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

Hello, and welcome to the Reliance Worldwide Corporation Half Year Earnings Call. [Operator Instructions] Please be advised that today's conference is being recorded. It is now my pleasure to introduce Chief Executive, Heath Sharp.

Good morning, everyone. Welcome to RWC's Half Year Earnings Call for the period ended December 31, 2023. This is Heath Sharp, CEO of RWC. Joining me here in Atlanta is Andrew Johnson, our Chief Financial Officer. In addition to our first half results, we will also provide an overview of the Holman Industries acquisition, which we announced last week. Let's start on Slide 3, with an overview of the first half. Our core repair and maintenance market remained resilient in all geographies. This has undoubtedly underpinned our performance for the half. In addition, the impact of our continuous improvement activities is evident in this result. These actions have enabled us to maintain our operating margin despite lower volumes. So we are pleased with the strong financial result overall, and in particular, the performance of the Americas region. Sales in the Americas were stable year-on-year, while operating margin improved significantly. This improvement is a result of focusing on those initiatives directly within our control. A key element was on our new product activity, which I'll address shortly, but certainly, our cost initiatives, including the restructure undertaken 12 months ago, have made a strong positive impact in the Americas region. Trading conditions in EMEA continued to be challenging. New construction and large remodel projects in particular have been negatively impacted. While our repair and maintenance activity proved resilient, our overall volume did decline. Nonetheless, we were able to take a number of actions to hold margin only slightly below 30%. Towards the end of the period, we undertook a more comprehensive restructure, similar to that in the U.S. last year. We will see the benefits going forward. At a group level, our resilient top-line and careful cost control, coupled with disciplined working capital management, led to another period with strong operating cash flow. This enabled us to further strengthen our balance sheet. A portion of this financial capacity will support the funding of the Holman acquisition. I Would like to call out our new product activities. They certainly contributed to the overall result, and particularly in the Americas. Headliners, of course, are SharkBite Max and PXA-a pipe and fittings, but they were supported by EZ-Flo gas appliance connectors and new HoldRite products. I am particularly proud of our team's execution of the SharkBite Max rollout. This is an immensely complex and challenging product implementation. Now people in the Asia-Pac region and in the Americas region really stepped up to deliver this project. Importantly, the customer reaction has been tremendous. We have delivered a clearly better, simpler, faster to install product. And we are also putting more value on our distributors' shelves. To summarize our performance for the first half, overall, we have delivered in line with our expectations and the guide we set at the beginning of the period, the Americas has done a little better than we had guided while EMEA has seen weaker conditions. Importantly, we are maintaining our guidance for the full year. Turning now to our financial highlights on Slide 4. Net sales declined 2% in line with our guidance. Adjusted EBITDA was 3% lower. We had several one-off items in the period, which Andrew will note. Adjusting for those, net profit after tax was up a little to $67.7 million. Cash from operations was up 61% on the prior corresponding period at just under $152 million. That represented a cash conversion rate of 121%. Lastly, following our review over the last several months, we have announced changes to our distribution policy, applying for this half and going forward. These changes will see us making future distributions through a mix of dividends and on-market share buybacks. I'll hand over to Andrew now to talk through our financial performance in more detail.

Thanks, Heath and good morning, everyone. On Slide 5, we have set out our performance summary for the half year, and there are a few highlights to note. The first of these is that sales were down 2% on the PCP. This is in line with the guidance we gave at the start of the year and the first quarter. We did have some favorable currency exposure in the period with the British pound stronger against the U.S. dollar. On a constant currency basis, sales were 3% lower, well in line with our outlook statements. In terms of operating margins, we signaled that EBITDA margin in the first half would likely be lower than the PCP. As you can see from this result, we're only 10 basis points down on the prior period margin. So very nearly in line with what we achieved in the first half of FY '23. We feel, this is a strong result, given that we saw lower volumes in APAC and EMEA. This performance has been primarily driven by the cost management initiatives we have underway in all regions. We did incur some one-off cost in the first half, totaling $12.2 million related to closing down a Supply Smart business and a restructuring in the EMEA region. Supply Smart is a direct sales business, which was acquired along with the EZ-Flo acquisition in 2021. We have made the decision not to continue selling direct to end customers. Instead, we will maintain our focus on working with our channel partners in North America. As a result, we will take a $9.4 million non-cash write down of intangible assets related to the Supply Smart customer relationships. We will also incur $400,000 in severance cost in related to Supply Smart for a total of $9.8 million. In EMEA, we undertook a restructure in the first half and incurred $2.4 million in restructuring costs. Adjusting for these one-off costs, impact was flat to the prior period. Turning now to Slide 6, and looking at our EBITDA performance in a little more detail, at a group level, we saw slightly lower volumes. Price was positive, although the impact was relatively small in comparison to prior periods. While we did see some input costs reduce over the PCP, overall, our manufacturing costs were slightly higher driven by under-recoveries as a result of lower volumes and reducing inventory. SG&A costs were also higher driven mainly by increased employee costs. We were able to offset these higher costs with cost management initiatives primarily in the Americas. On Slide 7, we have set out the Americas' performance highlights. We have guided to sales being down low single digits, and the stable year-on-year sales performance is ahead of this guidance. Note the PCP included the benefit from a winter freeze in the U.S. While there was no freeze in the first half of FY '24, we did see freezing weather in January. However, we expect the impact to be lower than last year. As Heath mentioned, a driver of our sales performance has been the rollout of new products, and we've listed them on Slide 7. The SharkBite MAX rollout is going to plan. We are now in the final phases of this product rollout, and we expect this to be substantially complete by the end of this financial year. The rollout of PEX-a pipe and fittings is also going well. We have finished the initial retail rollout and are now introducing this product into the wholesale channel. We got further traction with the EZ-Flo gas appliance connector rollout during the period. And finally, HoldRite launched a new range of fixture boxes in the half, and they have had a successful entry into the market. So overall, we had a broad range of new product initiatives which have contributed to the Americas sales performance. From a cost price standpoint, I want to stress that while we have seen input cost ease back from their highs, input costs such as copper and zinc are now aligned to the levels which are reflected in our pricing. The Americas EBITDA performance was very strong in half, with adjusted EBITDA margin up 310 basis points to 19.9%. This is partly due to the transfer of SharkBite manufacturing and assembly from Australia to the U.S. We estimate that the impact on EBITDA in the first half was around $5 million. Also positively impacting earnings were the cost reduction initiatives we have undertaken in the Americas. You may recall that 1 year ago we announced a restructure of the Americas organization and we saw the benefits of that in the operating performance in the first half. Turning now to Slide 8, and our results for Asia Pacific. Total sales were down 21% in large measure due to the transfer of SharkBite manufacturing to the U.S. External sales were only down 4%. New home starts were down 15% in the 12-month ending September, but the resilience of residential repair and remodel underpinned sales. Lower volumes of SharkBite manufacturing following the transfer to the U.S. impacted operating earnings in APAC. We estimate that there was an AUD 9 million impact from the shift in production of SharkBite components from APAC to the Americas. As we mentioned above, this reduction in APAC was substantially offset by commensurate increase in Americas operating earnings. So the net effect at a group level is not material. This is a permanent change, so we'll feature in APAC's results going forward. A second driver of APAC's EBITDA performance was the reduction in SharkBite manufacturing activity to lower inventory. In the prior year, we had built up inventories ahead of the SharkBite MAX launch. The reduction in manufactured volumes led to lower manufacturing overhead recoveries, and this impacted margins. So while the first half EBITDA margin contraction was a little higher than the 1/3 guidance we gave previously, our guidance for the full year continues to be for APAC EBITDA margin contraction of around 1/3 versus the full year of FY '23. On Slide 9, EMEA's net sales were down 7%. External sales were down 12% versus the 10% we noted in the first quarter. This reflects a further softening in the second quarter, specifically in the UK. UK external sales were down 9% on the PCP, with plumbing and heating sales down 6%, and specialty sales down 20%. Specialty sales include water filtration and drinks dispense products, as well as products for telecommunications and automotive. These products are tied to broader economic activity, which was weak for the half. It was a similar picture in continental Europe, where the majority of sales are in water filtration and drinks dispense. We saw continued reduced demand as a result of the economic backdrop in virtually all European markets. Despite the weaker top-line, EBITDA margin in EMEA held up well at 28.8% due to tight cost management. We will continue to pursue cost savings with the aim of ensuring our cost base is aligned with volumes. The restructure we took in EMEA in the first half will help mitigate lower volumes, and we will continue to look for further cost reductions in light of the current demand conditions. On to Slide 10. Talking briefly to our cash flow performance, we have had another very strong cash flow performance this half, with cash generated from operations up 61% to $152 million and operating cash flow conversion of 121%. Net working capital was $77 million lower versus the prior comparative period, driven by $52 million reduction in inventories. We have included a chart on our Americas SharkBite inventory mix. And as you can see, first-generation SharkBite now accounts for less than 20% of our total SharkBite inventories in North America. The team have done an outstanding job in managing through the complex transition to SharkBite MAX and ensuring we manage down our first-generation inventories. On Slide 11, you can see the reduction of $139 million in net debt since December 31 of 2022. As a result, net debt to EBITDA has declined from 2.12x last year to 1.56x for the 12 months ending December 31. For the full year, we have slightly lowered our CapEx forecast to a range of $50 million to $55 million, and that's down from $55 million to $60 million that we indicated at the start of the year. For the half year, CapEx was 3.6% of sales, which is slightly below our longer-term range of 4% to 6% of sales. And with that, let me hand you back to Heath.

Thanks, Andrew. On slide 12, we have outlined our new shareholder distribution policy. As we have flagged previously, our ability to frank dividends has reduced significantly due to the geographic mix of our earnings. The acquisition of Holman does not materially change this. Following a review of our policy, including consulting with many of our shareholders, we have made the changes set out here on Slide 12. We will continue to target distributing 40% to 60% of annual NPAT, but the mix will change. We now intend to distribute half of this in the form of dividends and half through on-market share buybacks. This new distribution policy will be implemented from this first half FY '24 onwards. For this period, we have declared a total distribution in line with the PCP's $ 0.045 per share. Per our new approach, this yields a dividend of $ 0.025 per share. The balance will be applied to an on-market share buyback of $17.8 million. This total distribution equates to 70% of reported NPAT and 53% of adjusted NPAT. Now turning to the outlook for FY '24. On Slide 13, we have summarized the guidance we have previously provided and updated as appropriate. At a group level, we are confirming guidance for the full year. We continue to expect sales to be down by low to mid-single digits compared with FY '23. We are continuing to target stable EBITDA margins. We expect ongoing strong cash generation with a cash conversion rate in excess of 90% for the second half. For the Americas, we have upgraded our top-line guidance. We now expect sales to be broadly in line with FY '23 after adjusting for the closure of the Supply Smart business. As we saw in the first half, we expect the full year EBITDA margin to be higher than FY '23. In Asia-Pac, we continue to expect external sales to be down by low single digits in line with the first half. We expect the EBITDA margin for the full year to be around 1/3 lower than FY '23. This is consistent with our previous guidance and an improvement on the first half for the reasons Andrew outlined. In EMEA, we expect full year external sales to be down by low double digits on FY '23, consistent with the run rate we recorded in the first half of this year. This is slightly lower than our previous guidance, which was for external sales to be down by high single digits. This reflects the further deterioration in market conditions, particularly in the UK. EBITDA margins are expected to be lower than FY '23, but as we have mentioned, we have taken action to better match our costs with the volumes we are seeing. Finally, before I turn to the Holman acquisition, I'd like to confirm our focus for the balance of FY '24. Of course, our people will always be at the forefront of our thinking, particularly in relation to safety. Nobody deserves to go home less healthy than when they arrived at work. Everyone safe every day. We will continue to invest in our people and we will continue to progress our ESG actions. We are now at exactly 4 years since COVID first affected our business. This has been a tremendously challenging period with ongoing unexpected external impacts. Our focus during this time has been on day-to-day execution and it has served us well. This execution capability gives us confidence that we can deliver on the programs noted here. We have rebased the EMEA cost structure and we are actioning our continuous improvement initiative in all regions. This will augment our profitability. We will also maintain our focus on working in capital management to deliver another strong cash result. Of course, growth activities remain tremendously important for RWC. SharkBite Max and PEX-a are at the center of these plans, but we will also continue to deliver on a myriad of smaller projects. These ongoing product enhancements and range extensions are the backbone of our above-market growth and will continue. And we are certainly also working on the next major initiatives for future years. Of course, we now have the Holman acquisition to complete, ready to provide multiple additional growth avenues. Overall, our goal is to ensure that we continue to make progress on strengthening the business and our product offering, while also pursuing efficiency and cost management initiatives. This will ensure that we are well placed to benefit from the upswing in demand as economic conditions improve. So that completes our review of our first half performance. I'd like to now briefly discuss the acquisition of Holman Industries that we announced last week. On Slide 15, we have set out the overview of the Holman acquisition. I won't dive too deeply into the detail, but just cover off the key points here today. The purchase price is AUD 160 million, which represents a multiple of 7x EBITDA of AUD 22.9 million for the 12 months end of December. We expect this acquisition will be EPS and ROCE accretive from the first full year of ownership, that is FY '25. We will use existing borrowing facilities to fully fund the acquisition. As we indicated last week, this increase will result in a performer leverage ratio of 1.9x net debt to EBITDA. This is comfortably within our target leverage range of 1.5x to 2.5x. Holman's revenues for the last 12 months were AUD 192 million. Combining Holman with RWC will essentially double our external revenues for the APAC segment. Holman's complementary product range will effectively double the size of our target addressable market in Australia. On Slide 16, we have set out the strategic drivers for the acquisition. We really are excited by the opportunity to add Holman to our Asia-Pac business. It will provide us with multiple additional levers for growth going forward. The primary driver for us will be Holman's range of water-out, drain waste and vent products. Holman have established a strong market position in the water-out part of the plumbing market. This has been a part of the market that RWC has been looking to enter in each of our regions. In residential repair and remodel, residential new construction and commercial construction, water-out and water-in are closely coupled elements of the same plumbing market. Adding the home and product suite to our existing portfolio in the Australian market will create significant opportunity. We will be looking to expand the penetration of home and plumbing products across our broader combined distribution footprint. The second major driver for us will be the diversification of our channel mix in Australia. Holman has a tremendously strong position within retail distribution in Australia. By comparison, RWC is largely centered around wholesale plumbing distribution. Holman has a formidable reputation for operational excellence in servicing the retail sector. For those who want to touch and see for themselves, I would encourage you to walk the relevant aisles of any mining store. You will see the breadth of product offering and the in-store presence that Holman has built over the last 20 plus years. We have met with the Holman management team as part of the due diligence process. There is a great culture and a real depth of talent in the business that we will be able to harness. We are really pleased that the founder, Wally Edwards, is going to remain involved for the next 2 years as we combine their businesses. So I will stop at that point and open up the call to questions, both on the half-year results and Holman. We will take questions first from those on the conference call, and then Phil will convey any questions that have come in via the webcast. Thank you.

[Operator Instructions] And our first question comes from the line of Lee Power with UBS.

Heath, can you maybe just talk a little bit about the focus of the big box channel in the U.S. just about pricing as we go into the second half? Like, obviously, you've done quite well on the new product side. I guess everyone hears reports around potential price deflation and the focus of big box. Is that something that we should think about or is it just solely linked to raw material inputs?

Look, there's a couple of major aspects. We've talked, Lee, previously about the freight and the shipping and some of those charges were surcharges that have come off. When we get to the primary driver of our cost, though, as you pointed out, is the commodities. And at the moment, our pricing is pretty much exactly aligned with the commodity pricing at the moment. So Andrew noted that in his presentation. You'll recall there was a period where we were absorbing some of those costs that were a little bit higher than the pricing, but at the moment it feels well aligned.

Okay. Perfect. And then maybe just on Europe and I guess the UK specifically, like How far below normal, like as you said, it's kind of gone from the COVID, we're a long way past, but we had before that Brexit and we've got a regional dispute in there as well. Like how far below normal volumes do you think we are? One. And then 2, I mean, there's obviously been pretty messy results for a while. Like do you think there's anything else going on in the result as far as you can see around share changes or anything else that you've noticed over the last kind of 12 months?

Certainly, that volume has come off a lot, Lee, I mean with an overall double-digit revenue decline and as you know there's been some pricing in there that points to a volume decline that's even greater than that. We have done quite a bit of work comparing where we're at to our peers and taking a whole lot of feedback. It's certainly a valid question to ask about share position. We don't believe we've lost share, but I think it's fair to say we're not complacent at all on that issue and we're looking really closely at where we're at and very focused on meeting our customers' expectations, which is the best way we can protect that share under the current environment.

And our next question comes from the line of Peter Steyn with Macquarie.

Andrew, just a quick question around the cash flow performance and particularly that inventory position. Clearly, you expected a lot of it with the transition to Max. But can you give us a sense of whether you're comfortable that, that is a sustainable position on a go-forward basis?

Yes, thanks, Peter. No, we do feel like, as we go through the second half, that cash conversion will be thereabouts 90%, which is historically where we've tried to target, maybe a little bit better. And that is a sustainable level. We do expect to continue to work on inventories, and there could possibly be some further reductions if we're successful with that. But generally speaking, where we ended the first half is a level, we feel like we can sustain.

Right. And then just to further expand on Max's benefits, if you -- could you comment on any sense of an uplift in penetration trends under Max from a sales cadence point of view, and what [ you're ] seeing there?

Thanks, Peter. I don't believe it had a particular dramatic impact in the results, any penetration increase. I mean, as you know, a really good year for push to connect. The penetration might increase by a point overall into the market. So the ability of SharkBite Max to change that significantly or it just isn't going to change that significantly. It might improve it a little bit, but it's not really going to come through in the results. I think what's quite important about SharkBite Max, is that we're getting the additional value that we saw in the product before we launched it. We're seeing that value be realized for ourselves and importantly for our distributors. And that is being accepted by the end users based on them getting a better product that's simpler and easier to use. So the rationale for doing it in the first place has been proven. We think it will incrementally improve the penetration, but it's not going to double it overnight or change a 1% to a 2% penetration.

Our next question comes from the line of Daniel Kang with CLSA.

I just wanted to ask in terms of your guidance, it does imply that there's a slight improvement in terms of your outlook. You were previously looking for low to mid-single-digit decline. And now you're looking for low single-digit decline. What are the drivers behind that performance of North America?

I thought we were guiding to that being unchanged. So previously we did say it's low to mid-single digits. I think we're at that same point. I think where we have changed is that the Americas, we thought we were pointing to low single digits down. We think the Americas will be in line with '23. So a slight improvement there and, of course, a slight weakening in EMEA. But for a -- at a consolidated level, it should bring us to about the same position.

Okay. And just in terms of your guidance for the full year for stable operating margins, it does imply that the second half is going to be -- is going to show some improvement on the first half. Is that likely to be driven by the cost savings coming through?

This is Andrew. I think cost savings will be the primary driver of the improvement. I think we also expect, as you would typically see in our second half, that volumes will be a bit of a tailwind as well, which will help out. But those are the 2 main drivers.

And our next question comes from the line of Harry Saunders with E&P.

Firstly, just one thing on margin profile into the second half and then into FY '25. Given the stronger first half margin than you perhaps guided to, given it's pretty much in line with PCP rather than lower, but sort of the unchanged flat full year margin guidance, just wondering sort of, I guess, the nuances there. Should the full year be sort of all else equal a bit better than you previously thought, albeit sort of still broadly unchanged? And then you talked about various one-offs in the first half previously, like new product introduction costs. So just wondering if that profile still ramps up considerably in the second half.

When we talked about margins dropping in the first half, we really referred to that being driven by 3 things. One was the lower volume that we expected to see in the business. Secondly, was the under recoveries driven by lowering inventory. And the third thing was the start-up cost related to SharkBite Max as we started into those later phases that had a broader SKU range and we expected that to bring efficiencies down a little bit in Holman. I think all 3 of those things did impact the first half margin, however, SharkBite startup costs were a little bit lower than what we anticipated, and I think that we got ahead of our cost management initiatives a little bit better than what we expected, so that was able to offset that margin reduction that we expected. I think as you look for the -- as the margins progress in the second half and you look for the full year, last year, we ended the year with EBITDA margins right at 22%, and that still should be what you're thinking in terms of how we finish the year.

Great. One other question. Just if you could give a bit more color on sort of key business lines in EMEA outside of that core UK plumbing market, just given that they were down sort of significantly more than that sort of core market. perhaps some key drivers. I appreciate you sort of said broader macro, but anything else you could point to there?

Sure, Harry. I think when you consider our offering in EMEA, in Europe it is almost exclusively or heavily a fluid tech, so water dispense, water filtration product offering, and certainly they're more discretionary, those products. And I think that's where the bigger impact has come through, just less remodeling of offices and updating offices and commercial establishments. When you jump across the channel to the UK, there is our core plumbing and heating market, as you noticed, which has some exposure to new construction and remodel, but primarily it's a repair and maintenance business. And that resilience held that number up better than the fluid tech number. And then in the UK, we do have a little bit of fluid tech or specialty business there, which again, is simply a more discretionary product. Underfloor heating, for example, if you're concerned about the outlook, you probably won't put underfloor heating in your sort of backyard conservatory. So that's really the dynamic at play there.

And our next question comes from the line of Keith Chau with MST Marquee.

First question, just to follow-up on Harry's question. I might ask it the other way. Andrew, on EBITDA margins, so clearly performances were strong in the first half. Is there anything for us to think that you might not be able to get slightly better in a stable outcome? So maybe this is a bit nuanced, but previously with the guidance, were you thinking stable to down, and now it's possible for stable to up, even if you'd roll through those costs, cost out faster than expected and roll out of SharkBite Max was better than expected, you should be keeping some of those gains, shouldn't you, going into the full year?

We're certainly going to work towards achieving that, Keith, but we will definitely stay with stable margins for FY '24 versus FY '23. Volume is going to play a big part in that, and obviously, with the EMEA volumes being down and being our strongest contributor from an EBITDA standpoint, we're watching that closely. But all things considered, we're pretty confident with stable EBITDA margins over the prior year.

Maybe a follow-on to that, Andrew. Your cost profile, your targeted cost savings, they've gone from $18 million to $20 million. It seems like as you look through the business and as you've had change of leaders, you're turning the screws on costs and period on period, you're getting some more efficiencies here, there, and everywhere through the business. So how close to the end of the line are we for maximizing the efficiencies of the business? Can you give us a sense of where that's tracking?

Sure. Look, from a continuous improvement standpoint, you never really hit the end of that road, right. It's just something that from a business perspective, you need to constantly be looking to improve and drive efficiencies. So you're never going to hear me say that I feel like we're at the end of that in terms of what we might be able to achieve. I think we will have a good year from a cost-out standpoint. We will have savings that will carry over into next year. The team has done a really good job. But I think there's more to get there, Keith.

And just to clarify that point, when you say the carryover cost savings, if you don't explicitly cut costs from the business, what's that carryover benefit into FY '25?

Yes. So a big chunk of the achievement in this first half was carryover from last year and the second half of last year with Americas restructuring and some of the other initiatives that we kicked off. We've got the new round of primarily procurement savings that we'll start to see in the second half that will carry into FY '25. And think about the $5 million carryover of those initiatives that will -- what we've identified that will start in FY '24 that will impact this cost savings in FY '25.

And our next question comes from the line of Shaurya Visen with Bank of America.

And congrats on a very good half. Heath, first for you, just on your revenues, right, so you're saying flat revenues for first half. Can you give us a sense of the price and volume within that? And just secondly, on your guidance, right, you obviously raised your guidance for North America revenues. Could you give us a sense of what's driving that? So is it like the continued strength in new construction? Or is it that repair and remodel is tracking better than you had early expected? I had another one on cost, but perhaps you go on this first.

Okay. I would say the results of the first half, and I think it will be similar in the second half, will be primarily volume-driven. I think on Page 6 of the presentation, we called out the price impact in that EBITDA bridge, and it certainly is not the primary driver, and we don't think that will change particularly in the second half, so it's really volume. I would say what's changed, and I guess it's in the context of the Americas region from our initial guides to where we landed and then our outlook for the rest of the year, I think we're quite pleased with how well some of the new product initiatives have gone. The EZ-Flo gas connectors, for example, that was a program we had our sights on even at the time of the EZ-Flo acquisition, and we've been able to execute on that, which is pleasing and that helps. But I would say that the core of the business, as it has been for the last few years, is supported by the really quite resilient repair and maintenance sector, which is our primary business. Our products are used generally in smaller, less discretionary repair projects, water heater replacement, pipe replacements, if there's an issue and so on. And I think that still is underpinning our result right now.

Andrew, next one for you. Just very quickly, on your shipping costs and delays. I'm just curious to think, are the Red Sea disruptions that you're seeing, does it impact you at all? I mean, my sense is that some of your volumes from UK to APAC would be impacted as perhaps they take the Middle East route. But can you confirm that? And also, roughly, what percentage of your volumes go through that route?

Go ahead.

I was going to say, I don't think it's particularly disruptive from a logistics point of view. That's not a major shipping channel for us. I would think -- I would say though that the knock-on impact we are seeing, not dramatically but a little bit. So costs have gone up again more recently. Logistics, although we're not going through that channel a whole lot, logistics generally just got a little bit more complex on shipping. So not sufficient for us to have called out in our announcement, but it's taking more effort to manage that now than certainly what it was before the issue started there.

Our next question comes from the line of Rohan Gallagher with Jarden Group.

A couple of questions have already been asked, but in respect to Supply Smart, could you just sort of highlight the sort of annual sales and [ EBIT ] contributions from that business that we should be backing out for go-forward forecasting purposes, please?

Sure. In this financial year, in the first half, we saw approximately $9 million in sales. That number will be -- there will be some come through, and the second half will be lower than the $9 million, at least around $6 million or so. But it's going to be very, very low margins in the second half. So overall for this year, think from an EBITDA margin perspective, less than 10%. So total for the year, round about $15 million with EBITDA margins, pretty insignificant.

Okay. And in terms of the medium-term, obviously there's been some significant shift around your manufacturing from APAC to the Americas. I'm conscious that in the Americas, you're only partway through your automation process. What sort of sustainable margins over the medium-term would you be looking at, given the business mix now for Americas and APAC going forward?

I would say we're really quite a long way through the automation for SharkBite Max. That part of the factory is up and running really quite well. There were some startup costs for that, that Andrew referred to, which was partly why we were forecasting a lower margin rate in the first half. I think the teams did really well to get that up and running quite quickly. I think that cost will roll off going forward, and then it's just we're then into a normal continuous improvement activity. There's always efficiencies we will go after, but by and large, that's up and running really quite well right now.

And an extension to that, Heath and Andrew, just with respect to Europe, what -- how would you define the fixed versus variable cost structures, conscious of no imminent recovery in Europe? Can we see that capitulate further from where it currently is?

So the UK and Europe are really the toughest markets. Obviously and quite difficult to know exactly where it's at. There's a lot of noise there as we try and read what's happening. I think it's fair to say our plans for the rest of the year are based on there being no recovery. Essentially, we're planning the current run rate to continue for the half and honestly probably the whole calendar year. So we're not seeing an uptick there and frankly that's the reason why we went through a restructure at the end of the half. We simply had to change the shape of that business according to the current volumes. Nothing pleasant or easy about that, but it was a necessary action. Now we think that will, even with current volumes, we'll see the benefit of that in the second half and into '25. And this is a little bit, it comes back to Keith's question before as well, is I think we're comfortable with the structure that we have over there now. We're very cognizant of the capabilities there, what that business is good at, what they bring to the market and to us as a group. We did not want to damage that and we haven't. So as volumes return and at some point, they will return, I'm certainly not going to try and put a date on that, but when volumes return, then we will be very, very well positioned to take advantage of that with a business that will be very streamlined and ready to rock and roll. So tough period for sure for the UK organization. I'm really pleased with the way the organization's reacting. They've come back from Christmas. They've just grabbed hold of that business and they're getting on with it and I'm very pleased with where they're at. It's a simple approach over there. It's back to basics. Build the core product, deliver the core product, keep the customer content, and then move on to do the same thing the next day. So there's nothing particularly glamorous and there's no rocket science to that, but it's just everyday execution. That's where we're at.

Our next question comes from the line of Sam Seow with Citi.

Just on EMEA, I guess the sales are down 12%. They're clearly a bit softer than what you were initially expecting in August. Could you perhaps talk to what changed their versus your expectations, I guess, in the last quarter of the year? And then on the guidance, you've got double digits, which I guess implies you don't expect things to get any worse. Maybe just a couple of comments on why do you think the environment has inflected there in your guidance.

So certainly there was -- has been a move in that volume from probably just before the start of the half, it started to soften and then it continued to soften through sort of July, August, September. We -- as you've identified, we are currently not projecting an increase in that volume for the second half. We're also not projecting a decrease in that volume. That seems to continue at the current run rate, certainly from our planning point of view seems to be the prudent thing to do. As you know, Sam, those volumes are off quite a lot. I mean, at some stage you get to the point from a repair and maintenance point of view, where you just need so much pipe and fittings and valves to keep the place running. And it does strike me that we must be getting mighty close to that point. So I'd like to think up is the direction we go from here. I just think it will be a while before we get there. But I'd qualify all that by saying it is the most difficult market for us to read at the moment. We have spent a lot of times -- time speaking with our customers, our invoicing customers, our distributors, but also the contractors, the true users, by the time looking at peer, whether it be peer manufacturers or peers on the distribution side, and their numbers trying to judge where the market's at, and its tough right now. So we are essentially projecting to continue at the run rate we left the first half from a planning point of view for second half and frankly, I think in the first half, '25, but we'll get another opportunity to review that and update you in the next month, of course.

That's actually really helpful. Just another quick question there, maybe on margin. I guess a couple of years ago you produced a margin of probably 300 basis points higher. You've got SharkBite Max to cost-out synergy, some EZ-Flo, which should be accretive now, it basically implies structurally if you had or got to the same level of volumes, you should have a higher margin than back then. Am I missing anything there? Was there any key detractors that you'd call out as to why you wouldn't get back there?

I think that's fair. The business is a better business today than what it was 3 years ago. There's no question. Better systems, better tools, better capability. The UK is just so frustrating. That loss of margin, as you know, that is a high margin business. That loss of volume just is very painful. The converse, of course, is when the margin comes back, a lot of it drops to the bottom line and we're position to take advantage of that. We really do need to stop though and just reflect on what the Americas did over the last 12 months. I mean they went similar position I guess to where the UK was 12 months ago in terms of volumes had come off, took some really hard decisions here, went through a restructuring, leaner, fitter business and the benefits of that are obvious. I mean it's not very often that you get to present a 300 basis point margin improvement. And that was the work that the team did. There's no free kicks in that. They had to execute on all of that themselves. And I think that's a real indication of the capability of the business. And so we talk a lot about execution, but certainly we still are focused on growth activities as well. So new products are the driver of our growth. We are continuing to bring through new products. We do have a business that's leaner and fitter and more capable than it was a few years ago. So when the volume comes back, we are very, very well positioned to take advantage of that.

Our next question comes from the line of Kai Erman with Jefferies.

First one around Holman. Could you please talk to the capital intensity and D&A of Holman compared to the existing RWC APAC business?

Sounds like a question for Andrew.

They are a little lighter on capital than what we would typically see in that APAC business. That APAC business manufactures a lot of product, not only for itself, but also for the U.S. business. So, much more capital light than what we would currently have in Australia.

Perfect. And then just one on capital management. Going forward, do you guys expect to continue a 50/50 split between the dividend and buyback? Or will the buyback be used to top up the dividend based on where your cash and franking credits sit at the end of each half?

I think that from where we sit today and the decisions that the Board has made, we'll continue a 50/50 split between a buyback and a dividend. But stay within, in a total distribution perspective, we'd stay within that 40% to 60% of impact. But obviously just split, as I mentioned, 50% buyback and 50% dividend.

And our next question comes from the line of James Casey with Ord Minnett.

Andrew, just a question around the effective tax rate, 17.2% around about for the half. So you've guided there to 17% to 20% for the year. Is this structurally lower now? Does it stay around that 20% for '25, '26? Or should we expect to return up to around that 22% level again?

So for this first half, we were approximately 5% lower from an adjusted effective tax rate perspective. Half of that is related to just the regional mix and the fact that we had lower earnings in EMEA. And the other half of that comes from the fact that we have, as a result, there's lower EMEA income that's subject to U.S. tax. So from a structural perspective of that 5% reduction, I think half of that would continue going forward.

Okay. So around perhaps 20% for FY '25, FY '26?

Yes.

And our next question comes from the line of Harry Saunders with E&P.

I just had a follow-up in relation to an answer you gave before. I think you said in EMEA expecting to continue at that sort of run rate of down those single digits in the second half. And then I think you made a comment, frankly, in the first half '25 too. I'm just wondering, are you talking about a further reduction down those single digits first half '25? Or are you talking about effectively continuing at that run rate, so sort of flat?

Flat, continuing at their run rate. So the rate, the volume at which we exited the second half, to be honest, feels like a sensible volume to consider for the second half, and I don't think we're bold enough to predict the point at which it turns up, which is why I made the comment about potentially rolling into first half '25 as well. We've got a few months to see whether that '25 comment's valid or not, and we'll update you there. But certainly, in terms of the second half, you should consider it. We'll continue with that run rate, which is why we've tweaked that guidance for the EMEA region.

Got it. Also, just running on EMEA, any pricing plans there, given historically you've always had an annual price rise?

We're certainly looking at that right now. We have noted that quite a few companies within the industry have moved on pricing. That would certainly be our inclination at this stage. As I said, we are looking really closely at all the information over there to read where it's at before we make that call.

Sorry, one last one if I can sneak it in. Just on interest guidance, assuming it's sort of march completion on Holman, any idea where sort of interest guidance could land?

Yes, in our outlook statement, we've put interest, including the Holman acquisition, at [ $26 million to $29 million ] for the year.

Now I'm showing no further questions on the phone lines.

Heath, I've got one from online which hasn't been answered. The others have been answered. And it's whether we would consider further expansion in APAC through M&A beyond Holman.

Yes. I think the answer to that is yes. I mean, it needs to be on strategy, of course. I would say our focus right now is clearly on Holman. Very, very good company that execute very well. We need to understand that business, which is what our focus is going to be on in the near term. So down the track, absolutely not excluding additional acquisitions in Australia, nor in the Americas or UK. I think at the moment, The UK, we're far more focused on day-to-day operations, sort of the back-to-basics approach. I think in the Americas, though, certainly we're interested in acquisitions still if it's in line with strategy. Okay. Well, I believe that's all the questions we've had for coming in. So with that, we will wrap up. I would like to thank everyone for their time this morning. Thank you so much. Have a good day.

Ladies and gentlemen, thank you for participating. This does conclude today's program, and you may now disconnect.