Board of Reece, a company that has been part of my family for over half a century. During my 6 years on the Board, I've witnessed this business grow, providing exceptional services to our customers and creating wonderful opportunities for our employees. I'm particularly proud of the initiatives like the recent introduction of the employee share purchase scheme. Having just returned from the U.S. a few weeks ago, it was once again wonderful to see the ongoing progress that we are making in that geography, both operationally and culturally. It is an exciting time for the business as it focuses on delivering the 2030 vision, and I feel privileged to play a part in that. I especially look forward to collaborating with Peter as he transitions into the role of Chairman and CEO. My previous corporate experience across multiple industries and countries, combined with my current role managing a portfolio of diverse global assets and involvement on various private and non-for-profit Boards ensures that I make a meaningful contribution to the Reece Group. I believe that robust constructive dialogue and a diversity of perspectives are essential for effective governance and leadership. The evolving composition of our Board positions us well to execute on our 2030 strategy and ensure a long-term success, something I'm proud to be part of. I want to ensure you that I have the time and dedication necessary to fulfill my responsibilities on the Board. With your support, I look forward to continuing to work alongside our senior leadership teams advocating for the best interests of all shareholders. Thank you.

Thank you, Andrew. Displayed on the screen are the details of the proxies received in relation to this item. The Board with Andrew abstaining, is supportive of the reelection of Andrew Wilson. All open usable votes will be directed in favor of this resolution. The next 2 agenda items relate to the long-term incentive grant of rights to the Group President, Sasha Nikolic and CEO, Peter Wilson. We benchmark remuneration annually. Our approach is to benchmarking in corporate Australian and North American peers, reflecting the international talent pool in which we operate. Attraction and retention of key talent are critical to support the successful execution of our strategy and the delivery of shareholder value. As explained in the Notice of Meeting on Pages 8 to 11, these performance rights will be granted in accordance with the terms and conditions of the company's long-term incentive plan. It is proposed that Sasha be granted 84,491 rights. This is calculated by dividing $1.5 million being 150% of Sasha's fixed remuneration by $26.63, which is the 15-day volume weighted average price of the shares from the August 19, 2024. Displayed on the screen are the details of the proxies received in relation to this item. The Board with Sasha abstaining, considers the grant of performance rights to the Group President appropriate in all the circumstances and recommends that shareholders vote in favor of the grant. It is also proposed that Peter be granted 248,227 performance rights. This is calculated by dividing $6.25 million being 250% of Peter's fixed remuneration by $26.63, which is the 15-day volume weighted average price of shares from the August 19, 2024. Once again, displayed on the screen are the details of the proxies received in relation to this item. The Board, with Peter abstaining, considers the granted performance rights to the Group CEO appropriate in all the circumstances and recommends that shareholders vote in favor of the grant. This year, we introduced an employee share purchase plan for our employees, which was incredibly well received. Today, we are seeking shareholder approval for the adoption of the Reece Limited North American employee stock purchase plan for all eligible employees of participating companies. We are seeking shareholder approval for the plan for 2 reasons: firstly, to meet the conditions to be a qualified plan under the U.S. International Revenue Code, which offers favorable tax treatment for employees. And secondly, to be exempt from relevant California securities regulations registration requirements. Displayed on the screen are the details of the proxies received in relation to this item. Once again, the Board considers it appropriate in all the circumstances and recommends that shareholders vote in favor of the North American employee share purchase plan. The last item of business is to adopt the remuneration report for the year ended June 30, 2024. This is included in the annual report on Pages 34 to 47. Displayed on the screen are the details of the proxies received in relation to the adoption of the 2024 remuneration report. We will now open the meeting to all members to ask questions or make any comments. I'll now hand over to Chantelle to read out the first question.

The first question is from Peter Rae, a volunteer from the Australian Shareholders' Association. Today, I hold proxies from 28 shareholders for about 419,000 shares. It is now 5 years since you have held a face-to-face AGM. You could adopt best practice in holding your AGM as a hybrid meeting. But retail shareholders, of which Reece has many thousands, would appreciate the opportunity to talk directly with directors at a face-to-face meeting. We would ask again for you to consider the format of your AGM that gives shareholders this opportunity.

Thanks for your question, Peter. Chantelle, you've dealt with this question in prior years. Maybe I can hand over to you to provide an answer.

Okay, Tim. And listen -- thank you for your question, Peter. You're right. We have had this question in previous years. And the reason we hold it as a virtual meeting is we think that this is the most effective way and also it provides the widest access for all of our shareholders to participate in the AGM to ask questions to us during the meeting. So we welcome the feedback. We will reconsider this as we plan for future AGMs. The next question is also from Peter from the ASA. With regard to the performance measures for the reward of rights to executive directors and the recent history of increasing earnings per share as given in Section 4.1 of your remuneration report, why is the threshold value of Group EPS CAGR so low at 1.5%?

Thanks, Peter. It's an interesting question. As Peter alluded to in his CEO address a little earlier, the long-term future of Reece is very strong, but we are seeing some short-term weakness in some parts of our business. And so as we project forward, over the next 3 years because that's the period the EPS hurdle is measured against in the LTI. We are seeing some softness in the short term. And so how we come out of that is going to determine whether or not those targets are achieved. So it's 1.5% at the threshold level, but it's 5.5% compound average growth rate at the top end of that range. If we come out of this dip in the softness period that we're going through reasonably quickly, then those targets might seem to be a little more achievable. But if this pocket of softness that we're going through at the moment, lasts a little bit longer than those targets are going to be very challenging. But the 1 point I do want to make, which is probably the most important piece is that the Board goes through an incredibly robust process to determine these measures. They go through a number of iterations. There are a number of discussions between the Board and the management team. So we're very confident they're robust and they're appropriate for this grant of LTI. Next question.

The next question is also from Peter from the ASA. I am pleased to see that you have made further appointments of Independent Directors to the Board. Would Mr. McEwan, please speak to his election and how he sees his role as Lead Independent Director?

Thank you for the question, Peter. I'm delighted to answer that. As I said in my address to become a member of the Board, I am delighted to have been asked to join the Reece Group. It is a very special organization and particularly coming on board as the Lead Independent Director, as Peter Wilson steps up to be Executive Chair. My job, I see is to look after independent directors -- sorry, the minority shareholders and also to support the management team and keeping things very simple in what is a very, very good business. I also see my job as to making sure that this business stays a very successful business for decades to come as it has shown over the last 70-odd years with the Wilson family involvement. I have a very good relationship with Peter Wilson. We've often disagree on topics, but always agree that we have great conversations and come to a conclusion that will always be in the best interest of the Reece Group. So looking forward to becoming a member of this Board and taking my role seriously as Lead Independent Director. Thank you for your question.

Thanks, Ross. Chantelle, next question.

The next question is also from Peter from the ASA. We note that you have introduced a minimum shareholding for all Nonexecutive Directors. Noting that U.S.-based executives receive cash for their STI and LTI payments, and there are no performance hurdles linking to total shareholder return. Would it be appropriate to require these executives to also achieve a minimum shareholding as is common on many ASX 100 companies.

So I think it's important to note that we do have performance testing in the LTI for our U.S. executives. So there is a service component and when we made the MORSCO acquisition 6 or so years ago, we were particularly keen to have a service-based component in our LTI, but we also do very much have performance measures in our U.S. LTI. So I think that's key. And then when it comes back to the key management personnel of the organization, which does include some of our people that are responsible for our U.S. business, they are covered by our shareholder ownership policy. So we think we've got that right. We'll continue to review it, but at this stage, we think we've got that right. Chantelle, next question.

The next question is also from Peter from the ASA. Resolution 7 offers U.S. employees company shares at a discount of 15%. Do you have an employee share purchase plan for Australia and New Zealand employees? And if so, what discount is available?

Yes, that's a good question, Peter. And we are excited to say that we do have one. And maybe I'll hand over to Peter Wilson to deal with that.

Well, thanks, Peter. And yes, we've just launched our ANZ plan. It's a matching plan. And it's a plan that goes for 1 for 10. So it's been well received. We've had a great uptake. So yes, there's a plan in both the U.S. and in ANZ. Thanks, Peter.

Thank you. Next question.

At this stage, Tim, there's no further questions.

Maybe we can see whether there's any questions on the audio. No, they don't appear to be. There are no more questions online at this stage.

No, not at this stage, too.

Okay. As there are no further questions, I will now move all resolutions. While you complete your voting, we will play a short video sharing an update from the Reece Foundation. [Voting] [Presentation]

I'd like to advise that voting on all resolutions has now closed. Thank you to everyone who has watched and participated in our meeting today. As usual, the results of voting will be reported to the ASX later today. I declare the meeting closed, and thank you for your attendance.