REECE LIMITED — Interim / Quarterly Report 2019

Feb 27, 2019

Reece Limited (ABN 49 004 313 133) and controlled entities

Half-year information for the six months ended 31 December 2018 provided to the ASX under listing rule 4.2A.3

This half-year financial report is to be read in conjunction with the financial report for the year ended 30 June 2018

Appendix 4D

Half-year report for the six months to 31 December 2018

Reece Limited (ABN 49 004 313 133)

1. Reporting period

Report for the half-year ended 31 December 2018.

Previous corresponding period is the financial year ended 30 June 2018 and half-year ended 31 December 2017.

2. Results for announcement to the market

2. Results for announcement to the market
		$A’000
Revenues from sale of goods	Up 104.0% to	2,718,210
EBITDA excluding business acquisition costs and finance income	Up 45.4% to	260,143
Profit before tax excluding business acquisition costs	Up 18.0% to	178,309
Profit after tax excluding business acquisition costs	Up 20.1% to	126,957
Net profit for the period attributable to members	Down 7.6% to	97,736
Dividends	Amount per security	Franked amount per security
Interim dividend	6.0 cents	6.0 cents
Previous corresponding period – interim dividend	6.0 cents	6.0 cents
Record date for determining entitlements to the dividend		20 March 2019

Review of Operations

Refer to the Review of Operations contained in the financial report for the half-year ended 31 December 2018.

Appendix 4D

Half-year report for the six months to 31 December 2018

Reece Limited (ABN 49 004 313 133) 3. Net tangible assets per security Net tangible asset backing per ordinary security 4. Dividends Ordinary shares Dividends paid during the half-year (fully franked) The final dividend relating to the year ended on 30 June 2018 was paid on 25 October 2018. Subsequent events Since the end of the half-year the directors have declared the following interim dividend: 6.0 cents (2017: 6.0 cents) per ordinary share fully franked The interim dividend relating to the half-year ended on 31 December 2018 has not been included as a provision in the financial statements because the dividend was declared after balance date. Date dividend is payable Record date to determine entitlements to the dividend Amount per ordinary security Interim dividend: Current year Previous year	2018 $A’000 2017 $A’000 26 cents 187 cents
	79,917 70,716
	33,649 29,880
	28 March 2019 20 March 2019 Amount per security Franked amount per security
	6.0 cents 6.0 cents (at 30% tax rate) 6.0 cents 6.0 cents (at 30% tax rate)

5. The financial information provided in the Appendix 4D is based on the half-year condensed consolidated financial report (attached).

6. Independent review of the financial report

The financial report has been independently reviewed. The financial report is not subject to a qualified independent review statement.

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28 February 2019 Melbourne

Gavin Street Company Secretary

Reece Limited

(ABN 49 004 313 133) and controlled entities

Financial report for the half-year ended 31 December 2018

This half-year financial report is to be read in conjunction with the financial report for the year ended 30 June 2018

Reece Limited and controlled entities

Financial report for the half-year ended 31 December 2018

Table of Contents

Directors’ Report............................................................................................................................... - 1 - Auditor’s Independence Declaration ............................................................................................. - 3 - Financial Report For The Half Year Ended 31 December 2018 Condensed Consolidated Income Statement .......................................................................... - 4 - Condensed Consolidated Statement of Comprehensive Income ......................................... - 5 - Condensed Consolidated Statement of Financial Position .................................................... - 6 - Condensed Consolidated Statement of Changes in Equity .................................................. - 7 - Condensed Consolidated Statement of Cash Flows .............................................................. - 9 - Notes to the Condensed Consolidated Financial Statements ............................................. - 10 - Notes to the Condensed Consolidated Financial Statements ............................................. - 11 - Directors’ Declaration .................................................................................................................... - 17 - Independent Auditor’s Review Report ........................................................................................ - 18 -

Reece Limited and controlled entities

Directors’ Report

The Directors present their report together with the condensed financial report of the consolidated entity consisting of Reece Limited and the entities it controlled (the Group), for the half-year ended 31 December 2018 and independent review report thereon. This financial report has been prepared in accordance with AASB 134 Interim Financial Reporting .

Directors’ Names

The names of the Directors in office at any time during or since the end of the half-year are:

Name	Period of directorship
Mr L.A. Wilson	49 years
Mr B.W.C. Wilson	47 years (retired August 2018)
Mr P.J. Wilson	21 years
Mr R.G. Pitcher, AM	15 years (retired October 2018)
Mr T.M. Poole	2 years
Mr B.C. Wilson	2 years
Ms M.L. Quinn	1 year
Ms G. Williams	1 year
Mr A.W. Wilson	4 months (appointed September 2018)

Each Director has been in office since the start of the financial period to the date of this report unless otherwise stated.

Review of Operations

Sales revenue for the six months ended 31 December 2018 was $2,718.2m, up 104% on the prior period (2017: $1,332.3m). Operating earnings before interest, tax, depreciation, amortisation, and acquisition costs were $260.1m, up 45% on the prior period (2017: $179.0m). Net profit after tax was down 7.6% to $97.7m (2017: $105.7m), net profit after tax excluding business acquisition costs was up 20.1% to $127.0m (2017: $105.7m).

The MORSCO acquisition completed on 2 July 2018, providing Reece entry into the US plumbing, HVAC and waterworks markets. Sales revenue for the first six months was $1,253m, in line with expectations. The MORSCO acquisition was funded through a $600m equity issue completed in May 2018 and Term Loan B facility of US$1.14b established in July 2018.

Reece increased the number of branches in New Zealand to 33 with the acquisition of Edward Gibbons Plumbing and two independent plumbing stores in July 2018. Integration of systems and processes for the New Zealand acquisitions are now complete, including Heatcraft New Zealand acquired in May 2018. Sales revenue for Australia and New Zealand was up 10% to $1,465m (2017: $1,332m). Like for like sales increased 5.4% on the prior year.

The cost of doing business excluding business acquisition costs was $558m, up 99% on the prior period (2017: $280m) reflecting the impact of the MORSCO and New Zealand acquisitions. The total branch network in Australia and New Zealand was 635 outlets, an increase of 20 outlets in the first half of FY2019. This included 6 new outlets and 14 through acquisitions. MORSCO opened two new outlets in the first half of FY2019, bringing the US network to 173 sites.

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Reece Limited and controlled entities

Directors’ Report

Review of Operations, continued.

Reece has continued to use its strong relationships and investment in technology to listen, understand and act on their customer’s needs, leading to the development of new products in HVAC, plumbing and bathrooms and a revitalised brand promise. In August 2018, Reece launched a new website making it faster and easier for our customers to search and buy our products online. The Company has continued to invest in understanding the current and future trends of the trade industry through its internal innovation centre, NEXT.

The Board has declared an interim dividend of 6.0 cents per share (2017: 6.0 cents per share), fully franked. The interim dividend will be paid on 28 March 2019, with a record date of 20 March 2019.

Significant changes in the state of affairs

In July 2018 the reporting entity acquired Patriot Supply Holdings, Inc and its controlled entities (MORSCO). MORSCO is a leading distributor of plumbing, waterworks and HVAC products operating in 16 states in North America.

Auditor’s Independence Declaration

A copy of the auditor’s independence declaration as required under section 307C of the Corporations Act 2001 in relation to the review for the half-year is provided with this report.

Rounding of amounts to nearest thousand dollars

In accordance with ASIC Corporations (Rounding in Financial/Directors’ Reports) Instrument 2016/191 , the amounts in the directors’ report and in the financial report have been rounded to the nearest one thousand dollars, or in certain cases, to the nearest dollar (where indicated).

Signed in accordance with a resolution of Directors.

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L.A. Wilson Executive Chairman

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P.J. Wilson Chief Executive Officer

Melbourne 28 February 2019

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Lead Auditor’s Independence Declaration under Section 307C of the Corporations Act 2001

To the Directors of Reece Limited

I declare that, to the best of my knowledge and belief, in relation to the review of Reece Limited for the Half-year ended 31 December 2018 there have been:

• i. no contraventions of the auditor independence requirements as set out in the Corporations Act 2001 in relation to the review; and

• ii. no contraventions of any applicable code of professional conduct in relation to the review.

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KPMG

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BW Szentirmay Partner Melbourne 28 February 2019

‐ 3 ‐

KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity.

Liability limited by a scheme approved under Professional Standards Legislation.

Reece Limited and controlled entities

Condensed Consolidated Income Statement for the half year ended 31 December 2018

	Half-year
Notes	2018 $A’000 2017 $A’000
Revenue from sale of goods 9 Other income Less: Expenses Cost of sales Employee benefits expense Depreciation Business acquisition costs Other expenses Operating profit Finance income 8 Finance cost Profit before income tax expense Income tax expense Net profit after tax Basic EPS Diluted EPS	2,718,210 1,332,306 4,239 1,798
	2,722,449 1,334,104 1,945,361 899,867 298,693 145,729 41,270 25,169 29,221 - 218,252 109,549
	2,532,797 1,180,314 189,652 153,790 2,481 - (43,045) (2,672)
	149,088 151,118 51,352 45,400
	97,736 105,718
	17.4 cents 21.2 cents 17.4 cents 21.2 cents

The accompanying notes form part of these financial statements

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Reece Limited and controlled entities

Condensed Consolidated Statement of Comprehensive Income for the half year ended 31 December 2018

	Half-year 2018 $A’000 2017 $A’000
Profit for the half-year Other comprehensive income Items that may be reclassified subsequently to profit and loss: 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	97,736 105,718 72,868 (956) (7,854) (1,208)
	162,750 103,554

The accompanying notes form part of these financial statements

• 5 -

Reece Limited and controlled entities

Condensed Consolidated Statement of Financial Position as at 31 December 2018

Notes	31 Dec 2018 $A’000 30 Jun 2018 $A’000
Current assets Cash and cash equivalents Trade and other receivables Inventories Derivative financial instruments 11 Total current assets Non-current assets Property, plant and equipment Intangible assets Deferred tax assets Derivative financial instruments 11 Total non-current assets Total assets Current liabilities Trade and other payables Interest bearing liabilities 7 Current tax payable Provisions Derivative financial instruments 11 Total current liabilities Non-current liabilities Other payables Interest bearing liabilities 7 Provisions Derivative financial instruments 11 Total non-current liabilities Total liabilities Net assets Equity Contributed equity Reserves Retained earnings Total equity	99,275 539,891 804,609 405,733 958,202 540,564 3,062 4,479
	1,865,148 1,490,667
	662,071 568,714 1,760,518 225,741 58,601 39,125 44,155 -
	2,525,345 833,580
	4,390,493 2,324,247
	608,111 369,557 103,636 - 9,835 7,624 82,509 60,013 2,773 -
	806,864 437,194
	17,953 2,212 1,590,961 - 3,666 4,003 6,878 -
	1,619,458 6,215
	2,426,322 443,409
	1,964,171 1,880,838
	604,849 604,349 72,886 7,872 1,286,436 1,268,617
	1,964,171 1,880,838

The accompanying notes form part of these financial statements

• 6 -

Reece Limited and controlled entities

Condensed Consolidated Statement of Changes in Equity for the half year ended 31 December 2017

Balance as at 1 July 2017 Profit for the half-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 / (loss) for the half-year Transactions with owners in their capacity as owners: Dividends paid Total transactions with owners in their capacity as owners Balance as at 31 December 2017	Contributed equity Reserves Retained earnings Total equity $A’000 $A’000 $A’000 $A’000 9,960 3,748 1,144,593 1,158,301 - - 105,718 105,718 - (956) - (956) - (1,208) - (1,208)
	- (2,164) 105,718 103,554
	- - (70,716) (70,716)
	- - (70,716) (70,716)
	9,960 1,584 1,179,595 1,191,139

The accompanying notes form part of these financial statements

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Reece Limited and controlled entities

Condensed Consolidated Statement of Changes in Equity for the half year ended 31 December 2018

Balance as at 1 July 2018 Profit for the half-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 half-year Transactions with owners in their capacity as Dividends paid Total transactions with owners in their capacity as owners Other movements Balance as at 31 December 2018	Contributed equity Reserves Retained earnings Total equity $A’000 $A’000 $A’000 $A’000 604,349 7,872 1,268,617 1,880,838 - - 97,736 97,736 - 72,868 - 72,868 - (7,854) - (7,854)
	- 65,014 97,736 162,750
	- - (79,917) (79,917)
	- - (79,917) (79,917) 500 - - 500
	604,849 72,886 1,286,436 1,964,171

The accompanying notes form part of these financial statements

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Reece Limited and controlled entities

Condensed Consolidated Statement of Cash Flows for the half year ended 31 December 2018

	Half-year 2018 $A’000 2017 $A’000
Cash flow from operating activities Receipts from customers Payments to suppliers and employees Interest received Finance costs Income tax paid Net cash provided by / (used in) operating activities Cash flow from investing activities Payments for property, plant and equipment Proceeds from sale of property, plant and equipment Purchase of intangibles Purchase of controlled entities Net cash provided by / (used in) investing activities Cash flow from financing activities Proceeds from borrowings Repayments of borrowings Dividends paid Net cash provided by / (used in) financing activities Net decrease in cash and cash equivalents Translation of cash balances held in foreign currencies Cash and cash equivalents at the beginning of the half-year Cash and cash equivalents at the end of the half-year	2,769,076 1,483,241 (2,620,354) (1,331,376) 766 755 (41,321) (2,659) (58,724) (58,866)
	49,443 91,095
	(51,838) (38,362) 7,846 1,771 (4,648) (2,119) (1,991,600) (33,219)
	(2,040,240) (71,929)
	1,667,282 37,000 (37,885) (37,000) (79,917) (70,716)
	1,549,480 (70,716)
	(441,317) (51,550) 701 -
	539,891 101,805
	99,275 50,255

The accompanying notes form part of these financial statements

• 9 -

Reece Limited and controlled entities

Notes to the Condensed Consolidated Financial Statements for the half year ended 31 December 2018

Note 1: Statement of significant accounting policies

This condensed consolidated half-year financial report does not include all the notes of the type usually included in the annual financial report.

It is recommended that this half-year financial report be read in conjunction with the annual financial report for the year ended 30 June 2018 and any public announcements made by Reece Limited during the halfyear in accordance with any continuous disclosure obligations arising under the Corporations Act 2001.

This condensed half-year financial report covers Reece Limited and controlled entities (the Group) as a consolidated entity. Reece Limited is a company limited by shares, incorporated and domiciled in Australia. The address of Reece Limited’s registered office and principal place of business is 118 Burwood Highway, Burwood, Victoria, 3125. Reece Limited is a for-profit entity for the purpose of preparing the financial statements.

The half-year financial report was authorised for issue by the directors as at the date of the directors’ report.

(a) Basis of preparation of the condensed consolidated half-year financial report

This condensed consolidated half-year financial report has been prepared in accordance with Australian Accounting Standard AASB 134 Interim Financial Reporting as appropriate for for-profit entities and the Corporations Act 2001 . The report is to be read in conjunction with the financial report for the year ended 30 June 2018.

(b) Summary of the significant accounting policies

The half-year consolidated financial statements have been prepared using the same accounting policies as used in the annual financial statements for the year ended 30 June 2018 including the extension of the hedge accounting policy to include additional financial instruments.

The consolidated entity has previously adopted hedge accounting effective 1 July 2016. The Group designates certain hedging instruments, which include forward exchange, interest rate swaps and cross currency swaps as cash flow hedges to hedge interest rate and foreign currency risks.

The Group documents whether the hedging instrument is effective in offsetting changes in cash flows of the hedged item attributable to the hedged risk. That is whether the hedging relationships meet all of the following hedge effective requirements:

• There is an economic relationship between the hedged item and the hedging instrument;

• The effect of credit risk does not dominate the value changes that result from that economic relationship; and

• The hedge ratio of the hedging relationship is the same as that resulting from the quantity of the hedged item that the Group actually hedges and the quantity of the hedging instrument that the Group uses to hedge the quantity of hedged item.

The effective portion of changes in the fair value of hedging instrument that are designated and qualify as cash flow hedges is recognised in other comprehensive income and accumulated under the heading of cash flow hedging reserve. The gain or loss relating to the ineffective portion is recognised immediately in profit or loss. When option contracts are used to hedge forecast transactions, Reece may elect to designate only the intrinsic value of the option contract as the hedging instrument. Gains or losses relating to the effective portion of the change in intrinsic value of the option contracts are recognised in the cash flow hedge reserve in equity. The changes in the aligned time value of the option contracts that relate to the hedged item are recognised in cost of hedging reserve. Where there is a difference in the derivative time value to the aligned time value, the delta is recognised in profit and loss.

• 10 -

Reece Limited and controlled entities

Notes to the Condensed Consolidated Financial Statements

for the half year ended 31 December 2018

Note 1: Statement of significant accounting policies, cont.

(b) Summary of the significant accounting policies, cont.

Discontinuation of hedge is not voluntary and is only permitted if:

• The risk management objective has changed;

• There is no longer an economic relationship between the hedged item and the hedging instrument; or

• The credit risk is dominating the hedge relationship.

(c) Rounding amounts

In accordance with ASIC Corporations (Rounding in Financial/Directors’ Reports) Instrument 2016/191 , the amounts in the directors’ report and in the financial report have been rounded to the nearest one thousand dollars, or in certain cases, to the nearest dollar (where indicated).

Note 2: Newly effective standards

The Group adopted AASB 15 Revenue from Contracts with Customers effective 1 July 2018. The Group's primary source of revenue is the supply of goods to its customers. A sale is recognised when control of the product has transferred, being when the product is delivered to the customer and there is no unfulfilled obligation that could affect the customer’s acceptance of the products. Delivery occurs when the product has been delivered or shipped to the location specified by the customer and the customer accepts the product or when the customer takes receipt of the product directly from a Reece site.

For customers who purchase on credit a receivable is recognised when the products are delivered, as this is the point in time that the consideration is unconditional because only the passage of time is required before payment is due.

AASB 15 requires the disclosure of sales revenue disaggregated into categories that depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors. The Group believes that the disaggregation of total sales revenue by geographical regions as presented in Note 9 Segment Reporting satisfies this requirement.

The adoption of AASB 15 has not had a significant impact on the Group's accounting policies or practices as the recognition of revenue is consistent with the transfer of goods to the customer and the consideration the entity expects at a point in time based on fulfilment of performance obligations.

Note 3: Accounting standards issued but not yet operative

The Group will adopt AASB 16 Leases for the annual reporting period beginning 1 July 2019 using the modified retrospective approach. The cumulative effect of adopting the new standard will result in an adjustment to the opening balance of retained earnings at 1 July 2019 and the establishment of a lease right to use asset and a liability for future lease payments, with no restatement of comparative information. The Group is in the process of assessing the impact of AASB 16.

Note 4: Subsequent events

There have been no material events subsequent to the end of the half-year that require recognition or disclosure in the half-year financial report, except for the proposed interim dividend payable as detailed in Note 5(b).

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Reece Limited and controlled entities

Notes to the Condensed Consolidated Financial Statements for the half year ended 31 December 2018

Note 5: Dividends

Note 5: Dividends
(a) Dividends paid or declared Dividends paid at 14.25 cents per share (2017: 14.2 cents) fully franked at 30% paid on 25 October 2018 (2017: 26 October 2017) (b) Dividends proposed after the reporting period and not recognised Proposed dividends not recognised at the end of the half-year at 6.0 cents per share (2017: 6.0 cents) fully franked at 30%	31 Dec 2018 $A’000 31 Dec 2017 $A’000
	79,917 70,716
	33,649 29,880

Note 6: Business Combination

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 173 branches in North America. Having MORSCO within the Reece Group, provides the platform to diversify Reece’s operations.

Costs of $29.2m in respect of the MORSCO acquisition have been expensed during the period.

The following fair values of the identifiable assets and liabilities of MORSCO as at acquisition have been determined on a provisional basis:

	$A’000
Cash consideration paid excluding business acquisition costs	1,967,245
Assets and Liabilities acquired:
Trade and other receivables	426,296
Other assets	15,948
Inventory	333,352
Property plant and equipment	83,064
Trade and other creditors	(332,591)
Other liabilities	(1,057)
Provisions	(18,178)
Provisional goodwill	1,460,411

The acquisition accounting for the above transactions is considered provisional due to the on-going work to be carried out to complete the identification and valuation of certain assets acquired including relevant intangible assets that will be amortised at their estimated life from the date of acquisition.

In the six months to 31 December 2018 MORSCO contributed revenue of $1,253m and net profit after tax of $34.3m to the Group’s results.

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Reece Limited and controlled entities

Notes to the Condensed Consolidated Financial Statements for the half year ended 31 December 2018

Note 6: Business Combination, cont.

Goodwill on acquisition is attributable mainly to:

• Expected ability to leverage operational expertise and relationships across Reece and MORSCO;

• Expected opportunity to drive future organic growth; and

• The skills, extensive industry expertise and technical talent of MORSCO’s employees.

Note 7: Interest bearing liabilities

		$A’000
	Current Revolving Facility Term Loan Other Non-current Term Loan (maturing July 2025)	85,000 16,152 2,484
		103,636
		1,590,961
		1,590,961

The Term Loan is a Senior Secured Term Loan B USD facility with the carrying value of the borrowings translated at the spot rate at balance date. It is subject to both foreign currency and interest rate hedging instruments (refer note 11).

Note 8: Finance income

	$A’000
Realised foreign currency gain on forward exchange contract Unrealised foreign currency gain on financial assets Unrealised foreign currency gain / (loss) on derivative instruments	5,753 2,396 (5,668)
	2,481

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Reece Limited and controlled entities

Notes to the Condensed Consolidated Financial Statements for the half year ended 31 December 2018

Note 9: Segment reporting

Segment information is presented in a manner which is consistent with the internal reporting to the Chief Executive Officer who is the entity’s chief operating decision maker for the purpose of performance assessment and resource allocation. The Group’s segments are based on the geographical operation of the business and comprise:

• Australia and New Zealand (ANZ)

• United States of America (USA)

2018 Half Year

	**2018 Half Year **
	ANZ USA Total 2018 $A’000 2017 $A’000 2018 $A’000 2017 $A’000 2018 $A’000 2017 $A’000
Revenue from sale of goods at a point in time Normalised EBITDA* Depreciation & Amortisation Business acquisition costs Finance income Finance costs Profit before income tax expense Income tax expense Net profit after tax Current assets Non-current assets Liabilities	1,465,116 1,332,306 1,253,094 - 2,718,210 1,332,306 185,962 178,959 74,181 - 260,143 178,959 (27,958) (25,169) (13,312) - (41,270) (25,169) (27,274) - (1,947) - (29,221) - 2,481 - - - 2,481 - (29,103) (2,672) (13,942) - (43,045) (2,672) 104,108 151,118 44,980 - 149,088 151,118 (40,690) (45,400) (10,662) - (51,352) (45,400) 63,418 105,718 34,318 - 97,736 105,718
	31 Dec 18 30 Jun 18 31 Dec 18 30 Jun 18 31 Dec 18 30 Jun 18 1,057,917 1,490,667 807,231 - 1,865,148 1,490,667 891,922 833,580 1,633,423 - 2,525,345 833,580
	1,949,839 2,324,247 2,440,654 - 4,390,493 2,324,247
	1,469,298 443,409 957,024 - 2,426,322 443,409

*Normalised EBITDA is earnings before interest, tax, depreciation, amortisation, business acquisition costs and finance income.

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Reece Limited and controlled entities

Notes to the Condensed Consolidated Financial Statements for the half year ended 31 December 2018

Note 10: Property, plant and equipment

Acquisitions and disposals

During the six months ended 31 December 2018 the Group acquired assets with a cost of $51.8m exclusive of the acquired entity’s assets (six months ended 31 December 2017: $38.4m).

Assets with a carrying amount of $6.5m were disposed of during the six months ended 31 December 2018 (six months ended 31 December 2017: $6.9m), resulting in a gain on disposal of $3.0m (six months ended 31 December 2017: loss of $6 thousand).

Note 11: Fair value measurements

This note provides information about how the Group determines the fair value of various financial assets and financial liabilities.

The following table provides an analysis of financial instruments that are measured subsequent to initial recognition at fair value, grouped into Level 1 to 3 based on the degree to which the fair value is observable.

• Level 1 - fair value measurements are those derived from quoted prices (unadjusted) in active markets for identical assets and liabilities.

• Level 2 - fair value measurements are those derived from inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (as prices) or indirectly (derived from prices).

• Level 3 - fair value measurements are those derived from valuation techniques that include inputs for the asset or liability that are not based on observable market data (unobservable inputs).

31 December 2018	Carrying Amount Level 1 Level 2 Level 3 Total A$’000 $‘000 $’000 $’000 $’000
Financial assets Derivative financial instruments Cross currency swap contracts Interest rate swap contracts Forward foreign exchange contracts Financial Liabilities Derivative financial instruments Cross currency swap contracts Interest rate swap contracts Forward foreign exchange contracts	45,083 - 45,083 - 45,083 - - - - - 2,134 - 2,134 - 2,134
	47,217 47,217 47,217
	(1,043) - (1,043) - (1,043) (8,608) - (8,608) - (8,608) - - - - -
	(9,651) (9,651) (9,651)

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Reece Limited and controlled entities

Notes to the Condensed Consolidated Financial Statements for the half year ended 31 December 2018

Note 11: Fair value measurements, cont.

	Carrying
30 June 2018	Amount	Level 1		Level 2	Level 3		Total
	A$’000	A$’000		A$’000	A$’000		A$’000
Financial assets
Derivative financial instruments
Cross currency swap contracts	-		-	-		-	-
Interest rate swap contracts	-		-	-		-	-
Forwardforeignexchange contracts	4,479		-	4,479		-	4,479
	4,479			4,479			4,479
Financial Liabilities
Derivative financial instruments
Cross currency swap contracts	-		-	-		-	-
Interest rate swap contracts	-		-	-		-	-
Forwardforeignexchange contracts	-		-	-		-	-
	-		-	-		-	-

(1) As the carrying amounts of cash and cash equivalents, trade and other receivables, borrowings and trade and other payables approximate their fair values, they have not been included in the above table. (2) For financial instruments that is carried at fair value on a recurring basis, the Group determines whether transfers have occurred between levels in the valuation hierarchy categorisation. There were no transfers between levels during the period.

(3) The fair value estimation of foreign currency exchange contracts, interest rate swaps and cross currency swaps are considered to be Level 2 valuations and measured using Discounted Cash Flows. The present value of future cash flows is based on forward exchange rates and forward interest rates (from observable market rates) and discounted based on the applicable yield curves derived from quoted interest rates and the credit risk of various counterparties, at the reporting date. Where a derivative incorporates an option, time value and intrinsic value is calculated based on market price volatilities and forward market rate curves and discounted based on applicable yield curves derived from quoted interest rates and the credit risk of various counterparties, at the reporting date.

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Reece Limited and controlled entities

ABN 49 004 313 133

Directors’ Declaration

The directors declare that:

1. In the directors’ opinion, the financial statements and notes thereto, as set out on pages 4 to 16 , are in accordance with the Corporations Act 2001 , including:

2. (a) complying with Australian Accounting Standard AASB 134 Interim Financial Reporting and the Corporations Regulations 2001 ; and

3. (b) giving a true and fair view of the financial position of the consolidated entity as at 31 December 2018 and of its performance for the half-year ended on that date.

4. In the directors’ opinion there are reasonable grounds, at the date of this declaration, to believe that the Group will be able to pay its debts as and when they become due and payable.

This declaration is made in accordance with a resolution of the directors.

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L. A. Wilson Executive Chairman

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P. J. Wilson Chief Executive Officer

Melbourne 28 February 2019

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Independent Auditor’s Review Report

To the shareholders of Reece Limited

Report on the Half-year Financial Report

Conclusion

We have reviewed the accompanying Half-year Financial Report of Reece Limited.

Based on our review, which is not an audit, we have not become aware of any matter that makes us believe that the Half-year Financial Report of Reece Limited is not in accordance with the Corporations Act 2001 , including:

• giving a true and fair view of the Group’s financial position as at 31 December 2018 and of its performance for the Half-year ended on that date; and

• complying with Australian Accounting Standard AASB 134 Interim Financial Reporting and the Corporations Regulations 2001 .

The Half-year Financial Report comprises:

• Condensed Consolidated Statement of Financial Position as at 31 December 2018

• Condensed Consolidated Income Statement, Condensed Consolidated Statement of Comprehensive Income, Condensed Consolidated Statement of Changes in Equity and Condensed Consolidated Statement of Cash Flows for the Halfyear ended on that date

• Notes 1 to 11 comprising a summary of significant accounting policies and other explanatory information

• The Directors’ Declaration.

The Group comprises Reece Limited (the Company) and the entities it controlled at the Half year’s end or from time to time during the Half-year.

Responsibilities of the Directors for the Half-year Financial Report

The Directors of the Company are responsible for:

• the preparation of the Half-year Financial Report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001

• such internal control as the Directors determine is necessary to enable the preparation of the Half-year Financial Report that is free from material misstatement, whether due to fraud or error.

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KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity.

Liability limited by a scheme approved under Professional Standards Legislation.

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Auditor’s responsibility for the review of the Half-year Financial Report

Our responsibility is to express a conclusion on the Half-year Financial Report based on our review. We conducted our review in accordance with Auditing Standard on Review Engagements ASRE 2410 Review of a Financial Report Performed by the Independent Auditor of the Entity , in order to state whether, on the basis of the procedures described, we have become aware of any matter that makes us believe that the Half-year Financial Report is not in accordance with the Corporations Act 2001 including: giving a true and fair view of the Group’s financial position as at 31 December 2018 and its performance for the Half-year ended on that date; and complying with Australian Accounting Standard AASB 134 Interim Financial Reporting and the Corporations Regulations 2001 . As auditor of Reece Limited, ASRE 2410 requires that we comply with the ethical requirements relevant to the audit of the annual financial report.

A review of a Half-year Financial Report consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with Australian Auditing Standards and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

In conducting our review, we have complied with the independence requirements of the Corporations Act 2001 .

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KPMG

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BW Szentirmay Partner Melbourne

28 February 2019

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