Construction prices to remain high despite passing peak inflation, warns Reece boss Peter Wilson

Building or renovating a home is not going to become cheaper soon despite inflation peaking, with prices remaining elevated after demand exploded during the pandemic.

Inflation has peaked, but the construction sector is yet to see a “dramatic unwind”, with high prices set to remain for some time after demand exploded during the pandemic.

That’s the assessment of Peter Wilson, chief executive of ASX-listed plumbing titan Reece. Mr Wilson said while sales volumes had softened, prices remained elevated, with the Morrison government’s $25,000 home builder grants still washing through the system.

The grants – which the former government launched when it was feared Covid-19 would crash the economy – sent demand soaring as people renovated their homes like never before while in lockdown, igniting supply shortages and prices of building materials rocketing.

“Certainly the home builder grant did create a stimulus and I think that’s still working its way through,” Mr Wilson said.

“The industry is really our capacity still. There’s still a high level of activity. It’s still hard to get a trade. We’re at full employment.

“The real challenge now is the home builder grant as it winds off, and then you’ve got all the interest rate rises, which hadn’t really impacted yet. So that’s all about to fly through.”

Reece boss Peter Wilson said sales volumes have softened, but prices remained elevated.

Reece’s net profit jumped 18 per cent to $186m in the six months to December 31. Revenue, meanwhile, surged 23 per cent to $4.4bn.

Product inflation – which soared 22 per cent in the US and 11 per cent in Australia – fuelled most of the gains, with Mr Wilson saying sales volumes had “progressively softened.

In Australia and New Zealand, volume fell 3 per cent during the second quarter, while the US eased 6 per cent, and are expected to continue to drift downwards for the rest of the year.

“That’s an indication of what is actually happening in the market. It’s still at higher levels, but obviously from the last quarter you can see that things are beginning to soften.

“Whenever you start or commence (construction) there is definitely a lag. And the lag to completion now is deeper because of all the shortages of product and labour.

“We’re not seeing a dramatic unwind. So we see this as being pretty persistent for our sector for a little while.”

Meanwhile, Reece’s wage bill has risen 20 per cent, with the US driving most of the pay increases.

“It’s definitely more moderate here at this point,” Mr Wilson said.

“But I think going forward, people’s expectations have definitely moved up. It’s definitely more expensive when you’re looking to hire. Hence, why the Reserve Bank is probably a little worried about making sure those expectations aren’t getting entrenched.”

Overall, Australian wages growth accelerated to a decade-high of 3.3 per cent in the December quarter from 3.2 per cent in the September quarter, according to the Australian Bureau of Statistics. But the result was lower than the 3.5 per cent growth that economists expected.

Reece’s US business, which spans more than 200 stores, generated the bulk of the revenue increase, with sales vaulting 34 per cent to $2.5bn.

The company opened seven new stores in the US during the past six months, bringing its total to 212. It also converted its Californian branches to the Reece brand, beginning a “multi-year rebrand process”.

“We also continued to focus on developing our employee proposition, developing future leaders, creating high performing teams and embedding ‘The Reece Way’,” Mr Wilson said.

“We are delivering this through targeted programs for our managers to develop future leaders at all levels. This strengthens and enhances our employee value proposition to build a pool of future talent for our US business.”

Across its Australian and New Zealand stores, revenue jumped 11 per cent to $1.9bn.

The company has appointed former Metcash supermarkets boss Scott Marshall to run its ANZ operations, with Mr Wilson saying he is a “strong cultural fit” and will bring “fresh perspectives”.

“In ANZ, we continued to progress a wide range of activity focused on operational excellence, while accelerating innovation and investing to strengthen our business,” Mr Wilson said.

“In particular, we were pleased to deliver a strong Customer Net Promotor Score of +60 following the extremely challenging pandemic period.”

Mr Wilson during the half-year supply chains improved but “complexities remained”.

“We worked closely with our suppliers and made strategic investments in inventory to avoid disruption for our customers.

“Our inventory position increased to $1.58bn at December 31 (compared with $1.53bn at June 30) translating to a net working capital to sales ratio of 22 per cent, in line with June 30, 2022. We continued to make progress on delivering our 2030 strategy and our vision to be our trade’s most valuable partner during the period.”

Reece will pay an interim dividend of 8c a share, fully franked, on April 5. This is a 7 per cent lift on last half-year payout.

Reece shares closed 2.1 per cent lower at $16.52 on Wednesday, valuing the company at $10.7bn. This compared with a 0.3 dip across the broader sharemarket.