Reliance Worldwide Corporation Limited (RWC.AX) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Reliance Worldwide Corporation Full Year Earnings Call. [Operator Instructions] I would now like to turn the conference over to Mr. Heath Sharp. Please go ahead.

Good morning, everyone. Welcome to RWC's FY '25 Full Year Earnings Call. This is Heath Sharp, and I'm joined here in Sydney this morning by Andrew Johnson, our CFO. We will provide an overview of our results for the financial year ended 30 June 2025, followed by Q&A. . And just before we get underway, I'd like to highlight that this year, we have incorporated our sustainability report within our annual report. This provides a combined view of our performance across financial, operating and sustainability metrics. Now moving on to our results. Let's start with an overview of the year on Slide 3. Certainly, this has been a challenging year from a macroeconomic perspective in all of our key markets. At the start of the year, we were anticipating interest rate reductions, leading to a gradual increase in new home construction and remodel activity. This is ultimately proven to not be the case. In the U.S., long-term mortgage rates have remained suddenly high. We have not seen any improvement in existing home turnover. This has been a headwind for discretionary remodel activity. In the U.K., the green shoots of economic recovery has not been sustained. New home construction activity continues to be subdued along with remodel activity. In Australia, we have seen a modest improvement in new home commencements. Nonetheless, activity levels are well below our long-run averages and more recent peaks. Against this challenging economic backdrop, RWC has performed solidly. This is testament to the resilience of our business and our execution focus. Underlying revenues were only slightly down on the PCP, while operating earnings were slightly higher. Pleasingly, we've continued to generate strong cash flow. We continue to be very pleased with the Holman acquisition. From an execution perspective, we fully consolidated Holman's operations with the legacy RWC business in Australia. We're seeing good momentum with respect to revenue synergies and also the cost out opportunity we identified at the time of the acquisition. During the year, we made incremental progress on our manufacturing and operational footprint program. Unfortunately, the introduction of tariffs on imports into the U.S. disrupted our plans. Mitigating these tariffs has diverted a considerable amount of resources that would otherwise have been deployed on the strategic footprint work. Further, the volatility of the tariff situation has us wearing of significant investment or infrastructure moves. Nonetheless, we have made progress. In the EMEA region, we divested our manufacturing operations in Spain and consolidated and engineering facility in the U.K. This is a meaningful rationalization of our operational footprint in that region. In Australia, we have closed 3 distribution centers as we have consolidated the warehouse network of Holman and legacy RWC. Managing U.S. tariffs has been our #1 priority since the start of calendar 2025. We have provided an update today based on the latest tariff rates and our progress in mitigating their impact. I must say I'm tremendously proud of how our teams have responded. It is a very dynamic and challenging environment. We've had to be agile in developing our litigation plan. I am pleased that we are now well underway on executing those plans. Turning to Slide 4, I will briefly note some of the year's financial highlights. We recorded net sales growth of 5.5% over FY '24. This year included a first full year's contribution from Holman versus the previous year's 8 months. Excluding Holman, net sales were down 0.5% versus the PCP. This reflects the weak underlying end markets. Operating earnings, as measured by adjusted EBITDA were up 1.1% on the PCP. Looking at our underlying operating margin, excluding Holman, adjusted EBITDA margin was steady at 22.3%. Adjusted net profit after tax was up 0.6% on the PCP at $147.7 million. Adjusted earnings per share were up 1.6% on the PCP. FY '25 was another strong year for cash flow. Cash generated from operations was $271 million. representing a cash conversion rate of 97.6%. This cash flow enabled us to further repay borrowings and we finished the year with a net leverage ratio of 1.3x net debt to EBITDA. We have declared a final distribution of $0.05 per share bringing total distributions for the year to $0.10 per share. This is up 5% from the $0.095 per share in FY '24. In line with our revised distribution policy, we will be paying half of this via dividend and the other half through an on-market share buyback. I will now hand over to Andrew to step through our financial results in more detail.

Thank you, Heath. On Slide 5, we have set out key performance metrics. Net sales were up 5.5%. The sales performance was driven by a full year contribution from Holman. Excluding Holman, net sales were 0.5 point lower than PCP due to lower volumes in the Americas and EMEA. Adjusted EBITDA was up 1.1% to $277.7 million. including a contribution from Holman. Adjusted EBITDA margin for the period was 21.1% compared with 22% in the previous year. As Heath has noted, the adjusted EBITDA margin, excluding Holman, was 22.3%. This was in line with FY '24 and slightly ahead of the guidance we gave in May. We're pleased that we were able to maintain our margin despite lower volumes. Contributing to the margin performance with the cost savings of $19.7 million we achieved in the year, driven by procurement savings, the benefit of the EMEA restructuring in the prior year and the realization of holding cost synergies. We incurred one-off costs totaling $7.9 million in the period. The 2 major components were in EMEA and APAC. In EMEA, we incurred costs associated with the sale of our manufacturing operations in Spain. In APAC, we incurred costs associated with integrating Holman with RWC and synergies realization costs. Adjusted earnings per share were up 1.6% to $0.19 and $0.18 in FY '24. Turning now to Slide 6 and looking at the Americas results in a little more detail. Americas recorded a 2.1% decline in sales due to weaker demand, primarily in the residential remodel market. Excluding SupplySmart, which we exited during the course of FY '24, Americas sales were down 0.6% versus PCP. The success we have had in rolling out new products have helped offset lower volumes driven by weaker market activity. As we mentioned in February at our half year results, we did see a pull forward of demand from the second half to the first half of FY '25. This was driven by some customers ordering ahead of the SAP upgrade to S/4 HANA and a customer-led sales initiatives switching from the second half to the first half. We also exited certain low-margin product lines in Canada during the year, which impacted sales. FY '25 EBITDA was impacted in the second half by additional U.S. tariff costs of $3.3 million. Despite the tariff impact and the 0.6% reduction in underlying sales, we were able to improve our EBITDA margin from 21% to 21.2%. This was a result of the cost reduction measures we undertook during the year, and we think the team in Americas has executed really well. Now on to Slide 7 in the Asia Pacific region. The biggest impact on performance in FY '25 was the inclusion of a full year of Holman versus the 8 months we owned the business in FY '24. This resulted in a 44.6% increase in net sales in the Asia Pacific region in local currency. Full year external sales, excluding Holman, were up 2.4%. While second half sales were 4.7% higher. Intercompany sales were down 16% due to the transfer of sharp life manufacturing to the U.S. in prior periods. Adjusted EBITDA was up 19.3% to $39.7 million. Adjusted EBITDA margin declined from 11.5% to 9.5% due to several items across the second half. First of all, the lower intercompany volumes I just mentioned, which resulted in lower manufacturing overhead recoveries. We also had higher input costs, particularly on copper, which was exacerbated by foreign currency movements. Additional costs incurred at supporting Holman during the implementation of SAP in the second half, and finally, extra cost can be incurred in sourcing products due to supply shortages. While we're disappointed in the second half result, we do expect that a number of these costs will not reoccur in FY '26 or will not be as acute. In addition, we have implemented price increases as appropriate in response to the increases in material costs and are actioning further cost reductions. Looking at seasonality for the combined RWC and Holman businesses, we estimate the revenue seasonality for the APAC segment overall is around 55% first half second half. Holman is more first half biased. So that split's going to be more 60-40 in first half, second half due to the watering side of that business. Operating earnings will have a greater first half skew due to the to the fixed cost base. Looking at EMEA on Slide 8. EMEA was our most challenging region from a volume perspective. although we did see a slowdown in the pace of decline versus FY '24. Total sales in local currency were down 4.2% and external sales were down 3.5% on the PCP. In the U.K., U.K. external sales were down 4% with U.K. employment and heating sales down by 3.8% due to the lower volumes in both prepared remodel and residential new construction markets. Demand did improve in the second half with U.K. plumbing and heating up almost 12%. Specialty products sales were down 5% to weaker conditions in the telecommunications sector in particular. Continental European sales for the year were 1.9% lower than the PCP. The sale of our Spanish manufacturing operations impacted reported sales performance and adjusting for this Continental Europe sales were actually up 1.3% versus PCP. As a result of the lower U.K. sales, we did see a further decline in adjusted EBITDA margin from 29.3% and to 28.8%. We have continued to remain vigilant on cost to minimize the impact of lower volumes on the business. Turning to Slide 9 and looking at our cash flow performance for the year. This has been another strong year from a cash flow perspective. Cash generated from operations of $271 million represented an operating cash flow conversion of 97.6%. This strong cash flow performance has enabled us to further reduce our net debt levels and we finished the year with a net debt-to-EBITDA ratio of 1.3x, down from 1.59x in the previous year. Given our low leverage, we reduced the total committed borrowing facilities by $150 million during the year from $1.05 billion to $900 million. We also extended the term of our committed bank facilities with an average debt maturity of 7 years. On Slide 10, we have set out in a little more detail the movements we saw in working capital balances. Overall, net working capital decreased very slightly versus PCP. The main movement was an $18 million increase in inventories. The increase was due principally to the impact of tariffs on the value of inventory as well as foreign currency movements impacting the translation of inventory held in currencies other than U.S. dollars. CapEx for the year was $33.5 million, representing just 2.5% of sales. We have continued to benefit from the capacity expansion we invested in several years ago, which is enabling us to keep capital expenditure to the lower end of our target range. We are forecasting a slightly lower level again in FY '26. Let me now hand you back to Heath to update on tariffs and discuss the outlook for FY '25.

Thank you, Andrew. Before I discuss the outlook for FY '26, I will provide an update on tariffs. On Slide 11, we have provided an update on our progress in diversifying product sourcing beyond China. In summary, we are on track to meet the reduction in China source goods for the U.S. market that we outlined back in May. We reduced China source COGS by 27% in FY '25. And by FY '27, we expect to have achieved a further 88% reduction from FY '25 levels. At the end of FY '26, we expect that this will be close to 0 on a run rate basis. Looking now at the expected financial impact of tariffs on Slide 12. The first point to note is that we have seen considerable movement in tariff rates since we first provided an estimate to the market in May. We have also seen the introduction of additional copper tariffs on copper and copper derivatives. Based on the announced tariff rates thus far, we estimate the net impact of U.S. tariffs on FY '26 6 EBITDA will be $25 million to $30 million. This estimate factors in the initiatives we have underway to diversify sourcing away from China to other countries. It also reflects price increases planned or already implemented. We are taking a carefully considered strategic approach to market pricing. We believe we are best served by taking a long-term perspective that retained our competitive position while ensuring gross margin dollars are maintained. Based on our mitigation plans, we do not expect a material impact from tariffs on operating earnings from FY '27 onwards. On Slide 13, we present our outlook for financial year 2026. For the first half of FY '26, we are not anticipating any improvement in activity levels in any of our key markets. As such, we expect consolidated group sales for the first half to be broadly flat to down by low single-digit percentage points. In the Americas, we expect first half sales to be down by low single-digit percentage points. This is after adjusting for the pull forward in sales from the second half to the first half in the PCP and the exit for certain product lines in the Canadian market in FY '25. In both Asia Pac and EMEA, we expect external sales to be broadly flat on the PCP. Operating earnings and margins in the first half will be impacted by tariffs. The tariff mitigation initiatives we have underway are phased progressively throughout FY '26 as we move product sourcing out of China and realized price increases. We, therefore, expect to see a disproportionate impact from tariffs on operating earnings and margins in the Americas in the first half of FY '26. As a result, we expect the first half consolidated EBITDA margin to be lower than PCP due to lower volumes, coupled with the impact of tariffs on operating earnings. Turning now to Slide 14, and I'll will step through our priorities for FY '26. Our people and the RWC culture remain our most valuable assets. And so the health and well-being of our people remains a clear priority. We will continue the progress we have made in the critical area of health and safety. We have made great strides in terms of our safety culture over the past 5 years. We will maintain our efforts to ensure everyone safe every day. We will continue to leverage the tremendous talent we have globally to deliver our primary goal of shareholder value creation. Short term, focusing on tariff mitigation will drive the largest benefit in terms of protecting value. Long term, we believe our existing strategy will create the greatest value. As such, this strategy guides our objectives for the year. There are 3 elements to this. Firstly, product innovation to deliver solutions for the job site; second, ensuring a superior customer experience for our distributors; and finally, industry-leading execution. To the first point, our innovation takes 2 forms. incremental and disruptive. Incremental innovation is the long-standing backbone of our growth. This is our continuous process of developing range extensions and product updates. This enables us to deliver ongoing product performance improvements. It also protects or improves margins. The second form is disruptive new product innovation. Our regional in-house product development teams collaborate globally in developing the next generation of products for the plumbing industry. This work is longer term in nature and significant new product releases are periodic. This ongoing pipeline of product innovation is key to RWC's brand and reputation. Of course, our incremental and disruptive innovation program are guided by our in-depth knowledge of the job site. This is a differentiator for us. It allows us to deliver products that improve our end users' productivity and profitability. The core of our customer experience is simply making ourselves to do easy to do business with. Over the last 12 months, we continued to improve delivery performance across all regions particularly in the U.K. In the new year, we will continue this effort to ensure we have the right inventory in the right place at the right time. We will embrace and enhance the new tools and processes we have implemented globally, all with the goal of seamless service to be the best possible partner, the partner to which have distributors turn or value-creating solutions. Of course, the foundation of our strategy remains operational excellence. We will continue to optimize our global manufacturing footprint, notwithstanding U.S. tariff uncertainties. The goal, of course, is to ensure at all times that we have the lowest cost of manufacture. We will continue to manufacture high-volume technically oriented product in-house while pursuing opportunities to outsource labor-intensive sub-scale processes. We have significantly strengthened our strategic sourcing operations. We are focused on leveraging our scale across the group to achieve optimum costs while also maintaining highest quality. Further, given the current environment, we are working to create the most robust supply chain and to provide maximum optionality. In summary, we will maintain our execution focus to drive efficiency and reduce costs while ensuring we are ready to capture the upturn in demand when it eventuates. So I will conclude here on Slide 15 before we open to Q&A. The main message here is that we remain tremendously well placed for long-term growth. I believe we have a truly talented leadership team. Our regional leadership are very focused on executing their respective strategic priorities. Equally, they are strongly aligned around leading and supporting group objectives. The global collaboration as we work through the tariff challenge is a great example of this. Our capabilities as an organization has lifted significantly over the past few years following a very deliberate plan. Strong global alignment and our ability to leverage group expertise are cornerstones of the RWC approach. We saw this with the SAP upgrade to S/4 HANA during the year. We are very clear on our growth strategy, regional new constructions and commercial plumbing offer significant potential for future organic and inorganic growth in each of our regions, while our core R&R market continues to provide our foundation. From a manufacturing capacity point of view, we are extremely well positioned following our investment in recent years. As markets and volumes recover, we will benefit from this investment and the corresponding operational leverage. We continue to believe that our core markets are underpinned by strong macro drivers and enduring tailwinds, aging housing stock and underbuild of new homes and pent up repair and remodel demand all go well for the future. Finally, RWC has a very strong financial position. This leaves us well positioned to fund future organic and inorganic growth opportunities in addition to delivering ongoing shareholder returns. And with that, I will open up the call for questions. We will take questions first from those on the conference call and then Phil King will read any questions we have received via the webcast.

[Operator Instructions] The first question comes from Harry Saunders with E&P.

Firstly, just wondering, is the $25 million to $30 million tariff impacts incremental on $25 million? Or is it including the $3.3 million you already experienced in the second half '25.

Harry, this is Andrew. It is incremental to what we saw in FY '25.

Great. And can you just maybe give a sense of the underlying margin movement expected in the first half, excluding the tariff impact, just based on that sales guidance? And then also in the second half of full year, say, assuming a flat end market in the second half, please?

Yes. Harry, if you look forward to the first half of FY '26. There are 2 main bridging items that I think you've got to consider. The first is the Americas volume, and we said, on a reported basis, will be down mid-single digits. And we've spoken in the past around how volume impacts the P&L, and I would stick to what we said in terms of our fixed variable ratio with 75% of COGS fixed -- I'm sorry, 75% of COGS variable, 25% fixed. And then in SG&A, that turns around with 75% fixed and 25% variable. But anyway, that will get you to the volume impact. On the tariff side, we feel like roughly 75% of that tariff number we've quoted will hit in the first half. So FY '26 is certainly a transition year for us as we deal with the tariffs and most of that's going to be dealt with in the first half. We do have some inflation. We have some cost savings. Those other items just kind of balance out. So to get you to where we think margins will be its volume and its tariff impact. .

Okay. And any initial view of second half versus first half, any signs of a better end market?

I don't think we're guiding at all for the second half now based on sort of the level of uncertainty that we're seeing -- certainly, we don't expect any uptick in the first half, I think is going to be quite tough, especially in the U.S. .

The next question comes from Rohan Gallagher with Jarden Group.

Aired. With respect to the tariff mitigation, the quantum of the price increases, you're proposing and the acceptance. The U.S. is a market that's not used to price increases, particularly the retail guys what would be the worst case impact of those price increases not being realized? Or can you help us out in terms of quantum of price increases that you're looking at, please?

Look, we haven't trying to break down the cost savings, the timing of those projects and the pricing simply because there's so many moving parts with the real day to try and set that out. What I would say is that we're heading in the direction that we set out in May when we first spoke about tariffs, and that is we've broken down our product list by customer and we're considering all aspects of the market, the nature of the product, our position in the market, the nature of our competitors, where we're moving the product to what the time frame is, all of that factors into where we ultimately need to land on price. And that's sets a lot in that. And even some of those decisions have changed based on the rate changes in tariffs by country and then with copper over the last few months. So shorter getting into a 10,000 line spreadsheet, it's a little bit hard to break that down, frankly.

And just in terms of -- are there any -- is the earnings impact of exiting the certain product lines in Canada material? And is there any work through as being considered around that?

No, not realize not really. There's a sort of headline revenue impact, which is why we called it out. It helps understand the second half result and also the guidance for the first half '26. But from a margin point of view, the PC negligible, which was really the driver of our decision to be honest. .

Yes. And finally, if I may, just on APAC. Obviously, Andrew talked about the earnings, which sort of helped that result back. But -- you did talk about a material step change or step up in top line sales, which would have included market share gains. Then you sort of deferred that and push that out. Yet your guidance for the first half is flat sort of top line sales. Is there anything we'll be seeing there? Or is there some products that have been pushed out or didn't see the light of day? Anything you can do to unpack that, that would be helpful.

Yes. We have pushed some initiatives into the first half of FY '26, and those are still going to come through. And the guide that we put out there reflects where we think the market will be in the first half. And certainly, we feel like overall, looking at flat reflects both of those aspects with the initiatives coming through being offset by what we see as a lower market in the first half..

So we're encouraged by an uptick in sort of housing commencements, but we have not seen any impact on that yet and really don't expect to in the first half, we're towards the back end of that construction process. So ultimately, it's still a pretty challenging market.

The next question comes from Lee Power with JPMorgan.

Just, Heath, on your comments around the pricing, like it sounds like it's not yet implemented. Are you you're less comfortable with kind of what's been agreed with the [indiscernible] box? Or is this something that's still going to take time to actually get a resolution with some of these things because you said there's a lot of moving parts I'm just trying to work out, given you've talked to timing, how much of the pricing has actually been already implemented or at least agreed to be implemented?

Yes. We're comfortable with where we are. Certainly, the framework of what we're doing has been pretty clear for a while. The variability, of course, was where the tariff rates are going to end up for each country. And copper, we knew that or expected that there was an announcement on copper coming through and that pretty significant one that's essentially a raw material price, I suppose, more than a tariff conceptually. So we needed that before we could actually move in some cases, but what we had to do with the framework and the discussions are well developed. So we're comfortable with where we're at. .

Yes. And do you think the moving parts around price, like copper, we usually think is something more -- a bit more of a flow-through piece. Do you think something's changed with this whole process that means you don't necessarily give back price if tariffs get unwound or copper tariffs get unwound. Is this something when you've had your discussions with the channel that they've said will give you price but we take it back at the moment, anything changes? Or is it going to stick?

I think we're slightly uncharted territory. To be honest, I would say when you get to copper price and copper tariff, that's pretty visible, and you need to deal with that quite openly. And look, you have to do on tariffs as well. I think that's 1 for us in the fullness of time to consider alternative sourcing locations and alternative manufacturing and so on. And look, we'll deal with that as necessary. I think ultimately, it's all pretty transparent what's driving this pricing. So you have to deal with that accordingly.

The next question comes from Sam Seow with Citi.

Just on APAC, ERP there's 10 costs for supply disruptions. They sound kind of one-off-ish just hoping you can help us to quantify in FY '26, what costs should reverse. And yes, just to confirm if they are all in the second half that they reverse?

Look, I mean, Sam, we moved on both cost actions and pricing actions in APAC. There'll be a little bit of the impact that carried into this new financial year, but it will be largely mitigated through the coming period. The 1 project that will take a while, of course, is rightsizing that manufacturing footprint, and that's been clear for a while. I think at the moment, we're most to make any big decisions on that footprint. It feels to us to be quite valuable to have that capability out of our disposals in the world that's pretty volatile. So we will carry the cost of that footprint, if you like, for a period to go.

Okay. Okay. And maybe just on the U.K. I mean I wouldn't call it a turnaround, but looking at U.K. plumbing and heating, it may have actually been positive there in the second half. Could you perhaps talk to the exit rate in EMEA and maybe what gives you confidence to give that flat guidance in that market, particularly?

We've been really cautious about the U.K. because that market's just disappointed us a few times for a while. It's been bumbling along at more or less the same level now for about 6 months. So we're quite happy that we're up positive. It's only just positive in the core underlying -- in the core timing in any market, but that's a win compared to where we've been. So I think we're comfortable to project that to continue. But we're not sufficiently bullish to say that, that recovery starts now and the volumes are going to increase. So a bit of a fine line we're walking there. But feels a little better, but it's still a lot of uncertainty.

No, that's helpful. That's helpful. But maybe just 1 following on from that. So in EMEA on the margin then, given GAD kind of exit rate, is there any reason to think EMEA margin can't be flat to up in FY '26?

Look, as we've talked about in heavily dependent. If we get just a little bit of volume uptick, you'll see that, but then there's certainly scope for there to be a little bit of a volume decline there as well, which it may make it hard to improve those margins. Rest assured, though, the team over there turning over every stone that they can to try and get that margin back. I think we've said for a while, I spoke for a while about how painful it is to see that margin slip under 30%. We really want to get back to there. But ultimately, we will need an uptick in volume like that, I think.

The next question comes from Peter Steyn with Macquarie. .

Andrew. Sorry, I'm going to go back to pricing, but I want to just sort of get a bit of a helicopter perspective. you are taking a very strategic view with your customers and channel partners. How is that going down? How are you differentiating yourself versus competitors as a consequence, how is that strengthening relationships and putting you in a better place in the medium to longer term in your view?

Look, I think, as I said on the call, a key aspect of that customer experience is simply making yourself easy to do business with. So getting that balance right in how many conversations you have and how many times you're talking to your customer, you -- I think we had handle ourselves really well over the last 6 months. Maximum disruption chaos is ultimately the real work were there. So for us, it's all about assuring our customers that we've got the product will continue to deliver it. We'll optimize our costs, and we'll work with them to ensure that our pricing and shelf pricing is at the right point to allow the business to keep moving forward. It's in line to walk. There's no magic bullet in all that, you've just got to deal with a customer by customer and the nature of the relationship. I think we've done well through this period quite frankly. The goal here is to take ourselves out of the complication basket or take ourselves out of the causing pain basket. And I think we've we're doing that. We'll continue to do that. And that's sort of the execution side that I think we do pretty well.

And then perhaps just stepping to the industry landscape for a second. How do you think the tariff context is playing out for competitors and more specifically would be M&A opportunities.

Although we've been up to our [indiscernible] is dealing with all bit tariff, craziness for some months now. It's still got a ways to go, I think, before the real impact has seen in terms of ultimate pricing inflation and what, if any, impact on demand that has. And then in turn, how our peers deal with it. You would have to imagine that there are some companies are really going to struggle to come through this period, the cash flow implications are pretty significant update. So I don't think we've seen anything yet. I suspect it will, over the next 6 to 12 months sort of shake out a little bit. There may be some acquisition opportunities that fall out because of that. we will see there may be simply some market share gains that we can make if we continue to execute well. So I don't think there's anything to call out there, but I think it's got a ways to go, Peter.

The next question comes from Ramoun Lazar with Jefferies.