Trade spat drains away Reliance profits

Reliance Worldwide has emerged as the latest Australian casualty of trade tensions between the US and China.

Heath Sharp, chief executive of Reliance Worldwide. Picture: Jeremy Piper

Reliance Worldwide has emerged as the latest Australian casualty of the escalating trade tensions between the US and China, with the plumbing supplies business warning that fallout from the global stoush will force it to hike prices.

Reliance, which sells ‘‘behind the wall’’ plumbing fittings in Australia, the US and across Europe, said yesterday that an increase in the cost of materials was likely to result from the recent increase in US tariffs on Chinese imports. That would hit profits from the company’s Americas business from July, Reliance said.

The warning came as the company downgraded its full-year earnings guidance sharply, triggering a 15.6 per cent drop in the share price to $3.89 as it blamed the Australian property market downturn for earnings pressure.

The share price slide came just months after the company’s founder and former chairman Jonathan Munz sold down a $367m stake in Reliance in February, selling out at $4.65 a share and retiring from the board.

Reliance said yesterday it now expected earnings before interest, tax, depreciation and amortisation for the full year to be within the range of $260 million and $270m, down from its earlier guidance of $280m-$290m, which had been partly based on predictions of icy weather across the US that never eventuated.

The lack of a so-called freeze event, which would normally benefit Reliance by cracking pipes, was estimated to have reduced sales by between $12m and $15m for fiscal year 2019.

Sales in the Asia-Pacific region — the company’s smallest operating segment — also underperformed in the second half so far, Reliance said, mostly as a result of a sharper-than-forecast decline in new home construction in Australia.

“We believe this decline has accelerated as the year has progressed,” Reliance said.

Macquarie analysts called the downgrade a “negative surprise”, but left an outperform rating on the stock, saying the company would be better positioned than its competitors.

“The ongoing trade issues between the US and China have brought more uncertainty,” the Macquarie analysts said.

“Reliance Worldwide has developed contingency plans, but would likely need to seek price adjustment from customers or cost reductions from suppliers.”

The analysts estimated that Reliance would need to mitigate a cost of between $10m and 12m, which could be possible in the context of high contribution margins.

The US last week hiked tariffs on $US200 billion worth of Chinese imports as trade negotiations between the two countries rolled on.

Economists say that the impact of the tariffs would be felt largely in the US consumer goods sector, which could detract as much as 0.5 per cent from GDP in 2020.

“Reliance Worldwide will seek to mitigate the (tariff) impacts through customer price increases or negotiated supplier price reductions, but say it is too early to estimate the impact on the fiscal year 2020 performance at this time,” the company said.

Still, Reliance said it was pleased with its current trajectory and underlying performance across its core products and geographies.

Reliance specialises in producing brass and plastic “push to connect” plumbing fittings and it has argued there is substantial room to grow in the US and Britain with these products.

At the same time Reliance said it remained pleased with the progress of integrating the John Guest business in Britain, which it acquired in 2018.

But its core businesses in Britain and Spain had not met expectations in the second half. That was partly due to a decision to exit its Thermal Interface Units product line in Britain.

“While Reliance previously saw these products as an opportunity in the context of its smaller UK business, it was determined that the growth opportunities presented by the combined Reliance-John Guest product portfolio are more attractive and should be prioritised,” the company said.

In February, Reliance reported a first-half net profit after tax of $65.7m, up 58.4 per cent on the prior period, partly on the back of strength in the Americas.

Meanwhile earnings before interest, tax, depreciation and amortisation shot up 52.3 per cent on the prior year to $130.8m.