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

Good day and thank you for standing by. Welcome to the Reece Full Year Results 2025 Conference Call. [Operator Instructions] I would now like to hand the conference over to your speaker today, Mr. Peter Wilson, Chairman and CEO, Reece Group. Please go ahead, Peter.

Good morning and thank you all for joining us for our 2025 full year results call. With me on the call today is Sasha Nikolic, our Group President and Managing Director; and Andy Young, our Group CFO. Welcome to you too. Today, we're going to start with an overview of the group's FY '25 performance, followed by our operational update for the year. Andy will then run through the financial results in more detail. We'll finish with the outlook before opening to Q&A. Please note that all results in this presentation are in Australian dollars, unless otherwise stated. Turning now to the FY '25 overview. FY '25 has been a turbulent year for Reece, one of the most challenging in our history. The group has delivered a disappointing result with group sales down 1% to AUD 9 billion and full year earnings impacted by soft end markets across both regions. EBITDA declined 11% to AUD 901 million, with group costs, excluding depreciation and amortization, up 3% for the year. EBIT declined 20% to AUD 548 million, reflecting a challenging market and increased competitive pressure. Softer earnings and ongoing investment impacted the group's return on capital ratio, which is down 365 basis points to 11.8%. The Board declared a final dividend for the year of AUD 11.86, taking the total dividend for FY '25 to AUD 18.36 per share. Turning now to recap on our strategy. Everything we do is guided by a blueprint from purpose to promise. Our purpose, building a better world for our customers by being the best, inspires us and together with our values is how we live the Reece Way. We embrace our 2030 vision to be our trade's most valuable partner through delivering on three strategic priorities: operational excellence, which is focused on the fundamentals of trade distribution, accelerating innovation aimed at enhancing our customer experience and investing for profitable growth to build a stronger business for the long term. Together, these help us deliver on our customer promise. We'll now look at the progress we've made during the year. We've continued to make solid progress against our three strategic priorities in FY '25. The team has shown resilience through a challenging period and remain focused on what we do best, delivering customized service. We've invested in our people through training and development programs designed to build expertise and core capabilities. And in the innovation space, we remain committed to enhancing our services and digitizing the customer experience. We continue to invest for growth, expanding our networks to better serve our customers. Turning now to take a look at our activity in ANZ. During the year, we continued to expand our network, delivering 15 new branches through organic growth and bolt-on M&A. The density of our network remains a competitive advantage, playing an important role in delivering our customer promise. Reece's success is grounded in our deep relationships with our customers. We provide expertise in branch and innovative products to make customers' lives easier. This year, we launched our first WiFi compatible heat pump by Thermann, providing homeowners with control over their hot water usage and running costs. The acquisition of Shadowboxer has enhanced our digital capabilities, and we have continued to invest in our people to strengthen leadership capability. Moving now to the U.S. In the U.S., we continue to build out our network. We increased our footprint by 24 branches this year, supported by organic growth and M&A. This brings the total U.S. network to 267 branches. During the year, we completed our rebrand with Plumbing, HVAC and Bath & Kitchen now -- branches all trading as Reece. The Fortiline brand has been retained as our U.S. Waterworks business. Developing our team is critical to our long-term success in the U.S. And during the year, we launched a new development program for senior leaders. This was successfully rolled out across U.S. and also in Australia and New Zealand and is a good example of collaboration across our regions. We also expanded our digital offering with the relaunch of the maX app, making it easier for our customers to trade with us. Turning now to the next slide. Despite a turbulent FY '25, we have continued to deliver for our customers while investing to strengthen the business. In the second half, we have executed some changes within our support centers to streamline our business and improve efficiency for the network. And as always, we will balance operational efficiencies against protecting the customer offer. I'll now hand over to Andy, who will go through the financial performance in more detail.

Thank you, Peter, and good morning, everyone. The soft volume setting in ANZ has continued through the second half. Sales revenue for the year was up 1% to AUD 3.9 billion, supported by M&A activity. Underlying volumes were flat with pricing broadly neutral. Second half sales were down on the first half, driven by six less trading days in the period. EBITDA declined by 12% to AUD 495 million, and our EBITDA margin contracted by 181 basis points. Costs were elevated in the ANZ region, primarily due to incremental investment in the business and moderating cost inflation. EBIT was down 17% to AUD 339 million, with our annual EBIT margin at 8.7%, down 193 basis points year-on-year. Turning now to the U.S. region. U.S. sales were down 5% to $3.3 billion, driven by lower year-on-year volumes and low single-digit deflation in select commodity-related categories. Our U.S. business operates in a highly competitive market and the slowdown in residential new construction has increased competitive pressure. Housing units under construction remained down year-on-year, particularly in the Sunbelt region. EBITDA was down 10% with our EBITDA margin contracting by 52 basis points. EBIT declined by 23% to $136 million, and our EBIT margin was down 102 basis points for the year. The greater contraction in EBIT margin reflects the earnings drag from increased D&A as we continue to expand our U.S. network. Turning now to the group's cash flow position. The group generated net operating cash inflows of AUD 600 million for the FY '25 financial year. Our CapEx to sales ratio was 2.9%, supporting network expansion, investment in technology and branch refurbishments. During the year, the group also deployed capital to support M&A activity across the business. Gross interest expense for the year was AUD 60 million. And based on current drawn debt, we anticipate gross interest expense in the range of AUD 50 million to AUD 60 million for full year FY '26. Moving to the balance sheet. Our group net working capital to sales ratio was 19%, an increase of 1% for the year. The uplift in net working capital was driven by investment in inventory to support network expansion and availability, including some pre-tariff purchasing in the U.S. Our net debt position increased to AUD 590 million, driven by lower operating net cash inflow and increased capital investment. The group's balance sheet remains strong, providing flexibility for growth and sufficient capacity to support the business as we navigate the cycle. Moving to the next slide. The business experienced a period of sustained growth in sales, earnings and return on capital after the MORSCO acquisition. As housing markets have softened, we have seen our performance moderate across both regions. Despite the slowdown, we have continued to focus on our long-term investment strategy and disciplined approach to capital deployment. Continuing to invest will ensure we are well placed to support customers as the market recovers. I'll now hand back to Peter to recap our capital management priorities.

Thank you, Andy. The allocation and deployment of group capital is guided by our well-defined capital management framework. Our first priority is to invest in the growth of the business, both organic investments and strategic M&A. Our second priority is to maintain a strong balance sheet, retaining flexibility for the future. And the third priority is to provide returns to our shareholders via ordinary dividends. And when we have surplus capital or excess balance sheet capacity, we will consider returning capital via a share buyback or special dividends. Turning now to the outlook. Starting with the ANZ, the outlook remains uncertain. We expect soft volumes to continue, particularly in Victoria and New South Wales, where the housing market slowdown has been more impactful, but we have a greater branch density in these states. Movements in interest rates will be positive for the sector and key to improving medium- to long-term sentiment, remembering that these take time to work through. We anticipate a slow recovery with a period of soft activity still to play out. Turning now to the U.S. In the U.S., the housing market is still frozen, and we expect it to be constrained for at least the next 12 to 18 months. Affordability continues to weigh on housing activity and the average 30-year fixed mortgage rates remains elevated. Lending rate reductions and improvements in affordability will be critical for increased demand. Our customers are telling us on the ground that things are tough, and we expect market headwinds to continue. So -- although we've delivered a very disappointing set of results, we do remain confident in our long-term approach. We are well capitalized, and we will continue to look beyond the cycle to protect and grow the business. Reece does operate in large markets with attractive long-term fundamentals. Housing underbuilt and population growth will drive an ongoing need for investment in both regions. That's it for the update. Thank you. I'll now open the line for questions.

[Operator Instructions] Our first question comes from Peter Steyn with Macquarie.

I was curious if you could give us a bit of a sense, your GPs and SG&A are trending in probably slightly divergent directions at this point in time with continued investment in the business for the longer term. Could you just shine a light on the regional differentiation between what you're doing, sort of just give us a bit of a sense of what your intentions and focus areas are in ANZ versus U.S. in relation to GP outcomes and SG&A, please?

Peter, it's Peter here. Look, as we've described many times, both regions are very different. ANZ is a mature business with a lot of capabilities. And so it plays a different -- it's a different outlook for Australia and New Zealand. In the U.S., we're really still at the early days, and we don't have the capabilities. So it's funny. It's -- probably everyone is interested in this, but for those who were with us when we did the acquisition, I always said it was going to be a multi-decade story and not to invest unless you took a really, really long-term perspective. And I think it's clear with what we're showing and what we're feeling, it's going to take longer and be more challenging than perhaps even I envisaged. And perhaps the COVID stimulus gave us a false sense of progress. And remember, I was always a realist. There are a lot of other optimists out there that were getting ahead of ourselves. So the MORSCO business that we bought was a business that really did compete by being the lowest price. And so we are attempting to try to build capabilities to allow us to differentiate. And we're 7 years in. We've definitely hit a big speed hump. And we've got both in the Plumbing and Waterworks business in the U.S. We probably would be losing share based on what we're seeing. So -- and that's a competitive -- there's a lot of competitive stuff going on in the U.S. So yes, so it's -- yes, it's a tale of two regions, and both regions have both got the challenges.

And then maybe just could you give us a bit of a sense of how you're traveling through the tariff complexities? You're generally going to be relying on your suppliers to do the job well. What are you experiencing from your perspective?

I might hand it across to Sasha because -- Sasha will give a bit of an update, Sasha.

Thanks, Peter, and thanks, Peter, for the question. For the most part, when we had Liberation Day, we had some vendors push it through. We are expecting that we will be in sync with what the market does around tariffs. So there will be pressures. There're affordability pressures that come through, but there's no doubt that those movements we will be able to work through as we have in the past. We're navigating okay now. It will just be what happens -- I mean there will be -- there's another wave probably. So -- but it's all to play out still, I think.

Our next question comes from James Casey with Ord Minnett.

Peter, on the last call, you mentioned some impacts to your Waterworks business with the loss of staff. Could you just provide an update as to how that business is performing and whether or not that's stabilized now?

Thanks, James. Yes, it's definitely -- it's ongoing. I mean it's -- in some ways, it's stabilized. Yes, it's somewhat, although last week, we got another uplift out, which -- so look, I don't think -- it's not going away. We've definitely got -- we've still got challenges. What basically I think is happening is you've got the original team with the original founder teamed up and they're creating another -- they're definitely creating another competitor. So it's a force that's not going to go away. We -- I'm not going to share on this call, but we lost our Waterworks, the incumbent Waterworks leader only about a month ago. And so it doesn't -- we don't have a Waterworks leader right now. So we're feeling pain James. But it has stabilized somewhat, but I don't think it's going away.

Okay. And then just on your statement about the streamlining of the business and the benefits to be realized in FY '26. Can you just provide a bit more color on what you're doing there? I don't know if you're going to quantify it or not, but if you could...

No, we're not going to quantify it, but it's really managing attrition, staff attrition, staff turnover and just becoming more efficient to -- I mean, we have been trying to solve for the future with the capability builds for both regions for digital, AI and so on. And that takes investing, it takes people. So they're fairly minor. So they're not -- the benefits are just allowing us to keep going after that, particularly in this region. So -- yes, there's nothing -- it's not material, James.

Our next question comes from Harry Saunders with E&P.

Firstly, just wondering, can you talk through exactly what happened to the ANZ margin in the second half, given this is well below where margins for this business have been historically? And perhaps do you expect this to get back to the more normal levels relative to history in FY '26, please?

No, Harry, the world has definitely changed. So yes, we -- there are structural changes going on everywhere. So the -- I've been trying to tell the market that you can't expect -- that's in my view, you're not going to expect those EBIT margins going forward. There are definitely cost pressures. The minimum wage, you've got issues like we do, we're based in Victoria in terms of trying to get our people to come to work and up to work to actually do -- to innovate to get productivity. So no, no. I think -- and also, you've got -- there's new dynamics happening. So technology is allowing more transparency, and you've got -- there's a new owner of Tradelink that we respect deeply. There's a new owner -- JB Hi-Fi have moved into the bathroom part. So everywhere I look, it's just -- it's getting more -- yes, it's getting more competitive. So we have to -- so yes, we have to get better, and we're attempting to do it. It's -- but you can't -- I don't think you can expect us to get back to where we were in Australia.

And -- I mean, just to be clear there, you did 7.7% EBIT margin in the second half from 9.7% first half. It's been double digits as far as I can remember in that business. So I just want to be clear, how should we think about it...

No, no, Harry, it's not always been double digit. If you go back to the time when we had the Victorian recession, we had about 4 or 5 years where we were -- it just depends on the cycle. We definitely -- we are in a soft market. So generally, when it's softer, it gets more competitive. There's more capacity. It just gets more contested. So that's the nature of these trading businesses. So our goal is to optimize. The goal will be to get back to the double digit in Australia, but it's a lot of -- there's a lot has to go right to get there. So it's not always been double digit if you go back through the history.

Got it. So we basically need a market pickup to sort of get back to that double digit effectively, it sounds like.

You need a market pickup, and we need to unpack productivity here. And that -- it's not -- that's easier said than done, which is what everyone -- we're all grappling with that challenge.

Just wondering as well, could you run through that AUD 19 million increase in allowance for slow-moving inventory in the second half? I mean, maybe which region does that translate more to? Did that have a part to play in the weak NZ margin, please?

I'll hand it to Andy, a little bit to do with the tariff preparation. But Andy, over to you.

Thanks, Harry. Harry, a couple of things are driving that number. So we've obviously got a fairly sizable increase in the network. So as we've sort of brought through that inventory impact of investing and growing 39 net new branches, that has a provisioning impact associated with it. But above that, we have invested in some parts of the business around availability. And as Peter said, there's also been some pre-tariff purchasing in the U.S. as well. So those sort of three things together are sort of driving an uplift in inventory. And then if you look at provision, it's the network expansion and then we need to adjust our sell-through -- our provisioning based on sell-through rates. So as they've come off a little bit through the year, we needed to reflect that from a provisioning. We haven't changed our methodology, but obviously, it has an uplift when you start to see the market slow.

Got it. Just -- sorry, a final question, if I may. Just on the Waterworks business. You gave some helpful color there. I'm just kind of wondering, if we step through the impact, you saw across '26, I mean, how much more impact is you sort of expecting maybe to quantify in '26, please?

Harry, it's like predicting the future. I can't -- we thought we might have bottomed, but nothing keeps -- we keep getting surprises. So -- and I'm not going to share the reasons why, the President of Waterworks left us on the call. But I mean that hasn't helped. And then there was another uplift last week. So they're going to continue to open stores, and they are the low-cost operator in America. So -- and yes, it's a situation that is creating a lot of pressure and anxiety for us. So I can't -- I actually don't know. So I know that's not going to help, Harry, but that's what it is.

Our next question comes from Brook Campbell-Crawford with Barrenjoey.

Just a first one on Australia. You did note there's a period of soft activity to play out. And I just wanted to sort of reference consensus, which has 32% increase in EBIT for the ANZ division in the first half '26 relative to the second half '25 you just reported. So I just want to check and see if there's anything, I guess, in that division that could help sort of support that level of growth that the market has? Or any other color we should think about?

Brook, we don't expect any different -- the next 6 months are going to be like the last 6. So I can only -- no. So the reality is July has started the same as June finished off. July has continued like that. We don't like to give guidance. So -- but it's continued on and that's still at the EBIT level, it's still going backwards in July.

Yes. No, fair enough. I appreciate the challenges out there. And I just wanted to check on, I guess, the multiyear outlook. It looks like the LTI sort of EPS growth has been lowered a little bit. And I appreciate things are a bit soft. But I guess at this point in the cycle, I would have thought perhaps there could be kind of an increase in EPS growth on a multiyear period, but the sort of stretch EPS targets being lowered to, I think it's greater than 5.5%. So I guess maybe just some comments on how we should think about...

I'll keep coming back. The end markets are soft and there are structural changes happening. You've got -- so the heartland is Victoria, and Victoria is the toughest place in this country. That's where we try to get our innovation place. And then we've got like-for-like sales that are down in both Plumbing and Waterworks in America. So look -- so we -- how do I -- I've been trying to say it for a long time. We are in America, a price taker, and we're trying to build capabilities to differentiate. But we are in this -- we got -- we've definitely got a big speed hump right now. That's the Waterworks part, but the Plumbing part is also like-for-like down. So -- because we're so exposed to the residential new construction. So if you're actually on the ground, it is stuck. People are waiting to do -- in America, it's driven off the long-term interest rates. They're not -- they haven't moved yet, and maybe they won't move as much as everyone expects. So yes, it's -- we're in -- for Reece perspective, we're definitely in a -- we're in a perfect storm. So it's -- look, that's just what it is. It's obviously testing us, and we will see how we respond, but you really find out a lot about yourself in these times and your teams and all of the alignment through all the different stakeholders. So yes, I don't know whether that answers the question, Brook, but that's where it is.

Our next question comes from Sam Seow with Citi.

Look, I just want to ask, you've had a good year on store rollouts. So I just wanted to maybe unpack what the difference in your like-for-like growth versus your reported sales growth is, I'm just kind of trying to understand what that underlying like-for-like is in both regions.

Sam, we haven't shared it. We've got -- like everyone is listening to us. It's -- we're not -- we're definitely -- I'm sharing a lot here. I'm being pretty honest here. So I'm not going to share that on the call.

Okay. Okay. And then maybe just on store rollout then as we think about FY '26, you've obviously had a strong year. Are we thinking about winding that down to manage the cost base a little or investing through the cycle? Anything we can think about above and beyond your historical norm?

No, it's a good question. Obviously, that is all not at this point, but if it keeps going like that, then that could be on the table. But if we then were to dramatically wind that back, our CapEx, we'd be really signaling that we may be losing faith in the long-term plan. So -- but it's definitely getting -- it's getting a hearing with management. Like what happened at the end of the GFC when we had a 6-year period of no growth. It's just that we weren't covered by everybody. So it was much easier to actually navigate that cycle. this one is harder than that for us. So yes, definitely, that -- part of that -- that is part of our differentiation in the U.S. But we -- it's going to take multi-decades before that becomes meaningful because you're rolling out stores, you're winning customers, one customer at a time. We've got some coverage through COVID because we got the COVID stimulus that benefited Plumbing, obviously, Waterworks. We've got the competitive threat of Waterworks now and everything has reverted back to the main in Plumbing and exposed where the business was back when we bought it, which was -- which needed a lot of work. I used to say we bought the worst house on the best street. I used the analogies of like it's buying a 100-year-old house and doing a big refurb whilst living in it. So it's -- all that's still at play. And -- yes, so that's just been giving you the narrative at all. But the positive of all that, you're having more honest conversations, not that that's not the way my style is anyway, but we're having much more honest conversations everywhere. So there could be positive out of that as long as you don't then lose the belief with the team because confidence and belief can get shaky when things like this happen.

Our next question comes from Keith Chau with MST Marquee.

The first one and certainly appreciate your candour on these topics. I think you mentioned earlier some market share loss in both Waterworks, and I think you did say Plumbing as well, the Plumbing business. I'm just wondering if you can elaborate on the Plumbing side of it. We've talked about [indiscernible]. But just if you can give us a sense on whether there are some competitive issues in that Plumbing business and whether you think part of that is the change in distribution structure in the U.S. as well, please?

Look, it's -- look, it's a good question. I'm just -- I've got to be careful here what we -- because a lot of our competitors are listening as well here. So we've been honest with -- well, being honest with everything. A lot of it is the softness in the -- both residential new construction and multifamily, which means that if there's less activity, you get -- if there's more trading happening at a local level, there's more competition. So when you've been a business that sells on price, that's the lever you pull. So we've been trying to create a point of difference and through the last 4 or 5 years, add some capabilities and some abilities to try and lift the margin. But when -- but ultimately, what happens under pressure, when you see the market fall like that, a lot of what you do goes out the window. It's like a football analogy; you can have great skills on the training track. And then when you're on the football field and then you have to kick the goal at kicking to win the match, the pressure comes up and often you miss the goal. So that's the analogy there. So a lot of it's to do with the market softness and maybe, I've always said this, we have got really big competitors in the U.S. And ultimately, in these times, it's the big competitors that have the capabilities that have got really sophisticated supply chain, bigger scale, a stronger more wider leadership. They are the ones that do better in these times. So that probably is a way of answering it. But we're feeling pain in both Waterworks and Plumbing.

Appreciate that, Peter. And then I guess maybe there's a bit of constellation in terms of the earnings performance here. I mean, quite clearly, you've got to fight back in a lot of ways to keep your position in the market for that longer-term story. Can you give us a sense of how much -- I mean, I'm not sure how to ask this question, but like how much additional cost the business is adding at this point in time to try and keep that position. You've had to rebuild the Fortiline team quite clearly, maybe you've had to defend a bit in the Plumbing business as well. But is there -- are there additional costs that have been put into the business to help you defend your position in the U.S. at this point?

Yes, definitely. That is definitely the case. So you are because you -- I mean it is it's definitely -- that's inflationary because it's both at the trading sense and then obviously, you're competing for the people part and trying to retain. So that definitely is playing out. And Sasha, you want to take that?

No, no, that's fine.

Our next question comes from Nathan Reilly with UBS.

It was just actually an extension to that question. Obviously, picking up everything you're talking about here in terms of the challenging macro, but you've obviously identified and highlighted that you committed to the strategy, plus you've got the strength of the balance sheet behind you. But just in terms of how you're thinking about investing in the business over the next year to defend and grow your position, can you give us some insight into whether you're sort of leaning more on cost at this point, operating efficiency, service offering, price and to some extent, even capital? Just trying to get a sense of maybe the cash cost that you're sort of thinking about to support the business over the next 12 months?

Well, I think what we've been really -- we've got a very clear sort of strategy and a clear blueprint and our priorities that we're going after. If anything, it's about trying to get bang for the buck. I mean we've been investing -- so it's an execution piece as well, which starts having people and getting high-performance teams and then actually getting outcomes. So it is staying true to the framework and the strategy. So the part -- for the part where it's harder this time, I mean, we -- if you look at Australia, we've got a great business and great capabilities. We're an essential service. Lots of the innovation comes from the center, which is here at Cremorne, we've got an innovation center as well. It's those areas, and we're based in Victoria, where through a huge period of lockdown, we have really struggled to uncouple innovation and productivity. We have struggled to get people to come into the office. We -- and so if you don't do that, if you -- with that part, you aren't going to unleash the innovation part of our strategy. So if we can't -- if we, in the next period, can't actually come to grips with that, then we will be pivoting and then everything will be on the table, including what we do, including the innovation investment and maybe pulling CapEx. So nothing is off the table yet, but we're holding our nerve just right now.

Okay. And just in terms of how you might be thinking about cash conversion over the next 12 months.

I think you can -- the next financial year is not going to be any better than this. It's -- we've got a challenging financial -- another challenging year coming. So it will be -- so you just got -- that's the -- I mean, we don't -- I'm already giving a lot more color. It's much easier when you're performing more, you can -- you don't have to explain as much. But I'm trying to give color without giving every single thing away for us to be then continuing to be attacked because this is really competitive. And we've got competitors that listen to this, and it's -- this is a new ball game. This was how it was 20 or 30 years ago, just it got more orderly for about 10 or 15 years. It's definitely not orderly now.

This concludes the question-and-answer session. I would now like to turn it back to Peter Wilson for closing remarks.

Well, thank you, everybody, for attending our full year webcast today. I do want to just close by thanking the Reece team and our shareholders and all the stakeholders for the ongoing support. It's definitely been a challenging period. So thank you, and we'll see you on the next call. Bye.

This concludes today's conference call. Thank you for participating. You may now disconnect.