Thank you for standing by, and welcome to the Reece Limited half year results 2022. All participants are in a listen-only mode. There will be a presentation followed by a question- and- answer session. If you wish to ask a question, you will need to press the star key followed by the number one on your telephone keypad. I would now like to hand the conference over to Mr. Peter Wilson, CEO. Please go ahead.
Good morning, everyone, and thank you for joining us. I'm Peter Wilson, the Reece Group CEO, and I'm joined today by Andrew Cowlishaw, our Group CFO, to outline our half year results for the period ending 31st of December, 2021. Today we're gonna take you through an overview of the results and our strategic priorities, a review of the operational highlights for the first half, and some thoughts on the macro environment. Please note for consistency, all figures are in Australian dollars unless otherwise stated. The first six months of FY 2022 were in many ways an extension of 2021. On one hand, we were navigating an unprecedented environment with the competing pressures of changing COVID rules, constrained global supply chains and capacity constraints. On the other hand, we were experiencing very positive demand. Our network and our customers remained busier than ever.
In this context, the strong execution from the team across the group stood out. Our people were stretched to the limit, but demonstrated what we were able to achieve when we all pulled together. This environment translated into another record half for Reece. Sales were up 17% on the prior year to AUD 3.6 billion, as we saw strong demand across all regions and a significant inflation tailwind driving growth. ANZ sales were up 11% and U.S. sales were up 24% with immaterial FX impact for the half. Our philosophy of holding higher stock weight has been a key part of our customer promise and has served us well in an environment of supply chain disruption. As Andrew will outline, we experienced an increase in cost of doing business, driven largely by an increased FTE and wage inflation.
We saw a step change in our CapEx program in line with our strategy and as previously flagged. Normalized EBIT after the period was up 14% to AUD 397 million, translating to a net profit after tax up 28% to AUD 157 million. The board has declared a dividend of AUD 0.75 per share. In short, this is a strong result driven by the market conditions and supported by our resilient business model and strong execution. Turning now to our focus. Our blueprint guides what we do across all areas of our business. We are a purpose and values-led organization, and our 2030 vision and strategic priorities help bring that to life. Each of these elements come together to help us deliver on our promise of customized service.
Now turning to the detail of that blueprint, I wanna focus for a minute on our vision and our strategy. Our 2030 vision is to be the trade's most valuable partner, helping them succeed in a digital world. This means we are aiming to be both a bricks and mortar and a digital business, providing the quality products and service that we are known for, and creating digital solutions to help tradespeople run their businesses more efficiently. We are already on this journey, and we are working to ensure that however our customers choose to do business with us, they will have the same personalized experience that they have grown to expect. We are bringing this vision to life through our three strategic priorities. The first is being brilliant at the fundamentals of trade distribution, an intentional focus on the foundations of the Reece model.
We cannot achieve our vision unless we are the best at the basics. The second is investing for growth like we've always done, continuing to grow our business through reinvesting in our stores and systems and expanding into adjacencies and markets where we can realize growth opportunities. Finally, staying ahead of our customers' needs through our innovation approach. In the U.S., we are focusing on the first two areas, and in ANZ we are focusing on all three and bring the learnings realized through delivering innovation into the U.S. where it makes sense. Now let's look at the progress in our business segments in the half. First, looking at our ANZ business. As we've outlined, it was a half heavily influenced by the external environment, and we were focused on managing the competing external challenges. We kept our focus on the long term throughout.
Through our brilliant fundamentals and investing for growth pillars, we continued delivering upgrades and improvements across many aspects of our business. We also continued to ensure we had the right capability and leadership in our business to execute on our ambitions. To that end, in December, after an extensive process that included a global search, we appointed Marius Vermeulen as the new CEO of the ANZ business. Marius joined us in 2020 to lead our supply chain. He's already having a big impact, and I know he is the right leader to take us forward to 2030. Finally, under our delivering innovation pillar, we continue to work towards making life easier for our trades in a digital world.
At a high level, we think we are positioned to maintain and build on our market leadership. We enjoy the benefits of scale and a resilient model heavily exposed to the R&R plumber, and we have growth opportunities in New Zealand and strategic business units. Now let's look at some of the progress in a little more detail. Critical to the ANZ performance in the half was the team. As I said earlier, in a period of disruption, their resilience has really stood out. We put a dedicated focus on supporting them to be the best through health and well-being initiatives. Knowing the team was stretched, we maintained our focus on safety, completing over 16,000 safety walks and delivering another 15% improvement in our LTIFR rate. We've continued to take a high compliance, high care approach to managing the growing impact of COVID.
Turning to the supply chain, we were able to leverage our scale and the flexibility of our distribution model during the half, and we think we've weathered the storm well. While navigating offshore delays and disruptions to domestic supply chains, we deliberately held higher stock on hand. Our service model, delivered by a knowledgeable team, meant that we were generally able to provide alternative options. Our customers are adaptable, and we tried to go the extra mile to find them solutions. We know that we were able to win pockets of market share by being in stock, and I think this helped drive our sales results. Turning now to the ANZ network. We have 644 branches, with two new branches added during the full year.
The density of our network continues to be a key competitive advantage, delivering convenience for our customers and enabling us to be flexible in the face of COVID-19 and supply chain issues. We continue to upgrade the network to ensure we are delivering the best experience for our customers with 17 refurbishments during the period. Looking now at our digital ecosystem, the customer experience remains front of mind as we invest in functionality and efficiency. This half, we made enhancements to our customer-facing maX platform. We've seen a 25% increase in online sales off the back of 57% growth in FY 2021. We also continued rolling out our new mobile-enabled point of sale system, which is now in 100 branches across our network, helping us deliver quicker service and gain new data insights.
Reece Connect is our automated approach that helps integrate systems like job management and accounting software, giving customers time back in their day. We expanded our ecosystem over the first half, meaning more customers have the flexibility to connect to Reece using their preferred technology systems, and delivered over 1 million electronic invoices directly into our customers' chosen accounting software. Moving now to our U.S. business.
We faced similar macro challenges to ANZ, although the impact of COVID disruption on our own team and network decreased compared to FY 2021. We maintained our focus on operational improvements and business fundamentals, and we've seen strong progress across multiple work streams covering both pillars of the strategy. For example, we invested in leadership and selling capabilities and accelerated our continuous improvement program. The team in the U.S. are working hard and are delivering on schedule.
We continue to see a great runway for Reece in the Sunbelt. We are seeing positive customer responses to the improvements we are making, and we have the benefit of a favorable demand setting while we go about making these changes. Almost four years in, the strategic rationale for entering the U.S. market is holding firm for us, despite the unexpected complexity in the external environment.
Turning to our U.S. store network. We have a multi-pronged strategy to upgrade and improve our existing network and to roll out new stores in refreshed formats across our business units. In particular, we see an opportunity to increase our offering to the more resilient R&R market that we are heavily- exposed to in ANZ, and where we believe we have a differentiated proposition. The store experience is very important to our customers as is the ability to get in and out quickly.
As COVID restrictions ease in the U.S., our team has spent more time in the field, and one thing that customers continue to tell us is that they need a brilliant in-store experience. That means physical presentation, high quality service, expertise, and availability. In line with this strategy, we rolled out five new stores this half and completed an additional 5 refurbishments. We expect this pace to continue in the second half as COVID constraints slowed some of our earlier efforts. We also completed a small bolt-on acquisition of 7 stores in the R&R space on the thirty-first of December. Another critical part of reaching our customers, and a key part of our 2030 strategy, is to provide a great digital experience.
In the U.S., we knew the legacy MORSCO online platform was not fit for purpose, so we've been working towards launching a local version of maX, which we did during the half. We're focused on providing the best digital proposition for our customers on a platform that will deliver a seamless experience as our digital ecosystem in the U.S. grows. maX is locally built and completely tailored to the needs of the U.S. customer. The online offering means we can truly partner with trades, honoring our long-held commitment to solving our customers' problems and helping their business thrive. Finally, in the U.S., at the last AGM, we shared that we were looking to launch the Reece brand locally.
This is a symbolic milestone after almost four years of learning and growing together. We know we are approaching the moment when our customer promise can be delivered in the U.S. market, and we're beginning the process of uniting under one single brand. This began with the Reece corporate brand launch and will progress to rebranding the network over the next two years, starting in California later this year. I'll now hand over to Andrew to go through our financial performance in more detail.
Thank you, Peter. I'm pleased to share that Reece delivered a record half year despite the backdrop of product and wage inflation, capacity constraints for our customers, and supply chain complexities. For the first half of FY 2022, sales revenue for the group was up 17% to AUD 3.6 billion. Normalized EBITDA was up 14% to AUD 397 million. Normalized EBITDA is calculated on the same basis as the prior period. EBIT increased 16% to AUD 275 million, and net profit after tax was up 28% to AUD 157 million. Earnings per share for the half year of AUD 0.24 is up 28% on the previous period. Normalized EBITDA margin decreased by 40 basis points, the result of increased operating expenses, primarily driven by higher numbers of FTE and wage inflation. Let's look at the ANZ segment.
The ANZ region delivered well, but again experienced COVID-19-related lockdowns and construction restrictions across various Australian states and New Zealand. Sales revenue in the ANZ operations was up 11% on the prior year, a record high. From a quality of earnings perspective, it is important to note that we experienced product inflation of 8%-9% during the period. Normalized EBITDA was up 6% to AUD 249 million, and EBIT has increased 6% to AUD 186 million. ANZ normalized EBITDA margin decreased 60 basis points for the half. It is also relevant to note ongoing EBITDA margin.
The 90 basis points margin compression excludes non-recurring government subsidy revenue and debt refinance expenses. The key driver of the margin compression for the half year was increased operating expenses, primarily related to higher employee numbers to meet increased demand and associated wage inflation.
These increased operating costs were foreshadowed in our FY 2021 investor materials and are likely to persist beyond FY 2022. Now moving to the U.S. The U.S. region performed very strongly for the half year, with record results being achieved across the majority of our markets. Sales revenue was up 24% with immaterial FX impact for the half year.
From a quality of earnings perspective, it is important to note that the product inflation impact for the U.S. region was estimated in the low teens for the half year. COVID-19 has continued to impact our U.S. operations through supply chain disruptions, staff shortages, and short-term branch closures. Operating expenses in the U.S. have increased, driven by additional headcount, wage inflation, and project expenditures. Normalized EBITDA was up 30% to $148 million, and EBIT was up 44% to $89 million.
Notwithstanding the higher operating expenses, the U.S. region was able to increase its normalized EBITDA margin by 30 basis points. Moving to the next slide. In December 2021, we announced the successful refinancing of our existing debt facilities with AUD 1.25 billion of syndicated multicurrency revolving facilities. The new facilities were used to fully repay the secured Term Loan B debt and associated revolving facility and to provide ongoing working capital support for the group's operations. The Term Loan B facility had been in place since the acquisition of MORSCO in July 2018. As part of the refinance, we reduced debt to AUD 1.016 billion for the half year, down from AUD 1.336 billion at 30 June 2021.
The new facilities are governed by a common term deed and provide diversity of tenor, reduced interest expense, and flexibility to draw down in Australian or U.S. dollars. Maintenance covenants of less than 3.5x net leverage ratio and greater than 2.5 x interest cover ratio will be applicable at reporting dates, and we were compliant with the covenants at 31 December 2021. The new facilities are expected to generate low expense going forward.
Based on drawn debt at 31 December 2021, we would expect interest expense in the range of AUD 10 million-AUD 12 million for the second half of FY 2022, assuming no material changes to interest rates or FX. The new facilities are currently unhedged for interest rates. Moving to cash flow and net working capital. The group experienced an AUD 84 million operating cash flow outflow for the first half of FY 2022.
The key driver of this outflow was a significant movement in net working capital for the period. The net working capital movement of AUD 348 million was the outcome of the group investing in higher inventory levels while ensuring strong supplier relationships in a competitive market for stock. Net working capital to sales for the half year was 23% versus 19% at 30 June 2021. There was no deterioration in the collections environment during the half, and we remain disciplined in managing our debtors across the group. The half year also presented a step up in capital expenditure, which is in line with our expectations and was communicated in the FY 2021 earnings presentation.
The capital expenditure has been targeted towards our focus areas of store refurbishments, new sites, and investment into digital capabilities. As referenced in the previous slide, we used AUD 344 million of our cash reserves to reduce drawn debt as part of the December refinance. Business acquisitions and investments includes payment of deferred consideration for the Todd Pipe & Supply acquisition, investments through Superseed and some small bolt-on acquisitions in ANZ and the U.S. Now looking at the net working capital movements in more detail.
Net working capital has increased from 30 June by AUD 348 million, which is primarily driven by an increase in inventory of AUD 283 million. This inventory investment reflects the Reece philosophy regarding stock as a strategic asset. As supply chain disruptions have continued in the half year, we have been proactively buying inventory when it's available.
This has allowed us to actively manage the incidents of being out of stock on items that are critical to our customers. During the pandemic, we have benefited from being well-capitalized and having long-term supplier relationships. This has enabled us to be in stock and to fulfill the significant market demand across the U.S. and ANZ regions. We expect that our inventory levels will remain elevated from their pre-pandemic levels until the supply chain and demand dynamics in our regions return to more normal levels. Moving to the balance sheet. Under the new bank facilities, the maintenance covenants are based on net leverage excluding leases and using pre-AASB 16 EBITDA. The information on the slide has been prepared on this basis.
At 30 June 2021, we had a cash balance of AUD 829 million, largely due to the AUD 647 million equity raise in April 2020. These cash reserves have been used to repay debt, invest in working capital and capital expenditure as previously discussed, with closing cash for the half year of AUD 118 million. Senior debt was reduced to AUD 1.016 billion at 31 December 2021. The net leverage ratio of 1.4x is up from 0.9 times at 30 June. I'll now hand back to Peter.
Thank you, Andrew, and I'll now step you through our views on the current macro environment in our markets. The demand drivers are strong in ANZ. We are seeing estimates for steady growth in residential markets this year and next, and a period of stronger growth in non-residential markets. This is largely due to the backlog of pent-up demand remaining strong post-lockdowns.
Where pockets of potential softening are forecast, like in alterations and additions, we would anticipate a soft landing given that capacity is currently constrained by the availability of trades. While we monitor factors that could influence this setting, today, we see a solid pipeline and strong demand, and we anticipate market conditions to remain strong in the near term. Turning to the U.S., underlying demand drivers in our markets also remain healthy.
Housing starts, remodeling, and non-residential markets are all anticipated to remain in growth in the near term. If we s tep back, we don't see any change in the long-term fundamentals we think will underpin growth in coming years, particularly strong population growth in the Sun Belt. Unlike in the lead up to 2008, where there was a significant overbuild, today, we see a cumulative underbuild in housing that has driven a large residential backlog.
In non-residential, we expect continued growth as a post-pandemic bump is more likely to come in mid-calendar year 2023. We continue to monitor the interest rate environment, but don't anticipate this resulting in an overnight change to these strong underlying factors in the near term, given we generally see an 8-12-month lag time between interest rate movement and housing impacts.
Clearly, the macro situation remains complex in both our markets, and we know the long-term outlook is less clear despite our optimism about the near-term demand. In this environment, we are focused on what we can control in our business. We believe we are well-placed if any softening occurs due to our scale and our investments we are making in line with our strategy.
Now turning to the summary. We have delivered a strong start to FY 2022, driven by the positive external setting and strong execution by the team. We believe we are well-placed to continue managing the current challenges for the remainder of the financial year, always maintaining our long-term focus and investing to deliver on our 2030 vision. Thank you for your time today, and we'll now take your questions.
Thank you. If you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star two. If you are on a speakerphone, please pick up the handset to ask your question. Your first question comes from Peter Steyn from Macquarie. Please go ahead.
Good morning, Peter and Andrew. Thanks very much for your time. If I may just ask you for a little bit more detail on the expenses growth. You know, just looking at it at a group level, employee expenses up 19 and other expenses up 23%. Just keen to understand, first of all, on employee expenses, the underlying FTE growth and what you saw in terms of wage inflation both in ANZ and the U.S. If you could just give us a little bit more of an understanding of what drove the 23% increase in other expenses.
Yeah. Look, thanks, Peter. It's Andrew speaking. I'll just start with employees. Look, for the half year, we had employee growth of about 11.3% for the group. Different for different markets, but we would be saying that wage inflation during the period has been on new roles, somewhere between 20%-30%. I think that's the dynamic around employee growth. If you look to the, I guess, what you're calling other expenses in the statutory accounts, Peter.
Yep.
Across various segments of our business, we've had higher expenses. Motor vehicles, IT and telecommunication, travel and entertainment has come back. Obviously that was at very low levels previously. We've also had quite a bit of consulting within the half year. Also within that, other expenses line is refinance expenses for the December debt refinance.
It sounds like there's perhaps an element of that that doesn't continue, and does consulting also step down? Obviously, refi won't recur, but wanting to understand what we need to think about on a go-forward basis.
I think what we're looking at the moment, Peter, is with the agenda that we've got around our strategic priorities, consulting around technology is a large part of us being able to deliver on our goals. We would be seeing that persisting. In general, cost of doing business for us is got significant upward inflationary pressure. We'd be expecting it to persist.
Yes. Perfect. Thanks. I may just ask very quickly on gross profit margins. So those were flat in a pretty severe inflationary environment. Do you think that there's a possibility of some over recovery on a forward-looking basis? You know, perhaps some mitigation in some of the real strength you've seen from a cost perspective.
Yeah, look, I mean, you're absolutely right. I mean, they're flat on the previous half. What we've been able to do because of our I guess in-stock position has been able to pass on some pretty significant price inflation to our customers. They've been able to obviously pass that on to their end customers. We don't believe there's any ability to effectively uplift gross margins. We work in a competitive environment in both ANZ and the U.S. We've got competitors who are effectively pricing based off commodity prices and market prices, and we don't see any advantage coming out of GP.
Thanks, Andrew. Appreciate that. I may just leave it there for now. Thanks.
Thank you. Your next question comes from Lisa Huynh from JP Morgan. Please go ahead.
Oh, hi, team. Just on the theme of inflation, I guess if we look towards the second half, with what you've got in the pipes in terms of planned price increases, do you see this ramping up across the balance of the year? And how should we think about that going into 2023 as well?
Yeah. Look, for the balance of the year, Lisa, we do see it persisting. You know, what we had in ANZ was a sort of an 8%-9% inflation dynamic for the half, and in the U.S. it's around 12%. We don't think that's going to moderate between here and 30 June, from what we're seeing in the market. Do we see there's upward pressure on it? In some lines, possibly, but I think on average, we'd be sort of seeing those numbers as persisting.
Sure. I guess, you know, it hasn't impacted demand yet, in terms of price rises, but I guess what are the kind of warning signs you're looking at across your customer base before it starts impacting, you know, demand for renovation work overall?
I think, Lisa, it's Peter here. Just if we do see, I mean, ultimately it could be an impact, but the demand settings are pretty strong in both markets. You know, you just only have to go, if you try and find a tradesman or if you try to find a builder to do some work, there's quite a queue. So we're pretty much at capacity. You can see this playing out for the medium term. Ultimately, how far it will go before it impacts demand, I mean, I don't think we really know at this point. From what we can see so far, we're seeing the demand settings remain where they are.
Okay. Sounds good. Just one quick one. In terms of the U.S. rollout, I guess, how should we be thinking about the number of stores you're planning to roll out? You know, you've done 12 this half, is that kind of a right level to half going forward? Or, you know, does it step up?
In the half, we did five new and five refurbs, so it's only five new. We anticipate that for the current half now because it's been hard. Going forward, our goal is to do between 10-15 new stores a year and that number of refurbs. We wanna make sure we're doing it right, we get the right locations and then good execution. That's the level we see after the experimenting. That is something that we can sustain.
Okay. Sure. Thanks. That's helpful. I'll leave it there.
Thanks, Lisa.
Thank you. Your next question comes from Brook Campbell-Crawford from Barrenjoey. Please go ahead.
Yeah, good morning. Thanks for taking my question. Just back on the gross margin and the inflation environment. Are you able to just provide a sense of how much of impact that had on gross profit in the half, if at all. I mean, you talked about, you know, not being able to put a price more than cost coming through, which is fair. But if you're able to quantify perhaps the impact in the half to GP from the inflationary environment.
Yeah. Look, I mean, Brook, the goal of the Reece business in both markets is to allow our customers to trade as effectively as possible. So we haven't been trying to effectively hold on to any additional margin coming out of price rises. We pass it on. If you look at our reported GP for the half, it's effectively flat on the previous half. If we look across our two regions, yes, there's changes in mix, but the way we've traded has basically meant we've been able to maintain GP in the inflationary environments of 8%-9% in ANZ and circa 12%-13% in the U.S.
Okay. Sounds neutral. Thanks for that. Just on this acquisition in the U.S., are you able to provide some more color there, you know, the name of the business, what the total cost was, transaction multiple, all the usual basics, if you could?
It's immaterial. It's very small. We're not gonna go through all the transaction costs and so on, but it's a small business called Schumacher, and it's in the R&R space, in the Baltimore state. Getting a little bit further north of the Sun Belt, but it's a store-based opportunity that we liked. It's we settled on the 31st of December. It just keeps adding to the growth story where these there's lots of these little potential acquisitions that will come up and where we feel that they fit our strategy and fit the network. We look to explore.
Okay, great. Last one for me, there was an investment in intangibles in the half, AUD 49 million, which I presume is digital, but correct me if I'm wrong. Are you able to provide a bit of color there on the increase and if that's, you know, more one-off or you expect that to persist at that level going forward?
The intangibles, Brook, is a variety of things. Some of the, you know, the business acquisition that Peter just referred to, some of the investments through SuperSeed. I mean, ultimately and also some of that is IT expenses. It's effectively a mixed bag where no one item really was any greater than the others.
Okay, great. Thank you.
Thank you. Your next question comes from James Casey from Ord Minnett. Please go ahead.
Oh, good morning, Peter and Andrew. Peter, I ask this question relatively cautiously. The sales revenue growth in Australia of 11% with 8%-9% inflation, how would you describe the volume growth compared to market? Because obviously the implication is there, it's low single digit volume growth.
I think it's a good question. I think we're growing with the market. Our stock position, our scale, and just the position in the market, I would say, we're definitely going with the market. There may even be some gains in some areas because of the availability of stock in our store network. I think given the big states had big, strong lockdowns, it's a very good result.
Okay. In the U.S., since the acquisition of MORSCO, the sales contribution's kind of been 55-45, and the operating margin has been worse in the first half as well. Can you just remind me, is it just the sales leverage, the reason why the operating margin's lower in the second half, and is that expected to continue?
For the U.S., you're talking about, James?
Yes. Yes, Andrew.
Last year, the U.S. margin was impacted by a management fee which was only charged in the second half. We're now accruing that on a monthly basis, so that'll make their margin stronger in the second half than it was previous H2.
Okay. Just finally, just with your debt refinancing, what's the cost of debt on that facility?
What we disclosed was 10-12-
10- 12.
Months of interest, 10-12 of interest expense for the second half. That's really on the drawn debt level of a bit over AUD 1 billion as we came through 31 December. And that's on the basis that FX and interest rates stay at the levels that they're at the moment, 'cause we haven't hedged that facility for interest rate risk. Effectively, if you effectively run rate the 10 over a billion, it's roughly about there, James.
Understand. Last one, just on the CapEx, just broadly speaking, if you doubled that, would that be a near enough guide to the full year CapEx?
Yeah. That's about 2.4% of revenue, the AUD 87 million, James. We'd be sort of seeing 2%-3% for the full year being the right sort of level. If you run rate it, you'll be in the right area.
Thanks, guys.
Your next question comes from Andrew Scott from Morgan Stanley. Please go ahead.
Thank you. Good morning. Peter, just a question for you on the U.S. I mean, fantastic job in offsetting some of those supply chain issues. I was just wondering if you think bigger picture, does this make you think about the way you structure your business? I'm thinking, do you rethink a distribution center strategy or anything like that?
That's a good long-term question 'cause we don't have a distribution center strategy. In the long term, our plan is to build a supply chain capability to suit the U.S. market. But that's still some time off 'cause you need the big scale of stores. It's a significant capital investment, big check investment, and people investment. We're still working through what we're calling, you know, the fundamentals of trade distribution to make it as consistent as we can and then to get on with the organic store rollout and then complement with some M&A that actually makes sense.
Like, definitely in the long term, you aren't gonna win unless you've got great supply chain capability and great digital capability. That definitely is on the agenda, but not for a little while.
No, understood. Thank you. Just a quick one following up on Lisa's question. Could you give us a rule of thumb on a cost of a new store and a store upgrade, please?
Well, look, there's some things for market sensitive reasons we don't disclose. We never have disclosed that. We're gonna probably just leave it as we're gonna continue with that policy.
No problem. I had to ask. Thank you, James.
Yeah.
Thank you. Your next question is a follow-up question from Brook Campbell-Crawford from Barrenjoey. Please go ahead.
Yeah, thanks for allowing the follow-up. On the new stores in the U.S., can you provide a sense of how long you think it will take for a new store to contribute to breakeven over there? Just, I'm presuming you need to, you know, win new customers in new regions, etc , and it'll take a period of time. Are you able to provide a sense of, you know, timeframe to profitability for a new store?
Yeah. Again, Brook, we don't normally disclose this. Yes, they do take some time to then break even. It's you know the organic way for us has been the best way, but it takes time. You know, in Australia, you're taking up to three years for profitability. That's why it's not easy to. You have to have a strong balance sheet, and you've gotta have a really long-term mindset to do this.
I mean, I've just given you something there for the Australia. Hopefully we can do it a bit quicker than that in the U.S. You know, the markets are bigger, so maybe we can do it a bit quicker. That's the plan. You know, when we do these things, we basically set out to optimize everything. Optimize the store, the way we set them up, the way they're managed with people, and then to get to profitability as sustainably and quickly as possible.
That, that's great. Thanks for the detail.
Thank you. Your next question is a follow-up question from Peter Steyn from Macquarie. Please go ahead.
Hi, James. Thanks for the follow-up. Just wanted to get a bit of a sense for how you guys are seeing the demand environment, perhaps at a little bit more granular level, you know, and probably a little bit more focused on the U.S. because we understand obviously there's a lot of backlog in an Australian context. The U.S. tends to work that slightly differently from a new construction perspective. I'm also curious on the R&R side because, you know, bathrooms and kitchens, which generally play into your space a lot better, have been quite strong.
You know, just curious how you guys are thinking about shaping the business in the context of that, whether you think that remains a sustained area of homeowner investment for the foreseeable future? I'm thinking probably 12-24 months when I ask that question from a timeline perspective.
Well, I think that from the sort of long-term underbuild and where demand is and all the settings from a residential home market, yes, I think we can see the line of sight for 12-24 months, as long as there's no crazy crisis and, you know, as long as you don't get seven interest rate rises or eight interest rate rises in a year. Definitely on that, the housing part looks really strong. You know, the R&R is a very resilient market, as we all know. It does look like because of COVID, there's a step change into that market. You can see that when you look at where Home Depot and Lowe's, where those businesses have grown in the last couple of years.
Just remember, we have a minor exposure to R&R. We are exposed to the construction markets, and that's what over time we wanna pivot more to have a bit more balance, and that's what the store rollout is to get to move into the R&R space. We have a relatively small showroom exposure, so it's not like here. That's our long-term plan is to get the structure, you know, more like where it is in Australia. That's gonna take a long time because it's mostly for the residential and commercial construction, which is, and all these markets are really strong right now.
Yeah. Sure. Thanks, Peter. I'll leave it there.
Thanks, Peter.
Thank you. That does conclude our question session for today. I'll now hand back to Mr. Wilson for closing remarks.
Well, just as usual, just to thank everyone for your time today and also for the ongoing support and interest. I know when I look back four years ago, when we're in the middle of the negotiation to buy MORSCO, it goes pretty quickly. You go two years ago with COVID coming. There's so many things that have come our way and that. The result we've delivered is a really strong result and definitely one that we're all proud of, given all the circumstances. I can honestly say that our people have done a great job.
The frontline people are the real heroes, and they are. I can honestly say they're really tired because they have to turn up day in, day out in the stores, serving customers with their masks. It's a credit to them. I just wanna say thank you for your time, and we'll catch some of you around over the next little while. Thank you.
That does conclude our conference for today. Thank you for participating. You may now disconnect.