RS Group plc (RS1) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to this conference call on our proposed acquisition of Distrelec. I'm Simon Pryce, CEO of RS Group, and I'm joined by David Egan, our CFO; and by Pete Malpas, our President of EMEA. We've uploaded this short presentation on to our website, and you'll be able to access it under the Investor Relations section, which is www.rsgroup.com/investors or alternatively contact Lucy or Sofie in the IR function. So moving on to Slide 3. Hopefully, this demonstrates that Distrelec meets all of RS' acquisition criteria. I think you've probably seen the venn diagram on the left-hand side of this slide before, but it emphasizes that in assessing acquisitions, we look at 3 things. We look for a good cultural fit. It goes without saying that we look for sound risk-adjusted value creation economics. And most importantly, we look for a good strategic fit. Taking each of those [indiscernible] in order and moving anticlockwise, the Distrelec high-performance customer-first digitally ledged culture is a very strong fit with ours. As you'll hear from David in a minute, the acquisition economics are very sound. And as the table on the right-hand side of this chart demonstrates, Distrelec is a strong fit, taking 3 of our 4 strategic criteria, namely increased product and service solution potential, geographic expansion in some key markets for us and of course, operational improvement and effectiveness. So for us, Distrelec sits right in our strategic sweet spot. Moving on to Slide 4. Distrelec is therefore an exciting opportunity for us as we continue to execute our growth and value creation strategy. It's high service and digital. It's focused on industrial and MRO business in Continental Europe, and it's a decent scale, last year, generating EUR 34 million of EBIT on turnover of EUR 270 million. It's been on our target list for some time, and we did look at it when it was first sold out of Datwyler, but we were busy acquiring and integrating Synovos and Needlers, we did need to improve our own German business, and we were developing our integration capability and all at the same time as managing through COVID. However, we did continue to monitor them, and towards the end of last year, decided that it was the right time to approach them because we saw an opportunity to significantly expand our presence in European markets. We see that there's a high degree of operational alignment with strong combination potential and of course, this gives us the ability to drive material cost and improvement synergies together with revenue growth opportunities. And all of this will accelerate value creation for RS stakeholders. Digging into this in a bit more detail on Slide 5. Distrelec gives us increased presence in the large and attractive industrial and MRO markets. The European market for industrial and MRO products is significant, growing and has attractive through-cycle GDP+ growth characteristics. In the high-end service where we play, it's also important to have a local presence and critical mass in key markets, but to have that supported by efficient distribution infrastructure. And Distrelec significantly accelerates our growth and strengthens our competitive position, therefore, in Europe. It increases DACH and the Scandinavia revenues by 40% and 80%, respectively. It significantly increases our presence in the German market, and it gives us critical mass in Switzerland and Sweden and add scale to our operations in Italy, Benelux and Eastern Europe. And as you can see from the map on the right-hand side, this is all supported by a local presence and complementary infrastructure, which is what is needed in those key European markets that we're pursuing with lots of additional potential. Slide 6 highlights that strong operational alignment that I referred to between RS and Distrelec, we both generate about 70% of our revenue from the industrial and MRO space. We're both very digitally led with around 2/3 of our revenue coming from -- in Distrelec, coming from digital channels. We both have low customer concentration and dependency. We both have extensive supplier bases, and we both hold wide and long tails of stocked and nonstocked products. Distrelec like RS, has a really purpose-led culture with great people that we believe will be able to prosper within RS. And Distrelec is passionate as we are about being a responsible business and taking advantage of the trends in ESG as a business opportunity as well as driving good internal and responsible business practices. The 2 businesses have complementary operational footprint, Distrelec has 2 distribution centers, 1 in Switzerland and 1 in the Netherlands. It has a shared service center like we do in Eastern Europe and there is some overlap from Distrelec's 12 sales offices, which serve the 19 countries that they address. In summary, this is a business, therefore, that we know and understand, and this provides us with much reduced transaction risk. And as I've referred to that significant combination potential. On Slide 7, this demonstrates how all of this translates into strong synergy and opportunity. We see significant cost savings through combining central functions and indirect costs through consolidating carriers and transport and freight routes, improving the efficiency of the combined distribution footprint and the opportunity to drive significant operational improvement. The combined scale provides increased buying power, which brings associated procurement benefits, but also the potential closer and more strategic relationships you can build with key suppliers. And we also see revenue growth potential through bringing our much broader product range to the Distrelec customer set introducing RS Pro and our broader services solutions to a larger customer community and extending our marketing reach to a broader range of existing and potential customers. We've been quite conservative in risk adjusting the scale, cost and timing of the delivery of these synergies, but the team is targeted on the significant upside to that, which we used in building our investment case. So all in all, I think this is an exciting one for RS. Now with that, I'll hand over to David, who will take us through the transaction economics. David?

Thank you, Simon, and good morning, everyone. Please turn to Slide 8. The acquisition price of EUR 365 million or GBP 323 million represents an acquisition multiple of under 11x trailing adjusted EBIT or under 10x trailing adjusted EBITDA. We hope to complete the acquisition in 2 to 3 months after customary regulatory clearances. We expect to deliver over EUR 15 million of easier-to-realize cost savings. We also expect revenue synergies from the combined business as we drive cross-selling and benefits from greater marketing reach. The acquisition is expected to be accretive to adjusted earnings in the first full year of ownership and comfortably exceed the group cost of capital within 3 years of ownership. Our balance sheet remains strong. Post the acquisition, our pro forma net debt to adjusted EBITDA to March 2023 will be circa 1x, well within our target leverage range of 1.5 to 2x and leaving us with plenty of additional capacity to continue to drive our organic and inorganic growth ambitions. And with that, I'll hand you back to Simon to close.

Thanks, David. So in summary and in this short presentation, I think we've demonstrated why the acquisition of Distrelec is an exciting opportunity for us. And I think on this Slide 9, it shows and highlights that this is just a continuation of the RS team's effective execution and delivery of our strategy to become first choice and make amazing happen for a better world through developing our product and service solutions and enhancing our customer experience to drive stickier customer relationships and expand our share of wallet. This underpins share growth in the large and fragmented industrial and MRO growth markets in which we operate, whilst accelerating digitalization and driving operational excellence all of which, of course, is supplemented by strategic opportunities and where we have the people, the process and the financial capacity to deliver them and enhance our already strong organic growth opportunities to accelerate value creation for all of our RS stakeholders. So with that, David and I would like to hand it over to -- for a short period to allow for any questions on the Distrelec acquisition and with that, over to the moderator.

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

Two questions from me. First, on the synergy potential. Can you -- just as a starting point, remind us on the range of margins that you have within Europe. And we haven't had the split since 2017, I think. But back then, you had Northern Europe at over 19% EBIT margins, but Central Europe at 7%. And then secondly, can you talk about how you plan to integrate the 2 businesses and especially in the current DACH region, which is bigger. Are you looking at warehouse consolidation? Or do you think that the kind of distribution center footprint will stay the same for each business? And then my final question is just, I guess, on the kind of time line and history. And obviously, in public markets [indiscernible] of Distrelec. A couple of times when it demerged from Datwyler in 2018 and then it was acquired again in 2020, at each time I think it was less profitable than it looks now. But were you ever involved with it in the past? And why you decided that now it's the right time to step forward.

That sounds like 3 questions and not 2. So we'll take it as 3. David, do you want to start on the nature of the synergies. And I'm not sure that we disclose our European margins, but I'll leave you to handle that piece.

In terms of EBIT margins, we don't disclose the individual country margins. I think it's suffice to say, though, that the vast individual countries have good EBIT margins, underpinned by strong gross margins and also sensible cost-to-serve ratios. The EBIT margin of this business is slightly lower than that of the group margin, but it won't have a material effect on the overall group margin -- EBIT margin as we see it. In terms of the synergies, the synergies are, as we said, more orientated towards costs. We said they're going to be more than EUR 15 million, and it will be in bigger buckets such as procurement, distribution and also some SG&A type costs.

And Pete, perhaps you'd like to just expand a little bit on your approach to the integration and the sorts of things at the very highest level you think will drive the realization of those.

Yes. No problem, Simon. So as Simon articulated at the beginning, one of the key drivers for any acquisition is to drive operational efficiencies. And this is no difference here. You asked the question specifically about the distribution centers, I think, in Europe, as Slide 7 shows, we see a number of potential opportunities from transportation, freight and across the whole supply chain capability, you'll be aware that we've made significant investments over the last couple of years in this area in EMEA. So I think as we understand this business more closely, we'll be able to look at how do we leverage all of those investments we've made in the last couple of years.

Thanks Pete. And then just, Rory, on prior interest in timeline, as I said, we have looked at this a couple of times. It has been on our target list. I think Aurelius has done a good job in, I suppose, fixing and then investing in and growing Distrelec. I think though we see significantly greater opportunity under our ownership to drive that growth further. And of course, to realize the combination benefits that we've alluded to and referred to both in the presentation and then the things that David and Pete have just talked about. So for us, it's the right time to acquire Distrelec and we see really good opportunity for Distrelec and for RS combined going forward.

The next question today comes from the line of James Rose from Barclays.

I've got 2, please. Firstly, could you talk about their recent growth track record. Are they taking market share themselves recently? And then secondly, when you compare their operations, when you compare their customer value-add options versus your own, Where are they at? How much work have you got to do to bring them up to your RS standards?

David, do you want to talk about the growth side of things, and then we'll hand over to Pete to talk about their operations versus ours and the opportunity or otherwise that we see to accelerate revenue growth.

So in very simple terms, their growth has been very similar to that of our EMEA business in the markets in which we have common businesses or common business and don't expect that to change. I won't talk about current trading, but certainly historical trading, very similar trends to that of our EMEA business.

Yes. And I think that is a credit to Aurelius who have helped support and drive that Distrelec growth just as we have been investing in driving that growth as well. So very similar sort of profiles there. [indiscernible] their operational maturity and the ability for us to pull through and accelerate revenue growth.

Yes. James, I think we covered in the earlier presentation. They've got a very broad customer count across the territories in which they operate, and we see a great opportunity there to work with Distrelec to exploit both opportunities. Given the broader product range that is available through RS, there's some cross-selling opportunities, but also significantly through our RS Pro brand where we see a great opportunity there, particularly on the services side, they have some service capability, but not as mature as ours at this moment in time. So again, a great opportunity to expand into a new customer base with our existing service offering, sorry.

Just to put it into perspective, about 8% of their revenue is services and solutions. So we would see certainly plenty of upside there over time.

The next question today comes from the line of Oscar Val from JPMorgan.

Simon and David, just 2 quick ones from my side. The first one is just understanding the supplier relationships. Are there any, I guess, exclusive agreements that could have to be renegotiated or how that change of control cost or any, I guess, dis-synergies that we should think about? And then the second one is, could you just touch upon how much exposure you have to electronics at Distrelec?

So just on supplier relationships, Oscar, no, there are no dis-synergies around suppliers. There's actually quite a big opportunity around suppliers as we become potentially better partners for certain key suppliers. So we don't see -- we see this as a positive not just for Distrelec customers, but also for Distrelec and RS suppliers. David and Pete between you, do you want to talk about electronics?

Sure. So Distrelec is largely an MRO industrial player. In terms of the on-the-board exposure that they have, it's high-single digits or 10% or so, with the balance being more of an industrial natured product sale and customer sale with the customers then pulling through the on-the-board products in the same way that they do with RS.

Nothing really to add Oscar to what David has just said there. I think RS have done a good job to focus on the MRO customer segment, and that's where the large performance has come in recent times.

And I think a lot of the onboard particularly electronics that they do is in support of their customer set and is very targeted to that industrial and MRO customer needs.

The next question today comes from the line of Anvesh Agrawal from Morgan Stanley.

I got 2 as well. And apologies if you already talked about it, I was slightly late. But -- on the synergy side, EUR 15 million is the gross number, right? Can you just sort of tell us about the phasing and what are the costs that you expect to achieve it? So how should we think about that over the next couple of years? And then the second is really, I mean, on the last call, I think we talked about some spare capacity in your own distribution centers and wondering how this M&A could have helped to achieve the fill rate on those distribution centers?

David, do you want to take synergies and phasing, and I'll just touch on distribution.

So with synergies, we've said more than EUR 15 million and the cost synergies, there will be some revenue synergies, so add a bit on there, and that should give you sort of a synergy number. In terms of the cost to implement, it's going to be a bit more than 1x, somewhere between 1 to 1.5. So maybe take the middle of the road there. And then with regards to the phasing, the delivery of the synergies will occur over a 3-year period. the cost synergies will be a little bit more front loaded.

And then on the distribution infrastructure, we have been investing and consolidating our European and effect our global distribution and infrastructure network, bringing Distrelec into the RS Group does give us an opportunity to consolidate at the right time, some of that distribution infrastructure. It also creates a cost avoidance for us where, actually, in particular, in Switzerland, we were probably going to have to put in a smallish fulfillment center or a distribution center, and of course, Distrelec already has a very effective 1 of those. So there are real benefits Anvesh from combining the 2 distribution networks. And from what we can see, there's no duplication and inefficiency over time.

The next question today comes from the line of Henry Carver from Peel Hunt.

Just 2 quick ones from me. First of all, any ideas around the NPS scores for Distrelec and -- or at least how they compare to RS. And the other thing is just in terms of integration thoughts around branding, are you going to look to convert it to an RS brand in due course? Or just how we should look at that?

Pete, probably both of those on customer satisfaction and NPS score and then views on branding is for you.

Henry, let's take the NPS question, first of all. I'm going to talk both a little bit about internal and external. So from an external perspective, Distrelec had been very focused on that whole customer experience and digitizing to become best-in-class use their terminology there. And so all of the research we've done, all of the assessments we've looked at and our customer satisfaction level is extremely high, at least comparable to our own. So we're very comfortable there from a customer perspective. And then when we look internally, looking at both their internal customers and employees, we've equally got a very high engagement score and satisfaction level. So I think both externally and internally, things look very good. From a brand perspective, initially, there's value in the brand, which Distrelec trade under, so they will be part of the group. So we'll retain their brands, but as part of the RS group. And then over a period of time, we'll assess what that looks like as we get more integrated into the business. So no immediate change, but we'll keep you posted on that.

There are no additional questions we see at the moment. So I'd like to pass the conference back over to Simon Pryce for any closing remarks.

Okay. That brings to close this presentation on Distrelec and we look forward to seeing you soon, certainly in 6 to 8 weeks' time. Thanks very much.