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

Thank you for standing by, and welcome to the RWC Full Year Earnings Conference Call. [Operator Instructions] As a reminder, today's program is being recorded. And now I'd like to introduce your host for today's program, Mr. Heath Sharp, CEO. Please go ahead, sir.

Good morning, everyone, and welcome to RWC's 2023 full year earnings call. This is Heath Sharp, CEO of RWC. Joining me here in Melbourne today is our CFO, Andrew Johnson. We will make a short presentation to discuss the results. We'll then take questions from those on the conference call and also those joining via the webcast. I will start on Slide 3 with some overview remarks. Overall, we are pleased with how we finished FY '23. The world feels like a very different place to what it was when we set our FY '23 plan well over a year ago. This time last year, the market was up greater than 10%. Now, it feels like it's down 5% to 10% to 15% or even more. In that light, our final result with 9% constant currency revenue growth is gratifying. We have long presented that we believe we can consistently outperform the market. I believe we have shown that emphatically this year. I would note that '23 included a full 12-month contribution from EZ-FLO. In FY '22, we only owned the business for 7.5 months. So, FY '23 sales performance was boosted by a full year's contribution. Excluding EZ-FLO, we recorded 3% constant currency sales growth for the year. In FY '23, the business demonstrated its resilience in the face of macroeconomic headwinds in most of the markets in which we operate. Our end market exposure is predominantly to non-discretionary repair and remodel projects. This sector has underpinned our results in FY '23 and will continue to do so going forward. Of course, we have seen interest rates climb dramatically over the last 18 months. This has had a knock-on effect for new home construction and large remodel projects. The parts of our business exposed to these sectors were impacted. This challenging environment demanded another year that prioritized execution. This enabled us to deliver a solid financial result. Certainly, a highlight of the year was the strength of our operating cash flow. This was more than double the prior year. Our focus on inventory management drove this very strong cash conversion rate of 107%. As we indicated at the half, we saw an improvement in EBITDA margin performance throughout the year. We will talk to this more later in the presentation. Part of that improvement was due to the cost reduction initiatives we undertook during the year, which totaled $18.3 million. Over the last few years, day-to-day execution has been our focus, but we have also continued to invest in products and the business during this time. It was very pleasing in FY '23 to announce a couple of major developments. It really was a milestone year with the launch of SharkBite Max and PEX-a and Expansion Fittings in North America. We didn't see a significant contribution from these initiatives in FY '23, but they are foundational product ranges, which will be important parts of our future offering in the Americas. The launch of the 2 new products was enabled by the investment we have made in our Cullman plant in Alabama. We have also reconfigured our Australian manufacturing operations. We'll talk about that more shortly, but suffice to say that these have been very significant projects for the company. I think the team has done an incredible job in bringing these projects to fruition. We will look at our financial highlights in more detail on Slide 4. Net sales were up 6% on a reported basis to USD 1.24 billion. Adjusting for the appreciation of the U.S. dollar against the Australian dollar and British pound, we achieved 9% constant currency growth rate. Adjusted EBITDA was 2% higher on a reported basis and up 5% on a constant currency basis. We had a number of one-off adjusting items this year, which Andrew will talk to in more detail. Reported NPAT was up 7%, while adjusted NPAT was 4% lower at $155.7 million. Cash generated from operations was up 110% to $292.7 million. This represented operating earnings cash conversion of 107%. The second half was particularly strong from a cash flow perspective and this was driven by inventory reduction and cost reduction initiatives that we undertook. This strong cash generation allowed us to reduce our net debt. We recorded a drop on our leverage ratio from 2.1x a year ago to 1.69x at the end of FY '23. We've declared a final dividend of USD 0.05 per share, which is in line with FY '22. The dividend will be unfranked. Going forward, we don't expect to be able to frank dividends. This reflects the changed geographic mix of our business with Australia now accounting for well below 10% of earnings. Given this, we are undertaking a review of our distribution policy to consider what changes, if any, are appropriate. In light of franking credits, no longer being a feature of our results, there may be more efficient means of distributing cash to shareholders, including share buybacks. On Slide 5, we have set out the first of our operational highlights for the year. We launched in March, 2 new product ranges in the Americas; SharkBite Max and PEX-a and Expansion Fittings. As indicated at the Max launch, the rollout is being undertaken in 5 phases with the timeline out to the end of June 2024. We are really pleased with how that rollout is progressing. It is proceeding to plan and we are on track to complete the full rollout of Max by financial year-end. The response to the SharkBite Max product has been extremely positive. The findings of our extensive functional and pricing studies have been borne out. The improved utility of the product does support a higher price. Although, we are only mid rollout, many distributors have already moved on pricing and are reaping the benefit. With PEX-a, we have commissioned the first 2 PEX-a extrusion lines in Cullman. We will ultimately have 6 extrusion lines commissioned in the first phase of our manufacturing program. We are now rolling out product to 1,600 Lowe's stores and we expect to complete that by the end of calendar 2023. Once done, we will turn our focus to the wholesale channel. We already have wholesale customers ready to jump on board. On Slide 6, we have set out what we are doing on the manufacturing front. SharkBite Max has enabled us to transfer to Alabama all plastic component production and final assembly of the fittings for the North America market. Prior to Max, around half of SharkBite volumes were manufactured and assembled in Australia and exported to the U.S. With Max assembly -- will be in the U.S., all Max assembly will be in the U.S. Australia will manufacture the brass bodies for a large number of fittings, particularly the elbows and tees and other complex shapes. This change means that we will have less inventory on the water and will have shorter supply lines. This will improve our flexibility and efficiency in serving the North American market. Here in Melbourne, we have a fully integrated copper processing and brass manufacturing operation. Australia will remain the center of excellence for brass production within the group. The transfer of SharkBite component manufacturing and final product assembly to the U.S. will create headroom for the Asia-Pacific business to pursue greater growth within the region. Another important development in the Asia-Pacific region is a move to lead-free brass from 2026. RWC is in a very strong position to lead this change. Now, the standards have been agreed. We're getting on and working with our customers to have products that conform with the new standard ready for the market. With that, I'll hand over to Andrew to discuss our financial performance in more detail.

Thank you, Heath, and good morning, everyone. I'll start on Slide 7, where we've summarized our financial performance for the year. Heath has already touched on some of these figures, but let me go over them in a little more detail. We reported net sales of 6% and adjusted EBITDA of 2%. Net sales growth in constant currency was up 9% and up 3%, excluding EZ-FLO revenues. We continue to see the U.S. dollar strengthen during the year, up on average 7% against the Australian dollar and up 10% against the British pound. If we look at results on a constant currency basis, adjusted EBITDA was up 5%. Our EBITDA margin for the year was 22.1% compared with 22.9% in FY '22. While our margins were down a little due to higher input costs and regional mix, we were nonetheless pleased to see margins improve sequentially throughout FY '23. We achieved price increases of 6.5% on average across the group, although these did vary by region. Adjusted EBITDA includes both the one-off gain and one-off cost. In the first half, we recorded a $15 million gain on the sale of property in the U.K. And in addition, we have recognized $13.5 million in one-off costs across the 3 regions. These included EZ-FLO synergy realization cost of $4.3 million related to the rationalization of 4 DCs in the Americas shipping network. Costs related to our restructuring and cost savings initiatives totaled $6 million across all 3 regions. Lastly, impairments of equipment related to first-gen SharkBite along with the write-off of component inventory related to the transition to lead-free product in Australia totaling another $3.2 million. Heath has called out our strong operating cash flow performance. But I would like to add that I'm really pleased with how the business executed, especially with the inventory reduction in the second half. It was a great team effort and a real highlight of the year. On Slide 8, we've set out the EBITDA bridge. You can see that volume and mix did not have a significant impact on FY '23. Price was largely offset by higher input and manufacturing costs. The higher SG&A cost were principally due to the inclusion of a full 12 months of EZ-FLO in FY '23 versus 7.5 months in FY '22. Our cost-out programs were well executed. We achieved $18.3 million in cost reductions over the course of the year. Firstly, $9.4 million was from continuous improvement initiatives undertaken by all regions and ahead of our target of $8 million we set for the year. We realized a further $5.8 million from EZ-FLO cost synergies. We have now gotten very close to achieving the annual cost savings run rate of $10 million we identified at the time we announced the transaction to buy EZ-FLO. Finally, we announced at the half of $15 million cost-out program. This program is on track to deliver the full $15 million benefit in FY '24 and we realized $3.1 million of that in the second half of FY '23. Let's look at the regions in a little more detail now, starting with the Americas on Slide 9. Americas recorded sales growth of 13%. This included a full year contribution from EZ-FLO and also the positive impact of price increases. Excluding EZ-FLO, the Americas growth was 4%. A standout of the Americas result was the growth in EBITDA, which was 19% and the improvement in EBITDA margin, which was 100 basis points higher at 17.9% versus 16.9% last year. Margins were helped by lower costs for key inputs as well as cost reduction initiatives. Overall, we are satisfied with the progress we have made delivering on EZ-FLO's product and distribution synergies. We did see a slowdown in sales in the second half of the year as discretionary consumer spending on large appliance purchases declined, which impacted EZ-FLO's appliance connector sales. Turning to Asia-Pacific on Slide 10. It's fair to say FY '23 was something of a transition year for the Australian operations. As Heath noted, with the SharkBite Max launch, we've been able to transform more of the production of SharkBite by product to the U.S., and we started to see the impacts of this in FY '23. External sales for APAC were down slightly, which was a good performance given that the Australian new housing commencements declined by 21%. We estimate that 60% of Australia's end market exposure is to new housing construction, both stand-alone and multifamily. Intercompany sales were 8% lower, mainly due to the partial transfer of the SharkBite Max production to the U.S., which commenced in the second half. Lower intercompany sales and profits related to SharkBite Max transition had a negative AUD 5 million impact to EBITDA in the second half. And for FY '24, the SharkBite Max transfer activities will reduce EBITDA by $6 million in APAC. However, this will be entirely offset by corresponding benefit in the Americas region. Looking at EMEA results on Slide 11. Local currency sales were up 3% overall and U.K. sales were up 7%, mainly driven by price. U.K. plumbing and heating sales performance proved resilient, up 12% in local currency terms. It's fair to say that the market held up better than we were expecting at the start of the year. We believe that the U.K. business has significantly outperformed the broader market and this is a real credit to the EMEA team. Macroeconomic conditions in much of Continental Europe have been challenging and sales were down 5%. Germany is our largest single market within Continental Europe and has seen recession for part of this past year. Adjusted EBITDA for EMEA was down slightly and the adjusted EBITDA margin was 32.3%, which compared to 34% in FY '22. Let me talk briefly about our cash flow performance on Slide 12. We recorded a 110% growth in cash flow from operations relative to '22. And that in turn, saw us deliver an operating cash flow conversion figure of 107% compared to 52% last year. In FY '22, we were holding extra inventory as a buffer against supply chain disruptions. We did see supply chain pressures ease during the year and this has enabled us to start winding back inventory levels, which in turn drove that strong operating cash flow conversion. We are targeting further inventory reductions through FY '24. On Slide 13, we set out our net debt position. With a strong cash flow performance, we've been able to reduce our net debt by $116 million. Consequently, our leverage ratio has reduced from 2.1x net debt to EBITDA last year to 1.69x at the end of FY '23. We have total debt facilities of $1,050 million. And with the cash flow we generated, we've been able to retire more floating rate debt. This has meant that 55% of our debt outstanding at year-end was at fixed interest rates. Our average debt maturity is 5.4 years, so we believe we have a very strong debt structure. Looking at CapEx. The total for FY '23 was $42 million, which was lower than the $60 million we incurred in FY '22. A lot of that investment in '23 was for SharkBite Max and PEX-a manufacturing in the U.S. We will have approximately $5 million in investment associated with these projects in FY '24. Overall, we expect CapEx in '24 to be higher than 23% and fall within the range of $55 million to $60 million, which is broadly in line with our annual depreciation and amortization charge. With that, let me hand you back to Heath to discuss the outlook for FY '24.

Thanks, Andrew. Let's consider now the outlook for '24 starting on Slide 14. There is clearly a great deal of risk and uncertainty around macroeconomic conditions globally. As such it is impossible to predict what may happen in the year ahead from an economic perspective. We do believe, however, that our core repair and maintenance markets will continue to be resilient and somewhat resistant to economic cycles. Nonetheless, we are seeing more uncertainty in relation to larger remodel projects. Considering all this, we expect most markets, we will see lower sales in FY '24. As a result, at a consolidated level, we expect our revenues will be down by low single-digits. Despite this, we are targeting to maintain EBITDA margins in FY '24, consistent with FY '23. We're aiming to offset lower volumes through cost-saving initiatives and pricing actions. From a phasing point of view, we expect that our first half operating margins will be lower than PCP, as we pursue the inventory reduction that Andrew mentioned. This means pulling back on manufacturing and we will, therefore, have lower manufacturing recoveries in the first half of the year. Of course, we will expect this to show up in a strong cash flow performance for the half and the full year. Lower sales will also impact margins and we will also have some one-off costs associated with the introduction of the new SharkBite Max and PEX-a products. For the Americas business, forecasters, including LIRA are projecting lower remodeling activity with a mid-single-digit decline for FY '24. Higher interest rates has been a deterrent for people wishing to trade homes and refinance their mortgages. So, turnover of existing housing stock has been well down in the U.S. Historically, turnover of existing homes has driven larger remodel activity and this is a potential headwind for '24. On a more positive note, new home construction set looks set to rise based on recent approvals data. Even though this is only a small part of our business, this will be a little helpful for us. Considering all that, we do expect sales in the Americas to be down by low single-digit percentage points versus FY '23. We expect operating margin in the Americas to be higher versus 23% due to the transfer of SharkBite production to the U.S. This will be more evident in the second half due to the project phasing. Turning to Slide 15 and discussing the outlook for the Asia-Pacific segment. As Andrew has already mentioned, our end market exposure in Australia is 60% new home construction and 40% repair, maintenance and remodel. We expect that the 21% decline in new housing commencements in the 12 months ended 31st March will flow into our sales in Australia for FY '24. Consequently, we are expecting sales to be lower in the Australian part of the business. On top of that, intercompany sales will be lower due to the transfer of manufacturing and assembly of SharkBite Max. It's also worth noting that the components we now export from Australia to the U.S. or Max are lower in value than the fully assembled fittings that were exported previously. Altogether, we expect the Asia-Pacific EBITDA margin rate to be down by around 1/3 relative to where it has been due to the lower volumes and the change in manufacturing activities in Australia. EMEA is the market we are viewing with the most caution from a macroeconomic perspective. While the U.K. held up well for us in '23, we are more cautious on the outlook for '24. One marker of potential demand is new home construction activity, which has been tracking lower. We expect sales in both the U.K. and Continental Europe to be lower versus FY '23 and at an aggregate level down by low single-digit percentage points. EMEA is our margin -- is our region with the highest margin and any decline in volume will impact EBITDA margins. We finish on Slide 16 with comments on our focus for the coming year. In FY '24, we will continue our emphasis on safety. Everybody deserves to go home from work as healthy as they arrived. Our goal is zero harm. We are working hard to embed this approach throughout the organization. As we begin the new year, we are determined to continue outperforming the market and our direct peers. We do this via our innovative product solutions and our focus on creating value for our distribution partners and of course, underpinned by day in, day out, industry-leading execution. In terms of major projects, we will complete the planned SharkBite Max rollout. We will also begin to take advantage of our new PEX-a pipe and Expansion Fittings and production capabilities in the U.S. In Australia, our major project efforts will continue with the transition to lead-free brass. In a year when volumes incrementally declined in all our markets, we executed extremely well to hold margins at the level we have. Our goal is to continue doing so. Further, as we head into FY '24, our balance sheet is strong. We decreased net debt significantly during the year and are approaching the lower end of our target range. We will continue our strong cash generation into FY '24. It is clear we are operating in an uncertain environment. While we're not comfortable with this uncertainty, we are confident we can continue to execute at a high level and continue to outperform the market. During FY '23, we had to pull multiple levers to sustain margins in a tough environment. This has us match fit and ideally positioned as we move forward. When we do start to see a recovery in volumes and we're not forecasting when that might be, but when it does occur, we are poised to enjoy the benefits of volume leverage across a very tight and efficient operating base. This should be reflected in further margin improvement. And finally, we have and will continue to invest in our people, in our products and in our business generally. We are very confident that we are tremendously well positioned to reap the benefits of these investments in the future. Let me finish there, and we will open up to questions firstly from those joining via the conference call.

[Operator Instructions] And our first question comes from the line of Peter Steyn from Macquarie.

Heath, Andrew, perhaps I just want to pick up on your U.K. commentary or EMEA commentary in relation to operating leverage there. It certainly seems like the market environment lends itself to price action to offset some of the negative operating leverage that you mentioned. What would your views be there? And then could you just give us a bit of a sense inherently of your fixed and variable cost position?

Let me deal with the first point there, Peter. This is Heath. I would say the -- I mean, as you know, there's been a lot of price movement in the U.K. over the last couple of years as we've worked hard to offset inflation and maintain our gross margin dollars. The market there now feels like it's falling back to its normal process, which is an annual adjustment of pricing. I mean that's not a given because it's a pretty dynamic environment, but we feel it will get back more to that sort of action on an ongoing basis. Looking at the numbers for the '23 year, I think that U.K. market held up really well. I mean, we've been talking about this for a long time now. Haven't we? Every month, we're sort of expecting that, that to decline and it did soften a little bit as the year progressed, but it certainly didn't fall off the cliff. And that final result was driven by pretty solid volume and certainly driven by price as well, heavily driven by price, of course.

Andrew, you're going to comment on costs?

Sure, Peter. From a cost standpoint, we've talked about the variable and fixed portion generally in our P&L because the EMEA business manufactures quite a bit of their product. Then generally speaking, we would see in COGS that the cost base is roughly 25% variable, 75% fixed. And then when you get to the SG&A line item, that flips around 75% fixed, 25% variable. And those are rough guidelines. And of course, depending on how far volume falls, what you might think would be fixed becomes variable. And so there's, of course, mitigation and management efforts that go into trying to minimize that volume decrease. We did call out sensitivity in EMEA, around a 5% reduction in volume would derive a 100 basis point to 150 basis point reduction in EBITDA margin. You get to 10%, and then it's more like a 150 basis point to 200 basis point reduction. But those are mitigated impacts. And of course, the team, if we see that, the team would work very hard to make sure that we minimize that impact to margin.

Sorry, just to get that correct. Andrew, those are pre-mitigation numbers or post mitigation?

Those are post-mitigation numbers. Without mitigations, you're looking at 100 basis points higher.

And then apologies, one last quick question. Just on the U.S., really strong margin outcome in the second half out of the Americas, 19%. Would one think about that as an approximation of the forward run rate?

Well, we've only commented on margins for the first half of FY '24. And I think it's fair to say, as we've said, across the whole business that margins will be lower in that first half, I think it's also fair to say that for the Americas that margins will be lower in the first half than that 19% that you quoted.

Got you. I'll leave it there.

As we've said, just getting back for the full year, we expect margins to get back to the FY '23 levels for the full year.

[Operator Instructions] And our next question comes from the line of Samuel Seow from Citi.

Just following on there, you provided the full year guidance, which is helpful. Given, I guess, the fourth quarter implied negative sales there in the U.S. and the destocking in the big boxes, would it be fair to say you're expecting the first half to be a lot softer than the second half? Or any thoughts on the shape?

Hang on, I don't think we've mentioned anything about destocking big boxes, Sam. What was the question?

Sorry, just maybe just on the guidance. I mean, obviously, you've given us the full year guidance, which is helpful. Maybe any color on the shape, I mean, it looks like first half is going to be a lot softer than the second half.

Look, for sure. And as I said in my intro, the markets that we're in, in every part of the world has changed quite dramatically in the last 12 months from sort of overall market up 10% to down anywhere around the world 10% or 10% or 15%. And while we outperformed at both ends, we're not immune to that level of change. So certainly, our volumes declined during the course of the year. And I think that's fair to say that was in all regions. And that is what leads us to our commentary in relation to '24, where we think it will be down low single-digits for the year.

And then in FY '24 question on price, could you perhaps comment on the impact of the SharkBite Max rollout? And additionally, any price rises you've taken or expect?

So as I said, there was no real contribution in '23 from the Max Project or PEX-a for that matter. And in fact, I'd say we had net costs in '23 for that rollout. And as we said, we will still incur some costs in the first half of '24, but that diminishes as the year goes on. And then I think in the second half of '24, we do expect to see the benefit of our pricing rolling through. Although, I would emphasize that it is a phased rollout. So, we have completed the first 2 of 5 phases, but that's as we speak, which is according to our plan, but that's well under half the total number of SKUs that we'll eventually shift. So that's -- there's definitely going to be a phasing through '24 on the impact of Max. The full benefit of that we should be receiving or seeing in '25.

[Operator Instructions] And our next question comes from the line of Brook Campbell-Crawford from Barrenjoey.

Can you just provide some more color on the outlook for sales growth for EMEA versus the U.S., which I guess is low single-digit for both of those divisions, but the U.S. should be benefiting from new products and you're talking about EMEA being the most uncertain backdrop. So, just keen to understand more why you're seeing sort of low single-digit decline for both those divisions, despite, I guess, those 2 points around new products in the U.S. and most uncertainty in EMEA?

Sure. I think that's -- trying to get much more accurate than that, it's really quite difficult at the moment, which has probably led us to where we landed with a qualitative sort of guiding, if you like. Certainly, we are most focused on EMEA, U.K. and Continental Europe in terms of how that market is performing. It has -- in the U.K., particularly our core U.K. plumbing and heating business has held up really quite well. Surprisingly, so as we've talked about a lot over the last couple of years or the last 12 months, we've been sort of watching that, expecting that to fall and it hasn't. But that's still a conversation we have every month. So, we're probably more cautious about that market and in relation to that forecast is the one we're watching or that guidance, it's the one we're watching most closely. But based on what we see the information we've got to hand and a whole lot of certainly ahead of a [ stack kind of, it's ] really where we land.

And for the new products in the U.S., you might have included this commentary already, but what's the expected contribution to sales or sales growth or some sort of way for us to better understand the benefit from new products in the U.S. or Americas rather in FY '24.

Look, we haven't called out the specific benefit and it's a little bit hard. I'd say the benefit of PEX-a is going to be small as we roll that out. There will be some benefit of SharkBite Max. But as I said, just a second ago, that's phased. And so we certainly -- that will have a minimal impact on the first half and I think our costs will weigh that in the first half. We will start to see benefit in the second half. But it's ultimately, that's the contribution to our -- that will provide a contribution to our overall margin, which helps us meet our target of flat margins for the year and what will be, we think, an overall volume decline. So there will be a contribution there, which will help us get that margin target. We're not really in a position to call that more specifically than that. [Operator Instructions] Our next question comes from the line of Shaurya Visen from Bank of America.

A question again on SharkBite Max. So, you mentioned in the presentation that the rollout is on track. And can you just give us a sense of what percentage has been rolled out? I think in the past, you've called you were expecting 95% rollout in the first 12 months. And again, a related question on pricing on SharkBite Max. I think you've called out that you expect higher margins with a higher pricing offsetting higher costs. I'm just wondering on the pricing dynamic, right, just given on your comments on a softer end market. Does that argument on pricing still hold?

So look, overall, the SharkBite Max Project is going to plan. So as I said, Phases 1 and -- Phases 1 and 2 are done. We are shipping those products. That represents over 100 SKUs that are now shipping. But the final 3 phases are a lot more SKUs than that. Now, Phase 3 is underway. We're prepared for that. Shipping begins in September. Phase 4 by the end of '23, calendar '23. And then the final phase, which is the 1-inch SKUs will be done by the end of financial year '24. So operationally, it's tracking to plan. Not a small project, but it's going really well. The teams really are doing a great job there. So, the project is meeting expectations operationally and financially. Now, you were mentioning their shelf prices. And of course, we don't set shelf prices. That's up to our distributors. And we certainly expect that there would be variability in the way our different distributors handle their pricing out to their customers, variability in terms of timing and variability in how much price that was passed through and that's obviously their call. What I would say is that those distributors who have increased shelf price are signaling that, that price is being accepted by the end user. So, the key point there is that the utility improvement of the product is supporting the increased shelf pricing. So that's gratifying because we spend a lot of time doing those pricing studies as well as our functional studies. And it indicated that, that utility would carry the higher price, would justify the higher price, and that is playing out in the marketplace where the pricing has increased. So overall, as I said, it's a big complex project with a lot of -- with -- made more complex by the phasing, but it is performing to our expectations operationally and financially.

[Operator Instructions] And our next question comes from the line of Simon Thackray from Jefferies.

Actually, Andrew, one for you, just one I have been sort of mulling over in terms of the floating rate for the debt stack and you've paid down a good chunk of capital or borrowing this year. What's your sort of assumptions? I know you're saying interest, you're expecting to be $30 million to $33 million or $30 million to $31 million, I can't remember which and you've just delivered sort of $33 million. Just step us through how we get to your interest rate assumptions? And is there any kick up in the lease interest in that calculation?

Yes. There's no kick up from a lease standpoint. So, we have signaled interest expense in FY '24 to be between $28 million and $32 million, I believe. And we fully expect to continue to pay down debt. We'll obviously pay down the variable interest rate debt first. So, you expect to see the fixed portion continue to increase. Currently, fixed portion is a little less than 4%. And then our floating rate is north of 5.5% or so currently. So that should only improve in terms of the overall interest rate as that mix to more fixed rate debt continues or is a higher part of our debt mix in FY '24.

So, does that imply you're having sort of a target for where you think your leverage finishes at the end of '24?

Yes, we obviously have a target or a view on where we think leverage will end in '24.

Would you share that?

Well, there's a lot of moving pieces. I expect it will be lower than where it is now, but I won't give you a specific number.

No, that's fair. That's fair. And just in terms of -- I know we've stepped through this, we're expecting weaker margins first half versus better margins in the second half. I think you've been pretty clear on that. Just a really small one, more housekeeping than anything, Andrew. Just there's been a bit of CapEx. There's been a bit of investment. There's been some change with new products. The D&A expectation for '24 versus '23 is pretty flattish. Is that what we probably would have expected given the investment? Or is that fully captured all the investments that have been made in new products and et cetera?

That should fully capture the investments and the depreciation on those investments in '24. It's -- I think we called out $50 million to $55 million in depreciation for '24. And yes, that number includes depreciation on those new areas, et cetera. Fully capture the investment and depreciation.

[Operator Instructions] And our next question comes from the line of Lisa Huynh from JPMorgan.

I guess, I just had a question on APAC. Can you talk to us about what you think underlying EBITDA and I guess, margins did ex the volume declines into company sales just on an underlying basis?

Lisa, could you repeat that question?

Yes. Sorry, just a question around just APAC's margins and EBITDA, just what you think it did on an underlying basis, just given there was a big swing in the intercompany sales line.

Look, I think that as we said, a lot of moving parts in APAC, it's really hard to get a view on underlying. If you look at the external sales, so, excluding intercompany, those external sales were only down slightly, roughly 1%, which we feel like is a really good result given the headwinds that the new construction side of the business basis. So overall, I think the APAC held up fairly well. When you get to the EBITDA line though, there are certainly a lot of moving parts.

Because I guess as we move into next year, you talked about volumes being lower on just commencements dropping. And also, I guess, we're going to see a step-up in the declines in intercompany sales as well. So I guess, can you just talk about the phasing of shifting the manufacturing to the U.S.?

Sure. I mean that's going to happen progressively over the course of FY '24, obviously finishing at the end of '24. And we did say that we expect APAC EBITDA margins to be down by 1/3 from the FY '22 level. And that's a result of both the SharkBite Max manufacturing move or mostly assembly of that product to the U.S. but also SharkBite production volumes overall will be down as we continue to manage through inventory and our inventory reduction efforts. And so margins down by 1/3, of that 1/3, think about half of it related to the Max transition and transfer pricing adjustments and the other half related to strictly volume and production of overall SharkBite product being lower.

Sorry to harp on about this, but just one follow-up. I think there were comments relating to the component parts being manufactured out of Australia being lower value. Are we going to get a dollar value where the intercompany sales line will eventually settle at?

I think so. I don't think we're going to give that number right now, but we should see that settling throughout FY '24 and then have that business kind of on a run rate basis exiting '24 into where we feel like it will land for '25 and beyond.

[Operator Instructions] And our next question comes from the line of Harry Saunders from E&P.

Firstly, I'm just wondering if you can talk through current trading trends in July and August, particularly EMEA, but also anything in other regions?

Harry, look, we're not going to provide any commentary on trading SOFR this year. It is ultimately moves from month to month and even, frankly, from quarter-to-quarter. You just shouldn't extrapolate whether you think it's a good thing or a good month or a bad month. So no, we're not providing any commentary on the SOFR.

And just a follow-up on that. Are there any assumptions, in particular, sort of underpinning your guidance for EMEA to be down low single-digits? Perhaps could you talk through sort of contents for Europe versus what you think would happen in the U.K.?

Well, I think generally, we believe the difference between the U.K. and Europe will continue. And as we called out in our results, the U.K. -- our U.K. core business outperformed the European business throughout '23 and we think that will continue to be the case in '24. And when you aggregate those and a lot of uncertainty and moving parts that there are, but when you aggregate those, the best we can sort of get to is that low single-digit outlook for those combined for the year.

And just on that U.K. market as well, have you got an estimate in particular for the U.K. of what your estimate is for the new construction versus remodel and repair?

Not particularly. I mean, look, at a granular level, we've got that, but we've never sort of tried to break that down directly in relation to our products. The nice thing again about our U.K. business is that most of our exposure is to the repair and remodel sector. So, we're around 75% of our business in the U.K. or in EMEA is repair and remodel, which gives us a nice sort of defensive position in a market where new construction is really challenged as you are now seeing.

And just on EMEA margin impact that you're sort of flagging a 5% volume decline 100 basis points to 150 basis points. I noticed the wording potentially. Is that sort of flagged before any input cost tailwinds that potentially could benefit EMEA in '24? Well, look, that's a really important point because at the moment, we're honestly, we're not seeing a lot of input cost tailwinds. Certainly, we've seen some easing of shipping and internal freight in all of our markets. In some cases, we've had to give that back in terms of pricing. Not a big component of our cost, but that's really the only one we've seen easing. When we talk about our major cost component from an import point of view, copper, brass, zinc, and polymers, we're not seeing any tailwinds. There's no benefit and certainly from a pricing point of view, there's nothing to give back because we haven't seen a benefit. I mean, Andrew that's my view on what...

I'll agree with that.

So that's really how it looked to us at the moment, Harry.

And just one final one, please, on margin as well. The stable operating margin outlook, just to be clear, does that include all of the cost out programs excluding that sort of $15 million cost out?

Yes.

[Operator Instructions] And our next question comes from the line of Keith Chau from MST Marquee.

First one, Heath, just want to go back to the price comment. So, I think you mentioned earlier that the U.K. was going back to a more normal cadence in response to Harry's question. You talked about not needing to give any input cost tailwinds back because you haven't seen any. So, can you give us a sense of whether you think the business can achieve price increases this year outside of the SharkBite Max product?

So, we think we will have some pricing yielded in '24. It varies a little bit across regions. It's not going to be anywhere near the level it has been the last couple of years as we've been chasing that significant inflation, but it will be positive. And in the U.S., as you know, that SharkBite Max will be a pretty significant driver of that, although we'll see that more in the second half than the first half given the phasing.

So, if you think about the quantum, we're talking low single-digits, is it broader inflation recovery? Is that the kind of broader price increase you're expecting for this year?

That feels pretty sensible. And back to my comment about the U.K. where that appears -- that it needs to play out, but that appears like it's falling back to its normal process. That's kind of what we've always sort of talked about that sort of a couple of points of pricing on an annual basis. Now that has to happen, but that's how it feels at the moment. So, I think what you said is pretty reasonable.

The second one, with respect to SharkBite Max, Heath, you mentioned rolling that out and it's going according to plan. Can you help us understand which channels you are stepping up prices for SharkBite Max? Are there any particular channels of customers where you haven't seen price increases flow through yet? And ultimately, for those that haven't raised prices yet for SharkBite Max, when do you expect that to happen?

So, 2 really quite different questions there. In terms of how it's performing for us from a pricing point of view, it's -- we're happy with where it is. And it's across all channels and it's to our expectations. So I'd say that's quite a different issue to the shelf pricing or the pricing out the door to the ultimate end user. That's going to take a while for that to all shake out. I mean some of our distributors have a view of changing prices the day the project is announced or the new products announced, some will wait until the very end of the phasing. Some will implement pricing on the way through based on a particular, when they think there's enough on the shelf to, in terms of number of SKUs to, to justify them and I mean there's all sorts of reasons there that we don't really control. I think -- so honestly, it's going to take potentially the full year before that shakes out and normalizes. And that's not particularly unexpected. I would say the important point for us is those who have moved price are getting the price and it's been accepted. There's no pullback on it. So to some extent and this is inevitably a manufacturer's view, I guess. But in some respect is that if you haven't moved price, you're leaving dollars on the shelf, but everyone's got their own sort of policies and processes and that will play out in due course.

And then just as a follow-on, you mentioned Lowe's, you mentioned some other customers in the channel, but one particular absent name is the largest retail distributor in the U.S. Can you provide us some sense of where your discussions are with that customer, regarding shelf by Max and/or Expansion Fittings, please?

Keith, I think you'd be surprised if I was prepared to talk about the status of discussions with individual customers that the specific management of Lowe's was in relation to PEX-a, which is a pretty clear visible project. So, there's really nothing to offer beyond that.

I thought I'd give it a crack. And then just a very last follow-up, just to cover off on the risk. There have been some impact on shipping lanes recently. I think it relates to your EZ-FLO business, potentially some shipping issues related to the Panama Canal, which have had an indirect effect from West Coast to China shipping in recent weeks. Has that been an issue for Reliance or EZ-FLO. Any impact on that respect?

No, no. First, I've heard of it, which is embarrassing, but no. So, it's not an issue for us at all, Keith.

[Operator Instructions] And our next question is a follow-up from the line of Sam Seow from Citi.

Thanks for letting me have a follow-up. Just want to clarify that point in your outlook statement about inventory reduction initiatives underway in FY '23 that will continue into FY '24. And yes, just if you could expand on that. And so I can get my head around what you're talking about specifically?

Sam, this is Andrew. We're not going to give specific numbers in terms of our view on how much inventory will reduce. I think the comment was there just to say that inventory management will continue to be a strong focus for the business. And generally, what we said is that we expect cash conversion back to that normal level of around 90% for the business. And so that's kind of where we see those efforts and how that will play out from a cash standpoint. But it is going to definitely be a focus for the business in '24.

[Operator Instructions] And our next question is a follow-up from the line of Harry Saunders from E&P.

I just had one follow-up question. Just wondering if you're seeing any M&A opportunities potentially that you're considering?

Nothing in particular to call out, which is our normal approach is, yes, it's still on our radar. We're considering what options are out there. There's been discussions that have come and go, which feels the same as that, as it always has, still an important part of our long-term growth strategy for sure. So, nothing though to call out particularly there, Harry.

[Operator Instructions] And our final question from the phone lines comes from the line of Niraj Shah from Goldman Sachs.

Just a quick one for me. I guess, you haven't sort of provided in the past for a reason, but your EMEA R&R at about 75%, would you hazard an estimate on the repair versus remodel split within that?

We haven't split that down. We haven't split that down. It's an active ongoing project trying to get better clarity there, but we haven't got it to a point that we'd be comfortable to put it out there in a rush.

Thank you. This does conclude the question-and-answer session of today's program. I'd like to hand the program back to Heath Sharp for any further remarks.

Very good. So, we will wrap it up with that. I appreciate you all taking the time to join us this morning. Have a good day. Thank you.

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.