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

Good day, and welcome to the RWC FY '21 Results Announcement Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. Heath Sharp, Chief Executive Officer. Please go ahead, sir.

Thank you. Good morning, everyone, and welcome to RWC's financial results presentation for the year ended 30 June 2021. This is Heath Sharp, CEO of RWC. I'm joined here today in Atlanta by Andrew Johnson, our group CFO. We are webcasting this call, and we have also people joining via the audio conference facility. We will take questions at the end of the presentation. [Operator Instructions] So let's get started. I'll begin on Slide 4 and provide overview comments on the year. In short, it has been a record year for RWC. We achieved exceptionally strong revenue growth across all 3 segments and a significant uplift in earnings. In constant currency terms, Americas sales were up 27% for the year. Asia Pacific sales were up 18%, and EMEA sales were up 25%. What was common to all regions was the growth in repair and remodel activity that we experienced throughout FY '21. Consumers staying at home and spending more on their home environments has been a positive for the business. Our results were further boosted by buoyant housing markets and new construction activity. What was also pleasing was how top line growth translated into higher operating earnings and margin expansion. We achieved these through a combination of operating leverage driven by the higher volumes and through good cost management. This also translated into higher net earnings, with adjusted net profit after tax up 63% to just under $212 million. This growth in earnings was responsible for the 20% increase in cash flow from operations. This enabled us to further pay down debt and pay an increased dividend for the year. On Slide 5, we've set out the financial highlights for the FY '21 year. We reported net sales of $1.34 billion, up 15% on a reported basis and up 25% in constant currency. Adjusted EBITDA of $349.2 million was up 39% on a like-for-like basis with the prior year. This growth in operating earnings translated into higher adjusted net earnings of $211.9 million. Operating cash flow of $334.3 million represented a cash conversion ratio of 98%, which was ahead of our target of 90%. As a result of debt reduction, net leverage stood at 0.51x at June 30, down from 1.39x. This strong performance enabled us to increase our dividend for the year to $0.13 per share. So that's a $0.07 per share final dividend on top of the $0.06 per share we paid at the half. Briefly stopping on Slide 6, and here we graphically illustrate these points. You can see the strong increase in cash flow from operations, which is nearly double what it was 2 years ago. Also clear is the substantial reduction in our net debt position along with the growth in dividends declared. Now turning to Slide 7, I'd like to make some observations about the year. Firstly, this is a year in which every one of our major markets experienced extremely strong volume growth. In the U.S., we were already experiencing 20%-plus top line growth coming out of the first half. Then in late February, we experienced a freeze event in Texas and surrounding U.S. states that caused demand to surge. We had to urgently mobilize to meet the new demand, and our second half results reflect our strong execution. A broader trend of homeowners investing in their homes prompted by COVID continued right through the year. This trend has been supported by rising house values and, when combined with record-low interest rates, made for a very supportive macro environment. Meantime, the commercial sector was slower to recover, although in Europe we have seen sales rebound as economies have opened up post lockdown. Meeting the very strong demand was our biggest operational challenge of the year, especially when managing through a pandemic at the same time. I'd really like to acknowledge the fantastic team of people working across RWC. Their enormous contribution over the past year delivered for our customers and generated these excellent results. Now beyond the day-to-day execution focus, we did continue to work on the business during the year. We delivered on our cost reduction program with cost savings of $22.3 million. In the U.S. and the U.K., we commenced the rationalization and expansion of distribution and logistics capabilities. With rising commodity prices and inflation in other cost areas, implementing offsetting price increases was a second half priority. I am pleased to report that we were able to achieve this. Turning to Slide 8. So we thought it was worth taking just a moment to reflect on RWC's first 5 years as a listed entity. We were listed on the ASX in April 2016, so completion of this latest year represented our first full 5 years. Over that time, through a combination of organic growth and the acquisitions of HoldRite and John Guest, we achieved a 22% compound annual growth rate in sales. And through strong execution, we turned this into a 30% operating earnings growth rate and a 34% compounded growth rate in net earnings. Expressed another way: We've more than doubled our annual net sales and nearly tripled our operating earnings and net earnings. Importantly, we have a larger and more robust business today. The platforms we now have in our key markets provide us with even greater opportunity for further growth and expansion. And now I'll hand over to Andrew to discuss our financial performance.

Thanks, Heath. On Slide 10, we've summarized our financial performance for the FY '21 year. As Heath has already mentioned, our reported net sales were up 15%, and on a constant currency basis, sales were up 25%. Reported EBITDA was up 56% and adjusted EBITDA was up 39%. The difference between reported and adjusted will be one-off costs in the year of $8.5 million related to warehousing and logistics improvements in both the U.S. and the U.K. Reported net profit after tax was up 111% to $188 million, while adjusted NPAT was up 63% to $212 million. As already mentioned, we will pay a total dividend for the year of $0.13 per share, which represents 55% of reported net profit after tax. As we announced in February, we are moving to U.S. dollar reporting in the next financial year. Slide 11 shows what our results would have been in FY '21 had we presented them in U.S. dollars. With over half of our business generated in the U.S. and Canada, the move to U.S. dollar reporting should help eliminate some of the currency volatility and will mean the trends we show are much closer to underlying performance. On Slide 12, we set out the main contributors to our strong EBITDA performance. While adjusted EBITDA was up 39%, it was up 45% on a constant currency basis. The biggest driver of this performance was the increase in sales volumes. Price was also a positive factor along with $22 million in cost-out savings. Higher commodity costs, COVID-related costs and other cost pressures were partial offsets. On Slide 13, we have provided more detail on costs. Commodity cost inflation was a significant cost driver for us this year. The average copper cost in FY '21 was USD 6,600 per tonne compared with $6,000 per tonne in the prior year. In the second half, the average copper cost running through our P&L rose to almost $7,500 per tonne. One point to note is that the higher sales during the second half has resulted in increased turnover, and therefore the lag effect of copper prices has reduced from 6 months to 4 months within that second half. On the right-hand side of the page is a summary of the cost reduction areas we have targeted, and it's very pleasing to report we achieved our goal of $25 million in annual cost savings on a run rate basis. Now a look at each of the segments. On Slide 14, in U.S. dollars, the Americas recorded a 27% growth in net sales and a 52% growth in EBITDA. The second half was impacted by the freeze event in Texas and surrounding U.S. states. We estimate the sales impact to have been USD 42 million in the second half and helped drive the 32% top line growth. This growth was especially noticeable in the third quarter, which you can see in the bottom left-hand chart, with sales up substantially versus the same quarter in the prior 2 years. With the exceptional volumes combined with cost savings initiatives, operating margins trended higher with 19.2% operating margin in the second half and a 19.1% margin for the year as a whole. On Slide 15, we have broken down the U.S. sales growth drivers in a little more detail. The market growth figure is derived from the LIRA index, and we have isolated for you both the impacts of the U.S. freeze event and COVID-19. Excluding the U.S. freeze, the Americas saw a 19% constant currency growth for the year. Looking at Asia Pacific on Slide 16. We recorded 13% sales growth for the year, and on a constant currency basis, sales were up 18%. The Australian repair and remodel market was strong throughout the year, as was new housing construction, with home starts up 7% in the year through March 2021. Intercompany sales were up 16% on a reported basis and 25% on a constant currency basis. I'd also draw your attention to the benefit in the year of over $10 million related to favorable profit-in-stock adjustment. This adjustment resulted from a combination of lower intercompany inventory levels as well as foreign currency transactional impacts. For Asia Pac, this was a significant factor in the operating margin uplift for the year, which we are likely to see reverse in FY '22 as we rebuild inventory. Now to Slide 17. In Europe, sales growth reported in local currency was up 26% for the year and up 43% for the second half. We saw a strong recovery in the U.K. from July onwards last year following the lockdowns of the fourth quarter in FY '20, and this was followed by a recovery in Continental European markets as their economies opened up. EMEA also sold increased volumes of fluid tech products to the Americas and APAC regions. Operating margins were up strongly for the year with an adjusted EBITDA margin of 33% benefiting from operational leverage and cost-out measures, on top of John Guest synergies achieved in earlier years. On Slide 18. As Heath noted, we recorded a very strong cash flow performance for the year, with cash flow from operations up 20% to $334 million. As a result of tight management of working capital, our operating cash conversion was 98%. We've previously indicated a target cash conversion ratio of 90%, so this was a very good result for the year. With the strong growth in sales, our receivables balance grew but was offset by increased trade and other payables balances. Inventory balances continued to be rebuilt from very low levels at the start of FY '21 as we geared up our manufacturing operations to meet future demand growth and to help mitigate supply chain issues. The cash flow generated was used to reduce net debt levels and resulted in reduction in our leverage from 1.39x to 0.51x net debt-to-EBITDA. We paid cash dividends of $102 million in the year, which included the additional payment of the deferred interim dividend of FY '20. Turning to our capital expenditure profile on Slide 19. We spent a total of $49 million in CapEx for FY '21, with $26 million of that targeted to growth projects and the remaining $23 million to maintenance CapEx. The growth CapEx related primarily to capacity expansion projects in the U.S. and U.K. For FY '22, we are forecasting to spend between AUD 80 million and AUD 90 million across a number of projects. In the Americas, we will be expanding our T&P valves and PEX pipe capacity as well as adding a fourth SharkBite manufacturing line. In EMEA, we will be increasing capacity for both Speedfit and fluid tech production and investing in tooling for product-related projects. In Asia Pacific, most of our investment will be primarily growth and maintenance CapEx to support SharkBite production. Part of the increase in CapEx for FY '22 relates to carryover projects from FY '21 as a result of delays in the delivery of equipment we have ordered. Previously, we have indicated that CapEx would range between 4% and 6% of sales. And the FY '22 figure will be towards the higher end of that range, partly because of the carryover of some projects from FY '21. On Slide 20, we have outlined the 2 warehousing and logistics projects we have underway in the U.S. and the U.K. In the Americas, we are pleased to be underway with a new project to lease a 600,000-square-foot purpose-built facility adjacent to our plant in Alabama. This will enable us to consolidate several locations in the area under 1 roof and will give us the warehousing capacity needed to support future growth. In EMEA, we are consolidating 5 warehouses into 1 facility located centrally in the U.K. Initial capacity of 140,000 square feet will be scalable up to 280,000 square feet. We are also outsourcing our logistics fleet to a third-party provider, which will give us greater flexibility in our logistics operations. The combined cost of implementing these changes across the U.S. and U.K. is approximately $8.5 million, and we have provided for these one-off costs in the FY '21 year. Thanks, everyone. And with that, I will now hand you back to Heath.

Okay, thanks, Andrew. So moving forward, I will touch briefly on our strategy and then turn to the outlook for FY '22. The Slide 22 schematic presents the summary of our strategy which we have previously outlined to the market. And then on the next slide, I will step through these major points. So on 23: We remained focused on driving growth in our core markets and in markets immediately adjacent to those. The pro plumber is at the heart of our business. Our products and solutions are all about making their lives easier and improving their productivity. Maintaining strong relationships with our channel partners is incredibly important. Ensuring that we are helping them grow their business over time is a priority for us. As we have proven over the past year, running our operations efficiently and maintaining high customer service levels is absolutely critical. We executed well for our channel partners and for our end users during the heightened demand from both COVID and the U.S. freeze. This enhances our relationships and positions us extremely well going forward. Our culture and our people have been integral to our performance over many years. Of course, this is easy to say, hard to prove, but it is absolutely at the heart of our success. In terms of M&A, we continue to have a very active stance. We are looking for and assessing opportunities to add products and brands to our portfolio, particularly in North America and the U.K. As you will be aware, the market at present is running quite hot. We have been determined to maintain our discipline around valuation and certainly maintain an emphasis on strategic fit. On to Slide 24. And here we reiterate our approach to capital management, which we first outlined in February. Our priorities are unchanged, being, first, to invest in organic growth opportunities and to invest where we can in selective inorganic growth through M&A. Beyond that, we remain open to returning excess cash to shareholders through on-market share buybacks. Turning now to Slide 25 and our outlook for the financial year 2022. To start, I can confirm that we will be providing quarterly updates to the market on our trading performance, starting from the first quarter of FY '22. We intend to provide segment revenue and operating earnings data along with group cash flow for each quarter. We are not providing guidance at this time, as we believe the continuing uncertainty as a result of COVID makes forecasting the year ahead too difficult. As we have noticed -- sorry. As we have noted in our release materials, price increases will average 6% across the company this year and will be reflected in reported sales. The rate of price increase varies by region, and those differences will be apparent in our segment reporting. In terms of margin impacts, we estimate that margins will be diluted by around 1 percentage point as a result of these price increases, which are simply offsets to cost inflation. We expect some impact on cash flows from inventory build, particularly in the first half. We also note that investing cash flows will reflect increased CapEx and the payment for the acquisition of LCL for $37 million. Turning now to our expectations for each of the 3 regions, starting first with the Americas. So we're now on to Slide 26. We are becoming increasingly confident that the step change last year in repair and remodel activity will persist through FY '22. Clearly, given the COVID uplift and the Texas freeze, this would mean the rate of sales growth will moderate significantly from the rate seen in FY '21, but it would leave us with a significant step change in revenue on a 2-year stacked basis, so FY '22 over FY '20. And this would position us extremely well to continue our long-term growth journey. As always, for FY '22, we expect growth in the Americas will be augmented by marketing initiatives and new product releases. In Asia Pacific, we are expecting to see continued volume growth from ongoing repair and remodel activity as well as robust new housing. Similarly, in EMEA, we believe that residential repair and remodel activity will remain positive. We believe that underlying demand continues to be robust, particularly given the backlog of work driven by a shortage of plumbers and some material shortages as well. At this point, I think it is prudent to note that we continue to face supply chain challenges, as indeed does everyone in our industry. The challenge spans shipping and general logistics, raw material availability and supplier capacity. This continues to demand resources to manage, but our teams are doing well. We are confident that we are handling these demands as well or better than our peers. Nonetheless, we do expect disruptions through most of the year, so while we expect demand to remain very strong, meeting the demand in full will be an ongoing battle. Now we look at some of the macro drivers in the Americas on Slide 27. The fundamentals in the Americas remain solid. In an environment of strong house price appreciation, low interest rates and strong new construction activity, we would expect a positive influence on the remodel sector as well. We remain cautious on the nonresidential sector, including multifamily apartment construction. We also continue to monitor closely the momentum of the COVID uplift. We've called out the increase in the LIRA and note in particular that it is a nominal measure of inputs and outputs. Therefore, the price increases seen across the building materials sector are reflected in the higher repair and remodel forecasts for the year ahead. In Australia, we've continued to see strong growth in new housing approvals, as we show in the chart on Slide 28. These were up 26% in the year to June, driven by increases in stand-alone residential approvals. The current lockdowns in eastern states are a concern in terms of the ability of the construction sector to carry on at full pace, so we will be watching how this plays out. On to Slide 29. In EMEA, the residential repair and remodel outlook remains robust. As you can see from the chart on the top left-hand side of the page, this has been the strongest-performing part of the U.K. residential construction sector. Activity levels have been running above their pre-COVID rate. As with other markets, we will continue to track consumer spending patterns as economies open up and discretionary expenditure is potentially redirected to other areas. Now on Slide 30. We set out our priorities for the new financial year. A key objective for the business remains delivering top line growth above that of the market in each of the regions. As was the case in FY '21, this will be achieved via ongoing focus on execution. We will also strive to further refine our operations, with a view to improving efficiencies and optimizing margins. We will be increasing our investment in capacity, as Andrew said, in each region and also investing in new products. Aligning our warehousing and distribution footprints in both the U.S. and the U.K. will be a positive development for this year. In Asia Pac, integrating the recently acquired LCL business will be a priority for the team in Australia. So now I'll conclude on Slide 31 with some final remarks. This has been a record year for RWC, but beyond the very strong financial results is the fact that the business has ended the year bigger and stronger than ever. We are very well positioned to continue growing this business as we have over the prior several years. Our platforms in each of our major markets provide the foundation upon which to execute our strategy to continue creating value. So thank you, everyone, for listening. We will now open up to questions, firstly, for those on the call. And then we will address those questions online via the webcast platform.

[Operator Instructions] We will take our first question from the line, Peter Steyn from Macquarie.

Heath, I just wanted to delve into the underpinnings of your expectations for growth in Americas, in particular in the context of some of the comments your channel partners made last week, at their results, in terms of the transition they are seeing from DIY to pro. And obviously, bases have varied quite significantly through this period, but is there something fundamental that is positioning you better in that pro customer base than perhaps it has been in the past that gives you more confidence that you continue to see growth supported by pros that are probably spending a little bit more than DIY-ers, obviously as the "do it for me" trend continues to grow, particularly in bathrooms and kitchens?

Okay, thanks, Peter, for the question. Certainly, early days of COVID, there was quite a shift to DIY. And that's kind of over a few months at the beginning, but there really has been a move back towards the pro fairly consistently over the months since. And what we're seeing now is that the demand coming through both the retail channel and the wholesale channel is really quite strong and in both cases driven certainly more by the pro than the DIY-er. And I think that also is in line with some of the comments we've heard from some of the big retailers where traffic has eased a little, but the ticket size has increased, which certainly points to more pro business.

And fundamentally, do you think you're better positioned? Or has the pro increased its inclination to be buying and using your products, Heath?

Look, I think it's somewhat neutral. The pro, we like because they tend to do the bigger projects. So there's some real momentum there, but I don't think there's any real fundamental. It actually feels to us like the early days of COVID were the anomaly and we're now back to sort of really how our business has felt for some years.

Okay, yes, okay, perfect. And then just wanted to get a brief elaboration on EMEA; and what you see as the product opportunities, the breadth that you can add to the range in the U.K. given how high the strategic priority seems to be on that.

Sure. Look, from the early days of that acquisition, we were pretty keen to utilize that strong John Guest organization from the end user relationships, the distribution partnerships, the operation capability back in the factory; to utilize that to push more Reliance products through. I think it's fair to say that Brexit and COVID have kind of made that a little bit challenging, but our outlook for '22 is that we are starting now to see and expecting ongoing to see additional accounts buying RWC or legacy RWC products and also a growth rate of those RWC products where we've integrated John Guest components on -- and connectors onto them. So a little bit slower than we expected, but it feels now and our expectations are that we should get some acceleration there in the coming year.

Fantastic. And then sorry, just a very last quick one just in terms of the rebuilding of inventories from here. Presumably it'll be a little bit more pronounced than it has been in previous periods given the strength of your demand environment. Would we be thinking about an excess, should I call it, operational leverage effect in the first half as you rebuild that inventory? Or will it be very similar to how we've seen it over the last few years?

Okay. So a few things to consider there is I think we ended the year a little bit under where we normally would have, so there's a little bit of rebuild there, in any case. You are correct that demand is running quite strong, so we also need to build a little bit extra for that. I think we're also needing to build extra given supply chain issues right now, shipping in particular. We definitely have and are putting more inventory in the system just to cope with those supply chain delays, so yes, I think that all points to there being a higher-than-normal inventory position at the end of the first half. That will, of course, manifest itself in some additional recoveries corresponding to that inventory. And then of course, the same discussion we have this time every year is what does that then look like once we cross into winter and what happens with winter here and then what the second half looks like. So it's that same profile as normal, Peter, although I think you are correct in that it will be exacerbated a little bit this year for those reasons that I set out.

We will take the next question from the line, Lee Power from UBS.

If we just dig into the quarterly revenues numbers in Americas. I know it's probably pretty hard to try and strip freeze out. It sounds like from your comments you thought most of that happened in the third quarter. I mean, should we think of those quarterly numbers for '21 accelerating ex the freeze? Or was enough of that in the first quarter that revenues actually declined quarter-on-quarter 3Q to 4Q?

Lee, this is Andrew. Look, if you look at that $42 million that we called out for the freeze, and you can see on the chart: A significant portion of that was in the third quarter. You take out that fourth quarter number and we still had pretty significant growth, but keep in mind the Americas saw a big impact from COVID in the fourth quarter of FY '20, so the growth rate that we did see in the fourth quarter of '21 is on top of a COVID period in the same quarter last year. So we're pretty pleased with that.

Yes, okay, excellent. And then the fourth SharkBite line, how long does that take to -- actually to get up and running? And then maybe can you just tell us where peak capacity utilization is at, at the moment?

Okay. So look, that additional line is you need to think in terms of 12 months, even a little longer. Actually everything is longer at the moment, so it's longer than 12 months but there -- but thinking those sort of terms. Right now all the factories are busy, running hard. We have the capacity we need, but the reason, of course, that we're investing is that we don't want to run our people nor our facilities at the rate that we are doing at the moment on a long-term basis. So that's really why our CapEx projection is higher for this year, because we'll be putting in some new capacity across all regions.

We will take our next question from the line, Peter Wilson from Crédit Suisse.

Can I just delve into the expectations for Americas growth a little bit? So I guess it's one thing to think that the market is going to grow, but I guess, if you compare yourselves last year to LIRA, LIRA looks -- LIRA was low to mid-single-digit growth, when you were doing 20% to 30% growth. So do you think it's possible not only for that market to grow but for you to grow as well given that you did so much better than the market in the last 12 months?

Look -- and certainly we are starting to lap some pretty strong comps. That's the reality sort of week by week, month by month now. Look, I think it's useful to go back to Page 15 of the presentation deck, where we set out the bridge for '21, because I think that's actually really useful in terms of informing '22. So look. The first thing you need to do is back out the entire freeze number, that $42 million. So that brings you back down to around $588 million. That's really what I'm thinking of as the start for the coming year. Then you've got to make a decision on that COVID uplift, that $30-some million there that we allocated to the COVID uplift for '21; and take a view on where do you think that's sustainable through the whole year or not; and then apply the price increase. And we've given some indication of that price increase on the way through. And frankly, that combination of the sustainability of the COVID uplift and the price increase really defines what, if you like, in our -- how we've described it, what market growth will be for the year. And look, we expect to outperform the market by 1 point or 2. And we do have some relatively minor product customer initiatives that can move 1 point or 2 as well, but really the -- you're -- back out the freeze. Apply your opinion on that COVID uplift and whether that's sustainable for the year or to what extent, and then the price increase on top of it, is really how I'd suggest to think about the '22 outlook for the Americas.

Okay, that's good. That's a helpful way to look at it actually. Would I be right to interpret your comments that -- I guess it was in June and -- June last year, I guess, when your sales really started to rock in the Americas. And would I be right to interpret your comments today that you're being -- still growing off that June figure and off that July figure?

Yes. Certainly that growth rate has moderated, where it would be lovely to think we could do a 25% and put another 25% on top of it, but clearly that's not going to happen. And I think we called out that, for the July period, we were up on -- 9% on a reported basis. I think it's 6% constant currency. And we were up in every region. So that sort of -- well, frankly, for me and somewhat biased, I guess, that feels like a pretty strong outcome on a month last year that was pretty strong, but that's where we're at this year, of course. It's lapping those strong numbers, so for us it feels like a year of consolidation. If that COVID uplift is sustained, we continue to execute well, we actually finish the '22 in a good spot, but hey, it's day by day, which is how it's been for the last 18 months, Peter. So...

Yes, understood. And one last one, on EMEA, the investment in tooling this year. Might that herald a bit of an acceleration in your NPD rollout in that business?

I think most of what we're spending on tooling over there is core production of existing items. You've seen that facility over there. There's not much space to move and there's an awful lot of people there. There is opportunity there for automation. There's opportunity there for tools that have more cavity so that you get more piece parts per cycle. That's where a lot of our effort is going into now so that we can utilize that space better and in the fullness of time get better efficiencies.

We will take our next question from the line, Keith Chau from MST Marquee.

Heath, I just want to talk about your comments for July. And I know it's dangerous just looking at 1 month, but to Peter's point, I think last year we had that step up in sales between June and July, anyway. You've guided to 6% price growth. In constant currency, revenues were 6%, so do I take that as volumes in July were flat? Or is it the case that those price increases are still ramping up such that you did see a bit of volume growth in that month?

We didn't get the entirety of the price increase in July, a good chunk of it, so there was a combination there that drove that number, but back to your first comment: Yes, I'd be a little bit cautious of drawing too much from a single month and particularly in the context of supply chain issues right now. You can have $5 million worth of stuff that either does or doesn't get picked up in the last week of the month which can mess up 2 months, so it's a pretty dynamic environment right now.

And do you think those supply chain issues are actually holding your growth back? I know you mentioned the team is pushing as hard as they can or doing as well, if not better than, the industry, but were it not for those supply chain issues, could your volume growth actually be stronger at the moment?

I think the answer is yes. And look, it's not going to double it, but I think all of us in the industry is struggling right now. Look. There could be a shortage of lumber stops a project and we miss out on it. It could -- the next project. It could be a case where we don't have the product, that we could miss out on it, so we actually hurt others in the industry. So yes, it's affecting everyone right now. I think we're really pleased that demand remains strong in all parts of the world. I think we're grappling pretty well with those supply chain issues, but it will -- I think, for this year, the supply chain issues will potentially dent our numbers just a little bit month-to-month, depending on it, so...

And where do you reckon your DIFOT metrics are sitting at the moment, Heath? Because I know with some of the larger retailers over there you've got to have a certain number in order not to be penalized by them. Can you give us some insight as to how the business is tracking?

Look. Nobody is meeting their DIFOT numbers right now, nobody anywhere. I think the feedback we're getting is quite positive and indicating that we are performing as well or, frankly, better than everyone else. And there is just a -- it really is hand to mouth, and I think everyone in the supply chain kind of realizes that. And it feels, frankly, like we've got some months to go with that daily challenge.

Yes, okay. And then just one question for Andrew: Andrew, I think you mentioned earlier on the call there may be some deleverage within the business after you build up your inventory. The intercompany sales and how products shifted between each division can make that reasonably tricky to understand going forward. Just wondering if you can give us a hand on understanding which divisions we might see that in, if I did interpret your comment correctly.

Well, I think that what I specifically mentioned was around that profit-in-stock adjustment that we saw in APAC. That favorability in FY '21 certainly will not repeat and is very likely to reverse, so -- and so that's going to be something that we'll be challenged with. And so if you're going to -- you'll certainly see that in APAC over the course of FY '22. Outside of that, margins really depend on volume. And that's, first and foremost, the rest of those factors that will impact margin. We mentioned the dilution from the price increases, but then outside of that, look, there's lots of puts and takes. And certainly the team is focused on execution. We're going to enjoy the operating leverage that we saw in FY '21 and that's something that we're quite proud of. And I think that we know how to achieve that. And we're quite focused on costs and facing those cost pressures that we see and quite confident that the team will continue to work through it.

And Andrew, on those price increases, I know you mentioned in the written commentary that the price increases will recover all costs. 2 questions on that front: One is, do you think you will over-recover on your [ cost imposts ] this year, or is it simply just a full cost recovery? And secondly, if input costs do start to retrace, is there the potential for some of your larger customers to ask for some of that price back? Or do you think prices have been rebased to a sustainable level going forward?

Well, look. The exercise that we've been through is a recovery of costs, for sure. And it's based on the increase in commodities. I think that, if those commodities do retrace, certainly some of that will be given back. That's just how that works, but it's a cost recovery process, so it goes both ways.

I think it's, though, fair to say that the movement in copper is the key one here. The movement in copper over the last 3 or 4 or 5 months is in keeping with what we've captured. And that's been the duration of our discussions with our customers. So right now it all feels settled, but definitely, as Andrew said, it captures the cost increase and that's it.

We will take our next question from the line, Simon Thackray from Jefferies.

Congrats on the performance, for the -- for you and the team, because it's been a pretty unusual year, to say the least. A few questions, if I may. I just wanted to explore again, on the back of Keith's question and your response, Heath, the discussion around how price rises are achieved, especially around copper. And yes, sure, there's the propensity for those to be given back if copper was to go in the opposite direction, but did -- was there any pricing discussions, particularly in and around Europe, on resins as well for the plastics side for John Guest?

Yes, yes, for sure. And look, I -- across the globe, we've dealt with pricing ultimately on a product-by-product basis, depending on what it's made up of, whether that be steel or copper or resin. So yes, it's been lots of moving parts. And everything has sort of come under focus in the last 6 months or so.

Yes. Terrific, okay. And then I know how near and dear you like getting on site, Heath, and understanding the whole plumbing process. Is -- the capacity constraints in Australia that we're seeing in new housing -- I mean we're seeing an increasing number of homebuilders struggling to move from slab to frame given obviously what's happening with timber. And we've seen a market shift to steel frame, which is great, but given where your products come during the rough-in for -- in the timber frames particularly, I'm just wondering whether that you're seeing those delays manifest, particularly in the last sort of couple of months in Australia. And it's particularly important, as you know, because those homebuilders, particularly the smaller tail, rely on a 15% progress payment to get to frame and then another 20% to get to lock-up. So just wondering whether that's you're really seeing those constraints play out in the detached market in particular in Australia.

At this point, no, we haven't. There's -- we're not particularly early in that process. As you said, the frames will be well and truly up before we get called to action, if you like. So no. At this point, we haven't. We do actually expect, though, that we will probably see some impact. I guess one thing we think that has become clear over the last sort of 15, 18 months is that these delays serve to, to a large extent, just prolong the uplift in the market. It's the demand remains. It's -- it just comes -- it just becomes pent-up demand in 2 weeks or 2 months time [ to be bet then ]. Now that makes it tough from an operational point of view. We'd much prefer that we weren't locked down from an operational point of view and from a health of the community point of view, but one, we can deal with it from an operational point of view. And two, the demand, simply it, from what we've seen so far, gets pushed down the track a little bit. So crazy times, that they are. And as I said, you deal with it on a day-by-day basis, but that's really what we've seen.

Sure, sure. So you wouldn't be worried about sort of a rising number of insolvencies in homebuilders and some of these projects actually being canceled rather than pushed out.