RS Group plc (RS1) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by. And welcome to today's Electrocomponents' Trading Update Conference Call. [Operator Instructions] And please be advised that today's conference is being recorded. And I would now like to hand the conference over to your first speaker today, Mr. David Egan. Please go ahead, sir.

Thank you very much, Carl, and good morning, everyone. This is David Egan, the Chief Financial Officer of Electrocomponents. And I'm joined here today by Polly Elvin, our Head of Investor Relations. But before we go on to talk through our trading update, I just wanted to touch briefly on the announcement that we made this morning on Lindsley Ruth, our Chief Executive. Back in November, we announced that Lindsley would be taking time out of the business for treatment of a medical condition. I'm very pleased to say that Lindsley will return to his position as Chief Executive on February 10, and we are all very much looking forward to welcoming him back. Now moving on to today's trading update, which covers the 4-month period from October 2019. Overall, we saw group like-for-like revenue growth of 2% in the first 4 months of the second half, which is similar to that which we reported after the first 6 weeks in mid-November. Despite this, we have seen quite a bit of variation in group growth from week to week. If you look at it from a month perspective, in October, we saw a very modest growth. In November, a more positive trend was delivered. In December was weak and impacted by holidays. And finally, in January, we finished above the trend for the period. We are pleased that despite ongoing uncertainty and volatility in some of our key markets, we continued to outperform from our competition and drive market share gains. Our growth continues to be driven by a strong performance and market share gains in industrial, and this is more than offsetting softness in electronic markets. We continue to take actions to position our electronics business for an eventual upturn in the cycle. And while we are not seeing evidence of this yet, we are encouraged by the more positive outlook statements that we have seen from some electronic manufacturers. Moving on now to RS Pro, OKdo and Digital. We are pleased by the continued strong performance we are seeing in our private label business. RS Pro saw double digit like-for-like growth over the period, significantly outperforming group's growth rates. We also saw strong growth from OKdo, our single board computing business over this period, and it grew at double the rate of the group. And Digital grew closely in line with the group growth during the period. Looking regionally. In EMEA, which accounts for 63% of group revenue, saw like-for-like growth of 2% during the full month period. Overall, it is clear that we continue to take share in Europe and the business is performing well, albeit, we continue to see macroeconomic headwinds in some of our key markets, such as Germany and the U.K. Despite this, we saw both our Northern Europe and Southern Europe subregions deliver continued growth of 3% each over the period driven by market share gains. Central Europe saw a decline of 4%, as our German business was impacted by the macro slowdown. Despite the economic backdrop, our teams across the subregions are focused on continuing to drive new customer growth and to sell more to existing customers via sales effectiveness and rolling out and improving our value-added solutions proposition. Our Americas business, which accounts for 27% of revenue, grew by 2% over the period. Our new leader in the Americas is making a number of changes, which will set the business up to drive faster growth over the longer term, and we are pleased with how the organization is responding to these changes. We believe we are certainly holding our own in this market, and we are encouraged that after a tough December in the U.S. impacted by holidays, January progressed more positively. Some of the key areas of progress in the Americas include: firstly, with regards to people. We've made some leadership changes in areas such as sales, finance and value-added solutions to strengthen our team and drive a more aspirational culture. In sales, we are on a journey to transform how we sell with the aim of moving to a value-led selling approach, akin to the approach which we take today in EMEA. We are making good progress at reprioritizing our resource and introducing data-driven tools and resources to help them. And we're making great progress, building an infrastructure to support and drive growth. Our newly expanded, highly automated warehouse is on track to go live in the summer, and we are well advanced in using data to devise an ambitious plan to expand our range in this market. Finally, in Asia Pacific, which represents around 10% of group revenues, we saw a 2% like-for-like growth during the period. We continue to see a similar trend to the first half with strong growth in Southeast Asia and Australia, New Zealand, offsetting softness in Japan and Greater China. We continue to work to localize and improve our offer in these markets. On the coronavirus, our primary concern is the health and safety of our employees. We continue to monitor closely both the China domestic customer needs and our wider global supply chain as a consequence of this disruption. It is too early to say what the impact of this will be. We will continue to keep close to the situation and adjust where possible. Now moving on to gross margin. As we said at the interims, the impact of product mix and OKdo means we continue to expect to see a decline in gross margin for the full year. Gross margin remains a key focus, and we continue to take actions to maintain and, where possible, improve our gross margin over time. Our ultimate aim, however, is to grow our business and drive towards a mid-teen operating margin. So to conclude. We are pleased with our performance over the last 4 months. We continue to deliver growth and market share gains in spite of a tougher than expected market backdrop and increased uncertainty in some of our key markets. Our relentless focus on the customer, digital leadership and sales force effectiveness continues to be key at driving outperformance, and we are pleased with how our teams continue to execute at a high level. Importantly, while we are extremely focused on managing our costs and performance in the short term, we also remain committed to investing for the long term. We're making good progress at building the right offer, capabilities and infrastructure which will enable us to scale our business and drive sustained outperformance over the medium term. And with that, we'll now open it up for Q&A. So Carl, could you please open up the call?

[Operator Instructions] Our first question comes from the line of Rory McKenzie.

It's Rory here from UBS. Firstly, on that volatile trading, you called that, David. Just wondering if we should read anything into the better January exit rates, given that you were hit, of course, by a weak U.K. pre-election and a weak U.S. due to trade wars. And both of those have seen some kind of resolution recently. So anything that is more hopeful looking forward just yet? And then secondly, after the EBIT margins fell back in H1, do you still expect to see margins stabilize year-on-year in H2? It sounds like the gross margin mix and growth is maybe a little bit tougher than expected. So has that changed the outlook for the margin at all?

Thanks, Rory. So in terms of trading, as you know, we have very little visibility within our business unit. The market in which we have the greatest visibility is the U.S. with some form of an order book. Look, I think we are hopeful in terms of what we've seen in January. But I think it's still -- it's too early to really sort of confirm that that's really a positive trend. I think the key for us in the real positive piece is our industrial side of the business is performing well in very positive territory, whereas, we are sort of challenged somewhat with regards to our -- with our electronics performance, excluding single board computing. So I think we remain positive in terms of the outlook and the trends that we saw in January. But I think cautiously is the view in terms of the outlook that we're looking at. In terms of the margins, as we called out, there may be a slight moderation in terms of the overall top line growth and a slight moderation with regards to the gross margin, so it does create a little bit more of a headwind with regards to the overall operating margin of the business. But again, I guess, we're looking through that. Over the medium term, we're still driving towards that mid-teens operating margin performance for the business, and we certainly see no reason why we can't achieve that in the medium term.

Our next question comes from the line of Daniel Hobden.

Daniel Hobden from Crédit Suisse. Just one from me. Thinking about, obviously, the coronavirus and the impact on the supply chain. I was just wondering if you'd be able to give a bit more clarity as to the percentage of products that you sell that are sourced from China or what the overall impact could be if this was to ramble on.

Sure. I think -- well, coronavirus, I mean, our first priority is our employees, and we're doing everything we can to assist them. We are certainly looking at the domestic element, which is our customers. And we're sort of doing whatever we can to actually continue to support our customers. And then the third element is with regards to the overall global supply chain. With regards to sourcing of product in China, we obviously do source products in China. There are alternative sources available outside of China. And obviously, we're working through all of that. So I think it's quite -- it's not really a meaningful number to actually give you in terms of what we actually source in China because there are alternatives available to us. I think for us, at the moment, depending upon how long this goes on for, in the short term, I'd say the impact is minimal. If it extends over a longer term, then we'll have to -- we're still working through all of that, and we'll have to come back to you in due course. But I think at this point in time, we're managing to continue to supply our customers. We have long lead times in terms of product that comes out of Asia Pacific anyway. And so again, I think we'll just -- we'll manage it on a case-by-case basis, and certainly have no intention of letting our customers down in -- through this process.

Our next question comes from the line of David Brockton.

2 question areas for me, please. Firstly, just touching on some of the weaker parts of the business, the electronics and Central Europe. I just wondered if you can touch on what the sequential trends are for those businesses, i.e., is electronics stable, sort of troughing? And similarly, did Germany worsen through the period? And then secondly, just in respect to IESA, I just wonder if you can give us an update in respect of how U.K. growth is going and the international opportunities are progressing.

Sure. In terms of IESA, well actually, we're very, very pleased with the performance of the IESA business. We've continued to secure additional customers throughout this financial year. We're continuing to look at the international expansion. Our primary target for IESA is the U.S. in terms of the next international market. And so that's really where we're focusing our attention on at this point in time. The model very much is reliant upon or it's easier for us to go with an existing client and move into a new country as opposed to greenfield, and that's certainly the approach that we're taking in. So we're working with IESA and our team in the Americas to progress that in a positive sense. In terms of the sequential element to it, so if we talk about Central Europe in the first instance, we've seen -- the main market in Central Europe for us, sort of the largest market for us in Central Europe is Germany. It's been impacted, in our business and I think many other businesses, a reliance upon the OEMs and certainly, automotive is certainly the key driver there. What we saw in throughout the 4-month period is certainly, January has been a little better than it was in November and December. So what I call -- but still negative, so what I call that is a positive trend, and it's something that we expect to continue. I think it's pretty lumpy at this point in time. So -- but again, the news is that January was a little better than the other months. In terms of electronics, I don't really think we have seen a real improvement in electronics. I'd say, it's probably bumping along at the bottom at this point in time. Obviously, we read the press and we read other company's announcements, and so there is certainly more positivity in the marketplace, generally speaking. And I think, certainly, for us, as we've called it in the past, it's probably a second half calendar year where we're probably going to start to see the improvements in our business.

Our next question comes from the line of Sam Bland.

Two for me, please. First was on -- I guess, basically, get a sense of what the like-for-like revenue trends were like, specifically within industrial, i.e., if you kind of remove any incremental weakness that was from the electronics market. Did it -- what was -- would industrial get particularly better or worse in the third quarter? And if so, how much of that do you think is market versus share gain related? And the second one was on gross margin. I think commentary on gross margins, maybe a little bit more downbeat than it was at the half year particularly on the amount of improvement that might come in the second half. Can you just talk about there -- what specifically versus -- since the half year has changed which makes that outlook for gross margin a little bit weaker?

No problem. So in terms of industrial, we're seeing sort of pretty close to single -- mid-single-digit growth in industrial. We'd say the vast majority of that would be market share gains, if not all of that would be market share gains. And so overall, from a group perspective, if you factor in the negative growth in electronics, that's why we're sort of seeing 2% growth, but mid-single-digit growth in terms of industrial is where we're sort of trending. That's been fairly similar trends through the period. It does vary by geography a little bit, but overall, that's sort of how we're trending in terms of industrial. And we'd say, sort of -- we're actually really pleased with that because that is largely market share-driven and customer growth-driven activities. In terms of the gross margin, yes, sort of slightly greater headwinds with regards to the gross margin. That's all down to product mix. So we are seeing an acceleration in some of the high -- sorry, some of the lower gross margin products and also sort of a slowing slightly in terms of some of the higher gross margin categories in which we sell. Nothing untoward there. It's just a trend that happens. Again, sort of our view is that we'll continue to drive a mid-teens operating margin. That's sort of where we're trending. In terms of the second half, I guess our view at this point in time is probably similar trends in terms of gross margin to what we saw in the first half. So slightly, slightly worse but not materially worse in terms of outlook for gross margin.

[Operator Instructions] Okay. Sir, there are no further question at this time. Please continue.

No problem. Well, look, thank you very much for joining the call, and we look forward to catching up with you over the next couple of months. Thank you, everyone, and good morning.

Okay, that does conclude your conference for today. Thank you for participating, you may all disconnect.