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Edited Transcript of RWC.AX earnings conference call or presentation 26-Aug-19 11:00pm GMT

Full Year 2019 Reliance Worldwide Corporation Ltd Earnings Call

Aug 29, 2019 (Thomson StreetEvents) -- Edited Transcript of Reliance Worldwide Corporation Ltd earnings conference call or presentation Monday, August 26, 2019 at 11:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Gerry Bollman

Reliance Worldwide Corporation Limited - Global CFO

* Heath Sharp

Reliance Worldwide Corporation Limited - CEO, MD & Director

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Conference Call Participants

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* Brook Campbell-Crawford

JP Morgan Chase & Co, Research Division - Analyst

* James F. Casey

Baillieu Holst Ltd, Research Division - Head of Research

* Keith Chau

MST Marquee - Building Materials & Packaging Analyst

* Peter Wilson

Crédit Suisse AG, Research Division - Associate

* Peter Steyn

Macquarie Research - Analyst

* Rohan Koreman-Smit

Goldman Sachs Group Inc., Research Division - Industrial Analyst

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Presentation

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Operator [1]

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Thank you for standing by, and welcome to the Reliance Worldwide Corporation Limited 2019 Full Year Earnings Announcement. (Operator Instructions)

I would now like to hand the conference over to Mr. Heath Sharp, Chief Executive Officer. Please go ahead.

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Heath Sharp, Reliance Worldwide Corporation Limited - CEO, MD & Director [2]

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Good morning, everyone, and thank you for joining us today. This is Heath Sharp, CEO of Reliance. And with me is Gerry Bollman, CFO; and IR Director Phil King.

We released our FY '19 year-end results to the ASX this morning, including our results presentation. For this call, we will run through the presentation and then open up to questions.

I will begin with the highlights and then hand over to Gerry to step through the financial results in more detail, and then I'll come back to talk briefly on our outlook before moving to Q&A.

So let's start on Page 5 of the presentation and hit the highlights for the year. Our adjusted net profit after tax increased by 80% to $152 million. This has been achieved in spite of a variety of headwinds around the globe. The result was driven by continuing underlying growth in the Americas of more than 8% and, of course, a full year contribution of John Guest. We are particularly pleased with EPS accretion in excess of 20% at the end of the first full year following the JG acquisition. The integration of the RWC and JG businesses is proceeding well with $14.2 million of realized synergies in the first year, exceeding our initially targeted figure, and an expectation to exceed $30 million per annum on a run rate basis at the end of financial year 2020.

Importantly, while we are pleased with the near-term results, we are always looking long-term as well. To this end, we have continued with a robust level of investment in product development and commercialization. So overall, we are pleased with the way the business is developing and feel that we are tremendously well placed to continue driving onwards and upwards.

Turning to Page 6 for the major financial metrics for the FY '19 year. Our revenue exceeded $1 billion for the first time, more than doubling in the 3 years since our IPO. The adjusted EBITDA achieved of $263.2 million is within the range advised previously. And perhaps the most satisfying number, though, is the cash conversion rate for the second half that landed at 90%, which is a return to our historical level, and we believe it is on a positive trajectory in terms of outlook.

Slide 7 of the presentation highlights a few key earnings and cash metrics. We are particularly proud of the EPS improvement. We have delivered $0.194 per share, up more than 20% and across a significantly larger share base. This is allowing us to increase our dividend with our declared final dividend for financial year '19 of $0.05 per share, bringing the total to $0.09 per share for the FY '19 year. This takes our total dividend payout for FY '19 to over $70 million. This represents 53% of NPAT, which is well within our guided range of 40% to 60%.

On to Page 8. FY '19 really was a momentous year for RWC. The John Guest acquisition was no small thing for us. The JG business represented around 40% of our revenue at the time of the deal, but the headcount of the business exceeded that of the entire RWC group. And I believe this is a more representative indication of the scale and complexity of the integration undertaking.

Despite that, we've made tremendous progress. Trading performance for our first full year was in line with expectations, and we delivered synergies and savings beyond our original goals.

John Guest is a business we had coveted, frankly, for many years, and we are delighted that it's now part of the RWC family. We have found it as advertised. And in fact, in many ways, we have been pleasantly surprised by the strength of the business' capabilities. Our integration game chart has no red flags, and in fact, we are ahead of plan in several areas. Importantly, beyond John Guest, our core business remains robust. The Americas segment continued to deliver above-market underlying growth, founded on the continued strength of SharkBite push-to-connect fittings and ably supported by an ever-increasing range of additional products, many with outstanding growth and margin.

We are achieving revenue synergies from the Holdrite deal and are seeing the same coming into focus for John Guest going forward. All of this was achieved with a number of significant headwinds, including raw material and other inflationary costs, a drastic slump in multifamily new construction in Australia, increased uncertainty with regard to Brexit and the lack of any semblance of a freeze in the Southern U.S.A. We continue to take a long-term view of the business and are working hard on product development and commercialization activities. We have also built a structure that is in keeping with the scale and complexity of the evolving business. And during the year, we implemented a new ERP system across Australia and New Zealand, which is our largest and most intensive manufacturing center.

Moving to the next slide, Page 9. Really, there are many points about which to be positive on Page 9, but the main message here is that RWC's business fundamentals are stronger than ever. The RWC business is more robust, with more avenues for growth and greater defensive capabilities than only a few years ago. The diversity of our business is significantly enhanced across channels, customers, end users, geographies, product types and even raw materials. Our core business offers a long runway of above-market growth, particularly in our most important markets in the U.S.A. and the U.K.

SharkBite in North America maintained its dominant position in the market and underpins our customer relationships across our wholesale, retail and hardware channels based on its strong brand recognition, the quality of the product, our execution capability and its value proposition to end users and distributors. With John Guest Speedfit in the U.K., we now have another strong brand with a market-leading position.

The Speedfit product has demonstrated 25 years of ongoing conversion from traditional metal fittings to push-to-connect fittings. Yet in the market in the U.K., there are still more metal fittings sold than push-to-connect fittings. This points to ongoing conversion opportunity and thus, above-market growth rates. This is a solid foundation for our U.K. business, but it also points to a long, ongoing market in the U.S.A., where the SharkBite product is earlier in its life cycle and non-push-to-connect fittings still hold the dominant position in the market.

So all in all, we are very positive about revenue growth opportunities ahead of us and the corresponding opportunity for earnings growth.

Let's turn to Page 10. Here, we highlight the targeted investments we are making in order to realize the revenue growth opportunities noted on the prior page. We are taking the necessary step and corresponding expenditure to commercialize products in existing and new categories, whether they are derived via acquisition or innovation. At the same time, we are committing as much effort to our continuous improvement culture that seeks to offset inflation every year to yield enhanced margins over time.

Finally, we have added the bandwidth we need to manage a business of increased size and complexity in the public space. The moves over FY '19 and FY '20 amount to really a step change from our prior state and are essentially done. On the right side of the page, we note our primary expenditure on R&D. We've increased this area at a rate that's at or even slightly above revenue growth. These efforts have yielded products that are delivering revenue gains today and are also incubating products that will drive revenue 3, 5, 8 years ahead.

So with that, I'll pass to Gerry to go over the financials.

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Gerry Bollman, Reliance Worldwide Corporation Limited - Global CFO [3]

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Thank you, Heath, and good morning, everyone.

I will begin on Page 12 of the presentation. At the group level, we reported net sales of just over $1.1 billion for the year, which were up 43% on the prior year. On a constant currency basis, net sales were up 37%. These results, of course, reflect the first full year inclusion of John Guest. Core RWC net sales, that is excluding John Guest, were $782.9 million, led by the Americas operating segment, where underlying sales grew 8.3% after adjusting for onetime items and currency movements.

John Guest sales for the period were $321.1 million, up 8% from the prior year. On a constant currency basis, the sales grew 6%. Reported EBITDA for the period was $242.5 million, up 79% on the prior year. Again, these results include John Guest for the entire year, including synergies of $14.2 million realized in the period. Excluding the John Guest integration cost expense and the unwind of the fair value inventory adjustment as well as the impact of adopting the new revenue recognition accounting standards, adjusted EBITDA was $263.2 million, a 66% increase over FY '18. Margins benefited from the inclusion of the John Guest business and increased scale in operations. Partially offsetting these benefits were the negative impact of higher input costs in the period, principally driven by copper in the form of brass bar and wage inflation.

The overall impact of these higher input costs on EBITDA for the period was in the order of $7 million versus the prior year. Margins were also affected by a negative impact of one-off supplier-related materials and equipment issues experienced in the first half of the year. The impact on EBITDA was in the order of $3 million versus the prior year.

Each of these supplier issues was addressed and did not further impact results in the second half. Finally, adjusted NPAT for the year was $152 million, up 80% over FY '18. This result included a higher net interest expense as a result of increased borrowings, which partially funded the acquisition of John Guest in June of 2018, and a lower income tax expense, which reflects the change in the geographic mix of earnings following recent acquisitions and the impact of the lower federal corporate tax rate in the U.S. This resulted in adjusted EPS of $0.194 per share, up 23% on last year.

On to Page 13. We've set out in the chart a relatively simple bridge to show more clearly the components of the change in net sales period-over-period, including the items we consider one-off in nature in each period. The primary components of growth in net sales are the increase in underlying net sales of the core RWC business, the favorable impact of translational foreign exchange rates as a result of a weaker Australian dollar versus the U.S. dollar and the inclusion of John Guest for the entire period.

FY '18 results included the onetime load-in to the second half of the Lowe's stores in the U.S. in the first half of the year, higher sales from a freeze event in the Southern U.S. in the second half of the year and sales in EMEA of former RWC products which have subsequently been discontinued. FY '19 results include revenue in EMEA from the wind down in sales of the discontinued products I just mentioned, partly offset by a small onetime reduction in net sales, reflecting the impact of the adoption of the new AASB 15 revenue accounting standard.

Excluding the impact of the favorable FX, John Guest sales and the one-off events underlying growth in net sales was 5.4%.

Now to cash flow on Page 14. Underlying cash flow from operations was $178.9 million ahead of the prior year by 43%. This result reflects the rise in reported EBITDA, partially offset by higher working capital requirements in the period. Pleasingly, cash flow conversion improved to about 90% in the second half of the year, up from 58% in the first half, for the full year cash flow conversion of 74%. Working capital growth and operating cash flow conversion principally reflect increases to support growth as well as the onetime impact of some specific planned actions.

I'll discuss the specific components of working capital on Slide 16. Importantly, results also included the one-time payment of loyalty bonuses to John Guest staff in July of 2018 post the close of the acquisition. These were funded by cash received at closing from the vendors of the John Guest business and had been accrued at 30 June 2018 via acquisition accounting.

Let's now discuss capital expenditures further on Page 15. We spent $45.2 million on capital expenditure for property, plant, equipment and intellectual property to support growth plans in the first half -- in the year. Growth capital expenditure is mainly related to previously announced expansion plans to meet forecast growth in demand for SharkBite and Speedfit PTC fittings, EvoPEX and PEX pipe and HydroFlame Pro. It also included $4.3 million spent to acquire additional intellectual property in the area of water treatment. We spent $24.4 million to maintain or improve existing facilities, including spend on long-term IT projects and the repair of damage to roofs at our Cullman, Alabama production facility caused by hailstorm last year.

So in total, CapEx for the year was just under $70 million or about 6.3% of sales. However, normalizing for repairs to the roof at Cullman, which were covered by insurance proceeds, and the spend on the new ERP in the Asia Pacific region, CapEx as a percent of net sales would sit comfortably within our target range of 4% to 6%.

Let's move on to Page 16 to review the balance sheet. The balance sheet at 30 June 2019 continued to be in a strong position. Our net debt is up slightly on 30 June 2018, which reflects the use of cash to invest in the business and to support growth, the payment of the loyalty bonuses to John Guest staff, as previously mentioned, as well as the impact of foreign exchange rates on translated balances. As a result, leverage also increased slightly, the net debt-to-EBITDA ratio at 30 June was 1.67x, up from 1.57x at 30 June 2018, although slightly improved from 31 December 2018.

As I mentioned, we had a higher net working capital balance compared with 30 June 2018, primarily to support a growing business. In addition, the increase in trade receivables partially reflects the expiry of one-off payment terms incentives, which benefited Reliance in the previous year. The increase in inventories partially reflects the planned increase in the U.K. to improve service levels and delivery times to John Guest customers as well as extra raw materials and finished goods stock built as a buffer in the event of disruption caused by Brexit.

And the reduction in trade payables partially reflects the change in payment terms to a supplier in exchange for price reduction as well as the payment of the loyalty bonuses to John Guest staff accrued at 30 June 2018.

Overall, we believe that we have a strong balance sheet and the available liquidity to support the continued growth of the business. I'll now talk a bit more about the performance in each segment.

So let's turn to the Americas segment on Page 18. The Americas segment recorded net sales for the period of $653.9 million, which was 17% higher than in FY '18. Excluding John Guest, net sales were $604.2 million, an increase of 9% on the comparative period. Net sales in the period included the positive impact of favorable FX, reflecting the weakening of the Australian dollar relative to the U.S. dollar. Moreover, the prior year included the positive impact of several items, including the onetime rollout of stock to the second half of the Lowe's stores as well as the freeze in the southern U.S. during the northern hemisphere winter months. Adjusting for these items and movements in FX rates, underlying net sales growth in the Americas was 8.3% on a constant currency basis.

We have included a chart on Slide 19, which shows each of these components. Driving the net -- driving the sales growth was continued underlying growth in demand for RWC's core SharkBite PTC fittings and accessories in the repair and maintenance market as well as expansion of the SharkBite range in Home Depot Canada. In addition, Holdrite product sales grew strongly, achieving revenue synergies foreseen at acquisition and helping to expand RWC's position in the commercial new construction market.

Pleasingly, the business continued to enjoy strong and productive relationships with all key channel partners, including The Home Depot and Lowe's. We continue to trial new products and systems with both channel partners. Ongoing efforts to grow share of shelf were aided by the Holdrite and John Guest product lines. Second half sales growth was curtailed by distributors in all channels working through the overstock of inventory from the first half which had been built up in anticipation of a freeze event as well as a modest slowdown in the growth of the remodel and new housing construction markets in the April to June quarter.

However, we believe the 8.3% growth for the full year was a reasonable indicator of underlying demand growth. Gross margin was negatively impacted by the processing of higher-cost brass, reflecting higher copper prices for the full year FY '19 versus the prior year, although it is worth noting that brass costs did reduce in the second half as anticipated. We also experienced a negative impact from the supplier-related materials and equipment issues previously discussed. Of course, margins also benefited in the prior year from the one-off net sales also already discussed.

Finally, the integration of John Guest into the Americas business was completed on schedule with the merging of both commercial organizations, including customer service, and the move into a new combined warehouse in New Jersey. As of today, both businesses are effectively operating as one business in the Americas.

I have already spoken to the content on Page 19, so I am going to turn to a discussion of the Asia Pacific business on Page 20. Asia Pacific delivered net sales of $249.1 million, an increase of 7% on the prior year, including John Guest sales for the period. Intercompany sales grew about 2% to supply the Americas segment, lower than in prior years, reflecting the expansion of capacity in the U.S. and the lack of a freeze. External sales were down about 3% due to weaker sales into the new housing construction market in Australia. This result also reflects a negative impact from adoption of the new revenue recognition standard, AASB 15, which resulted in recognition of about $2 million of revenue being deferred, and delays in the release of 2 new product ranges, which have been scheduled to be launched into the Australian market in the first half of FY '19.

This delay meant that the headwinds from lower new construction activity could not be fully offset. The issues delaying those launches have now been resolved, and the products have been released to the market.

John Guest sales in APAC performed well and were in line with expectations. Adjusted EBITDA for the period was $50 million, down 5% on FY '18. The decline in EBITDA and EBITDA margin reflects the impact of lower external revenues as well as a negative impact from the increased input cost, primarily the cost of copper, but also including higher wage and energy costs. These were partly offset by a reduction in SG&A costs.

A key achievement in the year was the rollout of a new ERP system across Asia Pacific that was completed in March of 2019. The business is now on the same platform as the Americas segment.

Moving then to Page 21, the EMEA segment. Given the contribution of the John Guest acquisition, our EMEA business grew significantly this year. Net sales were $360.9 million, up 345%, including $300 million from the net sales of John Guest products. Net sales from core RWC products were $60.1 million, down 1% from the prior year. However, net sales grew by 3% after normalizing both FY 2018 and FY 2019 sales for discontinued product lines.

John Guest sales -- net sales were broadly in line with expectations, including growth over the comparative period. Sales growth was driven by increases in core U.K. plumbing and heating volumes, price rises and stronger fluid technology push-to-connect sales in Continental Europe. The adjusted EBITDA contribution for the period was $109.4 million. The contribution from John Guest was slightly ahead of expectation and included synergies achieved during the period.

With that, I'll pass it back to Heath.

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Heath Sharp, Reliance Worldwide Corporation Limited - CEO, MD & Director [4]

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Okay. Thanks, Gerry.

So let's jump to Page 23, where we present the outlook for the business. As we head into financial year 2020, we are facing quite a diverse range of economic headwinds around the globe. In Australia, we have a cautious outlook, taking into account agency forecasts for continued decline in the number of multifamily units constructed. In the U.K., we see a significant amount of uncertainty over the impact of Brexit. Moving to the U.S., frankly, we have no idea what tariffs we will face next month. But nevertheless, we are very confident in our team's ability to navigate this complication. Further, we actually see tariffs as a competitive advantage. We manufacture a high proportion of our products in our own facility. Our direct competitors and distributors using owned brands are generally procuring finished goods from China. Overall, we are confident that the strength of our business and the nature of our business with large portions oriented towards the more defensive repair and maintenance area is very well placed to continue solid forward progress.

Further, we have the added resilience based on the strength of our brands, such as SharkBite and JG Speedfit, and the quality of our products, combined with our end-user demand generation activities and supported by our industry-leading execution.

Pleasingly, we see a long runway of above-market growth for this core business activity. And to enhance this base business, we have many ongoing development activities underway, targeting significant addressable markets in our existing geographies. And to further insulate ourselves from both near-term and long-term uncertainty, we have a range of initiatives underway, most notably in the area of continuous improvement and procurement. Turning to Page 24, where does this leave us for the financial year 2020 outlook? We are guiding to an NPAT of $150 million to $165 million. This corresponds generally to an EBITDA range of $280 million to $305 million, inclusive of the AASB 16 lease accounting changes.

I would note that we have certainly eased our range at the lower end, given global economic uncertainty, primarily in relation to Brexit. I would also highlight the move to NPAT guidance. We believe this is a more complete indicator of business performance, particularly in relation to capital allocation and efficiency.

So moving to the final slide on Page 25. Today, I've spoken a lot about growing the core business at above-market rates and also on delivering new products to supplement that growth. This is clearly a focus for our management teams going forward. Further, we are hyper-focused on delivering the synergies in relation to the John Guest acquisition as well as managing through the challenges of Brexit. And we will also be improving the business tools in the U.K. via the implementation of an appropriate ERP system. Heading into FY 2020, our teams in each segment are very much focused on cash management and reducing working capital. And as always, we will be prudent in relation to capital expenditure. So we are certainly clear on our priorities for the year. And we're very positive about the position of the company and our ability to create long-term shareholder value.

So that concludes the presentation. Operator, I would now like to open up the line for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from Peter Steyn with Macquarie.

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Peter Steyn, Macquarie Research - Analyst [2]

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Wanted to just hone in on the outlook commentary Heath, particularly in relation to your comments on Brexit. And having noted all the commentary that you did provide, what is your assumption for the market through the first half of FY '20? Because you've obviously entered soft. How do you guys think about having pared at your range at the lower end for that particular uncertainty? Just want to try and understand that better.

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Heath Sharp, Reliance Worldwide Corporation Limited - CEO, MD & Director [3]

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Yes, sure. It's -- look, I think the key word here is uncertainty, and it's actually a little hard to read in the marketplace the sort of shift in the first quarter to the second quarter where I think there was some buying ahead in the first quarter by -- in some of the channels, and it was selling down in the second quarter. And I think that marked for all of us what was actually happening underneath that. I think as we try and look through that and connect directly with the marketplace, it feels to us like the last couple of months in '19 was soft. I think the '20 started off a little soft, although there is some sort of sparks of interest in the market. And I guess I'm just a little cautious there because there's certainly opportunity for the channels to put inventory on the shelf ahead of end of October around the proposed Brexit date. So again, I think that clouds what's happening in the market.

Stepping back from all of that, what's it done to outlook for the U.K. market, historically, that's been a mid- to high single-digit growth rate business. I think fundamentally, it's still able to deliver that. But if the market sort of softens, as we think it possibly could, then we're not going to hit that same number in the U.K. market, I wouldn't believe.

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Peter Steyn, Macquarie Research - Analyst [4]

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Appreciate that. And then just one further question, distributor relationships. You've obviously mentioned some of the change that was afoot in the wholesale channel. More recently, there's also been some comments by some of your retail distribution channel partners about some realignment in some of the assortments. Could you just give us a quick assessment of those 2 factors and how you see them?

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Heath Sharp, Reliance Worldwide Corporation Limited - CEO, MD & Director [5]

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Okay. So on -- this is in the U.S. context, of course. On the wholesale side of the business, we have certainly not lost a customer by any stretch of the imagination. We have one particular wholesaler who's embarking on a quite robust own brand program, which is across several brands. It would appear to include SharkBite, but it's not SharkBite alone. We're pretty comfortable with how we're positioned to deal with that. We can still sell directly to the stores. And we have a whole lot of other wholesalers in the marketplace who are quite excited at the prospect of maybe having more SharkBite customers walk in the door. They're putting more SharkBite products on the shelf, more point-of-sales material and so on, which frankly, Peter, it's kind of normal course of business for us. I mean wholesalers add product, delete product. Fakebites come and go. Own brands come and go. Distribution goes via a DC. It doesn't go via the DC. I mean this is our business that we deal with on an ongoing basis in all parts of the world, and we have for many, many years. So it really is, for us, normal course of business.

I think in the case in question, we foresee with the activities we're taking and the outlook for how we can continue to work with this particular customer, the impact on a revenue basis is a fraction of 1% of our total revenue. So as I said, it's -- really, in our view, it's normal course of business stuff. And frankly, we're excited about the opportunity to get more products in other stores based on the noise, if you like, in the marketplace, and we'll convert more users. And I think in the long term, we come out pretty well. So that's kind of our view on the wholesale side. On the retail side, look, for us, it looks like business is normal, is -- the big wholesalers in the U.S. are continuing to do work on their store layout, their assortments, their plumbing aisles. They all use different terms. I think it's fair to say we're heavily involved with all of them, and I'm pretty excited about the opportunities that can bring for us in terms of new product, whether that be SharkBite push-to-connect product, PEX and crimp product, other push-to-connect products in our range, Holdrite, John Guest and so on. We like where we're positioned in relation to the activities in that marketplace.

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Operator [6]

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Your next question comes from Keith Chau with MST Marquee.

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Keith Chau, MST Marquee - Building Materials & Packaging Analyst [7]

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Just a few quick questions on my part. The first one just around FY '20 guidance again. Just want to try and clarify whether the guidance range factors in the tariff increases that were announced last week, and I know that's fairly fluid at the moment, but whether guidance does actually talk about what happened last weekend and also whether there's any freeze benefits factored into guidance, please?

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Heath Sharp, Reliance Worldwide Corporation Limited - CEO, MD & Director [8]

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Yes. Look, tariffs, I'll embrace your use of the term fluid in relation to tariffs. I think all of our material and our thinking and our planning included the tariff, the 25% rate up until, was it Saturday morning or whatever, we're pretty comfortable we've got that covered. I think there's a few million dollars at risk there, but I back ourselves to cover that. I think to be -- put it bluntly, any amount that may or may not have been announced since then is entirely at risk. And if it is a 5% move, then that, based on what we've talked about previously, represents $4 million at a cost level. If that happens, we'll do what we have to do, which we've done, what, 2, 3 or 4 steps so far and take every step to mitigate it. And I guess I'll back ourselves to do that to a large extent.

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Keith Chau, MST Marquee - Building Materials & Packaging Analyst [9]

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And then on the freeze event, please, Heath. I know last year, the revenue impact was $12 million to $15 million at the revenue level. So given the high-margin profile of those sales, just wondering if there's any freeze event factored into guidance, please?

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Heath Sharp, Reliance Worldwide Corporation Limited - CEO, MD & Director [10]

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No. 0.

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Keith Chau, MST Marquee - Building Materials & Packaging Analyst [11]

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Okay. Excellent. And then just on the John Guest integration costs, so they stepped up to $17 million, previously disclosed as $10 million. And I think the commentary in the release was -- it was done to fast-track synergies. So I'm just wondering what the incremental $7 million was spent on, please?

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Gerry Bollman, Reliance Worldwide Corporation Limited - Global CFO [12]

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Look, I think -- this is Gerry. The vast majority of the $17 million, so well over half of it, were people-related. So whether they were severance or legal costs related to severance or that sort of thing. There were -- there are other buckets of costs. We had to spend some on just integration support, that was integrating over 1,100 people, required a little bit of external support there. We had some legal support. There were some noncash asset write-offs related to the bringing together both of the businesses in Evesham, but really the closing of our business in Evesham and the move into West Drayton and the rationalization of their facilities in New Jersey. And then a few other bits and pieces.

I think if you think about where the incremental came from, originally, we had the $20 million target for synergies with $10 million of costs. I think we upped that synergy target to -- in excess of $30 million. And at the time, we didn't adjust the costs. So I think in some respects, this just reflects some of the additional costs to get the incremental $10 million. And we did choose to pull the trigger on some things this year, mostly because it was just the right thing for the business. So we brought in a new commercial lead for Europe broadly and also someone to lead the selling and commercial function in Continental Europe. And I think that individual needed clear runway to be able to grab a hold of that business and reorganize it. So that meant parting ways with our former MDs, who were leading the various countries in Europe. And that's not an inexpensive task. And we always knew we had to do that, but we figured we would do it this year so that we could get on with focusing on growing the business. I do think, as a result of that, we don't anticipate any further one-off integration costs in FY '20.

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Keith Chau, MST Marquee - Building Materials & Packaging Analyst [13]

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Okay. Excellent, Gerry. And just one last one for me. Heath, I know in the years gone by, Reliance has spoken about the delivery metrics and order fill rates, particularly in the U.S. retail channel. Obviously, that becomes more important as the retail channel demands more in terms of inventory turnover, et cetera, et cetera. So I'm just wondering if you can characterize for us how your order fill rates are going in the U.S. channels, particularly in retail but also across wholesale as well, please?

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Heath Sharp, Reliance Worldwide Corporation Limited - CEO, MD & Director [14]

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I think -- I mean we talk a lot about innovation and new product and so on. I think the real differentiator that we have in the marketplace is our ability to deliver product, our execution level, and it remains really high, I think, across all channels, Keith. And I think that's why we get invited to participate in programs for new products and new shelf space and so on. So I think we're doing pretty well there.

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Keith Chau, MST Marquee - Building Materials & Packaging Analyst [15]

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And just on the shelf space program is being rolled out across Home Depot, I know they're looking to increase the range of variety of products on the customers, what are your preliminary discussions with them? I mean, has there been any early signs that you'll get more product on shelves? Or are there any changes on the negative side equally?

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Heath Sharp, Reliance Worldwide Corporation Limited - CEO, MD & Director [16]

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Look, I think the key comment there is they're early discussions, and we're not keen to put sort of too much information out in relation to sort of what we're doing. But again, we execute very well. We've got a really interesting range of products now. I think it's fair to say we've got some pretty significant conversations underway with a range of retailers looking for additional shelf space and the opportunity to improve the productivity of the retailer shelf space. That's ultimately what it's all about. And I think that's what our products do, high value-added products that create end-user demand and put dollars on the shelf of our distributors. That's kind of our business. And we've got a number of pretty interesting conversation underway to that end.

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Keith Chau, MST Marquee - Building Materials & Packaging Analyst [17]

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Okay. And Heath, if you had to say whether it was SharkBite, John Guest or Holdrite that presents the biggest opportunity in the U.S. in particular, which one of those 3 would it be?

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Heath Sharp, Reliance Worldwide Corporation Limited - CEO, MD & Director [18]

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Keith, you can't -- you really can't disconnect it. I mean SharkBite's clearly becoming a smaller proportion of our overall business as the business evolves through acquisition and new product growth and so on. But what we do with some of the pipes and traditional fitting systems is directly linked to SharkBite. Some of the stuff we're looking at doing in the U.S. retail channel is really closely connecting the John Guest product to the SharkBite product and coming up with an ultimate assortment that crosses filter systems, plumbing systems, water softness and whatever else. So I think the real advantage we've got with these product ranges and brands that we have is the ability to sort of mix and match and leverage, sort of, one, to get some of the others. And which one we leverage in different markets with different end users is different. That's one of the things I really like most about our business, quite frankly. So it's not -- don't have a favorite, don't have one that's going to be the killer going forward. It really is pretty well integrated. But I think the key message there is that core business we've talked about for a long time, which is the push-to-connect in the U.S. remains robust. We'll continue to deliver above-market growth rate. And we have a lot of other products that I think that can grow, frankly, better than that, but they're earlier in their life cycle. But again, it's all integrated.

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Operator [19]

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Your next question comes from Brook Campbell-Crawford with JPMorgan.

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Brook Campbell-Crawford, JP Morgan Chase & Co, Research Division - Analyst [20]

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Heath and Gerry, just had a question. It looks like 2 large customers accounts for $308 million of sales in FY '19. How much of that relates to John Guest?

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Heath Sharp, Reliance Worldwide Corporation Limited - CEO, MD & Director [21]

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Reasonably small amount.

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Brook Campbell-Crawford, JP Morgan Chase & Co, Research Division - Analyst [22]

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Okay. I'll work with that. And then a question on Americas. The first half, the growth rate was illustrated to be sort of 14%, I guess, and if you pull down the base due to Lowe's stocking, I mean that's come down to 3% in the second half. I understand the market is softer. But can you just help us understand really why growth rate has moderated and maybe what you're doing to try and get that growth rate back up to maybe the levels it's been in recent years?

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Heath Sharp, Reliance Worldwide Corporation Limited - CEO, MD & Director [23]

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Look, I don't think there's actually a case of moving the growth rate or getting it back up. As Gerry mentioned, movements in -- across all of our channels in the first half, as we've studied that quite closely, there was a lot of movement there to put inventory on the shelf in preparation for a winter freeze. And of course, there was no freeze and that inventory was then bought down in sort of the January, February time. And we really have done a lot of work on this looking at the movement in inventory. And in some cases, we were seeing movements from the peak before Christmas to the trough after Christmas of 6 weeks or 8 weeks of inventory on hand. I mean that's a significant amount of inventory, and that really changes the half-on-half view quite dramatically. So we think a better indication of the business is that underlying whole year growth rate.

I think it's also quite interesting, if we jump back in history in our business and compare 2016 to 2015, it is -- this year looked -- felt like 2016. 2016 was a year with no winter, following year with a winter. 2016 was -- I think it was sort of 13%, 14%, 15% up in the first half, and it was actually flatter or a little bit down second half. The half following that was back up to, from memory, 10% or 11% or 12 -- 12%. And again, that was exact -- we believe exactly the same phenomenon where in '16, lot of buy forward following a really big winter, lot of inventory on the shelf as we crossed 31st of December as in the following, so the 3, 4, 5, 6, 7 weeks, there was the realization there wasn't going to be a potentially significant winter event. The inventory was just wound down in the channel and that was impacted in our shipments.

So if we take a step back and look at what's happening in the stores, the product that's going out the door, it kind of matches what Gerry was indicated as the sort of the underlying U.S. growth rate of sort of 8% thereabout is really how we look at that business going forward.

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Brook Campbell-Crawford, JP Morgan Chase & Co, Research Division - Analyst [24]

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Okay, excellent. And then one more on big opportunity for Reliance in the new construction markets, both residential and maybe even commercial as well. Can you talk about how you're going with penetrating those 2 other market segments, perhaps touch on EvoPEX as well, how are sales going there and traction with the contractor?

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Heath Sharp, Reliance Worldwide Corporation Limited - CEO, MD & Director [25]

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Yes. Sure. So -- and I think we kind of segment, and even beyond revenue, construction, commercial and new construction. I mean there's figures on the residential side, sort of the renovation, the repiping, remodeling market, there's specific water heater installers in the U.S. So we kind of break our business down heavily by different end users and then package up the product accordingly. I think we're pretty optimistic about all of those categories. Residential new construction is probably the most challenging, given the price pressure there. I mean we've made some inroads with EvoPEX. I think there's also some good inroads being made over the years with Holdrite. We're trying to sort of combine those efforts to get traction, and we're okay with that outcome. I think we're probably more excited about what commercial new construction is looking like and can look like in the foremost of time and that -- again, Holdrite influences that quite a lot in terms of getting us moving. But also in the sort of the renovation and repiping market in the U.S., I think the product ranges we have at our disposal now, including EvoPEX and potentially ProLock and the SharkBite and even traditional fitting systems, I mean, that combination of products, depending on where we're -- what the end user need is and where we are in the market gives us the opportunity to work all of those channels, all of those end-user opportunities. So overall, I think our bigger issue is deciding where we put the priority as opposed to looking for opportunities.

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Operator [26]

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Your next question comes from Peter Wilson with Crédit Suisse.

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Peter Wilson, Crédit Suisse AG, Research Division - Associate [27]

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If I could, I just wanted to follow-up that question on the underlying growth rate in the Americas business, so 8.3% for the full year and much less than the second half. If you just talk through the inventory effect of the lack of the freeze event. But I am of the understanding that the underlying sales growth rate excludes the freeze event. So I'm just wondering if there's anything else that might have explained that weaker second half.

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Heath Sharp, Reliance Worldwide Corporation Limited - CEO, MD & Director [28]

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That -- it also excludes the previous year, which had the lowest impact as well with rolling that product out and the move. So we've looked at it quite closely, Peter. And I think one of the challenges over the last couple of years with our results generally, particularly in relation to the U.S. market, is that there's been some really significant events through sort of '17, '18. And then seeing the impact of that into '19, trying to juggle all those gets pretty challenging, frankly, even with us when we have all the detailed numbers in front of us. But no, we're not seeing anything in the market at all that indicates other than that inventory move. And looking at what the U.S. market is doing in July and August, we're pretty comfortable with that position.

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Gerry Bollman, Reliance Worldwide Corporation Limited - Global CFO [29]

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Peter, just to -- just in case there was any confusion, that 8.3% underlying rate does not include any impact of a freeze per se. I think -- but the split in sales, the higher growth rate in the first half and the lower growth rate in the second half, I think, reflects some shifting of sales as the distribution channels built up inventory in December in anticipation of a freeze that never happened. So I think that kind of is -- that anticipation of a potential freeze kind of shifted the relative growth rates. But if you cut back to that 8.3%, there would be -- you're absolutely correct, there's absolutely no freeze impact in that across the year.

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Peter Wilson, Crédit Suisse AG, Research Division - Associate [30]

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I understand. So a shift in the first half versus the second half to the underlying [underwriting].

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Heath Sharp, Reliance Worldwide Corporation Limited - CEO, MD & Director [31]

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Yes, yes.

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Peter Wilson, Crédit Suisse AG, Research Division - Associate [32]

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Okay. And just -- so as you said, the 8.3% was a reasonable reflection of where you think the market -- the market is...

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Heath Sharp, Reliance Worldwide Corporation Limited - CEO, MD & Director [33]

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Where we are in the market.

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Peter Wilson, Crédit Suisse AG, Research Division - Associate [34]

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Okay. Where you are. How do I, I guess, unpack that? I guess it's below your double digit kind of long-term track record. How do I think about that 8% and then your comments around the weaker market conditions April to June and continuing, in the context of, or I guess the view, the message that your business has always been pretty resilient against the underlying market softness?

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Heath Sharp, Reliance Worldwide Corporation Limited - CEO, MD & Director [35]

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Yes. Look, I think if we look at what the base marks do in the U.S., and we've been watching closely some of the announcements and forecasts that are out there, is first quarter, first half, there's companies in our space that are flat to 1 or 2 points up. So I think if we're, if we're a significant amount ahead of that, and I believe we are and I believe we'll continue to be, that for me kind of reflects a strong business and is in kind of in keeping with what the business has looked like for a while. I mean, U.S. quite frankly is -- over the years, the combination of freezes and new product load-ins and new customer wins and even acquisitions, quite frankly, is what's driven the overall growth rate of the business on a global basis at that 12% or 13% CAGR. In the U.S. and the U.K. and Australia, we have the expectation to continue to deliver solidly above-market growth rates, which is our recent history and our expectation going forward.

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Peter Wilson, Crédit Suisse AG, Research Division - Associate [36]

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Is the expectation still double digit? Is that still the expectation?

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Heath Sharp, Reliance Worldwide Corporation Limited - CEO, MD & Director [37]

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Look, I think our aspiration is certainly double digit. But I think we also understand that depending on what's happening in certain markets and what's available to us any given year can impact that. If you have a look at the long-term growth rate of the overall business, which is beyond double-digit growth rate, we're looking at in the last week or so, 5 or 6 years out of the 11 or 12 we were looking at were well under 10% growth rate. And there was -- or under 10% growth rate. And many years that we're above growth rate, it's the circumstances of what's going on, what's available to us. As we look forward, we've got some product ranges for the 20-year, which are long-term product ranges in the valve category, which is the significant categories, which we actually see can deliver double-digit growth rate in those categories, which is linked to activities in the marketplace, new product development and new products we're releasing, which we can push through our distribution network and end users. So year-on-year, we'll pull every lever available to us to deliver the growth rate. It just varies year to year and product group to product group, depending on a whole range of circumstances.

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Peter Wilson, Crédit Suisse AG, Research Division - Associate [38]

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Okay. And just one on margins. Just your guidance is for a margin increase next year, and I was hoping you could just give us some commentary on how that looks across regions, some of the drivers. I'm just -- I think I'm right in saying that John Guest margins were quite weak in the second half, too. So just a comment on that.

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Heath Sharp, Reliance Worldwide Corporation Limited - CEO, MD & Director [39]

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Definitely John Guest margins were weak -- the margins of John Guest business are pretty strong margins clearly. Our expectation with the synergies, we delivered that actually, is improve those margins and we'll (inaudible) really quite robust going forward.

Margins in the U.S., as Gerry highlighted, there were a few issues this year which caused us some grief. And we were also comping over a year that had some pretty significant one-offs, which pushed the margins last year up to a higher level. So we think the margin outlook for the U.S. business, if you cut through all that, sort of is similar or above, quite frankly. And then as we've noted through this morning is we really are quite focused on our own continuous improvement programs and so on to generate the sort of margin expansion at the operating level. So that's kind of, I guess, how I view it.

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Operator [40]

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Your next question comes from Rohan Koreman-Smit with Goldman Sachs.

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Rohan Koreman-Smit, Goldman Sachs Group Inc., Research Division - Industrial Analyst [41]

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Heath and Gerry, just a couple of quick ones for me. First, sorry to belabor the point on what the underlying growth rate is. I guess the second half was probably relatively weak for a number of factors that you've outlined. But have you done any analysis on kind of what the same-store sales or kind of like underlying like-for-like growth is if you try and remove the kind of channel expansion that you keep on achieving? You talked to Home Depot Canada and Holdrite in commercial this time that I'm guessing that kind of helps to underpin that 8.4%.

And then the second question is just more on product discontinuations. You still got EvoPEX and John Guest. And you talked to John Guest connecting with Sharkbite and Home Depot. But I guess just maybe give some color on how you're thinking about situations where you do have duplicates of similar products in the same market?

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Heath Sharp, Reliance Worldwide Corporation Limited - CEO, MD & Director [42]

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Let me deal with the second one first, and then I will have forgotten the first one, let's come back to it. But I guess, overall, I really like the range of products we have at our disposal. And again, we think very much in terms of end users and making them as efficient and as effective as we can. Different products that we have, whether that be an EvoPEX fitting in the U.S. or a SharkBite fitting or a ProLock fitting offer different features, different capabilities, different competitive advantages in different end-user markets. So that's kind of how we're approaching that side of things. So really, we think it is a pretty strong, pretty powerful position to be in. And look, there's also some opportunity at the distribution level to differentiate us as well. But particularly in relation to the John Guest products that we have, we're still doing some trials, giving a lot of thought to how best we use that. But overall, I really like that we have them at our disposal. I mean they are all good products, good quality products that perform their job really quite well. I think we've got a great position in the marketplace. And with that, I have forgotten what the first part of the question was.

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Rohan Koreman-Smit, Goldman Sachs Group Inc., Research Division - Industrial Analyst [43]

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The first one was just on...

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Heath Sharp, Reliance Worldwide Corporation Limited - CEO, MD & Director [44]

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Oh yes, yes, yes. Same-store sales.

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Rohan Koreman-Smit, Goldman Sachs Group Inc., Research Division - Industrial Analyst [45]

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Yes, something that kind of removes channel expansion.

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Heath Sharp, Reliance Worldwide Corporation Limited - CEO, MD & Director [46]

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Yes. Look, the short answer is what we're seeing in comps at those outlets, where we're able to get that detailed, generally is in line with what we're saying our underlying growth rate is in our outlook for the business. It's complicated a little bit when you have a non-freeze year after a freeze year, where the comps just die drastically the moment that you line up with the period 12 months ago when the freeze happened and then it takes a while for those even on a -- like a rolling 8- or 13-week basis, it impacts those numbers negatively. And it takes a while for those numbers to come back out and normalize. But that's I think reached the normalized level when we're seeing the sort of comps that are in line with what our view is of the underlying growth for our business for the year and our go-forward growth.

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Operator [47]

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(Operator Instructions) Your next question comes from [Tony Shields] with [Proprietary Limited].

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Unidentified Analyst, [48]

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I was just inquiring about -- I read the commentary about how on the guided process of cultural integration with John Guest. And you mentioned that John Guest had more staff than RWC when you combine. It sounds like a big job and it sounds like a job that's going to take some time to change that culture. Just wondering if you could comment on that.

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Heath Sharp, Reliance Worldwide Corporation Limited - CEO, MD & Director [49]

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I think that's fair. I think culture is an ongoing for everything. It's certainly been a focus for us. Look, it was a good, solid, robust culture there in the first place, operating at a high level and operating well with integrity and so on. So there's a lot about their culture that's aligned with us. I think there's obviously some elements about how we operate that are a little bit differently. And we're spending a lot of time there working with those people so they understand who we are, how we make decisions, how we work, what our priorities are and so on. You've really got to live and breathe that. And frankly, I'm really pleased with the capabilities and the caliber of the people in the John Guest organization and how they've embraced sort of us and who we are and moving forward. So I'm comfortable with where we're at. But I absolutely acknowledge that it's not done and, frankly, it will never be done. I mean the culture in a business evolves on an ongoing basis forever. So.

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Operator [50]

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Your next question comes from James Casey with Baillieu.

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James F. Casey, Baillieu Holst Ltd, Research Division - Head of Research [51]

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Could I just clarify the situation in the wholesale channel? So there's speculation that SharkBite has been deleted from that wholesale customer. I think your comments earlier didn't confirm that. Can you just clarify exactly what the situation is and where the impact of that 1% you mentioned would come from?

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Heath Sharp, Reliance Worldwide Corporation Limited - CEO, MD & Director [52]

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Yes. Absolutely, I can confirm the product has not been deleted from that customer. It's being sold sort of literally as we speak. The stores, as I understand, will not be able to -- the standard stores -- normal stores will not be able to buy SharkBite through their distribution center. They are able to buy it direct from us. So we think that there's still a good chunk of that business we'll inevitably hang on to.

Then, if you like, and -- I mean, this is a key part of our strength. Any store in the U.S. of any channel that doesn't have SharkBite on the shelf is quite literally surrounded by 8, 9, 10, a dozen stores across all channels where SharkBite is on the shelf. If a store that has SharkBite is aware that a store nearby may not have it or might not be supporting it as much, those stores get pretty excited about the opportunity to do more work on SharkBite. And all those things that we push forever, which is more SKUs and more point of sales material and working with their sales team and educating the staff and so on, all of a sudden we're inundated with requests to do that. So if you -- how this unfolds, which I really will stress is normal course of business for us doing this, it has been forever. We'll continue to retain, I think, a pretty good chunk of the business with that wholesaler. I think we'll gain additional business from the stores around those wholesale stores. In some cases, it will be taking volume from that wholesaler. But frankly, in some cases, it will be just converting more users to SharkBite through those wholesalers and retailers around those stores who are now more energized with the product. So when you put all that together, the amount of inventory -- inventory, sorry, revenue that's impacted is kind of less than 1% anyway. And when you look at all those activities that we can do to sort of manage around it, I just explained, it's a fraction of 1%.

And look, the particular wholesaler in question, we have a really good relation with them. And some of the revenue that we generate from them in other product ranges exceeds quite significantly the revenue of SharkBite. So I think that's an important aspect of our business, where we've got a really good, robust activity in -- with that SharkBite push-to-connect business, but a whole range of other product ranges, which are unique, have some real value to the end user, create value for the distributor and are growing really quite nicely. So I would say it's overall, it's a pretty strong position.

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James F. Casey, Baillieu Holst Ltd, Research Division - Head of Research [53]

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Okay. Just in terms of the SharkBite product in the U.S., what's a reasonable assumption to use for your ability to grow above market? So there's a lot of different forecasts in the market for the remodel expenditure over the next 12 months, what's a reasonable assumption to use for your above-market growth?

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Heath Sharp, Reliance Worldwide Corporation Limited - CEO, MD & Director [54]

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Again, I think you've kind of got to look to what we've sort of said is the underlying growth rate for the business for the past year. I think that, on average, applies obviously across the whole business, but I think SharkBite looks a lot like that as well.

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James F. Casey, Baillieu Holst Ltd, Research Division - Head of Research [55]

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Okay. Last one, I'm not sure whether it's mentioned in the pack, I was just interested in the effective tax rate for '20.

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Gerry Bollman, Reliance Worldwide Corporation Limited - Global CFO [56]

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For '20. Yes, I think effective -- I think we're at 24.7% for this year, I'd expect something between 24% and 24.5% for '20.

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Operator [57]

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

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Heath Sharp, Reliance Worldwide Corporation Limited - CEO, MD & Director [58]

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Okay. Thank you very much. Look, I would like to thank everybody for joining us on the call today. I appreciate your interest and your support. Thank you. Have a good day.