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

Thank you for standing by, and welcome to the Reliance Worldwide Corporation Half Year Earnings Call. [Operator Instructions] I would now like to hand the conference over to Mr. Heath Sharp, Chief Executive Officer. Please go ahead.

Good morning, everyone. Welcome to RWC's earnings call for the 6 months ended 31st December 2024. This is Heath Sharp, CEO of RWC. Joining me here in Atlanta is Andrew Johnson, our Chief Financial Officer. Let's get started on Slide 3 with an overview of the first half. Overall, we are pleased to present these results. I'm very proud of the way our teams executed during the half. The environment remains challenging, but again, our people did an excellent job to stay focused on those things they can control. Their sustained efforts delivered another solid outcome and leave us very well positioned as we look forward. From a broad economic perspective, there was no noticeable improvement in our end markets in the first half. Despite official interest rates easing in the U.S. and the U.K., this did not impact underlying demand in these markets. So our performance for the half needs to be assessed against the backdrop of weak home improvement markets and weak residential and commercial new construction markets. Given these conditions, we are pleased with our financial performance for the half. The resilience of our core nondiscretionary repair and maintenance business underpinned our performance. We grew our sales ahead of market and delivered a step-up in earnings. Continued strong cash flow has enabled us to further repay debt and reduce leverage. A key highlight of the half has been the integration of Holman with RWC. We are executing well on the revenue opportunities and cost-out synergies we identified at the time of acquisition. A good example of this has been the rollout of SharkBite into Bunnings stores. On the cost front, we rationalized 2 distribution centers in Australia during the half and have a third DC to address in the current period. We have continued to make good progress on our manufacturing strategy. Clearly, with the rapidly evolving tariff environment, we have deferred some of this work until we gain greater clarity. I will speak to the issue of tariffs in more detail later. In EMEA, we have had a focus on lifting the operational performance of the business. We have started to record significant improvements in key operating metrics for the manufacturing business in the U.K. We expect this will deliver improved operating margins and customer delivery metrics in the future. I would also like to make mention of the ERP upgrade to SAP S/4 HANA, which was completed in the half. ERP projects don't normally warrant a mention, but this upgrade program was a clear success. It was delivered on time and within budget and with minimal operational impact on the business. It is a credit to the capability of the IT team here at RWC and the steadfast support of the finance and operational teams. Turning to our financial highlights on Slide 4. We believe this is a very strong performance given the weak market backdrop I noted previously. Net sales increased 14.8% to $676.5 million. This result included an initial 6-month contribution from Holman, which we acquired in March 2024. Excluding Holman and the Supply Smart business we exited in 2024, net sales were up 3.8% on the prior period. Operating earnings were also up strongly with adjusted EBITDA up 15.2%. Adjusted EPS at $0.098 per share is up 14% on the PCP. Cash generated from operations was $127 million, representing a cash conversion rate above 88% -- for this half, we have increased the interim distribution amount from $0.045 per share to $0.05 per share, split equally between dividend and share buyback. It is pleasing to see the reported EPS result reflecting the positive benefit of the share buyback program undertaken last year. I'll now hand over to Andrew to step through our financial performance in more detail.

Thank you, Heath, and good morning, everyone. On Slide 5, we have set out our performance summary for the first half, and there are a few highlights to note. The first of these is that sales were slightly ahead of guidance at the group level. Holman was a strong contributor, and we are pleased with the progress the team has made in integrating the businesses and delivering a solid earnings result. As Heath has mentioned, we saw strong growth in operating earnings with adjusted EBITDA up 15.2% to $143.8 million. From an operating margin perspective, excluding Holman, we recorded a 100 basis point increase in EBITDA margin to 22.2% compared with 21.2% in the PCP. This is in line with the guidance we provided last August. When you include Holman, our adjusted EBITDA margin was up 10 basis points on the prior period to 21.3%. This increase in operating margin was assisted by higher volumes in the Americas and APAC regions and also our cost-out programs, which all 3 regions did a really good job in executing. Cost savings for the half totaled $10.8 million and were driven by procurement savings, prior period restructuring in EMEA and also includes $1 million in early Holman cost synergy realization. These savings helped to offset cost inflation, particularly higher copper costs, labor costs and freight. We incurred $1 million of one-off costs in the period. These related principally to the Holman integration and final costs related to the closure of the 2 U.S. distribution centers tied to the DC rationalization work we undertook in 2024. On Slide 6 and on to the Americas, we have set out the Americas performance highlights. Americas reported sales were up 3.3%. The prior period included sales from Supply Smart, which we closed in the second half of FY '24. If you recall, Supply Smart was an online direct-to-consumer business we acquired along with the EZ-FLO acquisition. When you adjust for Supply Smart, Americas sales were up 5.4% higher than the PCP. This was ahead of the guidance we gave at the start of the year, and this outperformance was driven in part by 2 issues that resulted in a pull forward of demand from the second half to the first half. Firstly, we had a first half load-in of appliance connectors linked to a future channel partner marketing initiative. Secondly, the pull forward in sales was due to the planned upgrade we undertook of our SAP system to S/4 HANA. As their standard practice, some of our larger customers in the U.S. ordered ahead of that upgrade to guard against any disruption of supply. However, as Heath mentioned, the upgrade to S/4 HANA has gone extremely well, and there was no disruption. Excluding both pull-forward items, Americas sales would have been at the top end of our guidance, which was flat to plus/minus low single digits. Americas delivered another strong operating earnings performance with adjusted EBITDA up 8.9% to $92.6 million. Adjusted EBITDA margin improved 110 basis points to 21%, and this was driven by higher volumes, continued cost savings and operational efficiencies, which offset higher input costs. Turning now to Slide 7 and our results for Asia Pacific. The impact of Holman on the APAC business is very evident in the table. Net sales were up 87.4% to AUD 226.7 million, driven by the contribution from Holman of AUD 110.8 million. Excluding Holman, external sales were up 0.2% on the prior period. We continue to see good sales growth through our wholesale channel in Australia despite a flat volume environment and subdued residential new construction and remodel markets. Intercompany sales were down a further 16% due to the continued impact of the transfer of SharkBite manufacturing and assembly from Australia to the U.S. Operating earnings were up 111% with adjusted EBITDA of AUD 27.2 million and 130 basis point expansion in EBITDA margin from 10.7% to 12%. On Slide 8, EMEA's net sales were down 7% in local currency. External sales were 4.6% lower than the prior period. This was driven principally by lower sales in the U.K. plumbing and heating market, down 8.6%. U.K. specialty sales were broadly in line with the last year. Sales in Continental Europe were up 2.3% versus the PCP, and all markets were higher with the exception of Germany. Lower sales led to a reduction in operating earnings with adjusted EBITDA down 5.8% to GBP 27.5 million for the first 6 months. However, as a result of the cost reduction initiatives we have undertaken, we recorded a year-over-year 40 basis point improvement in adjusted EBITDA margin to 29.2%, up from 28.8%. Turning to Slide 9 and looking at our cash flow performance for the half. Cash generated from operations was $127 million, which was 16% lower than the pcp. Operating cash conversion was 88% versus 121% in the prior period. This is consistent with the guidance we gave at the start of the year. As a reminder, we indicated cash conversion rate in excess of 90% for the full year, but that we would be below this rate for the first half due to the normal seasonal inventory build. We continue to reduce our net debt levels through cash generation. Consequently, we have seen a further reduction in our leverage ratio, net debt to EBITDA, down to 1.41x from 1.59x at the end of June. Turning to Slide 10 and looking at our working capital performance in a little more detail. As I mentioned, we saw an increase in inventories in the first half relative to where we ended 2024 due to the seasonal inventory movement. However, inventory levels were down on the pcp if we exclude Holman. Furthermore, working capital as a percentage of sales has decreased versus the prior year by approximately 270 basis points to 27.4%. Total capital expenditure for the first half totaled $16.8 million, which represented 2.5% of sales. The most significant CapEx project in the first half was the investment in the S/4 HANA upgrade. We are forecasting CapEx for the full year to be in the range of $35 million to $40 million. And with that, let me hand you back to Heath.

Thanks, Andrew. Let's turn to the outlook for financial year '25, which is detailed on Slide 11. At a group level, we expect sales to be up by mid-single-digit percentage points on FY '24. This includes Holman. Excluding Holman and also Supply Smart, we're expecting group sales to be broadly flat on last year within the range of plus or minus low single-digit percentage points. Essentially, we are not expecting a change in trajectory in the second half from what we saw in the first half at a group level. From an operating margin perspective, we are targeting an improvement in consolidated EBITDA margin, excluding Holman relative to FY '24. We will achieve this through continuous improvement initiatives and synergy realization. In terms of regional performance, we expect Americas full year external sales, excluding Supply Smart, to be broadly flat relative to FY '24, plus or minus low single-digit percentage points. As we have already noted, the pull forward in demand from the second half to the first half led to a relatively stronger first half sales performance. We, therefore, expect a relatively softer second half. To be clear, we expect the underlying business to be largely unchanged across the halves. In Asia Pacific, we expect full year external sales, excluding Holman, to be up on the prior year by mid-single-digit percentage points. EMEA full year external sales are expected to be down by mid-single-digit percentage points relative to the pcp. Turning to Slide 12, tariffs. This issue is top of mind for all of us, so it is worth addressing head on. Clearly, we're dealing with a high level of uncertainty at the moment with respect to U.S. tariff policy and potential countermoves by other countries. So it is difficult to be definitive about anything in respect to tariffs. Nonetheless, we believe the issue is manageable. The tools at our disposal are the same ones we utilized successfully to address tariffs in 2018. I would also note that we have a running start this time. Our actions are well underway. I would remind you that we manufacture a significant amount of product in our own facilities. This shields a significant portion of our COGS from any tariff impact. In some cases, in fact, it provides us with a competitive advantage. We do retain some exposure to tariffs on items imported from China. At this point, that exposure amounts to around $120 million in purchases. This is down significantly from the peak, and we have line of sight to further sizable reductions. Of course, our inventory holding means there is a delay in any impact. It is also an incredibly dynamic situation, which we anticipate will oscillate during the next 6 months and beyond. Our manufacturing strategy will need to be flexible to accommodate this. I would like to take a moment to revisit the mitigation tools I mentioned earlier. These include modifying product design and material selection, leaning on our strong vendor relationships, changing the geographic location of our source and adopting appropriate market pricing. Ultimately, it will be a combination of these actions that carries us forward. So we are comfortable that we can navigate the path ahead. On Slide 13, we have set out key operational focus areas for the second half of FY '25. These are unchanged from our presentation at the start of the year. Our focus continues to be execution excellence to support our strategic initiatives and to optimally position us for future growth. From a culture perspective, we will continue the progress we have made in the critical area of health and safety. We are developing effective and authentic safety leadership at all levels of the organization. This remains a clear priority. We will sustain the focus on our culture and our people and maintain our commitment to ensure everyone safe every day. In terms of supply chain, we have a group-wide project centered around strengthening and standardizing our sales and ops planning process. The benefit of this will be improving delivery performance to our customers while also optimizing our inventory levels. Our strategic sourcing operations ensure that we are leveraging our scale across the group. We are increasingly taking a global approach to enable us to achieve optimum cost while also maintaining highest quality. Another benefit is increasing supply redundancy and ensuring we can respond quickly to changes in demand and of course, changes in tariffs. As we noted earlier, we are continuing to work on our global manufacturing strategy, notwithstanding the new tariff complexities. It is critical that we continue to target the lowest cost of manufacture. Finally, in terms of innovation, we will continue to work on new product releases and product updates as we do every year. Innovation in the form of new product releases can be lumpy. We had a significant new product launch in FY '25, whereas FY -- sorry, in '24, whereas '25 will be relatively quiet by comparison. However, our longer-term R&D program continues. We are working on a range of solutions that improve the productivity of our end users and increase the value on the shelves of our distributors. Finally, to Slide 14. And the main message here is that we are tremendously well placed for long-term growth. We have moved to the U.S., the bulk of the manufacturing operations for our core SharkBite fitting range. This optimizes our cost base and makes the supply chain more resilient and increases our flexibility in terms of meeting local customer demand. It also, of course, ring-fences this product line from tariff impacts. We are very well positioned for demand recovery given our significant operating leverage, particularly in EMEA. Recent capital investment in capacity will allow us to dramatically ramp up production with minimal additional cost. We have also continuously invested in our processes, business tools and the capabilities of our workforce over the last few years. Our business and our leadership are the strongest they have ever been across all regions. All of this means our earnings growth from operational leverage will be strong once volume recovers. We are tremendously pleased with the Holman acquisition and the opportunities it presents for us going forward. The combined business is yielding multiple new opportunities across our traditional plumbing wholesale distributors. We are also beginning to realize new opportunities through retail distribution, a segment we believe has, for us, significant runway. Beyond these core channels, the Holman range is opening new channels and new end-use segments that we were not previously able to access. In all, we are very confident we have a long run of above-market growth ahead of us. Product is at the core of our growth engine, and we remain well placed. Our R&D teams globally continue to yield the regular product improvements and range extensions that drive every period's above-market growth. Further, we have opportunity to expand into both commercial plumbing and residential new construction markets in all regions. And finally, the strength of our balance sheet and our strong cash generation means we can pursue inorganic growth opportunities. We will also continue delivering returns to our shareholders through dividends and share buybacks. So on all dimensions, we believe we are very well placed for long-term growth. With that, I would like to open up the call to questions. We will take questions first from those on the conference call line, then Phil will call out any questions that we have received via the webcast.

Thank you. [Operator Instructions] Your first question comes from Daniel Kang with CLSA.

So I just want to clarify the guidance for mid-single-digit revenue growth for the full year. On my calculations, it implies a fall in revenue on a year-on-year basis in the second half. Should we be reading this as a reflection of the strong pull forward impact in the first half? Or is there a level of conservatism that you're building in here?

It's certainly important to consider that pull forward in the first half, which is why we called it out. The timing of some of those things are a little bit unfortunate. And the comment I made about drawing a line through the whole year and considering it being the same trajectory, I think for the underlying business, its quite relevant in this instance.

And just on cost reduction measures, how much of the $15 million target was achieved in the first half?

So Daniel, we reported $10.8 million in savings in the first half, $1 million of that was Holman synergy savings. So roughly $9.8 million was our cost-out program. So $10.8 million out of the $15 million that we expect for the full year.

And just finally, if I can sneak one more in. On the Americas' COGS purchases or imports, the estimated purchases from China totaled $120 million. Are you able to provide an estimate for the rest of the world?

We haven't specifically called that out. At the moment, that's the only area where tariffs are applied. We didn't really want to get too far ahead of ourselves in trying to guess what was next really.

Your next question comes from Lee Power with UBS.

Heath, obviously, as you called out, there's a bunch of different moving parts in the first half. Can you give us an idea of just how you think the general market was tracking through the half and maybe how we've been half to date in the different end regions? Like are things getting better or worse in those end markets? And then maybe just as a point of clarification, I'm assuming the FY '25 regional outlook is all local currency.

So it really is an interesting point in time. I would say all of our markets are expectant, if that's the right term, is they've been challenged for a while. And as we got to the end of the first half, particularly here in the U.S., I think everyone was sort of ready and expecting for things to start to get moving. Interest rates are critical, of course, as we've discussed a lot. I would say here in the U.S. about not expectant, but no movement in demand. So we weren't seeing anything in any region from an order intake or a genuine demand point of view that was changing. It was just the sentiment that felt it was heading in the right direction. It's been interesting here in the U.S. I think sentiment changed pretty rapidly over the last some weeks. It does feel as though the possibility of tariffs and what that might do to inflation and therefore, interest rates, I think, have everybody really quite cautious. So I think there's certainly still a view that the market will uptick. I think the view on where that will happen has become much more cloudy. And we've seen a host of our peers change reasonably positive, even bullish outlooks for '25 to basically plus or minus not much flat essentially. And then even we talk of the second half of '25 helping to achieve that flat result. So that's kind of the world around us. But through all of that, the actual demand hasn't really changed that much. And that's really the core comment, I think that we made in the announcement is we think the trajectory of the business will be pretty similar across halves based on what we can see at the moment. But as you say, a lot of moving pieces here and quite a few things that have out of our control as we head into the second half.

And then your last one. It is that the regional commentary is all local currency.

Okay. Yes, that makes sense. And then a second one, I get your point around tariffs and it's kind of like you're clearly already thinking about mitigation options. It's kind of this weird dynamic where [ culp has ] started running again, and they're all obviously kind of somewhat related. Is it something that you need to have a single set view on some of these moves and go with a single price increase, do you think? Or is there something where the -- particularly the big box channel is kind of willing to accept that you might not have all the answers immediately and you can kind of go through this multistage step in pricing? I'm just trying to work out how we think about the kind of the mitigation and how long it might take to get the final answer?

I would say clarity on what's going to happen is really important in terms of approaching any customer anywhere in the world, frankly, a speculative move on pricing based on what may or may not happen with tariffs, I don't think would be particularly well received by any customer, large or small in any jurisdiction. So I think it's important to note that there are multiple tools at our disposal in terms of dealing with the tariffs. Appropriate market pricing is one of them, dealing with our vendors, looking at different geographies, I think, are critical in handling the tariffs. So they have been since '18, frankly, there's no one tool that we deployed at that point, and it will take a combination this time as well.

And sorry, so do you think the things like -- I mean, there's obviously some interrelationship between them, but stuff like copper. Do you reckon that can be split out? Like if you need to do other increases that are not necessarily directly tariff related, but clearly have some relationship. Is that all bundled into one? Or is it something that you -- if you need to pull the lever on pricing, you can do in multiple steps [indiscernible].

I think you can -- fair question. I think you can deal with those things separately. I think the track record put tariffs 2018 more recently, as you know, Lee, through sort of '21, '22, '23, we would deal with pricing that was due to freight, shipping, copper, plastics, cardboard, you can deal with each of those as you need to.

Your next question comes from [indiscernible] with Jefferies.

Just on that Asia PAC guidance for sales to be up mid-single digits for the full year. Just wondering what's going on in the second half? Is there a load-in impact from the SharkBite rollout in the retail channel? Or is it something else there that you expect to sort of drive that second half number there?

There's a whole host of initiatives, which are driving that number. That is not an expectation that the market is going to pick up. That is driven by initiatives that we launched anywhere from 1 month to 2 or 3 years ago. Remind you, you'll recall, we talked a lot when we were first starting to move SharkBite production from Australia to the U.S., we talked a lot about the need for Australia to turn its attention to its own market. and to flip over every stone, essentially look opportunities. They've been very, very active on that. and that we are starting to see the benefits of that coming through. That's what's driving that number for the second half in Asia PAC.

And just on APAC with Holman. Can you give us an idea of the seasonality there for sales and earnings versus the, I guess, the acquisition case that was made last year?

What was the last number you said, Andrew?

60-40.

60-40 was the last number we said, and we look, we're getting to live that right now as we get a feel for it. I think that 60-40 number is as good as any. Some of those initiatives that I talked about before will come into it. So I'd run with that number Ramoun, but we'll have a better idea as we finish up the year and take stock of what projects we'll be doing into next year.

And just one more, I guess, on EMEA and the U.K. result. Is there anything else to read to that result other than the weak macro? Is there something that you're seeing in terms of share or changes channel that are impacting your business heat? Maybe if you can comment on that. And then just an update on the sort of manufacturing changes that are being made there. And when that's expected to roll off and the sort of benefits that you could derive from that.

So the issue of share is really important. In a market that's down as much as that is, it's easy for share to get -- share changes to get lost. We have been really, really vigilant in watching what is happening on a volume level, a quantity level. with the key products and our key customers. And while there's been some minor share shift, which kind of happens anyway, I don't think that's unique to the period. But we can see it and we can explain it. There's no major issue there. I don't think we've gained. I don't think we've lost either, but it's something we continue to watch really closely. I think that leads really though nicely into answering your second part of your question, which is what is the impact of the operational changes we're making there. The most important impact is it's strengthening the relationships with our customers. So we're having better conversations with them. We've got more transparency with them in terms of how we're performing. They're opening up a whole lot a whole lot more and prepared to talk about longer-term projects. I mean that ultimately is the benefit of improving delivery performance, which we have done over the last 6 months. So I think that team in the U.K. to have their volumes come off as much as they have in the last couple of years and to be holding that EBITDA margin and even to have improved it in the last 6 months, I think, is frankly, a sensational effort. At the same time, though, they are improving the business, and that improvement is being noticed by the customers. That's really important in the current environment, I think.

The next question comes from Peter Steyn with Macquarie.

Sorry to belabor -- just coming back to the imports coming from China. Really keen to just understand the overhead loading costs that -- can you add to that and what the GP margin profile ultimately on the shelf would be for that product set, whether it's materially different? I guess what I'm trying to get a sense of is ultimately the amount of price that you need at the top line to overcome the implications of tariffs on $120 million.

Look, I don't want to be contrary here, but it depends on whether the tariffs stay at 10 or go back to 0 or end up at another plus 35 to be honest. I think at the moment, Peter, I think it's what we can do on the sourcing side and continue to move product from China to other parts of the world that give us the best advantage. The comment I made before about not really being able to preempt where those tariffs end up and where that pricing ends up is -- means that we have the pricing power. We know what to do with pricing, but that's not our first tool in this instance.

Yes. I guess I'm just trying to understand the leverage in the P&L for that product set and whether it's materially different to the rest of your product and therefore, you've got some relatively easy fix on pricing. I appreciate that that's not all you do.

Yes. I wouldn't -- and I'm looking at Andrew here as well. I wouldn't call out the products that are impacted there as having too dramatically a different profile to the average so.

Okay. And then perhaps just quickly coming back to FX impacts and particularly how that influenced your thinking for your full year guide. obviously, in the context of the movements that we have seen with the strength in the U.S. dollar, how that's come through in your reckoning as you've thought about the second half?

Yes, Peter, we had a bit of a tailwind related to translation impacts of FX in the first half. On average, across that half, the U.S. dollar was a little bit weaker than it was in the prior period. But of course, that started to change quickly in December. In the second half, that turns to a headwind and that is part of the guidance that we provided for in the second half. But it is something that we'll have to deal with, and it's part of that commentary that we provided.

Your next question comes from Niraj Shah with Goldman Sachs.

Just to round out the tariff discussion even further. How do you think competing products in relevant categories kind of compare with your exposure to China exports?

Sorry, Niraj, which products do we have an advantage in that we're making them here?

Yes. And well, more -- you mentioned that there is scope for this being a competitive advantage. I just wanted to get a sense of how your exposure compares with other key competing products.

Okay. Sure. Look, I'd say let's take push-to-connect, pretty important product in the scheme of things. As far as I'm aware, we're the only people making that product in the U.S. Everything else that I'm aware of is coming in from China. So that would seem to provide us with some advantage there. A lot of the PEX crimp fittings and expansion fittings, we're injection molding those in Cullman. So again, a product that's sort of ring-fenced in terms of tariff impact. And as you've seen, the PEX-b pipe and the PEX-a pipe that we sell is all made in Cullman. So again, pretty good buffer for us. When you get into -- you jumping down a little bit now in terms of volume, but still a lot of value add when it comes to our valves and the HoldRite products in the U.S. as well. So how that manifests itself in terms of what we can do with pricing and how to use that advantage in the marketplace, we've -- and that's yet to play out. But I do like the fact that we're making some of those really important products ourselves here.

And just a second one for me. Was there much incremental investment in the new single-family and commercial route to market in the half, whether it's boots on the ground or any other OpEx?

Nothing significant.

Your next question comes from Harry Saunders with E&P.

Just wondering, you provided EBITDA margin guidance for the full year, excluding Holman of an improvement. Given you said the same for the first half and then have now delivered a 10 basis point improvement, including Holman. Do you think a similar improvement for the full year margin is achievable, particularly seeing as the pcp had 4 months of Holman in already?

Harry, this is Andrew. It's hard to say. We have given the guidance, which was on margin, which was excluding Holman, and we are not guiding here at the half margins, including Holman. I don't anticipate it to be vastly different, but it is not something that we're going to provide.

Sorry, to be clear, I don't anticipate it to be vastly different to the pcp in the second half.

Correct.

Also, just wondering, in EMEA, competitive price rises of sort of mid-single digits. And I've seen you've now put through a 5% to 6% price increase in May. I mean can you just talk through the strong pricing in the context of a weaker market? Is that -- is this a sign things are expected to pick up there?

I think I wouldn't jump that far out. I think it's a good sign that the market is accepting the routine of annual pricing moves. I think that's a positive. I don't think, though, it means you can straight out all the way to people expecting an uptick. I would also say, as usual, the announced pricing always is subject to some level of negotiation sort of below the headline again, normal and pleased that it does feel normal in that sense.

Got it. And just wanted to clarify, I think you mentioned this, but the full year guidance, that's not constant currency, that's including sort of FX to date and spot going forward?

That's correct, Harry.

Your next question comes from Brook Campbell-Crawford with Barrenjoey.

Firstly, just around the Americas guidance for the full year. Andrew, you mentioned that in the first half, it would have been about low single-digit growth, excluding those two pull-forward dynamics you saw in the half. And then I guess you're saying for the full year, it will be roughly flat, I guess, by implication, that would suggest the second half will be down year-over-year. I don't think that's what you're expecting given [indiscernible] comments about sort of steady trends. I just wanted to confirm that sort of low single-digit growth, excluding those 2 pull-forward dynamics is probably the likely trend on a year-over-year basis in the second half as well?

No. We're talking pretty small margins at this point. So splitting 1% or 2%. I'm pretty comfortable that there's no real sort of change that we can see that's going to that's going to drive a different result within those half by the issues that Andrew spelled out. winter, I think last year was a normal winter, this year is feeling, believe it or not like a less than normal winter in terms of volume. That sort of probably plays into it a little bit, but we're really, really at the margins here.

Yes, understood. I appreciate that. I just wanted to clarify. Can you just maybe pass the comments on M&A? And I guess it's been a big focus for yourselves for a long time and you made clear what you're looking for. But has the tariff announcements and changing macro made you think that it's a pause, I guess, at this point on M&A? Or would you be happy to go ahead and execute despite some of those uncertainties?

I think we'd be happy to execute. I think -- Look, I think our due diligence is pretty thorough anyway. You probably take even an extra look at the numbers you went through, but it's not a massive list in any region of the things we think could really add to our business. I think if the opportunity came up to look at one of those things we really think would help us create value, we'd look at it for sure.

And just last one, if I can squeeze a third question and just the EMEA sales down 5%, I think in late October at the Investor Day, you're talking about more low single-digit decline. So just, I guess, a bit of a shortfall there. Any sort of color you can provide there and just helping us understand and perhaps why it was a little bit softer than what you thought in October?

Well, I think at late last year, we said that if anything, that would be at the softer end of the range, which is kind of where it ended up. The U.K. market has sort of been a little bit frustrating because every time we thought we'd hit the bottom, it seemed to have a little more to move. I'd like to think that we've stabilized there, but I will also acknowledge we've had a few fold on over the last sort of 12 months or so. So we really want to see that sort of solidify over some several months before we'd be comfortable to say it's heading in the direction. So I think it's prudent to be a little conservative in that outlook.

Your next question comes from Shaurya Visen with Bank of America.

Heath and Andrew, two quick follow-ups, one on tariffs and one on the outlook. Start with the tariff question. Look, I understand that there's no P&L impact for '25. That's fine. But how should we be thinking about a P&L impact for next year? I understand there will be -- there's obviously a range, but how should we be thinking about it? How are you thinking about it internally?

This is Andrew. The China tariffs that had gone through, which is another 10% that went into place on February 4. And so what we're doing from a mitigation perspective is in flight as we speak. But all of that gets enacted day 1, it will be phased. Some things we're going to be able to capture. Some things are going to take a little bit longer. I think at this point, it's a little premature to say what that's going to look like at the end of the process. in July and August when that starts hitting the P&L. But I think we can say confidently, generally, we're fairly confident that we can manage the issue and shouldn't have a significant impact in FY '26.

And just a quick follow-up on that. Your comment that most of the key products are manufactured within the region of sale. Just doing some quick math on based on the numbers you've told us, is that number around 70%.

I'm sorry, you're really breaking up there. I can't catch that at all.

Sure. So in terms of your key products being manufactured in each region of sales, what's the percentage like across your portfolio, how much of that is manufactured within the region of sales?

So look, we've -- I think the only number we've previously given out, as we said, on a total basis, globally, it's around 70%. I think it's fair to say the Americas is less than that. it is though quite a rapidly moving target right now as we move product to different parts of the world, make more of it ourselves and so on. So but I'm not really in a position to precisely set out that number for you today. I'm sorry.

Last, just a quick follow-up on Americas. Just trying to get my numbers right here. So based on your guidance, you sort of utilized that second half revenue is down around 3%. Now I understand your comments, the pull forward in demand and also the weather. But the other part of -- it looks a very weak number. Is it just a soft market as you pointed out to? Or there is something within the market that we should be aware of?

No, there's nothing particular to call out. I think the world around us was expecting that first half of calendar '25 was going to really bump up. We sort of hadn't really called that. Unfortunately, I think that appears to be the accurate at least, at this stage, look like the accurate assessment that it's going to continue at the current rate. Honestly, that feels from a market point of view, though the market in total flat to down and with product initiatives and new product releases, we can do a little bit better than that. But that there's nothing to call out as far as we can see in the second half from a market point of view, that's going to dramatically change how it's felt for 6 months, 12 months, honestly.

Our next question comes from Rohan Gallagher with Jarden Group.

Most questions have been answered. From a capital allocation point of view, however, with lower CapEx, significant manufacturing capacity in your key markets, good operating cash flow. Pete, what's the capital allocation priorities of company given that you're now trending below your targeted long-term gearing range? And then associated with that question is really what are you seeing in the market around M&A? And is the willingness or reasonables around price expectations moderating?

I think that's a really fair question. Look, a couple of things is we're only just below the bottom end of our range. And honestly, given sort of the uncertainty that's out there and what a trade war could do to inflation and so on, I think we're really comfortable to have a strong balance sheet right now. That said is -- and we sort of touched on this a little bit before, is we're definitely still looking for acquisition opportunities. I don't think our view on that has really changed is at this point, I would say we don't anticipate a significant change in terms of valuations or what things come to market. I think generally, they're still private companies. The timing of departure is their timing, not our timing and the circumstances that are their own. So we will simply continue to put ourselves in the position to form relationships with those companies, we think would be good additions to the business and see how it plays out.

And Heath, I'm aware that you've got some select price increases in the market. And obviously, you'll do everything before further price increases for tariff risk mitigation, as you've cited earlier. But are those price increases that you have announced, are you happy to sort of share where you're at, at the moment with respect to that?

I think the only price we've mentioned is the sort of the annual move in the U.K. There's nothing beyond that to call out at this point, Rohan.

And finally, if I may, obviously, the only certainty we have right now is uncertainty in terms of what's happening in the next -- in the short term. But as you sort of position yourself towards FY '26, do you feel with an inevitable recovery, particularly in the U.S., margin expansion opportunities given your manufacturing assets, given your flex? And what are the sort of permutations around achieving that margin expansion?

I think, yes, there's opportunity there for sure. I mean we talked a lot about volume being really the primary determinant of where our margin lands, that applies to all of the regions. Absolutely, it applies to EMEA. So I think in EMEA, we would expect an uptick in Asia Pac volumes take off, we'd expect an uptick there. I think we'd also expect it in America. There are a couple of initiatives to one of the questions earlier as to how much have we spent on pursuing commercial and new construction in the period. And the answer is quite low, where volumes do take off here and yield some additional margin, we would direct some of that -- those additional funds to those initiatives. But I think we'd also see a small increment in margin rate as well. So I think we're really well positioned. We've got capacity in all regions, the strength of the team is really high. We've continued to invest in the business and our capabilities over the last few years. They've been pretty tough years in terms of managing costs and trying to drive the best possible outcome in a declining environment, but I think the teams have done really well to improve the business and the capabilities of the people. And I think we're really well positioned. I just wish we were talking about it having taken off as opposed to trying to guess when it will. Frustrating, I can tell you for all of us [indiscernible].

Your next question comes from Sam Seow so with Citi.

I just want to be a little bit more direct and ask what your full year group guide would have been at a constant FX? Just trying -- I think we're just all trying to figure out or understand the translation when you've built into the group guidance.

So it's the level of detail, Sam, is really not something that we're going to provide. What we've given is a range. And so you can work out that from an FX standpoint, I mean, that's part of our guidance, and that's what gives us that plus minus low single digits to being broadly flat.

And then maybe on APAC, just following on, I think, from Ramoun's question there, you've got the guide that implies almost a double-digit second half '25 growth, excluding Holman. So just wondering how we should think about sustainability of those growth rates and the initiatives there?

It's a fair question. It's certainly -- there's a lot of those -- the initiatives are driving that number. I would not extrapolate that number out forever at that rate, the timing has an impact just in terms of what we think hits in the second half.

But presumably, that timing rolls through to first half '26 and you get the full year annualization benefit or...

Yes. I think [indiscernible] 2025 getting the full year of what we started in the first half, there's a little bit of that. But yes, I think there's probably a little bit more of that rolling into '26. We do think there's a lot of things there that we can still work on in the coming years, but it does feel like it will be quite a healthy second half there.

That's helpful. And then just to round out the balance sheet. Your targets -- you're obviously below your target now. And obviously, you're there arguably on depressed EBITDA. So just confirming we're ruling out capital management due to the environment, but we should think there's firepower there for an upcoming kind of commercial water out transaction. Is that how we should be thinking about the capital allocation?

Sure.

And then just if I could squeeze one in on Europe. Continental Europe looks to have turned positive. Interestingly, after a kind of a 30% fall, I guess, in the U.K., it seems like [indiscernible] 30%. Are you starting to see a trough in the order intake or any kind of correlation or read-through from Continental...

I think as we talked about a few times, they came off a lot, and it was always going to be a matter of starting to lap those really bad comps before we saw an uptick. So volumes aren't obviously back to where they were, but happy that there's some action there from the pretty painful lows 12 months and a bit more ago.

Your next question comes from Keith Chau with MST Marquee.

I'll try and get this brief. Just the first one on EMEA. Obviously, there's some changes on the U.K. budget last year, principally around minimum wage increases, national insurance, et cetera. Perhaps Andrew, can you help us understand the impact that, that will have on the business from an earnings standpoint and whether the price increases that have been implemented in that region will be enough to offset broader inflationary pressures in addition to the impacts from being the changes in the budget, please?

Keith, wage inflation was our biggest line item in the first half and I think that probably will continue. EMEA did have the national living wage increase. I think it was -- '24 is like 10% and I think it's 6.7% coming up in April of '25. So certainly, we'll have to deal with that. It's in our planning. It's part of our guidance. And but it is going to be a challenge and something that we're going to have to offset.

And Andrew, do you think price increases will be able to cover that? Or will you have to look for more cost efficiencies through the business?

I think it will take a combination of both.

Okay. And Heath, certainly, it seems like the U.K. is the key area which has perhaps led to kind of being a touch softer than the market expected at least. Certainly it seems as though the change in demand was quite swift towards the end of last year. So as we exited calendar '24, was demand erosion accelerating to the downside? Because it certainly seems like the impact or the change was quite quick, and we're only just starting to see the early parts of erosion in the U.K. But please correct me if I'm wrong in assuming that things were worsening at the end of last year and into the start of this year.

Sorry, are you assuming it was worsening at the end of last year or that was the theme that is the [indiscernible]?

Yes. That's right. [indiscernible] Worsening until the end of last year.

Yes. It's -- I'm just really cautious about making any statement of what I think the U.K. is going to do. It's been a market where every several times we thought we'd seen it as tough as it was going to be. I think we've seen some positive signs, small positive signs. I think -- I mean, I was there only last week or the week before, and I was actually surprised that it wasn't all doom and gloom. I kind of brace myself for a really tough visit, but it actually ended up feeling a lot better than that. That said, the demand hasn't picked up in terms of orders. But at the moment, I'll take sort of a positive sentiment compared to where it was, but we're being a little bit cautious to not get ahead of ourselves.

The second question there just -- or perhaps, Andrew, just any update on the progression of the global manufacturing review? I thought it was noted in the presentation. But as you delve deeper into that project, you more or less surprised with the potential benefits you could potentially generate from globe manufacturing rationalization or change?

Look, I think there are definitely opportunities there. I would say we really though, have diverted a lot of attention away from that sort of long-term activity to try to navigate the short term in terms of what tariffs might look like. That's -- we're pretty comfortable we can manage the tariff impact, but it's going to take some managing. It's taking some resource there. So that's really the focus today. But we've seen enough, Keith, to know that we'll definitely go back to those activities, and we know there's a few things we can get our hands into them, and we'll provide more information on that when we've got a little bit of breathing space.

And just a very quick one to cover off, Heath. The discussion on M&A, when you're looking at assets that may potentially come up for sale, are you rolling off offshore manufacturing and focusing on onshore manufacturing? Or are all acquisitions on the table at this point?

I think you have to -- there's not a $1,000 out there, Keith. So I think you got to start with all the ones that fit you think about, you consider and you may draw a slightly different conclusion now than once you do at other times, but you've got to start with the same broad approach, I think.

That is all the time we have for phone questions today. I'll now hand back to Mr. Heath Sharp.

So I think we have one question, Phil?

Just a quick one. I mean its concern is the changes at Tradelink here in Australia. Do we expect any impact on the APAC business? Have there been any change in our relationship with Tradelink since the new owners took control?

I think it's too early to say that there's going to be any to know what the impact will be. For sure, we're engaged with Tradelink, it's a significant customer as well as we have been at any point, and we'll continue to do so. I don't think there's anything else really to call out at the moment.

No more questions online.

Okay. Very good. Well, with that, I think we will wrap it up. I appreciate everyone's time to tune in this morning. Thank you very much. Have a good day.

That does conclude our conference for today. Thank you for participating. You may now disconnect.