Reliance Worldwide Corporation Ltd

ASX:RWC

Earnings Call Transcript 2022-Q1

[Operator]

Good day, and welcome to the RWC First Quarter Trading Update and EZ-FLO Acquisitions Conference Call. The conference is being recorded. At this time, I'd like to turn the conference over to Mr. Heath Sharp, the Group's Chief Executive Officer. Please go ahead, sir.

[Heath Sharp, Group CEO, MD & Director]

Thank you. Hello, everyone. Thank you for joining us on the call today. This is Heath Sharp, CEO of RWC. Joining me here in Atlanta are Sean McClenaghan, CEO of our Americas region; and Andrew Johnson, Group CFO. We have released 2 announcements this morning. The first of these highlights the acquisition of EZ-FLO International. The second is our first quarter trading update. We'll begin today with a presentation about EZ-FLO and then move to our trading update. We will take questions on both of these topics at the end of the presentation. I'll start proceedings with an overview of the EZ-FLO acquisition. Sean will talk through the business in more detail, the opportunities we see for it and the integration planning we have done. Andrew will then take us through the first quarter trading update. So starting on Slide 5. I'll step through an overview of the EZ-FLO acquisition. As we've announced today, the purchase price is $325 million. For clarity, I want to remind you that the dollar figures we mention here will be in U.S. dollars unless we specify otherwise. This, of course, reflects our move to U.S. dollar currency for reporting purposes starting this financial year. The purchase price represents an EBITDA multiple of 12x pre-synergies and 7x post revenue and cost synergies. Given how demanding valuations are at present, we are pleased that we've been able to conclude this transaction at what we believe is a realistic multiple. We have a good line of sight to both revenue and cost synergies. We will action these synergies within 3 years. Once realized, we will see a capital return in the mid- to high teens. Further, the transaction will be earnings accretive from year 1, and we expect to outearn the weighted average cost of capital from the outset. We see EZ-FLO as having a strong fit with RWC's existing North American operations. Equally important, it takes us into a new category in large appliance installation and service. As is typical with a family-owned business, exit timing is unpredictable. So we have to be ready to act when the opportunity comes up. I would note that we have known EZ-FLO for a long time. and have participated against them in prior retail line reviews, unsuccessfully I might add. Their manufacturing advantage and long-standing position kept us out. It is fair to say that as we studied the business, we came to better appreciate the substance of their operations and execution and the depth of their customer relationships. Frankly, we were really quite impressed. Key for us is the Eastman brand. Eastman is the leading brand in the large appliance connector segment. A further attraction is the fact EZ-FLO have a strong record of delivering top line growth. They have won market share through operational excellence and high service levels. So the parallels to RWC are clear. Turning now to Slide 6. I Funding for the acquisition will come from our existing committed credit facilities. We have been able to take advantage of the significant headroom we've created through strong cash generation over recent trading periods. Following completion of this acquisition, our pro-forma leverage ratio, net debt to EBITDA will be approximately 1.78x. This is still comfortably within our target range of 1.5 to 2.5x. We have also increased our committed bank funding lines by AUD 100 million. And this will give us an undrawn committed credit capacity of USD 127 million on a pro-forma basis. We have outlined the strategic rationale for the EZ-FLO acquisition on Slide 7. Firstly, it will expand our product range in the Americas, in particular, for the large appliance connector market. Examples of these appliances include washing machines and dryers, dishwashers, icemakers and, of course, water heaters. All of these appliances require specialized products for plumbing and venting. These products give us diversification across merchants, aisles and even sectors within the store. This serves to make us a more important supplier to the retailer. With the Eastman brand, we will have the leading position with major appliance installers in the U.S. EZ-FLO will establish RWC in a new category and enable us to engage with different merchants within our existing retail channel partners. We'll also be looking to leverage our channel partner relationships in both wholesale and hardware to broaden the reach of the Eastman and EZ-FLO portfolio. Sean will elaborate further on the benefits from manufacturing and sourcing and the strategic location of EZ-FLO's warehouse in the free trade zone within China. These capabilities are an important part of the acquisition from day 1. But we are also convinced we can drive broader benefits in the long term. Adding a network of 7 distribution centers in the U.S. is clearly beneficial. EZ-FLO's national network and execution capability allow them to provide next-day service to 80% of the U.S. population. This, in combination with our existing network, will further enhance our fulfillment and delivery performance. To Slide 8. The EZ-FLO acquisition clearly meets the criteria we have set for acquisitions of this type. It adds to RWC's product range targeted at our existing end user base. It also solidifies and, in fact, expands our relationships with key channel partners. Finally, it also broadens our geographic reach in this case, to Central and South America. Now let me hand over to Sean, who will discuss EZ-FLO in more detail.

[Sean McClenaghan, Chief Executive Officer of Americas]

Thank you, Heath, and hello, everyone. On Slide 10, we provided an overview of EZ-FLO. The company's history dates back over 40 years. EZ-FLO was established in 1980 and has a track record of growing organically over that time. The company supplies a broad range of plumbing products, principally used in behind-the-wall and rough plumbing applications. In 2000, the company acquired Eastman, a brand founded more than 50 years ago. And since that acquisition, EZ-FLO has grown Eastman into the leading brand for U.S. large appliance connectors. Today, approximately half of EZ-FLO's revenue come from large appliance connectors, including connectors for water heaters and a further 20% from adjacent products related to those installations. We estimate that the total market size for U.S. large appliance connectors is approximately $1.2 billion. This compares with the estimated total market size for U.S. residential potable water pipe and fittings of $2 billion. We consider the large appliance connector market to be a significant market that we will serve competitively with this acquisition. Now in terms of channel mix. About half of EZ-FLO's sales are through retail channel partners, which includes home improvement and hardware. A further 29% is through wholesale, and the balance is split equally between OEMs and international sales within the Americas. While we don't comment specifically on customer revenue, we can say that EZ-FLO's percentage of revenue attributable to the Home Depot and Lowe's combined is meaningfully lower than RWC the Americas, while still being their 2 largest customers. From a manufacturing perspective, EZ-FLO self-manufacturers in China, product that generates about half of its revenue. The in-house manufactured product principally consists of large appliance, water heater connectors, water fixture connectors, appliance outlet boxes and gas connector products. A further 20% of products sold by EZ-FLO are manufactured through exclusive arrangements with businesses in China. EZ-FLO has approximately 550 employees. Of these, 350 are manufacturing-focused employees located in China, and the balance of the team is located here in the U.S. EZ-FLO's competitors vary by product category, but key competitors include the BrassCraft division of Masco, the Dormont division of Watts as well as Oatey and Sioux Chief here in the United States. Turning to Slide 11. This page provides additional detail about the nature of the products manufactured and sold by EZ-FLO. The left-hand side of the page highlights that 50% of revenues generated by Eastman connectors and outlet boxes. As mentioned, most of these products are manufactured in-house and consist of large appliance supply lines, water supply lines, gas connectors, outlet boxes, water heater connectors and venting products. On the right-hand side of the page are 2 categories of products also sold by EZ-FLO. The category on the upper right of the page, the Eastman installation products, consists of a full line of specialty installation and accessory products that supplement the Eastman connector product offering. These are additional or optional items most likely needed when completing the installation of a large appliance or water heater. Collectively, these products account for approximately 20% of revenues. A further 29% of revenues consist of a broader array of supporting plumbing and replacement products represented here on the bottom right-hand side of the page, including general plumbing valves, tubular drainage, toilet repair and plumbing tools. These products are in the EZ-FLO's product line, to support the needs of the property maintenance and MRO channels, which is an area of focus for the company. While the Eastman brand is synonymous with premium quality appliance and plumbing connectors, the EZ-FLO brand is associated with quality repair and maintenance plumbing products used by property maintenance and MRO professionals. The majority of EZ-FLO products are complementary to RWC's product offering. We estimate that approximately 10% of EZ-FLO's sales are from products that overlap with those we currently offer. In addition, new construction accounts for about 5% of revenue, with the core EZ-FLO business model focused on repair, maintenance, replacement and remodeling activity. Slide 12 highlights the similarity between RWC and EZ-FLO's value propositions. This page uses large appliance connectors and their critical importance to the installation process as an example. It is important to understand 2 things about the large appliance market. First, the key part of the sales process for retailers of large appliance is to cross-sell the installation and delivery services of these appliances; and second, the major retailers require the purchase of new connection kits when electing the delivery install options for these appliances. For these reasons, having in-stock, high-quality connectors that will outlast the life of the appliance is fundamental to supporting a positive experience for all those involved in the purchase of a new appliance. That is a positive experience for the consumer, a positive experience for the retailer and a positive experience for the installer. You should also note that as with RWC's SharkBite, HoldRite and John Guest product lines, the dollar cost of each Eastman connector or connection kit is low relative to the cost of the overall job. But like RWC products, it is critical that these connectors work well, are easy to use and are available when needed. This example helps illustrate how over the past decade, EZ-FLO with the Eastman product line has created the #1 brand for appliance connectors in the U.S. Their success is based on high-quality product designed with the install remind and supported by the highest level of execution for retail partners, including logistics, service, support and in-stock position. The alignment between EZ-FLO and Eastman product promise and benefits a strong with RWC's and our key product lines. With Slide 13 and the next 4 pages, we'll now look at EZ-FLO's operational infrastructure. We'll start with their manufacturing and bonded warehouse facility in China. These are located within a free trade zone and adjacent to the port of Ningbo, one of the world's busiest ports, and then we'll look at EZ-FLO's U.S. network of distribution centers. Starting with Slide 14, which spotlights easy flows manufacturing operations in China. EZ-FLO has been manufacturing in China since 2003, with manufacturing concentrated principally on appliance and water supply lines, water heater connectors, outlet boxes and tubing. In early 2020, EZ-FLO invested further to bring online gas connector manufacturing and they have recently completed an upgrade to the capacity of this line. With more than 200,000 square feet of space and an average employee of tenure 10 years, EZ-FLO has the capacity and capability to support significant additional growth for these product lines from this facility. Turning to Slide 15. One of EZ-FLO's core competencies of sourcing products and components in China, mainly from suppliers in the Greater Ningbo-Shanghai region. This area of China is where RWC's current China supply base is located and is also the primary center for manufacturing plumbing products and components in China, particularly for the export -- for export to the American and European markets. Most key plumbing brands and distributors in the Americas source some products or components from this area of China. We see upside for RWC by utilizing EZ-FLO's expertise and presence on the ground to better leverage our China source products in the future. Critical to EZ-FLO's operations has been their ability to consolidate goods before export to the United States. Their bonded warehouse in the free-trade zone enables them to consolidate goods, manufactured in EZ-FLO's adjacent factory with goods procured elsewhere in China and then shift these efficiently to the U.S. This strategically located warehouse adjacent to the plant and the port in Ningbo is something we will leverage with RWC's purchases and shipments from China. EZ-FLO's operational profile in China is consistent with our approach around the globe. This is highlighted on Slide 16. With long-standing supplier, employee, government and agency relationships, EZ-FLO's Ningbo facilities well regarded in China, will provide a stable and clear competitive advantage to RWC. It brings the team deep in manufacturing, sourcing, quality and engineering experience and is located in a region with entrenched supply chain and manufacturing capabilities for our industry. In addition, the Ningbo Free-Trade Zone is a special economic area with the best trade policies and most flexible operating mechanisms in China and has the objective of promoting international trade. Like many of our factories, this facility also undergoes routine audits by many agencies and other organizations. For EZ-FLO's Ningbo facility, this includes audits from certification agencies such as IAPMO, NSF International, CSA Group and ISO which are focused on product and quality management system compliance, but also includes annual audits by customers such as Lowe's, the Home Depot, Whirlpool, Electrolux and Sub-Zero which are focused on broader ethical sourcing, compliance and manufacturing requirements. Looking at EZ-FLO's U.S. distribution network on Slide 17, you will see that EZ-FLO has 7 distribution centers that span the country. They are well located, and this has enabled EZ-FLO to deliver next-day service to 80% of the U.S. population. In addition, EZ-FLO has been able to demonstrate a 95-plus percent fill rate across all channels through this network. These high service levels are a core part of the EZ-FLO brand proposition. Combining this network with RWC's four Americas distribution centers will be a great catalyst to broaden our distribution capability and provide us a comprehensive footprint in the U.S. and Canada for our warehousing logistic activities going forward. With this network, and in the fulfillment of time, we may be able to combine some facilities, but the immediate priority for us will be extracting savings via freight optimization with the combined volumes and combined customer base. Moving on to Slide 18, which showcases some of EZ-FLO's channel partners and customers. You will notice overlap with RWC's channel partners and the addition of some new names as well. There is no doubt that we'll have an opportunity between our expanded product portfolio, our set of channel partners and our combined resources to further grow organically, leveraging the integrated businesses. As noted on an earlier slide and in terms of the key product category of major appliance connectors, EZ-FLO has relationships with Lowe's, The Home Depot and through its OEM relationship with Electrolux, the retailer Best Buy. These 3 retailers are the 3 largest retailers in major appliances and are estimated to have between them over 70% share of the U.S. large appliance market. Now looking ahead to the integration of these 2 businesses on Slide 20. The Americas team will take responsibility for integrating EZ-FLO and RWC. The management team here in Atlanta has worked closely on this transaction and has already gotten to know the business well. As a result of this and similarities between our business model, go-to-market approach, and our cultures, we have a clear integration plan developed. Significantly, senior members of the management team of EZ-FLO will remain with the business, and we welcome them to RWC. Key areas, we'll be focusing on the integration, we'll be merging our sales and channel management teams, integrating our marketing operations and combining our supply chain and sourcing operations to quickly leverage the opportunities we see in combining these 2 businesses. The overall integration approach and methodology will be similar to the one we successfully used for integrating HoldRite and John Guest North America into the RWC Americas business. We will combine resources and capabilities into one go-to-market and operational supply chain strategy and utilizing a common set of capabilities while leveraging increased scale in a common overhead structure. On Slide 22, we note some of the key financial metrics to give you a sense of scale and impact that EZ-FLO will have on the Americas segment. EZ-FLO has LTM revenues of $169 million for the period ending July 31, 2021, and LTM adjusted EBITDA of $27 million. Combined, RWC Americas and EZ-FLO will have a pro-forma annual revenue of almost $800 million, EBITDA of $147 million, and an EBITDA margin of 18.2%. While EZ-FLO's operating margin is slightly lower than RWC in the Americas, we expect it to expand as we deliver on synergies and growth. Turning now to synergies on Slide 24. The first point to stress is that we see a path to capture and drive synergies, both through revenue growth and through identified material cost-out opportunities. We have a clear line of sight is how we expect to grow the top line through further channel gains with EZ-FLO's lead product categories, particularly through their large appliance connectors, including gas and water heater connectors. In addition, we see an opportunity to leverage areas where RWC has deeper existing channel strength, particularly in wholesale plumbing, hardware and throughout Canada. We'll do this with EZ-FLO's product range to drive above-market growth. For the next 3 years, we are targeting a 10% compounded annual growth rate for EZ-FLO product revenues. We have also identified cost out opportunities, mainly where there is overlap in our operations as well as through leveraging EZ-FLO's expertise with China manufacturing, sourcing and freight logistics. We expect to achieve $10 million in cost-out synergies on a run rate basis in year 3 following the deal's completion. Cumulatively, these synergies once realized, will reduce the multiple paid by RWC for EZ-FLO to approximately 7x EBITDA by the end of year 3. On Slide 25, we've outlined one example of a revenue synergy that will drive incremental growth. RWC is a strong position supporting water heater replacement and upgrades across all channels in the U.S. and Canada. Combining with EZ-FLO's complete range of water heater connectors and gas appliance connectors will give us 100% of the product suite required to support all new water heater installations. EZ-FLO's in-house manufacturing gas and water heater connectors gives it a critical advantage, particularly when supply chains are disrupted. In addition, our retail partners focus on the delivery and installation of water heaters as a key growth area, much as they have done with major appliances. This is just one example from the growth pipeline we have with EZ-FLO. The pipeline has substantial depth as measured by the number and quality of the opportunities we see materializing from the combined RWC and EZ-FLO product ranges and channel resources. However, for commercial confidentiality reasons, we won't disclose specific -- planned specifics of the size of each opportunity at this stage. Let me conclude there and hand you back to Heath for some summary marks on the EZ-FLO acquisition.

[Heath Sharp, Group CEO, MD & Director]

Thank you, Sean. Now to summarize, and we're on Slide 27. EZ-FLO is a logical acquisition for RWC, given the alignment of our channel partners, end users and application of the products. We believe the multiple we're paying is appropriate, the realization of synergies and the growth we see in combining these 2 businesses will generate very positive returns on the investment. We're very excited by what this acquisition will do in terms of opening up new product categories and taking us into new parts of the market. Just as significant is the fact that we will gain access to different merchants and move into different aisles within large retailers, hardware outlets and wholesalers. EZ-FLO's China operation will benefit us in terms of providing a low-cost manufacturing base. It also significantly enhances our overall procurement and logistic capabilities. In the U.S., the national network of 7 DCs will be highly complementary to our loan, both in terms of our service levels and achieving those levels more cost effectively. So I'll finish up there on the EZ-FLO presentation and hand over to Andrew. He will talk through the first quarter trading update we released this morning in Australia.

[Andrew Johnson, Group Chief Financial Officer]

Thanks, Heath, and good morning, everyone. I'll now take you through the first quarter trading update that we've provided today. Net sales for the group were up 8.3% for the quarter with year-over-year sales growth in all 3 regions. As we noted in August at our full year results, we see this as a year where we consolidate the step-up in volume levels we saw through FY '21. Looking at sales growth on a 2-year stack basis, we recorded net sales in the first quarter, almost 29% higher compared with the same quarter in fiscal year 2020. Reported EBITDA was up 4.4% and up 3.1% on an adjusted basis. The adjustments we made this quarter were, firstly, the elimination of the gain on sale of the StreamLabs business; and secondly, deducting the one-off cost associated with the LCL acquisition. As we flagged in the full year results in August, we did see margin dilution. This was because of the price rises we put through in the second half of the last financial year, which took effect in the first quarter. These price increases are offsetting input cost inflation but are dilutive to our overall operating margins. Reported EBIT was up 5.4% and adjusted EBIT up 3.9% to $55.4 million. While net debt was down year-on-year by 10%, we actually saw net debt levels increase slightly from the 30th of June 2021. This was due principally to the payment for the acquisition of LCL, which was USD 28 million. In addition, we increased our working capital through building up inventory levels and we also saw higher capital expenditure in the period, reflecting the planned increase in FY '22. We signaled at the full year earnings announcement that we intended to increase inventory levels, and we still believe this to be the right thing to do in the current environment where supply chains are stretched. Let's look at each of the regions now, turning first to the Americas on Slide 31. The Americas recorded net sales growth of 4.5%, and this was principally driven by price increases and some new product revenues. Excluding price and new products, volumes were slightly lower than the same period last year. This was due in part to supply chain impacts, which adversely affected the availability of some raw materials and components. On a 2-year stack basis, Americas first quarter sales were 27% higher than the same period in fiscal year '20. The other big influence on volumes this quarter was the change in Lowe's warehousing and logistic activities. Lowe's are bringing their distribution activities in line with other retailers, whereby regional stocking warehouses are converted to cross-dock facilities, which lowers overall inventory levels. Importantly, this has not impacted the amount of inventory in the stores or the range of products they carry. If we adjust for this one-off change, growth in the Americas would have been up approximately 12% in the first quarter. We were pleased to have been named Lowe's Vendor of the Year in the rough plumbing category earlier this month. This is the third time we've received this accolade in the last 4 years, which we feel demonstrates the strength of our relationship. Also for the second time in 5 years, RWC was named Plumbing Vendor of the Year by Do It Best, the second-largest U.S. member-owned hardware cooperative. On Slide 32, Asia-Pacific had another strong quarter with net sales up 16.5%. The sales growth reflected continued strong domestic demand in the Australian market with higher residential construction and remodeling activity. Additionally, APAC continued to manufacture strong volumes for export to the Americas, partly related to the inventory build I referenced earlier. As in other regions, margins were adversely impacted by price increases, which are dilutive to margins. We also saw a negative impact from profit in stock, which is a natural consequence of increase in inventory levels of Australian-made product. Looking at EMEA on Slide 33, EMEA recorded 9% net sales growth in local currency. Sales in EMEA for the first quarter were up 15% on the same period 2 years prior in FY 2020. We did see strong increases in demand in Continental Europe with the FluidTech product range, driven by further reopening of many European economies. On the other hand, in the U.K., we saw lower volumes in July and August due to the resumption of typical U.K. vacation patterns. Also impacting sales volumes in the U.K. were supply chain and logistics issues. The shortage of transport drivers has received plenty of attention, and this has certainly had an effect throughout the construction industry in the U.K. Compounding this are material shortages and other supply chain issues, which have slowed the rate of new projects and led to the postponement of some construction and remodeling activity. We believe these conditions are transitory but likely to remain as headwinds over the next quarter or 2 at least. Let me conclude on Slide 34 by talking to the outlook for the balance of FY '22. Underlying demand for our products remains strong, driven by continued repair and remodel activity and in Australia, driven by strong new residential construction. Rising costs due to general inflation, freight costs and logistics delays will continue to challenge our supply chain teams in the next few quarters. Against this dynamic environment, we are putting through further price increases to offset the rising cost pressure we've been experiencing, but there will be a lag between when we incur some of these cost increases and when we see the price increases take effect on the revenue line. So we are flagging that we think margins at the half will continue to be 100 to 150 basis points behind prior year margins, assuming volumes remain at current levels. The impacts of cost headwinds should lessen in the third quarter as further rounds of price increases continue to come through in our results. We believe most of the supply chain headwinds are likely to be short term. Ultimately, we are confident we can continue to make -- to manage through these difficult times by keeping our focus on the customer and continuing to focus on ongoing strong execution. And with that, I'll hand you back to Heath.

[Heath Sharp, Group CEO, MD & Director]

Thanks, Andrew. So now let's get straight into Q&A. We'll take questions from those on the conference call first, and then we'll move to questions from those joining via webcast. Operator, I'll pass back to you for the questions.

[Operator]

[Operator Instructions]We will take our first question.

[Unknown Analyst]

Andrew, Heath. Quite a lot in that in a very short space of time with 20 minutes to digest all this M&A and as well as the trading update. So let's just start with the the trading update, if we can. The price rises, I really want to understand this for the second half. The previous commentary, we were talking about 1% margin dilution. And I take your point, Andrew, 100 to 150 basis points in the first half, that should be the peak of it and then abatement in the second half. What's the mechanism for these price rises? And is it across all channels? Or is it across some channels? I'm just trying to understand this -- put this in perspective just how these price rises will be transmitted through the course of the fiscal year.

[Heath Sharp, Group CEO, MD & Director]

Sure. Look, I mean I guess it's really a continuation of the process we've been on for many months now, several months now, I guess. And it's across all regions and all channels and virtually all products. So the timing of individual parts of that based on product and channel and whatever is different, but there's an awful lot of activity underway right now. And look, as it has been for a while.

[Unknown Analyst]

Yes. Heath, but I mean, the understanding we'd certainly been given was that Depot and Lowe's, for example, take it once a year. Is that not the case now? They will take multiple...

[Heath Sharp, Group CEO, MD & Director]

Look, I think what we've talked about in the past and specifically in relation to copper is that doesn't move. They're not daily discussions. I mean there's some period after you've -- after a commodity has moved that you'll just check that it's sort of got some stability. But no, it's not a once-a-year thing by any stretch. And look, particularly in this environment, I think there's awareness across the board that it's more dynamic, and those conversations are just happening more regularly. And that's happening across the board, not just with us, of course.

[Unknown Analyst]

No, that's good. It's really good, really encouraging to hear. So that's just kind of the acquisition. I mean, last time you spoke publicly, I think it was at our forum and said M&A was kind of mop-up, minnows here and there, nothing really of note. And you're talking with great detail and joy about this EZ-FLO acquisition. So I sort of take it a little bit of -- a bit back by that, Heath, the commentary. And also, it would seem to me that EZ-FLO would be a really decent COVID beneficiary to the shelter in place with major appliances, et cetera. I'm just trying to understand the run rate for the EBITDA in the current year, given what's been happening with supply chain constraints globally and for this business specifically, particularly with its China manufacturing base and whether it has maintained the same kind of run rate as we're going into the current year?

[Heath Sharp, Group CEO, MD & Director]

Well, look, 2 things that I really like about how they've been operating over the last several years. First of all, pre-COVID, their top line growth rate was in excess of 10%, nicely in excess of 10%. So pre-COVID, growing really quite well. Into COVID, yes, they had a pick-up through that period. which we've interrogated. I mean a large part of our due diligence process was into their details virtually skew by skew, looking for what the movements are. And I think that brings me to the second point that I really like: their ability to move pricing through the market, very strong. They've done a great job to manage just the complexity of the supply chain issues, but also to move those prices through to the market that their pricing power has really been evident as we dived into the details.

[Operator]

[Operator Instructions] We'll take our next question.

[Keith Chau, Basic Industrial Analyst]

Good evening, Heath and Andrew. It's Keith from MST. Can you hear me come through?

[Heath Sharp, Group CEO, MD & Director]

Got you, Keith.

[Keith Chau, Basic Industrial Analyst]

Very good. So just a couple on the trading update, first of all. So I just want to talk around the revenue growth for the Americas business, up 4.5% for the quarter. Can you remind me, are we still correct in assuming that the effective price increase that's flowing through that period is around 6% for North America, which means when you talk about a slightly down volume number, it's around kind of that 1% to 2% range?

[Andrew Johnson, Group Chief Financial Officer]

Keith, that's a good assumption. The price increase in the first quarter is in line with what we had signaled back in August.

[Keith Chau, Basic Industrial Analyst]

And then, Andrew, you talked about the EZ-FLO's distribution model changing from regional to cross-dock. Is that something that you had been aware of previously? And if that's the case, are you still expecting an impact to flow-through in the second quarter? Or is that largely done? Because if you stripped it out, I mean the growth rate in the Americas of 12% is actually very reasonable, if not strong.

[Heath Sharp, Group CEO, MD & Director]

I'd go with strong. I think strong is probably -- but that's exactly the case. I think it's -- it was a significant move. What's quite reassuring for us is, and as you know, we track the point of sales data really closely. That number, that 12% number is certainly more indicative of what we're seeing sort of on average at point of sales.

[Andrew Johnson, Group Chief Financial Officer]

And Keith, we feel like it largely...

[Keith Chau, Basic Industrial Analyst]

Sorry, go ahead, Andrew.

[Andrew Johnson, Group Chief Financial Officer]

Sorry, I was just going to say, we feel like it largely was worked through in the first quarter. The impact in the second quarter will -- there will be some, but it will be pretty small.

[Keith Chau, Basic Industrial Analyst]

Okay. And are there any of your other distributors where you need to think about them changing the distribution model this year, anything in the pipeline, any discussions that may continue to drag on sales?

[Sean McClenaghan, Chief Executive Officer of Americas]

Keith, this is Sean McClenaghan. No, it's really just limited to Lowe's. We don't see any other distribution models changing across the channels or customers.

[Keith Chau, Basic Industrial Analyst]

Okay. Can I get an understanding, Sean, of how much notice you were given about that? Because it seems like quite a material move, if it had an 8% revenue impact on the division as a whole. It must have been massive in the context of Lowe's as a customer.

[Sean McClenaghan, Chief Executive Officer of Americas]

Yes. Not to go into too much detail regarding Lowe's. I think everyone understands are kind of going through it quite well, a 3- to 5-year turnaround process, and I think you're just beginning to address some of the gaps between them and other world-class retailers on supply chain. So I think a lot of these changes are rather recent. And as they've been driving those changes, they've not communicated them all to the vendor community. So that's an area they're working to improve is to let the vendors know a little bit more visibility before they make these moves because we had limited visibility at this one.

[Keith Chau, Basic Industrial Analyst]

Okay. Okay. And then perhaps one on the acquisition, EZ-FLO. I think, Andrew, you mentioned there were 7 DCs in the U.S. and you're kind of okay on in-stocks given the distribution model you've got in the U.S. Can you give us a sense of how much stock on hand that business would have at any given time? I think obviously, the discussions around the freight issues that we're seeing globally in the logistics challenges, but let's just say, freights between China and and the U.S. was impacted by, call it, a lag of 2 months, would you have enough to cover yourself or your customers with stock for that kind of period if you've got into a 2-month hole?

[Andrew Johnson, Group Chief Financial Officer]

Keith, this is Andrew. We think so. That business was carrying a little bit more inventory than what the U.S. business would typically carry. So we would feel confident based on the number you just quoted 2 months that we'll be able to carry through that.

[Keith Chau, Basic Industrial Analyst]

Okay. But for the time being, no major logistics issues have transpired since the start of BD and the acquisition time?

[Heath Sharp, Group CEO, MD & Director]

No. Look, I mean, they're handling all the same craziness that all of us are handling it quite well. Nothing we saw in BD was a surprise given what we're dealing with in our business.

[Keith Chau, Basic Industrial Analyst]

Okay. And then, Andrew, just a few kind of minors to cover off on the financials of EZ-FLO. Can you give us a sense of what the D&A for that business is and the tax rate that, that business would incur? I'm assuming it would be pretty similar to the tax burden for the North America business from an effective tax rate perspective. But if you can give us a sense of D&A, tax and may as well go with interest as well, that would be very useful.

[Andrew Johnson, Group Chief Financial Officer]

Look, D&A is going to be $2.5 million to $3 million. I don't have an interest number for that business. And of course, it was -- the acquisition didn't come with debt. So -- I think we've signaled, it should add a couple of million to our interest expense in FY '22, the acquisition would.

[Operator]

We will take our next question.

[Peter Steyn, Analyst]

Hi Heath, Andrew, Sean. Thanks very much for your time. Peter Steyn from Macquarie. If I may, just very quickly try and quantify the level of disruption you've seen in the U.K. from a supply chain perspective, Heath? How much would that have taken from your growth rates in this period?

[Heath Sharp, Group CEO, MD & Director]

Look, I'd say, I don't think the U.K. is sort of any better or worse than what we're seeing everywhere in the world right now, and it's hand to mouth day by day, really. And honestly, it's impossible to put a number on exactly how it would have ended the revenue. I want to think it's a point or 2, but I haven't got hard data in front of me to determine that. It's -- right now, it's really hard to read through or look through the whole supply chain from the contractor through the distributor to us, it's a pretty dynamic period.

[Peter Steyn, Analyst]

Yes. No, I understood. It certainly seems that way. Maybe I'm just going to -- on EZ-FLO get the answer to Keith's question around the tax rate, just very quickly, is that demonstrably different from your position given the Chinese sourcing strategy?

[Andrew Johnson, Group Chief Financial Officer]

It's not, Peter. We would still call the tax rate between 24% and 26% for the financial year.

[Peter Steyn, Analyst]

And then maybe just a slightly more macro question around the supply chain for EZ-FLO. We are all wondering about the current situation and the risks. I'm curious in the sort of macro context. What are some of the things EZ-FLO would have had to do 2 years ago when tariffs were introduced on Chinese imports, as an example? What is the sort of mitigation strategies should an unfavorable trading regime come about or aggravate itself over the coming years? So just some of those macro all processes around that trade relationship?

[Heath Sharp, Group CEO, MD & Director]

Look, I don't think what they had to do was a whole lot different to us. I mean they work both by the end of it, what mitigation they could get from the customer end as well as what mitigation they could get through sourcing and manufacturing strategies. I think it's fair to say some items or components that were previously manufactured in China, they, like us, looked at manufacturing those elsewhere. So it was -- there are -- they pulled all the levers available to them in the same way that we did. So there's nothing really there that's a standout that's different, I guess, than what we had to do.

[Peter Steyn, Analyst]

So was there -- thinking about half manufactured in China, another 20% sourced in China, and then I presume the rest is onshore manufacturing in the U.S.? Is it -- and was that proportion then lower historically?

[Heath Sharp, Group CEO, MD & Director]

I -- look, other things sourced from elsewhere. There's not a whole lot of true manufacturing in the U.S. within EZ-FLO. And yes, that proportion has changed a little bit over the period, but not drastically. Just a few key items that help them deal with the complexities of the tariffs.

[Peter Steyn, Analyst]

Yes Yes. Last very quick question. Just curious what the biggest part of the cost synergy bucket would be, Heath. What's the single biggest item...

[Heath Sharp, Group CEO, MD & Director]

Breakdown of cost synergies...

[Andrew Johnson, Group Chief Financial Officer]

Yes, so of those cost synergies, you can think of them about fairly close to equally split between procurement sourcing synergies, synergies we're going to get on the distribution side, including freight and freight optimization. Those are the 2 largest buckets and then obviously behind that will be some SG&A synergies by running a common overhead structure here in the Americas business. So call it 35% each, and then the balance would be on the SG&A side.

[Operator]

We will take our next question.

[Peter Wilson, Associate]

It's Peter Wilson here. Just on the trading update. The comment that you expect first half margins to come in 100 to 150 basis points below. Were you referring to group margins there? And could you give some commentary on Americas, which seemed to suffer that the biggest margin decline in the first quarter?

[Andrew Johnson, Group Chief Financial Officer]

Peter, this is Andrew. That was group margins we were referring to, and we did not intend to get into that level of detail in terms of the Americas margins for the half. So we'll just not get ahead of ourselves at this point, and we'll talk about that in February.

[Peter Wilson, Associate]

Okay. Fine. And then the EMEA sales growth rate, 9%. Seems to have slowed potentially a little bit since the second half of last year. I'm just wondering whether you agree with that and what might be causing that?

[Heath Sharp, Group CEO, MD & Director]

I think -- I think what we saw a little bit in the U.K. in this period was vacation that we'd kind of forgotten about a little bit last year. Last year it was, and it was an unusual year last year and this year just felt a little bit -- not normal by any stretch, but I think there was a whole lot of people who took the opportunity in sort of July, August and even in September a little bit to take some vacations. So I think that trimmed some of the growth off. But I think it's fair to say it was probably a good time to have a vacation as well because some of the -- some of the supply chain issues were limiting what material was available as well. So there's a few factors that play there.

[Peter Wilson, Associate]

Okay. Good. And just a couple on EZ-FLO. Firstly, the -- your liquidity post the transaction, it was $127 million. strikes me that's a little bit light. I'm just wondering how you're thinking about that versus your uses in the next 12 months?

[Andrew Johnson, Group Chief Financial Officer]

Look, I mean, I don't think there's anything specific to call out there. That USD 127 million, obviously, is where we're seeing the headroom post acquisition. But nothing specific to call out. We did -- other than the capital investment that we mentioned at year-end last year, the USD 60 million to USD 70 million, we certainly are on track to invest that into the business. So that's going to be a pretty big use as we go through this financial year. But that's about it, Peter.

[Peter Wilson, Associate]

Okay. And do you think that's enough to account for all possible continued fees?

[Andrew Johnson, Group Chief Financial Officer]

I think so.

[Peter Wilson, Associate]

Okay. And then on EZ-FLO, so you've given an estimate of the market size, $1.2 billion versus a $2 billion market size for residential plumbing and fitting. So it implies a 15% share for EZ-FLO. I'm just wondering, could you give some commentary on who has the other 85%? Because, I mean, it's anecdotal, in my experience, those kinds of connected fittings, retailers generally only carry one, one particular brand. So just wondering who has the other 85%.

[Heath Sharp, Group CEO, MD & Director]

I think that -- look, it's a pretty fragmented market. I think if you break -- if you get into the details, because there's a fair bit that -- or a number of different product categories that make up that $1.2 million. The couple of key ones there, the water heating connectors and also the water -- appliance water connectors, we're sort of well in excess of 20% share from what we see with the numbers there. And in some of the other categories where obviously a whole lot lower. But that's sort of, I guess, from our point of view, the opportunity being in that channel or within those parts of that channel gives us the opportunity to grow those sectors. But there are a number of other suppliers and brands out there, as I said, it's quite a fragmented market.

[Operator]

We will take our next question.

[Daniel Kang, Research Analyst]

It's Daniel Kang from CLSA. I'm just curious about the background of the EZ-FLO transaction. How long had you been looking at the opportunity? How did the opportunity arise? Did the family approach you?

[Heath Sharp, Group CEO, MD & Director]

Look, without getting into too many details, I mean, that process is all those discussions, I guess, several months old or since they first began. I think COVID kind of disrupted them a little bit as well. And look, we try and put ourselves in a position to be aware of when these things are going to move. And we did sell in this -- in this case and look closely at it. And I think it's fair to say the more we got into it, the more we liked it, frankly. So.

[Daniel Kang, Research Analyst]

All right. And you mentioned before that EZ-FLO generated pre-COVID revenue growth of around 10%. Can you talk about the organic growth and the market share growth of EZ-FLO over the past 5 years and your expectations going forward?

[Heath Sharp, Group CEO, MD & Director]

Well, look, pre-COVID where they were more than 10% growth. I think we believe from here on in, we can continue that. They've had a couple of years of higher growth through COVID, which is what you'd expect. As we look forward, we're being -- we don't expect that COVID-level growth, obviously, but we think the ongoing 10% plus growth rate is possible with their products. That's certainly what we're targeting. And look, that's based on the nature of the products, the quality of the products, but their execution level, their reputation and capabilities to execute. So they've got a good track record of organic growth. Their last acquisition, Eastman was years and years ago. Everything they've done over the last several years has been organic.

[Andrew Johnson, Group Chief Financial Officer]

But I think if you look at the long-term growth of that market, right? It's like the water heater market, right? It's tied to major appliances. So if you look over a 10-plus year period, you can call those type of markets, call it, GDP growth markets. That's like the water heater market we serve today. So the majority of their success has been tied to those things Heath just outlined around the value proposition, which has enabled them to take share from other manufacturers, both through execution and expansion of their product line and offering.

[Daniel Kang, Research Analyst]

And just on the topic of share, where would that 15% market share has stood, say, 5 years ago? And where do you see the natural market share of EZ-FLO in the long term?

[Heath Sharp, Group CEO, MD & Director]

Look, we don't have the specifics of of what that breakdown was 5 years ago. Certainly, they've grown a couple of categories, in particular, well ahead of market. Look, we think there's a lot of runway here. If the one -- the one comment Sean made as he went through was you noted the 3 biggest installation or appliance retailers in the U.S. are Lowe's, Home Depot and Best Buy. And we're in 2 of those and EZ-FLO's in 3 of those. So we certainly see there's opportunities to expand the share they've got in each of those outlets across different parts of the stores and across different parts of the country depending on where they're currently in place and where the opportunity lies.

[Daniel Kang, Research Analyst]

And just a final one on supply chain issues. Just interested in how you see the situation evolving. Any areas of incremental improvement that you are seeing at the moment?

[Heath Sharp, Group CEO, MD & Director]

How is it evolving? It's -- Sean's sitting here smiling. I mean it's a day-by-day thing. You conquer steel today and you wake up tomorrow and it's a particular resin and the day after it's cardboard. I mean that's -- it's a well-run right now. I'm not confident to say anything settled at this point. I think we've still got some ways to go. Certainly, if we see it as transitory, but it's -- we've got a few months of craziness left, particularly on the shipping side, I think. So look, you pull all the levers you have available to you. The good long-standing relationships with our vendors at looking for material alternatives, particularly when it comes to resins. -- borrowing from other regions, doing deals with suppliers to swap one material for a different material. I mean, all sorts of stuff on the table and has been for months now. And look, we're not alone. I mean everyone is doing the same thing. It's the nature of the beast.

[Operator]

We will move to the next question.

[Lee Power, Analyst]

Hi, Heath. Hi, Andrew. Hi, Sean. Lee Power here. Just firstly, on the trading update. Asia Pac, the 17% sales growth. Was that -- in terms of the intercompany sales? Were they impacted by that cross stocking as well given that they're obviously imported into the U.S.? Or should we think that the intercompany component was close to that 12% number?

[Andrew Johnson, Group Chief Financial Officer]

Lee, this is Andrew. No, the -- those intercompany sales to the U.S. would not have been impacted by that reduction. It did allow us to build a little inventory in Americas, which is something we try to do this time of year. But that's -- we've got the Australian factory working pretty hard right now as we prepare for the kind of this winter season coming up and no impact from that Lowe's inventory reduction.

[Lee Power, Analyst]

Okay. Excellent. And then the 10% per annum EZ-FLO's sales growth that you've talked to for the next sort of 10% plus for the next 3 years. You've obviously given a bunch of different examples here on Slide 24. Any of them larger than others? Like it looks like the share growth, the product line extension, this geographic extension. Like is any one of them that you're kind of pinning to drive the large proportion of that sales growth? And then maybe at the same time, I think, Sean, you mentioned that EZ-FLO, only 5% of its sales was to new construction. Is that just a factor of the style of business, it's a very R&R-led business? Or is there something like -- is there some sort of large component of new construction that's sitting there that's potentially lead to be one?

[Sean McClenaghan, Chief Executive Officer of Americas]

So in terms of those opportunities, they're as listed or prioritized. So from largest to smallest, to give you a sense, some of the growth avenues opportunities in the pipeline. From your new construction question, again, there's a lot of similarities between our business that services the tank water heater market. If you look at just as a rule of thumb, say, there's 10 million tank water heaters sold a year. there's 1 million to 1.5 million new housing unit starts a year in the U.S. kind of implies 10% or 15% of that market is new construction and the balance is repair or replacement, I should say. I think the appliance major appliance market is similar. You only have so many new housing starts a year that require new washers and dryers versus those that are replaced. I think the other key activity that is slightly different, however, is remodeling. And I think as you all know, with all the various dynamics that are taking place in the American housing market today, I think we expect and most people expect the remodeling activity to remain robust. I do think you get a lot of new appliance sales, particularly in the kitchen tied to DAS connectors and other appliance connectors for that remodeling activity that is really probably the biggest growth opportunity. So a little less on the new appliance side that ties to new construction, more on replacement in the natural life cycle and then that remodel work that's going on.

[Operator]

We move to next question.

[Keith Chau, Basic Industrial Analyst]

Hi, Heath and Andrew. It's Keith again from MST. I just want to follow up on the growth in the North Americas [indiscernible] of 12%. If we look at it another way, can you give us a sense of what's driving most of that growth? Whether it's the Pro channel or the DIY channel?

[Heath Sharp, Group CEO, MD & Director]

Both. Well, it's -- yes, it's growing well across well, I will say both, all channels, including OEM, hardware is strong. it's -- and like I think across all channels, we're seeing the consolidation of that step-up from last year. then with a little bit of volume on top of that and then certainly the price increase on top of that. So there's really, Sean, no one channel that stands out. Is it?

[Sean McClenaghan, Chief Executive Officer of Americas]

There's not. And then you can layer in the complication that when you refer to the home improvement channel, I don't know if you're referring to that as DIY or Pro but if you follow the major home improvement players, clearly, what's been driving their growth, especially in categories like rough plumbing has been pro-based growth. and their investments to drive Pro. So it's really across all channels. And then even within a home improvement, Pro right now is probably outpacing what you would classically consider pure DIY work.

[Keith Chau, Basic Industrial Analyst]

And Sean, as you look at -- or you kind of appearance of the conversations you're having with your customers, are there any signs of growth moderating or your discussions with the sales folks. Does that suggest that things could potentially even accelerate to the end of this year? I mean I don't want to get ahead of myself here, but obviously, a 12% number [indiscernible] distribution change issue is a really punchy number, especially when you're still comping some pretty strong periods in the PCP as well. So I guess, based on the discussion that we've had just around this question, in the discussions you're having with your sales team or customers. Are there any signs of let-up at all?

[Sean McClenaghan, Chief Executive Officer of Americas]

Really isn't, I think, outside of, obviously, supply chain disruptions and complications, which again, have several levels to it, right? I mean there could be supply chain disruptions that could impact rough plumbing products, but a lot of jobs are slowed or stalled because of disruptions that impact other building materials. So as an example, in the world of single-family, multifamily construction today in the U.S., I believe the item that is in the shorter supply with the longest lead time right now are windows and windows and doors. So the availability of that product slows down construction generally for single multifamily construction, right? So absent that type of noise that's throughout the system, the fundamental demand remains robust. Most people tell you their job boards are booked into 2023 from a contractor standpoint. So the work in the volume is there. It's product availability across all building materials and building products, that's the complication.

[Heath Sharp, Group CEO, MD & Director]

Look, I mean, I think the commentary and the analysis we're seeing and receiving is that these supply chain issues will actually serve to stretch out the uptick in the market as the demand is not waning, the supply chain just is going to play out over a longer period. And we don't really want the supply chain issues we're dealing with every day, but we're kind of happy for that prolonged uptick in demand, if that's, in fact, how it plays out.

[Sean McClenaghan, Chief Executive Officer of Americas]

The insight we have to the volume at cash registers remains solid. -- remains solid.

[Keith Chau, Basic Industrial Analyst]

Okay. And then Andrew, I just want to circle back on a couple of things. So you pointed out to the acquisition being accretive in the first year. The preliminary numbers that we're getting to close to the high single-digit range. Just wondering whether you think that's a fair assumption. Whether there are any adjustments below the EBITDA line or EBIT line that we need to take into consideration?

[Andrew Johnson, Group Chief Financial Officer]

Yes. And of course, that we thought it would be accretive in the Americas in the first year post synergies just to clarify that. Look, from an EBIT perspective or for -- sorry, from an EPS accretion standpoint, this is going to be treated as an asset sale. So we'll get a step-up in basis as part of the acquisition. And like we did with HoldRite, then we'll be able to amortize that stepped-up basis on the intangibles and goodwill over 15 years for tax purposes. So we'll have more of that adjusted NPAT effect, where we've got a cash tax benefit related to the amortization of goodwill in this case. So that is something that you'll need to take into consideration, about $4.5 million on an annual basis from that perspective. So that's an additional deduction that we'll get because of that step-up in basis.

[Keith Chau, Basic Industrial Analyst]

Okay. And that comes through which line item...

[Andrew Johnson, Group Chief Financial Officer]

That'll hit the NPAT. That'll hit the NPAT line. That's NPAT cash tax benefit

[Operator]

We do not have any further questions at this time. [Operator Instructions]

[Sean McClenaghan, Chief Executive Officer of Americas]

And Heath, just to let you know, there are no questions online. So I think it looks like we're all done.

[Heath Sharp, Group CEO, MD & Director]

Okay. Well, very good. Well, with that, we will wrap it up. I appreciate your time today. Certainly, grateful for the opportunity to step through what is a fair bit of material here. But hopefully, we've done so satisfactorily. Thanks very much for your time, and we will leave it there.

[Operator]

Thank you. This concludes the call. Thank you for your participation. You may now disconnect.