Good day. Welcome to the RWC Financial Year 2023 First Half Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Heath Sharp, Group CEO. Please go ahead, sir.
Thank you. Good morning, everyone, welcome to RWC's half year results presentation for the 6 months ended December 31, 2022. This is Heath Sharp, CEO of RWC, and joining me here in Atlanta is our CFO, Andrew Johnson. At the end of this presentation, we will take questions from those on the audio call and then those on the webcast. I'll begin on slide 3 and provide an overview of the half. During the first half, our business demonstrated tremendous resilience. Our volumes held up well in the face of economic headwinds in every market in which we operate. Our teams continued to execute well in what was a challenging environment. Group sales on a constant currency basis were up 20% and up 15% on a reported basis, including EZ-FLO.
I would note that this period included a full six months contribution from EZ-FLO, compared to only six weeks in the prior corresponding half. Excluding EZ-FLO, constant currency sales were up 6%. Andrew will talk to this in a moment, weakness in the British and Australian currencies against the US dollar did impact our reported sales. Results reported in local currency were somewhat stronger. Volumes were up 11% overall. Excluding EZ-FLO, total volumes declined by a backlog of R&R activity. We would also note that the destocking actions by some distributors in the Q1 eased as the half progressed and now appear to have stabilized. We achieved sequential operating margin improvement in the Q2 over the Q1. Our margins overall were still impacted as peak commodity costs flowed through inventory, particularly copper and zinc. Half year, EBITDA margin was down on the PCP.
We continued to make strong progress in delivering EZ-FLO's revenue synergies through gaining additional shelf space with our distributors. We also progressed the cost reductions we outlined at the time of the acquisition. We delivered stronger cash flow in the half, with operating cash flow increasing by 57%. To wrap up this slide, during the half, we continued to make investments in our manufacturing capability. We also continued our ongoing new product releases, as well as preparing for the new product initiative, which we will be discussing further in late March. Moving to slide 4, here we've set out some of our financial highlights for the half. First, a reminder once again that all our figures are now reported in US dollars unless we specifically note otherwise.
Net sales were $601 million for the half, up 15% on a reported basis and up 20% on a constant currency basis. Adjusted EBITDA was up 2% to $128 million. This was an 8% improvement on a constant currency basis. Adjusted net profit after tax at $67.5 million was down 10% on the PCP. Reported net profit was up 5% on the PCP and included a one-off gain from the sale of a surplus property in the UK. Operating cash flow for the half was $94.3 million, up 57% at a cash conversion rate of 76%. While we saw a decline in our net debt at the end of the period, our leverage ratio was up slightly at 2.12 times.
Finally, we have declared an interim dividend of four and a half US cents per share. This is in line with the dividend we paid in the first half of 2022. The dividend will be 10% franked for Australian taxation purposes. Over to Andrew to discuss our financial performance in more detail.
Thank you, Heath, and hello, everyone. On slide 5, we have summarized our financial performance for the half year. As Heath said, our reported net sales were up 15%, and on a constant currency basis, net sales were up 20%. Sales growth was driven mainly by the contribution from EZ-FLO and also price increases achieved globally, which averaged 8.5%. We continued to see high commodity cost impact our margins throughout the half. As expected, we did see operating margins improve by 90 basis points in the Q2 versus the Q1. We expect further margin improvement in the second half of the year as we benefit from reductions in the high input cost that impacted results in the first half.
In addition, we expect further benefits to the P&L in the second half as we continue to execute on our cost savings initiatives. We make adjustments to EBITDA this half for two significant items. One being the $15 million gain on the sale of the surplus property in the U.K., and the second is an allowance for the one-off cost incurred as we realize the EZ-FLO cost reduction synergies. The main EZ-FLO synergy activity in the half was the closure of 3 distribution centers in North America. We will be closing a fourth D.C. at the end of February, following which we will have reduced the combined total of distribution centers from 11 down to 7. Turning to slide 6, we have bridged our adjusted EBITDA performance for the half. Price was the biggest positive influence on EBITDA in the half, followed by volume growth.
We continued to see input cost inflation as well as higher costs in our factories. Cost reduction measures helped to offset these impacts. The increase in SG&A was mainly due to the inclusion of a full 6 months of EZ-FLO costs over the period versus just 6 weeks in the PCP. On a constant currency basis, adjusted EBITDA was up 8% and up 2% on a reported basis. At the time of our Q1 update in October, we mentioned that we were going to target further cost savings in the business. We've identified an extra $15 million of annualized cost savings that we will look to deliver from FY24 onwards. We expect to achieve $2.5 million in savings from this new program in the current financial year.
Before we get into the segment detail, I would point out that we have made a change in how we show the profit and stock impact in our financial disclosures. For those of you who are not familiar with profit and stock, it is the profit on intercompany sales still in our inventory, so not sold to a third party. Previously, movements in profit and stock were shown in operating margins for each segment, primarily APAC and EMEA. We have now moved this adjustment out of the segment results and into the elimination column in the segment note, which is note two on the financial statements. We have restated prior period comparators to reflect this change and therefore comparisons within the prior period are relevant and consistent. The Americas recorded 28% sales growth, which included EZ-FLO.
Excluding EZ-FLO, sales growth for the half was 6%. We experienced sales growth across all product categories except FluidTech, our drinks dispense and water filtration product range. FluidTech sales were 23% lower than the PCP due to the strength of the prior period, which benefited from the reopening of the commercial and hospitality sectors post-COVID. Overall unit volumes, excluding EZ-FLO, were down 2% on the prior corresponding period. Adjusted EBITDA was 26% higher and reflected a full 6-month contribution from EZ-FLO. We continued to deliver revenue synergies in the half, mainly through expanding the distribution of EZ-FLO's product range, including gas appliance connectors. We saw a slowdown in EZ-FLO growth in the latter part of the half, reflecting weaker consumer purchases of large appliances. We are on track with the revenue growth opportunities and delivery of the cost savings from the EZ-FLO acquisition.
No discussion of the Americas this time of year would be complete without referencing winter weather. We did have a brief but widespread freeze event in the U.S., including the southern states, late in December. We don't believe it had a material impact on our results for the half, nor do we expect it to materially impact results for the full year. The freeze was severe, it was of short duration, and it happened over a holiday season when most people were at home and able to take effective action to counter unexpected leaks. Let's now look at Asia Pacific on slide 8. Sales growth overall in Asia Pacific was 1% in local currency terms, with external sales up 2%. Volumes in Australia were broadly stable. Intercompany volumes of SharkBite products manufactured in Australia and sold to the Americas were slightly lower.
We also had lower sales into China as a result of lockdowns in that market during the period. From a macro point of view, we think the strong growth we have had in the Australian market since 2020 has started to taper off. That's linked in part to the decline in housing commencements, which were 8% lower in the 12 months ended September thirtieth. Margins were adversely impacted in the half by high commodity costs given high percentage of brass products manufactured in the Asia Pacific region. Turning now to EMEA on slide 9. EMEA recorded 6% external sales growth in local currency terms. The U.K. market held up well, with sales up 10% on the PCP, mainly as a result of higher prices. Volumes were broadly stable. Continental Europe sales were in line with the PCP, with lower volumes offset by price increases.
Continental Europe is mainly a FluidTech market for drink dispense and water filtration products. Demand was lower in the first half versus the PCP, which benefited as a result of the reopening of the commercial and hospitality markets. Intercompany sales were 24% lower due to the lower volumes of FluidTech products manufactured in EMEA and sold into the Americas. The team in EMEA has done a good job of managing its margins, specifically in Q2. Adjusted EBITDA in local currency was flat year-on-year. Adjusted EBITDA margin was down 100 basis points on the PCP, mainly due to lower volumes manufactured and sold during the period, along with higher input costs. Turning now to our cash flow performance on Slide 10. As we've already mentioned, cash flow from operations was up 57%, principally due to lower working capital growth than we experienced in the PCP.
Our operating cash flow conversion was 76%. This is an area we will continue to focus on improving in the second half. Key to that, of course, is inventory management. We have maintained high levels of stock through the supply chain disruptions over the last 2 years. As these have eased, we believe we can unwind some of that inventory, especially now as we come through the U.S. winter season. Another factor which has impacted our in-inventory build is a stock up of new product inventory ahead of that launch later in this second half. Turning to Slide 11 and looking at our key balance sheet metrics. Net debt reduced by just under $18 million in the half, while our leverage ratio was broadly in line with the 2.1 times for the year ended June 30th, 2022.
We have incurred higher interest costs in this half due to the funding of the LCL and EZ-FLO acquisitions. Rising interest rates have also impacted interest expense. 44% of our debt is on a fixed rate basis and the balance is a floating rate, we are progressively feeling the impact of central bank interest rate rises. We have reduced our capital expenditure forecast for the year from the $60 million-$70 million that we indicated at the start of the year to between $55 million and $60 million. The reduction is partly a function of some delays in receiving equipment and also decisions we have made to ensure we align capacity with demand. Thank you for your attention, let me now hand you back to Heath to discuss the outlook for the year.
Thanks, Andrew. Moving now to Slide 12. I'll conclude with our outlook for the balance of the FY23 year. We believe the RWC business is well positioned. Our exposure to the R&R sector will continue to underpin our volumes. It is important to highlight that our products are most commonly used in low-cost, non-discretionary projects, and that our brands are widely recognized as the go-to solutions for this type of work. Our ongoing execution focus will deliver cost savings and efficiency gains as we head into FY24. As we unwind inventory that we bolstered during supply chain challenges, we will deliver strong cash conversion. Looking more broadly, we are encouraged by household balance sheets that are generally in a strong position and that unemployment rates remain high. Of course, it has to be noted that we face a highly uncertain economic environment.
Continuing rises in interest rates and high inflation are both clear risks to consumer confidence. We are certainly mindful of this and the corresponding risk of an economic downturn in any of our key markets. Looking specifically at each of the regions, starting with the Americas. We believe that underlying volumes in the second half will be down on the prior year due to lower levels of remodeling activity. This is in line with the results and experiences of other remodeling-oriented building products companies. The prior two financial years were particularly strong from an R&R perspective, and we achieved top-line annual growth rates in the order of 20%. A moderation in remodeling activity levels in the face of slowing economic growth is not unexpected. Nonetheless, we continue to believe that we will deliver better than market volume performance regardless of the macroeconomic environment.
In Asia Pacific, lower new housing starts pose a risk to our volume trajectory in the Australian market. We have seen volume growth moderate through the first half. In EMEA, we have a watchful eye on the U.K. market. The U.K. did hold up very well in the first half, better than most were predicting at the start of the period. Nonetheless, the economy remains quite challenging and we are therefore cautious about the volume outlook for the second half. Within Continental Europe, we think the first half trend of lower volumes will be sustained in the second half. In all our markets, we believe larger remodel projects can be impacted by general consumer confidence. Offsetting that, we continue to expect smaller remodel projects and ongoing repair and maintenance activity to be more resilient.
Let me conclude on Slide 13 with our priorities for the balance of the year. On pricing, we've come through a very dynamic two-year period. At this point, we believe our pricing is appropriate relative to the commodity costs we've seen in recent times. In the event we see further cost pressures, we will look to make pricing adjustments as necessary. Cost reduction initiatives will be a priority. As mentioned earlier, we have implemented a new cost reduction program targeting $15 million in cost savings in FY24. This is in addition to the continuous improvement initiatives we have underway in this financial year and in addition to delivering on the EZ-FLO cost synergies. Delivering the improvement in operating margin for the second half is also critical. It's fair to say that higher operating cash flow and improved cash conversion is absolutely in the spotlight.
On the new product front, our ongoing new product program is the backbone of our business and will continue to deliver every period. We have output from our long-term development actions to be announced on March 28th. This is focused on our core and will be an important part of our next growth phase. We're excited to set all this out for you next month. ESG actions remain on our radar. We will pursue the targets outlined in our recent ESG report. During the first half, we took a hard look at our organizational structure, especially in the Americas. We have made a number of changes which will partially contribute to the $15 million of savings noted earlier.
We will be set to head into the FY24 year with an operational size and shape appropriate for the near term, while also able to deliver on our long-term growth objectives. In summary, we are very focused on executing on those activities we can control to take maximum advantage of the resilient sector in which we operate. With that, I will pause, and we can open up to questions from those on the call.
If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow the signal to reach our equipment. Again, if you would like to ask a question, please press star one. We will take our first question from Lee Power with UBS. Please go ahead.
Hi, team. Morning or evening. Digging into your trading commentary, January broadly consistent with trends observed in the first half of 23. That feels like it's more positive than given what you did in the first half and given your uncertain economic slide where you give some more details of what you're expecting in the second half. Can you just maybe give a little bit of color around what you've actually seen in the different divisions and if that is the case, whether you've seen that kind of fall off that you're expecting?
Lee, thank you. Thanks for your question. Frankly, not a lot to add to the release. I think the comments were trading has been broadly in line with the trends of the first half. Beyond that, nothing to add really.
Okay. Yep. Just on pricing, I mean, I think you've got a comment in there that, despite what we've seen with things like copper, I know that it's come back and it's slightly below $9,000 a ton now that you're comfortable with your pricing. Do you wanna give us an idea of what level of copper that you feel that you would start to need to look at pricing increases again?
Certainly. The copper peaked above $10,000, and that's the cost we're seeing, or certainly in the Q1, we saw flow through the balance sheet and we had to carry that relative to our pricing, the way the timing of pricing was implemented. Copper now, as you've seen, has been hovering around that $9,000 mark. Per our comments in the announcement, we think where our pricing is at today is appropriate for that level of copper and sort of on average, the other costs we're seeing at the moment.
Okay, perfect. Then just a final one. The $15 million additional cost savings, full benefit by 2024, is that $15 million, is that achieved in the period? Is that some sort of exit run rate? Like, how should we think about it?
Hey, Lee, this is Andrew. That $15 million is what we would expect to achieve in FY24, that should be very close to an annualized run rate by the end of the year. Within the year.
Okay.
I think we said that we would see $two and a half million realized in FY23, in this current year.
Excellent. Excellent. Thank you. I'll leave it there. Thanks.
Thank you, Lee.
We will take our next question from Daniel Kang with CLSA. Please go ahead.
Good morning, everyone. Just, Heath, I just wanted to expand on your outlook commentary where I guess you're indicating weaker volume in all markets. I understand that that's based on your view of lower remodeling activity. To what extent do you see further destocking or inventory normalization to be a factor in your lower volume expectations?
Thanks, Daniel. We saw that destocking activity ease through the half. It was certainly a feature of the first few months of the year. We spoke about it at the quarter. That did ease as the half went on. It does feel stabilized at the moment. I would also note that there have been a few other companies in our industry have made similar comments, whether it be in water heaters or faucets and so on. Some movement early on feels as though it's in a more stable position right now.
Fair to say that you're not really factoring in much further destocking in the second half.
That's correct. Yes.
Great. Great. Andrew, in terms of your cost out initiatives, just wondering if these targets of $8 million and $15 million in FY23 and FY24 are net of inflationary costs? What sort of inflationary costs should we factor in?
Look, they are not net of inflationary costs. I just want to make that very clear. Look, in terms of inflation, I would expect that, well, let's hope that inflation stabilizes, you know, somewhat close to what we've seen in the, in the latter part of the half. That would be my expectation. Of course, you know, there's a lot of factors that come into play. Just to make that clear, they are not net of inflation.
Thanks for that clarification. Thanks, guys. Pass around.
Thank you, Daniel.
We will take our next question from Samuel Seow with Citi. Please go ahead.
Oh, morning, guys. Thanks for taking my question. Just a quick one on price. Just wanna clarify your outlook. You had, I guess, 8.5% in the first half. Are you expecting that to slow as you cycle the higher comps, or are you still pushing through price rises?
Hey, Sam, this is Andrew. We are still working on price. I think EMEA's got a price that'll go through in February. Outside of that, I think you hit the nail on the head. We are comping higher prices in the second half than the first half. That, that rate year-over-year will decline from eight and a half in that first half to a rate in the second half that's a little less than half of that amount. Think about something in the 4%-5% range in the second half.
Got it. Thanks for that. Just on exit rates, it looks like in terms of volumes, at least the Q2 held up okay relative to the Q1. I guess, is that correct? Interested as this appears, you know, better than R&R more broadly, just to comment on, is that kind of market share or your resilience, or do you think that's more of a timing issue as the backlog unwinds?
Thanks, Sam. I think it's generally resilience of the sector that we're in. The point we made a couple of times in the presentation, we're at generally the smaller end of the renovation remodel projects, then augmented by repair and maintenance. I think the larger remodel projects are the ones that have slowed. We're not quite as exposed to that. That feels more like residential new construction generally. I would say that the nature of that market that we're in is what has help keep our volumes. You know, as we compare our rate, we were up single-digit revenue, ex EZ-FLO. Looking at the industry in general in that Q4, as far as we can tell, the industry looks to be down single-digit revenue.
There's quite a gap there for us, which we're pleased about. That's 1 quarter. We think that's a fundamental, but we'll continue to execute and watch how the second half unfolds.
Awesome. Just maybe quickly follow up. Do you see your margin improvement guidance predicated on that kind of resilient volume assumption? Kind of like that, you know, low mid-single digit
Certainly, yeah, our margins are volume dependent, there's no question. You can see the decline, period over period is heavily linked to volume. That will always be the case. With the volume sort of in keeping with what we've indicated, which is generally down volumes on the prior period for the second half, the actions on costs, we think is what will drive our margin improvement in the second half.
Sweetie. Thanks for that, guys. Congrats on the result.
Thank you.
We will take our next question from Lisa Huynh with JP Morgan. Please go ahead.
Hi. Morning, Heath Sharp. Morning, Andrew. I just have a question on EZ-FLO, actually. Can you talk about the underlying sales growth in EZ-FLO for the 2Q, just given there was a part period ownership in the PCP?
look, certainly, Andrew's just digging through some numbers there. I would say, generally that market, that those volumes have come off from where we were originally expecting. Our growth there is based on share gain, shelf space gain, and we certainly had some projects running through. I think the overall market, though, has come off, similar to the rest of the plumbing market.
Okay, sure.
Yeah, Lisa
Just the. Yeah, you go, Andrew.
You know, if you take and adjust for the prior year to include a full period of EZ-FLO sales, you're looking at that Q2, revenue is gonna be downQ2 of this year versus Q2 of last year. It's somewhere in that mid-single digit range.
Okay. Sure. Thanks. That's helpful. In terms of the new product innovation, look, I know you're launching a product in March, but will there be any sales boost to either FY23 or FY24 from the sell-through of this product, you know, through the channel?
Nothing significant in 2023, no.
Okay. Sure. What about 24?
Yes, we would expect to see, to see benefit in 2024.
Okay, thanks. I'll leave it there.
Thanks, Lisa.
We will take our next question from Brook Campbell-Crawford with Barrenjoey. Please go ahead.
Thanks for taking my question. Just on this guidance for operating margins to improve in the second half. Do you mind providing us with a range of expectations for that step-up that you would expect in second half?
Hey, Brook, this is Andrew. you know, look, I don't think we're gonna comment on a range of guidance. I do think we're pretty confident that margins will improve. Again, that's given the current trend that we see in volumes and assuming that those continue, albeit it will be down year-over-year from a volume standpoint, we expect. When you think about the input cost that we see, and you follow that copper through our P&L, that should give us a boost, as well as the cost reduction activities that we've been working pretty diligently on and we'll start to see come through in the second half.
Okay, thanks. Thanks for that. I guess the expectation for improved cash conversion is in the second half. Do you have a sort of a broad range you can provide us on what you expect that to step up to in second half FY23?
You know, we expect that cash conversion would be back to our normal levels in the second half. For us, normal cash conversion is somewhere in the kind of the low 90% range. I think that's kind of how you need to look at second half. We are working very intently on inventory and not just the unit volumes, obviously on our shelves will come down, but we also expect supply chains to continue to normalize, which will allow us to bring down some of our safety stock, and we'll reduce in-transit inventory. Think about cash conversion in that normal range in the second half.
That's great. Thanks. Just last one from me. No, no tree in the accounts you give the sales by product category, which is very helpful. Can you just talk through what drove the big increase in HoldRite, which I guess is the installation solutions big increase there year-over-year? If you can provide some color on what drove that, and then also why the push-to-connect fitting sales is underperforming other fittings as a category. Thanks so much.
Dealing with that second part first, there's some pretty significant currency moves due to the speed fit-fitting in U.K. there. When you adjust for currency, that feels more like mid-single digits upwards. I believe that in that installation solutions category, there's some EZ-FLO product as well. It's EZ-FLO's in the, our last three-- spread across those last three categories, which is certainly moving the needle there.
Great. Thank you.
We will take our next question from Peter Steyn with Macquarie. Please go ahead.
Morning, Heath and Andrew. Thanks very much. Could I ask for you to just step through the $15 million cost reduction intent in a little bit of detail? Where is it coming from? What are you hoping to achieve at a more specific level? Because obviously this is going to be on top of everything you've done in a supply chain context post EZ-FLO.
Yeah, certainly. Look, first thing I would say there is the thinking in relation to our CI goals for the year and also EZ-FLO synergies were based on higher volume production, all still entirely valid, but as the volumes come off, it really means there's additional things you can look at. That's what's driving that $15 million. I would step through. There's really four broad categories, I guess. First of all, operating efficiencies. We look to the factories, we always will aim for operating efficiencies, and I think you know, a situation like this forces you to look harder and be perhaps a little more aggressive than you normally would. I would also say, though, that we are going to take advantage of automation, which we've implemented over the last 18 months.
The timing of that is quite good. With a lower volume, it actually allows us to put a greater proportion of our production through automated assembly versus manual assembly. That's the first category. Second one, supply chain. There has been, as you know, a whole lot of disruption there, and we've had to put a lot of additional time and effort and people and tools and floor space and whatever else to work over the last period. We are really focused on that area, and that will also yield additional savings to where we were first thinking. We are, of course, working closely with our vendors, leveraging our volumes better where we can, and that's particularly relevant, I would think with EZ-FLO.
Beyond what we were originally thinking with EZ-FLO and looking at where we can utilize their volumes in conjunction with our volumes and also how we can use their team. They have a strong sourcing team here in the U.S., but also a strong sourcing team in China. How can we use those teams to yield more than what we originally had on the radar? Then finally making changes to the structure of the organization. Clearly we're talking our people here, and this is definitely the most painful part of this. Look, I think if I can take a moment, it's worth elaborating a little more on this structural side of it for our two largest regions. Americas first. I would say this actually is a good time for a change in leadership.
Will Kilpatrick, as you know, is leading the Americas organization now. He has led his team really well through the assessment of where we're at. There is a real benefit in a fresh set of eyes. They started with the proverbial blank sheet of paper in determining what the organization should look like. And what they've set out is good. I think they're absolutely on the right track. I think it's sufficiently tight and streamlined to get through the near term, but it's appropriate for us to remain focused on core, the core products from a development point of view and to drive future growth. Restructure, as you know, Peter, it needs some tough decisions. They fronted them, they made them, and now they're managing through it. Interestingly, compared to EMEA, that market got tougher earlier.
They really were mobilized some months ago, also fronting those challenging decisions. An example, the headcount in EMEA as we speak, is down around 10% from the original plan. They haven't reduced the headcount by 10%. They've just held the freeze and really tightened the reins. As I mentioned, more automated assembly coming through, utilizing that CapEx we've spent there in the last 18 months or so. The benefit of that automation and that really tight management, I think really came through in these results today. Their volumes are declined quite an amount from the peak, and their margin rate held to 32%. I think that's a great outcome, certainly a credit to Edwin and his team over there. Although we're at different places, we do know what to do. We do know what levers to pull.
Many of us have been through this before, albeit it's some years since we've last had this situation, and we're just getting on with it. Sorry for taking a few extra minutes there, but there's a lot in it. You know, we really have got our arms around it and are getting on with it, Peter.
Thanks, Heath. That was useful. Just a quick one for Andrew, following up on the cash conversion comment you made earlier. I mean, if you've got supply chain normalization, wouldn't you expect inventories in a broad sense to come down? I realize that there's obviously price that's higher, would you not expect not just a conversion improvement, but an absolute reduction in your networking capital in due course?
hey, Peter. Yes, I would agree with you that as supply chains normalize, you would expect inventory to come down. That's correct.
The fact that you would still just go to a normalized level of cash conversion as opposed to an outsized level of cash conversion, does that presuppose that there's other movements in the opposite direction?
Look, I would hope we would do better than what I've stated, but at this point, in terms of providing an expectation, I would say, you know, that it's back to normal levels in the second half. There will be, as we've seen in the first half, there will be an increase in inventory associated with the new product launches, and we'll obviously talk more about that in March. That's, that's one thing that would offset, for example, the supply chain normalizations.
Okay. Sorry, last quick one. The willingness of channel to take further price adjustments if you were to come to that, could you describe your expectation there?
I think we would tackle it the same way we have in the past. I think we've shown a good track record there. We got 8.5 in this period. It was on top of a period where we had 7.5 or 7.9 or thereabout. I think the strength of our brands, the importance of our or the significance of our products in an overallOur, our portfolio for a distributor is. And look, the nature of the products, frankly, is such that we are certainly prepared to have whatever discussions we need to, we need to have.
Thanks, Heath. I'll leave it there.
Thank you.
We will take our next question from Simon Thackray with Jefferies. Please go ahead.
Morning, Heath, good morning, Andrew. Thanks for taking the questions. Thanks for the slide on, well, page 16, just in terms of end market exposures. Just wanna confirm, you say you've got repair there in the Americas at around 55, 60%. Is that right, of your end market exposure? Just wanna confirm that.
Around 60. I think we said at Investor Day 2020, 60. Yes.
Yeah. Okay. EMEA is sort of combined and in R&R, at around 80% or so. Just that there's nothing there on APAC. I just wanna confirm, has there been, you know, in terms of the end market exposure for APAC, that's still, we're still more leveraged to new?
Yes, that is absolutely correct. A little more than half of our external sales, not in the company in Australia are new construction. I think it puts it globally at about 5% of our total business or thereabouts.
Yeah, that's perfect. Thanks, Heath. I just wanted to make sure I was still on the right page on that one. Thank you. Then just in the discussion you've given, and Andrew, thank you for the sort of brief on pricing as well. Other than the EMEA price rise in February, which you've called out, and I think you've answered Sam's question to say, look, pricing will comp sort of, you know, 4%-5% in the second half versus second half 2022. I think that's my understanding. Just to confirm, other than that EMEA pricing, you think the pricing is right? We're not to expect any further pricing in the second half? I've got
I'm only asking that question against the background inflation that you've still got wages and other things that are still weighing. Am I clear on that? No further pricing in the second half?
I think that number that Andrew threw out there is correct. I would say though, it's certainly not correct to think that it's a static environment. It is by region, by product group, by channel. It is, we will assess it on an ongoing basis. I think at this particular point in time, and especially from an Americas point of view, our biggest market, I think where our prices are today are appropriate for the cost we're seeing today. Now we've got lags and so on for that to flow through. I think in terms of your ability to talk more pricing or frankly your ability to resist requests for price reductions at the moment, it's about right.
There's nothing to talk about in terms of giving anything up. I think there's also today nothing to talk about in terms of moving upwards. Copper moves from $9-$10 and onwards, there's a conversation to have for sure. Resins are tough because they're so they do move around a little bit and there's so many that we have to sort of take a weighted average approach. Resins move upwards again, then there's got to be a conversation there. Look, as you say, there is wage inflation, there's health insurance and so on. Frankly, our CI programs and our cost savings become quite important in relation to those costs. That's where we are mobilizing.
Yeah. No, that, that's fair. Just in terms of your customer relationships, which have always been very good, you know, you still, in terms of DIFOT and all your metrics and winning awards and all that sort of stuff, and, no change there? Just, just a discussion about demand and price and the usual, you know, "Can you drop your price, because we wanna keep our margins." Is that where we are?
I'd like to think we spend more time talking about new products and shelf space and opportunities to improve the productivity of our distributors' footprint. Look, by and large, that is where most of our conversations are right now. I mean, there's that admin stuff you have to deal with of course. No, I think we'd like that we're coming through what has been a really disrupted supply chain period so that we can you know, get back to expanding the right amount of effort on delivering the products and therefore turn all of our attention to the future and new products and new opportunities. The state of the relationships are remain solid, Simon.
That's great. Thanks, Heath. I mean, it wouldn't be an RWC call without talking about M&A opportunity. You know, it's been a core part of the growth strategy. Just in terms of, and I'm not suggesting you're about to make an acquisition, but just in terms of your observation of people's expectation and valuation multiples in the current market for bolt-on opportunities.
It certainly remains an important part of our M&A out of our overall strategy, you know, filling gaps in our, in our product range. I think it's quite variable out there at the moment in terms of expectations. I think in some places they've reached sensible levels. There's still some pretty amazing deals getting done, although they tend to be at the so-called transformational end of things where we play I think, I think it's feeling reasonably sensible. You know, these fees, this is a long-term ongoing activity for us, of course.
All right. That's terrific. Thanks, gents for your time.
Thank you, Simon
We will take our next question from Peter Wilson with Credit Suisse. Please go ahead.
Thanks. Morning. just to start with EZ-FLO, you noted deteriorating sales in the Q2 as you do slowing appliance sales. Can you give us an idea of just how weak those trends are for EZ-FLO and perhaps compare them to, you know, what was in the business case when you acquired the business?
If I could just jump in first, Peter. This is Heath. I would say that market generally is closer on average to the broader plumbing market. I spoke before about the where our core legacy products reside have been up single digits, whereas the overall revenue, whereas the overall market looks like it's off single digits revenue. The EZ-FLO core business feels more like that on an ongoing basis. Of course, what we said at the time of acquisition is that we thought we could grow it faster than market. We said, 10% growth. We certainly still believe we can outgrow the market based on share gains, as we gain shelf space and so on. Those projects are underway. We've had some wins.
There's additional activities that we will be rolling out in the coming quarters. We think we can out comp the market. The market, though, is at a different position to where we started.
Okay. That's good. Andrew, just to follow up some earlier questions on these, the costs out for FY24, should we expect the $15 million cost savings? Is that on top of continuous improvement? Therefore, might we expect continuous improvement to take care of inflation and then the cost reduction to come on top of that? Or is that not correct?
We haven't really taken a look at continuous improvement for FY24. We'll certainly do that before we report, you know, year-end results when we speak in August. Look, we'll continue to look and continuous improvement really should be part of the narrative on an annual basis. At this point, we just don't have a line of sight whether we're gonna have continuous improvement on top or not of what is a pretty significant cost reduction effort in the $15 million that we talked about.
Okay. Perhaps just looking backwards to the half just gone. The slide 6, $10.5 million increase in manufacturing costs, which exceeded the $6.2 million cost reduction. Manufacturing costs, how much of that was EZ-FLO versus the underlying business? Yeah, what's your kinda expectation looking forward there?
Yeah, EZ-FLO in that, in that bucket, is gonna probably end up being a couple million of that number. You know, when you show that $10 million, that's increasing cost within the factory. That's gonna be, higher cost of things like MRO, spare parts, you know, higher wages that we paid the employees in the factory, and also higher costs for services as well. Lower volumes also impacted recoveries, and therefore, we had some efficiency cost in the first half, and that's also part of that $10 million number.
Good. Okay, I'll leave it there. Thank you.
Thanks, Peter.
We will take our next question from Harry Saunders with E&P. Please go ahead.
Hi, guys. Thanks for taking my questions. Firstly, I just wanted to get back onto price of that sort of 4% or 5% you talked about in the second half. We can sort of see what the EMEA price rise has put through have been obviously well in excess of that sort of range. Perhaps could you just break down what sort of price realization you're expecting in EMEA for the second half and for Americas?
Hi, Harry. We really don't wanna give too much of a breakdown by region. When I talk about 4%-5% price comp in the second half, that's gonna include what the EMEA region did in February, but it's also gonna include pricing actions that took place late in FY21 last year, as well as the first part of this year. That would include really all regions, APAC and the Americas, in terms of some of the things that we've done earlier this year or either late last year.
Sure. Would that also include the price notification for March for APAC?
Yes.
Great. Thank you. The next question I had was, you know, it's great to see, you know, the margin improvement, quarter-on-quarter sequentially. Noticed APAC margins actually went backwards, about 110 basis points in the quarter. Could you just talk through what happened there and, what the expectations are in the second half for APAC?
I think the APAC margins were down. I think that recoveries in the factories were certainly impacted as we look to bring down inventories overall. That certainly played a part. I think the biggest impact is just the higher copper cost, given the amount of brass product that's produced in Australia. I think we would expect margins in all of our regions to improve around the fact that copper prices should come off a bit in the Q3 in the P&L. 'Cause if you look back, you know, six months ago, that drove a peak in Q1 and that kind of remained at flat into Q2. We should see the benefit when copper dip, we should see that in Q3. Of course, it's come back up again.
sequentially Q4 and commodity impacts will be a little bit higher than Q3. generally speaking, those commodity improvements should drive an improvement in margin in APAC as well as the overall group.
Great. Thank you. Just lastly, on EMEA, volume trends, looks like UK had pretty strong new construction volumes and also, R&R volumes, in the half. Just wondering where that's tracking now and also just how you think you perform relative to the market there.
Look, that's our most interesting market, Harry, for sure. It has been for a while. It's the one we specifically called out as one we were watching. I don't think we've got anything particular to offer beyond what we've already said there, to be honest.
Thanks, guys.
Thank you.
We will take our next question from Keith Chau with MST Marquee. Please go ahead.
Hi, Heath. Hi, Andrew. Thanks for all the details so far. Just a couple of quick ones from me. The first one, with respect to the new product launch, I know we'll be talking about that more in March, but can you confirm whether it is the expansion fitting set or it's a new product set outside of that?
look, Keith, we'd really like to leave that till March. I mean, there's multiple years worth of effort gone into this, and this forum really doesn't do it justice to try and.
What the key focus or priorities are, and his influence in the business over the last, call it six months since he's joined, or maybe less than maybe five months.
Sure. Thanks for the question. Look, Will generally I think benefited from spending a couple of years working with Edwin. Edwin is now across residential new construction, large remodel, the smaller remodeling projects, which is kind of where we live. Then certainly in repair and maintenance. I mean, maintenance, you can dig into the numbers on maintenance, and it's almost linear from 20 years back, year-on-year. It happens. Repairs, a little more variable than that. Then the small remodel again and onwards. That is the end that we play in, which is the benefit that we're getting. I think that broader plumbing market feels from a revenue point of view like it's down single-digit numbers for sure.
Thank you, Heath. It's very helpful. Just secondly on the headcount, just wanted to go back to your comments that you made on the 10% headcount reduction in EMEA on hiring freeze. Can you also just give us a sense of your group level headcount changes? Thank you.
I would say, just to be really clear, is that 10% headcount number was a variation from their original plan. They have not reduced their headcount by that much. That's quite an interest. That plan, if you think for this financial year, really, we started putting that together back in March, April time, and the world has moved quite dramatically in the subsequent period. They have had a freeze in place. They have reduced their numbers somewhat, but overall it's relative to the plan. Certainly, it varies by region, what we're doing, and the actual headcount reductions vary from sort of 2%-3% to 5% range is where we're at.
Thank you, Heath.
At this time, there are no further questions. Phil King, I'll turn the conference back over to you for any additional or closing remarks.
Heath, just one question online. Will the $15 million cost savings program impact customer service levels at all?
Oh, absolutely will not be the case. Delivering for our customers, absolutely critical. Making sure that we're continuing to work on those key core products that drive our business two, three, four years out is also key. We've been very selective in where we've made those changes.
Thanks. There were no other questions on the webcast.
Okay. Thank you, Phil. With that, I think we will wrap up. Thank you very much, everybody. Appreciate your time this morning. Have a good day.
This concludes today's call. Thank you for your participation. You may now disconnect.