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

Good day, ladies and gentlemen, and welcome to RWC Third Quarter Trading Update Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Heath Sharp. Please, go ahead.

Hello, everyone, and welcome to RWC's trading update for the 9 months ended 31st March, 2022. I'm Heath Sharp, Group CEO, and with me today is Andrew Johnson, Group CFO. In the materials we have released this morning, we have endeavored to provide the same level of information that we provided at the first quarter. This includes sales, EBITDA and EBIT at a group and regional level. As a reminder, we are now reporting in U.S. dollars. All the figures we reference will be in U.S. dollars unless we state otherwise. Starting on Slide 3 and looking at group performance for the 9 months ending 31st March. We recorded a 14% increase in net sales to $845 million. The result included a contribution from EZ-FLO from mid-November through to 31st March. Excluding EZ-FLO, we recorded a 5% increase in sales for the 9 months. We continued to achieve price increases to offset cost inflation. Over the 9-month period, we averaged 8.7% price increase across the group. We have further price increases underway for the fourth quarter and we'll be close to achieving double-digit price increases for the full year. This will mean we have achieved close to $100 million in price increases for FY '22. You will recall that last year, we benefited from an increase in sales as a result of the freeze in Texas and surrounding states. We estimate that freeze event contributed $31 million in sales in the third quarter of FY '21. Adjusting for that U.S. freeze last year, sales excluding EZ-FLO were 9% higher compared with the prior 9-month period. Adjusted EBITDA was 9% lower at $191.4 million. As we've expressed before, we have achieved price increases that contribute to the sales line. These are generally margin neutral or even margin dilutive in the cases where we are simply offsetting cost increases and that was certainly the case in the Americas during the period. We are pleased that we have been able to achieve the necessary price increases in all 3 regions to mitigate cost inflation. Price increases that we've introduced in the third quarter and those we plan for the fourth quarter will positively impact fourth quarter margins. While we continue to maintain tight cost control, inflation pressures continue to be felt across the business and were reflected in higher SG&A costs for the period. SG&A costs were also higher as a result of project costs and an increase in marketing activity post COVID. Moving to Slide 4. Let's now look at each of the regions individually, starting with the Americas. Americas sales were up 20% for the 9 months, reflecting the contribution from EZ-FLO of nearly $70 million for the period. Excluding EZ-FLO, net sales for the 9 months were up 5%. The prior period included sales of $31 million arising from the U.S. freeze in February 2021. Adjusted EBITDA was down 1% and down 7% if we exclude EZ-FLO. The incremental volume from the U.S. freeze last year generated higher margins than average. The absence of these volumes, coupled with the margin diluted price increases, explain the reduction in adjusted EBITDA for the period. Turning to Slide 5 and looking at performance on a 2-year basis. Americas achieved sales growth of 34%, excluding EZ-FLO. If we include EZ-FLO, sales are up 53% on a 2-year basis. EBITDA has risen 61% over the same 2-year period. Underlying sales growth for the 9 months, excluding EZ-FLO and adjusting for the winter freeze event last year was 12%. If we further adjust for the one-off distribution changes by Lowe's in the first half, underlying revenue growth for the 9 months was 15%. This is well ahead of the price rises we've achieved in the Americas. So, we've definitely seen continued volume growth as a result of higher activity levels. We've also seen a contribution to revenue growth from our new products. So, it is really pleasing that we've been able to continue to build on the step-up in volumes that we achieved in the FY '21 year. We remain very pleased with the progress of integrating EZ-FLO with RWC. We are firmly on track to deliver both the revenue and cost synergies that we outlined at the time of the acquisition. While EZ-FLO's EBITDA margins have been running below the level prior to acquisition, this is due to the lag between cost increases and compensating price increases. We have seen margins improve in March and on into April. We still expect that the impact of the price increases will be reflected in the margin in the fourth quarter. I would note that EZ-FLO's margins were also impacted by the government-enforced shutdown of the Ningbo area for 2 areas in January. You will recall, Ningbo is the location of EZ-FLO's manufacturing plant and distribution center in China. The shutdowns in the Shanghai area have not had a direct impact on our operations in Ningbo. We are maintaining a watchful eye on any potential knock-on impacts in logistics and shipping, which may arise due to the shutdown of the Shanghai area. Switching to Asia Pacific on Slide 6. Revenues for the region were up 9% for the 9 months. This was driven by ongoing robust new housing construction and remodel activity in Australia, driving volume growth in the period. APAC's performance over the last 2 years has been strong, and you can see in the graph that revenues are 20% higher over a 2-year period. EBITDA was 6% lower and this was due principally to lower intercompany sales. Volumes shipped to the Americas in the third quarter of FY '21 were significantly higher as a result of the U.S. freeze and inventory levels were consequently depleted. In the latest period, we have rebuilt inventories resulting in a negative profit in stock adjustment. We estimate that the combined impact of reduced volumes without the freeze and profit in stock adjustment from higher inventory levels was approximately AUD 8 million. In EMEA, on Slide 7, net sales were down very slightly for the 9 months versus PCP and adjusted EBITDA was down 5%. Sales on a 2-year basis are 10% higher. Continental European sales were higher versus PCP. This was principally due to demand for fluid tech products, which are focused on the water filtration and greens dispense markets. U.K. plumbing and heating volumes were lower, with the prior period having been particularly strong as volumes recovered following the COVID lockdown. During the third quarter, we completed the transfer of our warehousing and logistics activities to a third-party provider in the U.K. This led to some disruption in our delivery time frames and order fulfillment. We believe this negatively impacted sales in the period by around GBP 3.2 million. Delivery performance has now improved substantially and we are confident we will recover these sales in the fourth quarter. Turning to Slide 8. We wanted to provide more detail on the trends we have seen in U.K. plumbing and heating volumes. This chart is rebased to an index of 100 back to the fourth quarter of FY '19. It tracks the volume of our top 20 plumbing and heating SKUs in the U.K. measured against external activity indicators for the plumbing sector. What you can see quite clearly is the strong growth in volume as the U.K. came out of lockdown from July 2020 onwards. This was significantly stronger than underlying activity at the time and reflect the distributors rebuilding depleted inventory. More recently, we have seen distributor demand adjust to better match underlying activity levels. And so, we have seen our sales volumes for these top 20 SKUs aligned with real activity levels, which are higher than pre-COVID. I'll now pass over to Andrew to discuss our debt profile and outlook for the balance of the year.

Thank you, Heath. On Slide 9, we have set out in the graph our debt maturity profile following our recent $250 million debt issue in the U.S. private placement market. The issue has 4 tranches with maturities between 7 and 15 years and will supplement our existing loan facilities. We have increased our total committed funded lines to $1,050 million. Net debt at the end of March was $555 million, up slightly on the half due mainly to higher accounts receivable balances. Looking ahead to the full year, we plan to maintain a conservative stance around inventory levels. Supply chain disruptions remain a risk to the business. And since the half, we have seen the war in Ukraine and shutdowns in Shanghai exacerbate matters further. We are successfully mitigating these risks by maintaining our inventory levels as a buffer against supply chain disruptions. And we also see opportunity to win new business based on our ability to control our supply chain and respond effectively to demand. What this may mean in the short term and specifically in the second half, is cash conversion will be lower than the 90% we would normally target. Let me now turn to Slide 10 on the outlook of the remainder of FY '22. One of the really positive aspects of the results today is just how robust our end markets have remained and we don't see that changing for the balance of the fiscal year. Remodel markets remain strong and there appears to be a significant backlog of work, which will underpin volumes for some time. In Australia, new residential construction is also expected to remain strong. The biggest issue we continue to face is cost inflation and the need to seek price increases to offset these cost pressures. As we have demonstrated in these results, we have a strong market position, which allows us to recoup cost increases through price. We expect fourth quarter margins to show improvement as the price increases we have put through the business are fully realized. However, continued cost inflation means that while we expect to achieve EBITDA margin firmly in the mid-20% range, we may fall slightly short of matching the FY '21 EBITDA margin percentage. No question, supply chain challenges remain headwinds across industries and for us as well. The control we have of our own manufacturing facilities and our ability to execute allow us to respond quickly to changes in demand. We remain very well placed to not only manage through the current disrupted environment, but also seek new opportunities. All in all, we are really pleased with our ability to consolidate volume gains, particularly in the Americas and continue to grow from there. This reflects not only positive market conditions, but also attest to the strength of RWC and its brands. We are focused on growing further from this higher base through market share gains, new products and continued service excellence for our customers. And with that, I will now hand you back to the operator to start our Q&A session.

[Operator Instructions]

It's Brook Campbell-Crawford here from Barrenjoey. I just had a question, firstly, around price increases. And if we think about -- if no further price increases are announced beyond the current quarter to the fourth quarter FY '22, what would the group price increase be into FY '23?

Brook, you're referring to sort of the rollover benefit?

Yes. Just like your finance price increases for the fourth quarter this financial year. I'm just trying to think about if there's nothing beyond that, what's the roll through price increase we should see in FY '23 at the group level?

Yes. Look, Brook, this is Andrew. As we reported, the price realized within the period for this 9 months year-to-date was 8.7%. Now that's higher than -- I think every time we've given an update that number has increased, which is indicative of our ability to get more price. We expect that by the end of the financial year that, that number that we'll report will approach 10%. The exit rate, obviously, then, in terms of the exit price increase run rate will be higher than that and that will impact FY '23.

And then just for the third quarter, you may have called this out earlier on, but the underlying volume growth in the Americas division in the March quarter if we normalize for EZ-FLO and the freeze, what was that? I think the sales growth was 22%. But what was volume?

Well, we haven't split out price and volume. If we talk about an 8.7% realized price increase for the group, it's going to be higher than that for the Americas. It's going to be around that double-digit range. And so that gives you Brook, kind of a relative idea of how that would split out.

And that compares to the 15% if you back out EZ-FLO and the freeze and allow for loads.

For the 9 months.

For the 9 months.

22% was for the third quarter.

That's right.

Okay. Yes.

And then just the last one for me on EZ-FLO, clearly, some impacts there from the lagged pass-through from pricing and 2 weeks shutdown in January. But just can you provide some comments there? Because clearly, the run rate of earnings is below what it was when you acquired the business. So, can you just provide some commentary to give us some comfort that the outlook for this business is still as you would have expected at the time of acquisition and that the impacts here are just sort of temporary?

We're really confident that the impacts are temporary. The margin rate we saw in March and which is continuing in April, I mean there's a little bit more price to come through as well, are as we expected. So, if we talked about at the half, we thought we could exit the fourth quarter at a number that was approaching the business in the first -- in the first instance, and then we get to put the synergy benefits into the business as we go forward. So look, our long-term view of that business hasn't changed. We're not going to want to get too excited, but the revenue pipeline and opportunities are real and there's a lot we can get our hands around there. So, we're -- we like that business very much.

[Operator Instructions]

Good evening, Heath, Andrew and PK. It's Keith Chau from MST. First question, gents, for the Americas, can you just give us a sense of where sales trends have progressed in the Americas since the end of the third quarter? Are there any signs of demand waning? Or is it kind of steady -- well, more steady, but continued growth into the fourth quarter?

Yes, it's profile similar, so.

And Heath, any feedback from customers and the longevity of demand and how much further this demand can last? Some of the key indicators we look at suggest that demand can remain pretty resilient right up until the end of this calendar year, if not beyond. But is that the kind of feedback you're getting as well from your sales team and your customer base?

Yes. Look, I think the key indicator is where the contractors are at with their sort of workbooks and how much work they've got going on. That demand is going to hang in for some time I think. I mean, look, it's really hard, frankly, look partly the end of the financial year, let alone the calendar year. But there's no signs of anything slowing down here in the U.S. at this point. The price is pro-driven. We've talked a lot about that. And the pros are busy, and they're not looking for work, they're trying to get work done. I mean that's really the sentiment over here and how it feels.

And then second question, maybe to Andrew. I think you mentioned the Shanghai lockdowns haven't had a direct impact on the business and yet to be any flow in effect. So, I just want to get a sense of how much safety stock is within the business, particularly for EZ-FLO but also the legacy business, which I think the import supply chains from China are a bit more fragmented than for EZ-FLO and Ningbo. How much stock do you have on the hand? Let's just say everything shuts down from China today, and you can't get any product out, how many months of inventory do you have on hand?

It's a good question, Keith. I mean, as you know, we're really happy on inventory right now over and above what we would normally carry. We feel pretty confident that we could cover a shutdown in a -- but it would be a matter of weeks, not months, obviously, which is why we're watching closely and we're going to continue to hold that additional inventory as a buffer against circumstances as of that. I mean if you look at just the inventory turns, right now, our inventory is turning about 3x a year. So, that's about 4 months' worth of inventory, right? And that's across the whole business, but it wouldn't be that different when you're looking at that Chinese sourced inventory.

And Andrew, do you have any alternate sources of supply maybe not for EZ-FLO because that's all contained within the Ningbo region. But for your legacy business, if things were to go about haywire or more haywire in China, do you have alternate sources of supply for your -- for the products in the legacy business?

Look, I think it's fair to say over the last 12 months or so, we've looked at every nook and cranny and an opportunity for alternative sources and so on. We've -- and we've been calling on those, Keith, for some time. And look, ultimately, the decision we've made on inventory is pretty conservative and consume some cash, but deliberately so because ultimately, it's that buffer is the strongest protection we've got.

And third question just relates to the impact, the $8 million impact in the Asia Pacific region. Andrew, you called out that, that was due to lower intercompany sales, which, I guess, should be well understood, but there's also a profit and stock impact in there as well. Just wondering if you could quantify for the 9 months, approximately what that profit and stock impact was?

Sure. And I just want to make sure that I clarify that profit in stock number that we talk about, that's the movement between last year and this year. So last year, it was a positive impact. This year, it's a negative impact. So, you have to look at that at the difference between those 2 years. But out of the $8 million, roughly 3/4 is profit in stock with the remaining being the volume impact that we talked about.

So, let's call it $6 million for the 9 months. So, I think in the first half, it was a couple million bucks, so implied for the third quarter in isolation would have been $4 million by implication, the impact would have been $4 million?

That's correct. And again, it's more of the benefit last year than the big negative this year if you look at that.

And then just one final quick one. The $3.2 million sales impact in EMEA, can I confirm that, that is simply a timing issue and will be caught up in the fourth quarter? And is it possible all to give us an EBITDA impact from the impact of warehousing and logistics operations changes?

Okay. Look, first of all, that was GBP 3.2 million not dollars. So, I guess that's around USD4 million. Those margins are pretty strong over there, Keith. That hurt. We haven't called out the number I haven't got it to hand, but you can approximate it pretty readily. So, it was painful. And look, there were additional project costs related to that project as well in the period, and they made a difference in conjunction with that profit in stock amount they're really the move is worth calling out from an EBITDA point of view for the quarter. Back though to the issue of will we make it up, yes, that's our expectation for the first quarter. They're making really good -- or had made really good strides over there and that run rate of shipping fields feels like where it should be. They do have to catch up a little bit, but that's our expectation for Q4. And that, of course, contributes to the margin in Q4.

[Operator Instructions]

It's Pete Wilson from Credit Suisse. Can I ask a question on Americas. So, implied volume growth in the third quarter of about 10%. That's an improvement versus the first half where volumes are stable. Can you give us an idea of what changed and what improved and whether we should extrapolate that growth or it's just quarter-to-quarter volatility?

Yes, I don't think you don't want to extrapolate too much there. I think there is just a bit of volatility quarter-to-quarter shipping times and delays and nothing is normal these days. So, you got to be a little bit careful. There's really nothing in particular to point to. Definitely, there was no new -- there were some new products, but there were new products through the whole year. So, there's not one thing that's really moved the needle. It's just the ongoing work to get the product on the shelf. I mean if you can get it on the shelf, it moves off the shelf that can make a little bit of difference quarter-to-quarter.

And then U.K. sales, so down again, I guess, which you attribute to a strong PCP. It seems, I guess, your competitors and product distributors there, they're reporting flat sales or even slight growth. So, better results than you seem to be reporting. Can you maybe just give us your opinion on why that would be?

Look, we've spent a lot of time looking at our volumes comparing it to the market, comparing to indices that are available and there's not many out there. But I'm talking a lot with our contractors, we are really confident that we've held our share -- at least our share through the period. There's an awful lot of noise in it. I mean, the reason we put that chart in there was just to show how much the moves, just how much variation there's been in what the overall market is doing versus what our shipments have been doing. And I think the thing we like is that for us, it feels more stable now. The macro and the demand than what it did a few months ago. And I guess that's coming a little bit more into alignment with what some of the others are saying. Incoming order rates are really quite solid. I think that misalignment of shipments into distributors versus those out, that's now realigned, which we've got on Page 8 of the deck. And overall, I think those volumes have recovered to above pre-COVID level. So, it's still hard to really read that market as well as the others, but it does feel a little bit better than a few months back. But I think critically, we certainly are confident we haven't lost here on the way through at all.

And one last one on input costs. So, given what's happening in Europe with gas prices and assumed resin prices, do you expect, I guess, further cost increases to flow through your business, I guess, in the next 12 months? And are the price rises that you put through so far enough to get you back to that FY '21 type margin? Or do you expect to put through -- or do you need to put through further price increases?

Yes. Look, it's a really good question. Where -- the impact in Europe on energy costs, we think will likely have a knock-on effect to material cost sort of metals and resins. The impact on oil potentially can impact resins just a little bit as well, particularly when you get to the lower -- the lower end of the resin spectrum. So, that's something we're watching and anticipate we'll have to deal with. In terms of price increases, what it feels like is there's no discrete price increase anymore. It's just an ongoing activity, you have to deal with on a weekly basis, just reassess where you're at and mobilize. So, the days -- at the moment, the days where you had a once-a-year move in the U.K. just seemed like the distant past. It's -- they're not discrete activities anymore you adjust as you need to adjust on an ongoing basis. I think that's how it certainly feels in Europe for the -- or we'll feel in Europe for the next however long.

[Operator Instructions]

It's Simon Thackray from Jefferies. Good day, Heath and good day, Andrew. A couple of questions have already been fielded by you from the guys, but a couple of extras if I may. Just hearing your comments on the pro channel strength and ongoing demand in the U.S. and obviously, the pipeline in Australia in particular, Heath. Just with what you've experienced so far in the fourth quarter, can I just get a view on the top line expectations for 4Q from both a volume and pricing perspective? I know you've called out for the full year, 10% realized price expectation or approaching it, but do you expect sequential improvement in volume in the fourth quarter?

No, I'd say the current run rate through the third quarter into the fourth quarter feels about right. I don't think there've been a drastic difference in volume. There will be a little bit more price increase that comes through as Andrew was talking about before. We expect that average for the year, it will be sort of around the 10% mark. So, that will pick up a little bit through Q4, but I don't think volume is going to -- we don't expect volume to change significantly through Q4.

So, revenue sequentially goes up as a function of price, not volume in the fourth quarter?

I think that's correct, yes.

And then just in terms of the experience with inflation in raw materials. If you can, can you just give us a sense of how the LCL acquisition has helped sort of mitigate some of the materials cost, if at all?

Look, I think what it's given us is control more than an outright cost. Look, certainly, the copper we make or the brass we make in Australia comes from recycled copper. I mean 100% of the brassware we're making down there is from recycled copper, but that was costed in, if you like. So, that hasn't been an increase over what we thought it's a good position full stop. I think it's control of that supply of the reworking of the brass from our facility back into the LCL facility, which is adjacent to that and being able to secure cabling and so on that we can process into copper. It's back control. It's one aspect of supply chain that we don't have to worry about. That's the benefit, I would say.

And Andrew, one for you, if I can. Just the addition of the $250 million private placement debt in the U.S., can you just step through the rationale again in terms of the requirement for that additional headroom and whether M&A features in the funding decision? And I guess, as an adjunct to that, the organizational appetite for M&A at the moment, considering you are still betting down the EZ-FLO acquisition?

Look, our thought process behind that placement were really 2 things. We wanted to increase the tenor of our debt. Our current facility was over 2 tranches. It was 3 and 5 years, and this takes us to 7, 10, 12 and 15. So, that was one thing that we accomplished. And then secondly, we wanted to fix a portion of our debt, where previously it was obviously a variable type interest rate facility.

Floating, yes.

And so those were the 2 objectives and the thought process behind that. I think we did a pretty good job, the team did of getting that through. And look, in terms of capital management, really no change. That money is there to fund organic growth, capital projects, new product developments and then, of course, M&A in due course. But that's what that money is for, as we've kind of outlined over the last couple of years, and there's no change to that.

[Operator Instructions]

Good evening, gents. Pete Steyn from Macquarie. I just wanted to pick up on 1 or 2 things around the pricing environment, Heath. Perhaps just at a macro level, how comfortable are you around pricing power? You spoke about it becoming a daily activity, which suggests you're very comfortable. But in the context of a market that's certainly getting a little bit tighter with rates and everything else going on, do you foresee any strategic level change in your ability to pass on costs?

Yes, I think that's a good question. At this point, no, we don't. The short-term outlook, it feels as it has for the last the last several months, I guess, or longer even. So no, at this point, no, it doesn't feel any different, Peter.

And just on that extending a response that Andrew gave to an earlier question. Andrew, presumably, as you think about FY '23, you're not going to be annualizing the run rate that you're likely to have in the fourth quarter because your base is going to firm. So, I guess it's ill-advised to think that we're going to see double digit for FY '23 if you don't to raise prices further from here?

I think that's fair. It's fair comment.

Lapping some increases...

That's right.

Were pretty early in the year. The copper base increases were really --were early in the year. Some others are happening now. So, yes.

I just wanted to clarify my thinking there. And then the last one was just the Chinese COVID impacts that we're seeing right at the minute. We've spoken about inventory. But just curious, you're not actually seeing any impact at this point? Are you still being able to ship out of China without any issues?

Every day, there's an issue of some description there. We haven't had a day without issues for probably the year, but look, right around the fringes, well, there's a couple of minor components here and there that are -- from vendors that are within that region, but we're able to make up for that. The bulk of it, the core of it is of our own facility and all our major sort of legacy vendors is Ningbo or elsewhere and we've been fine. That continues to be the case. But we do watch that pretty closely, Peter. I mean that's one decision by one person can make a big difference to a whole lot over there. So, we're watching it, for sure.

And I may just slip in one last quick question. Just sort of bigger picture response to what we've seen in interest rates in the U.S. Just curious in your channel partner conversations, how people are reacting to what they're seeing at this point more from a sentiment perspective because very clearly, it's going to take a little while for these realities to really hit home. But just curious what you're sensing from a sentiment perspective?

Look, at this point, I don't think much has changed. I think there's a little bit of discussion around the traps about it. I don't think the sentiment in terms of purchasing has shifted at this point. I think, though, it still feels early days into what's happening with the rate. I think again, we take a lot of comfort from the fact we're much more heavily RMI focused. And I think even the biggest projects we get in are sort of mid-size remodel as supposed to major ones, and I think the potential for interest rates to impact those is less, but it's to play out. But at the moment, there is no softening of demand. We're not really seeing or feeling or hearing a sentiment change. I mean we're out in the market all the time, keeping in the air out for that, of course, but at this point, no real impact in the world we live in.

Operator, we'll now take questions from those online.

Sure. Thank you. There are no more questions in audio line as well. Thank you.

Thank you. So, I'll just read them out, Heath and Andrew. There's several. Are we having active discussions with additional price increases currently? Are these discussions more difficult than they were in the first half?

Certainly, discussions ongoing in I'd say, everywhere around the globe. No harder or easier than before, depending on which channel, which customer, or -- so no, it's still similar.

Similar. Okay. Do you think supply chain pressures that we've called out are getting better or worse or no change?

Look, I was optimistic back at the half that we'd stop getting worse. And I guess, then hope that it would start to get better, but it hasn't. And in some things, it's got tougher. So, it's a bit mixed. It doesn't feel like it's going to be easy tomorrow.

Thank you. Slightly different one now. Are you able to provide a perspective on the John Guest acquisition? Integration pre-COVID, post-COVID, at [ weather ] side periods? What went well, less well or differently from expectations?

We could occupy a lot of time with this answer. We've gone through a lot. Overall, we're really, really pleased with that -- with that business. It's a platform that's given us in the U.K. and the opportunity to continue to expand in that market, bring new products, make bolt-on acquisitions on what is now a really strong business with a strong team. I think is what we wanted and more, I mean the capabilities there are tremendous. What I really want is a 12-month period where there's no craziness so we can actually demonstrate what that team has achieved over there coming through Brexit disruption a couple of years ago, through our SAP implementation, through COVID, through the challenges with the -- what's on Chart A, we had to make that distribution change setup that we did over the last couple of months, which is to give us the capacity we need going forward based on what we want for that business, we needed more scalability in the warehouse. We're coming through all that. If we can get a solid period, I think we're going to just show how strong that business is, and I really would love to do that. So overall, we're really -- we like it a lot. It's a super solid business and it's delivering expertise for other parts of the world as well. So for me, it's a big positive.

Next question. Can you just remind us on the seasonality of the business? And does the fourth quarter stand out in any way in that effect?

[ Wish him ] only seasonality. I'm trying to remember what seasonality is for our business. Q4 normally is a bit stronger than Q3 because Q3 has got a sort of legacy of the Christmas and holidays. So, Q4 normally is a bit stronger than Q3. But, yes, I mean whatever freeze happens if it's in Q3 makes a difference. So generally, that's how it lands.

Next question. How much additional inventory do you believe you were carrying in dollars relative to what you may normally be carrying in this price environment?

And as we've looked at this, you really need to break inventory down and that increase partially is related to inflation. So, it doesn't mean that we've got more units on the shelf. It just means that they cost more, obviously. But roughly, if you look at the inventory that we're carrying, we probably have somewhere in the magnitude of $40 million to $50 million that would represent additional units. And then you've got, of course, inflation on top of that. And that doesn't also include M&A, which is added to our inventory balances this year.

Thank you. Final question. How are you managing the risks of losing the key distribution channel across markets, [ EG ], Home Depot in the U.S?

By delivering really well. That's the best thing we can do. Look, that's -- that's directly linked to the inventory question, isn't it? I think delivering well really solidified those relationships. I think I think we're -- I'm going to elaborate too much here, Phil, but just bear with me for a second. I think we're really well positioned. Look, as we understand it, and we don't get this data, of course, but as we understand it, our delivery performance is materially better than our peers, okay? Think 10 percentage points to 20 percentage points better on fill rates, okay? Even large sophisticated vendors are struggling in this environment. At the other end, smaller vendors, frankly, I can't tell you they've got the balance sheet to support the big volume step up from last year in combination with the inflationary environment right now. And frankly, you see that in fill rates. Our inventory, which is consuming cash, it was a deliberate decision puts us in such a good position to deliver, get the product on shelf, it comes off -- that solidifies the relationship. That's really what it's all about. So, that's the best thing we can do to secure that business going forward.

Thank you, Heath, Andrew. There are no further questions and on the call either that I can see.

Okay. Well, very good. I appreciate everyone's time today. Thank you very much. Have a good day.

Ladies and gentlemen, this concludes today's call. Thank you for your participation. Stay safe. You may now disconnect.