Rising costs have put the construction sector under severe pressure, but CSR boss Julie Coats sees 18 months of strong demand.
The brutal squeeze on profit being faced by the construction sector has been one of the few air pockets in Australia’s white-hot economy over the past 12 months, with the combination of surging construction costs and the sector’s obsession with fixed-price contracts sending builders to the wall.
Last week’s collapse of Melbourne developer Caydon Properties came after a slew of failures across the industry, from volume home builder Pivotel Homes to commercial developer ProBuild.
Julie Coates says the pipeline of demand for building products is getting longer.
But Julie Coates, chief executive of $2.2 billion building products giant CSR, remains upbeat about a pipeline of activity she believes stretches for at least 18 months – and is getting longer.
Supply chain disruptions and labour shortages are the biggest problems for CSR’s customers, Coates says, not demand.
Completions of detached homes (which account for about 55 per cent of CSR’s business) ran at about 115,000 in the year to March, well above commencements of 143,000; that gap means the industry’s pipeline keeps being extended.
“I’m not suggesting for a minute it hasn’t been challenging and there haven’t been issues for some builders. But what we see with our customers is that they’ve been able to manage their way through this,” Coates says.
“We see really strong underlying demand for our products. And we expect that to extend through this current financial year and well into the next.”
Coates can even see an end to the residential sector’s Homebuilder mess, which built up when builders signed up a glut of fixed-price contracts under the previous government’s pandemic home-building stimulus program, only to be hit by soaring construction costs.
“A lot of those customers are managing their way through that and in fact, in some states, we’re actually almost through Homebuilder.”
With apartment developments starting to fire up again and non-residential activity growing, Coates argues CSR is well-placed to withstand the impact of rising interest rates and a potential economic slowdown by tilting its business towards the strongest parts of the construction sector.
“We see we have quite a positive outlook on certainly the next 12 to 18 months, but also beyond that.”
Coates has taken a fascinating path to CSR’s top job. She joined Woolworths’ human resources department 20 years ago before rising through the business to become chief logistics officer, managing director of Big W, and finally chief transformation officer.
She says a stint as managing director of food manufacturer Goodman Fielder between 2015 and 2019 provided a good bridge to building products, and particularly the challenges of manufacturing in Australia.
Indeed, many of Coates’ previous roles have informed the change in strategy she’s driven at CSR since arriving in September 2019.
The biggest shift was a major restructure that reorganised the previously siloed building products business around three divisions: masonry and insulation, interior systems and construction systems.
The idea, Coates says, is to foster an approach where the various divisions work together more closely to get more CSR products into more projects. The Sydney Football Stadium redevelopment is a good example. With the help of the group’s new digital project tracker, CSR has provided Gyprock plasterboard, Rondo wall and ceiling systems, Cemintel fibre cement, Himmel interior products (such as ceiling tiles, aluminium partitions and hardware components) and products from the Martini commercial fit-out business.
Drawing on her background at Woolworths, Coates has also restructured CSR’s supply chain. A new centralised logistics function has been created, three transport hubs have been created on the East Coast and new partnerships have been formed with transport providers. A new transport management system has also recently gone live to give customers better visibility over where their orders are.
The supply chain investment, which will continue this financial year, is paying off; Coates says CSR’s products aren’t causing major shortages on the nation’s building sites.
“What I would say is right now we’re not the problem. There were some challenges for us that we worked our way through at the end of last year, but right now we’re able to supply to demand from our customers.”
Restructuring a business against the backdrop of the pandemic and the building boom requires a certain amount of juggling, but Coates insists it’s been an exciting opportunity that has produced great results. Profit in the year ended March 31 rose 20 per cent to $193 million, while the building products division delivered record earnings before interest and tax.
“The team was able to deliver a record profit in a period of considerable disruption. And yes, it was a strong market and we were able to play to our strengths in that market and we’ve managed through disruption. But in addition to that, we’ve also got on with the strategy. We reorganised the business through COVID. And we’ve got on with executing the strategy around customer solutions and supply chain.”
CSR shares are up about 16.7 per cent since Coates joined, three times better than the 5 per cent gain on the ASX 200. But there have been gyrations along the way; the stock more than doubled between April 2020 and November 2021, but has since fallen 28 per cent.
A $100 million share buyback announced at last month’s AGM has sparked a 12 per cent rally, but analysts remain wary of how the company will fare as rates rise, house prices fall and the economy slows. Macquarie, which described CSR’s full-year result as good quality, is perhaps typical of this view. “The cycle is maturing, and while detached activity is still strong and multi-res is lifting, the macro context is getting harder.”
The recent weakness in the CSR share price has also coincided with a savage increase in energy prices. Coates is hopeful that government intervention can help protect the manufacturing sector.
“We’ve got 12 months’ visibility of current gas and electricity pricing, but that will be challenging if nothing changes as we move into future years.
“The government will be focused on it because it must be one of the most pressing issues for them and the regulators, with the implications being wider than just building materials. It’s important for manufacturing in Australia.”
CSR has so far been able to raise prices to pass on higher energy costs, but the economics of energy-intensive products such as bricks will be challenged if energy costs keep rising. But Coates is confident CSR can keep pivoting; a product like Hebel, a form of aerated concrete that can be an alternative to bricks, is less energy-intensive to produce and requires fewer of the bricklayers builders are currently desperate for.
“Depending on how it plays out [with energy prices], people will look to engineer houses to be both energy efficient and cost-efficient in the build. And we play into that as well.”
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