Shares in Reece Ltd (ASX: REH) have been sold off sharply as the market digested what management described as a “disappointing result”.
In one of the more candid FY 2025 earnings calls, CEO Peter Wilson stated that next year would be “one of the most challenging years” in the company’s history, as it faces softening demand and intensifying competition.
Peter Wilson is the son of one of the founders, Alan Wilson. Today, the AFR reported that “father Alan had been against the initial US push, but son Peter said he, “did the work in secret” and got the board over the line.”
These results show that even more than 5 years after making the US acquisition, Reece shareholders are still suffering from the decision.
The Reece share price finished 15.07% lower to close at $11.96 on the day of results, and has since declined more than 8% further, to trade below $11.
Reece FY 2025 Results
Despite expanding its distribution network in FY 2025, weak construction activity from end markets in the United States and Australia halted Reece’s growth.
Key financial results include:
- Revenue of $9.0 billion, down 1% compared to FY 2024.
- Earnings before interest, tax, depreciation and amortisation (EBITDA) of $901.0 million, down 11% compared to FY 2024.
- Earnings before interest and tax (EBIT) of $548.0 million, down 20% compared to FY 2024.
- Earnings per share of 49 cents, down 24% compared to FY 2024.
- Dividends per share of 18.36 cents, down 29% compared to FY 2024.
A small increase in revenue combined with higher costs, including new store branches and wage inflation, led to profits declining more sharply than revenue.
After accounting for capital expenditures, employee share purchases, intangible assets, and leases, Reece generated a free cash flow of $186.5 million.
That was used to fund dividends and acquire store branches totalling $249.8 million, with the business relying on existing cash reserves to fund the shortfall.
Total closing cash fell to $275.4 million against $865.7 million of debt so Reece had net debt of about $590 million at the end of the June 30, 2025.
Reece Australia FY 2025 Performance
Australian sales inched 1% higher but failed to offset cost base inflation and incremental network improvements. As a result, operating EBITDA fell 12% to $339 million.
Historically, Reece has taken market share and grown earnings by providing an unmatched product range conveniently located for end customers. This allowed the business to command higher prices and achieve margins above the typical levels expected for building wholesalers.
The plumbing market, however, has become more competitive in the last year or so.
During the financial year, competitor Tradelink was sold to US-based Blackfriars Corporation. Meanwhile, low-cost operator JB Hi-Fi Ltd (ASX: JBH) became a new competitor when it purchased 75% of E&S Trading.
With new owners aiming to regain market share, revenue growth in Australia will be harder to come by.
Reece USA FY 2025 Performance
Despite adding 24 stores to the branch network, market share losses squeezed margins at Reece USA.
Revenue declined 5%, while EBITDA fell 23%. Management blamed competition, but the CEO’s comments about how having staff work from home reduces productivity, suggests at least part of the problem arises from suboptimal execution.
The President of the waterworks (called Fortline) division recently stepped down. Additionally, the founder and former management team of Fortline have chosen to set up a competing supplier, which is negatively impacting Reece’s market share.
“We’ve got both the plumbing and waterworks business in the US. We would be losing share based on what we’re seeing.” – Peter Wilson, CEO, August 25 Results Call
High long-term mortgage rates also remain a big hurdle to construction activity in the US
Many borrowers are on low 30-year fixed mortgages secured during the pandemic. Most are reluctant to refinance, given that the new interest rate will start with a seven rather than a three.
Reece Board Lowers Earnings Target for Management
Key management personnel at Reece are remunerated through salary, short-term incentives and long-term incentives (LTI).
It’s the movement in LTI that has drawn my attention, particularly the earnings per share hurdles and how they have changed over the past three years.
In 2023, the LTI stretch target was 10% earnings per share growth. That has dropped to 5.5% in 2025, indicating the Board expects lower growth over the next three years.
Reece Australia Financial Guidance For FY 2026
Reece did not provide explicit financial guidance, however management detailed a difficult market outlook for each of Australia and the US.
Housing volumes remain soft, but lower interest rates should drive incremental demand, at least in Australia. In the US, they have 30-year fixed-rate mortgages, so many people have low mortgage rates and are thus disincentivised to move until rates come down a lot further.
As for earnings, management said double-digit EBIT margins of past years are behind them as competition ramps up.
“There are structural changes going on everywhere. I’ve been trying to tell the market… you’re not going to expect those EBIT margins going forward.” – Peter Wilson, CEO, August 25 Results Call
Reece USA Financial Guidance For FY 2026
Management confirmed sales for its two largest US divisions, plumbing and waterworks, are currently negative in FY 2026.
“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.” – Peter Wilson, CEO, August 25 Results Call
Put simply, Reece is subscale in the USA. It doesn’t have a dominant market position to lean on and therefore profits are being squeezed by the construction cycle.
Detractors will be quick to question the viability of the US business.
But I think it would be unfair to call the move into the US an abject failure.
Acquiring MORSCO for $1.9 billion (now the US division) lengthened Reece’s growth runway in a separate geographic region. To that end, Reece has grown revenue by 29% and adjusted EBITDA by 76%.
While the acquisition could have generated value by leveraging the balance sheet of the superior Australian operations, that move now looks to be an error as competition at home is intensifying. Arguably, by weakening its balance sheet, Reece encouraged investment in competitors.
Overall, I still think Reece may be able to work through the current challenges, but I don’t think the market will see it that way. This means the Reece share price could face pressure from two fronts: negative near-term earnings, and the market assigning a lower multiple to those earnings.
Would I Purchase Reece Shares?
Reece’s Australian operations face a structural challenge from renewed competition. Competitors with new owners are seeking a return on investment, and Reece will likely need to sacrifice some margin to fend off rivals.
Although the US presents a larger opportunity, the road ahead is tougher there. Both structural and cyclical pressures mean execution risk is high and issues won’t be resolved quickly.
I think management knows there are lean years ahead. The Board certainly thinks so, with executive remuneration tied to low-to-mid single-digit earnings growth. The CEO alluded to another period of low growth on the earnings call:
“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.” – Peter Wilson, CEO, August 25 Results Call
Still, Reece remains a well-run company. The Wilson family, which owns 67% of the business, would be committed to making decisions with the long-term health of the company in mind. Since taking control in 1969, the family has a proven track record of successfully navigating construction cycles.
There is a price I would buy this business. But an earnings multiple of around 21.5 and a slim trailing dividend yield of 1.8% (or around 2.6% grossed up for franking credits) is hardly what I would hope to pay for a company with declining earnings, declining margins, and a meaningful amount of debt.
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Disclosure: The author of this article does not own shares in REH and will not trade REH shares for at least 2 days following the publication of this article. The editor of this article, Claude Walker, does not own shares in REH and will not trade REH shares for at least 48 hours following the publication of this article. This article is not intended to form the basis of an investment decision and is not a recommendation. Any statements that are advice under the law are general advice only. The author has not considered your investment objectives or personal situation. Any advice is authorised by Claude Walker (AR 1297632), Authorised Representative of Ethical Investment Advisers Pty Ltd (ABN 26108175819) (AFSL 276544).
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