RS Group plc (RS1) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to the RS Group Q3 results. My name is Drew, and I'll be the operator for today's call. [Operator Instructions] It's now my pleasure to hand over to Simon Pryce, Chief Executive Officer, to begin. Please go ahead.

Good morning, everybody, and thanks for joining us this morning, and welcome to this Q&A after the release of our trading update earlier today. In brief, as you might have expected weakening Q3 industrial production and PMI data, mainly in Europe and particularly in the U.K. together with a week or 2 weeks at the end of December, means that our Q3 trading was a bit softer than anticipated. Whilst we've seen trading recover in January, in line with our revised expectations, we don't think we're actually going to catch back up the weaker Q3 trading with only 2 months of the year left. And therefore, we're guiding to full year profit before tax being around the bottom end of the current consensus range. More importantly, as I look across the business, I'm really pleased with the progress we continue to make as we drive efficiency, execute better and continue to deliver share gains even in these challenging markets. Whilst PMIs have softened, we continue to manage our cost base effectively whilst maintaining our investment in a controlled way to further strengthen our already differentiated proposition and to better position us to generate stronger and more sustainable returns in the future, which will accelerate when markets return to growth. So with that, I'll hand it back to Drew, who will facilitate the Q&A session. Drew, over to you.

[Operator Instructions] Our first question today comes from James Rose from Barclays.

I've got 2, please. The first is for the U.K. specifically within EMEA, could you perhaps give us a number for how the business has traded? Secondly, is there a view on sort of exit rate that you could talk to? I mean, you sort of mentioned January, perhaps that's a bit more stable. But I mean how would you think about EMEA for the fourth quarter? And then, thirdly, if we think about the level of OpEx inflation still running in the business in both FY '25, FY '26, what's your latest thoughts there?

Thanks, James. We're not going to get down to country level quarter-on-quarter detail. But just to reemphasize what I said both in the announcement and in my introduction, we did see PMI data soften in EMEA in Q3 and particularly in the U.K. from November and that is the principal area where trading was weaker than we anticipated. The exit rate is alluded to and I'll comment about January trading being in line with expectations. And we're comfortable that markets have stabilized, but PMI data has yet to demonstrate a sustained recovery. And so it's still quite challenging out there. And costs, Kate for '25 and '26?

So inflation costs in '25 are the order of around 3-ish percent. And just to kind of reminder as to how inflation works within our RS salary increases going in June every year. With regards to next year, and clearly, we're still working through our budget numbers. But in our markets, weighted inflation is sitting around 3% to 4% that includes the [ NII ] increase that came out of the U.K. budget.

And I think just to sort of conclude on next year, James. I don't know what people are going to do after this call, but our view is it makes most sense for us to continue to plan relatively low growth and soft markets until we see a more sustained improvement in PMI data.

[Operator Instructions] Our next question comes from [ Karen Soe ] from JPMorgan.

Just around the tariff [Technical Difficulty] and maybe on that basis, how should [Technical Difficulty]

Karen, unfortunately, I can't hear you. You keep cutting out. Is there a way you can use the chat box or find a clearer line?

Yes. Sorry, can you hear me now? Or is this better?

That is better.

Yes. So my question is around the tariffs. Maybe if you could remind us about your exposure there in Mexico and China as well? Basis, how should we read the strength in Mexico and the strength in Americas? How much of that do you see as clients pulling forward? Hopefully, that went through.

I think -- sorry, you kept cutting out, Karen, but I'll try. I think it was a question about tariffs. It's still too early to understand what is going on in reality on tariffs versus what is political positioning. Importantly though, we need to think about tariffs in 2 or 3 different ways. Firstly, it's the tariffs on goods that we import into our central and regional distribution centers, where that's sourced out of Mexico and China. That's principally an issue for our suppliers, and most of them have been busy working on managing their supply chain for a number of years. So we don't see a major issue with supplier supplying -- suppliers supplying from high tariff areas and being unable to find an alternative. Second, we don't do much cross-border trading into the U.S. from Mexico, from China or indeed from Europe. So that's not really an issue for us. Thirdly, tariffs because we have pricing power, generally are passed on in the cost price or as a separate line item to customers and importantly, because we're in a broad range electrical and industrial automation MRO provider, we carry a broad range of brands and product alternatives. So if you go back and take a look at -- we've also experienced the first version of tariffs under the last Republican administration, and if you go back, you'll see we were able to weather that without really any material impact and indeed a little bit of benefit.

[Operator Instructions]

We had one question on the webcast, which I'd like to ask, please. Given the strength in Asia Pacific, is it fair to say electronics conditions have improved?

I wouldn't have said they've improved. I would say they're not -- they're not getting materially worse. I think we have seen 2 years of both reducing demand and supply chain unwind and it certainly doesn't seem to be falling at the same pace. And if anything is stabilizing, and indeed, even in a couple of areas, we are beginning to pick up a little bit of that share that we lost over the last couple of years as people get back to a more normal way of buying for production.

I've got another question actually on the webcast. Just coming back on the cost inflation, the '25 -- well, full year '26 actually, given the ongoing weak PMI situation and your comment that you should continue to plan cautiously in Europe, in particular. Could you maybe flesh out your plans for cost mitigation rather just allowing for the 3% to 4% cost increases on a potentially stable top line? So just in terms of where we are, just as a reminder as to -- for the cost base dynamic that we have about 6% of our costs are variable in relation to revenue. We're still very much in the process of our budgeting dynamics. So the indicators of inflation are reflection of the metrics that we're working with at the moment. We are -- and intend to continue to invest in our business. We think it's very important that we continue around the strategic actions that we talked about in CMD as they position us well for market recovery and ensuring over the long term, we can have a more productive fixed cost base more sustainably. So therefore, there will be a continuation of the integration and restructuring costs into next year. We also expect more benefits to come through into next year. So I would expect the behavior of the cost base in full year '26 to reflect those assumptions that we make, which are similar to the assumptions in '25.

And I suppose I'd just tail this question with something that I said at the introduction, which is that we're making really good underlying progress at RS as we told you back at our prelims last year. We do see a significant opportunity by investing sensibly and in the right place to better position RS to benefit both from the existing business it does and also to accelerate share gain and our gain with market when it gets back to growth. We've made really good progress on our digital and technology that platform improvements, our e-commerce capability. We're introducing major changes to our delivery to promise capability. We're improving our customer relationship management. We are beginning to use trends and effective data and to leverage much more analytics and the decisions we make, and all of this is as a result of the investments that we have made and will continue to make going forward. But clearly, we're mindful of the trading environment in which we play, and we'll continue to ensure that investment is appropriate, positions the company well for recovery, but is not excessive given that we're anticipating a flatter 2026 than we might have said a year ago.

[Operator Instructions]

Yes. Okay. So another one on the webcast. Can you just elaborate on the comment that you think you're taking share. Can you please point us to where that is most evident regionally? And maybe can you quantify the numbers at all? Just remind me what measure you used for market shares, please?

Thank you. It's always an interesting question talking about market share. As you know, it's quite difficult to define the markets in which we play. More importantly, it's quite difficult to measure them quarter-on-quarter. The way we test that whether or not the market -- we're gaining share or not is talking to our suppliers. We have about 200-odd -- we have about 2,000 suppliers, all of which are key, but there's sort of 2 -- just over 200 of them that will share with us on a quarter-by-quarter or half year by half year data around the growth or otherwise in the distribution channel to market and then the growth or otherwise of the participants in that channel. And we continue to gain share in virtually all of our suppliers' channels and that's the source of how we verify whether we're gaining share or not. I think -- we also look at things by product category, and I think we're gaining share across all categories with the exception of particularly semis and passives in electronics, which we talked about a lot before, we benefited from supply chain constraints to -- and when we had availability to deal with customers we wouldn't traditionally deal with. And in one area, connectors where we have a particular supplier issue, which we've now dealt with. So pleased with the continued share gain that we see. Our suppliers are pleased with what we continue to do. But clearly, we're doing it against the background of quite a tough market. So it's difficult to see that in our top line numbers.

And the follow-on from that is actually asking in regions or countries.

I don't think we're going to get into talking about regional share or individual country market share, but it's pretty much across the board.

Okay. Another question online. Referencing the stability in January, does this include the U.K.? And does this imply a year-on-year stability?

I think we refer to stability in line with our revised expectations. I mean it is more stable, but it's still quite challenging in the U.K. everywhere else is actually not a bad place.

I think that's all the ones we've got on the webcast now. Drew, any more come in, or otherwise...

We have -- we have no further questions dialed in either, so I'll hand back over to Simon for some closing remarks.

Great. Thanks, Drew. Thanks, everybody, for attending relatively early this morning. And I think the main message we're trying to say is, look, we had a weaker Q3 for the reasons I've outlined. I don't think we're going to catch that up in the last 2 months of the year. Trading has stabilized, but we haven't seen a sustained recovery in PMIs across the globe really yet. And so we're going to be pretty conservative going into '26. The most important thing for me is the business is performing on an underlying basis, much better than it would have done a couple of years ago. We are making significant improvements in our underlying processes and infrastructure. We're continuing to gain share whilst we do that, and this is positioning us for a much more sustained and high-quality growth and value creation, particularly when markets return to growth, which they certainly will. Thanks for your interest.

That concludes today's call. You may now disconnect your lines.