Reliance vows to cut costs following disappointing 1Q FY23

Reliance Worldwide (ASX: RWC) was down -13% at the open after the plumbing materials giant warned investors that the growth outlook for its key markets has "become less certain" in recent months.

Impacted by higher costs, lower volumes and US dollar headwinds, the group’s adjusted earnings (EBITDA) margin fell in the three months ended 30 September 2022 to 21.4% (excluding EZ-Flo), compared with 26.6% in the previous period.

Overall, adjusted earnings (EBITDA) fell -4% to $US63.2m, while sales for the period were US$303.1m ($480.1m), up 23% on the previous period including net sales of US$53.8m from EZ-Flo which was acquired in November 20212.

Back to reality

Following two years of heightened growth in the Americas, CEO Heath Sharp witnessed moderating demand in the first quarter of FY23.

While UK plumbing and heating volumes were steady, Australia continued to see volume growth due to new residential construction and remodelling activity levels.

“While we are comfortable we have achieved price outcomes that enable us to offset input cost inflation, we are responding to the deteriorating economic conditions by reinvigorating our cost-out programme,” Sharp noted.

No specifics were provided.

Costs and price increases

While they have eased since their peak in mid-2022, management notes higher input costs experienced early in 2022, particularly copper, zinc and stainless steel, also adversely impacted margins.

Much of this is due to the timing lag between materials purchase and consumption and the sale of finished goods.

Given the typical lag between movements in commodity prices and the timing of product sales, the company expects to benefit from the lower input costs later in FY23.

The business implemented price rises of 7.9% to offset inflation with volumes lower in the Americas, UK and Continental Europe during the quarter.

Highlights from today’s first quarter FY23 update include:

• Sales growth in constant currency was 28%

• Operating earnings (EBITDAS) came in at $US76.8m, up 16% on the previous period, but included $US15m from a sale of surplus property in the UK and $US1.4m in EZ-Flo cost reduction synergies.

• Net debt of US$518.2m at 30 September 2022 was US$32.9m lower than at 30 June 2022, due to US$25.2m received from the sale of a surplus property in the UK.

• US$541.0m of cash and unutilised committed facilities available.

• Sales in the Americas were 43% higher than previous period.

• APAC external sales were 7% higher due to continued strong demand in Australia from new residential construction and home remodelling activity.

• EMEA external sales growth of 7% was driven by a strong performance in the UK, with plumbing and heating sales up 13% and UK sales up 9% overall.

No changes to FY23 earnings

Despite today’s disappointing update, there have been no changes to the key assumptions for FY23 outlined in the full year earnings announcement dated 22 August 2022, which included:

• Depreciation and amortisation expense is expected to be in the range of $52m to $55m (previously $55m to $60m).

• Net interest expense is expected to be in the range of $27m to $30m (previously $23m to $27m).

Outlook

While underlying demand for plumbing and heating products has been broadly stable, management notes rising interest rates and continued inflationary pressures are impacting consumer confidence.

The company expects the backlog of repair and remodel (R&R) work to underpin volumes in the short term.

Working capital is expected to reduce in the second half of FY23 as inventory levels are brought back in line with sales volumes.

Due to ongoing geopolitical tensions and covid variants, the company also flagged further risk of supply chain disruption and potentially higher materials, freight and energy costs.

What brokers think

The company’ share price is down -40% over 12 months.

Consensus on Reliance is Moderate Buy.

Based on Morningstar’s fair value of $5.43 the stock appears to be undervalued.

Goldman Sachs believes Reliance is one of a number of companies mispriced following its FY22 result.

The broker is Buy rated on Reliance with a target price of $4.85 and considers the stock more defensive within the building materials sector with a high proportion of revenue derived from repairs in the R&R sector.

While there are Sell, Hold and Buy ratings on Reliance from the seven brokers that cover Reliance (as reported on by FN Arena) the stock is trading with 33.4% upside to an overall target price of $4.78.

Reliance Worldwide's share price over 12 months.