RS Group PLC

Well, good morning. I'm Lindsley Roos, CEO of Electro Components PLC, and welcome to our 2021-2022 interim results presentation. The front of this presentation and our annual report shows our people. And I will say that the health and well-being of our people remains an unwon priority for us on a worldwide basis. And before I get into the presentation this morning, I'd just like to address a few things. And first of all, let me start by saying there's three major themes that have come out over the last month that we've heard from investors and from analysts, from brokers, and from the market in general. One is, why have we outperformed? So as we go through the presentation today, we'll talk about that. But I think the question people beat around the bush a bit by saying, why have we outperformed? When the real question is, will we continue to outperform? And why do we think that's the case? So we'll get into that. The second question is, what's next? So we've been on a transformational journey. I will assure you, we're not done. So we're not done yet. And I had the great opportunity a month ago to see a football game in the US, an American football game, college football. Alabama lost the number one team in the country, lost to Texas A&M. It was the first time. And 26 games that Nick Saban, who's probably the greatest football coach of all time, lost to a former assistant. That assistant's name is Jimbo Fisher. And when he started four years ago at Texas A&M, he came into the program with an attitude around transformation. He says it's not going to be like it used to be. We've got to install toughness, effort, discipline, grit, and pride into the program. So it was all about attitude. But what he said after the Alabama game, which struck me, is he said, we ain't done yet. So to translate that for you here, that's we are not done yet. And I'll say the same thing. We ain't done yet. So for those people that think they've missed the boat, I can tell you, they haven't. And we're just getting going. So there's plenty of room on the boat, obviously. But we're not stopping yet, and I'll talk some about that today. So what's next? We've gone from being a very average company. Some people often say to us, gosh, you guys have done great. It's fantastic. We have done well, so we'll agree with that. But we're not as great as some people think, because it's not that we were coming from a good place. So are we that good? Maybe not. Were we that bad? Yes, we were. So we came from a really bad spot to a really good spot to where we are today. And if you look at point A, where we were, to point B, where we are today, where many of you would think it's a good company, we ask the question, is good good enough? And for many people, it is. But for us, it's not. And going from point A to point B, where we are today from where we were six years ago, hasn't been easy. It was hard. And a lot of people get caught up in strategy, right? So what is your strategy? The why, the what, the when, the who. And they forget the most important thing, which is the how. So the most difficult piece of the journey is the execution. And a distribution is 90% execution, 10% strategy. You can take a good strategy and have bad execution, you'll fail. You can take a bad strategy and have good execution, and you might have a chance of being successful. So it's all about execution, and we'll talk about that today. So why have we outperformed? Simply put, we execute. And I'll get into that. And what's next? We want to go from good to great. We'll talk a little bit about that and lay the foundation for the future. And then I know the third theme or topic that has come up recently is what's happening in the market. How do we see the market, the supply chain shortages? What are we doing? And I think just to level set, we're all... We're all in the same world together, right? And you can have, you can have two ways of looking at this. Some people walk down the hallway, they see a door that says crisis, they open it, they see opportunity, they immediately close the door because it's difficult, right? Others see opportunity. They open the door to opportunity and they see crisis and they close the door. Well, we look at the crisis situation today. We see opportunity in crisis. So we're not sitting around waiting. for the market to change. We didn't sit around waiting for the pandemic to change. We rose to the occasion, which was the point of our rise program. And we're doing it again. And you can accept that this is what's happening in the market. And again, just react and wait for it to ease itself out. You can blame others. You know, when there's nobody left to blame, who do you blame? The government. So a lot of people are blaming governments. It's not the government's responsibility. They can raise interest rates, they can control demand, etc. But it's up to us in business, I think, to mitigate and to find solutions, to look at alternatives and do everything we can to develop a new plan and execute to that plan. So with that, let me get into the presentation itself today. Our people underpin our performance. And our people, I think, have gone from a position of where I started six and a half years ago David started shortly, so I'll say I for a moment, and then I'll switch to we. So I remember meeting David about five and a half years ago. The best day of his life, I think. Love at first sight from his side. Maybe... I like to get David smiling early in the morning. It's good to be back face to face with you. But when I first met David, we talked about the potential of the company. And you know what? What's the biggest difference between then and now? At that point, we had more talkers than doers. Today, we have more doers than talkers. So I'm a firm believer in that your actions have to speak so loud that you can't hear what you're saying. you have to do what you say you're gonna do. And that's what's really important. So that's why, historically, we haven't given guidance. We haven't said a whole lot about what we're working on, what the future is. But I assure you, everything we've done up to this point, we thought we could do. And we've done what, internally, we said we can do. And we often say that even if we would have said four years ago, five years ago, this is what we're planning to do, most people wouldn't have believed it anyway, because we didn't have a track record of success. We want to continue to build on that credibility. So the key reason for outperformance in the market gets down to our people not accepting that there isn't opportunity in crisis, because there is. And our people have driven the outperformance by doing, talking less, and making things happen. And we've empowered our people and given our leaders greater operational ownership. And it's not that people felt like they were discouraged to take risk. but they didn't feel like they were encouraged to take risk. Now we're encouraging people to take risk, to speak up, to look at what the barriers are to success, the obstacles we need to overcome, and to voice those. And you say, well, how do you do it? Well, we gotta prioritize. We gotta prioritize, and that's something we're getting better at and we'll talk about. So we have faced, without a doubt, significant external challenges, but we've reacted quickly. In many cases, we shifted from reacting to being proactive by anticipating what's next. We've been agile and we've had the foresight and experience to adapt. So people say, what's the greatest strength of your business today? I would say it's adapting to change and we can't lose that. We can't become complacent because if we do, we'll become irrelevant. So that's underpin our performance. And for those employees within our company that are here today or they're listening, I want to say a special thank you to everyone that's put in the effort to make a difference for us because you truly do make the difference for us. The next slide talks about the drivers of our market share growth. So we've talked about this before, but I want to reiterate. Our product breadth. Lucy, are you? Oh, okay. Our product breadth. So if you look at this slide, you can see we've got four key areas, which we consider to be our needle movers. The product breadth and availability. Really, really critical. So why have we been able to satisfy the demand of customers? We're able to get products others can't. How do we do that? There's lots of different ways. That gets into the how, the execution. We're able to keep availability at a reasonable level. Has availability dropped? Yes. Has it dropped? Significantly in comparison to our competition, no. Because we hold inventory. And that is the basic fundamental strength of distribution, to hold inventory. Our specialist own brand, RS Pro. We continue to expand our range. When you look at supply chain challenges, we've got an option. If you can't find it, source it in your private label brand. So we're doing much more of that today across the business, including our OK Do business. And being omnichannel. So what does omnichannel mean? Omnichannel means We can do business any way a customer wants to do business. We have people that visit customers. We have people that can take phone calls from customers. And believe it or not, we still take faxes from customers. Tens of thousands of faxes a year. It's not printed though, Andrea. They come in in an automated fashion. And then we receive those and convert them to orders. But we get email orders and we get digital orders. Digital is underpinning our omni-channel strategy. And when we say digital, two-thirds of that is the web. When some people say digital, two-thirds of that is EDI, or it's what's existed for many, many years. For us, we invest significantly in the web. will continue to invest significantly in the web as we move forward around the world. So the digital side is really important to us. And then solutions. So whether it's product solutions by getting into adjacent product categories such as PPE solutions and products that can help to offer existing customers more product, or it's service solutions around integrated supply or e-procurement or VIN stock, Kanban types of items. We're involved in all of those solutions. And the solution side of the business we'll continue to invest in over time, and we'll expand those solutions more and more to Asia Pacific, which we have, which underpins the success and the growth from a profit standpoint we've had within Asia Pacific. Now I'll pass you over to David Egan, our CFO, to talk a little bit about the financial performance.

Thanks Lindsay and good morning everyone. Thanks for joining us. I'm going to talk about our results for the six months ended 30th of September 2021. In summary, we've delivered very strong like for like growth and this is on both a one and also a two year basis. We've been we've seen profitability and margins in all regions increase. Asia Pacific, in particular, has delivered a significant turnaround in its profit and its marginal performance. And we've generated strong cash, free cash flow, despite investing in additional inventory to protect our supply chain. And we're proposing our interim dividend of 6.4 pence per share, and this is as per our stated policy of equivalent to 40% of the prior year full year dividend. Our first half performance has been very strong on a one-year basis as we've annualised against COVID-19 comparatives, but also on a two-year basis. I'd like to focus my attention on our two-year run rates. So on this basis, our revenue grew by 22%, with pure web like-for-like revenue increasing 26%. And our specialist-owned brand, RS Pro, growing 28%. Profitability-wise, our adjusted operating profit margin rose 1.2 percentage points on a two-year basis to 12%. And our adjusted operating profit conversion margin was 27.4%. We had strong cash flow and return on capital, a strong return on capital of nearly 25%, which again is a significant improvement from the prior years. Our net debt to adjusted EBITDA reflects our strong balance sheet. In the first half, we generated 1.2 billion of revenue and an adjusted PBT of 142 million. Our tax charge for the first half was 23.8%, broadly in line with the 24% we expect for the full year. The following slides detail the drivers of this performance. So let's take a look at revenue. In the first half, revenue grew by 300 million, and this was due to increased volumes as our customers benefited from our breadth of range, strong product availability, and our service proposition. And this was driving market share growth. We also had a favorable market backdrop, especially in our electronics product range, which accounts for approximately 22% of group revenue, and we saw a 33% like-for-like growth over the two years in our electronic product range. Our average order value also grew, and we had a revenue contribution from our acquisitions of Synovos, Needless, and Liskim during the period. Price increases were only low single digits during the period. There was a 38 million pound headwind from foreign exchange during the period. Our customer base has grown and total customers grew by 24%. B2B customers, which are over 95% of group revenue and are our most profitable, grew by 18%. The average order value increased 9% due to a larger number of products in customer baskets, partly due to greater volumes of electronic products and a focus on higher value transactions, plus some geographic mixed benefits. Our net promoter score, which is a 12-month rolling metric, was 52.2. There has been a number of external pressures, including supply issues and Brexit, plus the internally-led decision to introduce a small handling delivery charge within our APAC region. But that was for the right reasons, because it's focusing us more on more profitable customers. And that has contributed to our NPS score deteriorating during the period. NPS is a core component of everyone's incentive plans and thus is a key focus for us to address and to continue to delight our customers all the time and every time. We've put in place a work stream team to look at improving the NPS metrics across our organization. We are seeing some signs of improvement on a monthly basis, but it's still many variables that are impacting the customer experience. Our adjusted operating profit margin was 12% in the first half, driven largely by our revenue growth, but also operational efficiencies. Our gross margin was 43.7%, up half a percentage point. We saw gross margin benefits from less discounting, tighter pricing, our own brand products, and better buying terms. Our RISE program, to simplify and streamline the group, is on track and it delivered 10 million pounds of benefit during the first half. We did award a pay rise earlier in the year across all of our organization and we had a higher incentive payment as a consequence of our stronger results. During the period, we incurred 7 million of additional costs relating to COVID, including higher freight rates and delivery charges. And the two year increase for COVID related costs has been 15 million. For the vast majority of these, we see no signs of cost pressures unwinding. Additionally, we had 2.5 million of costs relating to Brexit. We're also investing in our digital offer to ensure we remain industry leading and have recruited additional expertise within this space and also across the board. Now onto the regions. My comments will focus on profit because we've provided you the revenue guidance as part of our update in early October. So moving to EMEA. In EMEA, we increased our operating profit margin to 15.9%, largely a function of the strong revenue growth, increased margin focus, operational efficiencies, and a more agile model. This was despite additional costs such as freight and relating to COVID, but also some Brexit. EMEA has been the main beneficiary of our RISE program. as we changed the leadership structure and flattened it. Our German distribution center extension is now in the early stages of commissioning and the performance of our German operations continues to improve. We will increase our European warehouse capacity. It's in the early stages of commissioning, and we are certainly delighted with the progress that's being made despite all of the challenges of commissioning a warehouse during the height of COVID. In the Americas, our operating profit margin was 12.8%, with our momentum continuing to build following our significant capital and operational investment within this region. And you will hear from Ken Bradley, our president, shortly in terms of the improvements that are being delivered over there. Our pure web growth of 34% on a two-year like-for-like basis is a good example of how the change in management and sales focus has become more proactive and certainly margin-driven. And that has been the foundation and the fundamentals of the improvements in our America's business. Our operating profit margin has benefited from increased volumes, our product category, work, our price optimisation, less discounting, greater focus on value creation, opportunities and operational efficiencies. And then finally, but not least, our Asia-Pacific region. In Asia-Pacific, we've delivered a 9.7 percent operating profit margin, a function of all the hard work of our President and the team in Asia-Pacific have done during the last number of years. And this region has moved from a £22 million annual loss that we inherited a number of years ago to a £12 million profit in the first six months of this year. Again, a change in management culture has led to more focused and proactive and productive sales processes as we have concentrated on more profitable opportunities across the various countries within the Asia-Pacific region. Thus, greater volume, the implementation of small handling charges to weed out the right customers for us has delivered the 9.7% operating profit margin. And that's a fantastic result from where we've come from. Now we move to cash. We remain a robust cash generative business with an adjusted operating cash flow conversion of 76% at a time where we invested an additional 46 million into our inventory. Our capital expenditure during the first half was lower than the last two years as our American distribution center was completed in the first half of last year and we had some payments for that German distribution center that will push into the second half of this year. We invested in inventory to mitigate some of the industry supply constraints, support our growth, and also to increase the product held initially within our American DC. And latterly, we will do the same with our German DC. Our inventory turn increased to 2.8 times, reflecting the current demand driving faster throughput of our higher volume products. We expect this to moderate somewhat as we invest further in our product breadth. Given our strong cash generation and the fact that we didn't acquire any new businesses during the period, our net debt fell to 84 million, giving us a 0.3 times net debt to adjusted EBITDA ratio. We've restructured our existing 300 million revolving credit facility to a sustainability linked loan. And this will be measured against three specific annual ESG actions and will provide a scaled margin benefit. We're pleased that our key metric, return on capital employed, has recovered to 24.7% in the period, reflecting our strong financial discipline and performance. Moving on to inorganic growth opportunities. We're working hard on several deals. The market is very active, and we are receiving a lot of incoming interest. But we remain very disciplined, having walked from five transactions in the current period. We're looking at businesses that will accelerate our organic growth ambitions, which will work strategically and financially, but most importantly, fit culturally. We are totally focused, we're working hard, and we are confident there are deliverable opportunities which fit our criteria and will generate significant economic value for our group, but our discipline will remain. So turning to current trading. Over the first five weeks of the second half, we have continued to see good momentum across all regions, reflecting ongoing growth in market share and strength in our underlying markets. The external environment remains very challenging, especially with supply chain and resulting product shortages, freight inflation, which continue to rise, and labor inflation and some availability. We are mitigating these pressures as best we can with our sourcing expertise and early actions to ensure our availability rates remain as strong as possible. Thus, we remain confident of all that we can influence and plan for, but mindful of the external uncertainties being faced. And with that, I shall hand you back to Lindsley to cover the strategic elements of our story.

Thank you, David. In the interest of time, I'm going to pick up the pace here, which is always difficult for me to do. So if we go to our opportunity, and I can assure you I've never been more excited about the opportunity before us than I am today. I think it's quite exciting what we've got in front of us. And as a company, when I first started and people would say, we think your business is a cyclic business. I wouldn't disagree with that. If you look at the next slide where you look at our performance and the value we've created for our shareholders, our employees, our stakeholders overall, we've come a long way, but there's still so much more to come for us. And when I started, a lot of people said, are you a cyclic business? Reality was, in certain parts of our business, we were, and we still are, but not as much as we once were. Because in a cyclic business, if you want to offset the down cycle, you've got to focus more on indirect materials. We weren't doing enough on that side. We are now. And by indirect materials, just because the volume drops in half on the direct side, they still need manufacturing lines and processes to be able to make the product, ship the product, etc., Indirect materials support those types of solutions or products or challenges opportunities within the customer's manufacturing plant. The more we do on that side, plus what we do on the direct side, gives us a great opportunity when the market's hot, but also offsets that when the market overall is down. So for us, I think there's still much more to come as we move forward. So from that perspective, yes, we've done well. But I still hold out hope that we can do much better. And I can tell you and assure you, we will do much better. It's not a can anymore. Because we know what to do. And it's just a matter of executing and staying focused on what we need to do as we move forward. So on the next slide. We operate in many markets with a much broader product offer than our peers. Our key customers are the designers, builders, and maintainers of industrial equipment and operations. The MRO market, maintenance, repair, and operations, which we're focused on, is highly fragmented. digitally immature, with many small regional players. This is our greatest strength and our greatest opportunity. Meanwhile, the electronics market is much more concentrated and global, but our sales of electronic products are mainly to our industrial customers wanting high service electronics and small volumes. So why can we get products others can't? It's much easier to get smaller volumes than it is large volumes today. So, and typically we pay slightly higher prices to the manufacturer because we're buying smaller quantities, so it's easier for them to ship those quantities to us. And these customers want specialist help. They want specialist help from a partner that understands their business, that can anticipate their needs. And as the model becomes more digitized and connected, we're there to take advantage of the market and to serve those needs. So we think our total addressable market is roughly around 400 billion pounds. We've said that for the last couple of years. We got that number at one point by looking at competitors annual reports and talking to suppliers and we built the number. And then we went out and commissioned a study of the Thomas Reed Distribution Center. for research in the United States. And they came back, and they came up with a number that was around 400 billion pounds. And 173 pages later, they confirmed what we already knew. So that was good to have, a third-party testimony on that. But that's roughly where the market is. Some people have the number higher. You know, an Amazon business-to-business might have 7 trillion. something more significant like that. But we know it's a big market. At the end of the day, what matters is what percentage do we have of the market. It's small, less than 1%. So the opportunity for growth is absolutely phenomenal. On the next slide, it's really important to note, we are not a British company. We are not an American company. We are a global company. We're not a product company. We're not a service company. We're not a digital company, a catalog, a store company. We are omnichannel. omnichannel, underpinned certainly by digital, without a doubt. We are not just a product supplier, but we're a product and service solutions provider. And you can look at this chart and you can say, well, do you do business aerospace, defense, manufacturing, all the industries I have up there? We focused in to say we're focused on industrial and processes. Now, that's a large segment. But we're very focused on the industrial market. And specifically, the last point is B2B within the industrial market. David referenced a small order handling charge for Asia. Purpose of that was to try and reduce the number of B2C customers that we have. Now, B2C customers are a good thing because the same customers that buy from us in the B2B world might come online at night in the B2C world. But our average order value is 37 pounds. And we pay freight in Europe and the Americas. So how do you make money on that? So it's all about, at the end of the day, how we make money. And it's about the triple bottom line, people, profit, and planet, which we'll get to next. With that, I'll say on the next slide, we have a sustainability advantage. We're not talking about sustainability today because of COP26. We're not talking about sustainability today because it's the end thing. But we've been doing this for years. We've been focused on corporate responsibility for years. We've been focused on making a difference for years. So what we're doing is talking about what we have been doing, and what we will be doing as we move forward. So given our product width, breadth, and mix, we're well-positioned to follow our customers' demands. And it's clear they want more sustainable solutions. And we already sell many products that can help our customers to be more sustainable, such as low-energy lighting, which we've offered for years in terms of high-powered LED solutions that help customers save on their energy bills, variable speed drives, and high-efficiency motors. And the list goes on and on. We're product agnostic, but we have specialist sales expertise to help our customers transition to the right type of product. And when I say product agnostic, it's really supplier agnostic. We're already supplying energy and water saving solutions through our maintenance solutions division of RS. And we're working with our supplier base to reduce unnecessary transportation routes, buying and storing more locally around the world. And that's the advantage of having multiple distribution centers around the world. So when we talk about supply chain issues as a theme, we're able to mitigate many of these by sourcing locally in many markets. And we're being proactive and thinking of circular solutions such as reusable packaging and product recycling. And a great example will be coming up around OKDU where we're now recycling raspberry pies, which is saving on the environment. One of the worst polluters in the world is old motherboards of computers. You can see them piled up if you Google it online around the world. So they don't just evaporate into thin air. Our strong external ESG ratings mean we're a desirable partner for both customers and suppliers. And it's even helped recently win new customers. And I'll give you an example of one in particular as we move forward. So we talked earlier about going from point A to point B. And execution is important. But also what's really important is having a purpose and having a vision. When you're a kid and you're playing sports and you have a parent that pushes you forward, If all you're doing is being pushed eventually, you're going to probably rebel and say, I don't want to play this sport anymore. I don't want to do this activity. I'm tired of playing chess, whatever it might be. It helps if you love what you do. It helps if you're being pulled in that direction. That's our purpose. Our purpose has been to make amazing happen. We've reconfigured that to say we want to make amazing happen for a better world. Our vision is to become first choice, first choice of stakeholders, our suppliers, our customers, our employees, our investors in society. Most importantly in that, I would say, is our own employees. Because if you want to offer world-class customer experience, it starts at home first. So our purpose is to make amazing happen for a better world. Our vision is to become first choice. That's what pulls us on this journey. As we've gone from point A to point B, which has been hard, and I can assure you point B to point C, going from good to great, will be even harder as we move forward. But if we keep that purpose at the heart of everything we do, and we keep that focus on our vision, We will achieve great things. So today we launch. We put out a separate R&S this morning. The next stage of our ESG, Environmental Social Governance Responsibility, which I will let our VP of Social Responsibility and Sustainability, Andrea Barrett, talk through. Before she does, I want to say yes, that we. and especially me, are completely committed to our ESG action plan. It is integral to our destination 2025 growth strategy and beyond, and it supports our vision to be first choice for all our stakeholders and become a truly great company while focusing on the purpose to make amazing happen for a better world. Andrew.