RS Group PLC

Thank you for attending this morning and thank you for your continuing interest in the RS Group. And welcome to our interim results presentation for the six-month period ended 30 September 2023, which was my first six months as CEO. For those joining physically, I'd just like to point out the fire exits at the side in the back of the room. There's no scheduled fire alarm today. So if the alarm does sound, please make your way to the fire exit and follow the instructions of the fire marshals. So, I've been CEO at RS for seven months now, and as you can tell from our headline numbers, at one level, it's... Sorry, can you just go back one slide, please? I don't want to save all the really exciting stuff. As you can tell from our headline numbers that we'll talk about in a minute, it's been relatively challenging. But what you won't be able to see in the numbers, but what you'll hopefully pick up throughout this presentation today, is that it's been a dynamic and very exciting six months for me personally. And what I'd hoped I'd find when I started to look under the RS hood, which was good people and a great growth opportunity to deliver excellent outcomes for all stakeholders, is exactly what I've found. And notwithstanding that, the challenging short-term markets that we're experiencing at the moment is actually a great time to be at our rest. I'm joined today by Jane Tichner, who's been our excellent interim CFO since the end of April and who'll continue to support our new CFO until the end of this year before moving back into a permanent role in the group. And I'd just like to take this opportunity today Jane, to thank you on behalf of all of our stakeholders for the excellent work that you've done stepping in and up to the role at short notice and for your continuing commitment and enthusiasm. And I'd also like to thank you personally for all the support you've given me in the last seven months. And I look forward to continue to work with you as you transition to your new role in strategic performance management at the end of the year. I'm also joined by Kate Ringrose, who many of you will know from her time at Centrica, where she was latterly the CFO. She joined us five weeks ago. It's been busy. She's been a great addition to the team and she brings a wealth of experience with her. And aside from gloating about South Africa's recent cricket successes and Rugby World Cup wins, she's already having a positive impact on the group. And I'm really looking forward to working closely with Kate and the rest of the team to build on the progress that we've made at RS over the last few years and to accelerate realisation of that exciting opportunity that I see and I think we all see at RS. Presentation should take about 40 minutes. I'll do a quick overview of the first half. I'll ask Kate to say a few words. Jane will then take us through the numbers and then I'll wrap up with a quick look at the underlying strategic and operational progress we've made in the half and to share a bit more colour with you about the exciting future. medium and long-term opportunity that exists here. And then we'll open it up for questions. I know everybody's busy, so we will try and get you away by 10 o'clock. So now we can look at the numbers. Although financially it was a difficult first half, we are making good underlying progress. We delivered a resilient performance in markets that were all a bit more challenging than we anticipated at the beginning of the year. And we've also been trading against strong comparators. So against that backdrop, revenue was down 1%, but 8% down on a like-for-like basis. Although digital was only down 5%, and we saw good growth, continued growth in both RS Pro and value-added services. We continue to deliver double-digit operating margins, and although declines in PBT and EPS were significant, return on capital employed still remains well above 20%. And the board's recommending a 15% increase in the interim dividend, reflecting our through-cycle progressive dividend policy, and of course confidence in the group's long-term growth and cash generation prospects. So despite challenging markets and the impact on our numbers, we also did a lot of good things in the first half and we have good underlying strategic and operating momentum. We're balancing continued investment in growth accelerators with more effective cost management and we're planning actions this year that will deliver more than 30 million of annualised savings, most of which will come next year. And through the work that we're doing to reduce duplication, simplify and improve our physical process and digital infrastructure, we see opportunity to further optimise our cost base while still delivering and executing our growth strategy. I'm pleased with the long-term potential I see in Resul and Distrelec, and the Distrelec integration is pleasingly ahead of plan. And perhaps most importantly, after seven months, I see that we are... executing broadly the right strategy and that our exciting growth opportunity is real. We're a strong global player operating in fragmented markets that have attractive through cycle and underlying fundamentals. Through investment in growth accelerators, there is a potential for continued and sustained outperformance over time here. There is additional opportunity for through cycle margin expansion and from improving operating leverage and driving operating effectiveness. And we're cash generative with a robust balance sheet that supports accelerating realisation of our strategy and enhancing our underlying organic growth. We're beginning to see tighter focus, more alignment, better prioritisation and improved execution across the group. And we're making good underlying progress despite those short-term market challenges I've referred to. So that's a quick trot through what I think has been actually on an underlying basis a pretty good six months for RS. But before we move into the numbers, I thought it would be helpful if Kate would just stand up and introduce herself and say a few words about what attracted her to RS. Admittedly, though, after five weeks, her impressions are presumably initial.

Good morning, everyone. I'm really delighted to be here, and thank you to Simon for the very kind introduction. I chose to join RS principally for three reasons. It's an organization that has a very positive impact on a global scale in keeping industry moving, and I like being part of enterprises that really matter. I see significant potential within both the markets in which RS serves as well as within the organization itself. And the board and the exec team have deep, relevant experience. And Simon's got a very strong reputation as a CEO. And I'm really excited about the plans for the business. I also believe I can bring a lot of value to the journey that we're on. I joined our race from Centrica, which is a large diversified business and in which I held a variety of financial and operational roles in various parts of the group. And in that gained a lot of experience across the years. In the last five weeks, I visited a number of countries. I've visited distribution sites and I've been very encouraged by what I've seen and the people I've met. The opportunity is very much how Simon and the board described it to me. I think one of the great things that we have in RS, though, is our will to get after those opportunities. Yes, the markets are tough. They're challenging. We've got a lot more to do. But this is a growth business with many levers, and that makes it very exciting for an incoming CFO. So that's probably more than enough for me for now at this stage. You know, as Simon said before I introduced Jane, she's been extraordinary at stepping into the CFO role on an interim basis and a huge support to me in the coming weeks. So huge thanks to her. I very much appreciate you being with us today. I'm very much looking forward to getting to know you all and to meet you all in the coming weeks. And at this stage, I'm going to pass on to Jane.

Thank you, Kate, and good morning, everybody. So let's then look at our financial performance. On slide seven, we've summarised the performance during the first half of the year, during what's been a challenging trading period against a strong set of comparatives. Revenue declined by 1%, including contributions from our newly acquired businesses. We saw an 8% decline in like-for-like revenue, a reflection of that difficult trading backdrop. We delivered 10.8% adjusted operating profit margin, reflecting lower volumes and dilution from our acquisitions, offset by savings in our underlying cost base. We generated £26 million of adjusted free cash flow, with investments in working capital particularly inventory through the first half. And, as Simon has said, our ROKI remains over 20%, despite only one quarter of trading contribution from Distrelecq. Some key metrics at the bottom of the slide to highlight. Industrial product and service solutions revenue, which accounts for 80% of group revenue, was down 2% like for like. Our electronics category declined by 24% like for like, reflecting the electronic cycle. Our digital channel performed better than the overall group, down 5% like for like. We've seen good growth in our service solutions revenue due to greater uptake of digital solutions and RS Pro has outperformed with a proposition of a quality alternative to the main branded ranges continuing to resonate well with our customers. So on slide eight, then, we outline the revenue bridge, comparing revenue in the first half with the same period in the prior year. So in 2022-23, we benefited from strong product availability when global supply chains were constrained, mainly in electronics, and we estimated the benefit impacted revenues by about 5%. The 8% like-for-like decline was largely the result of reduced volumes in challenging market conditions and customers trading down in their mix of products, with inflation contributing a small single-digit increase. On our acquisitions, Rizal contributed a full six months of revenue and Distrelex three months following the completion of the acquisition at the end of June. And there was a small impact from fewer trading days and foreign exchange movements. On slide 9, we show our adjusted operating profit margin bridge. So again, we've estimated that the unwind of the inventory benefit from the first half impacted our operating profit by about £26 million. In the first half, we saw 180 basis point decline in our gross margin, of which 140 basis points was the dilutive impact of the acquisitions. And the acquisitions dropped through to a 30% basis point dilution to adjusted operating profit margin. Adjusted operating costs reduced 4% like for like. We flexed down our variable costs and taken targeted actions to reduce overheads, which have more than offset cost inflation. a large proportion of our operating costs relate to our people. And in June, we awarded a mid-single-digit pay increase, which included a higher-than-average increase for our non-management populations. And in response to the current trading environment, we're taking action to reorganise our cost base, which will deliver around £30 million of savings on an annualised basis, with around £2 million in the first half and £8 million in the second half, and most of the remainder in the next financial year. The costs of delivering these savings are estimated to be £15 million, and our first half numbers include £4 million of this, the balance to be taken in the second half. Despite the short-term environment, we continue to balance medium-term growth opportunities with some reinvestment of savings into our growth drivers, improving the search capability on our websites, developing common customer relationship management processes and systems, becoming cloud-based, and enhancing our distribution network. So let's move on then to our regions, starting with EMEA on slide 10. Performance in the EMEA region has been resilient given the challenging market conditions. Like-for-like revenue fell by 4% with margin discipline, improvement to operational efficiencies and tight cost control, allowing us to take advantage of our scale, resulting in the like-for-like operating profit margin growing by 40 basis points. We've maintained share with our higher lifetime value customers and have seen smaller value transactional customers reduced as inventory availability normalises. We've increased the relative share of our growth drivers, digital, own brand RS Pro and service solutions. In the markets where our offer is broader and more rounded, including the UK and France, we've had our strongest performance, with Germany in particular negatively impacted by the cycle due to relatively high exposure to electronics. We've seen good gross margin discipline with some gains from price inflation. We're improving our operating efficiency and leveraging the variable cost base where appropriate, resulting in operating margin gains. Distrilex trading reflects the trading environment slightly below expectations, particularly with its exposure to German and the electronics market. But we've got detailed plans for integration and we remain really confident in the delivery of cost savings and synergy benefits from cross-selling opportunities. So going forward, we continue to build on the solid foundation with more focus on high value customers and growth drivers and continuing to improve operational efficiency and leveraging our scale in the region. So let's move on then to the Americas on slide 11. Like-for-like revenue in the Americas fell by 14%, including the unwind of the benefit of last year's inventory availability. In the Americas, our product range is narrower than in EMEA, and we've got a greater proportion of our business in automation and control, and a higher proportion of smaller manufacturers in our customer base. Their purchasing patterns are more correlated to the electronics cycle. So as with many in our industry, we've seen customer destocking, which is also depressing volumes. Our like-for-like operating profit margin reduced by five percentage points as gross margin gains from the prior year reversed, and we've seen more competitive pricing in electronics. We have taken action to right-size the cost base, including a reduction in headcount, with benefits delivery into the second half. Revenue performance at Resol has been better than expected, as Resol benefits from stronger order book and good inventory availability versus peers, and the integration of Resol is progressing well. So going forward, we're focusing on our value-add areas of digital service solutions and own brands and operating with a more flexible cost base, leveraging our value drivers to move to a more strategic relationship with our customers. On slide 12, we detail our performance in Asia-Pacific. So revenue in Asia-Pacific was down 18% like for like against very strong period of growth in the prior year. Trading in APAC continues to be impacted by our exposure to the electronic cycle and continued macro uncertainty, particularly China. Customer destocking also impacting volumes. Our operating profit margin during the first half reduced to 2%, affected by high operational gearing, giving our relatively small scale in the region. Gross margin gains from the prior year are unwinding, and we're seeing more competitive pricing activity, particularly electronics. We've taken action to adjust our cost base, including a reduction in headcount to deliver benefits in the second half of the year. We're investing in local customer fulfilment centres to improve service and reduce freight costs and focusing on developing our service proposition to capture opportunities with larger industrial customers. So we'll move on now to the cash flow and balance sheet, which is on slide 13. So starting then with adjusted free cash flow. So just to orientate everybody here, free cash flow doesn't include the acquired balance sheet of Distrilec. So we generated £26 million of adjusted free cash flow in the first half of the year, which is down £86 million from the first half of last year. 40% of the reduction related to lower EBITDA. And the balance is largely due to the timing of inventory intake, which is weighted to the first half of the year. And this was impacted by two dynamics. The first, a change in our supplier performance, which is rapidly improving as supply chains unwind. Shorter lead times mean that new orders are being fulfilled more quickly than the prior year, and we're also seeing the release of built-up back orders, meaning delayed orders from suppliers are also received. And those backlogs were highest in electronics products, where minimum order quantities required to protect availability are higher than across other parts of our industrial range. And at the same time, customer demand is declining, given the market backdrop impacting the rate of throughput of inventory sold. Over half of the inventory intake in the first half was in fast-running products, which has already begun to unwind into cash in the second half. And now onto the balance sheet and working capital. So again, just to orientate you, these will include the acquired assets and liabilities of Distrilec. So working capital as a percent of revenue increased by 3.5 percentage points, with about half of this relating to acquisitions. Gross inventories increased by £139 million from the year end, again approximately half as a result of the acquisition of Distrelec. And our inventory return in the first half was 2.3 times, and that's already improving as we take action to reduce our order book and sell through our current inventory. Inventory provisions increased by £35 million, and £23 million of that, again, was from Distrelec. And just as a reminder, our inventory provision is calculated on an inventory cover basis, so it reflects the estimated number of years of sales we have of injuries in each product. So the increase in the inventory in the first half is mechanistic. It reflects the effect of the slowdown of sales volumes, which increases our estimate of the timeline to sell the inventory, which in turn moves the inventory through our provisions categories. Capital expenditure was 1.2 times depreciation as we continue to invest in optimising our distribution centres, implementing products and customer management systems and strengthening our digital and technology platforms. Our net debt increased to £502 million with the acquisition of Distrelec increasing net debt by £333 million. So now let's move on to slide 14 with some themes to consider for the second half. So as we move through a changing cycle, market conditions continue to be challenging and uncertain. However, the factors below are relevant in considering likely outcomes for the second half of the year. So gross margin was more robust than we anticipated in the first half, and we have still had some benefit from price inflation. Assumptions we made on gross margin at the prelims for the full year still hold and we continue to expect to see prior year inflation to unwind and our acquisitions will have a dilutive impact. On costs, as we've already outlined, we've taken action to manage our cost base more effectively to deliver 30 million of annualised cost savings. And we expect to invest around 11 million of cost investment in the second half and see realisation of about 8 million of benefit from the actions we've taken in the first half. And there's also a further 9 million of operating profit benefit from the second half of the prior year. We're anticipating that our full-year interest charge will be around £30 million, reflecting high net debt position, and our tax charge will be around 26%, reflecting the increase in the UK tax rate. On cash, average lead times mean that actions to reduce our inventory order commitments will lag the declining sales. But over half of the inventory billed in the first half was in fast-running products, which is already beginning to unwind in the second half, which is benefiting cash flow. And as a result of this, cash flow clash generation will be more weighted towards the second half as we reduce our inventory intake and sell through our current inventory. Capital expenditure will be in line with previous guidance, including continued disciplined strategic investment. Further guidance points, including trading days for an exchange and a summary of those operating cost actions, is included in slide 28 of your pack. So, thank you. I'll hand back to Simon now.