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

Thank you for standing by, and welcome to the Reliance Worldwide Corporation Trading Update. [Operator Instructions] I would now like to hand the conference over to Mr. Heath Sharp, CEO. Please go ahead.

Good morning, everyone, and welcome to this morning's update call. We've released several updates recently, and I thought today provided a good opportunity for me to talk through what we were seeing in each of our regions and to provide a little more color. Phil tells me that you're all sick of hearing his voice that it's about time I got back on the line to chat. So hopefully, this will be a useful call. I'm joined on the call today by Andrew Johnson, our interim group CFO; and Phil King, our group IR Director. Let me now cover off some of the key items from this morning's update. In Australia, we are going to be reducing our manufacturing operations from 5 days a week to 4 days a week from mid-May. While demand has been steady and all our distributors have continued to trade through the current period, we are conscious that forward indicators around new residential construction are weaker. We want to ensure that we are not in a position where we are generating extra inventory and that we are matching production to align with demand. As such, we have decided to modify our shift patterns in all of our Melbourne and Brisbane facilities from 5 days to 4 days a week. But importantly, as we noted in the update, we will be continuing to operate our warehouse and customer services on a 5-day a week basis. Turning to Europe. We announced earlier in April that we were furloughing over 40% of our U.K. employees. And that's a reflection of the reduction in demand that we've seen in that market and on the continent as well. As we noted in the update this morning, we're seeing underlying demand across the EMEA region in aggregate, running in the range of 35% to 45% (sic) [ 40% ] of pre-COVID-19 levels, which is clearly a significant decline. As a result, we have now also furloughed a number of employees on the continent as a result. Demand is varied across the different European markets. Germany is probably one of the stronger markets at the moment and the U.K. arguably one of the weakest. In the U.K., this is a reflection of the fact that most of our channel partners have severely limited their distribution activities, which in turn has made it hard for us to get our products to the end users. It's also a reflection of the strict lockdown conditions in the U.K., which have reduced significantly the amount of construction work and repair and refurbishment work going on in that market. On a brighter note, the U.K. market has tracked pretty well throughout April. And generally, trading has been in line with what we were expecting. We have recorded particularly strong activity through the retail channels, driven in part by increased home DIY activity. Our channel partners have continued to trade, although there has been some self-imposed reductions in store hours or restrictions on store access. We noted at our half year results announcement that we had one particular marketing activity planned for the second half, which involved the loading of stop valve new products at one of our retail partners. That is largely now completed and gone very well. So that has been a benefit to us. We do note in the release today that Canada has been weaker. And like the U.K. market, we have seen restrictions around distribution activity in that market, particularly in Ontario and Québec. And that certainly has impacted sales activity there. In respect to the U.S., we mentioned at the time of our half year results in February that we were going to consolidate our manufacturing operations with the closure of our Tennessee plant and moving those manufacturing activities related to the Holdrite product suite, moving those activities to Alabama. We are continuing with that. But the reality is that some of the specific state restrictions and safety considerations have slowed our progress somewhat. And so whereas we had been intending to have that all completed by the end of June, we are now targeting completion in the third calendar quarter. That is, we are aiming to have it all done and the relocated plant operational by the end of September this year. We also discussed at the time of the half year earnings announcement that we were looking at other aspects of our cost base particularly in the Americas to ensure that SG&A is kept in line with revenue. As a result of that activity, we have reduced the number of full-time roles in the U.S. operations by around 20 people. Turning to supply chain. The team here at Reliance have done a great job managing our supply chain partner. We obviously had some early disruption from Chinese suppliers, both for our components and some finished goods due to COVID-19. We have worked hard with them to minimize any impacts, and that is now largely sorted. We also had a key supplier of components in Italy shut down for a period due to restrictions there, but they are now back up and running. And in the meantime, we were able to ramp up our second source for those components. So net-net, we have been able to work our way through supply chain issues without any material impact on our operations. I do want to publicly recognize our supply chain team. They worked incredibly hard, got on to this early and delivered up a very good outcome. So thank you very much. In the U.K., we successfully cut over to a new ERP platform, going live with SAP at the beginning of March. We certainly had no idea when we did that, what lay ahead for us in terms of COVID-19. I want to acknowledge all of those on the team who worked on this project. It has gone exceptionally well. And as we referenced in today's release, it was delivered on time and on budget. The system was up and running right from the first week. The only area where we had some business interruption was in our distribution center, which was a function of the significant changes in processes around inventory scanning, stock picking and dispatch, which did slow up some distribution activity in the U.K. for a couple of weeks. We continue to refine those activities. And overall, it has been a very satisfactory implementation. To wrap up our trading status, I'd note we are continuing to operate in an incredibly dynamic environment. We have stepped away from our earnings guidance for the year. And the reality is we just don't have enough certainty from 1 week to the next about how markets are faring. So it continues to be very challenging to forecast. We will continue to keep the market updated if there is any further significant changes to our operations as a result of COVID-19. And finally, in our release of 25th of March, we did reference our funding and liquidity. Let me just emphasize that our situation remains strong, and we continue to have significant headroom within our debt facility. Andrew has spoken with all our syndicate banks since taking over from Gerry, and they remain very supportive of the company. I'm sure Andrew will be happy to talk through some of that if you have any more questions. And with that, I will open the call up any questions.

[Operator Instructions] Your first question comes from Brook Campbell-Crawford from JPMorgan.

I had a question just around the EMEA division. It seems like sales is down roughly 60% to 65%. I'd be interested to understand what sort of EBITDA decline or margin pressure you're seeing in the division. There's a lot of moving parts here, for example, employees being furloughed. So any sort of color you can provide us around margins in the EMEA division would be great.

Look, I mean, the -- certainly, it's a challenge when you have a revenue move of that magnitude. I guess what we've done is pull back the cost levers as aggressively as we can. I mean there was more than 400 people, unfortunately, we had to furlough in that operation, so quite a bit above 40%, which is certainly helping. And that's across operations and across the SG&A side of the business. And I guess the position we've taken is to pull back as hard as we can without causing any permanent damage to that business, retain our flexibility so that we can ramp up again when sort of the U.K. market comes back, which we kind of -- or opens up at least, which we expect it to do. So look, there's no way that we can pull cost back sufficiently with that level of revenue decline to make up all the margin, for sure and certain. But certainly, I hesitate to put any number out there as far as what that decline has been simply because it's just changing on a daily basis, and we do whatever we can to keep it moving.

Understood. And then a second one for me, just around the decision to take off a day in the Australian manufacturing operations, given your comments around the U.S. holding up to date. Yes, a lot of the product made here in Australia is being sent to the U.S., so maybe there's been some changes in sort of where products being made or the types of some machinery being taken offline. Just if you could reconcile the 2, just given significant intercompany sales line there between Aussie and the U.S.?

Yes, sure. Look, we looked at this pretty closely. The -- one of the challenges with the nature of our Australian business is you either run 4 days a week or you run on 5 days a week. And we thought it was prudent to sort of err on the side of conservatism and go to 5 days. What we don't want to do right now is run the facility at the normal level and build up -- build that inventory and consume cash along the way. The Australian market has been pretty good. It softened just a little bit, and we certainly see that there's going to be some weakening orders coming through with new construction. So that move was definitely more focused on what we are seeing in Australia as opposed to the U.S. And look, we've also done in a way -- done it in a way that allows us to flex back to 5 really quite quickly if we need to. So in an ideal world, you could run that business at 4.5 or 4.6 or 4.4 days a week, but you just can't do that. And we elected, as I said, to take the more conservative route and move it to 4.

Your next question comes from Lee Power from CLSA.

Heath, is it possible just to flesh out your comments around the U.S. being broadly in line with expectations? I mean at the half, you were calling out stronger sales for the second half. How should we think about what has actually occurred today?

Yes, sure. So one of the really frustrating things is that the business was at or even better than what we'd expected for Q3. And now of course, everything's changed. So at the half, we discussed that we expected stronger growth in the second half than the first. And we achieved that or even a little bit better in Q3 in the U.S. And certainly, that was partly assisted by the new product initiative at the major retailer, which launched or rolled out pretty well. But there were some other sort of customer and some productivities, which supported that number. But overall, it was probably at or just a little bit above our expectation.

Okay. And then maybe just going on from what Brook asked about the U.K. Is it possible to give us an idea of what the current variable versus our fixed cost base is there?

Yes. Okay. So I think Andrew will jump in on that one, if that's okay.

Yes. Yes, sure, Lee. I mean keep in mind that this really started in mid-March. So it's a bit early to really tell kind of where the fixed costs are going. Certainly, the team did a really good job of getting variable cost out of the business. From a fixed perspective, it's just going to really depend on how long this things -- how long the crisis lasts and then we can work from that and deal with it. But at this point, it's just a little too early.

Okay. Can you give us an idea like broadly what fixed versus variable cost is? What percentage is fixed cost in the business?

Yes. Look, it's a pretty complex question because, of course, it depends on what region you're talking about. It depends on what products. And as I mentioned earlier, it depends on what duration that you're looking at and what time frame are you considering cost, fixed versus variable. So I'll kind of leave that there. We really don't have a view on that at this point.

Okay. Okay, sure. And then maybe just around the Australian business and paring back the manufacturing, Heath, you talked about inventories. Is it a question of you're continuing to draw down on inventories? Or are you taking that manufacturing offline, so you don't get a buildup?

Look, I guess we can use the inventory to give us just a little bit of flex. So as I said is that we either run that facility at 4 days a week or 5 days a week. We try and do it somewhere in the middle, but the efficiencies just go crazy and you shouldn't do it. So we sort of elected to go to 4, knowing we can sort of flex a little bit of inventory there. We're not particularly on a build or reduction push right now. I guess we're sort of -- we're aware that we're heading or at the point where we need to start thinking about what our inventory level is at the end of the year to sort of plan for the stronger winter season. But at the moment, it's not really a case of either. We're -- sort of knowing the production rates and where we stand from an inventory point of view, we can stand to maybe take a little bit out of it over a several-week period and then as necessarily flex up if we see the need to do that. So it really is a case of trying to remain as flexible as we can, juggling all the variables, quite frankly.

Your next question comes from Keith Chau from MST Marquee.

Just a few follow-up questions. So the first one with respect to Australia and the sell-through to the U.S. I just want to clarify the reduction in manufacturing capacity in Australia, does that at all reflect a view that sales in the U.S. or demand volumes in the U.S. will soften in the coming periods?

Look, we -- as I said, we've seen up to this point, the U.S. remains strong, okay? There's a little bit of nuance, depending on which end users you're considering. So the pro users, the plumbers, there's a little bit of resistance in the U.S. right now by homeowners to let the plumber in the door. So that end users, their demand, it softened just a little bit. Flip side is the DIY demand has gone up, which is sort of pulling demand through retail and wholesale. And that's a factor of a whole lot of people being at home, taking on projects that they otherwise wouldn't or even taking a project that they'd otherwise bring a pro in to do. So they're the sort of the factors at play. We're again taking a sort of, I'd like to think, prudent or slightly conservative view. As we look forward and new construction comes off in the U.S. and the unemployment numbers are skyrocketing here, our view is that must have an impact on demand at some point in the future. We don't obviously know how much, but it's more likely to soften than strengthen based on those with that being the case. So again, is it -- we've got the choice to keep managing -- or sorry, manufacturing at the current level or ease off a little bit, I think it just makes sense to ease off a little bit, which is what we're doing in Australia.

So if we look at -- back to Australia, it sounds like the shift from 5 days to 4 days is principally a decision on the Australian market but also maybe a slight contribution from the U.S. as well. So if we look at that context, is the expectation -- or are you planning for demand levels to drop, say, very simplistically 20% in Australia in residential?

I don't -- look, this is a bit like throwing darts right now, Keith. I don't think it will come up that much. I mean ultimately, who knows? I think it will impact -- the impact is probably less than that in Australia. And look, mate, I would love nothing more than in a month's time, 6 weeks to say, "Hey, we need to crank those factories back up again." And that's probably my preferred position -- or definitely my preferred position is to stay cautious for the next sort of 4 weeks, 6 weeks, 8 weeks. We've got normal inventory levels on hand. And that's fast enough to give us the buffer to do this. And then if things haven't softened as much as what they could, well, then fine, we'll flex back up or -- and if they have, well, then we'll be in a good spot. So again, it's just trying to, in pretty uncertain times, be as prudent as we can with some cost and cash, but absolutely making sure that we don't do anything to harm the business for the long term. And that's obviously a tightrope to walk and that's the way we went.

Well, if you look at your capacity utilization post taking 1 day off, what do you think that would be after you move to 4 shifts from a manufacturing perspective?

Well, look, if I understand the question correctly is what we don't want to do is try and run a half day or a half shift because then you've got a whole lot of cost that's unproductive. I mean shutting down 1 whole day gives you the maximum efficiency on those 4 days you're working. But of course, you're automatically only at 80% maximum capacity because you're effectively working, [ stating the bleeding obvious ], 4 days rather than 5 days. So it's just -- it's dealing with it as an increment gives you the best chance to manage your efficiency. Trying to run half a day or half a shift is -- that's where you get blowed out. You're better off pulling it back to 4 and handling it that way and watching it closely and then flexing in either direction as necessary going forward.

Yes. Understood. Okay. And then a question on EMEA. If we look across the product -- the very broad product groups within that segment, so being FluidTech, push-to-connect, both brass and plastic and pipe, and there's another category in there, would it be possible for you to characterize which of those categories are being impacted the most at this point in time?

Yes. Look, at a really broad or macro level, kind of unexpectedly, the one -- and I'll explain why. The one that has been impacted the most is the core plumbing and heating product in the U.K. in the pipe and fittings. And that's due to the really significant reaction of the distributors post the announcement, whatever date it was, that Monday night that Boris Johnson announced they're all shutting down. I mean the distributor is shut down. It wasn't a case of we'll stay open tomorrow and work it out. It was we'll shut down tomorrow and we'll work it out. And look, some of them just haven't started up again. So that demand is absolutely being throttled by the distributors shut down. And in some cases, we've seen demand drop by 70% or 80%. Or in some cases, distributors are shut, so they're just -- it's like 100% off. And that, to me, suggests that our end users, some of them need the products and aren't getting it. So I think it's artificially throttling the -- sort of the market. If you jump across to Europe, it varies a little bit. But -- and that's a FluidTech market in Europe. It hasn't been too bad, all things considering. I mean probably most amazingly is Italy, our warehouse because of the -- where it was located and the status of the business by the local regulations, it was able to say open the whole time. And we've shipped product in Italy throughout. And so yes, they've certainly come off but at a number that's just sort of commensurate with what you'd think based on activity as opposed to the U.K., where it's just been artificially throttled to a really low level.

Your next question comes from Peter Wilson from Crédit Suisse.

Heath, if I could just follow up on some of the questions around the U.S. sales and hopefully get you to be a bit more quantitative. So you say your sales are broadly in line, and you made some comments earlier that the third quarter being particularly strong. Can you be specific about the fourth quarter and what percentage revenue growth or decline you're actually seeing there?

You mean through April month-to-date?

April month-to-date for North America, yes.

Look, it's actually -- it remains steady is -- so we haven't -- other than sort of what I've said to you before with the slight difference in the pro customer versus the DIY customer so that the overall level is, at this point, it's still about where we expect it to be.

Okay. So if I take the expectation where you're flat or even up slightly, can you maybe just pick that apart a little bit? How much -- or how large has this stocking event been, i.e., what is the underlying growth rate? And on the pro DIY, do you get any sense on the DIY side of things there's been a bit of a kind of a pull-forward, a bit of a short-term spike? And are you anticipating that to abate in the coming weeks?

Yes. That's a good question. And I really, really wish I had the answer to it. I believe there are projects happening that otherwise wouldn't have happened and that's great. I think there are definitely some projects happening that probably are a pull-forward from 3 months, 6 months or 9 months ahead. But that's -- honestly, that's sort of my gut feeling as opposed to having any data to confirm that. So it's a little hard to draw any really drastic conclusions from that as to what the future might look like. And look, the underlying growth rate right now, Q3 was driven by a combination of the underlying growth rate, customer-specific and product-specific activities. It delivered a result that was actually a little bit ahead of what we were expecting. And if you remember at the half, we talked about thinking that the second half was going to be up, I think we said, around 9 or 10 points on the prior year. Q3 [indiscernible]. Q3 was at that level or even better than that level. So betting at this point, though, being able to pick out the underlying growth rate versus those customer-specific, product-specific activities and in light of some of the really unusual, non-normal movements, it's really a hard task. So to put number on it would be -- from my point of view, I just can't.

Okay. Fair enough. Maybe just to pick out one factor. How large is that stocking, that new product stocking been?

Look, if you take that out, we still had a number that was -- for Q3 that was up on the prior Q3, what we expected. So we talked about high single-digit improvement over the prior year. So it certainly wasn't that stocking event on its own that drove it, but it helped to drive it better than what we first thought.

Okay. And given that, I mean, given that sales are broadly steady, we're 6 weeks-ish into isolation measures and parts of the U.S. are starting to consider reopening up, I mean, are you trying to say that effectively, the U.S. business in terms of sales has been unaffected by this crisis?

No, it's definitely been affected. I think the net level that it's at, it's probably landed about where we expected. But I think the makeup of it is a little bit different, which channels and which end users and which projects the products have been used for. And as we look forward, I mean, there's 30 million people who are now unemployed in the U.S. that weren't unemployed 6 weeks ago. I mean that's got to have an impact in 2 weeks' or 2 months' time. So trying to peg where that lands is just impossible. And again, that's kind of back to the same point, really happy with the way the U.S. demand is holding up. I do expect it's going to soften. I have no idea how much or when or for how long, which sort of points to what we're really talking about here today, which is trying to back off just a little bit on manufacturing, so we don't end up in a situation where we've got too much inventory. I mean if demand stays and doesn't fall off, I mean, there's no one happier than me and we can flex manufacturing back up and cover it. So it just strikes me as this is the right position for us to be and to sort of to give ourselves the best option, all things considered.

Your next question comes from Peter Steyn from Macquarie.

Just wanted to -- there's been a lot of questions around your U.S. demand. What I'm interested in is just if you could give us some sort of micro trend through the month of April for each of the regions, just very high level, because there certainly is a sense that the back end of April looks like it's been better than the front end of April. And I'm curious to see if you've seen any of that in your business.

No, not at all.

That's a short answer, Heath, appreciate that.

Well, look, it's kind of crazy with it. I mean I just -- where my head jumped to was -- it doesn't answer your question, Peter, but I'm going to tell you what I'm thinking anyways, is my head jumped back to the U.K. in March. And I've never seen anything like it ever, it's the falloff in orders in the U.K. in March, it just dropped. And it just stayed at that level. And the U.S. is kind of at the other end, it's sort of stable and the same thing all the way through. I mean certainly, in April, we haven't seen it move around. But again, kind of look-forward is we certainly think it's far more likely that it will soften in the U.S. and Australia than get better at this point.

Sure. That makes sense. And then just your opening remarks, the tail end of it, you spoke about your funding position, be really interesting just to have an elaboration of that and Andrew's views on his conversations with your funders and how you guys are thinking about navigating that all.

Yes, sure. I think Andrew will pick that one up.

Yes. Yes, Peter, we certainly have been in close contact with our syndicate banks over the last couple of weeks. Reliance is in a great position with the strength of our balance sheet. And I think based on the numbers that you would have seen from the half, we're very much in line with that coming into April. Our leverage has slightly improved from the 1.57 net debt-to-EBITDA ratio that we had reported. So net debt generally is in line and flat through the third quarter. So I think banks enjoy those conversations better than they do some of the other ones that they've been having at late. But they've been extremely supportive, giving us some good insight into what they're seeing in the market. And that's also given us an opportunity to talk to them about the first tranche, tranche A, that will expire September of '21. So we started those discussions and they've been very constructive. And again, the banks are very supportive.

And your comments about net debt-to-EBITDA you said coming into April, so is that a March number? Or are you sort of giving us a slightly more up-to-date sense of where your balance sheet is from a leverage perspective?

No. That was March month-end.

Perfect. Sorry, maybe one really quick one. Heath, just the Australian resi exposure, you put at 50%. Could you give us a bit of a sense of how the split works between multi and single family?

Heavily multifamily. Yes.

Your next question comes from Simon Thackray from Jefferies.

A lot of questions there, all cycling around demand, which is pretty sensible, I guess. But I just want to summarize, Heath, so I'm crystal clear. You haven't actually seen a falloff in Oz yet. You haven't seen a falloff in the U.S. yet. You've seen some softening in Canada. And you've been very clear already about the state of the U.K. in particular. And EMEA has sort of followed suit. So I get that. Is that the right summary so far?

Yes. I think that's fair.

Yes, cool. All right. So then we're adjusting production in Australia, taking 20% of production down, albeit temporarily. Even though the pipeline is pretty solid in Oz, there's pretty good visibility when you come at the end of that pipeline. 2/3 of the product manufactured -- that goes to the U.S. comes out of Australia and China. Is that right?

2/3 of what we make in Australia goes to the U.S.? Look, I haven't got the exact number to hand. I mean we make a lot more in Australia than just the fittings, all the valves and so on that go to the U.K. and the U.S. and so on. So I just haven't got that exact split.

Yes, that's okay. I'm just trying to think about it from a manufacturing point of view, that to Keith's question earlier that it seems more -- it feels more like a statement on the U.S. than it does about Australia, given that manufacturing bias. But maybe we can just jump to sort of one really more -- probably more important point. I understand what you're doing and what you're preparing for. And I think it's sensible and I think it's exactly the right thing to do. And I can sense that the flex you've got to meet the market if it comes back is also actually quite relieving and quite appealing. But what are your customers in Australia and your customers in the U.S. actually telling you about their environment and their expectations at the moment?

In terms of what they think the demand is going to look like in a month or 2 months or 3 months?

Yes. What are they saying to your order book?

Yes. Look, honestly -- and believe me, we have a lot of these conversations, but no one knows what that number is. We're all looking at the same reports on housing starts and foot traffic and point of sales numbers so on and trying to sort of draw whatever conclusions we can from that. I mean certainly, if we talk to a wholesaler that's got a heavy new construction focus, they're a little bit worried about what might be coming down the pipeline. I think that applies whether you're talking about Australia or the U.S. It's -- no one has got the answer. And everyone is just trying to stay as sort of flexible as they can, given that it's not entirely clear, and we'll have to deal with whatever comes down. So believe me, if someone had the answer, we'd be all over it. I just don't think anyone -- no one that we've spoken to had the answer, I guess.

Just confirming, Simon, you've asked all your questions?

Sorry, I flipped on to mute by accident. Sorry, so I just want to be perfectly clear then, Heath, that the purpose of this update is really saying things are tracking pretty well in the U.S., in fact better than we expected in the third quarter, where unemployed is a big number. There will be an impact from that, I don't disagree. We've already talked and probably dealt with a large part of the U.K. and the EMEA impact and you're preparing for Australia to be weaker. But none of that is yet being seen in the numbers, but it's -- this is preparatory, preparatory on the basis that it is just such an uncertain environment at the moment to call. Is that the summary?

Yes, heavily. I mean look, in the Australian market, it softened a little bit. I mean that alone wouldn't have led us to this action. But that, in combination with what we think is, or more to the point, is not coming down the pipeline, it sort of leads us to where we are.

Your next question comes from [ Neil Brisset ] from Nemag Superfund.

Look, I missed the start of the call, so you may have already covered this question. But yes, just wondering what the likelihood of any capital raising may be, please.

We certainly didn't touch on this. I think it's fair to say at the moment we're, obviously, and you would expect, we're having conversations about what all the options are for us. But Andrew just talked a few minutes ago about our current position with the banks. And I think we're in a pretty solid position. So let's probably leave it there, I'd say.

You said you got pretty good arrangements with your bankers. So I sort of assumed from that, that there probably wouldn't be any.

Look, I think, like Andrew said, we kind of like where we're at right now. I think every day I wake up, I'm glad I'm dealing in plumbing and not in hospitality or something like that. So I actually quite like our balance sheet and the current status.

So you do. So you haven't really answered the question, I don't think. But just what may be...

I'm not sure there's anything else to offer. I mean we're -- never say never. But we're pretty focused right now on keeping the customers happy, making the product and shipping it out the door. I think we've got the liquidity to support that. We've run some sensible scenarios, and we think we're in a pretty good spot. So that's the answer.

Your next question comes from James Brennan-Chong from UBS.

All my questions have been answered.

Your next question comes from Keith Chau from MST Marquee.

Andrew, sorry, just circling back for a follow-up on cash flow. Andrew, just going back to your comment around net debt being around the same level at the end of March as it was at the half. Just wondering if you can give us some context on whether you've seen any abnormalities in payables or receivables at this stage. It doesn't sound like [ inventories ] are out of the realm. But just with respect to the other two, whether you've seen receivables -- or receivables lengthen and payables shorten or something to that effect?

Yes. No, thanks, Keith. Look, at this point, we're watching closely, obviously as all customers and all vendors are watching their customers, specifically the smaller accounts. We're very fortunate in plumbing that the -- our large customers pay their bills. Actually, all of our customers pay their bills. And we're watching it closely. We have not seen a deterioration at this point. But certainly, the accountants in the group are on top of that. We're fortunate now that we've got the U.K. on SAP, all of the regions have the same tools and the same analysis to run through and look at the numbers. So far, we have not seen a deterioration in the payment stream from the customers.

Okay. Andrew, I want to just quickly follow up, you're just talking about SAP there and the ERP system. So between March and now, it's gone through user acceptance testing. I'm assuming all of the audit processes are working fine. So between the time it was cut over at the end of March to now, has there been any major issues that you've had to rectify? Or has it worked smoothly in these strange times?

It's been...

I wanted to answer this one, Andrew. [indiscernible] the guys in the U.K. It has been staggeringly impressive, from my point of view, watching what the guys had to do within the U.K. And SAP implementation is never an easy thing. I mean it's just really, really a challenging activity. Their preparation was unbelievable. And in the middle of the month, their orders went from normal to almost nothing. And during the same month, they had to furlough almost half the workforce. So March is the most incredible month I've ever seen in any monthly record in my history. And the team over there closed the books in about 2/3 of the time they used to close it under the old system. It's just really, really an impressive activity by the team over there. And the disappointing thing is that the business is not still running at the rate to really take advantage of it. But I really like the fact we've got that system in place. And when it comes back, we're just going to be really well positioned. So it was -- thanks for indulging there a little bit, Keith, but they did [ just a great job ].

Your next question comes from Lee Power from CLSA.

Just a quick follow-up for me. So Heath, just trying to get a bit of an idea. So do you think U.S. is holding up because renovation is stronger than you expected? Or is it just the overweight repair exposure that's coming through?

Look, again, it's super challenging time to try and look through and analyze exactly what's happening where and sort of for what reason. I mean it's just a strange, strange time. I've got to believe that at -- sorry, and back to your point a bit more specifically, if you look at the spectrum of renovation activities is, at one end, it looks a lot like a repair. And at the other end, it looks like a new construction project. I think down at that end, what looks like repair, so small renovation, repair and maintenance work, I think that picked up. There's a whole lot of people who just don't want the plumber in the house right now. They're doing work themselves. There's a whole lot of people, like millions and millions of people, in the U.S. who are at home that otherwise wouldn't be that are doing those sorts of projects. I think that's helping the -- without question, it's helping the market right now. Early days, I kind of had the view that I thought this situation could give us some really interesting insight to our breakdown of sales by pure repair or mandatory repair versus discretionary repair or discretionary activity. But I've now got the feeling that there's just so much noise and so much unusual activity underway that I'm not sure we're going to be able to draw too many conclusions whatsoever. So we'll -- just every day we get up, we do what we've got to do, we learn what we can and we do it all again tomorrow. And at some point, we get back to normal and we get back to our normal analysis and away we go. But perhaps and surely an unsatisfactory answer, but that's kind of the reality of what we're living with right now.

No, that's fine. That was pretty much going to be my next question, what's the mandatory repair split? But I think I understand that. So I'll leave it to another day to ask that.

Your next question comes from Peter Wilson from Crédit Suisse.

I was actually going to withdraw this, but while I've got the forum, Heath, you said that you're trying to target SG&A reductions in line with revenue and you've started with some reductions in staff in North America. Can you just give us an idea of what kind of, I guess, reductions you are targeting or what kind of reductions you've already put through the business in Q4?

Yes. Okay. So look, there's a couple of aspects of this. I guess first of all, if you step back to when we spoke at the half, we talked about looking closely at where we were spending our development and commercialization to the time, effort and money and that we were going to make some changes at that point in time. The changes that we referred to in the announcement today were essentially those changes. So that's not really a coronavirus- or COVID-driven change. That was change driven out of our assessment based on where we're at in January and February. Still prudent. There was no -- probably more justification or more reasons for those changes now rather than less. So there's that activity. Beyond that at the half, we spoke about that move of the Tennessee plant into the Alabama plant, still underway, will be delayed but still underway. We also talked about looking at the structure of our European business. And look, that one has been delayed, still underway, we'll still do it, but it's been delayed by everything that's going on right now. But I think -- so that's kind of where we were at the half, and we've actioned those things that are still sensible to action. I think it's fair to say though that over the last sort of 6 weeks, 8 weeks, we've looked really closely at all the costs in all the businesses and pending how things play out over the next sort of 6, 8, 10 weeks as to what additional actions that we'll take. Right now, it's very definitely a case of staying as flexible as we can be, so pull all the levers we possibly can. So look, all the -- we've got a hiring freeze in place, discretionary spending just out. There's obviously no travel. So we pulled all those levers back, but we're trying to retain flexibility because we expect at some point the market will come back and we want to flex up. But obviously, we got a close eye on all costs right now and we'll, if necessary, make other moves as we go forward.

Your next question comes from James Casey from Baillieu.

Can you hear me okay?

Got you, James. Yes.

Okay. Just back to the debt position. Just in terms of liquidity, how much liquidity have you actually got in the business with your existing debt facility?

So the total facility is $750 million. And that's in 3 tranches, according to what we had announced on the 25th. And so I think gross debt that we reported was approximately $400 million at the half. We have drawn down that and conserved cash. So that's why I referred to net debt, which is essentially flat from the end of December.

Excellent. The covenants in place, can you clarify what they are?

So we don't disclose our covenants. If you read the IPO document, I think we had 2 covenants at the time, which was gross debt and the -- our interest cover. The covenants we have now are slightly better than that. And as we did announce on the 25th, we feel like we're in a good position and can't see a reasonable scenario where we would run into an issue from a covenant standpoint.

Okay. That's great. And just finally, just to clarify, the net debt to EBITDA, the leverage ratio you quoted, is that based on the 12 months' EBITDA to the end of December or the end of March?

Pardon me, just confirming, James, have you asked all your questions?

I think Andrew was on mute there, maybe.

James, I'm sorry, I was on mute. So the leverage ratio that I mentioned was as of the end of December. It is a trailing 12-month EBITDA in that calculation. And we have improved on that slightly at the end of March.

Your next question comes from Simon Thackray from Jefferies.

Heath, a little COVID-19 question. Has any product in the range surprised you in terms of a surge in demand that you didn't expect? That's the first part of the question. And the second part is just referencing the growth in the DIY sales saying that the mix has been different. And I want to reference, for example, my friend, Keith Chau's DIY skills. If he installed SharkBite incorrectly, which I suspect he would, and it fails, does it lead to an increase in warranty claims and processing? So do risks go up with higher DIY? You're all laughing because you know it's true.

Specifically on Keith's skill set. But no, look, I mean, there's a proportion of our product that's always going to DIY, so that's kind of fine. And it's a product that lends itself to that use pretty well. I think what you would expect if there's an increase in small projects and DIY projects, SharkBite lends itself to that a little bit more than, by comparison, PEX pipe and crimp fitting, I mean, not drastically so, but a little bit more pickup in that. But I'm just thinking, there's no one product that's really stood out that's been particularly relevant or more useful than normal under the current circumstances, no, not really so.

[Operator Instructions] Your next question comes from Peter Steyn from Macquarie.

Sorry, just bouncing some other one, I won't make any comments about plumbing skills. Just was keen if this -- keen to hear your views around the strategic landscape and if there's particular interest in thinking about M&A opportunities in a market that potentially throws up some opportunities for you. How would you think about those?

Yes. Good question. I think generally, our strategy -- and look, we've obviously been pretty focused short term. But we've got -- [ our future ] is in our business that continue to look sort of ahead and forward. And I think we're in a pretty good position, at least at the moment and we think our strategy is absolutely sound and doesn't have to change at all going forward. Now we continue to monitor that. We think it's entirely still valid. And included in that has always been augment the product range, augment the distribution through M&A. So that's still certainly valid. I think we're of the view that the current circumstances may bring into play companies that otherwise might have been longer-term prospects. So we're considering that. And I think if the right company became available and the commercial terms were sensible and it fitted with the strategy, I think we'd look at it really closely.

[Operator Instructions] There are no further questions at this time. I'll now hand back to Mr. Sharp for closing remarks.

Very good. I guess my conclusion, and Phil is now going to be looking at me shaking his head, wondering what I'm going to say. But look, a lot of the questions, and naturally enough, were trying to dig into whether there was something drastically changing in our business in the U.S. or in Australia, which prompted this move. And I mean that's just not the reason we've made this move. It's juggling all the variables we have to juggle right now. We just thought it was a prudent move, gives us maximum flexibility. It's in alignment with managing costs and cash sensibly, which is why we're doing it and allows us to flex up or down if necessary going forward. So that's what drove the move. We'll continue to update you as we see changes in the marketplace that we have to react to. And other than that, thank you very much for your time today. Thanks for your support, and we will talk to you next time. Cheers.

That does conclude our conference for today. Thank you for participating. You may now disconnect.