Shares in Reliance Worldwide Corporation plunged more than 26% yesterday after it downgraded 2018-19 profit guidance.
Reliance shares ended a rough day’s dealings at $3.89, down 15.6% after touching a low of $3.40, the lowest the shares have been for more than 18 months.
From what the company said yesterday the problems have emerged in the current second half, especially in North American and European markets.
The company said its statement that it “now expects FY2019 EBITDA to be in the range of $260 million to $270 million. The previous FY2019 EBITDA range advised by RWC was $280 million to $290 million, subject to, among other things, an assumption that a modest freeze event would be experienced in the USA.”
“A modest freeze event” seems to be plumber speak for very cold weather that busts pipes and boosts “demand for new fittings, pipes and plumbing services in the US,” the company said yesterday.
A modest freeze event is considered to be the average level occurrence of winter storms over a sustained period across the USA, causing cracked or broken pipes. In other words the recent US winter was mild with temperatures higher than expected and mostly above ‘freezing’ point especially in southern and southwestern states where Reliance is based.
Company management estimates that the lack of a modest freeze event has reduced net sales by the order of $12 million to $15 million in FY 2019.
On top of this Reliance says a number of its channel partners have actively reduced inventory on hand. As a result, net sales in this half are lower than expected, particularly in retail outlets. Management believes this is a timing issue due to these inventory strategies rather than a fundamental demand issue.
Reliance says its John Guest business (bought a year ago this month) is performing to expectations in emerging and middle eastern markets, but its core Reliance Worldwide businesses in the UK and Spain have not met expectations.
This is largely due to a decision by management to exit certain product lines previously sold.
Finally, the Asia Pacific area has also fallen short of expectations as a result of a sharper than forecast decline in new home construction in Australia.
Despite these negatives, Reliance management says it continues to be pleased with how the business is positioned, its current trajectory, and the underlying performance across core products and regions.
“RWC remains a global leader in both brass and plastic push to connect (PTC) fittings technology. Given the current relatively low penetration levels of PTC, particularly in the USA and the UK, there remains sizeable runway to grow product sales, the company said yesterday.
“We remain very pleased with the progress of integrating the John Guest and core RWC businesses. Cost synergies are being realised as expected and we are starting to see revenue synergies coming through. We have made significant progress in integrating the people and cultures of the two businesses and aligning our combined resources to pursue the most attractive growth opportunities.
“RWC retains market-leading positions across multiple product categories in key geographic segments and has unrivaled distribution networks in the Americas, Australia and the UK which can be leveraged to extend the reach of future products we develop or acquire.”
