RS Group PLC

Good morning, everyone, and welcome to the virtual 2021 interim results presentation for Electro Components for the six months to the 30th of September, 2020. I'm Lucy Sharma, responsible for investor relations at Electro Components. I'd like to introduce you to Lindsley Roo, our CEO, who joins us from Texas today, and David Egan, our CFO, who is in the UK. First, on a technical note, if you'd like to ask questions at the end of this presentation, please dial into the audio conference call and use the presentation slides on our website under our investor relations link. Over to you, Lindsley.

Thank you very much, Lucy, and I wanted to start by saying that we hope you and all of your families are doing well and staying safe. Our number one priority remains the health and well-being of our employees, and we continue to do all we can to ensure their safety. These remain difficult and uncertain times that have got worse over recent weeks, especially in Europe and in the United States. We remain very mindful of the challenges our colleagues and all of our stakeholders are going through today, personally and professionally. Electro Components has worked exceptionally well through this crisis. I am so proud of our team. Our team has done an amazing job. at demonstrating the resiliency within this business, the leadership within this business, and most importantly, protecting those around them during this pandemic, their families, their coworkers, while still delivering on the key initiatives within the business. Our digital and technological capabilities around the group have been a great strength. Our management teams have been more connected than ever as we work remotely and our employee engagement has remained at high levels throughout the pandemic. Most importantly, our DCs have remained open and our operating model has not been disrupted as we continue to deliver for our customers and suppliers while protecting our people dedicated to delivering for our stakeholders and our distribution centers. Our people have been amazing. And we have returned to business as usual, quicker than we expected, albeit with new norms. In short, we have adapted well. So on to slide four. We have been resilient during this crisis. Not something that we could have said about electro components when I joined the business five years ago. This resilience has been driven by repositioning the business, allowing us to perform well given the challenges that COVID-19 presents, despite no PPE benefit, personal protection equipment benefit. We have continued to drive market share gains as we have focused on delivering customers and suppliers a reliable and trusted service. And it is our differentiating and outstanding customer service that gives us an edge and builds a bigger barrier against competitive threats. Four key areas to highlight. One, our value-added solutions offer as we partner with our customers. Two, our omni-channel offer, which isn't just digital, but an entire service infrastructure. Three, our own brand proposition, our private label, RS Pro, develops products our customers need. And four, it goes without saying, our customer service and technical support, which is down to the outstanding people we have. that have delivered and continue to deliver and improve customer experience for our customers. This pandemic has brought challenges as well as opportunity. And oftentimes we hear the words, there is opportunity in crisis. It's no different for us. COVID-19 has driven an acceleration in the industry and customer trends towards our proposition, providing more of an opportunity for us both now and in the future. Rise will help us to grasp this opportunity. It is not a change in our strategy. Rise is an acceleration of our strategy, which we call Destination 2025, to make electro components a leaner, more agile, and more responsive business. The improving momentum we have been seeing is not driven by the market, but rather the work we have done to turn this business around. The confidence in our model and our financial strength led the board to recommend resuming our dividend policy with reinstatement of the final dividend that was deferred last year and to propose an interim dividend this year. Today, we have the building blocks in place to go faster so we can accelerate our growth strategy. Many of you heard me five years ago, almost to the day, when I presented my performance improvement plan. And at that point in time, I never used the word strategy once because it was more about execution than strategy. And that strategy was focused at the time on execution and more specifically getting the basics right and setting strong foundations. It was based on three principles of delivering the best customer and supplier experience. So putting the customer and supplier back at the heart of everything we do. creating an accountable and responsible organization, driving accountability and P&Ls back into the business, and operating their left. And that is exactly what we have delivered as seen on slide five. We have turned this business around. Improving the customer journey and experience has always been at the center of all we do. We have seen a further improvement in customer net promoter score the way we measure customer satisfaction, now standing at 56.3 on a worldwide basis, gaining in all regions despite the challenges that everyone faces. Our productivity continues to improve, with revenue per employee increasing by 37% over the last five years. We don't just sell solutions. We use them ourselves. to deliver these improvements. Our omnichannel offer is industry-leading and has underpinned our digital revenue growth and our market outperformance. We continue to focus on improving our margins by increasing the proportion of our own brand private label products to RS Pro, adding more value-added solutions to our offer, and also driving overhead efficiencies. Most importantly, We have transformed the culture within this business and invested in our people. To this end, we have seen our employee engagement scores rise the highest ever at 75 in the first half of this year. This is a testament to our incredible leaders and the way our people have all worked together through this crisis. So how do we differ from the competition? So let's flip to slide six. and let's first look at our omnichannel approach. We have a strong omnichannel business based on customer type and needs. This is not just about digital, it's about the whole offering, which continues to expand. Our omnichannel model is a significant advantage to us, as many of our competitors don't offer the customer the choice of being able to order exactly how they want to order. We have a lot of data from our digital operations, more than most of our peers. This allows us to understand and optimize customer lifetime value through targeted acquisition. We've also been able to redirect our marketing spend and drive increased returns on advertising spend. So while we focus on improving our digital returns, we will continue to leverage our omni-channel capability to meet the needs of our customers and outperform our competition. So let's move on to slide seven and another area of differentiation from our competition, our value-added solutions business. Our value-added solutions generate cost efficiencies for our customers by saving time across their procurement process, eliminating waste and downtime, and lowering inventory holding. We find solutions to procurement processes and problems using specialist businesses within maintenance, inventory management, procurement, and design. Building these layers into our proposition increases the moat between our business and the competition and increases the stickiness of our customer relationships. Our outsourced procurement inventory and storage management services business has seen an increase in customer engagement and client wins during the first half as customers have increasingly wanted more time-saving solutions. We are on track to offer an IESA-like proposition to our customers in the RS world as well, called RS+. In addition, OKDo, our single-board computing business, has won a high-profile contract to launch the new BBC micro-bit computer based on being able to offer distribution into new markets. DesignSpark, our engineering community, now has one million members with a piece of content being downloaded every 12 seconds. We will continue to build out our value-added services offering both organically and also inorganically by selectively adding high quality businesses that pass our stringent fit and value criteria following on from the success of IESA. COVID-19 has delivered many challenges, but our steps have never faltered. We have pulled together as a group and even two weeks closure of our DC and Italy led to minimal change in service levels. as if orders were fulfilled out of our DCs elsewhere. Slide 8 shows what changes we are seeing as a result of COVID-19. COVID-19 has fast-tracked trends. COVID has forced us to prioritize within the business on what is most important. We have seen this with our customers and suppliers, too. where we are more aligned than ever before. The accelerated shift in working digitally has driven a double-digit increase in our customer numbers in the first half, even more in customer traffic, as people have gravitated to our site to use digital purchasing systems and e-procurement. Procurement teams are becoming increasingly, they're becoming a more increasingly important part of a company strategy, and good supply relationships have been critical in maintaining procurement operations throughout the pandemic. Supply chains are being rethought, reimagined, and consolidated to use the strongest, most agile and trusted partners, but the most extensive reach, which fits us perfectly. Operationally, we have focused on improving efficiencies and reducing costs, and we're seeing a greater automation of transactional tasks through e-procurement, as well as robotic process automation. Lastly, we are seeing increased focus on supplier codes of conduct, employee protection, and sustainability within business processes. Our ESG considerations are driven by our people and team, overseen and monitored by our management, but embedded throughout all our decisions and into our destination 2025 targets. Customers want to partner with those they trust. And we are doing these things because they're the right things to do and not just to check some box on a scorecard. The world has changed and distribution is changing more rapidly than ever, but we are already there. We are well positioned for the changes we see and anticipate in the future. So let's take a look at the next phase of our journey on slide nine. Ours is a growth strategy that continues to evolve. The first path of the journey was putting the foundations in place, fixing the house. We believe that our improving momentum continues to outperform the market, and that is due to our differentiated offer and outstanding people. So that is why we want to go faster. We want to differentiate further. And we want to leverage our increased scale. We want to be bolder in pursuit of our outperformance. Moving to slide 10, let's be clear. There is no change to our strategy and ambition. We have always been aspirational, but we wanted to fix the house first. We want to simplify further the way we operate. We're flattening the structure and moving to a globally connected but regionally delivered business. We are integrating regional teams across marketing, digital, innovation, and product and supplier management so that expertise can be shared across the group and adapted locally. This will give our management the opportunity to shape their area better to regional needs using globally shared tools. We want to drive higher gross margins by improving the sales mix towards our value-added solutions offer and our own branded RS Pro products. And we also want to work more efficiently by leveraging our distribution capabilities. These initiatives will generate 25 million pounds of net benefits over a two-year period, with the majority in fiscal year 2022 at a cost of 22 million pounds. Detail of the phasing is in the appendix on slide 23. RISE will help us accelerate the opportunities we see to drive further outperformance and support us in achieving our target of a mid-teen operating profit margin. So let's bring what we're doing all together on slide 11. And I'll pause for a moment for you to turn to slide 11. We are well positioned for future growth opportunities. Due to the work over the past five years, We are well positioned. The pandemic has stress tested the business, but it's also fast tracking market trends towards our proposition. Momentum is building as our proposition continues to resonate with customers. We are simplifying our business further to increase agility. Our customer base is increasing. We've doubled our DC capacity in the Americas and will soon do so in Germany. It will be done by next summer, more than likely in June. These two extensions will allow us to substantially increase our breadth of product portfolio, including our private label offer. We have strengthened our relationships with customers and suppliers and continue to add more on both fronts. We continue to invest in our team, and we want to unleash the talent unleashed the potential that we have that exists around the group to allow everyone to take ownership. We have a very strong balance sheet and we've managed cash well. So with all that in place, as we look forward to the next five years, I believe we have the potential to transform this business again. And I am more confident in the model today, more so than I've ever been, And I'm also more confident in our people than I've ever been. And now, over to David for the financial results.

Thanks, Linsley, and good morning, everyone. Turning first to the financial highlights, which is on slide 13 of the presentation. Group like-to-like revenue fell 7.3% in the first half. We delivered a significant improvement in the second quarter to minus 4% from the minus 11% seen in quarter one. We have continued to outperform versus the market and take market share. This has been driven by our core underlying product and service offering. Our trading has not benefited from any material PPE and safety related products. Today this category accounts for less than 3% of the group's revenue. Digital, which accounted for 62% of group revenue, grew broadly in line with the group over the first half, but outperformed by 1.4 percentage points in the second quarter. Our digital performance was temporarily affected at the start of COVID-19 by a fall in corporate customer orders, but demand returned as we moved into quarter two. we saw good growth in both website visits and in new customers during the period. RS Pro returned to growth in June and has continued to outperform the group, delivering 8% like-for-like revenue growth in quarter two and 2% for the first half. This has been driven by product launches, digital marketing, and being more proactive in our sales and marketing approach. Adjusted operating profit fell 26.5% as we experienced a decline in demand, as well as incurred additional costs relating to COVID. We saw strong cash flow generation as we took actions to conserve cash, with adjusted free cash flow of $85 million in the period. Our return on capital employed for the period is 20.7%. Whilst this is down from the 23.5% in the prior year, we have continued to invest in the medium and long-term priorities of the group, ensuring discipline around capital allocation. With strong cash flow and continuing capital allocation discipline, our balance sheet remains strong, with net debt to EBITDA falling to 0.5 times. As a result of the resiliency The group has shown over the past months our robust trading position and strong balance sheet. We have reviewed our position on dividends. We've decided to pay the previously deferred final dividend for the year-ended 31st of March 2020 at the same level as the March 2019 final dividend of 9.5 pence per share. This dividend will be paid on the 18th of December 2020. In addition, in the normal course, the interim dividend is equivalent to approximately 40% of the prior year full year dividend. As such, we will pay an interim dividend for the year ending 31st of March 2021 of 6.1 pence per share. This dividend will be paid on the 29th of January 2021. Let's look in a bit more detail at the summary income statement on slide 14. Revenue fell 7.1% to $908 million, or 7.3% on a like-for-like basis. The gross margin was down .5 points to 43.2%. Excluding COVID-19 impact, the gross margin saw an improvement driven by pricing initiatives, discount discipline, and some mixed benefits. However, we saw two pressures from COVID-19. Firstly, additional inventory provisions. This was from slower moving inventory through the pandemic and price declines of certain PPE products now that supply is more plentiful. And the second pressure has been higher inbound freight costs. Adjusted operating costs fell by 2.1% on a like-for-like basis, driven by lower volumes, labor savings, digital advertising efficiencies, and lower regional offline marketing. The group did not make any furlough claims in the UK. However, there was an additional 8.8 million of COVID-19-related costs, and this stemmed from increased outbound freight costs and labor inefficiencies as we adhered to social distancing within both our DCs and office environments. Adjusted operating profit margin fell 2.3 points to 8.5%, and our adjusted profit before tax of 74.3 million was down 28.1% on the prior year. Excluded from our adjusted profit are charges of 18.7 million, and these relate to the rise reorganization costs of 16 million and 2.7 million of amortization of acquired intangible assets. For the period, the adjusted tax rate was 23% down slightly on the prior year of 23.3%. Turning now to our regional performance on slide 15. Starting with EMEA, we saw 8% like-for-like revenue decline in the first half. We grew market share in all sub-regions despite the difficult economic backdrop. Digital for EMEA, which accounts 74% of the region's revenue outperformed the region by 1.9 percentage points. As a result of lower revenue, operating profit fell by 22.8% on the like-for-like basis. Looking at the subregions of EMEA, we have taken significant market share in Northern Europe. aided by the higher proportion of value-added solutions integrated into our offer. The UK remained relatively resilient with a significant improvement in momentum during quarter two. The strongest growth was from small to medium-sized customers due to our strong digital proposition and strength of our inventory availability. The IESA value-added solutions model has remained robust throughout the period. Whilst we've seen a small number of large corporate customers decrease their trading due to their end market, we have seen many others either maintain or increase their spend through this model. In addition, AESA has both a strong prospects pipeline as well as some new client wins, including some international contracts. Southern Europe performed well and saw a significant improvement in trading from Q1 into Q2, as the most severe lockdown restrictions in April unwound, leading to a strong recovery. We continue to grow market share in all countries within this subregion. Central Europe saw a small improvement in trading from Q1 into Q2. Our German business is heavily focused on the OEM automotive and electronic subcontractor segments, areas of the market that have been significantly impacted by reduced capital budgets. We saw minimal improvement in momentum during the half. We continue to make changes to our operations and have invested in our sales force. The Americas saw a 7.8% decline in like-for-like revenue during the half, with a small improvement in Q2. Automation and control, which is driven more by larger CapEx programs, continues to play a significant role in the allied proposition, which we believe explains the more measured recovery. The Americas operating profit was down 27% on the like-for-like basis within the period. We continue to invest in our sales force and have better aligned our teams to revenue and gross margin growth. Our nearly extended DC provides a significant increase in capacity and allows us to broaden our range more into the MRO market. Moving on to Asia Pacific, we saw a 2% decline in like-for-like revenue during the first half. Performance was a little mixed and varies by country, but this was predominantly driven by the extent of COVID-19 lockdowns. Greater China has seen growth, excluding OK Do, every month, even during the height of COVID-19, as it benefited from a more focused sales force. Meanwhile, Japan has underperformed, primarily due to our electronic exposure. Asia Pacific reported flat operating profits due to the tight control of overheads and labor costs. And given the circumstances, we're actually very pleased with that performance. Now moving on to the cash flow on slide 16. Adjusted free cash flow of 85 million was materially better than last year due to a smaller investment in inventories and improvements in other working capital. Working capital as a percentage of revenue improved by 90 basis points to 23% whilst inventory term remained unchanged at 2.5 times. As a result, adjusted operating cash flow conversion increased to 132.5% from 42.3% in the prior year. Net capex decreased to 25.5 million from 37.2 million last year. During the first half, we deferred or slowed some projects to conserve cash while ensuring that the delays would not impact the delivery of our medium to long-term strategy. Our CapEx spend concentrated on expanding our DCs in the Americas and Germany, as well as our technology platform, which included the development and launch of our new RS mobile first responsive website. Due to the reduction in spend, the CapEx depreciation ratio fell to 2.1 times but it's still well above our typical maintenance equivalent of one to one and a half times. Our full year cap expense is likely to be around 60 million. Onto the balance sheet, which is on slide 17. As of the 30th of September 2020, our net debt fell to 114.8 million, including IFRS 16 lease liabilities of 57.9 million. This was down from the 189.8 million at the year end in March, and this was due to improved free cash flow, plus no final dividend having been paid during the period. Even aid to interest is around 25 times. We have significant headroom against our banking covenants, which are detailed on the slide. As of the 30th of September, we have committed facilities of $446 million, of which $289 million remains undrawn. Now moving on to current trading on slide 18. Over the first five weeks of the second half, we have continued to see momentum across all regions. We saw market share gains in industrial and continued positive growth in RS Pro. However, we remain acutely aware of the challenges and uncertainty we all face as we navigate through this global pandemic. With further lockdown restrictions in some of our key markets, meaning COVID-19 related costs are unlikely to ease slightly as previously hoped. Thus, although we are confident about the strength of our business, we remain cautious about the economic backdrop and short-term uncertainties. And so with that, I will now hand you back to Lindley.