Reliance result not quite what it seems

Company News

by Glenn Dyer

On the face of it the 23% rise in sales to $US303.1 million for the September quarter reported by Reliance Worldwide (ASX:RWC) looked more than OK, as did the 16% rise in operating EBITDA of $US76.8 million.

But the bare figures didn’t tell the real story of a company suffering margin compression from rising costs and weak sales in the US (Australia was OK) and a profit figure bolstered by a one-off gain on a property sale which when deducted (along with some other costs) saw that operating EBITDA figure fall.

That triggered the selling as investors in RWC went nah thanks and sold off the shares by well over 16% at one stage. They ended the day down more than 13% at $3.11.

The quarterly sales figure of $US303.1 million included net sales of $US53.8 million from the EZ-Flo acquisition almost a year ago in November 2021.

“US dollar strength against most other currencies, including the British pound and Australian dollar, adversely impacted reported sales. Sales growth in constant currency was 28%,” the company commented.

And excluding EZ-Flo, constant currency sales growth for the period was just 6% – another reason for the selloff was that rise was less than the inflation rate in most of its major markets, especially the US and Australia.

“Sales growth excluding EZ-Flo was driven principally by price rises of 7.9% achieved to offset inflation. Volumes were lower in the Americas, UK and Continental Europe, while Australia continued to record volume growth. Underlying demand for plumbing and heating products has been broadly stable, while demand for specialty products including water filtration and drinks dispense products has softened following a strong recovery in FY22,” RWC told the market. The lower volumes were a concern.

The operating EBITDA of $US76.8 million included a $US15 million gain on sale of a surplus property in the UK, and $US1.4 million in costs incurred in the realisation of EZ-Flo cost reduction synergies. Excluding these items, Adjusted EBITDA was $US63.2 million, down 4% (though it has to be pointed out that one off gains and losses have to be taken into a company’s statutory results, even if they distort the true picture of the performance).

RWC said its adjusted EBITDA margin was 21.4% excluding EZ-Flo, compared with 26.6% in the first quarter of 2021-22 and before the EZ-Flo buy which didn’t please analysts, nor did the litany of negatives impacting margins that directors mentioned in the update.

“Lower volumes and higher costs negatively impacted margins, while price rises implemented to recover costs resulted in diluted margins. Higher input costs experienced early in 2022, particularly copper, zinc and stainless steel, also adversely impacted margins due to the timing lag between materials purchase and consumption and the sale of finished goods.”

And investors ignored the glimmer of light off in the distant months when the company said “Input costs have eased since their peak in mid-2022 which is expected to positively impact operating margins later in FY23.”

RWC said it had net debt of $US518.2 million at September 30 which was $US32.9 million lower than at June 30 thanks to the $US25.2 million received from the sale of that UK property.

“At period end RWC had US$541.0 million of cash and unutilised committed facilities available. RWC remains in compliance with the terms of its borrowing agreements.”

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