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

Good day, and welcome to the RWC Financial Year 2023 First Half Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Heath Sharp, Group CEO. Please go ahead, sir.

Thank you. Good morning, everyone, and welcome to RWC's half year results presentation for the 6 months ended December 31, 2022. This is Heath Sharp, CEO of RWC. And joining me here in Atlanta is our CFO, Andrew Johnson. At the end of this presentation, we will take questions from those on the audio call and then those on the webcast. I'll begin on Slide 3 and provide an overview of the half. During the first half, our business demonstrated tremendous resilience. Our volumes held up well in the face of economic headwinds in every market in which we operate. Our teams continued to execute well in what was a challenging environment. Group sales on a constant currency basis were up 20% and up 15% on a reported basis, including EZ-Flo. I would note that this period included a full 6 months contribution from EZ-Flo compared to only 6 weeks in the prior corresponding half. Excluding EZ-Flo, constant currency sales were up 6%. Andrew will talk to this in a moment, but weakness in the British and Australian currencies against the U.S. dollar did impact our reported sales. Results reported in local currency were somewhat stronger. Volumes were up 11% overall. Excluding EZ-Flo, total volumes declined by a backlog of R&R activity. We would also note that the destocking actions by some distributors in the first quarter eased as the half progressed, and now appear to have stabilized. We achieved sequential operating margin improvement in the second quarter over the first quarter. Our margins overall were still impacted as peak commodity costs flow through inventory, particularly copper and zinc. So half year EBITDA margin was down on the PCP. We continued to make strong progress in delivering EZ-Flo revenue synergies through gaining additional shelf space with our distributors. We also progressed the cost reductions we outlined at the time of the acquisition. We delivered stronger cash flow in the half, with operating cash flow increasing by 57%. To wrap up this slide, during the half, we continued to make investments in our manufacturing capability. We also continued our ongoing new product releases as well as preparing for the new product initiative, which we will be discussing further in late March. Moving to Slide 4. And here, we've set out some of our financial highlights for the half. First, a reminder once again, that all our figures are now reported in U.S. dollars, unless we specifically note otherwise. Net sales were $601 million for the half, up 15% on a reported basis and up 20% on a constant currency basis. Adjusted EBITDA was up 2% to $128 million. This was an 8% improvement on a constant currency basis. Adjusted net profit after tax at $67.5 million was down 10% on the PCP. Reported net profit was up 5% on the PCP and included a one-off gain from the sale of a surplus property in the U.K. Operating cash flow for the half was $94.3 million, up 57% at a cash conversion rate of 76%. While we saw a decline in our net debt at the end of the period, our leverage ratio was up slightly at 2.12x. And finally, we have declared an interim dividend of USD 0.05 per share. This is in line with the dividend we paid in the first half of 2022. The dividend will be 10% franked for Australian taxation purposes. Now over to Andrew to discuss our financial performance in more detail.

Thank you, Heath, and hello, everyone. On Slide 5, we have summarized our financial performance for the half year. As Steve said, our reported net sales were up 15%, and on a constant currency basis, net sales were up 20%. Sales growth was driven mainly by the contribution from EZ-Flo and also price increases achieved globally, which averaged 8.5%. We continue to see high commodity costs impact our margins throughout the half. As expected, we did see operating margins improved by 90 basis points in the second quarter versus the first quarter. We expect further margin improvement in the second half of the year as we benefit from reductions in the high input cost that impacted results in the first half. In addition, we expect further benefits to the P&L in the second half as we continue to execute on our cost savings initiatives. We make adjustments to EBITDA this half for 2 significant items: one being the $15 million gain on the sale of the surplus property in the U.K. And the second is an allowance for the one-off costs incurred as we realized the EZ-Flo cost reduction synergies. The main EZ-Flo synergy activity in the half was the closure of 3 distribution centers in North America. We will be closing a fourth DC at the end of February, following which, we will have reduced the combined total of distribution centers from 11 down to 7. Turning to Slide 6. We have bridged our adjusted EBITDA performance for the half. Price was the biggest positive influence on EBITDA in the half, followed by volume growth. We continue to see input cost inflation as well as higher cost in our factories. Cost reduction measures helped to offset these impacts. The increase in SG&A was mainly due to the inclusion of a full 6 months of EZ-Flo cost over the period versus just 6 weeks in the PCP. On a constant currency basis, adjusted EBITDA was up 8% and up 2% on a reported basis. At the time of our first quarter update in October, we mentioned that we were going to target further cost savings in the business. We've identified an extra $15 million of annualized cost savings that we will look to deliver from FY '24 onwards. We expect to achieve $2.5 million in savings from this new program in the current financial year. Before we get into the segment detail, I would point out that we have made a change in how we show profit in stock, how we show the profit and stock impact in our financial disclosures. For those of you who are not familiar with profit in stock, it is the profit on intercompany sales still in our inventory, so not sold to a third party. Previously, movements in profit and stock were shown in operating margins for each segment, primarily APAC and EMEA. We have now moved this adjustment out of the segment results and into the elimination column in the segment note, which is Note 2 on the financial statements. We have restated prior period comparators to reflect this change and therefore, comparisons within the prior period are relevant and consistent. The Americas recorded 28% sales growth, which included EZ-Flo. Excluding EZ-Flo sales growth for the half was 6%. We experienced sales growth across all product categories, except FluidTech, our drinks dispense and water filtration product range. FluidTech sales were 23% lower than the PCP due to the strength of the prior period, which benefited from the reopening of the commercial and hospitality sectors post COVID. Overall, unit volumes, excluding EZ-Flo were down 2% on the prior corresponding period. Adjusted EBITDA was 26% higher and reflected a full 6-month contribution from EZ-Flo. We continue to deliver revenue synergies in the half, mainly through expanding the distribution of EZ-Flos product range, including gas appliance connectors. We saw a slowdown in EZ-Flo growth in the latter part of the half, reflecting weaker consumer purchases of large appliances. We are on track with the revenue growth opportunities and delivery of the cost savings from the EZ-Flo acquisition. No discussion of the Americas this time of year would be complete without referencing winter weather. We did have a brief but widespread freeze event in the U.S., including the Southern states late in December. However, we don't believe it had a material impact on our results for the half, nor do we expect it to materially impact results for the full year. While the freeze was severe, it was a short duration and it happened over a holiday season when most people were at home and able to take effective action to counter unexpected leaks. Let's now look at Asia Pacific on Slide 8. Sales growth overall in Asia Pacific was 1% in local currency terms with external sales up 2%. Volumes in Australia were broadly stable. Intercompany volumes of [indiscernible] products manufactured in Australia and sold to the Americas were slightly lower. We also had lower sales into China as a result of lockdowns in that market during the period. From a macro point of view, we think the strong growth we have had in the Australian market since 2020 has started to taper off. That's linked in part to the decline in housing commencements, which were 8% lower in the 12 months ended September 30. Margins were adversely impacted in the half by high commodity costs given high percentage of brass products manufactured in the Asia Pacific region. Turning now to EMEA on Slide 9. I EMEA recorded 6% external sales growth in local currency terms. The U.K. market held up well with sales up 10% on the PCP, mainly as a result of higher prices. Volumes were broadly stable. Continental Europe sales were in line with the PCP with lower volumes offset by price increases. Continental Europe is mainly a FluidTech market for drink dispense and water filtration products. Demand was lower in the first half versus the PCP, which benefited as a result of the reopening of the commercial and hospitality markets. Intercompany sales were 24% lower due to the lower volumes of FluidTech products manufactured in EMEA and sold into the Americas. The team in EMEA has done a good job of managing its margins, specifically in Q2. Adjusted EBITDA in local currency was flat year-on-year. Adjusted EBITDA margin was down 100 basis points on the PCP, mainly due to lower volumes manufactured and sold during the period, along with higher input costs. Turning now to our cash flow performance on Slide 10. As we've already mentioned, cash flow from operations was up 57%, principally due to lower working capital growth than we experienced in the PCP. Our operating cash flow conversion was 76%. This is an area we will continue to focus on improving in the second half. Key to that, of course, is inventory management. We have maintained high levels of stock through the supply chain disruptions over the last 2 years. As these have eased, we believe we can unwind some of that inventory, especially now as we come through the U.S. winter season. Another factor which has impacted our inventory build is a stock up of new product inventory ahead of that launch later in the second half. Turning to Slide 11 and looking at our key balance sheet metrics. Net debt reduced by just under $18 million in the half, while our leverage ratio was broadly in line with the 2.1x for the year ended June 30, 2022. We have incurred higher interest cost in this half due to the funding of the LCL and EZ-Flo acquisitions. Rising interest rates have also impacted interest expense. 44% of our debt is on a fixed rate basis and the balances of floating rate, so we are progressively feeling the impact of central bank interest rate rises. We have reduced our capital expenditure forecast for the year from the $60 million to $70 million that we indicated at the start of the year to between $55 million and $60 million. The reduction is partly a function of some delays in receiving equipment and also decisions we have made to ensure we align capacity with demand. Thank you for your attention, and let me now hand you back to Heath to discuss the outlook for the year.

Thanks, Andrew. Moving now to Slide 12. I'll conclude with our outlook for the balance of the FY '23 year. We believe the RWC business is well positioned. Our exposure to the R&R sector will continue to underpin our volumes. It is important to highlight that our products are most commonly used in low-cost nondiscretionary projects and that our brands are widely recognized as the go-to solutions for this type of work. Our ongoing execution focus will deliver cost savings and efficiency gains as we head into FY '24. And as we unwind inventory that we bolstered during supply chain challenges, we will deliver strong cash conversion. Looking more broadly, we are encouraged by household balance sheets that are generally in a strong position and that unemployment rates remain high. But of course, it has to be noted that we faced a highly uncertain economic environment. Continuing rises in interest rates and high inflation are both clear risks to consumer confidence. We are certainly mindful of this and the corresponding risk of an economic downturn in any of our key markets. Looking specifically at each of the regions, starting with the Americas. We believe that underlying volumes in the second half will be down on the prior year due to lower levels of remodeling activity. This is in line with the results and experiences of other remodeling oriented building products companies. The prior 2 financial years were particularly strong from an R&R perspective, and we achieved top line annual growth rates in the order of 20%. A moderation in remodeling activity levels in the face of slowing economic growth is not unexpected. Nonetheless, we continue to believe that we will deliver better-than-market volume performance regardless of the macroeconomic environment. In Asia Pacific, lower new housing starts pose a risk to our volume trajectory in the Australian market, and we have seen volume growth moderate through the first half. In EMEA, we have a watchful eye on the U.K. market. The U.K. did hold up very well in the first half, better than most were predicting at the start of the period. Nonetheless, the economy remains quite challenging, and we are, therefore, cautious about the volume outlook for the second half. Within Continental Europe, we think the first half trend of lower volumes will be sustained in the second half. In all our markets, we believe larger remodel projects can be impacted by general consumer confidence. Offsetting that, we continue to expect smaller remodel projects and ongoing repair and maintenance activity to be more resilient. Let me conclude on Slide 13 with our priorities for the balance of the year. On pricing, we've come through a very dynamic 2-year period. At this point, we believe our pricing is appropriate relative to the commodity costs we've seen in recent times. In the event, we see further cost pressures, we will look to make pricing adjustments as necessary. Cost reduction initiatives will be a priority. As mentioned earlier, we have implemented a new cost reduction program targeting $15 million in cost savings in FY '24. This is in addition to the continuous improvement initiatives we have underway in this financial year and in addition to delivering on the EZ-Flo cost synergies. Delivering the improvement in operating margin for the second half is also critical. And it's fair to say that higher operating cash flow and improved cash conversion is absolutely in the spotlight. On the new product front, our ongoing new product program is the backbone of our business and will continue to deliver every period. Further, we have output from our long-term development actions to be announced on March 28. This is focused on our core and will be an important part of our next growth phase. We're excited to set all this out for you next month. ESG actions remain on our radar, and we will pursue the targets outlined in our recent ESG report. During the first half, we took a hard look at our organizational structure, especially in the Americas. We have made a number of changes, which will partially contribute to the $15 million of savings noted earlier. We will be set to head into the FY '24 year with an operational size and shape appropriate for the near term while also able to deliver on our long-term growth objectives. In summary, we are very focused on executing on those activities we can control to take maximum advantage of the resilient sector in which we operate. And with that, I will pause, and we can open up to questions from those on the call.

[Operator Instructions] And we will take our first question from Lee Power with UBS.

Just digging into your trading commentary, January, broadly consistent with trends observed in the first half of '23. That feels like it's more positive than given what you did in the first half and given your uncertain economic slide where you give some more details of what you're expecting in the second half. Can you just maybe give a little bit of color around what you've actually seen in the different divisions. And if that is the case, whether you've seen that kind of fall off that you're expecting?

Frankly, not a lot to add to the release. I think the comments were trading has been broadly in line with the trends of the first half. But beyond that, nothing to add really.

And then just on pricing, I mean, I think you've got a comment in there that despite what we've seen with things like copper, I know that it's come back and it's slightly below $9,000 a tonne now that you're comfortable with your pricing. Do you want to give us an idea of what level of copper that you feel that you would start to need to look at pricing increases again?

Certainly. So the copper peaked above $10,000, and that's the cost we're seeing certainly in the first quarter, we saw flow through the balance sheet, and we had to carry that relative to our pricing, the way the timing of pricing was implemented. Copper now, as you've seen, has been hovering around that $9,000 mark. And per our comments in the announcement, we think where our pricing is at today is appropriate for that level of copper and sort of on average, the other costs we're seeing at the moment.

And then just a final one. The $15 million additional cost savings, full benefit by $24 million. Is that $15 million? Is that achieved in the period? Is that some sort of exit run rate? Or how should we think about it?

Lee, this is Andrew. That $15 million is what we would expect to achieve in FY '24. And should -- that should be very close to our -- to an annualized run rate by the end of the year. Within the year, I think we said that we would see $2.5 million realized in FY '23 in this current year.

We will take our next question from Daniel Kang with CLSA.

Just, Heath, I just wanted to expand on your outlook commentary, where I guess you're indicating weaker volume in all markets. I understand that, that's based on your view of lower remodeling activity. But to what extent do you see further destocking or inventory normalization to be factoring your lower volume expectations?

Thanks, Daniel. We saw that destocking activity eased through the half. It was certainly a feature of the first few months of the year and we spoke about it at the quarter. That did ease as the half went on, it does feel stabilized at the moment. And I would also note that there have been a few other companies in our industry have made similar comments, whether it be in water heaters or [ forcets ] and so on. So some movement early on feels as though it's in a more stable position right now.

Right. So fair to say that you're not really factoring in much further destocking in the second half?

That's correct, yes.

Andrew, in terms of your cost-out initiatives, just wondering if these targets of $8 million and $15 million in '23 and '24 net of inflationary costs. What sort of inflationary costs should we factor in?

So look, they are not net of inflationary costs. I just wanted to make that very clear. Look, in terms of inflation, I would expect that this hope that inflation stabilizes somewhat close to what we've seen in the latter part of the half. That would be my expectation. But of course, there's a lot of factors that come into play. But they are just to make that clear, they are not net of inflation.

We will take our next question from Sam Seow with Citi.

Just a quick one on price. Just want to clarify your outlook. You had, I guess, in the first half. Are you expecting that to slow as you cycle the higher comps? Or are you still pushing through price rises?

Sam, this is Andrew. We are still working on price. I think EMEA has got a price that will go through in February. Outside of that, I think you hit the nail on the head. We are comping higher prices in the second half than the first half. And so that rate year-over-year will decline from 8.5% in that first half to a rate in the second half that's a little less than half of that amount. So think about something in the 4% to 5% range in the second half.

And just on exit rates, it looks like in terms of volumes, at least the second quarter, went up okay relative to the first quarter. I guess, is that correct? And then interested as disappears better than R&R more broadly, just to comment on -- is that kind of market share or your resilience? Or do you think that's more of a timing issue as the backlog unwinds?

I think it's generally resilience of the sector that the we're in is we -- the point we made a couple of times in the presentation, we're at generally the smaller end of the renovation remodel projects then augmented by repair and maintenance. I think the larger remodel projects are the ones that have slowed, we're not quite as exposed to that. That feels more like residential new construction generally. So I would say that the nature of that market that we're in is what has helped keep our volumes. And as we compare our rate, we were up single-digit revenue ex EZ-Flo. Looking at the industry in general in that fourth quarter as far as we can tell, the industry looks to be down single-digit revenue. So there's quite a gap there for us, which we're pleased about. That's 1 quarter. We think that's a fundamental, but we'll continue to execute and watch how the second half unfolds.

And just maybe quickly a follow-up. So do you see your margin improvement guidance predicated on that kind of resilient volume assumption? -- kind of like that low mid-single digits…

Well, look, certainly... Certainly, our margins are volume dependent. There's no question. You can see the decline period-over-period is heavily linked to volume. So that will always be the case. With the volume sort of in keeping with what we've indicated, which is generally down volumes on the prior period for the second half. The actions on costs, we think is what will drive our margin improvement in the second half.

We will take our next question from Lisa Huynh with JPMorgan.

I just had a question on EZ-Flo actually. Can you talk about the underlying sales growth in EZ-Flo for the second quarter, just given there was a part period ownership in the PCP?

Look, certainly, Andrew is just digging through some numbers there. I would say, generally, that market has -- those volumes have come off from where we were originally expecting. Our growth there is based on share gain, shelf space gain, and we certainly had some projects running through. I think the overall market, though, has come off similar to the rest of the plumbing market.

Well, if you take and adjust for the prior year to include a full period of EZ-Flo sales. And you're looking at that second quarter, revenue is going to be down on Q2 of this year versus Q2 of last year, and it's somewhere in that mid-single-digit range.

And then in terms of the new product innovation, look, I know you're launching the product in March, but will there be any sales boost for the FY '23 or '24 from the sell-through of this product through the trial?

Nothing significant in '23, no.

What about 24?

Yes, we would expect to see benefit in '24.

We will take our next question from Brook Campbell-Crawford with Barrenjoey.

Just on the guidance for operating margins to improve in the second half. Do you mind providing us with a range of expectations for that step-up that you would expect in second half?

Brook, this is Andrew. I don't think we're going to comment on a range of guidance. I do think we're pretty confident that margins will improve. And again, that's given the current trend that we see in volumes and assuming that those continue, albeit it will be down year-over-year from a volume standpoint we expect. But when you think about the input cost that we see and you follow that copper through our P&L, that should give us a boost as well as the cost reduction activities that we've been working pretty diligently on and we'll start to see come through in the second half.

And I guess the expectation for improved cash conversion in the second half, do you have a sort of a broad range you can provide us on why you expect that to step up to in the second half '23?

We expect that cash conversion would be back to our normal levels in the second half. And for us, normal cash conversion is somewhere in the kind of the low 90% range. I think that's kind of how you need to look at second half. We are working very intently on inventory and not just the unit volumes, obviously, on our shelves will come down, but we also expect supply chains to continue to normalize, which will allow us to bring down some of our safety stock and will reduce in-transit inventory. But think about cash conversion in that normal range in the second half.

And just last one for me. No tree in the account to give the sales by product category, which is very helpful. Can you just talk through what drove the big increase in [ Holdrite ], which I guess is the installation solutions big increase year-over-year. If you could provide some color on what drove that? And then also why the post-collecting sales is underperforming other fittings of the category?

Dealing with the second part first part first, there's some pretty significant currency moves due to the Speedfitting in U.K. there. And when you adjust for currency, that feels more like mid-single digits upwards. I believe that in that installation solutions category, there's some EZ-Flo product as well. It's EZ-Flos in the -- our last 3 spread across those last 3 categories, which is certainly moving the needle there.

We will take our next question from Peter Steyn with Macquarie.

Could I ask for you to just step through the $15 million cost reduction intent in a little bit of detail. So where is it coming from? What are you hoping to achieve at a more specific level? Because obviously, this is going to be on top of everything you've done in the supply chain context post EZ-Flo.

Yes, certainly. Look, first thing I would say there is the thinking in relation to our CI goals for the year and also EZ-Flo synergies were based on higher volume production, all still entirely valid. But as the volumes come off, it really means there's additional things you can look at. And that's what's driving that $15 million. But I would step through there's really 4 broad categories, I guess. First of all, operating efficiencies. So we looked to the factories. We always will aim for operating efficiencies. And I think situation like this forces you to look harder and be perhaps a little more aggressive than you normally would. I would also say, though, that we are going to take advantage of automation, which we've implemented over the last 18 months. The timing of that is quite good. And with a lower volume, it actually allows us to put a greater proportion of our production through automated assembly versus manual assembly. So that's the first category. Second one, supply chain. There has been, as you know, a whole lot of disruption there. And we've had to put a lot of additional time and effort and people and tools and floor space and whatever else to work over the last period. We are really focused on that area, and that will also yield additional savings to where we were first thinking. We are, of course, working closely with our vendors, leveraging our volumes better where we can. And that's particularly relevant, I would think with EZ-Flo. So beyond what we were originally thinking with EZ-Flo and looking at where we can utilize their volumes in conjunction with our volumes and also how we can use their team. They have a strong sourcing team here in the U.S., but also a strong sourcing team in China. So how can we use those teams to yield more than what we originally had on the radar. And then finally, making changes to the structure of the organization. And clearly, we're talking people here, and this is definitely the most painful part of this. Look, and I think if I can take a moment, it's worth elaborating a little more on the structural side of it for our 2 largest regions. Americas first. I would say this actually is a good time for a change in leadership. So Will Kilpatrick, as you know, is leading the Americas organization now. He has led his team really well through the assessment of where we're at. There is a real benefit in a fresh set of eyes. They started with the proverbial blank sheet of paper in determining what the organization should look like. And what they've set out is good. I think they're absolutely on the right track. I think it's sufficiently tight and streamlined to get through the near term, but it's appropriate for us to remain focused on core -- the core products from the development point of view and to drive future growth. Restructure, as you know, Peter, it needs some tough decisions. They funded them, they made them and now they're managing through it. Interestingly compared to EMEA -- that market got tougher earlier. So they really were mobilized some months ago, also funding those challenging decisions. An example, the head count in EMEA is -- as we speak, is down around 10% from the original plan. So they haven't reduced the head count by 10%. They've just held a freeze and really tightened the reigns. As I mentioned, more automated assembly coming through utilizing that CapEx we've spent there in the last 18 months or so. And the benefit of that automation and that really tight management, I think, really came through in these results today. So their volumes declined quite an amount from the peak and their margin rate held to 32%. I think that's a great outcome, certainly a credit to Edwin and his team over there. So although we're at different places, we do know what to do. We do know what levers to pull. Many of us have been through this before, albeit at some years since we've last had this situation, and we're just getting on with it. So over taking a few extra minutes there, but that's -- there's a lot in it. And we really have got our arms around it and are getting almost at Peter.

And then just a quick one for Andrew, following up on the cash conversion comment you made earlier. I mean if you've got supply chain normalization, wouldn't you expect inventories in a broad sense to come down? Now I realize that there's obviously price that's s higher. But would you not expect not just a conversion improvement, but an absolute reduction in your net working capital in due course.

Peter, yes, I would agree with you that as supply chains normalize, you would expect inventory to come down. That's correct.

So the fact that you would still just go to a normalized level of cash conversion as opposed to an outsized level of cash conversion does that presuppose that these other movements in the opposite direction?

Look, I would hope we would do better than what I've stated. But at this point, in terms of providing an expectation, I would say that it's back to normal levels in the second half. There will be, as we've seen in the first half, there will be an increase in inventory associated with the new product launches, and we'll obviously talk more about that in March. But that's one thing that would offset, for example, the supply chain normalization.

Last quick one. The willingness of channel to take further price adjustment if you were to come to that. Could you describe your expectation there?

I think we would tackle it the same way we have in the past. I think we've shown a good track record there. We got 8.5% in this period, was on top of a period where we had 7.5% or 7.9% or thereabouts. So I think the strength of our brands, the importance of our -- or the significance of our products in an overall portfolio through a distributor is -- and look the nature of the products, frankly, is such that we are certainly prepared to have whatever discussions we need to have.

We will take our next question from Simon Thackray with Jefferies.

On Page 16, just in terms of end market exposures. I just want to confirm, so you've got repair there in the Americas at around 55%, 60%. Is that right of your end market exposure? So I confirm that?

Around 60%. I think we said at Investor Day 2020.

And EMEA is sort of combined in R&R at around 80% or so. But just there's nothing there in APAC. I just want to confirm, as in terms of the end market exposure for APAC, that's still -- we're still more leveraged to new?

Yes, that is absolutely correct. So a little more than half of our external sales, so not in the company in Australia or new construction. And I think it puts it globally at about 5% of our total business or thereabouts.

Yes, that's perfect. I just want to make sure we're still on the right page on that one. And then just the discussion you've given and Andrew, thank you for the sort of brief on pricing as well. Other than the EMEA price rise in February, which you've called out, and I think you've answered Sam's question to say, look, pricing will comp sort of 4% to 5% in the second half versus second half '22. I think that's my understanding. So just to confirm, other than that EMEA pricing, you think the pricing is right. We're not to expect any further pricing in the second half. I'm only asking that question against the background inflation that you've still got wages and other things that are still weighing. But is that -- am I clear on that? No further pricing in the second half?

I think that number that Andrew or out there is correct. I would say, though, it's certainly not correct to think that it's a static environment. It is by region, by product group, by channel is we will assess it on an ongoing basis. So I think at this particular point in time, and especially from an Americas point of view, our biggest market, I think where our prices are today are appropriate for the cost we're seeing today. Now we've got lags and so on for that to flow through. But I think in terms of your ability to talk more pricing or frankly, your ability to resist requests for price reductions at the moment, it's about right. So there's nothing to talk about in terms of giving anything up. But I think there's also 2 day nothing to talk about in terms of moving upwards. Copper moves from 9 to 10 and onwards. There's a conversation to have for sure resins, which resins are tough because they do move around a little bit. There's so many that we have to sort of take a weighted average approach, but resins move upwards again, and there's got to be a conversation there. And look, as you say, there is wage inflation, there's health insurance and so on. And frankly, our CI programs and our cost savings become quite important in relation to those costs, and that's why we are mobilizing.

Yes. That's fair. And just in terms of your customer relationships, which have always been very good. You're still in terms of [indiscernible] your metrics and winning awards and all that sort of stuff and no change there. Just a discussion about demand and price and the usual can you drop your price because we want to keep our largest -- is that where we are?

I'd like to think we spend more time talking about new products and shelf space and opportunities to improve the productivity of our distributors' footprint. And look, by and large, that is where most of our conversations are right now. I mean there's that admin stuff you have to deal with, of course. And -- but no, I think we like that we're coming through what has been a really disrupted supply chain period so that we can get back to expanding the right amount of effort on delivering the products and therefore, turn all of our attention to the future in new products and new opportunities. So -- but the state of the relationships are -- remain solid, soon.

I mean it wouldn't be an RWC clout talking about M&A opportunity. It's been a core part of the growth strategy. And just in terms of -- I'm not suggesting you're about to make an acquisition, but just in terms of your observation of people's expectation and valuation multiples in the current market for bolt-on opportunities.

Certainly remains an important part of our M&A out of our overall strategy, filling gaps in our product range. I think it's quite variable out there at the moment in terms of expectations. I think in some places, they've reached sensible levels. There's still some pretty amazing deals getting done, although they tend to be at the so-called transformational end of things where we play, I think it's feeling reasonably sensible, but these -- this is a long-term ongoing activity for us, of course.

We will take our next question from Peter Wilson with Credit Suisse.

Just to start with EZ-Flos. You noted deteriorating sales in the second quarter due to slowing appliance sales. Can you give us an idea of just how weak those trends are for EZ-Flo and perhaps compare them to what was in the business case when you acquired the business?

If I could just jump in first, Peter, this is Heath. I would say that market generally is closer on average to the broader plumbing market. I spoke before about the -- where our core legacy products reside have been up single digits versus the overall revenue, whereas the overall market looks like it's off single digits revenue. The EZ-Flo core business feels more like that on an ongoing basis. Of course, what we said at the time of the acquisition is that we thought we could grow it faster than market. We said 10% growth. We certainly still believe we can outgrow the market based on share gains as we gain shelf space and so on. And those projects are underway. We've had some wins. There's additional activities that we will be rolling out in the coming quarters. So we think we can outcomp the market. The market, though, is at a different position to where we started.

And Andrew, just to follow up some earlier questions on the -- the cost out for FY '24. Should we expect the $15 million cost savings, is that on top of continuous improvement? And therefore, might we expect continuous improvement to take care of inflation and then the cost reduction to come on top of that? Or is that not correct?

So we haven't really taken a look at continuous improvement for FY '24, and we'll certainly do that before we report year-end results when we speak in August. Look, we'll continue to look and continuous improvement really should be part of the narrative on an annual basis. But at this point, we just don't have a line of sight whether we're going to have continuous improvement on top or not of what is a pretty significant cost reduction effort in the $15 million that we talked about.

And perhaps just looking backwards, so the half just gone. So the Slide 6, a $10.5 million increase in manufacturing costs, which exceeded the $6.2 million cost reduction. Manufacturing costs, how much of that was EZ-Flo versus the underlying business? And what's your kind of expectation looking forward there?

Yes. EZ-Flo in that bucket is going to probably end up being a couple of millions of that number. When you show the $10 million, that's increasing cost within the factory. So that's going to be higher cost of things like MRO, spare parts, higher wages that we paid, the employees in the factory and also higher cost for services as well. Lower volumes also impacted recoveries. And therefore, we had some efficiency cost in the first half, and that's also part of that $10 million number.

We will take our next question from Harry Saunders with E&P.

Firstly, I just wanted to get back on to price. Of that sort of 4%, 5% you talked about in the second half. We continue to see what the EMEA price rise has put through been, obviously, well in excess of that sort of range. So perhaps could you just break down what sort of price realization you're expecting in EMEA for the second half and for Americas?

Harry, we really don't want to give too much of a breakdown by region. When I talk about 4% to 5% price comp in the second half, that's going to include what the EMEA region did in February, but it's also going to include pricing actions that took place late in FY '21 last year as well as the first part of this year. And so that would include really all regions, APAC and the Americas in terms of some of the things that we've done earlier this year or either late last year.

And would that also include the price notification today in March for APAC?

Yes.

And the next question I had was it's great to see the margin improvement quarter-on-quarter sequentially, but noticed APAC margins actually went backwards about 110 basis points in the quarter. Could you just talk through what happened there and what your expectations are in the second half for APAC?

I think the APAC margins were down. I think that recoveries in the factories were certainly impacted as we look to bring down inventories overall. That certainly played a part. I think the biggest impact is just the higher copper costs given the amount of brass product that's produced in Australia. I think we would expect margins in all of our regions to improve around the fact that copper prices should come off a bit in the third quarter in the P&L because if you look back 6 months ago, that drove a peak in Q1 and that kind of remained flat into Q2. And then we should see the benefit when copper dip, we should see that in Q3. But then, of course, it's come back up again. So sequentially, Q4 commodity impacts will be a little bit higher than Q3. But generally speaking, those commodity improvements should drive an improvement in margin in APAC as well as the overall group.

And just lastly, on EMEA volume trends, it looks like the U.K. had pretty strong new construction volumes and also R&R volumes in the half. Just wondering where that's tracking now and also just how you think you performed relative to the market there.

Look, that's our most interesting market, Harry, for sure. It has been for a while. It's the one we specifically called out as one we were watching. I don't think we've got anything in particular to offer beyond what we've already said there, to be honest.

We will take our next question from Keith Chau with is MST Marquee.

Just a couple of quick ones from me. The first one, with respect to the new product launch, I know we'll be talking about that more in March. But can you confirm whether it is the expansion fitting set or it's a new product set outside of that?

Look, Keith, we'd really like to leave that to March. I mean we -- there's multiple years' worth of effort going into this, and this forum really doesn't do justice to try and expand…

What the key focus or priorities are? And has influencing the business over the last, call it, 6 months or please join or maybe less than maybe 5 months.

Look, we'll generally, I think, benefited from spending a couple of years working with Ed. Edwin is now across residential new construction, large remodeled, the smaller remodeling projects, which is kind of where we live, and then certainly in repair and maintenance. I mean maintenance, you can -- you dig into the numbers on maintenance, and it's almost linear from 20 years back, year-on-year. It happens. Repairs a little more variable than that and then the small remodel again and onwards. But that is the end that we play in, which is the benefit that we're getting. But I think that broader plumbing market feels from a revenue point of view, like it's down single-digit numbers for sure.

Just second on head count, I just wanted to go back to your comments that you made on the 10% head count reduction in your hiring freeze. Can you also just give us a sense of your group level head count changes?

So I would say, just to be really clear, is that 10% head count number was a variation from their original plan. They have not reduced their head count by that much. So that's quite an interest that plan, if you think for this financial year, really, we started putting that together back in March, April time, and the world has moved quite dramatically in the subsequent period. So they have had a freeze in place. So they have reduced their numbers somewhat. But overall, it's relative to the plan. Certainly, it varies by region what we're doing. And the actual head count reductions vary from sort of 2%, 3% to 5% range is where we're at.

At this time, there are no further questions. Mr. King I'll turn the conference back over to you for any additional or closing remarks.

Heath , just one question online. Will the $15 million cost savings program impact customer service levels at all?

Absolutely will not be the case. So delivering for our customers, absolutely critical, are making sure that we're continuing to work on those key core products that drive our business 2, 3, 4 years out is also key. So we've been very selective in where we've made those changes.

Thanks. There were no other questions on the webcast.

Okay. Thank you, Phil. Well, with that, I think we will wrap up. Thank you very much, everybody. Appreciate your time this morning. Have a good day.

This concludes today's call. Thank you for your participation, and you may now disconnect.