Good day, and welcome to the AWC First Quarter Trading Update and ECflow Acquisitions Conference Call. Today, the conference is being recorded. At this time, I'd like to turn the conference over to Mr. Hishav, the Group's Chief Equity Officer. Please go ahead,
sir. Thank you. Hello, everyone. Thank you for joining us on the call today. This is Heath Sharp, CEO of RWC.
Joining me here in Atlanta are Sean McClenahan, CEO of Our Americas region and Andrew Johnson, Group CFO. We have released 2 announcements this morning. The first of these highlights the acquisition of EZflow International. The second is our Q1 trading update. We'll begin today with a presentation about EZflow and then move to our trading update.
We will take questions on both of these topics at the end of the presentation. I'll start proceedings with an overview of the EZflow acquisition. Sean will talk through the business in more detail, the opportunities we see for it and the integration planning we have done. Andrew will then take us through the Q1 trading update. So starting on Slide 5, I'll step through an overview of the EZYFLOW acquisition.
As we've announced today, the purchase price is $325,000,000 For clarity, I want to remind you that the dollar figures we mentioned here will be in U. S. Dollars unless we specify otherwise. This, of course, reflects our move to U. S.
Dollar currency for reporting purposes starting this financial year. The purchase price represents an EBITDA multiple of 12 times pre synergies and 7 times post revenue and cost synergies. Given how demanding valuations are at present, we are pleased that we've been able to conclude this transaction at what we believe is a realistic multiple. We have a good line of sight to both revenue and cost synergies. We will action these synergies within 3 years.
Once realized, we will see a capital return in the mid to high teens. Further, the transaction will be earnings accretive from year 1, and we expect to out earn the weighted average cost of capital from the outset. We see EZflow as having a strong fit with RWC's existing North American operations. Equally important, it takes us into a new category in large appliance installation and service. As is typical with a family owned business, exit timing is unpredictable.
So we have to be ready to act when the opportunity comes up. I would note that we have known EZflow for a long time and have participated against them in prior retail line reviews. Unsuccessfully, I might add, their manufacturing advantage and long standing position kept us out. It is fair to say that as we studied the business, we came to better appreciate the substance of their operations and execution and the depth of their customer relationships. Frankly, we were really quite impressed.
Key for us is the Eastman brand. Eastman is the leading brand in the large appliance connector segment. A further attraction is the fact EZflow have a strong record of delivering top line growth. They have won market share through operational excellence and high service levels. So the parallels to RWC are clear.
Turning now to Slide 6. Funding for the acquisition will come from our existing committed credit facilities. We have been able to take advantage of the significant headroom we've created through strong cash generation over recent trading periods. Following completion of this acquisition, our pro form a leverage ratio, net debt to EBITDA will be approximately 1.78 times. This is still comfortably within our target range of 1.5x to 2.5x.
We have also increased our committed bank funding lines by AUD 100,000,000 and this will give us an undrawn committed credit capacity of USD127 1,000,000 on a pro form a basis. We have outlined the strategic rationale for the EZflow acquisition on Slide 7. Firstly, it will expand our product range in the Americas, in particular for the large appliance connector market. Examples of these appliances include washing machines and dryers, dishwashers, ice makers and, of course, water heaters. All of these appliances require specialized products for plumbing and venting.
These products give us diversification across merchants, aisles and even sectors within the store. This serves to make us a more important supplier to the retailer. With the Eastman brand, we will have the leading position with major appliance installers in the U. S. EZflow will establish RWC in a new category and enable us to engage with different merchants within our existing retail channel partners.
We'll also be looking to leverage our channel partner relationships in both wholesale and hardware to broaden the reach of the Eastman and EZflow portfolio. Sean will elaborate further on the benefits from manufacturing and sourcing and the strategic location of EZflow's warehouse in the free trade zone within China. These capabilities are an important part of the acquisition from day 1, but we are also convinced we can derive broader benefits in the long term. Adding a network of 7 distribution centers in the U. S.
Is clearly beneficial. EZflow's national network and execution capability allow them to provide next day service to 80% of the U. S. Population. This, in combination with our existing network, will further enhance our fulfillment and delivery performance.
To Slide 8. The EZflow acquisition clearly meets the criteria we have set for acquisitions of this type. It adds to RWC's product range targeted at our existing end user base. It also solidifies and in fact expands our relationships with key channel partners. Finally, it also broadens our geographic reach, in this case to Central and South America.
Now let me hand over to Sean, who will discuss EZflow in more detail.
Thank you, Heath, and hello, everyone. On Slide 10, we provided an overview of EZflow. The company's history dates back over 40 years. EZ FLOW was established in 1980 and has a track record of growing organically over that time. The company supplies a broad range of plumbing products, principally used in behind the wall and rough plumbing applications.
In 2000, the company acquired Eastman, a brand founded more than 50 years ago. And since that acquisition, EZflow has grown Eastman into the leading brand for U. S. Large appliance connectors. Today, approximately half of EZflow's revenue come from large appliance connectors, including connectors for water heaters and a further 20% from adjacent products related to those installations.
We estimate that the total market size for U. S. Large appliance connectors is approximately $1,200,000,000 This compares with the estimated total market size for U. S. Residential potable water pipe and fittings of $2,000,000,000 We consider the large appliance connector market to be a significant market that we will serve competitively with this acquisition.
Now in terms of channel mix, about half of EZflow sales are through retail channel partners, which includes home improvement and hardware. A further 29% is through wholesale and the balance is split equally between OEMs and international sales within the Americas. While we don't comment specifically on customer revenue, we can say that EZflow's percentage of revenue attributable to the Home Depot and Lowe's combined is meaningfully lower than RWC of the Americas, while still being their 2 largest customers. From a manufacturing perspective, EZflow self manufactures in China product that generates about half of its revenue. The in house manufactured product principally consists of large appliance and water heater connectors, water fixture connectors, appliance outlet boxes and gas connector products.
A further 20% of products sold by EZflow are manufactured through exclusive arrangements with businesses in China. EZflow has approximately 550 employees. Of these, 350 are manufacturing focused employees located in China and the balance of the team is located here in the U. S. EZflow's competitors vary by product category, but key competitors include the BrassCraft division of Masco, the Dormont division of Watts, as well as ODi and Sioux Chief here in the United States.
Turning to Slide 11, this page provides additional detail about the nature of the products manufactured and sold by EZflow. The left hand side of the page highlights that 50% of revenues generated by Eastman Connectors and outlet boxes. As mentioned, most of these products are manufactured in house and consist of large appliance supply lines, water supply lines, gas connectors, outlet boxes, water heater connectors and venting products. On the right hand side of the page are 2 categories of products also sold at EZ FLOW. The category on the upper right of the page, the Eastman installation products, consists of a full line of specialty installation and accessory products that supplement the Eastman Connector product offering.
These are additional or optional items most likely needed when completing the installation of a large appliance or water heater. Collectively, these products account for approximately 20% of revenues. A further 29% of revenues consists of a broad array of supporting plumbing and repair and replacement products represented here on the bottom right hand side of the page, including general plumbing valves, tubular drainage, toilet repair and plumbing tools. These products are in the EZ Flows product line to support the needs of the property maintenance and MRO channels, which is an area of focus for the company. While the Eastman brand is synonymous with premium quality appliance and plumbing connectors, the EZflow brand is associated with quality repair and maintenance plumbing products used by property maintenance and MRO professionals.
The majority of EZflow products are complementary to RWC's product offering. We estimate that approximately 10% of EZflow sales are from products that overlap with those we currently offer. In addition, new construction accounts for about 5% of revenue with a core EZflow business model focused on repair, maintenance, replacement and remodeling activity. Slide 12 highlights the similarity between RWC and EZflow's value propositions. This page uses large appliance connectors and their critical importance to the installation process as an example.
It is important to understand 2 things about the large appliance market. 1st, a key part of the sales process for retailers of large appliance is to cross sell the installation and delivery services of these appliances. And second, the major retailers require the purchase of new connection kits when electing the delivery install options for these appliances. For these reasons, having in stock high quality connectors that will outlast the life of the appliance is fundamental to supporting a positive experience for all those involved in the purchase of the new appliance. That is a positive experience for the consumer, a positive experience for the retailer and a positive experience for the installer.
You should also note that as with RWC's SharkBite, HoldRite and John Guest product lines, the dollar cost of each Eastman connector or connection kit is low relative
to the cost of the
available when needed. This example helps illustrates how over the past decade EZflow with the Eastman product line has created the number one brand for appliance connectors in the U. S. Their success is based on high quality product designed with the installer in mind and supported by the highest level of execution for retail partners, including logistics, service, support and in stock position. The alignment between EZflow and Eastman product promise and benefits is strong with RWCs and our key product lines.
With Slide 13 and the next four pages, we'll now look at EZflow's operational infrastructure. We'll start with their manufacturing and bonded warehouse facility in China. These are located within a free trade zone and adjacent to the port of Ningbo, one of the world's busiest ports. And then we'll look at EZflow's U. S.
Network of distribution centers. Starting with Slide 14, which spotlights EZflow's manufacturing operations in China. EZflow has been manufacturing in China since 2003 with manufacturing concentrated principally on appliance and water supply lines, water heater connectors, outlet boxes and tubing. In early 2020, EZflow invested further to bring online gas connector manufacturing and they have recently completed an upgrade to the capacity of this line. With more than 200,000 square feet of space and an average employee of tenure of 10 years, EZflow has the capacity and capability to support significant additional growth for these product lines from this facility.
Turning to Slide 15, one of EZflow's core competencies is sourcing products and components in China, mainly from suppliers in the Greater Ningbo Shanghai region. This area of China is where RWC's current China supply base is located and is also the primary center for manufacturing plumbing products and components in China, particularly for the export for export to the American and European markets. Most key plumbing brands and distributors in the Americas source some products or components from this area of China. We see upside for RWC by utilizing EZflow's expertise and presence on the ground to better leverage our China source products in the future. Critical to EZflow's operations has been their ability to consolidate goods before export to the United States.
Their bonded warehouse in the free trade zone enables them to consolidate goods manufactured in EZ FLOW's adjacent factory with goods procured elsewhere in China and then ship these efficiently to the U. S. The strategically located warehouse adjacent to the plant and the port in Ningbo is something we will leverage with RWC's purchases and shipments from China. EZflow's operational profile in China is consistent with our approach around the globe. This is highlighted on Slide 16.
With long standing supplier, employee, government and agency relationships, EZ FLOW's Ningbo facility is well regarded in China and will provide a stable and clear competitive advantage to RWC. It brings a team deep in manufacturing, sourcing, quality and engineering experience and is located in a region with entrenched supply chain and manufacturing capabilities for our industry. In addition, the Ningbo free trade zone is a special economic area with the best trade policies and most flexible operating mechanisms in China and has the objective of promoting international trade. Like many of our factories, this facility also undergoes routine audits by many agencies and other organizations. For EZflow's Ningbo facility, this includes audits from certification agencies such as IATMO, NSF International, CSA Group and ISO, which are focused on product and quality management system compliance, but also includes annual audits by customers such as Lowe's, The Home Depot, Whirlpool, Electrolux and Sub Zero, which are focused on broader ethical sourcing, compliance and manufacturing requirements.
Looking at EZflow's U. S. Distribution network on Slide 17, you will see that EZflow has 7 distribution centers that span the country. They are well located and this has enabled EZflow to deliver next day service to 80% of the U. S.
Population. In addition, EZflow has been able to demonstrate a 95 plus percent fill rate across all channels through this network. These high service levels are a core part of the EZflow brand proposition. Combining this network with RWC's 4 Americas distribution centers will be a great catalyst to broaden our distribution capability and provide us a comprehensive footprint in the U. S.
And Canada for our warehousing logistic activities going forward. With this network and in the fulfillness of time, we may be able to combine some facilities, but the immediate priority for us will be extracting savings via freight optimization with the combined volumes and combined customer base. Moving on to slide 18, which showcases some of EZflow's channel partners and customers. You will notice overlap with RWC's channel partners and the addition of some new names as well. There is no doubt that we will have an opportunity between our expanded product portfolio, our set of channel partners and our combined resources to further grow organically leveraging the integrated businesses.
As noted on an earlier slide and in terms of the key product category of major appliance connectors, EZflow has relationships with Lowe's, The Home Depot and through its OEM relationship with Electrolux, the retailer Best Buy. These 3 retailers are the 3 largest retailers of major appliances and are estimated to have between them over 70% share of the U. S. Large appliance market. Now looking ahead to the integration of these two businesses on Slide 20.
The Americas team will take responsibility for integrating EZflow into RWC. The management team here in Atlanta has worked closely on this transaction and has already gotten to know the business well. As a result of this and similarities between our business model, go to market approach and our cultures, we have a clear integration plan developed. Significantly, senior members of the management team of EZflow will remain with the business and we welcome them to RWC. Key areas we'll be focusing on in integration will be merging our sales and channel management teams, integrating our marketing operations and combining our supply chain and sourcing operations to quickly leverage the opportunities we see in combining these two businesses.
The overall integration approach and methodology will be similar to the one we successfully used for integrating HoldRite and John Guest North America into the RWC Americas business. We will combine resources and capabilities into one go to market and operational supply chain strategy and utilizing a common set of capabilities while leveraging increased scale in a common overhead structure. On Slide 22, we note some of the key financial metrics to give you a sense of scale and impact that EZflow will have on the Americas segment. EZflow has LTM revenues of $169,000,000 for the period ending July 31, 2021, and LTM adjusted EBITDA of $27,000,000 Combined, RWC Americas and EZflow will have a pro form a annual revenue of almost $800,000,000 EBITDA of 147,000,000 and an EBITDA margin of 18.2%. While EZflow's operating margin is slightly lower than RWC in the Americas, we expect it to expand as we deliver on synergies and growth.
Turning now to synergies on Slide 24. The first point to stress is that we see a path to capture and drive synergies both through revenue growth and through identified material cost out opportunities. We have a clear line of sight as how we expect to grow the top line through further channel gains with EZflow's lead product categories, particularly through their large appliance connectors, including gas and water heater connectors. In addition, we see an opportunity to leverage areas where RWC has deeper existing channel strength, particularly in wholesale plumbing, hardware and throughout Canada. We'll do this with EZflow's product range to drive above market growth.
For the next 3 years, we are targeting a 10% compounded annual growth rate for EZflow product revenues. We have also identified cost out opportunities, mainly where there is overlap in our operations as well as through leveraging EZflow's expertise with China manufacturing, sourcing and freight logistics. We expect to achieve $10,000,000 in cost out synergies on a run rate basis in year 3 following the deal's completion. Cumulatively, these synergies once realized will reduce the multiple paid by RWC for EZflow to approximately 7 times EBITDA by the end of year 3. On Slide 25, we've outlined one example of a revenue synergy will drive incremental growth.
RWC is a strong position supporting water heater replacement and upgrades across all channels in the U. S. And Canada. Combining with EZflow's complete range of water heater connectors and gas appliance connectors will give us 100% of the products we require to support all new water heater installations. EZflow's in house manufacturing of gas and water heater connectors gives it a critical advantage, particularly when supply chains are disrupted.
In addition, our retail partners focus on the delivery and installation water heaters as a key growth area, much as they have done with major appliances. This is just one example from the growth pipeline we have with EZflow. The pipeline has substantial depth as measured by the number and quality of the opportunities we see materializing from the combined RWC and EZflow product ranges and channel resources. However, for commercial confidentiality reasons, we won't disclose specific plan specifics or the size of each opportunity at this stage. Let me conclude there and hand you back to Heath for some summary remarks on the EZflow acquisition.
Thank you, Sean. Now to summarize, and we're on Slide 27. EZflow is a logical acquisition for RWC given the alignment of our channel partners, end users and application of the products. We believe the multiple we're paying is appropriate, the realization of synergies and the growth we see in combining these two businesses will generate very positive returns on the investment. We're very excited by what this acquisition will do in terms of opening up new product categories and taking us into new parts of the market.
Just as significant is the fact that we will gain access to different merchants and move into different aisles within large retailers, hardware outlets and wholesalers. EZflow's China operation will benefit us in terms of providing a low cost manufacturing base. It also significantly enhances our overall procurement and logistics capabilities. In the U. S, the national network of 7 DCs will be highly complementary to our loan, both in terms of our service levels and achieving those levels more cost effectively.
So I'll finish up there on the EZflow presentation and hand over to Andrew. He will talk through the Q1 trading update we released this morning in Australia.
Thanks Heath, and good morning, everyone. I'll now take you through the Q1 trading update that we've provided today. Net sales for the group were up 8.3% for the quarter with year over year sales growth
in all
three regions. As we noted in August at our full year results, we see this as a year where we consolidate the step up in volume levels we saw through FY 2021. Looking at sales growth on a 2 year stack basis, we recorded net sales in the Q1 almost 29% higher compared with the same quarter in fiscal year 2020. Reported EBITDA was up 4.4% and up 3.1% on an adjusted basis. The adjustments we made this quarter were firstly, the elimination of the gain on sale of the Streamlabs business and secondly, deducting the one off costs associated with the LCL acquisition.
As we flagged in the full year result in August, we did see margin dilution. This was because of the pricing rises we put through in the second half of the last financial year, which took effect in the Q1. These price increases are offsetting input cost inflation, but are dilutive to our overall operating margins. Reported EBIT was up 5.4 percent and adjusted EBIT up 3.9 percent to $55,400,000 While net debt was down year on year by 10%, we actually saw net debt levels increase slightly from the 30th June 2021. This was due principally to the payment for the acquisition of LCL, which was US28 $1,000,000 In addition, we increased our working capital through building up inventory levels and we also saw higher capital expenditure in the period reflecting the planned increase in FY 'twenty two.
We signaled at the full year earnings announcement that we intended to increase inventory levels and we still believe this to be the right thing to do in the current environment where supply chains are stretched. Let's look at each of the regions now turning first to the Americas on Slide 31. The Americas recorded net sales growth of 4.5% and this was principally driven by price increases and some new product revenues. Excluding price and new products, volumes were slightly lower than the same period last year. This was due in part to supply chain impacts, which adversely affected the availability of some raw materials and components.
On a 2 year stack basis, Americas' 1st quarter sales were 27% higher than the same period in fiscal year 2020. The other big influence on volumes this quarter was a change in Lowe's warehousing and logistics activities. Lowe's are bringing their distribution activities in line with other retailers whereby regional stocking warehouses are converted to cross stock facilities which lowers overall inventory levels. Importantly, this has not impacted the amount of inventory in the stores or the range of products they carry. If we adjust for this one off change, growth in the Americas would have been up approximately 12% in the Q1.
We were pleased to have been named Lowe's Vendor of the Year in the Rough Plumbing category earlier this month. This is the 3rd time we've received this accolade in the last 4 years, which we feel demonstrates the strength of our relationship. Also for the 2nd time in 5 years, RWC was named Plumbing Vendor of the Year by Do It Best, the 2nd largest U. S. Member owned hardware cooperative.
On Slide 32, Asia Pacific had another strong quarter with net sales up 16.5%. The sales growth reflected continued strong domestic demand in the Australian market with higher residential construction and remodeling activity. Additionally, APAC continued to manufacture strong volumes export to the Americas, partly related to the inventory build I referenced earlier. As in other regions, margins were adversely impacted by price increases, which are dilutive to margins. We also saw a negative impact from profit in stock, which is a natural consequence of increasing inventory levels of Australian made product.
Looking at EMEA on Slide 33, EMEA recorded 9% net sales growth in local currency. Sales in EMEA for the Q1 were up 15% on the same period 2 years prior in FY 2020. We did see strong increases in demand in Continental Europe with the FluidTech product range driven by further reopening of many European economies. On the other hand, in the UK, we saw lower volumes in July August due to the resumption of typical UK vacation patterns. Also impacting sales volumes in the UK were supply chain and logistics issues.
The shortage of transport drivers has received plenty of attention and this is certainly having effect throughout the construction industry in the UK. Compounding this are material shortages and other supply chain issues, which have slowed the rate of new projects and led to the postponement of some construction and remodeling activity. We believe these conditions are transitory, but likely to remain as headwinds over the next quarter or 2 at least. Let me conclude on Slide 34 by talking to the outlook for the balance of FY 'twenty 2. Underlying demand for our products remains strong driven by continued repair and remodel activity and in Australia driven by strong new residential construction.
Rising costs due to general inflation, freight cost and logistics delays will continue to challenge our supply chain teams in the next few quarters. Against this dynamic environment, we are putting through further price increases to offset the rising cost pressure we've been experiencing, but there will be a lag between when we incur some of these cost increases and when we see the price increases take effect on the revenue line. So we are flagging that we think margins at the half will continue to be 100 to 150 basis points behind prior year margins, assuming volumes remain at current levels. The impacts of cost headwinds should lessen in the Q3 as further rounds of price increases continue to come through in our results. We believe most of the supply chain headwinds are likely to be short term.
Ultimately, we are confident we can continue to make to manage through these difficult times by keeping our focus on the customer and continuing to focus on ongoing strong execution. And with that, I'll hand you back to Heath.
Thanks, Andrew. So now let's get straight into Q and A. We'll take questions from those on the conference call first and then we'll move to questions from those joining via webcast. Operator, I'll pass back to you for the questions.
Thank you, We will take our first questions. Your line is open. Please go ahead.
Thanks. Good day, Andrew. Good day, Heath. Quite a lot in that in a very short space of time with 20 minutes to digest all this M and A and as well as the trading update. So let's just start with the trading update, if we can.
The price rises, I really want to understand this for the second half. The previous commentary where we were talking about 1% margin dilution. And I take your point, Andrew, 100 basis points to 150 basis points in the first half, that should be the peak of it and then abatement in the second half. What's the mechanism for these price rises? And is it across all channels or is it across some channels?
I'm just trying to understand this, put this in perspective, just how these price rises will be transmitted through the course of the fiscal year?
Sure. Look, I mean, I guess it's really a continuation of the process we've been on for many months now, several months now, I guess. And it's across all regions and all channels and virtually all products. So the timing of individual parts of that based on product and channel and whatever is different. But there's an awful lot of activity underway right now.
And look, as it has been for a while.
Yes. But I mean, the understanding we'd certainly been given was that depot and Lowe's, for example, take it once a year. Is that not the case now? They'll take multiple
parts of the business? Look, I think what we've talked about in the past and specifically in relation to copper is that doesn't move. They're not daily discussions. I mean there's some period after you've after a commodity has moved that you all just checked that it's sort of got some stability. But no, it's not a once a year thing by any stretch.
And look, particularly in this environment, I think there's awareness across the board that it's more dynamic and those conversations are just happening more regularly. And it's happening across the board, not just with us, of course.
No, that's good. It's really good, really encouraging to hear. So let's just go to the acquisition. I mean, last time you spoke publicly, I think it was at our forum and said M and A was kind of mop up minnows here and there, nothing really of note. And you're talking with great detail and joy about this EZflow acquisition.
So I was sort of taking a little bit of a bit backed by that, and Heath, the commentary. And also it would seem to me that EasyFlow would be a really decent COVID beneficiary in terms of shelter in place with major appliances, etcetera. I just want to understand the run rate for the EBITDA in the current year given what's been happening with supply chain constraints globally and for this business specifically, particularly with its China manufacturing base and whether it has maintained the same kind of run rate going into the current year?
Well, look, there are 2 things that I really like about how they've been operating over the last several years. First of all, pre COVID, their top line growth rate was in excess of 10%, nicely in excess of 10%. So pre COVID, growing really quite well. Into COVID, yes, they had a pickup at through that period, which we've interrogated. I mean, a large part of our due diligence process was into their details virtually SKU by SKU looking for what the movements are.
And I think that brings me to the second point that I really like, their ability to move pricing through the market, very strong. They've done a great job to manage just the complexity of the supply chain issues, but also to move those prices through to the market that their pricing power has really been evident as we dived into the details.
Okay. Thanks, Andrew. I'll let somebody else have a crack.
Thanks,
Simon. We'll take our next question. Your line is open. Please go ahead.
Good evening Heath and Andrew. It's Keith from MST. Can you hear me come through?
Got you, Keith.
Very good. Thanks for taking my question. So just a couple on the trading update, first of all. So just want to talk around the revenue growth for the Americas business, up 4 0.5% for the quarter. Can you remind me, are we still correct in assuming that the effective price increase that's flowing through that period is around 6% for North America, which means when you talk about a slightly down volume number, it's around kind of that 1% to 2% range?
Keith, that's a good assumption. The price increase in that first quarter is in line with what we had signaled back in August.
And then Andrew, you talked about the slows distribution model changing from regional to cross stock. Is that something that you had been aware of previously? And if that's the case, are you still expecting an impact to flow through in the Q2? Or was that largely done? Because if you strip it out, I mean, the growth rate in the Americas of 12% is actually very reasonable, if not strong?
I'd go with strong. I think strong is probably but that's exactly the case. I think it was a significant move. What's quite reassuring for us is, and as you know, we track the point of sales data really closely. That number, that 12% number is certainly more indicative of what we're seeing sort of on average at point of sales.
And Keith, we feel like it largely
Sorry, go ahead Andrew.
Sorry, I was just going to say, we feel like it largely was worked through in the Q1. The impact in the Q2 will there will be some, but it will be pretty small.
Okay. And are there any of your other distributors where you need to think about them changing their distribution model this year? Anything in the pipeline, any discussions that may continue to drag on sales?
Hey, Keith, this is Sean McClanahan. No, it's really just limited to Lowe's. We don't see any other distribution models changing across the channels or customers.
Okay. Can I get an understanding Sean of how much notice you were given about that because it seems like quite a material move? If it had an 8% revenue impact on the division as a whole, it must have been massive in the context of Loews as a customer.
Yes. Not to go into too much detail regarding Lowe's. I think everyone understands they're kind of going through it quite well at 3 to 5 year turnaround process. And I think they're just beginning to address some of the gaps between them and other world class retailers on supply chain. So I think a lot of these changes are rather recent and as they've been driving those changes, they've not communicated them all to the vendor community.
So that's an area they're working to improve is to let the vendors know a little bit more visibility before they make these moves because we had limited visibility to this one.
Okay. Okay. Thank you, Sean. And then perhaps one on the acquisition, EasyFlow. I think Andrew, you mentioned there was 7 DCs in the U.
S. And you're kind of okay on in stocks given the distribution model you've got in the U. S. Can you give us a sense of how much stock on hand that business would have at any given time? I think obviously the discussions around the freight issues that we're seeing globally and the logistics challenges, but let's just say freights between China and the U.
S. Was impacted by call it a lag of 2 months. Would you
have enough to cover yourself
or your customers with stock for that kind of period if you got into a 2 month hole?
Hi, Keith. This is Andrew. We think so. That business was carrying a little bit more inventory than what the U. S.
Business would typically carry. So we would feel confident based on the number you just quoted 2 months that we'd be able to carry through that.
Okay. But for the time being, no major logistics issues have transpired since the start of DD and the acquisition
time? No. Look, I mean, they're handling all the same craziness that all of us are and handling it quite well. Nothing we saw in DD was a surprise given what we're dealing with in our business.
Thank you.
And then Andrew, just a few kind of minus to cover off on the financials of eZflow. Can you give us a sense of what the D and A for that business is and the tax rate that that business would incur? I'm assuming it would be pretty similar to the tax burden for the North America business from an effective tax rate perspective. But if you can give us a sense of D and A tax and may as well go with interest as well, that would be very useful.
Look, D and A is going to be $2,500,000 to $3,000,000 I don't have an interest number for that business and of course it was the acquisition didn't come with debt. So going forward, I think we've signaled it should add a couple of million to our interest expense in FY 'twenty two, the acquisition would.
Okay, excellent. Thanks very much. I'll circle back.
Thanks, Kate.
We will take our next questions. Your line is open. Please go ahead.
Hi, Heath, Andrew, Sean, thanks very much for your time. Peter Stane from Macquarie. If I may just very quickly try and quantify the level of disruption you've seen in the U. K. From a supply chain perspective Heath.
How much would that have taken from your growth rates in this period?
Look, I'd say, I don't think the U. K. Is sort of any better or worse than what we're seeing everywhere in the world right now. And it's sort of hand them out day by day really. And honestly, it's impossible to put a number on exactly how it would have dented the revenue.
I want to think it's a point or 2, but I haven't got hard data in front of me to determine that. It's right now, it's really hard to read through or look through the whole supply chain from the contractor through the distributor to us. It's a pretty dynamic period.
Yes. No, understood. Certainly seems that way. Maybe I'm just going to on EasyFlow, get the answer to Keith's question around the tax rate. Just very quickly, is that demonstrably different from your position given the Chinese sourcing strategy?
It's not Peter. We would still call the tax rate between 24% 26% for the financial year. Okay.
Thanks Andrew. And then maybe just a slightly more macro question around the supply chain for EasyFlow. Rather than wondering about the current situation and the risks, I'm curious in the sort of macro context, what are some of the things eFlow would have had to do 2 years ago when tariffs were introduced on Chinese imports as an example? What are the sort of mitigation strategies should an unfavorable trading regime come about or aggravate itself over the coming years? So just some of those macro processes around that trade relationship?
Look, I don't think what they had to do was a whole lot different to us. I mean, they work both end of it, what mitigation they could get from the customer end as well as what mitigation they could get through sourcing and manufacturing strategies. I think it's fair to say some items or components that were previously manufactured in China, they like us looked at manufacturing those elsewhere. So it was they pulled all the levers available to them in the same way that we did. So there's nothing really there that's a standout that's different, I guess, than what we had to do.
Yes. Thank you. So was there thinking about half manufactured in China, another 20% sourced in China, and then I presume the rest is onshore manufacturing in the U. S, is it? And was that proportion then lower historically?
Look, other things sourced from elsewhere, there's not a whole lot of true manufacturing in the U. S. Within EZflow. And yes, that proportion has changed a little bit over the period, but not drastically, just a few key items that helped them deal with the complexities of the tariffs.
Yes.
Last very quick question. I'm just curious what the biggest part of the cost synergy bucket would be? What's the single biggest item there?
Breakdown of cost synergies. So generally what those buckets are?
Yes. So of those cost synergies, you could think of them about fairly close to equally split between procurement sourcing synergies, synergies we're going to get on the distribution side, including freight and freight optimization. Those are the 2 largest buckets and then obviously behind that will be some SG and A synergies by running kind of a common overhead structure here in the Americas business. So call it 35%, 35% each and then the balance would be on the SG and A side.
Perfect. Thanks, Sean. Appreciate that color. Thanks, gents and good luck. Thanks very much.
Thank you, Peter.
We will take our next questions. Your line is open. Please go ahead.
Hi, good morning. It's Pete Wilson here. Good morning, Peter. Just on the trading update, the comment that you expect first half margins to come in 100 basis points to 150 basis points below. Were you referring to group margins there?
And could you give some commentary on Americas, which seem to suffer the biggest margin decline in the Q1?
Hey, Peter, this is Andrew. That was group margins we were referring to and we did not intend to get into that level of detail in terms of the Americas margins for the half. So we'll just not get ahead of ourselves at this point and we'll talk about that in February.
Okay, fine. And then the EMEA sales growth rate 9%, seems to slow potentially a little bit since the second half of last year. I'm just wondering whether you agree with that and what might be causing that?
I think what we saw a little bit in the U. K. In this period was vacation that we've kind of forgotten about a little bit. Last year it wasn't. It was an unusual year last year and this year just felt a little bit not normal by any stretch, but I think there was a whole lot of people who took the opportunity in sort of July, August and even in September a little bit to take some vacation.
So I think that trimmed in that trimmed some of the growth off. But I think it's fair to say it was probably a good time to have a vacation as well because some of the supply chain issues were limiting what material was available as well. So there's a few factors at play there.
Okay, good. And just a couple on EZflow. Firstly, the your liquidity post the transaction, euros 127,000,000 dollars strikes me as a little bit light. I'm just wondering how you're thinking about that versus your uses in the next 12 months?
Look, I mean, I don't think there's anything specific to call out there. That $127,000,000 obviously is where we're seeing the headroom post acquisition. But nothing specific to call out. We did other than the capital investment that we mentioned at year end last year, the $60,000,000 to $70,000,000 we certainly are on track to invest that into the business. So that's going to be a pretty big use as we go through this financial year.
But that's about it, Peter.
Okay. And you think that's enough to account for all possible contingencies?
I think so.
Okay. And then on EZ Flows, you've given an estimate of the market size, dollars 1,200,000,000 versus the $2,000,000,000 market size of residential plumbing and fitting. So it implies a 15% share for EZflow. I'm just wondering, could you give some commentary on who has the other 85%? Because I mean it's anecdotal that in my experience those kinds of connector fittings retailers generally only carry one particular brand.
So just wondering who has the other 85%?
I think that look, it's a pretty fragmented market. I think if you break if you get into the details, there's a fair bit that or a number of different product categories that make up that 1.2 percent. The couple of key ones there, the water heater connectors and also the water appliance water connectors, we're sort of well in excess of 20% share from what we see with the numbers there. And some of the other categories were obviously a whole lot lower. But that's sort of, I guess, from our point of view, the opportunity being in that channel or within those parts of that channel gives us the opportunity to grow those sectors.
But there are a number of other suppliers and brands out there. As I said, it's quite a fragmented market.
Okay, perfect. I'll leave it there. Thank you.
Thanks, Pete.
We will take our next question. Your line is open. Please go ahead.
Hi, everyone. It's Daniel Kang from CLSA. I'm just curious about the background of the EasyFlow transaction. How long had you been looking at the opportunity? How did the opportunity arise?
Did the family approach you?
Look, without getting into too many details, I mean, that process is well, those discussions, I guess, has several months old or since they first began. I think COVID kind of disrupted them a little bit as well. And look, we try and put ourselves in a position to be aware of when these things are going to move. And we did so in this case and look closely at it. And I think it's fair to say the more more we got into it, the more we liked it, frankly.
All right. Thanks, Heath. And you mentioned before that EZflow generated pre COVID revenue growth of around 10%.
Can you talk about
the organic growth and the market share growth of EZflow over the past 5 years and your expectations going forward?
Well, look, pre COVID where they were more than 10% growth, I think we believe from here on in we can continue that. They've had a couple of years of higher growth through COVID, which is what you'd expect. As we look forward, we're being a little we don't expect that COVID level growth obviously, but we think the ongoing 10% plus growth rate is possible with their products. That's certainly what we're targeting. And look, that's based on the nature of the products, the quality of the products, but their execution level, their reputation and capabilities to capabilities to execute.
So they've got a good track record of organic growth. Their last acquisition, Eastman, was years years ago. Everything they've done over the last several years has been organic.
Right.
But I think if you look at the long term growth of that market, right, it's like the water heater market, right, it's tied to major appliances. So if you looked over a 10 plus year period, you can call those type of markets, call it GDP growth markets, much like the water heater market we serve today. So the majority of their success has been tied to those things Heath just outlined around the value proposition, which has enabled them to take share from other manufacturers, both through execution and expansion of their product line and offering.
And just on the topic of share, where would that 15% market share have stood, say 5 years ago? And where do you see the natural market share of EZflow in the long term?
Look, we don't have the specifics of what their breakdown was 5 years ago. Certainly, they've grown a couple of categories in particular well ahead of market. Look, we think there's a lot of runway here. If the one comment Sean made as he went through was he noted that the 3 biggest installation or appliance retailers in the U. S.
Are Lowe's, Home Depot and Best Buy. And we're in 2 of those and EZ flows in 3 of those. So we certainly see there's opportunities to expand the share they've got in each of those outlets across different parts of the stores and across different parts of the country depending on where they're currently in place and where the opportunity lies.
Thanks, Heath. And just a final one on supply chain issues. Just interested in how you see the situation evolving? Any areas of incremental improvement that you are seeing at the moment?
How is it evolving? It's Sean's sitting here smiling. I mean, it's a day by day thing. You conquer steel today and you wake up tomorrow and it's a particular resin and the day after cardboard. I mean that's it's a wild ride right now.
I'm not confident to say anything settled at this point. I think we still got some ways to go. Certainly, we see as transitory, but it's we got a few months of craziness left, particularly on the shipping side, I think. So look, it's you pull all the levers you have available to you. The good long standing relationships with our vendors that are looking for material alternatives, particularly when it comes to resins, borrowing from other regions, doing deals with suppliers to swap 1 material for a different material.
I mean, all sorts of stuffs on the table and has been for months now. And look, we're not alone. I mean, everyone's doing the same thing. It's the nature of the beast.
Got it. Thank you, guys.
Thanks, Daniel.
We'll move to next question. Your line is open. Please go ahead.
Hi, Heath. Hi, Andrew. Hi, Sean. Lipower here. Just firstly on the trading update, Asia packed the 17% sales growth.
Was that in terms of the intercompany sales, were they impacted by that cross docking as well, given that they're obviously imported into the U. S? Or should we think that the intercompany component was close to that 12% number?
Hey, Lee, this is Andrew. No, those intercompany sales to the U. S. Would not have been impacted by that reduction. It did allow us to build a little inventory in Americas, which is something we try to do this time of year.
But that's we've got the Australian factory working pretty hard right now as we prepare for the kind of this winter season coming up and no impact from that loads inventory reduction.
Okay. Excellent. And then the 10% per annum EZflow sales growth that you've talked to for the next or 10% plus for the next 3 years, you've obviously given a bunch of different examples there on Slide 24. Are any of them larger than others? Like it looks like there's share growth, there's product line extension, there's geographic extension.
Like is any one of them that you're kind of pinning to drive the large proportion of that sales growth? And then maybe at the same time, I think, Sean, you mentioned that, EZflow, only 5% of its sales was to new construction. Is that just a factor of the style of business as a very R and R led business? Or is there something like is there some sort of large component of new construction that's sitting there that's potentially to be 1?
So in terms of those opportunities, they're as listed, they're prioritized. So from largest to smallest to give you a sense of some of the growth avenues, opportunities in the pipeline. From your new construction question, again, there's a lot of similarities between our business that services the tank water heater market. If you look at just as a rule of thumb, say there's 10,000,000 tank water heaters sold a year, there's a 1,000,000 to 1,500,000 new housing units starts a year in the U. S.
Kind of implies 10% or 15% of that market is new construction and the balance is repair or replacement, I should say. I think the appliance major appliance market is similar. You only have so many new housing starts a year that require new washers and dryers versus those that are replaced. I think the other key activity that is slightly different, however, is remodeling. And I think as you all know with all the various dynamics that are taking place in the American housing market today, I think we expect and most people expect the remodeling activity to remain robust.
I do think you get a lot of new appliance sales particularly in the kitchen, ties to gas connectors and other appliance connectors for that remodeling activity that is really probably their biggest growth opportunity. So a little less on the new appliance side that ties to new construction, more on replacement in the natural life cycle and then that remodel work that's going on.
Okay. Excellent. Thank you.
Thanks, Lee.
We'll move to next questions. Your line is open. Please go ahead.
Hi, Heath and Andrew. It's Keith again from MST. I just want to follow-up on the growth in the North America's ex the lows issues of 12%. If we look at it another way, can you give us a sense of what's driving most of that growth, whether it's the pro channel or the DIY channel?
Both. It's growing well across well, both I'd like to say both. All channels, including OEM, hardware is strong. It's and I think across all channels we're seeing the consolidation of that step up from last year then with a little bit of volume on top of that and then certainly the price increase on top of that. So there's really shown no one channel that's a standout, is it?
There's not. And then you can layer in the complication that when you refer to the home improvement channel, I don't know if you're referring to that as DIY or pro, but if you follow the major home improvement players, clearly what's been driving their growth, especially in categories like rough plumbing, has been pro based growth in their investments to drive pro. So it is really across all channels and then even within a home improvement pro right now is probably out pacing what you would classically consider pure DIY work.
And Sean, as you look at or as you kind of peer into the conversations you're having with your customers, are there any signs of growth moderating or your discussions with the sales folk, does that suggest that things could potentially even accelerate to the end of this year? I mean, I don't want to get ahead of myself here, but obviously a 12% number ex the Lowe's distribution change issues is a really punchy number, especially when you're still comping some pretty strong periods in the PCP as well. So I guess based on the discussion that we've had just around Lee's question and the discussions you're having with your sales team or customers, are there any signs
of lead up at all?
There really isn't. I think outside of obviously supply chain disruptions and complications which again have several levels to it, right? I mean there could be supply chain disruptions that could impact rough plumbing products, but a lot of jobs are slowed or stalled because of disruptions that impact other building materials. So as an example, in the world of single family and multifamily construction today in the U. S, I believe the item that is in the shortest supply with the longest lead time right now is our windows and windows and doors.
So the availability of that product slows down construction generally for single multifamily construction, right? So absent that type of noise that's throughout the system, the fundamental demand remains robust. Most people will tell you their job boards are booked into 2023 from a contractor standpoint. So the work in the volume is there, it's product availability across all building materials and building products, that's the complication.
Look, I mean, I think the commentary and the analysis that we're seeing and receiving is that these supply chain issues will actually serve to stretch out the uptick in the market. As the demand is not waning, the supply chain is just going to play out over a longer period. And we don't really want the supply chain issues we're dealing with every day, but we're kind of happy for that prolonged uptick in demand if that's in fact how it plays out.
Yes. The insight we have to the volume at cash registers remains solid.
Okay. And then Andrew, I just want to circle back on a couple of things. So you pointed out to the acquisition being accretive in the 1st year. I mean the preliminary numbers that we're getting to are close to the high single digit range. Just wondering whether you think that's a fair assumption, whether there are any adjustments below the EBITDA line or EBITDA line that we need to take into consideration?
Yes. And of course that we thought it would be accretive in the Americas in the 1st year post synergies, just to clarify that. Look, from an EBIT perspective or from sorry, from an EPS accretion standpoint, this is going to be treated as an asset sale. So we'll get a step up in basis as part of the acquisition. And like we did with Hold Right, then we'll be able to amortize that stepped up basis on the intangibles and goodwill over 15 years for tax purposes.
So we'll have more of that adjusted impact effect where we've got a cash tax benefit related to the amortization of goodwill in this case. So that is something that you'll need to take into consideration about $4,500,000 on an annual basis from that perspective. So that's an additional deduction that we'll get because of that step up in basis.
Fine. Okay. And that comes through which line item?
I might be kidding myself, Barry,
what's the implication? That'll hit the impact line, the cash tax benefit.
We do not have any further question at this time.
And hey, just to let
you know, there are no questions from online. So I think it looks like we're all done.
Okay. Well, very good. Well, with that, we will wrap it up. I appreciate your time today. Certainly, grateful for the opportunity to step through what is a fair bit of material here.
But hopefully, we've done so satisfactory. Thanks very much for your time, and we will leave it there.
Thank you. This concludes today's call. Thank you for participation. You may now disconnect.