Reliance worldwide Stock

Thank you for standing by, and welcome to the Reliance Worldwide Corporation Full Year Earnings Call. [Operator Instructions]

I would now like to hand the conference over to Heath Sharp, CEO. Please go ahead.

Good morning, everyone. Welcome to RWC's Financial Year 2026 Results Call. This is Heath Sharp, and I'm joined here in Sydney by Andrew Johnson, our CFO.

This morning, we released our full year results material. But before we turn to the results, I want to deal with our second announcement this morning. So let's start on Slide 3 of our presentation.

RWC has entered into a process deed with Brookfield Capital Partners on August 17. This relates to Brookfield's unsolicited nonbinding indicative proposal to acquire RWC for AUD 4.75 cash per share. The proposal follows earlier approaches from Brookfield at $4.15, $4.25 and $4.50 per share, which the board considered insufficient.

Following a period of engagement including providing Brookfield with nonpublic information over an approximately 8-week period, Brookfield submitted its current $4.75 proposal. The proposal values RWC at an enterprise value of approximately AUD 4.1 billion. This represents an FY '26 EV-to-EBITDA multiple of 12.9x on a pre-AASB 16 basis. This is at the upper end of precedent transactions.

The Board has assessed the proposal on a fundamental valuation basis, taking into account RWC's strategic position, long-term growth opportunities and cash generation. The Board also considered the FY '27 outlook, including the execution risk to deliver future earnings growth and the broader macroeconomic and geopolitical environment.

While the Board remains confident in RWC's strategy and future prospects, this was weighed against the certainty of value offered by Brookfield's cash proposal.

After careful consideration, the Board determined that the proposal of $4.75 is attractive and warrants further evaluation. To that end, RWC and Brookfield have entered into a process deed to enable Brookfield to complete a 4-week period of exclusivity to conduct confirmatory due diligence and work towards a binding offer.

Based on the merits of the proposal during the exclusivity period, RWC and Brookfield have agreed to work together in good faith towards entering into a scheme implementation deed, as SID on terms consistent with the proposal. Brookfield has agreed that any formal SID entered into will include a go-shop provision. This will allow RWC to solicit and engage with other potential bidders for a 30-day period from signing the SID. I would note that there is no binding offer today and no certainty that a transaction will proceed. Shareholders are not being asked to take any action at this time.

With that, let me turn to our FY '26 results on Slide 4 of the presentation. FY '26 was undoubtedly a demanding year for RWC. We had to manage through weak end markets in the U.S. and U.K., the ever shifting impacts of U.S. tariffs and significant cost inflation.

While our results were impacted by those headwinds, we nonetheless delivered strong operating cash flow, and we continued to advance our manufacturing footprint product pipeline and service improvement initiatives. In February, we discussed transitioning from copper-based alloys to other materials and in particular, stainless steel.

We made good progress on this major initiative during the period. We launched a broad range of accessory products in stainless steel in the Americas. The plan to transition from brass to stainless for core products such as control valves and SharkBite Max is underway. We expect to be in the market in the first quarter of calendar 2027 with the first of these fittings and valves.

Our manufacturing footprint optimization has moved at pace. The new Poland facility ramped up strongly after commencing operations last November. As of June, the facility has over 110 people and is assembling 1.2 million fittings monthly. In North America, the implementation of a new facility in Mexico is progressing well and we expect it to be operational by the end of calendar 2026. In Asia Pac, we announced a significant restructuring of our manufacturing operations. The largest move is the closure of brass forging and machining operations in Melbourne. We have also announced the closure of additional facilities within Australia.

Turning now to Slide 5 and the financial overview for the year. Reported net sales were 0.7% lower than the prior year. There are several adjustments to reported revenue, which we have called out in the release materials. These relate to tariff refund provisions and changes in the accounting classification for some customer incentives.

Adjusting for these, net sales were 3% higher. That also adjusts for the exit from selected Canadian product lines, and it adjusts for the sale of our manufacturing operations in Spain last year. On the same basis, net sales were 1.5% higher in constant currency.

Adjusted EBITDA was $242.1 million. That is 12.8% lower than the PCP. Adjusted EBITDA margin was 18.5%, that compares to 21.1% in the PCP.

Operating earnings were adversely impacted by U.S. tariffs, higher copper costs, lower volumes in the Americas and EMEA and general cost inflation. These impacts were partly offset by price mitigation actions and $10 million of cost savings achieved during the year.

Reported NPAT was $6.3 million, that is net of $103.3 million post-tax of one-off charges. Those charges relate principally to the Asia Pacific restructuring. Adjusted NPAT was $125.1 million, that is 15.3% lower than the PCP. Adjusted earnings per share were USD 0.165.

The RWC Board has determined not to declare or pay a final distribution for FY '26. This follows receipt of the Brookfield proposal. Under the proposal, the offer price is reduced by the cash amount of any dividends paid or payable. That applies to dividends after the date of the proposal, including any final dividend declared for FY '26. We undertook 2 on-market share buybacks during the year. In total, we repurchased 25.5 million shares at a total cost of AUD 85.7 million. The second buyback has not been completed and is now suspended following receipt of the proposal. The Board will reassess paying a dividend and resuming the on-market share buyback if the proposal does not proceed.

I will now hand over to Andrew to take you through the results in more detail.

Thank you, Heath, and good morning, everyone. Moving to Slide 6. FY '26 was a challenging year from an earnings perspective, but the business remained operationally disciplined. The key financial themes were tariff-related margin pressure, softer markets in the U.S. and U.K. input cost inflation, and that's essentially copper and the benefits of strong cost and cash discipline. As Heath referenced, underlying group sales were 1.5% higher versus the reported reduction of 0.7% and 3% higher before adjusting for currency movements. We delivered $10 million in cost reduction initiatives during the year, partly offsetting the external pressure on earnings. Importantly, the actions we are taking on sourcing, pricing, manufacturing footprint and operating efficiency are building momentum and will support improved performance over time.

On the adjustments, FY '26 included one-off items principally related to the APAC manufacturing restructuring as well as the closure of distribution centers in Sydney and Perth. We have set these out in the supplementary financial information. Adjusted group EBITDA margin was 18.5% lower than the 21.1% in the PCP. I'll discuss the reasons for the movement in each of the regional sections. Second half adjusted group EBITDA margin was 19.8% versus 17.3% in the first half with the improvement driven by the Americas.

Turning now to Slide 7 and the Americas segment. Reported sales were 4% lower than the PCP. Adjusting for the tariff rebate provision, the reclassification of customer incentive payments and the exit from selected low-margin Canadian product lines, underlying American sales were 1.4% higher than the PCP. New product initiatives and tariff-related price increases helped offset weaker U.S. residential remodeling and new construction markets as well as around $10 million of customer inventory reductions that we saw and we spoke about in the first half. Channel inventories were broadly normalized by the fourth quarter.

In FY '26, a change in accounting for customer incentive arrangements impacted reported sales but had no impact on earnings. To briefly explain the reclassification most customer sales incentives are treated as a deduction from gross sales. However, we have historically had some incentives which have been expensed through SG&A. The change we have made classifies sales incentives in the same way as a deduction from gross sales. Note that we have not adjusted prior period sales or SG&A. Americas sales performance was stronger in the second half, consistent with our guidance. Underlying sales were 8.3% higher, partly driven by price increases as the benefits of tariff-related price rises flow through to results.

Adjusted EBITDA was $161.4 million, 11.5% lower than the PCP, with the adjusted EBITDA margin reducing from 19 -- reducing to 19.6% from 21.2%. Earnings were significantly impacted by U.S. tariffs as well as higher input costs, including copper. The tariff cost impact was at the lower end of our guidance range of $25 million to $30 million. We also recorded a net tariff refund benefit of $4.2 million as part of operating earnings. This was the difference between what we received in tariff refunds and a provision that was established for potential tariff rebates to customers.

Second half adjusted EBITDA margin was 22.2% compared with 16.9% in the first half. The uplift was partly due to the tariff refund as mentioned earlier and also driven by price increases and cost outs. Operationally, we are on track to commence activities at our new facility in Mexico by the end of calendar year 2026. As a reminder, this new facility will augment current manufacturing operations in Alabama. It will be focused on lower volume manually assembled products that complement our high-volume, high-technology U.S. manufacturing capability.

Moving to APAC on Slide 8. APAC sales were 5% higher in local currency. Sales growth was driven by broad-based growth in both RWC and Holman product categories. Intercompany sales were 7.4% higher due to stronger volumes ahead of the planned closure of APAC's brass manufacturing operations in Melbourne.

APAC adjusted EBITDA was $21.1 million in local currency, 26.7% lower than the PCP, with margin down 290 basis points to 6.6%. Operating margins were negatively impacted by higher raw material and freight costs and lower manufactured volumes partly offset by price increases and cost reduction measures.

Stepping back from the financial performance aspect, it is useful to look at the broader context around the changes in APAC. The business is really undergoing a significant transformation. From metals manufacturing to supply Americas to a business very much focused on its home market. This change is impacting short-term earnings performance. The future APAC business model will be focused on product and brand stewardship, driving further product penetration, revenue growth with our channel partners and operational excellence around sourcing and fulfillment.

Turning to EMEA on Slide 9. EMEA reported net sales were 3.4% lower in local currency. External sales were 0.8% lower after adjusting for the sale of our manufacturing operations in Spain in FY '25. U.K. external sales were down 3.6%, with U.K. plumbing and heating sales down 4.7%, while specialty and other product sales were 5.4% higher. Continental Europe performed well with external sales 6.8% higher after adjusting for the sale of Spain. Germany, France and Italy all recorded sales growth supported by product launches across an expanded distribution network.

Adjusted EBITDA was 11.3% lower than PCP, second half EBITDA margin was flat on the first half, and we had previously guided to higher operating margin in the second half. The U.K. service improvement program impacted margins and the Poland ramp-up led to a short-term increase in costs in the second half. The ramp-up has gone well. And as Heath mentioned, we have achieved a record output of 1.2 million fittings per month. We expect the lower cost base of the new Poland facility to support earnings growth in FY '27.

On Slide 10, you can see that cash generated from operations was $263.4 million and operating cash flow conversion was rather strong at 108.8% of adjusted EBITDA. This strong result was partly due to the receipt of the U.S. tariff refund late in the financial year. As a result of this strong cash flow performance, we were able to repay $88.2 million in borrowings during the year, and our leverage at year-end was 1.11x compared to 1.3x in the PCP.

On Slide 11, we have again demonstrated our tight management of working capital. Inventories were slightly higher than the PCP despite significant input cost inflation, particularly copper. Total net working capital was $35 million lower than the PCP. We continue to be very disciplined with capital expenditure while continuing to fund critical strategic projects including Poland, Mexico, new product development and manufacturing optimization.

And with that, let me now hand you back to Heath.

Thanks, Andrew. On Slide 12, we have set out our guidance for FY '27. This covers the full year. For FY '27, we do not expect an improvement in economic conditions in our major end markets. As we referenced in our results materials, global geopolitical uncertainty is likely to be a headwind, so too are higher commodity inflation and interest rate pressures. Americas external sales are expected to be up by mid- to high single-digit percentage points, driven by new product revenue and pricing actions. We expect EBITDA margin to be broadly consistent with FY '26. That is despite the significant rise in input costs, most notably copper. Price increases to offset cost inflation will assist us with this. We expect a net impact from U.S. tariffs to be $5 million to $7 million in FY '27, that is consistent with our previous guidance. Asia Pacific external sales are expected to be up by mid-single-digit percentage points.

Total sales are expected to be lower than the PCP due to the reduction in intercompany revenues of approximately AUD 50 million. This follows the closure of metals manufacturing in Australia. We expect EBITDA margin to be broadly consistent with FY '26 despite the decline in intercompany revenues. EMEA external sales are expected to be up by mid-single-digit percentage points. EBITDA margin improvement is expected through a combination of pricing actions and ongoing cost reductions. At a group level, we expect consolidated sales to be up by mid- to high single-digit percentage points relative to FY '26. Adjusted EBITDA margin is expected to be broadly consistent with FY '26. We are targeting further cost reductions to deliver approximately $10 million to $12 million in savings for the full year.

And I will pause there and open the call to questions. We will take questions first from those on the conference call line then Phil King will read any questions received via the webcast.

[Operator Instructions] The first question comes from Ramoun Lazar from Jefferies.

Just one for you, Heath, around the bid this morning -- announced this morning. I was just wondering just the thinking around engaging with Brookfield at those prices. I mean given the significant changes in the manufacturing network that the team has put into place over the last 12 months following the trade changes, the transition to stainless steel and the housing cycle while bouncing around the bottom, not getting worse. I mean, is there a change -- a structural change in the earnings power of this business going forward? Maybe if you can shed some light there, particularly given -- I mean, the share price is above that bid, not that long ago, and it looks like the worst is kind of behind you given all those changes that the team has worked hard to put in place?

Ramoun, thanks for your question. Look, I would say that the Board assessed the proposal on the basis of fundamental valuation and we've taken into account our strategic position, all of our long-term growth plans and cash generation. I think it's fair to say the Board considered the outlook for FY '27 and the near-term operating environment, which is clearly quite different to sort of 6 months, 12 months ago as well as the execution risk to deliver on the future earnings growth. And all of that, of course, in the context of the broader macroeconomic and geopolitical environment. And weighing all of that up against the certainty of a cash proposal. So, in that light, the Board considers the proposal to be credible and attractive. And so, in the best interests of shareholders to undertake further due diligence work towards a binding offer.

Right. Okay. So there's nothing sort of structurally different that you see with the business and the earnings power against what you've previously talked to the market about? I mean you had an Investor Day not that long ago here in Sydney, talking about the various businesses and the earnings power of those businesses. Has something changed in terms of getting back to that kind of run rate of earnings across the business? Or is it just about this near-term volatility uncertainty?

I think there's no structural change for our business. I think we've weighed up all aspects of the environment we're in, taking into account all of our plans, whether it be stainless steel Poland, Mexico, ongoing footprint. We worked as you would expect, all of that into our model. And all of that pointed to us are considering it or the Board considering it appropriate to engage at $4.75.

The next question comes from Sam Seow from Citi.

I just really wanted to follow on from Ramoun there. You had the 4 bids in 8 weeks, but still, I guess, a lack of a recommendation. I just wanted to ask to what you're allowed to say how you're thinking about the valuation, where we are in the cycle? And if there's a view on normalized earnings or normalized margins and just high level what that might look like?

So a couple of points in there, Sam. First of all, we're not holding a binding offer today and shareholders are not being asked to take action. What we've announced is the process deed, not an SID. And as I said, to Ramoun's question, the Board believes the process announced is appropriate given the attractiveness of the proposal and the increases in proposed value over a few bumps over the last few months and the go-shop mechanism that we've announced. So all that being considered, taking into account the outlook and acknowledging that it is quite a different world right now to 12 months, 2 years, 3 years ago. That's what has led us to the announcement today.

Got it. Got it. That's helpful. And then maybe on the outlook, I guess, clearly, conditions aren't expected to improve, but sales growth across most of your regions are looking quite healthy or expected to look quite healthy. Maybe if you could just give us some color on what's driving that and maybe the rough split between price and, I guess, share gains or bottom-up initiatives?

Thanks, Sam. I think most of that uplift in revenue that you see in FY '27 based on the guidance that we've given, most of that's going to be price. I'm not going to give you the split between price and what volume we would see based on our initiatives in NPD. But to the extent that we have volume, it would be based on those 2 factors. We really don't see a significant change in the macros in any of our regions through the course of FY '27.

The next question comes from Brook Campbell-Crawford from Barrenjoey.

Heath, just first for you, I guess, while you and the Board were considering this offer, did you sort of step back and consider alternative options to unlock value for shareholders, accelerate performance and things around the portfolio that you could do to try and deliver a better outcome for shareholders over a period of time?

Brook, thanks for the question. I think it's fair to say that the consideration undertaken by the Board was quite exhaustive. Considering the proposal that we had received, a number of other inbounds and specifically to your question, yes, we considered all manner of alternatives sort of directly under our control as a stand-alone business. All of that was considered in forming the view.

Okay. And just around the due diligence. Can you just provide a bit of color around the extent of due diligence already sort of provided to Brookfield. Are they looking for a huge amount more information? Or are they largely sort of completed their process, and it's a bit more down to formalities now? And I guess second question, it might be in the release, so apologies if it is, but just do you have an estimated time to closure if this sort of progresses with Brookfield that sort of what time would it close and shareholders get their funds?

Thanks, Brook. So what I would say is over the last sort of 7, 8, 9 weeks, we have been engaged with Brookfield in discussions, primarily dealing with, if you like, the commercial aspects of the business and our positioning and relative strength and focuses and so on. And on the basis of those discussions, Brookfield made their latest proposal, which is the one that we've presented today. The process now is a short 4-week process that is confirmatory in nature to go through all of the normal things you go through in a due diligence wrap-up process. So that's the first element.

Timing. So we have essentially started today that 4-week DD process during that 4-week period we will work together with Brookfield to -- with the aim of developing a SID along the largely the same terms as the proposal. At that point, that's -- well, that it will include the 30-day go-shop mechanism that we've set out in the materials. So that 30-day starts at the point of signing a SID. If that occurs, and they're the main near-term milestones in the process.

The next question comes from Peter Steyn from Macquarie.

Andrew, if I may, could you help just bridge how you've accounted for what you've got refund wise, the net $4.2 million and then the guidance for FY '27 from a margin perspective in Americas at flat. I guess I'm kind of coming back to some of the questions that have been posed before. But just curious more specifically how you go about getting your margins back to where they were before because that has been the ongoing intent to effectively reset those margins to pre-tariff levels. So just curious when that happens and how it happens?

Thanks, Peter. I think to your first question, we did recognize a net tariff benefit of $4.2 million, as I mentioned in the prepared remarks. That's the net number. Obviously, there was a gross refund amount. And then there was a reduction of that, which was essentially a provision that was an offset to sales. And that's a provision that we put on the books. And first of all, it was a conservative accounting position, as you would expect from the accounting team at RWC. But secondly, it will provide, I believe a provision that will be useful over the course of FY '27, as we discussed, not only pricing but also customer investments and strategic initiatives. I'm not going to give you the 2 pieces, but obviously, we have disclosed that there is a $4.2 million net tariff benefit there.

In terms of the Americas guidance, for FY '27, we have said broadly consistent or flat. And look, and I think that there are a couple of big moving parts there. The first one that you would more likely come to would be the reduction in the tariff cost benefit. So we've said that we were at the lower end of our range in '26, so $25 million to $30 million back that down by the tariff refund. And so you're in that low 20s range. And we expect that to go to $5 million to $7 million in FY '27. So roughly a $15 million tariff benefit year-on-year. I think the next thing we need to talk about, however, is inflation. And as you guys know, copper has really made a run through the second half of FY '26. We do expect that the year-on-year increase in the LME for our books would be roughly $3,000 per ton. As we've said in the past, our sensitivity is $900,000 per $100 movement. So that's a significant impact. Partially offsetting that, of course, would be price and cost outs. But there's a lot of moving pieces, a lot of things to execute on, and I think the team has done a good job to get us back to consistent or essentially flat year-on-year. I will say that given the amount of inflation that we're covering with price, there is a dilution impact to margins that you don't see. I mean some of the other actions that we're taking are offsetting that, but that kind of furthers the headwinds that we're facing from a margin perspective in the Americas.

Got you. So the rebuilding of margins is going to be a multiyear process. Is that the read on that then, Andrew?

For sure, Peter. I think that we are working on Mexico. We will see some benefits from the metals closure and moving to stainless steel, but we'll be well into FY '28 before those really come through on the P&L.

The next question comes from Harry Saunders from E&P.

Firstly, just on copper, can you talk us through any potential price increase to cover that in the interim with the transition to stainless steel and then how we should think about the earnings upside in '28 and '29, as you transition away from copper, please?

So Harry, we do have quite a bit of price coming through in FY '27 to cover copper. You can see that in the revenue guide that we've stated. I don't want to talk too much about FY '28 given the time and distance between now and then. But I will mention that we do expect to see savings related to the move to stainless steel. And as we've called out in the past, we expect that to be roughly USD 9 million, but that will be FY '28.

And is that saving, assuming you sort of offset any copper movements on a go-forward basis?

Yes.

Understood. And just wondering more broadly, if you could bridge '27 to last year, I appreciate you helpfully provided us with the net tariff benefit of $15 sort of million. But the other benefits, could you just talk us through those and repeat non-repeats of sort of one-off costs, perhaps destocking or manufacturing changes. Maybe you could just give us the building blocks, that would be helpful.

Sure. So from FY '25 to FY '26. And I'll talk about the consolidated numbers. Look, there are -- typically, there's 2 things that we have to talk about. There's net tariff costs, which, as I mentioned earlier, there's a couple of pieces in that. And when I talk about net tariff cost, that's going to be inclusive of the tariff refund benefit. The net tariff cost, roughly $21 million, copper through our P&L in FY '26, we saw roughly $1,000 per ton increase. So as we've said, that gets you close to $9 million to $10 million of copper, just copper inflation that we've had to deal with. And as you look through the rest of the moving pieces, you're going to find the volume was slightly down. We obviously have wage inflation like we do every year. We did see some unfavorability related to factory performance, and that's specifically in the APAC as we've gone through the metals closure and the ramp down of that production. We've also talked about some investments in customer service deliveries in the U.K. as well as the Poland ramp-up, which caused some slight factory underperformance in FY '26.

Now those things are offset by roughly $10 million in cost savings that we've been able to bring to the bottom line. So those are the big moving pieces. And it's essentially -- and you'll hear this a lot in our Q&A, the big moving pieces are tariff costs copper inflation and then what we've been able to do in terms of self-help with the cost outs.

Got it. And are you able to perhaps quantify those one-off kind of impact factory performance in U.K. and Poland impacts there as well?

Harry, I'm not going to go into specifics on those. We're not talking huge numbers. We're talking low single-digit millions.

Okay. And just one more follow-on from Sam's question earlier. Can you just give a sense of the upside in the earnings base from macro recovery and also operationally?

So we're not anticipating significant macro recovery in FY '27. So from a macro perspective, that would just be very minimal. Some of the upsides that we've mentioned, we do -- as you see in our earnings guide, we do see a lot of price coming through in FY '27, and we called out cost savings between $10 million and $12 million. So those are some big moving pieces. And I've talked about the tariff reversal. What's between those savings or favorability is a lot of inflation. We're talking not just copper, we're talking resin, freight, and of course, wages. So -- but those are the things I would call out.

The next question comes from Lee Power from JPMorgan.

Just on -- Andrew, on your comments around the stainless upside, like I'm surprised it's not looking a lot more attractive now. Like you've got copper well above $14,000 a tonne, you like a first mover. I would have thought everything would have probably looked more positive around the stainless rollout. So can you just maybe like help me understand what else has kind of changed there?

Well, I don't think anything has changed. I think that -- look, we're talking about FY '28. And certainly, a lot could change between now and then. We've talked about $9 million in savings, and that's a number that we'll stick to. And obviously, there's risk associated with achieving that $9 million. If we do better, I think there'll be some puts and takes, obviously, but $9 million is the benefit that we see sitting here today.

Okay. And then just the rollout piece, like how quickly do you get this out there? I would have assumed likewise, like the pressure on copper is clearly enormous on you at the moment. I'm assuming it's the same for everyone else. So like how quickly can you actually get this product rolled out through the channel? And then maybe is anyone else kind of doing something similar when you look across your peers who are not in stainless currently?

Look, I think there's kind of 2 streams here. I think to some extent, releasing new products and new additions to our range doing that in stainless and/or non copper-based alloys is now business as usual. So our U.S. team during the course of the last 6 months have launched a couple of hundred items in stainless steel, so particularly across appliance, connectors and so on. So that's now just a matter of course, to use stainless as the material for new products. So that's rolling on quite nicely. As I said, a couple of 100 components and they've got line of sight to an additional sort of 300-odd and SKUs. So well underway.

The second stream, though, is more the one that Andrew was referring to there, which is the transition of existing products to stainless steel. And the big volume items there in terms of copper consumption or the control valves, the safety valves and SharkBite Max. As you would imagine, we are moving at pace on those items, but also aware of the significance of those items in terms of quality and performance and so on, and that underpins our brand and our reputation in the market. So we are being very thorough there. The first of those products on the larger-sized SharkBite items and some of the safety valves will be launched into the market at the start of next calendar year. So that is to my mind, are quite rapid for our industry, but also prudent given the nature of the product where they're used and how they underpin our brand and reputation in the marketplace.

The next question comes from Keith Chau from MST Marquee.

Maybe just a quick follow up on Lee's question on stainless. Heath, I was thinking about stainless steel driven earnings upside, the shift to stainless steel is it more about matching product economics, say, for control and safety valves and SharkBite Max. Is it more about matching those product economics to, say, $10,000 copper price by shifting to stainless steel? So perhaps defending against product economics eroding? Is that a better way to think about it? Or is there genuine upside shifting to stainless steel relative to a $10,000 copper price?

I think -- and you're going to hate this, but I think it's buffers. I think the initial thinking was that more conservative, how can we backstop the cost of our product to USD 12,000, USD 12,500 a tonne for copper. That was sort of the initial drive. I think as we've gotten into it, though, we do see a competitive advantage for us in the stainless steel products. It's regarded generally as a superior material, yielding a superior product, which I think is in keeping with who we are, what we do, the brands that we have, and so being able to frame the products as an improved superior product, I think, is helpful. And then, look, over time, we will continue, as we always have, to seek ongoing processing improvements, continuous improvement to sort of to chip away at that cost basis. I think that's independent of the material we use. I think though moving for statuses and new material perhaps gives us a little more scope than brass. But it's going to be sort of an incremental ongoing process, I think, Keith. And ultimately, it leaves us, I think, with a really good product range and an offering to the marketplace that's in keeping with what we've created here.

Okay. Certainly don't hate that answer, I think that's a good response. And then secondly, under your go-shop provisions to the extent that you can provide us some color just can understand what it would take to progress discussions with another party? Is it simply a list in the offer price? And is there a certain range of magnitude of lift that would be required to produce something else? Or are there other key terms that RWC is looking for under that go-shop provision or the process of running through the go-shop provision?

So what's probably we're doing is just talking briefly about the process over the next couple of stages is, as you know, we're not holding a binding offer today. So there's, in our view, no recommendation to make, and we're not asking anyone to take any action. We have though begun a 4-week exclusivity period in order for Brookfield to undertake confirmatory due diligence. During that 4-week period, it is exclusive and everything that, that entails. No shop, no talk, no DD with others. The aim of that -- during that 4-week period, we will aim to prepare in conjunction with Brookfield SID along largely the same lines as the proposal that SID will include the go-shop mechanism. Once a SID is signed, that begins a 30-day go-shop process or mechanism. During that -- those 30 days, we are able to receive and able to solicit interest from other parties. Should another offer emerge that is superior to the $4.75, then we are able to continue to work with that party and develop that proposal through or beyond the go-shop period if we have received a superior offer during the 30-day period. We can extend that period to the extent which is necessary to fulfill our statutory and fiduciary obligations and then develop that and see where that lands. As you would expect Brookfield has a matching right or will have a matching right as part of any SID that signed.

And just for clarity, are you looking for just -- when you go into that process, are you simply looking for a lift in the total offer price? Or I think -- are there going to be considerations around whether you might see -- receive a bit of part cash, part shares. I mean what's the trade-off there? Is that something you just go through with the board as if a bid does come to fruition or alternative bid?

Yes. Look, I guess, I would say the potential certainty of an all-cash offer is part of why we've taken the action that we have today and engaged or in the process deal of $4.75. In the event there is a competing offer, then we simply will need to consider on its merits. But I don't want to preempt what is or isn't appropriate at this point in time.

Yes, that's fair. And just going back to Ramoun's question earlier on, I guess, I think we're also looking at this big, okay, well, the share price has been as high as $6 previously, the bid's at $4.75. Clearly, the world has changed. As you look at the business, and this is maybe we're just requiring a broad comment here, but has the earnings power of the group do you think perhaps deteriorated in the last 5 years? And if so, is that principally driven by cost inflationary pressures. I don't know if you can answer that in a very broad way heat, but maybe some views on maybe the -- some reference points over the last 5 years might be an easier way to answer that question?

Sure. Look, I would say it -- look, it's even hard to pick a point in time over the last 5 years as to reference. I mean it's been quite a period and the world today feels different generally to how it felt 5 years ago. I guess all I can do to elaborate on the process we went through is we considered all of the things we're working on, whether it be stainless steel, Mexico, Poland, ongoing footprint activities in all of our regions around the world, the new product initiatives, the stainless steel, our view of what the market will do in the coming years as best as we're able to factor all that in to develop our own valuation. And I think it's fair to say that on that basis, we were -- we thought it was appropriate to engage with Brookfield in this manner at $4.75.

The next question comes from Daniel Sykes from Jarden.

I was just wondering if you could just flesh out a bit of those comments around the resin impacts. Just if you could help us understand, I guess, how that impacted top line and also below the line across the segments in FY '26? And then also what you'd expect in FY '27, whether some of those are rolling off as well?

Yes. So we really did see after the start of the Iran war, I think we started to see pretty significant resin inflation, specifically in our APAC region. A lot of that goes into inventory towards the end of the year, and then we'll push into FY '27 as an impact. And it will be significant. If you look on balance, the inflation that we will see related to resin, freight and all and wages and everything else is really coming close to what we're going to see on the copper side running through the business. So it's significant.

Are you able to kind of give us an idea of how much that impacted the top line as well in terms of how much you were able to push through those costs in the second half in particular?

Look, I think we've mobilized pricing in all regions, probably multiple rounds certainly in APAC and EMEA. I'm not going to call out specifically what those pricing actions were and the financial impact. But I will say that the majority of that top line increase that you'll see was price driven.

The next question comes from Nathan Reilly from UBS.

First question. I'm just curious to get a bit of understanding in terms of the level of shareholder engagement you've kind of had through this process as you've been receiving the offers from Brookfield, more so just conscious just in terms of maybe how that's influenced your decision to propose or not declare that final dividend?

Look, we -- during the course of this week, we'll undertake engagement with our shareholders. That's really the plan for today and the next few days.

And also just in terms of maybe from a historical perspective, just the level of engagement you've seen from either sort of, I guess, what are we consider to be more sort of traditional trade players, plumbing manufacturers, building materials manufacturers just in terms of showing interest in the operations in the business?

You mean in the context of providing competing bids in the process?

Just in terms of how you've got the go-shop option available to you? Just trying to get a sense of whether that -- you've had a high level or a moderate level of inbound interest indicative of otherwise [indiscernible]?

Look, I would say that -- so look, first of all, the proposal from Brookfield was unsolicited, but over the course of a few months, we've gone through a process, which has yielded increasing value proposals over 3 months. We have received multiple other inbounds over the last several months and held discussions with interested parties, and none of those have progressed to the same level of engagement. We've received no -- nothing in writing there. Nonetheless, we thought it was in the best interest of shareholders to establish a process that provides a mechanism for anyone who does see value beyond $4.75 to participate, which is what we've announced today as part of that process.

Great. And final question, just in terms of the strategy to take copper out of your products. We've heard, Andrew, just in terms of the impact in terms of what you'd expect current copper price inflation to mean in terms of EBIT impact. But once you kind of get through that process, fully sort of implementing those changes from a stainless steel transition point of view, where do you expect that level of kind of earnings sensitivity to ultimately end up when that process is fully completed?

Look, I think we'll still have some exposure to copper, certainly. For example, we sell the electrical cords as part of the appliance connector business. There's a significant amount of copper in that. But it's really hard to say where that sensitivity will land. We haven't finalized those calculations.

The next question is a follow-up from Sam Seow from Citi.

I just wanted to pick up on your previous comments there where you said you look to enter into a SID on terms consistent with the proposal. I just wanted to clarify, is there any, I guess, other terms not price related with the proposal? Or do you just mean price?

We -- as I've said a couple of times, Nathan, we have no finding offer at this point in time. We will work over the next 4 weeks with Brookfield in a process that ideally turns an indicative proposal into a binding proposal along the same lines as the proposal. So really nothing else to add to that.

Thanks, Sam. I think we have time for 1 more question, if there is one.

No. At this time, we're showing no further questions.

Very good. Well, with that, I will thank everyone for their time on the call today. Enjoy the rest of your day. Thank you.

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

Good morning, everyone. Welcome to RWC's Financial Year 2026 Half Year Earnings Call. This is Heath Sharp. I'm joined here in Atlanta by Andrew Johnson, our CFO. Today, we'll cover our results for the 6 months ended 31 December 2025. Then we'll move to Q&A.

Before I get into the numbers, I want to recognize the effort behind this half. This has been a demanding period. The results are in line with the tariff impact we forecast, but they're not at the level we aspire to deliver. Notwithstanding, they required tremendous execution to achieve. Our teams have worked incredibly hard. I'm very proud of their efforts. They have navigated an ever-changing tariff environment with discipline and speed, and they've continued to progress major strategic initiatives at the same time.

That combination matters, and it positions us very well as markets recover. With that, let's get started on Slide 3 with some details on the first half. We continued to face headwinds during the period. U.S. tariffs impacted earnings and margins. End markets in the U.S. and U.K. remained soft. As we previously guided, the FY '26 tariff impact on operating earnings is expected to be $25 million to $30 million.

That impact was weighted to the first half, and that is reflected in today's results. Even in this environment, we delivered strong cash generation. Cash flow remained a key strength of the business. I want to recognize our finance teams across all 3 regions. Their discipline on working capital enabled a further reduction in net debt. Operationally, we made strong progress on major projects, and we executed well across multiple product initiatives at the same time.

In EMEA, our new Poland assembly plant was commissioned and began production during the half. That was a major achievement delivered at pace. In the U.K., customer service performance improved meaningfully. Order lead times reduced and fulfillment rates lifted. In the Americas, we finalized plans to augment U.S. manufacturing with a new facility in Mexico. The team did a comprehensive job in evaluating options and selecting the best path forward, and we are now actioning that plan.

In Australia, we launched SharkBite Max across our customer base. It was a substantial rollout and implementation was excellent. Finally, our tariff mitigation actions remain on track. Diversification of sourcing away from China continues, and pricing actions have now been completed and will flow through the second half.

Turning now to Slide 4, and the financial overview for the half. Reported net sales were down 4.6% versus the prior corresponding period. Underlying sales were down 1.9% after adjusting for several items. Those adjustments include demand pull forward in the Americas in the prior first half, the exit of selected product lines in the Canadian market and the sale of our manufacturing operations in Spain.

For the balance of this presentation, we will refer to underlying sales. This is consistent with the guidance we provided in August. Adjusted EBITDA was down 22.5% to $111.4 million. This reflects tariffs and lower volumes. Adjusted NPAT was $52.2 million, adjusted EPS was $0.067 per share. The distribution declared for the half totals USD 0.04 per share. That is evenly split between a $0.02 interim dividend and an on-market buyback equivalent to USD 0.2. I will now hand over to Andrew to take you through the results in more detail.

Thank you, Heath, and good morning, everyone. Moving to Slide 5. Let me start by saying this was a tough half. Although we are not satisfied with the financial results, we did perform in line with our top line guidance. We maintained strong cash discipline and have positioned the business for materially better performance in the second half.

Underlying net sales were down 1.9% versus the first half of FY '25, which is in line with our guidance in August. Underlying net sales adjust for items we have called out in prior periods. Number one, the demand pull forward in the first half last year in the Americas. Number two, the exit of low-margin product in Canada; and number three, the sale of our manufacturing operations in Spain.

The real story of the half is in the margin compression driven by tariffs and weaker end markets. Adjusted EBITDA of $111.4 million was down 22.5% on PCP, with our margin falling from 21.3% in the first half last year to 17.3% this year. The 400 basis point margin hit breaks down into 3 pieces. First of all, roughly 250 basis points is derived from the tariff impact, about 100 basis points from lower volumes and operational deleverage and the balance from the EMEA investment and service capabilities, and the competitive pressures on the [ DWV ] market in Australia.

I'll walk you through the regional details in the following slides. Despite the earnings pressure, we delivered $4.4 million in cost savings during the period through procurement, manufacturing efficiencies and distribution optimization. These actions, combined with our tariff mitigation measures, will deliver improved margins as we move through the second half.

On a housekeeping note, we had 2 nonrecurring items during the period. These were a profit on sale of our warehouse in France and final Holman restructuring and integration costs. The net effect of these 2 at the EBITDA line was $0.3 million. Before I move on to the regions, I just want to reiterate that the first half absorbed the worst of the tariff impact, approximately 2/3 of the FY '26 annual impact of $25 million to $30 million.

Our mitigation actions are working, and we expect improvement in margins across every region in the second half. Turning to Slide 6 and the performance of the Americas segment. Americas, as you know, is ground 0 for the tariff story. Underlying sales were 3.4% lower than the PCP, but more significantly, EBITDA margins compressed 410 basis points to 16.9%. Adjusted EBITDA was down 25.4% on PCP to $69.1 million.

In the U.S., we continue to experience weak markets and are not assuming a significant improvement in FY '26. U.S. existing home sales remain near multi-decade lows, while long-term mortgage rates have eased, we believe long-term rates need to decline materially further before we see sustained turnover improvement. However, we remain confident that we are well positioned to benefit when the recovery does come.

Also negatively impacting revenues by approximately $7 million was the movement in inventory weeks on hand by some of our major customers versus the PCP. Channel inventory appears broadly normalized now, and we are not expecting further material reduction. But we are also not assuming weeks of stock to increase in half 2.

On a positive note, on tariff mitigation, we are executing well across a very complex set of initiatives, despite what has been at times of moving goalpost on tariffs. We've made good progress on 3 critical work streams. First, we've diversified sourcing away from China to lower tariff countries. This is well underway and accelerating. Second, we've implemented pricing adjustments across the entire U.S. customer base.

Those are now in place and flowing through. Third, we're executing on cost reduction initiatives that will build momentum in H2. As Heath has referenced, we intend to augment our U.S. manufacturing operations with a new facility in Mexico. This new facility is about manufacturing flexibility, cost optimization and, of course, tariff mitigation. The Mexican operation will be focused on lower volume, manually assembled products that will complement our high-tech, high-volume[ Pulman ] facility.

We are partnering with a local operator to derisk execution, keeping capital requirements modest and within our existing guidance. We expect to be operational in 2027. Looking at the results for the Asia Pacific region on Slide 7. APAC delivered 0.6% sales growth in local currency, but margins were under significant pressure.

EBITDA margins fell 340 basis points to 8.6%. Two factors drove this. First, competitive intensity in PVC pipes and fittings impacted both volumes and margins. We address pricing discipline aggressively during the period, and we're already seeing sequential improvement in PVC margins in Q3.

Second, we had lower manufacturing overhead recoveries as we source more from third parties, which impacted manufacturing volumes. Also impacting earnings in the half was wetter than usual weather in some of the states in Australia, which meant a delay in the spring selling season for watering products. On the positive side, SharkBite Max launch across the Australian market has performed well.

Looking forward, we expect APAC margins in the second half to be higher than both prior year and the first half. So the PVC market has stabilized. We're recapturing overhead efficiencies. Pricing continues to move through and SharkBite Max momentum continues.

Moving on to Slide 8 and EMEA. EMEA showed resilience with underlying sales down just 1.3% in local currency, but we made deliberate investments that compress margins. In the U.K., sales were down 1.6%, with Plumbing and Heating down 1.3% on weak remodel demand. But our focus for the half was on fixing service levels. We've achieved substantial reductions in order lead times and meaningful improvements in fill rates.

These improvements came at a cost. We incurred incremental expenses that we view as short-term investments. As we optimize these processes and commission our new Poland facility, we expect to manage out these excess costs. Continental Europe was the bright spot with underlying sales up 5.7% after adjusting for the Spain disposal in the previous year.

We saw growth in Germany, France and Italy driven by new product launches with key distributors. These are early-stage wins that should build momentum. U.K. minimum wage increases also pressured margins. This is exactly why the Poland plant is strategic. It gives us competitive cost structure flexibility as U.K. labor costs rise.

For H2, we expect EMEA margins to be higher than H1 as service delivery costs normalize and Poland ramps up. On Slide 9, despite earnings headwinds, we delivered good cash performance. Cash generated from operations was $102.6 million, down 19% on lower earnings but operating cash flow conversion was 92.1%, beating both PCP and our 90% target.

This is a testament to disciplined working capital management. We reduced net debt by $21.2 million in the half and $70.2 million over the past 12 months. Net leverage declined to 1.39x maintaining strong covenant headroom and financial flexibility.

Turning to Slide 10. On working capital, the story is really about inventory. The balance increased $33 million during the half, predominantly from tariff impacts on inventory values, strategic positioning ahead of sourcing transitions and inventory build to support customer initiatives.

Importantly, this was largely offset by working capital management elsewhere. Receivables were down through tighter collections and payables were up through improved supplier terms. Net working capital as a percentage of sales was 29%, up only modestly from 27.4% in the PCP. Capital expenditure continues to trend down $12.6 million or just 2% of sales.

We're maintaining discipline here while funding critical projects like Poland and Mexico within existing guidance. Looking ahead to H2, we expect inventory levels to normalize as tariff transitions complete and we optimize stocking positions. Cash generation should remain strong. And with that, let me now hand back to Heath.

Thanks, Andrew. Turning to Slide 11. This is our tariff update. The key message is clear. We are executing strongly across the full set of mitigation actions. We continue to make robust progress reducing purchases from China. And we are shifting sourcing to lower tariff countries largely in line with plan. Pricing actions have now been completed, and those increases are flowing through the current half. We have delivered this progress despite shifting tariff conditions over the past year.

While the goalposts have continued to move, our approach has remained disciplined. For FY '26, there is no change to our expected tariff impact. We still anticipate a net EBITDA impact of $25 million to $30 million. Looking to FY '27, there is a small change. We now expect a residual net EBITDA impact of $5 million to $7 million. Our previous target was 0 FY '27 impact. This reflects changes in country and material tariffs and points to our decision to invest in manufacturing in Mexico.

Importantly, the Mexico facility strengthens the business. It improves manufacturing flexibility, and it supports our long-term tariff mitigation strategy. Over time, the Mexico plant and final sourcing changes will deliver a full tariff offset.

On Slide 12, we set out our assumptions and outlook for the remainder of FY '26. As Andrew said, we are not assuming a material improvement in end market demand in the second half. However, we are targeting improved operating margins in each region. In the Americas, we expect second half underlying sales to be up mid- to high single digits on the PCP. That is partly driven by pricing flowing through and it also reflects a softer comp due to last year's pull forward.

We also expect Americas EBITDA margin to improve in the second half versus the first. Margins will still be lower than FY '25 due to tariffs, but the trajectory improves as mitigation actions take hold. In Asia Pac, we expect second half sales to be broadly flat to up low single digits. We expect operating margins to improve meaningfully. This reflects stabilization of our PVC feeding segment, and it reflects the actions we have already executed.

In EMEA, we expect broadly flat underlying sales. We expect EBITDA margin to improve in the second half. We are now [ betting in the ] customer service improvements, and we expect some of the incremental first half costs to unwind. We will also begin to see benefits from the Poland assembly plant. At a consolidated level, we expect second half external sales to be up mid-single digits, and we expect full year FY '26 external sales to be broadly flat on the PCP.

We expect second half EBITDA margin to improve versus the first half. Full year EBITDA margin will be lower than FY '25. This sequential improvement reflects tariff mitigation and operational actions. Slide 13 sets out our priorities for the second half and beyond. A major focus, of course, is copper. Copper volatility is an industry-wide issue. -- and it is 1 we are tackling directly. In the near term, we will execute the traditional offsets. That includes supply chain optimization, tight cost and overhead control and pricing actions into the market.

We expect these actions to largely offset the copper impact for FY '27. At the same time, we are accelerating longer-term actions. These actions will structurally reshape the cost base. We are progressing material substitution that includes polymers and it includes alternative metals. We are also progressing product and component redesign, and we are assessing alternative manufacturing processes. Internally, we have set a clear goal. By FY '29, we aim for copper to no longer be a material part of the RWC P&L. This will influence our manufacturing footprint over time, and it will strengthen our long-term competitiveness.

The investments we have already made in automation and assembly create flexibility and it will be augmented by our new plants in Poland and Mexico. On Slide 14, let's take a step back for just a moment. As we look beyond this half, it's worth coming back to what RWC is built to do. Our strategy is unchanged. We are executing against a clear vision to be the complete plumbing global leader across repair and remodel, new construction and commercial plumbing serving both residential and commercial buildings, distributed through wholesale, retail and OEM channels.

Now I'll wrap up on Slide 15 before we open to Q&A. The core message is simple. RWC is well positioned for long-term growth. We have a strong leadership team, and we are aligned on global priorities. Across the organization, execution remains strong, and collaboration across regions continues to strengthen. Our differentiated position is a real advantage. We have strong channel partnerships built on value creation. We bring products that earn their place on the shelf.

We also have industry-leading brands they are recognized for innovation and service. We have a clear strategy. We will grow through product innovation. We will grow through customer experience and service levels and we will grow through industry-leading execution. We also remain well positioned from a manufacturing capacity perspective. We have invested significantly since 2021. As volumes recover, we will see meaningful operating leverage.

We continue to see strong long-term macro drivers, aging housing stock supports repair and remodel. Under building supports new construction over time and labor shortages continue to favor smart product solutions. Finally, RWC has a strong balance sheet. That gives us flexibility. It supports organic growth, it supports M&A and it supports ongoing shareholder returns. With that, I'd like to open up the call to questions. We will take questions first from those on the conference call line, then Phil will read any questions received via the webcast.

[Operator Instructions] The first question comes from Niraj Shah with Goldman Sachs.

Just a couple on copper for me. Firstly, can you remind us of what the process is with your customers in terms of taking the price action, how that might vary by channel? And then secondly, where you have copper intensity in the portfolio like SharkBite or valves. Can you talk about how this might compare with competitor or alternative products, just thinking about the risk of substitution as the copper price is reflected in product price?

Sure. So we've talked a little bit over the years of the mechanism for pushing through pricing. Ultimately, it's just a little bit different by channel. But fundamentally, in the case of copper, where it's a clear index, and that information is available to everyone. That's the foundation of the submission and you provide the information in the standard format that, that particular customer wants. It's a process we're pretty familiar with. We've gone through it now all too many times. So pretty comfortable that we know what to do there.

And can run through that process. The question on alternatives in the marketplace. I think I think we've got a good idea of what our end users need. I think that's absolutely a differentiator for us. Niraj, You've been to our training center here in Atlanta and we talk a lot about spending time in the field. So any changes we make to our product will be based on knowledge of the market, what our end users value, what's important for them. We're also not going to make any changes without having undertaken the appropriate trial and focus groups and field tests and whatever else.

Obviously, right now, with copper, we're in the same position as everyone else. So it's not a commercial disadvantage for us. It's just time and effort to handle that. I actually see the project to move to alternative materials. That's a real opportunity for us. It's a sort of project I think we do very well. It's a sort of project that energizes our people.

And I think it's an opportunity for us to show that innovation and disruption that we're known for and to solidify the strength of our brands. So it's clearly going to be our #1 priority for the next few years. And I think that's entirely appropriate.

Next question is from Ramoun Lazar with Jefferies.

Gary, I think we lost Ramoun

The next question comes from Lee Power with JPMorgan.

Can you maybe talk to the level of pricing that you actually got. So how much does it contribute in that second half mid- to high single-digit growth, Heath. And then I get the kind of the weaker PCP in Americas and a few other moving parts, but maybe just your view on how the core U.S. market is actually tracking, stable? Or are we still seeing declines?

So I think on the market generally, it's -- I think it declined just a little bit further in the last period. It's a little tricky at the moment to look through pricing moves in the market to determine exactly what's happening with volumes. I think pricing is only just starting to move through now.

So overall, the market feels like it was off by another few points at least over the last 6 months. Look, in terms of the pricing action we've taken, I think as we've set out in August and then earlier last year, we've got a very comprehensive model of all our cost imports literally by SKU. We then cross reference that to the particular channels and the particular markets.

And we'll take the pricing action that we feel is appropriate. Based on the nature of the product, our position in the market and a whole host of other factors. So I don't want to point to any specific numbers on pricing. I don't think we've called that out anywhere, and that's quite a quite a sensitive issue. So I think we revert to, again, what we've talked about a few times is all those combined activities with sourcing, cost saving, pricing has yielded the result in line with what we guided to in August.

Okay. And then just on the outlook, can you confirm that that's [ constant ] currency? Because I guess the currency has moved a lot and it would seem very conservative if it was in constant currency.

It is in constant currency. .

Okay. And then just a final one. Your point, Heath, that you were chatting about material substitution and alternative metals, like SharkBite's obviously very well known as a brass fitting brand, and there's a lot of other products out there where they're plastic resin based. So how do you -- like how do you think it actually -- like how do you manage what has been core for Sharkbite for a long period of time. And then you try and strip out what customers know the product as if you looked at polymers or some other materials?

I think carefully. But I also would point to the tremendous amount of work we did during the SharkBite Max transition. We learned a lot there. And I would say the heart of that project was to disconnect assembly from the body manufacturing. And that's what allowed us to bring assembly to the U.S. as you know, Lee. But if you think that through to the next level, disconnecting the body from the assembly process also disconnected the choice of material for the body from that assembly process.

So that was in our mind all along. So it has been part of what we've tested. So we've got a range of options there. I think we've got a pretty good handle on the right direction to go. I don't really want to provide any more information on that at this point, but we'll be making those trials and making -- and taking the right action, we believe, over the coming months.

The next question is from Harry Saunders with E&P.

Firstly, just wondering with about 2/3 of the tariff impact has been in the first half or sort of $18 million roughly. Therefore, sort of implies a $9 million to $10 million step up in the second half, all else before other factors. Should we then be factoring in some other positive or negative factors in the second half, such as seasonality and maybe some of those one-off factors you discussed in some of the regions rolling off? I mean could we maybe just step through a bridge to the second half given more complex than most sort of second half movements, please?

Thanks, Harry. This is Andrew. I'm not going to bridge it, but let's just kind of talk through it. You are absolutely right. We will see a reduced impact in the second half in terms of the tariff impact. We're still sticking to the [ 25 to 30 ] And so roughly 1/3 of that would hit in the second half. So that will certainly be an improvement over the first half. .

Some of the other items that we've called out, APAC PVC margins are already recovering. We expect that to continue. And in EMEA, we're working really hard to optimize those service costs that flowed through. And of course, we'll have more of an impact of Poland as those volumes ramp up. And I think lastly, we are executing well on cost savings. We've called out $8 million to $10 million. So you could take another round of cost savings in the second half very similar to what we achieved in the first half.

So overall, we think that's going to support the margin improvement in the second half. And that's pretty clear line of sight, at least on those 4 things that I mentioned.

That's helpful. Maybe asking another way. I appreciate you may not be able to answer. The second half margin clearly should be up on the first half, but lower than PCP. I mean is there any indication at all which one we're closer to in the second half, just given a lot of movements today.

Yes. Look, I think volume is going to be the wildcard. I think if we can see a good volume uptick, although we're not planning on it, volume is going to move that needle either closer to last year, or closer to the first half. So it's really hard to say, Harry.

And maybe just a comment on cost out measures. Just to be clear, are you sort of indicating there's some incremental cost out versus the first half run rate in the second half potentially?

No. What I'm saying is that run rate will continue. So we'll see another roughly $4 million or $5 million in the second half to get you that $8 million to $10 million for the full year.

Got it. And just lastly, can you just talk through, I guess, in that Americas guidance for sales versus volumes? I know we touched on this, given the tariff pricing impact? Or is that something you can't answer.

No, we're not going to talk specifically about the tariff pricing actions and the impact. But that certainly drives a significant part of that guidance we've given in Americas for the top line.

The next question is from Brook Campbell-Crawford with Barrenjoey.

I just had 1 on volume in the second half. Andrew, you noted that's the key swing factor in the second half in Americas. I'd love just to hear your thoughts around elasticity relating to all these prices that have gone through for, I presume, tariffs and copper. What's your kind of assumptions there and impacts to demand from prices going up? And have you kind of thought through that one providing the second half guidance.

Yes, it's really hard to to say, Brook, I think that certainly, there is some point where pricing will impact demand. I'm not sure we're seeing it at this point because you have to remember that the whole industry has had to push price related to either tariffs or copper tariffs. And so we're kind of all in the same boat. Not saying it won't impact demand at some point, but it's just not something we're really seeing at this point.

Look, I also point you to the fact that, that a really good chunk of what we do, particularly here in the U.S. is absolutely repair and maintenance. So far less discretionary, which helps. I think the bit of the market that's more susceptible, of course, is that remodel and particularly the larger the larger remodel. The other issue that works in our favor to a degree is the fact that our products, particularly in that repair and maintenance area are a pretty small percentage of the overall cost of the project. So I'm not sure where we're at and what our pricing is dramatically moves the needle on demand.

That's helpful. And just one on the Mexico facility. How should we think about the cost reduction from that relative to I presume things being done at [ Cullman ] at the moment that will get shifted across. And then just bigger picture, how do you get comfort that there won't be sort of further changes in tariffs that would impact Mexico and sort of, I guess, become a complicating factor on planning this new project?

Yes. Look, I'm not sure we have any comfort whatsoever with regard to tariffs being stable. It's an ever-moving -- an ever-moving target. But we took this action with that in mind. We've been considering a [ facility ] in Mexico for a while now. And the opportunity from tariffs was, I guess, the last catalyst to get us over the line to make that move. But our view is solidly that having a flexible lower labor cost production facility pretty close to our markets is going to be a useful thing for the fullness of time irrespective of tariffs.

So I'm very comfortable with where we're headed. We've also taken, and we talked about this in -- certainly at the Investor Day last October, we've taken a no-regrets approach, if you like. So low CapEx fast and reversible. So this is not a $100 million project. We're talking about couple of million dollars, a few million dollars' worth of sort of OpEx, CapEx. That's the order of magnitude. But I think the optionality it gives us is pretty significant. So yes, at the moment, there would also be some additional tariff benefit, and that's great. But long term, we think it's a pretty useful facility to have regardless.

The next question is from Peter Steyn with Macquarie.

Perhaps just furthering that line of questioning briefly, Heath, the $5 million to $7 million impact that you've called out in '27, you sort of suggested that, that's as a consequence of moving goalpost in tariffs more so than perhaps as a consequence of you not taking price associated potentially with some of the production that you moved to Mexico. Is there an impact like that? So very much like what we've just seen over the last 6 months?

I think there's a few factors that converge there, Peter. Look, we were looking at the history of tariffs last week as we were getting ahead around this call. And even though we've lived, we were surprised when we put it down on a sheet of paper how much has changed. I think there was of the top 12 countries we source from, it was 9 or 10 of them, the number had changed from the original number. Perhaps more significantly, some of the materials tariffs have changed, whether that be steel or copper.

And then even beyond that, once you get into the detail of what the funds locally manufactured, whether it's [ Melton Poor ] or whether it's processed or subsequently processed, also changed during the period. So if you put all that together, is there were a handful of items in our original plan, where moving them was not going to yield as much of a benefit as we first thought. It was going to take some effort, and there's risk in all of that.

So we simply decided to look closer to home for a longer-term solution as opposed to moving only to have to move it again. I think there are some things we've moved that we will subsequently move again and perhaps bring to Mexico. And I think -- the final point I'd make there is -- there's some low-volume production we will take out of ultimately take out of Coleman and move to Mexico, but only some we're definitely eyeing some other things we're now doing in other parts of the world, whether that be Southeast Asia or even the U.K. and Europe that we may ultimately bring to Mexico.

So there's a lot of factors at play there. And in the end, we thought it was prudent to reduce risk just a little bit and make that sort of not have a secondary move, but only have an initial move. And that's really what's led us to that change in the FY '27 guide.

Got you. That's useful. And then just curious, obviously, around the inflationary pass on perspective, if you could just give us a sense of how customers are reacting. You're obviously or maybe channel partners are reacting. You're obviously moving things around a fair amount. How are you managing that process? And how are they responding?

Peter, I'd say no one's real happy right now. Us, our peers, our customers, our vendors, our end users, I mean, there's everyone along the way is absorbing just a little bit. Everyone's passing on as much as they can. It is having somewhat of an inflationary impact on the very final product. Ultimately, we all do what we have to do. I mean this has got complete visibility. It's not a thing that's unique to us or unique to our product or our category.

So that helps. I think everyone's just frustrated that it's taking a whole lot of time and effort that ultimately we'd all prefer to be putting into something else. So there's nothing specific that I'd call out there in terms of big over the odds wins or big problems. We're just working through it.

The next question is from Daniel Sykes with Jarden.

I just wanted to touch on APAC and the EBITDA margin there, whether you could provide some color on what drove the decision to source more externally versus manufacture. It seems from the guidance around look forward EBITDA margin for APAC. It seems transitory. But I'm just wondering if you could help us understand why it was so [ acute ] this half.

Look, ultimately, it's a cost-driven decision. Volumes in the Aussie market are really quite low relative to the rest of the world. You'll recall that back when we were doing all of the U.S. manufacturing and assembly in Australia, we were able to do the volume for Australia as well within that context. But now we've taken that volume assembly volume out of Australia. It makes it very hard to justify that level of cost and overhead to an Australian-only product and hence, we've outsourced it.

And it was an approach similar to what I just mentioned for Mexico. So low capital, fast and ultimately just gave us flexibility, and that's the direction we've gone, and obviously, a unit cost advantage as well.

Okay. Great. And just in terms of the comments around inventory levels in Americas, obviously, the $7 million hit from customer destocking. Is that something that's finished now? Or how does it look forward through to H2? Are you expecting some kind of inventory drop again through H2 in the guidance?

We are not expecting further reduction. And I think I mentioned that in my prepared comments, what -- but at the same time, we're not expecting those weeks of stock to increase either. From where we sit today, we feel like it's normalized and we should be fairly stable from here forward.

The next question is from Keith Chau with MST Marquee.

Andrew, first question, Heath, just going back to the point around elasticity, it certainly seems to me that at least part of the answer to demand elasticity due to cost [indiscernible] answered by the actions taken by Reliance with substitute materials in terms of manufacturing and change of product design. And I think you made the point in the presentation that the goal is to make copper nonmaterial part of the P&L by FY '29. So these actions actually seem a lot more significant than the changes that have been made to the core product set over the course of history. Is it as extreme as substituting a metallic fitting with the plastic fitting? Or is it more about changing the alloys and the production process and [indiscernible] to connect products?

Look, it's going to vary by product. I mean in some cases, the solution will be the answer. I think in many cases, we'll probably end up with a stainless steel solution. I think the bigger question is how you actually go about processing that metal and which particular version of stainless you choose. I mean there's a little bit in it, but I think it's all [ handlable ].

That page I think it was 13 -- the copper page in the deck is there's really 2 parts of that slide. There's the near term on the left-hand side and then the long term. And near term, as we put there, it's the same levers we've had at our disposal previously. I mean that's when copper is at where it is today, plus or minus a little bit, I think those mechanisms are fine.

We just have the view that -- well, look, it's volatile right now, and we're a little bit tight on dealing with that. That makes it hard. But we also have the view that data centers, electrification of vehicles and whatever else is not going to make it any easier for us to source copper at sensible prices going forward. So we really have put a stake in the ground and then pivoted to the right-hand side of that page is how do we remove the volatility, how do we protect ourselves from that long-term long-term impact.

That's the approach we're taking. To some extent, some of them at Americas team made this comment the other day is copper is the new China. We took action over the last 12 months or so to sort of decouple ourselves from China. We're taking a similar approach to copper right now. It will take longer. It's a multiyear project. It's got some challenges in it, but I think we can pull those off. And I think it actually helps us in the marketplace.

We'll have to do it carefully at pace, but carefully. And of course, none of that, though, in the event [ heaven forbid ] copper precipitously dropped in price. We can always go back to making these products in copper. So it is reversible, although I don't expect that will be an issue for us. I very much don't want to be sitting here in a few years' time and talking about copper at 18,000 or 20,000 or 21,000 because elasticity -- all those conversations are going by that point.

And Heath, just thinking about this on the longer term because I guess when you're talking about product substitution or material substitution, it's always a discussion to be raised around the earnings power of the business and what it means if you do move to polymer for some products from metal because effectively, the embedded value of the product -- sorry, the embedded cost in the metallic product is higher than a plastic product, but Reliance has always been a business that sells value.

And I think in the past, you've talked about putting labor on the shelf. So maybe simplistically, the question is, can you retain the current earnings power of the business, all else being equal? If there are changes to the product design and a material substitution, are you confident that you can still generate the same unit dollar profit per product sold.

Keith, we're acutely aware of that model. We live it every day and have fought for you. So we're not about to make decisions that up in that. I would also say, and you've seen this firsthand over many years, this is a super conservative market in the U.S. like changing full stop, and they certainly don't like changing to a material that's perceived as a less robust material. All of those things will factor into our consideration as we make these changes. I'm pretty comfortable that we can we can make the appropriate moves here. Your question is absolutely valid and one that we're absolutely all over, I believe.

And maybe if I can, a couple of quick ones for Andrew, just to cover off. Andrew, I think as announced before around some of the costs that will come out of the P&L for [indiscernible] investments to improve service levels and establishment of the Poland facility kind of come to an end. So if we just isolated to those 2 factors, is the quantum of cost reversal in the second half or FY '20 somewhere at the range of flat low single-digit millions in pounds?

We think so. I mean, look, if you look at that 270 basis point drop that we saw in the first half, the majority of that margin drop you can tie back to those production inefficiencies. I'm not saying we're going to get -- we'll be completely clear of those in the second half, but the team is making really good progress to get the overhead recoveries and the labor recoveries back to where they were. So that's going to get most of that back that you just mentioned. .

Inflation is still an issue in the U.K., and it has been for years now, of course. But gosh, when you take a step back and look at it, we've seen significant increases in the national minimum wage and it's impacted our business. We do push through price. We'll push through price again in the second half, which will certainly help. So we're on our way back kind of, of course, getting towards 30%. I'm not saying we'll get to 30% in the second half. I think we'll need volume to get all the way there. But at least covering off on those 2 things that hit us in the first half, you should see a significant improvement in the second half.

And then the final couple was one, whether you can update us on the copper sensitivity for the business? And secondly, again, a small point, but any fees benefit factored in for the second half of the FY '26 guidance?

So from a copper standpoint, we're at USD 900,000, and that's the EBITDA impact for every $100 movement in the LME. And that that's pretty consistent with where we were last year. I think you also have to factor in that there's a tariff cost, a copper tariff cost that's not in that number, and there's -- that's probably another 25% on the number that I just gave you.

So that's kind of what we're looking at because of the lag, we can tell you what copper will be in the second half. Copper on average will be about $10,600 a ton in the second half. It was about 9,600 last year. So that gives you the relative movement in copper. We'll see $4 million, $4.5 million in additional copper costs in the second half. And Keith, what was the second part of that question?

Just whether there are any freeze benefits factored for the second half of the FY '26 guidance?

It did get quite cold. I don't think it was any more significant than some of the colder weather we had last year. We're tracking kind of the the impact. We always have more clarity. The further we get through the second half and kind of look back because obviously, customers have inventory levels that have to be drawn down and then you see reorders. So it's -- it tends to to kind of flow through later than you would think. So sitting here today, I don't have a perfect visibility on what any freeze impact may have been. So we'll just have to see how the half progresses. Right now, it would be very marginal in terms of the difference this year versus last year.

The next question is from Ramoun Lazar with Jefferies.

Just a couple of follow-ons from me. Just APAC, maybe Andrew can answer this. I guess just with the changes in the manufacturing and sourcing, where could we expect those margins to get to now that you've made those operational changes, Andrew?

Well, we're working through those. I mean I think that the team has done a really good job of getting their hands around price. And that's started to flow through on [ DWV ] in the first half. And then we've got other pricing initiatives that we'll see come through in the second half. .

From a volume standpoint, I mean, you've been following our business for a while now, and you can -- as you can imagine, intercompany volumes in terms of the product being shipped to the U.S., I don't expect that to increase year-over-year. And that's always a big variable in that APAC P&L because essentially, it's a manufacturing business when it comes to that copper production and the SharkBite bodies that are provided to the U.S. Where this goes from here, I think volume and I always have to go back to that volume is always a big driver. Our target for that region, we haven't lost sight of the mid-single-digit EBITDA margin target, but I do think it's going to take us a couple of years to get there.

Yes. Okay. That's helpful. And then just a follow-on from Keith's question just around the U.S. growth in the second half to get to that high single digit, are you assuming for that to happen, you need to see some benefit from the freeze or is that just predicated on potentially a broader volume recovery gets you to that high single-digit top line growth number in the Americas?

No, we're not in really banking any big benefit from the freeze in the second half. And as I mentioned earlier, the majority of that's going to come from pricing.

Okay. So no sort of major volume recovery expected in that mid-single to high single-digit top line growth in the second half for Americas?

Not really. I mean the team is doing some good things. Nothing I really would call out. There's some business we've -- on the OEM side that we've been able to move forward with that's going to help out. And Heath mentioned the softer comp last year because you recall, revenue was pulled ahead to the first half last year. So that's going to create a favorable comp. And those are the primary things that I would call out in terms of what's going to get us to that top line guidance that we provided.

Next question is from Shaurya Visen with Bank of America.

Just a quick follow-up on copper, for Andrew, perhaps. Andrew, [ look ] very detailed in terms of the steps you have taken to reduce the impact of copper. I was just curious to understand whether hedging is something you've looked at? And if yes, could you help us with some numbers on what's hedged and at what price?

Yes, we have looked at hedging and actually, we're going through a very small hedging trial as we speak. It's something we want to have potentially as a tool in the future, but it's not something that we're currently doing. And again, if we do decide to hedge, it's really just -- it's not going to be opportunistic. It's really just going to be to take some of the commodity volatility out of the P&L. But we haven't made a decision on how we're going to move forward, but it is something we've considered and actually conducted a small trial and currently doing that as we speak.

The next question is from Daniel Kang with CLSA Australia.

Andrew, just -- probably just a housekeeping question here. I just wanted to clarify your guidance for Americas and EMEA, you called out some adjustments to the exit of low-margin products in Canada and then, I guess, the sale of the manufacturing plants in Spain. Can you just quantify for us these 2 adjustment factors.

Sure. I think -- so let's walk through those. So we had -- last year, we had an S/4HANA implementation as would typically happen. Some customers bought inventory ahead of that. And then we had a load-in of some appliance connectors into one of our customers. If you take those 2 together, it's low double-digit millions. And then if you take the low-margin product that we exited, that's mid-single digits. And hopefully, that gives you enough information to get you where you need to be. I'm not going to give you exact numbers, but that would get you really close.

That's great, Andrew. And just in terms of APAC Holman, can you help us with the level of contribution Holman provided in the period and the level of synergies that you've been able to extract?

Sure. I'm not going to -- look, Holman, we've had the business now, and this is our second financial year. We've done a lot to integrate those 2 businesses. So pulling out profit and EBITDA margins, it's pretty difficult. Nicole and her team are managing as one business today and the accounting obviously follows that. Revenue was down slightly versus the prior year. And as we've mentioned, there was a really slow start to the watering season, it started to pick up late in half, but it's still left us with slightly lower volumes than we had in the first half last year. .

Overall, we're still excited about the business. It's really driven revenue opportunities and synergies on both sides. So that's not only RWC selling more products into Bunnings. But of course, selling some of that Holman product through some traditional RWC customers.

Just last one, if I may. I realize market conditions obviously fairly tough at the moment. It is for the entire industry. Wondering, Heath, if you can talk about the M&A outlook? And are you actually seeing more opportunities come about because of the current conditions?

No, I'd say it's the opposite. Everyone over here is positioning, taking the view that it's better to be early than late. So valuations are pretty spicy unfortunately.

The next question is from Sam Seow with Citi.

Just 1 on material substitution. I think that's obviously a great initiative. But in terms of the profile, could you perhaps outline the rough shape when you expect that sensitivity of copper to start really dropping away the most, maybe make reference to that $900,000 you've given us. But yes, just any rough approximation on the shape of that sensitivity and when you think it will start to materially drop away.

So look, I don't -- no small thing we're jumping into here. I would like to think -- look, I'm not sure we'll catch anything in '26. So certainly, we'll start catching some things in '27. But Sam, there's a reason we pegged it as '27, '28, '29 project because there's some work in it. But we think during the course of those 3 years, it will sort of incrementally yield benefits.

Got it. So just back end weighted '28, '29, you suspect.

I think that's the goal we set for ourselves, yes.

Okay. That's helpful. And then I'm going to try a question then on FY '27. I know in a normal year, we wouldn't talk about it, but given -- it's not really a normal year in the copper price we're seeing now, is likely to hit your P&L in first half '27. Just wondering if there's any reason your bigger customers to reopen contracts out of cycle? Or if the percentage of copper in your fitting is just too low a percentage. Just anything to consider about first half '27.

So look, there's not a whole lot else to -- there's no magic answer. There's no silver bullet is. We're pretty comfortable we can offset the number in the copper impact in '27 based on our estimations for copper for the '27 year. All I can really say, absolutely, it's in focus for us, and we believe the whole industry. The good question you asked, the volatility at the moment makes aggressive moves a little bit difficult.

But there must be pricing. There's no question. There has to be pricing here and we believe, as in the past, it will be an industry-wide move and will move as part of that. So very tuned to that spending some good time and effort on it. But at the same time, working really hard on the cost saving side of things and the supply chain side of things and continuing to pull those levers that are absolutely at our disposal today.

That's helpful. And then maybe then on the cost side of things, maybe a more holistic question, but there's plenty of things eying on at the moment, the tariff mitigation and et cetera. Is there any kind of cost that might reverse limiting sell down or anything you can kind of help us or point to. I mean there's obviously a lot of non-BAU work happening within your business. Just if there's anything you can kind of point to or quantify that might kind of reverse as we kind of go through the next couple of years.

Look, I mean, it's hard to point out anything specifically. Costs are really only going in one direction these days, at least from what we can see. But I just want to remind you that we've done fairly well over the last few years on cost reduction initiatives, and we've got our $8 million to $10 million pretty much in hand for this year.

We're working on more for the following year, and that's outside of Poland and Mexico, and those will certainly bring cost savings for the business. We're -- we don't expect it to be easy. In fact, we expect it to be hard, and we're going to have to work on costs every day and we have, and we'll continue to do that.

And I just want to look at -- if you look at our SG&A for the first half, which really as the CFO is something it's pleasing to see and that I think we've kept a really tight grip on our SG&A costs, and they've been flat to down in the regions, even more so than the cost savings that we've called out, and that's just indicative of us controlling those discretionary costs and keeping things really tight, and we'll continue to do that.

The next question is from Nathan Reilly with UBS.

just zeroing in on your decopperization project. I'm just trying to get a bit of a sense of the scale of the [indiscernible]. So maybe just help me just in terms of what proportion of your SKUs might be sort of subject to that redesign and material substitution project. I'm also curious to understand what level of sort of step up in R&D or other costs just to -- you might be looking at just to sort of test and implement that project.

Thanks, Nathan. Look, I must admit as I see here, I haven't got an exact number in terms of number of SKUs or percentage. I mean it's -- there's a pretty decent chunk of our business that or large number of our products that have copper in them. So it's not an insignificant thing. I mean there's pipe, a lot of polymer fittings, all the [ John Gas ] business is polymers. So there's also, I guess, a chunk that isn't. I mean it's a U.S. story here, by and large, isn't it?

So I think -- so not insignificant. It's not the entire business by any stretch. We will have to invest a little bit. But I mean, we're talking about low single-digit millions of investment we'll have to put in this. This is not a whole new office and a whole new raft of engineers or so on. We're pretty comfortable we can handle it by and large with with the people and the teams that we have it, it just means that becomes the priority, doesn't it?

And honestly, it's -- as we sit here, it's difficult to think of something that's potentially more valuable to us, not just from a cost point of view, but from a market leadership and innovation disruption point of view. So we're pretty positive that it's a project that can service on multiple fronts. So we'll put the effort in.

And would you anticipate you'd be running kind of parallel SKUs, 1 sort of.

No.

The next question is from James Casey with Ord Minnett.

it's been a long call, so I'll keep this brief. Just in terms of the CapEx profile, CapEx to sales is kind of looks to be a tad over 2% this year, kind of peaked in FY '22 at around 5%, I think can you kind of -- are you underinvesting at the kind of low point in the cycle? And would you flex that up as the cycle improves? Am I reading that incorrectly?

Look, I think we invested a significant amount back in 2021 and '22. I think we're very well placed. If we hadn't then we would need to be -- or the question of being concerned would be valid. I think we're in a really comfortable position at the moment, James.

Okay. And then I understand your comments around the second half '26 looking the same as the first half '26 just in terms of outlook. Just in trading for the first 7-odd weeks this year, with interest rates heading lower, albeit slowly. Have you seen any improvement in the U.S.?

No, not really.

There are no further questions at this time. I'll now hand back to Mr. Sharp for any closing remarks.

Okay, do we have any questions online?

They've all been answered with the extensive Q&A we've already had.

Okay. Very good. Look, I'd like to thank everyone. It was a long call as someone mentioned, but I thank you all for your interest this morning, certainly been an interesting half for us. But as we sit here, we're actually really quite optimistic and energized as we head into the second half. I think a whole lot of externalities, which have impacted us. over the last little bit and a whole lot of direct action that we have taken and are taking that's going to set us up really quite well to do better in the second half and beyond. So with that, we will get back to it. Appreciate everyone's time. Thank you.

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