RS Group plc (RS1) Earnings Call Transcript & Summary

Hello, everyone, and welcome to the Electrocomponents' Trading Update Call. My name is Seb, and I'll be the operator on the call today. [Operator Instructions] I will now hand the floor over to David Egan to begin. Please go ahead, David.

Good morning. This is David Egan, CFO of Electrocomponents. Lindsley Ruth, our CEO, is still in Texas, where it's currently 2 a.m. in the morning, so I will be hosting today's call. This trading update covers our performance for the fourth quarter and full year to the 31st of March 2021. We delivered full year like-for-like revenue growth of 1%. Our resilience in the first half and strong recovery in the second are a testament to our teams and their ability to adapt to the difficulties faced this year. Our employees did an amazing job. It also demonstrates the strength of our proposition, which is resonating with both our customers and suppliers. As a group, we definitely stepped up to the challenge that the pandemic brought, looking after our people and working with our suppliers, customers and communities, to help them through the difficult times. This is a reflection of the values and behaviors of the team at Electrocomponents. This underlying care and responsibility within our group has also been reflected in our ESG rankings. I'm pleased to announce that our MSCI ESG rating has increased to A from BBB and our EcoVadis rating moved up to Gold from Silver, both reflecting our ongoing work to continually improve our social responsibility and sustainability journey. We'll update you on all we do here largely as part of our normal course of business at the prelims in May. On to our fourth quarter performance. Trading has been quite volatile throughout the 3-month period, given COVID lockdowns, border closures, Brexit, Texas weather and, for the last 2 weeks in March, much weaker comparatives. The group's 12% like-for-like revenue growth in the fourth quarter benefits by circa 4 percentage points from weaker comparatives over the last 2 weeks of March 2020. We can see from industrial production data, peer reports and our supplier base that we are outperforming the market more than our target of 2x. Our industrial products, which accounts for circa 80% of group revenue, grew by low double digits with electronic products broadly -- a growth broadly similar. Our electronics product offering is driven largely by demand from our industrial customers. And thus, we haven't seen the higher growth of the electronic industry, but neither have we seen -- been affected by product shortages. Our private label brand, RS Pro, grew like-for-like revenue by 18% in the fourth quarter. Our product offering continually adapts to reflect our customers' needs with regular product launches, quality assurance and a strong value proposition underpinning growth above the group average. Digital accounted for circa 63% of group revenue, with growth of 12% in the fourth quarter. Weaker performance of our key corporate customers led to slightly weaker e-procurement participation whilst there is also a regional mix effect from the Americas, which has a lower digital penetration. Web traffic grew by 14% in Q4. Our digital proposition and data has allowed us to drive stronger growth organically, thus improving our marketing spend returns. We continue to focus on improving the user experience, and our responsive web offer is delivering faster speeds and improved mobile capability. Moving on to the regions. EMEA, which is roughly 2/3 of group revenue, saw like-for-like revenue growth of 12% in the fourth quarter. Feedback from customers and suppliers has highlighted our strong product availability, and financial strength is providing significant competitive advantage alongside our digital capabilities, including the new mobile-responsive website. The U.K. saw improving momentum through the quarter to finish with high single-digit growth. January and February were slower months, due to the unwinding of pre-Brexit purchases, new lockdowns and larger custom -- and longer custom processes post Brexit. However, March started off strong, driven by good growth in organic web traffic, RS Pro and our value-added solutions offer. The last 2 weeks improved significantly against the weaker comparatives from the first COVID lockdowns in 2020. France, Italy and Spain all delivered double-digit revenue growth during Q4, with Germany close to double digit, driven by ongoing corporate customer recovery against tougher COVID-19 impacts in March 2020. There's been tentative signs of improvement in some industry verticals and growth within the electronics market. Germany had a weak January, which we believe was affected by some temporary factory closures, especially within automotive industry, but has seen improvements since. We are particularly pleased of our growth in Continental Europe, given the logistical challenges faced crossing U.K. borders post Brexit. We look forward to our German DC extension being operational this summer and the opportunities that this brings. IESA continues to perform well, although revenue was held back during Q4 due to lockdown issues, as implementation of new contracts has been delayed, as this normally involves our teams being on-site initially for setups. Within the existing business, we've seen weaker demand within auto and aerospace customers but growth within food and pharmaceutical customers. Our business development pipeline remains very strong, and we're already working on joint pitches with Synovos on transatlantic client opportunities. The Americas region, roughly 1/4 of group revenue, saw improved trading during Q4 to grow like-for-like revenue by 13%. The region exited January in double-digit growth with trading momentum having improved from Thanksgiving. However, in February, Texas experienced extreme cold weather conditions that led to statewide power grid failures. Our Allied [Audio Gap] temporarily, but we had the site back up and running quickly. Our performance in the region has been driven by a more proactive sales team, greater focus on digital in our marketing proposition and in an expanded product range due to the extension of the distribution center. The latter has improved our product diversification, allowing us to appeal to a wider customer base in more industry verticals. We're excited about the opportunity that DC extension brings our opportunities in the Americas. Asia Pacific, which is circa 10% of group revenue, grew by 12% like-for-like in the fourth quarter, where we've been increasing and improving our sales coverage in markets where we have minimal share. The strongest performance was in Greater China, where our improved offer is resonating, with Southeast Asia also performing well, despite some regions continuing to suffer lockdown restrictions. Japan moved into growth in Q4, driven by a better performance in electronics, albeit not as strong as the market due to our narrower product offering. Now moving on to gross margin and costs. We continue to target a mid-teen adjusted operating profit margin, through improving product gross margins, increasing our value-added solutions and participation in generating operating efficiencies as we leverage our cost base. Our second half gross margin is expected to be lower than the first half of 43.2%. Some points to note. On the positive side, our own brand, RS Pro, growing faster than the group, but still only accounting for circa 14% of group revenue. On the negative side, we saw gross margin pressure from continuing inflation in inbound freight costs for both air and sea. We had some mix effects primarily from the stronger performance of the Americas, which is a lower gross margin region currently. An additional charge relating to earlier PPE purchases, which have been written down to net realizable value, this equates to a circa 100 basis point year-on-year impact on gross margin during the second half. We continue to proactively manage our cost base to deliver savings and efficiencies. Our simplification of the group through RISE to increase agility and accelerate Destination 2025 is on track and will deliver GBP 7 million of savings in 2021. However, we incurred GBP 9 million of additional costs in the second half relating to COVID and Brexit. A significant majority of this was heightened outbound freight rates. But we also saw some extra costs due to longer border and custom controls post Brexit. Cash generation has been a key focus in the year, and the strength of the customer collection seen earlier in the year continued into Q4. Net debt at the year-end should be broadly similar to the end -- of net debt at the end of the first half. We added a new business, John Liscombe Limited, in February, which supplies specialist PPE product to many of our industrial customers. This is our third acquisition in less than 4 months, alongside Synovos and Needlers. All 3 businesses are performing well. Integration is on track, and we're already working on cross-selling opportunities. Our acquisition pipeline remains solid. So overall, the strength of our revenue performance is a testament to the hard work and efforts our teams have put in, for which we thank them during what has been a very challenging year. We expect our full year 2021 adjusted PBT to be around the top end of the consensus range due to the stronger end-of-year revenue performance. Looking forward to the year ahead, we're mindful of the mainly external pressures that we face: heightened freight costs that show no signs of abating; the translation impact from a strong sterling, with roughly 3/4 of our revenues outside the U.K.; Brexit; and then lastly, COVID uncertainties. Despite this, we know that our offer is resonating, our proposition is gaining traction with more customers, and we're gaining market share, security and assurance of supply, given our global supplier base, breadth of our product and services offer, an omnichannel proposition differentiates us in our role as a trusted partner. We're well positioned to deliver ongoing growth in line with expectations, through continued organic and strategic investment, whilst operational efficiencies will drive margins as we continue on our Destination 2025 journey. And with that said, I'll now hand you back for Q&A.

[Operator Instructions] Our first question today comes from Rory McKenzie at UBS.

Three for me, please. Firstly, David, can you talk about the different customer segments and where you've seen that activity levels increase, either in terms of customer numbers or the frequency? And then secondly, can you explain what you mean by the comp adjusted plus 8% organic growth again? And how should we think about the benefit from the weaker COVID hit comparators into Q1 and Q2? Could you give us a similar number to the 4% that you've called out? And then lastly, [indiscernible] costs. [ Maybe we'll do those ] 2 on top line trends first.

Great. So with regards to what are we seeing in the marketplaces, overall, we've seen an increase in customer numbers, quite a significant increase in customer numbers for the group. That is both B2B customers, but also B2C customers. And just remember that the B2C element of our group is a very, very small, low single-digit percentage of our revenue. So we've seen a good growth in our customer numbers and good growth in our web traffic for both new and existing customers. In terms of some of the verticals, during the year, first half of the year, we saw many of the verticals decline. Automotive definitely declined. Education definitely declined. Theme parks in the U.S. definitely declined. What we're starting to see now is some of those trends reversing. So automotive is certainly starting to pick up. Theme parks in the U.S. are now starting to reopen and so the demand is beginning to improve. Pharmaceutical, food and beverage have remained strong. Utilities has remained strong throughout the period. So it's a bit of a mix and match. But overall, we'd say sort of there are improving trends in the vast majority of the verticals in which we operate. There are still some that are continuing to be challenged, some of the -- obviously, some of the automotive companies in some jurisdictions and other verticals. But overall, we'd say it's an improving trend. In terms of the comps, what we sort of outlined is that we've seen about probably a 4% -- 4 percentage point benefit through the weaker comps in Q4. So 8% underlying growth for Q4, similar to the 8% underlying growth in Q3. I'll have to come back to you with regards to the COVID-related challenges with regards to Q1, Q2. I can come back to you immediately following this call. I think sort of our best view at this point as we look forward is sort of continuing trends for the full year of FY '22 of those sort of what we've seen in Q3, Q4. So sort of somewhere around the 7% to 8% mark is what we would say is our best view at the moment for the full year of FY '22. Now obviously, there's going to be some very big deviations as we go through the year. But for the full year, sort of that's our best view at this point.

Okay. Great. And then just on profits and the cost base, can you just help us understand how much of the cost base in FY '21 will not recur in FY '22? And obviously, the [ inventory ] write-down should be a one-off. You called out the COVID-specific related costs that hopefully would fade. But beyond that, the investments in the business, the higher freight costs, how should we think about that kind of wider cost base potentially unwinding or normalizing into the next year?

Yes, sure. So on the -- with regards to the gross margin, the main nonrecurring element there is the PPE-related provisions. For the full year, that's about 50, 60 basis points. We called out sort of about 100 basis points for the second half, but it's about 50, 60 basis points for the full year. So that would be nonrecurring on the gross margin line. In terms of the transport-related costs, we have seen heightened initially sort of air. Our mitigation was then to going to sea, and we've also then seen an acceleration in those costs. We're not seeing those abate, so we would say transport-related costs are likely to continue. Our mitigation, twofold. One is obviously, the distribution center in Germany will help mitigate some of that, but that will take time to come online. And the second mitigation is then to source more locally. But again, that takes time. So unlikely to see any material change is our expectations for '22 on transport-related costs. In terms of Brexit and COVID, we'll see some moderation of those costs as we go into FY '22. But until Brexit -- those Brexit costs will continue until we sort of get the DC -- the German DC up and running, again, which will be sort of once it's fully operational, really the back end of FY '22. So that's -- the main one is we'll stop the provision, and there'll be a slight moderation in some of the COVID and Brexit-related costs during the course of '22, but more the back end of it.

Our next question is from Sam Bland at JPMorgan.

I've got probably 3 questions, please. The first one is, I guess, over the last 12 months, we've seen acceleration in the market share gains, which may be helped by the group's digital presence. Just wondering, I mean, how do you assess the risk of that potentially reversing over the next 12 months as the world reopens and maybe actually you could start underperforming the market? Second question is on the U.S. DC. I think, from memory, that roughly doubled your U.S. capacity. So kind of what's the sort of operating rate for that DC today? How full is it? How much kind of future growth could come from it? And what's the process basically getting it up to sort of full capacity? And the third question is just a simple one, which is, are you still expecting around GBP 15 million of RISE cost benefits in FY '22?

Great. Thanks, Sam. So market share gains, in the industrial world, we've definitely captured market share fairly consistently across the world during FY '21 and certainly continued into Q4. We certainly have confidence that we can continue to take market share across those key markets of ours. And really, it's the proposition that we offer. We -- it's all about extension of product, availability of products, the digital omnichannel approach, the value-added services and solutions and being able to get it to the customers quickly. So we believe that our proposition has certainly resonated with many customers. Our customer numbers have increased. And I wouldn't say never, but I guess we're confident that we can continue to outperform the market in the industrial world -- sorry, in the industrial product side. On the electronics side, we're probably tracking at best the market. The market is very hot at the moment. Our proposition and product range in electronics is limited, and it's more focused on industrial customers. So we're not going to see the peaks and troughs in electronics, but I think we can hold our own with electronics, but we certainly expect to outperform in the industrial side. On the U.S. DC, it went live in the summer of last year -- calendar year. We've added about 40,000 new SKUs into that facility. So they're running at about 200,000 SKUs now in that facilities. And there's certainly plenty of opportunity for further expansion. I was physically there last week with Lindsley, and it's performing very well. And we're in the process of bringing new products in and continuing to improve the efficiencies and the automation within that facility. So plenty of runway to take it beyond the 300,000 SKUs in time. With regards to RISE, the year-on-year benefit, so it was GBP 15 million to be delivered off a 2020 base. So we delivered GBP 7 million incremental benefit in FY '21. So there'll be an incremental benefit on '21 into '22 of GBP 8 million.

Our next question comes from David Brockton at Numis.

Just one question, please, on RS Pro. It's been particularly strong through the final quarter. Just wondered if you could share any insights into what's driven that. I appreciate you're growing from a low base in the U.S., but this would appear to be something more than that. And I just wondered if you can touch on is it range expansion? Is it availability? Is it just some change in demand? I appreciate any thoughts there.

Sure. David, it's a little bit of everything. So our U.S. -- still -- the U.S. proposition for RS Pro is still around 1% or less than 1% of the overall U.S. revenue or North American revenue. The main -- the bigger growth in absolute terms has come from our more established markets, that being Europe and in particular the U.K. So the growth has really come from our more established markets. We've continued to add new products to the range. We've made sure that those products are available, and we certainly price them competitively. So it's a whole combination. Obviously, there's a little bit of comp benefit as well in the last 2 weeks in RS Pro, but it certainly has outperformed the overall group growth for the whole of FY '21. And we certainly see the proposition going forward is that we would expect it to continue to take market share and grow at very nice levels going forward.

Our next question is from Henry Carver at Peel Hunt.

David, I think you covered the queries around market share gains, so I'll leave that one. But just another one on acquisitions and the landscape at the moment. I mean, clearly, there's going to be quite a lot to choose from out there. You've already been pretty busy. I just wondered if you could remind us that -- the key things that you're looking for, first and foremost, in more deals is sort of margin and quality of business, or is it looking to fill something that you're not selling currently? I just wanted to sort of get that nuance straight and see what that acquisition landscape is like at the moment.

Sure, Henry. So look, our proposition on acquisitions is that digestible bolt-ons is the first priority. Within that, it's acquisitions that can help accelerate our organic growth. And then within that, first cab off the rank is adding value-added solutions and services. The second cab is product expansion, so range fill and do a buy as opposed to a build type approach, and then lastly is market share growth. So that's really the prioritization. We're not looking for broken businesses. So we're looking for businesses that can, over time, be accretive and move us forward in terms of the operating margin. It is a seller's market at the moment. There are a lot of opportunities out there, but valuations are also high. So we're being very disciplined around strategic fit, cultural fit and financial returns. But ultimately, there are opportunities out there, but we're going to stick to what we know and make sure that we stay within the guardrails of our strategy and make sure that we can deliver financial returns.

[Operator Instructions] As we have no further questions on the call, I'll hand the floor back to David.

Thank you very much. Thank you very much for your time. And if there are follow-up questions, then please don't hesitate to get in touch with Lucy or myself. But otherwise, we look forward to speaking to you on the 25th of May when we do our prelim results. Thank you, and good morning.

This concludes today's conference call. Thank you all very much for joining. You may now disconnect your lines.