REECE LIMITED — Annual Report 2019

Aug 27, 2019

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Preliminary Final Report
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UNDER LISTING RULE 4.3A

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Appendix 4E

Preliminary Final Report

Reece Limited (ABN 49 004 313 133)

1. Reporting period

Report for the financial year ended 30 June 2019

Previous corresponding period is the financial year ended 30 June 2018

2. Results for announcement to the market

2. Results for announcement to the market
		$A’000
Revenues from ordinary activities	Up 103.2% to	5,463,787
Earnings before interest, tax, depreciation, amortisation
and business acquisition costs and fair value inventory un-	Up 38.0% to	521,950
wind
Profit before tax excluding business acquisition costs and fair value inventory un-wind	Up 4.7% to	334,522
Profit from ordinary activities after tax attributable to members	Down 10.0% to	202,100
Total Comprehensive income for the period attributable to members	Down 2.2% to	223,808
Dividends	Amount per security	Franked amount per security
Interim dividend	6.0 cents	6.0 cents
Final dividend	14.25 cents	14.25 cents
Record date for determining entitlements to the dividend		9 October 2019

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Reece Limited – Preliminary Final Report

3. Statement of Comprehensive Income

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

for the year ended 30 June 2019

Revenue	2019 ($000’s)	2018 ($000’s)
Sales Revenue	5,463,787	2,688,576
Other income	8,026	2,780
	5,471,813	2,691,356
Less: Expenses
Cost of sales	3,926,427	1,799,481
Employee benefits expense	635,587	299,730
Depreciation and amortisation	128,072	53,847
Business acquisition costs	28,516	-
Other expenses	396,831	213,822
	5,115,433	2,366,880
Operating profit	356,380	324,476
Finance income	23,948	-
Finance cost	(83,304)	(5,035)
Profit before income tax expense	297,024	319,441
Income tax expense	94,924	94,821
Net profit for the year	202,100	224,620
Other Comprehensive Income
Items that may be reclassified subsequently to profit or loss:
Exchange differences on translation of foreign operations, net of tax	82,839	(1,204)
Change in fair value of effective cash flow hedges, net of tax	(61,131)	5,328
Total comprehensive income	223,808	228,744
Basic earnings per share	36 cents	45 cents
Diluted earnings per share	36 cents	45 cents

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Reece Limited – Preliminary Final Report

4. Statement of Financial Position

CONSOLIDATED BALANCE SHEET

as at 30 June 2019

	2019	2018
	($000’s)	($000’s)
Current assets
Cash and cash equivalents	127,707	539,891
Trade and other receivables	875,324	405,733
Inventories	955,711	540,564
Derivative financial instruments	2,209	4,479
Total current assets	1,960,951	1,490,667
Non-current assets
Property, plant and equipment	664,009	568,714
Intangible assets	1,772,166	225,741
Deferred tax assets	39,263	39,125
Derivative financial instruments	37,721	-
Total non-current assets	2,513,159	833,580
Total assets	4,474,110	2,324,247
Current liabilities
Trade and other payables	699,893	369,557
Interest bearing liabilities	16,256	-
Current tax payable	1,555	7,624
Provisions	66,808	60,013
Derivative financial instruments	8,680	-
Total current liabilities	793,192	437,194
Non-Current Liabilities
Long-term payables	29,335	2,212
Interest bearing liabilities	1,593,041	-
Deferred tax liability	43,777	-
Provisions	5,008	4,003
Derivative financial instruments	18,177	-
Total non-current liabilities	1,689,338	6,215
Total liabilities	2,482,530	443,409
Net assets	1,991,580	1,880,838
Equity
Contributed equity	604,849	604,349
Reserves	29,580	7,872
Retained earnings	1,357,151	1,268,617
Total equity	1,991,580	1,880,838

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Reece Limited – Preliminary Final Report

5. Statement of Changes in Equity

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

for the year ended 30 June 2019

	Contributed equity Reserves Retained earnings Total Equity ($000’s) ($000’s) ($000’s) ($000’s)
Balance as at 1 July 2017 Profit for the year Exchange differences on translation of foreign operations, net of tax Change in fair value of effective cash flow hedges, net of tax Total comprehensive income for the year Transactions with owners in their capacity as owners: Additional contributed equity Dividends paid Total transactions with owners in their capacity as owners: Balance as at 30 June 2018 Balance as at 1 July 2018 Profit for the year Exchange differences on translation of foreign operations, net of tax Change in fair value of effective cash flow hedges, net of tax Total comprehensive income for the year Transactions with owners in their capacity as owners: Additional contributed equity Dividends paid Total transactions with owners in their capacity as owners: Other movements Balance as at 30 June 2019	9,960 3,748 1,144,593 1,158,301 - - 224,620 224,620 - (1,204) - (1,204) - 5,328 - 5,328
	- 4,124 224,620 228,744
	594,389 - - 594,389 - - (100,596) (100,596)
	594,389 - (100,596) 493,793
	604,349 7,872 1,268,617 1,880,838
	604,349 7,872 1,268,617 1,880,838 - - 202,100 202,100 - 82,839 - 82,839 - (61,131) - (61,131)
	- 21,708 202,100 223,808
	- - - - - - (113,566) (113,566)
	- - (113,566) (113,566) 500 - - 500
	604,849 29,580 1,357,151 1,991,580

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Reece Limited – Preliminary Final Report

6. Statement of Cash Flows

CONSOLIDATED STATEMENT OF CASH FLOWS

for the year ended 30 June 2018

	Consolidated Entity 2019 ($000s) 2018 ($000s)
Cash flow from operating activities Receipts from customers Payments to suppliers and employees Interest received Finance costs Income tax paid	5,446,191 2,926,274 (5,018,635) (2,633,037) 1,637 1,987 (82,376) (5,753) (92,351) (108,546)
Net cash provided by operating activities	254,466 180,925
Cash flow from investing activities Purchase of property, plant and equipment Proceeds from sale of property, plant and equipment Purchase of intangibles Purchase of controlled entities, net of cash acquired	(99,199) (88,244) 10,382 5,662 (5,329) - (2,001,442) (54,050)
Net cash used in investing activities	(2,095,588) (136,632)
Cash flow from financing activities Proceeds from borrowings Repayments of borrowings Proceeds from capital raising Dividends paid	1,771,568 182,000 (230,938) (282,000) - 594,389 (113,566) (100,596)
Net cash provided by financing activities	1,427,064 393,793
Net (decrease)/ Increase in cash and cash equivalents Net foreign exchange translation difference Cash and cash equivalents at the beginning of the year	(414,058) 438,086 1,874 - 539,891 101,805
Cash and cash equivalents at the end of the year	127,707 539,891

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Reece Limited – Preliminary Final Report

7. MORSCO acquisition

Effective 2 July 2018, Reece Limited acquired 100% of Patriot Supply Holdings, Inc and its controlled entities (MORSCO) a leading US distributor of plumbing, waterworks, heating and cooling (HVAC) products. MORSCO operates 175 branches in 16 states in the Sun-Belt region of North America. The acquisition of MORCO, provides a platform to diversify and grow Reece’s operations into the US market.

From the date of acquisition, MORSCO contributed revenue of $2,598m and net profit after tax of $25.4m to the Group’s results.

8. Dividends

Dividends
Interim dividend – year ended 30 June 2019 Final dividend – year ended 30 June 2019	Date of payment Total amount of dividend $
	28 March 2019 33,649,371 30 October 2019 79,917,257

Amount per ordinary security Final dividend: Current year Previous year Interim dividend: Current year Previous year	Amount per security Franked amount per security
	14.25 cents 14.25 cents (at 30% tax rate) 14.25 cents 14.25 cents (at 30% tax rate) 6.0 cents 6.0 cents (at 30% tax rate) 6.0 cents 6.0 cents (at 30% tax rate)

Total dividend per security Ordinary securities	Current period Previous period
	20.25 cents 20.25 cents

9. Statement of retained earnings

Balance at beginning of year Net profit attributable to members of the parent entity Dividends paid Balance at end of year	Consolidated Entity 2019 ($000’s) 2018 ($000’s)
	1,268,617 1,144,593 202,100 224,620 (113,566) (100,596)
	1,357,151 1,268,617

10. Net tangible assets per security

Net tangible assets per security
Net tangible asset backing per ordinary security	Current period Previous corresponding period
	40 cents 288 cents

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Reece Limited – Preliminary Final Report

11. The financial information provided in the Appendix 4E has been prepared in accordance with Australian Accounting Standards.

12. Commentary on the results for the period

For the year ending 30 June 2019, sales revenue increased by 103% to $5,464m (2018: $2,689m), driven by the acquisition of MORSCO, and record sales revenue in ANZ. Profit before tax was down 7% to $297.0m (2018: $319.4m) and net profit after tax was $202.1m, a decrease of 10% on the previous year (2018: $224.6m). The reduction was impacted by the recognition of business acquisition costs, fair value inventory un-wind, recognition of the amortisation for the US investment and a slowdown in the Australian economy.

In July 2018, the Reece Group completed the acquisition of MORSCO, funded through a debt and equity raising. MORSCO is a leading US-based plumbing, HVAC and waterworks distribution business servicing customers in 16 states in North America. Integration continues to track as planned with a focus on strategy and culture.

Reece has continued to use its strong customer relationships and investment in technology to listen, understand and act on customer needs, leading to the development of new products in plumbing HVAC and waterworks. Additionally, the Company released the latest version of maX. Developed exclusively for Reece account customers, maX provides online access to product pricing, allowing users to build product lists, manage accounts and generate customer quotes and orders.

Creating customers for life is a core value for the Reece Group and the Company has continued to listen to customer feedback and use these insights to improve products and services. The Reece Group has continued to invest in its insight gathering and innovation capability ensuring it will continue to meet and exceed customer expectations into the future through its innovation centre, NEXT.

During the year, the Reece Group has continued to invest in the core business. The cost of doing business excluding depreciation and amortisation increased by 101% to $1.032m (2018: $513.6m) due to the acquisition in the US and NZ and the continued investment in people and technology. Employee benefits expense was up 112% to $635.6m (2018: $299.7m). This reflects the continued investment in people, related to our acquisition-led growth and investment to develop our technology and service offering. Operating costs have continued to be well managed

when taking into account the current economic environment and continued focus on investing in technology and innovation.

Following recent business acquisitions, the Reece Group has grown its international logistics and supply chain network. This logistics capability will continue to support the growing branch network in Australia, New Zealand and the United States. Inventory levels increased to $955.7m, up 77% on the previous year (2018: $540.6m), driven by the acquisitions and the introduction of new products and improved service levels. The Group continues to work closely with suppliers to manage and mitigate risk to the supply chain capabilities of the group. Net working capital continues to be a focus for the business with net working capital ratio decreasing from 21.6% to 20.7% at 30 June 2019.

The $600m equity raising completed in May 2018 and debt raised through the US Term Loan B market was utilised to fund the acquisition of MORSCO. The debt is hedged for interest rate and foreign currency risk. The net debt position at 30 June 2019 was $1,469m including the impact of derivative instruments. The leverage ratio (net debt divided by normalised EBITDA) decreased from 2.9 at 31 December 2018 to 2.8 at 30 June 2019. Operating cash flow increased from $181m to $255m during the year.

Property plant and equipment increased by 17% to $664.0m (2018: $568.7m) as a result of the investment in the branch network and assets acquired as part of the acquisitions in MORSCO and New Zealand. The Reece Group in Australia will continue to focus on investing in people, products, technology and customer service. In the US, the focus is on developing the long-term strategy and culture and positioning the US business to take full advantage of the growth opportunities in the Sun-Belt region. The Reece Group is embracing innovation to drive change to deliver world-class, insight-led digital transformation across the business.

The Board has declared a final dividend of 14.25 cents per share fully franked. The final dividend will be paid on 30 October 2019 with the record date for entitlement of 9 October 2019. Total dividends paid and to be paid relating to the year ended 30 June 2019 will be 20.25 cents per share (2018: 20.25 cents per share), flat on the previous year.

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Reece Limited – Preliminary Final Report

13. The audit has been completed

The financial report is not subject to audit dispute or qualification.

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The annual general meeting will be held as follows: Place Mayfair Ballroom Grand Hyatt Melbourne 123 Collins Street Melbourne, Victoria Time 2.00 pm Date 30 October 2019 Approximate date the annual report will be distributed 23 September 2019

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G W Street Company Secretary

28 August 2019

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