Building Products

Largest deterioration in DWC driven by a material increase in inventory holdings.

The Building Products sector experienced significant growth in 2022, with all of our sampled companies experiencing an uplift in activity, and revenue increasing by 24% (on average). The increase was driven by the residential sector, with record building approvals supported by the Government’s HomeBuilder stimulus in 2021 converting into a strong pipeline and sustained activity across 2022.

Managing the above demand presented some challenges for operators, with global supply chain issues and raw material price increases triggering significant supply side pressures during 2022. Notably, there was a 24% increase in timber, board, and joinery and an 18.4% increase in metal products. Interestingly, close to 50% of our sample were able to pass on the increased costs to their customers, evidenced by their ability to increase gross margins and EBITDA margins (relative to the prior year). This highlights the importance of Building Products operators in the context of the full property development and construction supply chain.

In terms of working capital performance, the average DWC of our sampled companies increased by 11.7 days to 81.9 days in 2022. This was primarily attributed to a significant increase in inventory holdings.

Average DIO increased by 19.4 days to 110.4 days in 2022. This meant that, on average, our sampled companies held close to four months of inventory, “locking up” an additional $2.7bn in cash. Most of the inventory build occurred in H1 2022 as the value of inventory increased and companies looked to protect against supply constraints. This was most notable in timber, where local supply was reduced following bushfires and increasing restrictions on native forest harvesting, while imports were impacted by global supply chain issues resulting in shortages and sharp prices increases.

Across our sampled companies, average DSO increased by 1.5 days (to 53.6 days), however average DPO increased by 2.0 days (to 64.4 days) which (on average) offset the DSO increase.

Our international benchmarking shows that Australian companies had a longer inventory cycle and shorter supplier payments cycle than their US, EU, and Asian counterparts; indicating that our relative isolation may have influenced purchasing decisions during the year.

Looking ahead for the Building Products sector, an expected easing in demand and global supply chain pressures is expected to shift the focus back to working capital and cash flow management, with a particular focus on reducing inventory holdings to longer-term averages (of between two and three months).

Net working capital performance

*A positive cash impact is a “release” of cash from working capital (improvement). A negative cash impact is additional cash invested or “locked up” in working capital (deterioration).