Reliance Worldwide Corp Ltd (RWC) Q4 2021 Earnings Call Transcript

Reliance Worldwide Corp Ltd (ASX:RWC) Q4 2021 earnings call dated Aug. 23, 2021

Corporate Participants:

Heath Sharp — Chief Executive Officer

Andrew Johnson — Chief Financial Officer

Phil King — Investor Relations Director

Analysts:

Peter Steyn — Macquarie — Analyst

Lee Power — UBS — Analyst

Peter Wilson — Credit Suisse — Analyst

Keith Chau — MST Marquee — Analyst

Simon Thackray — Jefferies — Analyst

Daniel Kang — CLSA — Analyst

James Casey — Ord Minnett — Analyst

Presentation:

Operator

Good day and welcome to the RWC FY ’21 Results Announcement Conference Call. Today’s conference is being recorded. At this time, I’d like to turn the conference over to Mr. Heath Sharp, Chief Executive Officer. Please go ahead, sir.

Heath Sharp — Chief Executive Officer

Thank you. Good morning, everyone, and welcome to RWC’s financial results presentation for the year-ended 30 June 2021. This is Heath Sharp, CEO of RWC. I’m joined here today in Atlanta by Andrew Johnson, our Group CFO.

We are webcasting this call, and we have also people joining via the audio conference facility. We will take questions at the end of the presentation. If you are joining by webcast, you can type your question, and it will be read out at the end of the presentation by Phil King, our IR Director.

So let’s get started. I’ll begin on Slide 4, and provide overview comments on the year. In short, it has been a record year for RWC. We achieved exceptionally strong revenue growth across all three segments and a significant uplift in earnings. In constant currency terms, Americas sales were up 27% for the year, Asia Pacific sales were up 18% and EMEA sales were up 25%. What was common to all regions was the growth in repair and remodel activity that we experienced throughout FY ’21.

Consumers staying at home and spending more on their home environments has been a positive for the business. Our results were further boosted by buoyant housing market and new construction activity. What was also pleasing was how top line growth translated into higher operating earnings and margin expansion. We achieved this through a combination of operating leverage, driven by the higher volumes and through good cost management. This also translated into higher net earnings with adjusted net profit after tax, up 63% to just under AUD212 million. This growth in earnings was responsible for the 20% increase in cash flow from operations. This enabled us to further pay down debt and pay an increased dividend for the year.

On Slide 5, we’ve set out the financial highlights for the FY ’21 year. We reported net sales of AUD1.34 billion, up 15% on a reported basis and up 25% in constant currency. Adjusted EBITDA of AUD349.2 million was up 39% on a like-for-like basis with the prior year. This growth in operating earnings translated into higher adjusted net earnings of AUD211.9 million.

Operating cash flow of AUD334.3 million, represented a cash conversion ratio of 98%, which was ahead of our target of 90%. As a result of debt reduction, net leverage stood at 0.51 times at June 30th, down from 1.39 times. This strong performance enabled us to increase our dividend for the year to AUD0.13 per share, so that’s a AUD0.07 per share final dividend on top of the AUD0.06 per share we paid at the half.

Briefly stopping on Slide 6. And here, we graphically illustrate these points. You can see the strong increase in cash flow from operations, which is nearly doubled what it was two years ago. Also clear is the substantial reduction in our net debt position along with the growth in dividends declared.

Now turning to Slide 7. I’d like to make some observations about the year. Firstly, this is a year in which every one of our major markets experienced extremely strong volume growth. In the U.S., we were already experiencing 20% plus top line growth coming out of the first half. Then in late February, we experienced a freeze event in Texas and surrounding U.S. states that caused demand to surge. We had to urgently mobilize to meet the new demand and our second half results reflect our strong execution.

The broader trend of homeowners investing in their homes prompted by COVID continued right through the year. This trend has been supported by rising house values. And when combined with record low interest rates, made for a very supportive macro environment. Meantime, the commercial sector was slower to recover, although in Europe, we have seen sales rebound as economies have opened up post-lockdown.

Meeting the very strong demand was our biggest operational challenge of the year, especially when managing through a pandemic at the same time. I’d really like to acknowledge the fantastic team of people working across RWC. Their enormous contribution over the past year delivered for our customers and generated these excellent results.

Now beyond the day-to-day execution focus, we did continue to work on the business during the year. We delivered on our cost reduction program with cost savings of AUD22.3 million. In the U.S. and the U.K., we commenced the rationalization and expansion of distribution and logistics capabilities. With rising commodity prices and inflation in other cost areas, implementing offsetting price increases was the second half priority. I’m pleased to report that we were able to achieve this.

Turning to Slide 8. So we thought it was worth taking just a moment to reflect on RWC’s first five years as a listed entity. We were listed on the ASX in April 2016. So completion of this latest year represented our first full five years. Over that time, through a combination of organic growth and the acquisitions of HoldRite and John Guest, we achieved a 22% compound annual growth rate in sales. And through strong execution, we turned this into a 30% operating earnings growth rate and a 34% compounded growth rate in net earnings. Expressed another way, we’ve more than doubled our annual net sales and nearly tripled our operating earnings and net earnings. Importantly, we have a larger and more robust business today. The platforms we now have in our key markets provide us with even greater opportunity for further growth and expansion.

And now I’ll hand over to Andrew to discuss our financial performance.

Andrew Johnson — Chief Financial Officer

Thanks, Heath. On Slide 10, we’ve summarized our financial performance for the FY ’21 year. As Heath has already mentioned, our reported net sales were up 15% and on a constant currency basis, sales were up 25%. Reported EBITDA was up 56% and adjusted EBITDA was up 39%. The difference between reported and adjusted will be one-off cost in the year of AUD8.5 million related to warehousing and logistics improvements, in both the U.S. and the UK. Reported net profit after tax was up 111% to AUD188 million, while adjusted NPAT was up 63% to AUD212 million. As already mentioned, we will pay a total dividend for the year of AUD0.13 per share, which represents 55% of reported net profit after tax.

As we announced in February, we are moving to U.S. dollar reporting in the next financial year.

Slide 11 shows what our results would have been in FY ’21, had we presented them in U.S. dollars. With over half of our business generated in the U.S. and Canada, the move to U.S. dollar reporting should help eliminate some of the currency volatility and will mean the trends we show are much closer to underlying performance.

On Slide 12, we set out the main contributors to our strong EBITDA performance. While adjusted EBITDA was up 39%, it was up 45% on a constant currency basis. The biggest driver of this performance was the increase in sales volumes. Price was also a positive factor along with AUD22 million in cost out savings. Higher commodity costs, COVID related cost and other cost pressures were partial offsets.

On Slide 13, we have provided more detail on cost. Commodity cost inflation was a significant cost driver for us this year. The average copper cost in FY ’21 was $6,600 per ton, compared with $6,000 per ton in the prior year. In the second half, the average copper cost running through our P&L rose to almost $7,500 per ton.

One point to note is that the higher sales during the second half has resulted in increased turnover, and therefore, the lag effect of copper prices has reduced from six months to four months within that second half. On the right-hand side of the page is the summary of the cost reduction areas we have targeted, and it’s very pleasing to report we achieved our goal of AUD25 million in annual cost savings on a run rate basis.

Now look at each of the segments. On Slide 14, in U.S. dollars, the Americas recorded a 27% growth in net sales and a 52% growth in EBITDA. The second half was impacted by the freeze event in Texas and surrounding U.S. states. We estimate the sales impact to have been $42 million in the second half and helped drive the 32% top line growth. This growth was especially noticeable in the third quarter, which you can see in the bottom left-hand chart, with sales up substantially versus the same quarter in the prior two years. With the exceptional volumes combined with cost savings initiatives, operating margins trended higher with 19.2% operating margin in the second half and a 19.1% margin for the year, as a whole.

On Slide 15, we have broken down the U.S. sales growth drivers in a little more detail. The market growth figure is derived from the LIRA Index, and we have isolated for you both the impacts of the U.S. freeze event and COVID 19. Excluding the U.S. freeze, the Americas saw a 19% constant currency growth for the year.

Looking at Asia Pacific on Slide 16. We recorded 13% sales growth for the year and, on a constant currency basis, sales were up 18%. The Australian repair and remodel market was strong throughout the year, as well as new housing construction, with home starts up 7% in the year through March 2021. Inter-company sales were up 16% on a reported basis and 25% on a constant currency basis.

I’d also draw your attention to the benefit in the year of over AUD10 million related to favorable profit in stock adjustment. This adjustment resulted from a combination of lower inter-company inventory levels, as well as foreign currency transactional impacts. For Asia Pac, this was a significant factor in the operating margin uplift for the year, which we are likely to see reverse in FY ’22, as we rebuild inventory.

Now to Slide 17. In Europe, sales growth reported in local currency was up 26% for the year and up 43% for the second half. We saw a strong recovery in the U.K. from July onwards last year, following the lockdowns of the fourth quarter in FY ’20, and this was followed by a recovery in continental European markets as their economies opened up. EMEA also sold increased volumes of FluidTech products to the Americas and APAC regions. Operating margins were up strongly for the year with an adjusted EBITDA margin of 33%, benefiting from operational leverage and cost out measures on top of John Guest synergies achieved in earlier years.

On Slide 18, as Heath noted, we recorded a very strong cash flow performance for the year, with cash flow from operations up 20% to AUD334 million. As a result of tight management of working capital, our operating cash conversion was 98%. We’ve previously indicated a target cash conversion ratio of 90%, so this was a very good result for the year. With the strong growth in sales, our receivables balance grew, but was offset by increased trade and other payables balances.

Inventory balances continued to be rebuilt from very low levels at the start of FY ’21, as we geared up our manufacturing operations to meet future demand growth and to help mitigate supply chain issues. The cash flow generated was used to reduce net debt levels and resulted in reduction in our leverage from 1.39 times to 0.51 times net debt-to-EBITDA. We paid cash dividends of AUD102 million in the year, which included the additional payment of the deferred interim dividend of FY ’20.

Turning to our capital expenditure profile on Slide 19. We spent a total of AUD49 million in capex for FY ’21, with AUD26 million of that targeted to growth projects and the remaining AUD23 million to maintenance capex. The growth capex related primarily to capacity expansion projects in the U.S. and U.K.

For FY ’22, we are forecasting to spend between AUD80 million and AUD90 million across a number of projects. In the Americas, we will be expanding our T&P valves and PEX Pipe capacity, as well as adding a fourth SharkBite manufacturing line. In EMEA, we will be increasing capacity for both Speedfit and FluidTech production and investing in tooling for product related projects. In Asia Pacific, most of our investment will be primarily growth in maintenance capex to support SharkBite production.

Part of the increase in capex for FY ’22 relates to carryover projects from FY ’21, as a result of delays in the delivery of equipment we have ordered. Previously, we have indicated that capex would range between 4% and 6% of sales, and the FY ’22 figure will be towards the higher end of that range, partly because of the carryover of some projects from FY ’21.

On Slide 20, we have outlined the two warehousing and logistics projects we have underway in the U.S. and the U.K. In the Americas, we are pleased to be underway with a new project to lease a 600,000 square foot, purpose-built facility adjacent to our plant in Alabama. This will enable us to consolidate several locations in the area under one roof and will give us the warehousing capacity needed to support future growth.

In EMEA, we are consolidating five warehouses into one facility, located centrally in the U.K. Initial capacity of 140,000 square feet will be scalable, up to 280,000 square feet. We are also outsourcing our logistics fleet to a third-party provider, which will give us greater flexibility in our logistics operations. The combined cost of implementing these changes across the U.S. and U.K. is approximately AUD8.5 million, and we have provided for these one-off cost in the FY ’21 year.

Thanks, everyone. And with that, I will now hand you back to Heath.

Heath Sharp — Chief Executive Officer

Okay. Thanks, Andrew. So moving forward, I will touch briefly on our strategy, and then turn to the outlook for FY ’22. The Slide 22 schematic presents the summary of our strategy, which we have previously outlined to the market. And then on the next slide, I will step through these major points.

So on 23. We remain focused on driving growth in our core markets and in markets immediately adjacent to those. The pro-plumber is at the heart of our business. Our products and solutions are all about making their lives easier and improving their productivity. Maintaining strong relationships with our channel partners is incredibly important, ensuring that we are helping them grow their business over time is a priority for us. As we have proven over the past year, running our operations efficiently and maintaining high customer service levels is absolutely critical. We executed well for our channel partners and for our end users during the heightened demand from both COVID and the U.S. freeze. This enhances our relationships and positions us extremely well going forward.

Our culture and our people have been integral to our performance over many years. Of course, this is easy to say, hard to prove, but it is absolutely at the heart of our success.

In terms of M&A, we continue to have a very active stance. We are looking for and assessing opportunities to add products and brands to our portfolio, particularly in North America and the U.K. As you will be aware, the market at present is running quite hot, we have been determined to maintain our discipline around valuation and certainly maintain an emphasis on strategic fit.

Onto Slide 24, and here, we reiterate our approach to capital management, which we first outlined in February. Our priorities are unchanged: being first to invest in organic growth opportunities and to invest where we can in selective inorganic growth through M&A. Beyond that, we remain open to returning excess cash to shareholders through on market share buybacks.

Turning now to Slide 25, and our outlook for the financial year 2022. To start, I can confirm that we will be providing quarterly updates to the market on our trading performance starting from the first quarter of FY ’22. We intend to provide segment revenue and operating earnings data along with Group cash flow for each quarter. We are not providing guidance at this time, as we believe the continuing uncertainty, as a result of COVID makes forecasting the year ahead, too difficult.

As we have noted in our release materials, price increases will average 6% across the company this year and will be reflected in reported sales. The rate of price increase varies by region, and those differences will be apparent in our segment reporting. In terms of margin impact, we estimate that margins will be diluted by around 1 percentage point, as a result of these price increases, which has simply offset to cost inflation. We expect some impact on cash flows from inventory build, particularly in the first half. We also note that investing cash flows will reflect increased capex and the payment for the acquisition of LCL for AUD37 million.

Turning now to our expectations for each of the three regions, starting first with the Americas, so we’re now on to Slide 26. We are becoming increasingly confident that the step change last year in repair and remodel activity will persist through FY ’22. Clearly, given the COVID uplift, and the Texas freeze, this would mean the rate of sales growth will moderate significantly from the rate seen in FY ’21. But it would leave us with a significant step change in revenue on a two-year stacked basis, so FY ’22 over FY ’20, and this would position us extremely well to continue our long-term growth journey. As always, for FY ’22, we expect growth in the Americas will be augmented by marketing initiatives and new product releases.

In Asia Pacific, we are expecting to see continued volume growth from ongoing repair and remodel activity, as well as robust new housing. Similarly in EMEA, we believe that residential repair and remodel activity will remain positive. We believe that underlying demand continues to be robust, particularly given the backlog of work driven by a shortage of plumbers and some material shortages as well. At this point, I think it is prudent to note that we continue to face supply chain challenges, as indeed does everyone in our industry.

The challenge span shipping and general logistics, raw material availability and supply of capacity. This continues to demand resources to manage, but our teams are doing well. We are confident that we are handling these demands as well or better than our peers. Nonetheless, we do expect disruptions through most of the year. So while we expect demand to remain very strong, meeting the demand in full will be an ongoing battle.

Now we look at some of the macro drivers in the Americas on Slide 27. The fundamentals in the Americas remains solid. In an environment of strong house price appreciation, low interest rate, and strong new construction activity, we would expect a positive influence on the remodel sector as well. We remain cautious on the non-residential sector, including multifamily apartment construction. We also continue to monitor closely the momentum of the COVID uplift.

We’ve called out the increase in LIRA and note in particular that it is a nominal measure of inputs and outputs. Therefore, the price increases seen across the building material sector are reflected in the higher repair and remodel forecasts for the year ahead.

In Australia, we’ve continued to see strong growth in new housing approvals. As we show in the chart on Slide 28, these were up 26% in the year to June, driven by increases in standalone residential approvals. The current lockdowns in Eastern state are a concern in terms of the ability of the construction sector to carry on at full pace. So we will be watching how this plays out.

Onto Slide 29. In EMEA, the residential repair and remodel outlook remains robust. As you can see from the chart on the top left-hand side of the page, this has been the strongest performing part of the U.K. residential construction sector. Activity levels have been running above their pre-COVID rate. As with other markets, we will continue to track consumer spending patterns, as economies open up and discretionary expenditure is potentially redirected to other areas.

Now on Slide 30, we set out our priorities for the new financial year. The key objective for the business remains delivering top line growth above that of the market in each of the regions. As was the case in FY ’21, this will be achieved via ongoing focus on execution. We will also strive to further refine our operations with a view to improving efficiencies and optimizing margins.

We will be increasing our investment in capacity, as Andrew said in each region and also investing in new products. Aligning our warehousing and distribution footprints in both the U.S. and the U.K. will be a positive development for this year. In Asia Pac, integrating the recently acquired LCL business will be a priority for the team in Australia.

So now I’ll conclude on Slide 31, with some final remarks. This has been a record year for RWC, but beyond the very strong financial results is the fact that the business has ended the year bigger and stronger than ever. We are very well positioned to continue growing this business, as we have over the prior several years. Our platforms in each of our major markets provide the foundation upon, which to execute our strategy to continue creating value.

So thank you, everyone for listening. We will now open up to questions, firstly, for those on the call, and then, we will address those questions online via the webcast platform.

Questions and Answers:

Operator

Thank you. [Operator Instructions] We will take our first question from the line of Peter Steyn from Macquarie. The line is open now. Please go ahead.

Peter Steyn — Macquarie — Analyst

Thank you. Good evening, Heath and Andrew. Thanks for your time. Appreciate it. Heath, I just wanted to delve into the underpinnings of your expectations for growth in Americas, in particularly in the context of some of the comments in terms of channel partners made last week, they result in — in terms of the transition they are seeing from DIY to pro, and obviously basis have varied quite significantly through this period. But is there something fundamental that is positioning you better in that — in that pro customer base than perhaps it has been in the past that gives you more confidence that you continue to see growth supported by pros that are probably spending a little bit more than DIY is obviously is the do it for — for me trend continues to grow particularly in bathrooms and kitchens?

Heath Sharp — Chief Executive Officer

Okay. Thanks, Peter, for the question. Certainly early days of COVID, there was quite a shift to DIY, and that’s kind of over a few months at the beginning. But there really has been a move back towards the pro fairly consistently over the months since. And what we’re seeing now is that the demand coming through both the retail channel and the wholesale channel is really quite strong, and in both cases driven certainly more by the pro than the DIY. And I think that also is in line with some of the comments we’ve heard from some of the big retailers, where traffic has eased a little, but the ticket size has increased, which certainly points to more pro business.

Peter Steyn — Macquarie — Analyst

And fundamentally, do you think you’re better positioned or has the pro increased its inclination to be buying and using your products, Heath?

Heath Sharp — Chief Executive Officer

Look, I think it’s somewhat neutral. The pro we like because they tend to do the bigger projects. So there is some real momentum there. But I don’t think there’s any real fundamental. It actually feels to us like the early days of COVID with the anomaly, and we’re now back to sort of really how our businesses felt for some years.

Peter Steyn — Macquarie — Analyst

Okay. Yes. Okay. Perfect. And then, just wanted to get a brief elaboration on EMEA, and what you see as the product opportunities, with Brexit you can add to the range in the U.K., given how high is the strategic priorities since beyond that?

Heath Sharp — Chief Executive Officer

Sure. Look, from the early days of that acquisition, we were pretty keen to utilize that strong John Guest organization from the end user relationships, the distribution partnerships, the operation capability back in the factory to utilize that to push more Reliance product through. I think it’s fair to say that Brexit and COVID have kind of made that a little bit challenging. But our outlook for ’22 is that we are starting now to see and expecting ongoing to see additional accounts buying RWC or legacy RWC products. And also a growth rate of those RWC products, where we’ve integrated John Guest components on — and connectors on to them. So little bit slower than we expected. But it feels now and our expectations are that we should get some acceleration there in the coming year.

Peter Steyn — Macquarie — Analyst

Fantastic. And then, sorry, just a very last quick one. Just in terms of the rebuilding inventories from here, presumably it will be a little bit more pronounced than it has been in previous periods, given the strength of your demand environment. Would we be thinking about an excess, should I call it, operational leverage effect in the first half, as you rebuild that inventory? Or would it be very similar how we’ve seen it over the last few years?

Heath Sharp — Chief Executive Officer

Okay. So a few things to consider there is, I think we ended the year a little bit under, where we normally would have. So there’s a little bit of rebuild there in any case. You are correct, the demand is running quite strong, so we also need to build a little bit extra for that. I think we’re also needing to build extra given supply chain issues, right now, shipping, in particular, we’ve definitely have and are putting more inventory in the system, just to cope with those supply chain delays. So yes, I think that all points to there being a higher than normal inventory position at the end of the first half. That will of course, manifest itself in some additional recoveries corresponding to that inventory. And then, of course, the same discussion we have this time every year is what does that then look like once we cross into winter and what happens with winter here, and then, what the second half looks like. So it’s that same profile as normal, Peter. Although, I think you are correct and that it will be exacerbated a little bit this year for those reasons that I set out.

Peter Steyn — Macquarie — Analyst

Fantastic. Thanks, Heath. I’ll leave it there.

Heath Sharp — Chief Executive Officer

Thanks, Peter.

Operator

Thank you. We will take the next question from the line of Lee Power from UBS. The line is open now. Please go ahead.

Lee Power — UBS — Analyst

Hi. If we just dig into the quarterly revenues, numbers for Americas, I know it’s probably pretty hard just to try and strip freeze out. It sounds like from you comment, you saw most of that happened in the third quarter. I mean, should we think of those quarterly numbers for ’21 accelerating ex the freeze? Or was enough of that in the first quarter that — that revenue has actually declined quarter-on-quarter 3Q to 4Q?

Andrew Johnson — Chief Financial Officer

Hi, Lee, this is Andrew. You know, look, if you look at that AUD42 million that we called out for the freeze, and you can see on the chart, a significant portion of that was in the third quarter. You take out that fourth quarter number, and we still had pretty significant growth. But keep in mind, the Americas saw a big impact from COVID in the fourth quarter of FY ’20. So the growth rate that we did see in the fourth quarter of ’21 is on top of a COVID period in the same quarter last year. So we’re pretty pleased with that.

Lee Power — UBS — Analyst

Yes. Okay. Excellent. Thank you. And then, the fourth SharkBite line, how long does that take to actually to get up and running? And then, maybe can you just tell us, where capacity utilizations are at the moment?

Heath Sharp — Chief Executive Officer

Okay. So look, that additional line is, is you need to think in terms of 12 months, even a little longer. Actually, everything is longer at the moment. So it’s longer than 12 months, but there — but thinking those sort of — those sort of terms. Right now, all the factories are busy, running hot. We have the capacity we need. But the reason of course, that we’re investing, is that — is that we don’t want to run our people nor our facilities at the right the way of doing — at the moment on a long-term basis. So that’s really why our capex projection is high for this year because we will be putting in some new capacity across all regions.

Lee Power — UBS — Analyst

Yes. Excellent. Thanks, Heath. Thanks, Andrew.

Heath Sharp — Chief Executive Officer

Thanks, Lee.

Andrew Johnson — Chief Financial Officer

Thanks.

Operator

Thank you. We will take our next question from the line of Peter Wilson from Credit Suisse. The line is open now. Please go ahead.

Peter Wilson — Credit Suisse — Analyst

Great. Thank you. Kind of just delve into the expectations for the — for Americas growth a little bit. I guess, it’s one thing to think that the market is going to grow. But I guess, if you compare yourselves last year to LIRA, LIRA looks — LIRA was low to mid-single digit growth when you’re doing 20% to 30% growth. So do you think it’s possible — no ends to that — for that market to grow, but for you to grow as well, given that you did so much better than the market in the last 12 months?

Heath Sharp — Chief Executive Officer

Look, and certainly, we’re starting to lap some pretty strong comps, that’s the reality sort of week-by-week, month-by-month now. Look, I think it’s useful to go back to Page 15 of the presentation deck, where we set out the bridge for ’21, because I think that’s actually really useful in terms of informing ’22. So look, the first thing, you need to do is back out the entire freeze number, that AUD42 million. So that brings you back down to around $588 million. That’s really what I’m thinking of as the start for the — for the coming year.

Then, you’ve got to make a decision on that COVID uplift, that AUD30 million some there that we allocated to the COVID uplift for — for ’21 and take a view on whether you think that’s sustainable through the whole year or not, and then, apply the price increase, and we’ve given some indication of that price increase on the way through. And frankly, that combination of the sustainability of the COVID uplift, and the price increase really defines what if you like how — how we’ve described it what market growth will be for the year.

And look, we expect to outperform the market by 1 point or 2, and we do have some relatively minor product customer initiatives that can move a point or two as well. But really the — your — just back out the freeze, might — apply your opinion on — on that COVID uplift and whether that’s sustainable for the year or to what extent and then, the price increase on — on top of it really how I’d suggest think about the ’22 outlook for the Americas.

Peter Wilson — Credit Suisse — Analyst

Okay. That’s good. That’s helpful. I look at it actually. Would I be right to interpret your comments that I guess, it was — it was June, in July — June last year, I guess, when your sales really started to rock in the Americas. Would I be right to interpret your comments today that you’re being still growing offset June figure and also July figure?

Heath Sharp — Chief Executive Officer

Yes. Certainly, that growth rate has moderated, where — where, it would be lovely to think we could do a 25% and put another 25% on top of it, but clearly that’s not going to happen. And I think we called out that for the — for the July period, we were up on — 9% on a reported basis, I think it’s 6% constant currency and we were up in every region. So — so that sort of — well, frankly for me and somewhat biased, I guess, that feels like a pretty strong outcome on our — on a month last year that was pretty strong, but that’s — that’s where we’re at. This year, of course, is lapping those strong numbers. So for us, it feels like a year of consolidation. If that COVID uplift to sustain, we continue to execute well, we actually finished the ’22 in a good spot. But it’s — it’s day-by-day, which is — which is how it’s been for the last 18 months, Peter, so.

Peter Wilson — Credit Suisse — Analyst

Yes. Understood. And one last one on EMEA. The investment in tooling this year, might that herald a bit of an acceleration in your NPD roll out in that business?

Heath Sharp — Chief Executive Officer

I think most of what we’re spending on tooling over there is core production of existing items. You’ve seen that facility over there. There is not much space to move, and there is an awful lot of people there. There is opportunity there for — for automation. There is opportunity there for tools that have more cavity, so that you get more piece parts per cycle. That’s where a lot of our effort is going into now, so that we can — we can utilize that space better and in the fullness of time get better efficiencies.

Peter Wilson — Credit Suisse — Analyst

Got it. Thanks for that.

Heath Sharp — Chief Executive Officer

Thanks, Peter.

Operator

Thank you. We will take our next question from the line of Keith Chau from MST Marquee. The line is open now. Please go ahead.

Keith Chau — MST Marquee — Analyst

Thank you. Good evening, Heath and Andrew. Heath, just want to talk about your comments for July, and I know, it’s dangerous just looking at one month, but to Peter’s point, I think last year, we hit that step up in sales between June and July anyway. You’ve guided to 6% price growth and constant currency revenues were 6%. So — so I take that as volumes in July were flat or is it the case that those price increases are still ramping up such that you did see a bit of volume growth in that month?

Heath Sharp — Chief Executive Officer

We didn’t get the entirety of the price increase in July, a good — a good chunk of it, so there was a combination there that drove that number. But back to your first comment, yes, I’d be a little bit cautious of drawing too much from a single month and particularly in the context of supply chain issues right now. You can have AUD5 million worth of stuff that either does or doesn’t get picked up in the last week of the month, which can mess up two months. So it’s a pretty dynamic environment right now.

Keith Chau — MST Marquee — Analyst

And do you — do you think those supply chain issues are actually holding your growth back? I know, you mentioned the team is pushing as hard as they can or doing as well if not better than the industry. But were it not for those supply chain issues, could you volume growth actually be stronger at the moment?

Heath Sharp — Chief Executive Officer

I think the answer is yes and look, it’s — it’s not going to double it. But I think all of us in the industry is struggling right now. Look, there could be a shortage of lumber, stop the project and we miss out on it. It could — the next project, it could be a case, where we don’t have the product that we could miss out on. So we actually heard others in the industry. So yes, it’s affecting everyone, right now. I think we’re really pleased that demand remain strong in all parts of the world. Well, I think we are grappling pretty well with those supply chain issues. But it will, I think for this year, the supply chain issues will potentially dent our numbers just a little bit month-to-month depending on, so.

Keith Chau — MST Marquee — Analyst

And where do you reckon your DIFOT metrics are sitting at the moment, Heath, because I know, some of the larger retailers over the — you’ve got to hit a certain number in order not to be penalized by them. Can you give us some insight, as to — as to how the business is tracking?

Heath Sharp — Chief Executive Officer

Look, nobody is meeting their DIFOT numbers right now, nobody, anyway. I think the feedback we’re getting is quite positive and indicating that we’re performing as well or frankly better than everyone else. And there is just a — it really is hand to mouth. And I think everyone in the supply chain kind of realizes that. And it feels frankly like we’ve got some months to go with — with that daily challenge.

Keith Chau — MST Marquee — Analyst

Yes. Okay. And then, just one question for Andrew. Andrew, I think you mentioned earlier on the call, there may be some deleverage within the business after you build up your inventory, the inter-company sales and how products shifted between each division can make that reasonably tricky just to understand going forward. Just wondering, if you can give us a hand on understanding, which divisions we might see that in, if I did interpret your comment correctly?

Andrew Johnson — Chief Financial Officer

Well, I think that what I specifically mentioned was around that profit in stock adjustment that we saw in APAC, that favorability in FY ’21 certainly will not repeat and it’s very likely to reverse. So — and so that’s going to be something that we’ll be challenged with. And so, if you’re going to — you certainly see that in APAC, over the course of FY ’22. Outside of that, margins really depend on volume and that — that’s first and foremost, the rest of those factors that will impact margin, we’ve mentioned the dilution from the price increases. But then outside of that, look, there is a lots of puts and takes, and certainly the team is focused on execution. We’re going to enjoy the operating leverage that we saw in FY ’21 and that’s something that we’re quite proud of. And I think that, we know how to achieve that. And we’re quite focused on cost and facing those cost pressures that we see, and quite confident that the team will continue to work through it.

Keith Chau — MST Marquee — Analyst

And Andrew on those price increases, I know, you mentioned in the written commentary that the price increases will recover all costs. Two questions on that. One is, do you think you will over recover on your costs — on costs this year or is it simply just a full cost recovery? And secondly, if — if input cost do start to retrace, is there the potential for some of your larger customers to ask for some of that price back or do you think prices have been rebased to a sustainable level going forward?

Andrew Johnson — Chief Financial Officer

The exercise that we’ve been through is a recovery of costs, for sure. And it’s based on the increase in commodities. I think that if those commodities do retrace, certainly some of that will be given back. That’s just how that works. But it’s a cost recovery process, so it goes both ways.

Heath Sharp — Chief Executive Officer

I think it’s though fair to say that the movement in copper is the key, the key one here. The movement in copper over the last three months or four months or five months is in keeping with what we’ve captured and that’s been the duration of our discussions with our customers. So right now, it all feels settled. But definitely, as Andrew said, it captures the cost increase and that’s it.

Keith Chau — MST Marquee — Analyst

Okay. That’s great. Thanks very much, gents. I might circle back. Thank you.

Heath Sharp — Chief Executive Officer

Thanks, Keith.

Operator

Thank you. We will take our next question from the line of Simon Thackray from Jefferies. The line is open now. Please go ahead.

Simon Thackray — Jefferies — Analyst

Thanks very much. Good morning, Heath, Andrew, and Phil, no doubt on the line. Congrats on the performance for the — for you and the team because it’s been a pretty unusual year to say the least. A few questions, if I may. I just wanted to explore again on the back of Keith’s question and your response, Heath, the discussion around how price rises are achieved especially around copper. And yes, sure, there is the — the propensity for those to be given back of copper was to go in the opposite direction. But did — was there any pricing discussions, particularly in and around Europe on resins, as well for the plastic side for John Guest?

Heath Sharp — Chief Executive Officer

Oh, yes. Yes, for sure. And look I — across the globe, we’ve dealt with pricing ultimately on a product-by-product basis depending on what is made up of whether that be steel or copper or resin. So — so yes, it’s been a — lots of moving parts and everything sort of come under focus in the last six months or so.

Simon Thackray — Jefferies — Analyst

Yes. Terrific. Okay. And then, I know how near and dear, you like getting on site, Heath, and understanding the whole plumbing process, is the capacity constraints in Australia that we’re seeing in new housing — I mean, we’re seeing an increasing number of homebuilders struggling to move from slabbed frame, given obviously what’s happening with timber and we’ve seen a market shift to steel frame, which is great. But given, where your products come during the graphene for — in the timber frames, particularly, just wondering whether that you’re seeing those delays manifest, particularly in the last sort of couple of months in Australia and it’s particularly important, as you know, those homebuilders, particularly, the smaller tile rely on — on a 15% progress payment to get to frame and then, another 20% to get to lockup. So just wondering whether that you’re really seeing those constraints play out in the — in the detached market in particular, in Australia?

Heath Sharp — Chief Executive Officer

At this point, no we haven’t. There is — we’re not particularly early in that process. As you said, the frames, they’d be well and truly up before — before we get call to action, if you like. So no, at this point, we haven’t. We do actually expect though that we will probably see some impact.

I guess, one thing, we think that has become clear over the last sort of 15 months, 18 months is these — that these delays serve to a large extent just prolong the uplift in the market, is the demand remains, it’s — it just comes — just becomes pent-up demand in two weeks or two months time to be — to be back then. Now that makes it tough from an operational point of view. We’d much prefer that there weren’t lockdowns.

From an operational point of view, and from a health of the community point of view, but, one, we can deal with it from an operational point of view; and two, the demand simply is from what we’ve seen so far gets pushed down the track a little bit. So crazy times that they are. And as I said, you — you deal with it on a day-by-day basis. But that’s — that’s really what we’ve seen.

Simon Thackray — Jefferies — Analyst

Sure. Sure. So you wouldn’t be worried about sort of a rising number of insolvencies in homebuilders and some of these projects actually being canceled rather than pushed out?

Heath Sharp — Chief Executive Officer

Look, there is a — when there is a macro shift to the point that it moves those sorts of numbers and you have, there is knock-on effects, that are — that are potentially beyond the day-to-day. So we will be watching that experience, as I say over the last sort of 15 months, 18 months is that it has pushed the demand out, as opposed to — to killed it.

Simon Thackray — Jefferies — Analyst

Yes. No, let’s hope that — that remains the case. Just one for Andrew. The strong cash flow numbers and — and obviously an inventory rundown, as you — as you point out, there’ll be a rebuild in the first half. Can I just confirm the LCL acquisition, the AUD37 million, is that — and apologies if you’ve answered this, is that in the AUD90 million capex guidance? Or is it over and above that?

Andrew Johnson — Chief Financial Officer

No, that’s over and above.

Simon Thackray — Jefferies — Analyst

Okay. So what’s the sort of target for net debt, for the leverage targets by the end of the first half?

Andrew Johnson — Chief Financial Officer

We haven’t provided that guidance.

Simon Thackray — Jefferies — Analyst

Okay.

Andrew Johnson — Chief Financial Officer

No, there will be a lot of factors that will play into that certainly.

Simon Thackray — Jefferies — Analyst

Yes. Okay. But I presume higher than where we’re currently sitting based on the guidance that’s been given.

Andrew Johnson — Chief Financial Officer

Yes. I would presume so.

Simon Thackray — Jefferies — Analyst

Okay. And just in the phasing of that capex for the half-on-half for the AUD90 million?

Andrew Johnson — Chief Financial Officer

Look, it’s going to be pretty, pretty evenly spread. You will likely see more in the first half than the second half, given the nature of the projects that we’re working on. Larger projects require down payments, and you’ll see a lot of those in the first half. So it will be a little bit more than half in the first half.

Simon Thackray — Jefferies — Analyst

Excellent. Excellent. All right. Thanks, Andrew. Thanks, Heath. Appreciate it.

Heath Sharp — Chief Executive Officer

Thank you, Simon.

Operator

Thank you. We will take our next question from the line of Daniel Kang from CLSA. The line is open now. Please go ahead.

Daniel Kang — CLSA — Analyst

Good morning, gentlemen. Heath, the first one is for you. I guess, you spoke about your own inventory restocking. Just wondering, if you can shed some light on how you’re viewing the whole channel inventory levels around the regions. I guess, what I’m trying to work out is, is the market is in a restocking cycle, how much further we should expect it to run?

Heath Sharp — Chief Executive Officer

Yes. I would say that — that it — look again, it varies very — I’m just thinking through the different product ranges and so on. On average, it’s actually not too bad in the channels. It certainly doesn’t feel like we’ve got a whole lot to catch up. But it’s certainly — certainly doesn’t feel like it’s over staffed either. So — so our comments before we’re really in relation to having our position strong both to get back to where we want to be. But also as we do every year be — be in a good spot, as we head into winter.

Daniel Kang — CLSA — Analyst

Okay. Got it. Got it. And just maybe one for Andrew. In terms of your balance sheet ended the year very strongly, now that it looks a little bit under geared in my view, anyway. In terms of M&A opportunities, can you talk about your key focus areas, the likely acquisition size and potential timing and should you now be able to find the right opportunities, what’s the Board’s view with regards to capital returns? Thanks.

Andrew Johnson — Chief Financial Officer

Sure. I think for us right now, the focus is to make the investments in the business and we’ve talked about the capex investment next year. We’ve done the LCL acquisition that we’ve just talked about. Outside of that, our main priority is to be patient and certainly disciplined. You never can quite predict when M&A opportunities will arise. It does feel like there is quite a bit of activity out there right now. We want to be able to take advantage of opportunities, as they arise. So I think we’re going to be patient. I think we’re comfortable with the leverage, where it is. In the event that we do feel like we’ve exhausted those opportunities, then, capital management is something — and returning funds to shareholders is something that would be considered. But that’s not our priority at the moment.

Daniel Kang — CLSA — Analyst

Great, guys. I’ll leave it there. Thank you.

Heath Sharp — Chief Executive Officer

Thank you.

Andrew Johnson — Chief Financial Officer

Thanks.

Operator

Thank you. We will take our next question from the line of James Casey from Ord Minnett. The line is open now. Please go ahead.

James Casey — Ord Minnett — Analyst

Good morning, gentlemen. Andrew, just wondering — just on Slide 16, you called out that AUD10.9 million realization of profit in stock, can you just explain that line item to me? And then, looking into FY ’22, is it best to look at that APAC result, is it the EBITDA was kind of AUD11 million lower or AUD55 million is that the right starting point? Thanks.

Andrew Johnson — Chief Financial Officer

You know, that — that’s not a bad way to look at it. Inventory increases and decreases over time and that tends to knock around that APAC P&L. This year it was favorable, years past, it’s been unfavorable. It kind of swings back and forth. So certainly don’t bake that in if you’re looking at FY ’22.

In terms of explaining that, so obviously APAC sales inventory to the Americas — to the extent that America is still holding that inventory, we have to back that profit out of the APAC result. So — so in years, where we built profit, it’s an unfavorable adjustment, in years, where inventory is decreased, it’s a favorable adjustment to the P&L.

So you’ve got really two combinations, you’ve got fluctuation in inventory, but you’ve also have fluctuations in profit. And given where the exchange rate went, APAC saw lower profits on those sales to the Americas, so that also turned it down a bit in terms of the profit that we put on the balance sheet that covers that inventory that’s still sitting in the Americas.

James Casey — Ord Minnett — Analyst

Okay. Thanks. With regards to the commodity pricing, I think I saw somewhere you called out the second half copper price was $7,400. What would the price be for the first half ’22?

Andrew Johnson — Chief Financial Officer

You know, look that 7 — it was almost $7,500, $7,450 in the second half on average and that’s a lag right. So that is what hits the P&L after that inventory. And those costs flow through inventory and then, we do the inventory turns, and then, we actually sell the product. So the rate that we’ll see in the first half of FY ’22 certainly will be higher and will be closer to the spot rates that you’re seeing right now in those — in that low 9 range.

James Casey — Ord Minnett — Analyst

Okay. And just to clarify, the price rise that you’ve put through will offset that copper price increase.

Andrew Johnson — Chief Financial Officer

We are very confident that the price increases that we had through at the moment will cover that copper price increase.

James Casey — Ord Minnett — Analyst

Yes. Okay. That’s great. Thanks, gentlemen.

Heath Sharp — Chief Executive Officer

Thanks.

Andrew Johnson — Chief Financial Officer

Thanks.

Operator

Thank you. And we will take our last question from the line of Keith Chau from MST Marquee. The line is open now. Please go ahead.

Keith Chau — MST Marquee — Analyst

Thanks very much for taking my follow-up, Heath and Andrew. Just a question on your capex, it’s ramping up quite significantly. And I think — and correct me, if I am wrong Heath that some of these projects might have been pulled forward is — which to us seems like to signal the confidence that the business is on bit of a pathway of strong growth. Is there anything that’s changed your view internally, as to the line of sight for growth that you can see, whether it would be in the core products or new products to be released?

Heath Sharp — Chief Executive Officer

Not particularly. Look, I think there is — there is certainly a little bit of, you know, at this time, last year, I guess, we were talking about pausing some — some projects a little bit earlier than 12 months ago, pausing some projects, given there was some uncertainty there and so we’ve had to — there’s a bit of catch up in that — in that number. But I think mainly it’s connected to the current volumes. Our order book is still only about three days long, two days long, maybe. So this is all based on sort of which is the current run rate and us making a call on how it looks going forward.

There is also we called out, I think we called out increasing PEX capacity in the U.S., and we’re at the point, where that particular shed is full. So we need to expand the shed to put a couple of more lines in, and you don’t expand the shed just for two lines, you expected — expanded a bit more than that. So there is some of those step changes in there as well. But yes, look, generally, though it’s in keeping with — with sort of the volume, the demand we’re seeing right now and our expectation that, that demand will continue or at least our — certainly, our desire to be ready for, stay at this level, and then, keep incrementing in current years — coming years.

Keith Chau — MST Marquee — Analyst

Okay. Thank you. And then, just a quick one, Heath, I’m not sure, if this is — is possible to answer. But your DIY business pro, is there anyway or do you have an assumption on how much of your business goes to the pro-plumber instead of the DIY?

Heath Sharp — Chief Executive Officer

It’s a really hard number to get. Look our customers have a really good idea of that, that is not information that they share — share with us. So we’re at — we’ll then take deductions based on the nature of the product. So for example, a 100 foot coil is a lot of PEX, a 10 foot stick is — is — it suggest more of a repair. We’ve said 100 foot coil suggests a larger project and probably a pro. It’s not that black and white, but generally. So we watch those trends. And look those split feel somewhat normal as I said on — to Peter on the first call is — the first question there, certainly was some variation, early COVID seemed to more of a push to DIY. But the pro, at least from what we’ve seen is certainly been running much harder for several months now. But we don’t have that exact data unfortunately.

Keith Chau — MST Marquee — Analyst

Do you think you would be somewhere in the vicinity of, call it, 70%, 75% coming from that effect, could be —

Heath Sharp — Chief Executive Officer

We always felt that the pro versus DIY split within that order of magnitude could have in the — in the 70%, 75% range, so that — that’s been the case historically. And it kind of feels similar to that now.

Keith Chau — MST Marquee — Analyst

Okay. That’s great. Thanks very much.

Heath Sharp — Chief Executive Officer

Thanks, Keith.

Operator

Thank you. There appears no further question at this time.

Phil King — Investor Relations Director

Heath, I’ve got a few online quick ones, of course.

Heath Sharp — Chief Executive Officer

Okay.

Phil King — Investor Relations Director

The first one is just the growth in Americas EBITDA. To what extent was that driven by operational leverage and how should we think about margins into FY ’22?

Andrew Johnson — Chief Financial Officer

So I’ll take that one, Phil. That Americas EBITDA margin was really driven primarily by volume and also those cost out initiatives. But by and large, the largest part of that would have been the operating leverage that we saw. We’re not going to guide to directionally even to ’22 margins for the Americas. But I’ll say this that one has given us the margin result in FY ’21, has been good execution, good focus on execution and good cost management. Those things will continue into FY ’22. So if the volume is there, I think we’re very confident in the team that we’ll be able to have a good margin result in FY ’22 as well.

Look operating leverage is something that certainly the team is focused on. Over the short term, there are many factors that will impact operating leverage. But over the long term, we expect that to make progress and to see improvements in operating leverage. And so that’s directionally kind of what we would say. But we’ll keep doing what kind of got us that result in ’21, in terms of executing well and good cost management.

Phil King — Investor Relations Director

Thank you. The next question is around increasing our inventory and how do we manage that, if there is a reduction in demand and what would the impacts be?

Heath Sharp — Chief Executive Officer

Yes. Look, sure, and this is — this is sort of an ongoing forever issue, of course, is particularly given the build for the freeze at the end of — end of every year is we need to be ready for it. And look with the COVID uplift as well as we need to — we need to assume from an inventory point of view that, that continues. If — for example, we don’t get a freeze and that means we do what we’ve had to do many times before, which is bring that inventory back down in the second half and that has a — has an impact on the recoveries in the — in the factory. It’s not our preferred outcome. We’ve done it many times before. We know what to do and — and you just get on with it.

Phil King — Investor Relations Director

Thank you. The next one, RWC is being recognized in the U.S. by the big boxes for its service. Has there been any changes to product SKUs or shelf space awarded to RWC, as a result for FY ’22?

Heath Sharp — Chief Executive Officer

Not as a direct result. I think those — those sorts of awards and recognition are — are lovely. And I think it’s — it’s great for our people, who do a tremendous job to get that recognition. The reality is the relationship with — with our customers is build over — over many years or decades. And it’s our ability to bring the new product and to bring them product that sells at a higher rate and at a higher margin is what — what really drives those — those relationships and that’s what we work on every day.

Phil King — Investor Relations Director

Thank you. And the last one, a clarification really possibly for Andrew. The assumption of 1% margin dilution in the FY ’22, is that based on relevant copper pricing of $10,000. And if the copper price falls below that, would margins fall by less than 1%?

Andrew Johnson — Chief Financial Officer

Well, I’ll say that any time that you’ve got a price increase that is just recovering cost, you’re going to see some margin dilution, it’s just the way the math works. But I think that where copper prices go from there, really have no clue. But I do know for sure that the team has managed well through that whole dynamic. And I think we’re comfortable with the fact that we’ve got copper pricing covered. And if that changes, then, we’ll just have to continue to manage through it.

Phil King — Investor Relations Director

Thank you. There were some others, but I think we’ve covered them off from the commentary and some of the other questions. So I’ll leave it there. Heath, I hand back to you.

Heath Sharp — Chief Executive Officer

Okay. Thank you, Phil. Okay. With that, we will wrap it up. I certainly appreciate everybody joining the call this morning. Thanks very much. Have a good day.