RS Group plc (RS1) Earnings Call Transcript & Summary

Welcome to the Electrocomponents Q1 Trading Update Conference Call. My name is Elliot, and I will be coordinating your call today. [Operator Instructions] I will now hand you over to our host, Lindsley Ruth, to begin. Lindsley, please go ahead.

Thank you very much, Elliot, and good morning, everyone. This is Lindsley Ruth, CEO of Electrocomponents, and I'm somewhat delighted to be back in the U.K. again. I'm certainly delighted on Saturday, but a little concerned certainly over the rise in COVID cases, as I think many of you are, especially with the Delta variant. So welcome, first of all, to our trading update covering our performance for the first quarter ended June 30, 2021. I will hand you over to David Egan, our CFO, to go through the quarterly details as normal in a few minutes. But certainly, I couldn't resist joining him for this update, number one, to say congratulations to England for making your first finals in 55 years in the Euros. I think -- I've been back for the Ukraine match and last night's match, to watch on television -- or the telly, and -- which I'm having to learn the English language again, but that was quite exciting to see and congratulations to all of you. But before I pass it over, it's certainly nice to be in the same time zone again and not 2 a.m. in Texas. Before I pass over to David, I just wanted to say a few quick things. Firstly, I'm sad to report the passing of my predecessor. I think many of you know Ian Mason -- knew Ian Mason. Ian led the development of the group as CEO for 13 years, for 17 years as the Director of Business Development. He was way too young, and our thoughts and prayers are definitely with his family. I give him credit for getting us into digital. We were one of the first players in 1998 to move to the Internet. So he was -- his contributions to this organization were fantastic, and I'd just like to recognize that. And also, he was a class act, so very, very popular within our organization. And it's just sad to see his passing at such a young age. So our thoughts and prayers, again, are with his family. Secondly, following yesterday's announcement, I want to welcome Alex Baldock, who will be joining the Board as a non-Executive Director in September. Alex is currently the Group Chief Executive of Dixons Carphone plc, where he's been working on a turnaround for the last couple of years, and congratulations to Alex on his recent update. He will join the Board, as I said, in September, a great addition to the Board, especially with his exceptional track record of digital transformation at places like Shop Direct, at Dixons and his acceleration of the omnichannel growth and embedding customer focus within his business, and I'm really looking forward to working with him. I've known him for a couple of years. I think he's a fantastic addition to our Board. And thirdly, I want to say how pleased I am with our performance and the progress we made in Q1. Another area is not just performance but like ESG. And ESG, for us, is about doing the right thing and doing the right thing right. And there's -- every investor has a different view on what ESG means today. Every investor has a different view if you should pay or not pay on it. I will say this. We're investing a lot in terms of the [ risks ] in time and the [ deploying ] our ESG strategy. If you want to learn more, you can contact Lucy Sharma, and we've got hours and hours of material to go through the focus around ESG and we can certainly take any questions on that at the end of this call. So for this reason, and if you look at the progress we made in Q1, we've certainly accelerated to our destination 2025 strategy. We were certainly -- as we went through last year, it was looking like a bit of a setback, but I think we've caught up and accelerated some, and I'm very proud of the people that we have within the company, and the progress we've made. For this reason, I'd like to say a huge thank you to all of our people. They continue to do an amazing job through difficult times. And I think great leadership is defined in today's world as those people that can deal with the volatility, the uncertainty, the complexity and the ambiguity that exists in today's world, and our leaders are doing an amazing job in proving the resilience that they have and the team that we've added over the last couple of years. The additional throughput from significantly higher volumes, despite national lockdowns in many countries -- and who knows if we'll have more lockdowns. We're seeing quite a few right now in Asia as it stands right now as well as the logistical challenges that we faced as a result of Brexit, and many supply chain shortages have tested our people recently and our systems to the extreme. But the one thing it has done, it has affirmed that we have the right people, we have the right processes and we have the right systems to continue to outperform the market. So we thank each and every one of our amazing team. And let me just add one bullet to the end, that health and safety remain priority #1 for us, and we don't know what the future holds, but we will, as they say in scouting, be prepared, regardless of what happens. And we will not, rest assured, become complacent regardless of how good our performance is. So as I've said many times before, we're just getting going. Every 3 to 5 years, it's like we're working for a new company. I've got huge aspirations and ambitions for this business that we've yet to achieve. So rest assured, I'm not going anywhere. I'm happy to be back in England where it's about, oh I don't know, 20 degrees. Cooler than it was in Texas. So it's nice to be back, and I look forward to seeing all of you soon. So with that, let me turn it over to David to comment on our financial performance.

Thanks, Lindsley, and good morning, everyone. To our first quarter performance, trading has been strong during the 3-month period across all regions as our offer continues to resonate with our customers, the market backdrop has improved, and we've traded against weaker comps from the global outbreak of COVID-19. First quarter like-for-like revenue growth was 37%, with acquisitions contributing a further 7%, foreign exchange being a 6% headwind and additional trading days adding a further 1%, to give total revenue growth in Q1 of 39%. Our 2-year like-for-like growth was 22% as our industry-leading availability, product breadth and service solutions offer with digital capabilities provided differentiation against our peers. Having the product in stock has meant that we have benefited at a time supply issues have constrained others. Pleasingly, our B2B customer numbers grew 8% in Q1, continuing the strong growth that we saw from FY '21. We can see from industrial production data, peers that have reported and our supplier base, that we are continuing to outperform the market and grow share. Growth of our electronics products slightly outpaced the performance of our industrial products, consistent with the overall market growth. Our electronics demand is largely from industrial customers. But due to shortages within the market in general, we believe that our electronics reach has widened both with new and existing customers. Our main own brand, RS Pro, grew like-for-like revenue by 36% in the first quarter, driven by the quality product offer and targeted marketing. This was a strong result given it's tougher comparatives than the group as a whole. A reminder that RS Pro was in growth in the month of June last year, and there are fewer electronic products within the RS Pro range. Digital accounted for circa 63% of group revenue on a like-for-like basis with growth of 38% in the first quarter. Web revenue, which is a truer representation of our digital demand as it strips out eProcurement, grew by 41%. This is being driven largely by an increase in the average order value as the customer mix moved back towards corporate and away from B2C, reversing the trend we saw last year. We continue to adjust our digital marketing spend away from paid advertising and towards organic, which is driving better returns. eProcurement revenue, which is attributable to larger corporate customers, has seen improving growth in all regions, albeit trading is dependent on industry verticals. Our group Net Promoter Score has softened as the current supply chain problems the industry is facing has reduced availability. We believed we are faring better than most, but we have increased our focus on improving this score, although it will take time to show in the rolling 12-month measure. We continue to develop our ESG journey. We've achieved good ESG recognition from external rating agencies to date, but there is much more we can do. We're working with our suppliers and logistic partners to reorganize our supply routes to reduce the freight miles traveled, a long-term but vital project. Additionally, we are also developing and investing in our ESG products and services that provide environmental solutions and sustainable products for our customers. We have seen increasing interest from customers in our ESG credentials, even helping win global client mandates. Taking a look now at the regions. EMEA, which is roughly 2/3 of group revenue, saw like-for-like revenue growth of 37% in the first quarter, 19% on a 2-year view. On a 1-year view, country growth was broadly consistent with the uniform recovery against the COVID-19 comparatives. The U.K., which accounts for over 35% of the region's revenue, performed well, albeit against weak comparatives. Its 2-year run rate was lower than EMEA's, but it still delivered low teens growth. This was a strong result given that the country was in lockdown during this trading period, and it has a lower electronics exposure than other EMEA markets. On a 2-year view, we saw growth above the regional averages from Germany, Italy and Spain, with France being a little weaker. Since Brexit, customer delivery times have lengthened due to longer custom controls. Over recent months, our European service levels have largely recovered, but this has incurred some additional costs and our NPS did suffer as well. Our extension to our German distribution center remains on track to open at the start of the autumn this year. IESA continues to win new contracts, especially within Europe, as business increasingly want supply solutions, improved efficiencies and better [ boarding ] prices. New clients are taking longer, however, to onboard as lockdown has restricted access to customer sites, but we have been managing our cost base appropriately. There have been some start-up costs related to our rollout through Europe, which will drive operational leverage as we drive revenue into the future. Performance was strong across the Americas region, roughly 1/4 of group revenue with 40% like-for-like growth in the first quarter or 28% on a 2-year basis, with growth being driven within automation and control, electronics and mechanical and power transmission. The region continues to benefit from the refocused management and sales team, which has delivered a significant change in mindset and culture. This, we believe, is driving the stronger growth. We have rolled out a more proactive and dynamic digital program, which is delivering a significant increase in web sales conversion and returns. We continue to broaden our product offer through utilizing the expanded distribution center, so appealing to a wider customer base in more industry verticals. Synovos has a strong pipeline of new businesses and is working with our teams in EMEA and Asia Pacific to extend the integrated supply proposition internationally. We're very excited about the opportunities for this and also through working closer with Allied to expand further into MRO product and develop RS Pro in the Americas. Asia Pacific, which is circa 10% of group revenue, grew by 31% like-for-like in the first quarter or 27% on a 2-year basis. All 4 subregions had positive double-digit growth, with Japan benefiting from the rebound in the electronics market, to which it is more exposed. A change in our sales focus in Greater China towards higher-margin new customers is delivering positive results and Southeast Asia has seen high growth due to a greater focus on our digital offer. Now moving to gross margin and costs. We continue to target a mid-teen adjusted operating profit margin over the medium term through improving product gross margins, increasing our service solutions participation and generating operating efficiencies as we leverage our cost base. In the first quarter, we have seen all regions deliver small gross margin gains, largely through our product category work rather than benefiting from selling price inflation. However, due to the strength in the Americas' performance, this is largely offset at the group level. The additional freight, COVID and Brexit costs experienced during last year, amounting to circa GBP 19 million over the full year, have continued into the current year. We are not seeing any signs of freight pressures abating yet. Operating cost growth reflects the much greater volumes, higher cost to serve and inflationary pressures, with over 50% of our cost base relating to labor, where we have deployed at least inflationary wage increases. Our RISE program, to simplify the group to improve our agility, is on track to deliver GBP 15 million of savings during the year. Meanwhile, we continue to invest in our operating model to ensure we can support the growth opportunities we see and drive operating efficiencies. We continue to target a medium-term operating profit conversion of 30% from the 22% we delivered last year. Now moving to cash. We've seen strong cash generation continue into the first quarter, and this remains a key focus. We expect to increase our inventory position during the year to support our distribution center expansions in both the Americas and Germany, but also to bring forward orders we have with suppliers given the supply shortage the industry is facing. We continue to look for inorganic opportunities to accelerate our strategic growth aspirations. The pipeline is very exciting with more options and of increasing size. However, we retain our strict discipline in terms of ensuring any additions fit strategically and culturally and meet our financial criteria. So looking forward, industry growth is expected to slow during the balance of the year as supply shortages and manufacturing backlogs hold back recovering demand. Accordingly, we have experienced lower fulfillment rates from our suppliers into our DCs. However, we have seen only a minimal reduction in our availability rates to customers, as we have worked closely with our suppliers, increasing our supply orders while benefiting from our low inventory turns, broad product offer and wide supplier base. We have a strong level of experience and expertise within the group, especially after successfully handling Brexit. We expect to continue to outperform the industry by at least twice the market rate. Notwithstanding the supply chain issues and FX headwinds, the strong start to the year leaves us on track to deliver low double-digit to mid-teens like-for-like revenue growth for FY '22, while supporting a return to an adjusted operating profit margin around our FY '20 levels. Despite these external challenges, we know that our proposition is gaining traction with more customers and we're gaining market share. We are well positioned to deliver ongoing growth through continued organic and strategic investment, while operational efficiencies will drive margins as we continue on our Destination 2025 journey. And with that, Lindsley and I will be happy to take your questions. Elliot?

[Operator Instructions] So our first question comes from David Brockton from Numis.

Can I just ask about, I guess sort of the potential operational gearing in the business? One would think that, I guess given the strong progress you're seeing on a 2-year basis, there could potentially be more operational gearing benefits. One, I guess what are you assuming still in terms of COVID inefficiencies? Do you expect those to ease as the year progresses? Two, what are you seeing in terms of mitigating the freight pressures that you drew out last year? Are there any signs that's improving? And third, are there any other sort of ongoing or increased OpEx investment that is sort of limiting that near-term progression?

Sure, David. Let me take that one. So in terms of operational gearing, as we've guided, we're saying that we expect to be back to FY '20 operating margin during the course of FY '22. That was 11.3% in FY '20 on a reported basis for us. We -- when you deliver sort of 20-odd percent on a 2-year basis, 22% on a 2-year basis and 37% on a 1-year basis, it does come with growing pains. And then at the same time, when you've got an 8% growth in the customer numbers -- our key objective here is to [ drive ] our customers, to grow our customer numbers, but to retain those customers. So again, we've continued to see freight costs not mitigate. The COVID inefficiencies are still there. And as we called out in our prelims, we're still -- we have the objective of driving towards a good to great, and there's certainly some processes and activities that are still on that good to great program. And so as you're growing significantly, it does come with a few growing pains, and that's to ensure that we delight our customers. So overall, we're on track and certainly expecting to deliver that mid-teens operating margin and certainly, FY '22 is certainly moving in the right direction. So mitigation of freight, it's not going to happen in the short term. We are sourcing more locally and trying to reduce the number of miles, but quite a lot of the freight is outbound freight to our customers, which we don't charge for as well. So again, there is mitigation for the inbound freight, and there's mitigation for freight between distribution centers over time. But the bigger one for us is the outbound freight with our customers. And on the OpEx, we've continued -- despite growing significantly, we've continued to invest in our business for the medium term. It's in particularly areas around process improvement, automation. It's in areas around people. I'll give you an example with regards to IESA. We are expanding into Europe, and that was either a buy or a build-type approach. We've chosen to go down the build. So it comes with a little bit more investment upfront, but then sort of better medium-term returns. And so that's really part of our progression to continue to drive the business and grow the top line and profitability.

Yes. David, if I can, let me just comment on the freight for a moment. There are trade-offs that we have to consider around inventory turns, local sourcing, buying at volume in the U.K. shipping overseas, and most importantly, the organizational capability to be able to source locally. So we're very focused on building up local sourcing capabilities which start with people and follow a systems and processes and then the supplier relationships in that order. [ It's always ] supplier relationships before you have the people and processes down, that's a huge mistake. So obviously, the rising price of oil has some impact for unplanned demand for next day shipments that we have to take into consideration as well. I would like to point out just one remark that David made that you might have missed. For the first 6 months of this fiscal year, we and all our dashboards, are comparing our performance to 2 years ago or pre-COVID levels because of how weak it was for the first 6 months. The second 6 months, we grew at 10% versus the year before. So we will be shifting throughout the year in terms of how we look at things. But it's very important to note that we're up 22% over pre-COVID levels, which we believe is obviously certainly much greater than 2x the market growth.

Our next question comes from Rory McKenzie from UBS.

It's Rory here from UBS. Firstly, on that growth run rate you just talked about Lindsley, with revenues up 20% against '19, it seems like trends, if anything, strengthened through the quarter, whereas your guidance requires that to slow over the year. Can you just spend a bit more time on where you're worried? Will shortages limit your product sales? Is it just client demand to worry about? Or is there anything else to be aware of like B2C revenues falling back [ between the seams ] ? And then on...

The first thing I'd say is I'm extremely worried about Italy after watching them play and only conceding 3 goals in the last 2 years. So [Foreign Language] for your comments, but you got a tough match on Sunday, but I certainly will be pulling for you. And let me just note, we do have what we call the electric cup competition going right now. This is more for our team that's listening. It's between Europe and it's between the U.S., so we've left Asia out for now. At this point, the Americas is leading. But as I've told them, now that I'm back in Europe, my allegiance, and the fact that -- by the way, I've passed the residency exams. So I can tell you where the tapestry of 1611 is located. But my allegiance has shifted back to Europe for now. So I'm pulling for the European team to catch up and pass them. So with that, the momentum has continued through the quarter. I'll let David comment on the numbers specifically. But thank you, Rory, and it's great to be back. And I look forward to seeing you soon, although I will be wearing a mask, even regardless of Freedom Day.

Yes. I guess the start of the comment, Rory, is that as we look at the quarter and the exit rate through the quarter, both on a 1-year and a 2-year basis, we have seen a little slowing through the quarter. The quarter started very strong, again, largely down to comps, but the exit rate through the quarter was slowing. But let's put it all into perspective, still very strong growth numbers. I think the second comment that I would make is that through that period, we have seen very strong growth in electronics, as I called out in the words. We probably track the market. Electronics demand in the market is very strong. Our position in electronics is relatively weak, but the fact that we've had inventory has certainly been of some benefit to us. In the industrial side, the growth hasn't been as strong as electronics, but still significantly outperformed the market. So overall, that's how the trends have flowed. There's been possibly maybe a little bit of restocking, I wouldn't call it material for us as a business, but that's pretty much what's happened during quarter 1. I'll let Lindsley cover a little bit more on how we seize the future in some of our markets.

Yes. I think, Rory, the -- I've been through now 5 cycles in electronics since 1995. And what you see is you see that kind of spike and you see double ordering, and you see some inconsistency in terms of behaviors. And then you see the cancellations that follow with the lead times of 52 weeks, et cetera. If you look at areas like the auto industry where there's severe penalties for a lot of these companies, there's a lot of products flowing there, but still not enough. And if you're in the U.S. today, you would see a lot of the dealerships have these huge signs out front and say, we buy cars. So there's definitely a shortage, because of the fact that TSMC and the Intels and those types of companies control so much of the fabs today, you're talking 2022 before you see a significant online capacity that will take care of the demand now. The good news is we don't see a lot of double ordering because we don't take many scheduled orders. So we're in a better position than most. What we are starting to see, to David's point, is a bleed over into the plc world, the Siemens and others and Schneiders that -- where, obviously, they're experiencing a lot of shortages in the electronics space. So we're better positioned, I think, from a supply relationship standpoint than most of our competitors, certainly our regional competitors. So it's something we should be able to take advantage of moving forward. I think one area that we have not taken advantage of yet is price inflation to where we can pass along the price increases at a much larger level, but we will see that moving forward. So I'm encouraged by the market environment. We tend to thrive in these types of situations, as you know, and have been reported on. So I'd be fundamentally -- we should win, but we can't become complacent through this process either. So we've got to continue to drive every single day, continue to look at yesterday's performance and make sure we focus on the next day. So we're not going to lose sight of that by any means.

And I just -- my second question was actually on that last point you mentioned. You've obviously stabilized underlying gross margin despite the negative mix. But given your great availability and the wider shortages, isn't there an opportunity to do even better? And what are you looking at to try and improve how you can selectively lift that gross margin in the right areas without impacting your customer brand and service?

Yes. I think first of all, our average order value has actually ticked up to over GBP 200 now. It's around GBP 211 across the group, so that's good news. And we've got less B2C customers coming in for safety products, COVID-related products, that were at a much lower gross margin. However, I will say that my expectations are that we are able to pass along because -- as I've said before, I think in various examples, the average order values are so small that as long as we have availability, which is the key to all of this, availability is always the #1 key to driving customer satisfaction and driving margin. As we continue to bring in products, continue to outperform our competitors in getting back orders on the shelf, we should have the opportunity to pass along those price increases. And keep in mind, our turns are less than 3. So as prices go up, we sold inventory potentially at older prices. And I don't want to say a whole lot more than that at this point. But I do have -- and Dave and I both have expectations placed on the team for continuing to strive for improved gross margins over time. And as you know, our goal is still and remains organically 45%.

Our next question comes from Rajesh Kumar from HSBC.

Two, if I may. The first one is on -- if you could help us unpack that growth rate between volume value kind of thing. So how much of it is basically the average order value going up versus the number of orders? That would help. The second one is on the exit rate. You made a very interesting point, it has slowed down, but -- due to the comps. But compared to 2019, when you look at the exit rate, and obviously, second half comps are difficult versus '20. So are you comfortable with the level the market is currently expecting in terms of the exit rate? Or do you think the market is a bit optimistic for second half on growth side? And finally, on the product availability as a key differentiating factor. Understandably, nobody needs to have inventory. You guys must be playing a crucial role in supporting existing and new customers in providing that service. So when you look at the growth in your B2B customer numbers, do you think the growth is predominantly due to product shortages? Or the -- a part of the ESG strategy you're adopting is helping to convert more customers who are necessarily not operating in areas where there are inventory shortages?

Yes. So let me start with the last question first, and then David can comment on the volume versus price, et cetera, and the exit rate. And the exit -- just for the record, you saw a slowing in the exit rate. That doesn't mean it is bad in comparison to what we expected. So we're -- I would never say I'm happy. I would say I'm satisfied because it takes a lot to make me happy and I have high expectations. But let me just comment on your third point in regards to product availability. There's 2 factors there. One is with the Americas coming online with the expansion of the warehouse, we've added 50 new suppliers in the last 6 months. We're adding a lot of inventory, so we're expanding our product substantially. So we're now up to, let's call it, 650,000, 670,000 parts. We'll continue to add products, but we'll do that based on data and analytics, which we've got a system we're developing, which is really, really cool. We'll talk more about that when it's finished, as always. My belief, the older I get is, the more I believe in what people do as opposed to what they say. So we're not going to talk a lot about until it's done, but we do have some pretty cool systems we're working on to identify what moves and what doesn't move. So I think that helps a little bit with shortages. Our business today is really -- why are we winning more business? Well it's because of the omnichannel presence we have. Our digital has grown to 63% of our total account acquisitions, and so we continue to make great progress. If we compare 2 years over 2 years, our digital business is up close to 26%. Over 1 year, it's north of 40%. And when I say digital, I'm talking specifically the web where we've made huge progress. Our B2B customers in Q1 were up 8%, so we're very happy with that performance in general. And when it comes to ESG, it's still one of those factors where everybody has a different interpretation about what ESG means. And it's not just carbon emissions, right? We did pick up a significant contract recently in the U.S. because of our ESG credentials and what we're doing on that front, which we're really proud of, and we're going to go into a lot more detail on that in November. It is a key driver, I think, and one reason why larger customers come to us, not necessarily smaller customers, but I would say it's the overall customer experience, it's a solutions-focused and it's the omnichannel approach. We give it to the customer the way they want it, whether it's online or off-line. It's the combination of online and off-line that really make a huge difference to the customer journey and experience, and we're not going to lose sight of that. As far as the first 2, I'll just flip it to David, Rajesh, on the volume and the price and the exit rate, and any questions you might have on FX, which you didn't ask, which is a surprise.

I do apologize. I didn't wish to undermine our exit rate. Let me just reassure everyone that our exit rate in the month of June was very -- was high teens or very close to actually overall average for the quarter on a 2-year basis. In terms of volume price, it's largely volume. There's a small element of price, but it's not -- it's a very, very small percentage of the overall growth on either 1- or a 2-year basis. Obviously, we are seeing a little bit of a tick up in terms of the average order value. But again, it's probably about GBP 10, GBP 15 as opposed to hundreds of pounds. So again, it's -- this is largely new customer numbers, growth of existing customers and share of wallet, and it was a volume gain, both in electronics and industrial. In terms of the exit rate and the way forward, well, I think I've just covered it. But as we look forward, I think the key for us is inventory availability and then also end customer disruptions and how disrupted are they in terms of their demand and their requirements of our products and services as we go forward, and that's really where the watch out is for us at the moment. Lead times from our suppliers have pushed out. Certainly, nowhere near others have reported. We're well positioned. Our inventory levels are still relatively well positioned. But for us, the key watch out is making sure we've got the inventory. We do expect further disruptions. But equally, we do expect greater disruptions with our end customers, which is why we sort of are a little cautious in -- with regards to the overall growth rates for the full year.

Understood. Just on the mid-teens margin. Obviously, mid-teen is a very [ fast train ] and starts from 13% to 17%, right? And where we see consensus right now, it's about 13.5% to north 25%. It's just like people have taken the guidance and just got through there. Would that be a level you would be comfortable with? Or is the aspiration properly mid-teens, which is closer to 15% or 16%?

I think for us -- sorry, go on, Lindsley.

Yes. Just before -- Dave will answer them in [ 5 years ], but I'm going to reassure you of one thing. Our goal has always been a [ 45, 30, 15 ] model, and we've said that publicly. That doesn't mean that when we hit 15% one day, we're going to stop. So we want not just to be best-in-class. You've seen what [indiscernible] what they do. We want to be world class. So we're not going to stop with our drive to becoming more efficient. And keep in mind that significant is only 40% of your costs tend to be labor, so that means that 60% out there, that's non-labor. We made great progress under David with shared business services. We've got some aspirational goals in terms of our RPAs and what we're doing from that standpoint. And I think we've made incredible progress on efficiency gains, yet not -- certainly, we're not going to stop, and we don't want to become arrogant or confident -- or overconfident in those areas, but we're going to continue to strive in the future for much greater numbers. I'll let David comment just on the numbers themselves, so I don't give myself in trouble here.

Yes. Look, I think Rajesh, I think we'll leave it for you guys to make your own choices, but we're happy with middle of the range.

Our next question comes from Kean Marden from Jefferies.

Sorry to come back to sort of first [ discussing ] availability again, but just to recap on this. So statement says no -- so no availability issues in the first quarter. And I think if I'm right, Lindsley, you were maybe suggesting that any tightness in the supply chain at the moment was predominantly in electronic. So is that the case? And then the 50 suppliers that you mentioned that you'd added over the last few months, are they in industrial MRO? Or are they in electronic? And I've got a few more questions, but rather than blitz you with them, maybe if we can just start there?

Yes. So first of all, the suppliers in the U.S. are mostly -- so I kind of got 3 questions and [ 2 ] there I think. The suppliers are mostly in the industrial space, which is where we see our expansion and where we've got a target to increase our margins in the Americas. They are not in the semiconductor space, although, on a global basis, we have added quite a few semiconductor lines over the last 1.5 years. We just have been a bit quiet in terms of those additions until we're performing for those lines. In regards to availability, when I first started within the company, our availability was around 83%. It's substantially ahead of that. It's off our goal slightly, but not substantially at this point. Part of that, of course, is because of the long-tail product that we do stock. Our lead times -- to David's point, they've crept out a little bit, but any time you're in the world of distribution, product tends to flow to your highest profit margin partner. And not only are we a high-margin company overall, but we're a high margin for our suppliers. So our ability with our relationships with the price we'll pay and the ability to pass it along, give us really a 3-pronged approach to the market to continue to provide strong availability. As far as shortage is today, I would say more than 90% of them are in electronics. But there's no doubt that we will see an impact in markets where there are industrial products with electronics in the coming quarters. They're feeling the impact today, and there's no doubt that's going to continue for some period of time. The real question is -- and I do not have the answer to this. The real question is how much double ordering is taking place? How much capacity is truly being brought on? And I don't have the answers to that. I don't know anybody that does at this point. So I think we'll have to see how that plays out over time. But again, as I said before, we're very well positioned to take market share in this environment. So the longer this lasts, I think the greater the benefit is to our organization as a whole and the way we do business and with our sourcing capabilities in general.

Okay. And then you touched on this earlier in the comments as well. So really on pricing of scarcity, which I guess is what future we're very successful at doing as well over the last sort of 10, 20 years. So to be clear, are you flagging the potential to price that scarcity more and expand the gross margin in the second half? And have you included any benefit from that in your full year margin guidance?

First of all, let me just point out, Future is a private company. So their ability to speculate -- they're the world's best in electronics is speculation, and they've got deep pockets and can -- and kudos, in the end, they're doing a phenomenal job right now. And I take great pride in that, in having the organization deal with them for many years. And hats off to them, availability is the key to their success, and I learned a lot from Robert Miller, the owner of the company over the years around the importance of availability. We're not in a position where we're going to take a significant amount of risk in speculating. So just rest assured, we're not going to cash returns and do anything on that front, but we will do whatever we can to get the products that our customers need and our customers desire, but we're not going to speculate on that front, and we're not going to take those risks. And part of that, too, is just like many of our competitors benefited from safety products during COVID, and obviously, that's lapsed and it's a onetime order. We're looking for long-term loyal customers for repetitive buys as much as possible, and we're looking at really the customers for life, if you will. Not for short-term opportunistic deals where you take advantage one day and it's gone the next day. So we want consistent business over time and to provide you, when we have updates, with a consistent message and what we're doing.

Okay. And in terms of the guidance. Our guidance, what we said on the gross margin is our gross margin year-on-year for the full year would be flat, but then you add back the 60 basis points of the nonrecurring mask provisions of last year. And then the overall operating margin guidance is using that gross margin as the basis. So any upside through pricing or better buying through the gross margin has not been reflected in terms of our margin guidance. But I think at this point, it takes time for that to be implemented. And so I think the guidance we provided is the best guidance we can give at this point.

Okay. Great. And then 2 quick ones as well maybe for you as well, David, if I may. Would you mind sharing the cost of the organic expansion into Europe for IESA for this year? So how it comes from an IESA headwind would that be for this year? And then secondly, you flagged inventory investments as well. Can you put a number on that for us as well, please?

So on the inventory side, we're trying to work towards a turns number. So what we've seen in the first quarter and probably for the first half is that we've seen inventory being utilized as we've had it in stock. As we did with Brexit, we brought in another nearly GBP 30 million of inventory during Brexit. We're certainly looking to add at least that much through these stocking challenges. Some of that may unwind during the balance of the year. We haven't got an exact number, but we're certainly looking to put in at least what we had through the Brexit process through ordering activities of that -- of those higher running or faster running items. In terms of the investments, I don't want to just call out specifically IESA. It is across the board. We're putting investments into our North American business. Digital, we're putting investments in terms of some of our shared services to try and put more automation in there. So again, it's more in the ordinary course. But it's a good handful of millions for us as we go forward. But again, I think the key message, rather than the value, is more that we are continuing to invest for the medium term because we believe that that's where we will get the operating leverage and take us towards that 15% mid-teens margin objective.

[Operator Instructions]

Yes. Kean, just to reiterate what David said, we're also investing in salespeople. So even though the web is really important to us, omnichannel is important and the shift that we're going through as a company that we've talked about before from product to being solutions-led requires, to a certain extent, different characteristics for our sales force. Some people will make it, some won't. But we are adding a more technically qualified, solutions-oriented sales force around the world. So -- and we're not talking just a dozen or so. We've added closer to 50, I think, over the last few months, and we'll continue to add to be able to take market share and increase the B2B customer base that we're focused on.

For our next question, we go to Harry Gowers from JPMorgan.

It's Harry here from JPMorgan. Just a quick one on the inorganic opportunities, if I can. Could you give a little bit more color on what areas the pipeline is exciting? And then also when you talk of increasing size in those deals, does that mean that you're looking to do some larger M&A? And what sort of sizes are you talking about there?

Yes. So let me take that, Harry, and thank you for joining the call this morning. First of all, given that I've been spending a lot of time in the U.S., I reached out to more than 40 companies proactively. We've got numerous discussions not just in the Americas but around the world, including in Asia, and the 3 focus areas that we're really honed in on. One is geographic expansion, which we're doing predominantly organically. So we've launched in Vietnam and Indonesia with digital-first websites. We'll start to put some feet on the ground in those areas as businesses continue to shift outside of China and we see great opportunity in those markets, as an example. Two, being product expansion. And three, being value-added service expansion. Now the priority order is actually the reverse. So it's value-added solutions, and then its product expansion, then it's geographic expansion. We know in markets like Germany, where we have huge aspirations, we have to look for a German brand over time. But we do believe we can grow double digits organically in Germany with the footprint we have, with the investments we're making in Bad Hersfeld and expansion of our warehouse there. As David mentioned, it will open in the autumn. I want to reiterate, we are not looking at acquisitions, whether it's smaller deals or transformational deals, which certainly are in the queue. We're not looking at acquisitions for the sake of scale. So scale for the sake of scale means nothing. We're looking at acquisitions that will accelerate the organic journey that we're on. So it's got to be additive to the focus, into Destination 2025 and to our overall strategy, and that's exactly what we're looking at today. Now the biggest challenge we've got on the M&A front, Harry, is a lot of these companies are private. And many of these companies we've not had historical relationships with. So we have to develop the chemistry, and that's down to me working with their CEO or Chair of the family to develop that chemistry, supply to them, to spend time with them, to get to know them, to convince them that we're the right cultural, strategic and financial fit. But for many of these companies, it's really about the cultural fit and how we treat their employees. And I'm very proud of the track record we have of how we've treated our employees. Our engagement scores are up. They're at an all-time record level. We went from 72 to 74. We paid people bonuses in the warehouse. Essential workers, we took care of. I'm really proud of how we treated our employees. And most importantly, there's a physical toll to COVID. And hopefully, none of you have to be hospitalized. I've seen it firsthand with my own father and the suffering he went through before he passed away, and I hope that doesn't happen to anyone in this call. But I'm really proud of what we've done from a physical standpoint with our employees and their health and well-being. But more importantly, today, I think, is the mental well-being of our employees. And we're doing a lot on that front, which goes a long way with the acquisition targets and how we treat our employees. It makes a huge difference, it makes a difference than probably most people realize in developing that chemistry with the privately-held companies that we're targeting.

For our next question, we go to Sanjay Vidyarthi from Liberum.

Another question on availability, I'm afraid. I just wanted to understand if you can give any guidance as to -- you suggested that availability hasn't been hit yet, but what kind of deterioration are you assuming as a restraining factor in terms of your kind of mid-teens sales growth target for the year? And kind of following on from that, you could just give us reasons as to why you can punch above your weight in terms of the market share gains and getting more stock from your suppliers than others. I guess you've talked about being a high-margin customer for your suppliers. And also, you've widened the range of suppliers. Are those the 2 main factors? Or would you also be doing other things like taking bigger upfront orders just to ensure you get the stock?

No, no. So first of all, I think David covered the incremental inventory that we're bringing in. Part of that is to protect against extended lead times. Part of that is to offset the cost of freight with doing local sourcing as well. But let me just say a couple of things here. One is, when it comes to market share growth and availability, our ability to spend a little more to get products faster, we can pass along. Many of our competitors cannot do that because of contractual reasons, et cetera. We don't -- we're very careful in terms of our contracts. We don't have cost-plus agreements. We're very sensitive to that in terms of how we do pricing, because we know our model is not about price. If you look at the top 5 reasons why customers do business with us, price might be #5, but it's probably 6th. So availability would be the top and then a one-stop shop, the ability to be able to come in -- it's like if you go to the grocery store, you have 17 items on your list, you can only get 16, you're frustrated. That's our customers. So being able to have the product on the shelf. The deterioration we've seen in availability from a bigger picture standpoint is quite small. So we're still at a very high level. We're 700 basis points ahead on availability than when I joined 6 years ago. So I would say availability for us is still good. It can always be better. On-time delivery can always be better from suppliers to us, and from us to our customers, so that's all part of continuous improvement as we move forward. But I would say at this point, I'm not overly concerned about continuing to take market share, because that's really about a solution sell. And customers are understanding of what's happening in the marketplace. So they're not naive. They -- in many cases, they probably read more than some of our salespeople on what's happening, and they're experts in lead times and they see our competitors. They get the full picture of what's happening in the channel, so they know. And we get a lot of good feedback from our customers on what's happening with our competition, and we know we've got [indiscernible] right now. And I'm going to make the assumption, which is a mistake, that we're going to continue to have that advantage. But I'll make that assumption because I'm not going to let that go away. And I get numbers every single week on availability and [ on-time ] promise, and how we're performing. We get daily numbers on a dashboard, but I like to have face to face -- or at least virtual face-to-face updates every week on how we're performing from our supply chain team, how we're really performing and the trends we're seeing on lead times. Lead times, by the way, you can't always go by what the supplier says they are. You have to go based on experience.

And Sanjay just very briefly, we're not factoring anything material in terms of a drop-off in terms of availability. But as I said, there's 2 ends of the spectrum. One is have I got the product from our supplier? But equally, can the customer actually consume the product, given that they may have their own supply chain disruptions within their own manufacturing activity? So again, it's at both ends where we are sort of cautious with regards to the outlook. But even so, we're still expecting to deliver that low to mid-teens growth for the full year.

We currently have no further questions. So I'll hand back to the speaker team.

Yes. So Elliot, thank you very much. And to everybody on the call today, thank you. And for everyone here in England, best of luck to you Sunday night. Rory, I thought you were from Scotland, by the way. So I don't know if that qualifies you as an England fan, but maybe. It's great to be back here. I would just highly encourage everyone to continue to wear masks, to get vaccinated when you can. It's obviously your decision. But having seen it firsthand and what it can do to you, I can assure you, you don't want it. And we've heard of many people recently that have had both vaccines and are picking up the virus. So I'll just say, take care of yourselves. Be careful. If you ever need our help, please reach out with anything. We're -- your health and safety is as important to us as our own employees. And so whether you're an investor or an analyst, there's nothing that can replace a life. And we're here for you if you need us, so keep that in mind. I'll end the call now, but we're available. If anybody wants to talk to me, I'm in quarantine for another couple of days. And good news is I've got a negative test. I feel great. I'm adjusted to the jet lags so if you're bored and want to have a conversation, just let Lucy know, because I'm sure she want to listen in on the call. But please reach out. And my best to all of you and hopefully, our next session will be face-to-face, even if we have to wear masks. And we look forward to seeing you in the coming future. But again, reach out if you have questions. Thank you for your continued support of our company. We really, really appreciate it, and we're here. So with that, Elliot, we'll say goodbye, and we'll speak to you all soon.

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