Ann: Half Year Report and Accounts, page-10

@madamswer

This is my view on why the ROE has gone down from the mid 20s to mid teens.

You can divide the recent history of REH into 2 distinct parts:

1. Rapid growth in store numbers between 2001 to 2009

During this period, REH increased its outlet numbers from 180 in 2001 to 424 in 2009.

This is also the period when ROE increased from about 15% in 2001 to more than 23% in 2008.

As can be expected, this kind of supercharged growth eventually caused the supporting infrastructure to be bursting at the seams.

So, what did they do about it? The answer is in the next part of the history.

2. Slowdown in the rollout of new outlets and massive investment in logistics capability

From 424 outlets in 2009, the number of Reece outlets (excluding Actrol's) only increased to about 490 in 2017.

Management instead poured a lot of capex into building the foundation for the next growth phase of the company, i.e. new distribution centres all around the country.

FY2009: New National DC opened in Victoria
FY2012: New regional DC opened in Brisbane
FY2015: New regional DC opened in Melbourne
FY2016: New regional DC opened in Perth
FY2017: New regional DC opened in Sydney

As we all know, opening DCs are much much more complicated and expensive than opening new outlets.

On top of that, they also spent $280m buying Actrol.

The Wilsons are not going to spend money for the sake of spending money. These massive investments in their logistics capability will allow them to start the next phase of their growth. My guess is, it will involve opening a lot of new Actrol outlets all around the country. What they had done to the plumbing industry is exactly what they are planning to do to the highly fragmented HVAC industry.

It is also worth noting that these investments into new DCs is a must, because without it, they will simply be unable to support the growth of the business into the future.

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With 5 relatively new DCs now operating in all of Australia's major cities (sorry Adelaide), the major capital expenditure program is now behind them. This is also why they are now looking at other smaller projects that can drive further efficiency gains, for example: solar panels on own sites.

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Therefore, to answer your observation regarding lower ROE, personally, I'm quietly confident that as the stores rollout accelerate again, this metric will also gradually improve over the next few years.