RS : Trading Update (TRANSCRIPT)

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RS Group plc Q2 FY2023 Trading Update

Lindsley Ruth:

I'm Lindsley Ruth, Chief Executive Officer of the RS Group. And I'm joined today by David Egan, our Chief Financial Officer. So, welcome to our Q2 trading update to the 30th of September 2022.

We've delivered another strong performance this quarter, due to the hard work and dedication of our teams. And I would attribute that to the culture that we've established. We continue to invest in our people and our culture who are fundamental in driving our performance. And to say thank you for their hard work, and then recognition for the more difficult economic backdrop around the world we're giving all our permanent employees the £500 award in November. We've had an exciting summer as we started to rebrand our business RS around the world. We've already rebranded IESA and Synovos, which we acquired, to RS Integrated Supply. And this has been very well received both externally as it brings recognition to our global offer and improves our procurement strength. And internally as the business adapts to the best mind commercial model as we unite our group. Next month, we rebrand Needlers and Liscombe to RS safety solutions and Ally becomes RS Americas, in early calendar 2023. From a performance perspective, we have continued to grow our market share, we continue to take share. Our active inventory management has supported our product availability, we've improved our pricing and discount model. We're running a more commercial regional operating model, focusing on where we can add more value. As such, we remain confident in the strength of our people, our proposition, and the opportunities we see to drive ongoing stronger revenue and profitable growth.

So, at this point, I'll hand over to David to take you through our second quarter in more detail.

David Egan:

Thanks, Lindsley, and good morning, everyone. As Lindsley said, our performance for Q2 was strong. Like for like revenue increased by 15 percent. Within the product categories, our industrial components range, which accounts for around 75 percent of our group revenue grew by 21 percent. Electronics in single board computing which accounts for the remainder has seen some slowing in growth partly due to tough comparatives, but also an ongoing lack of supply particularly within Raspberry Pi, in our OKDO business. Our main own brand range, RS Pro, grew revenue by 21 percent, driven by strong availability, new product launches, and greater online personalization, leading to increased conversion. Web revenue increased by 15 percent like for like, with digital accounting for 63 percent of overall group revenue. We continue to see growth in our average order value from our loyal customers, which is our key area of focus. Conversely, there's been a small decline in one off guest purchases, which drives limited value to the group. RS Integrated Supply Amia [spelled phonetically] continues to win more new contracts with existing customer retention remaining strong. In the Americas, we see significant growth in the pipeline of new contracts. And we're working on several global pitches utilizing RS Integrated Supply as a new brand.

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Moving on to the regions, Amia accounts for circa 60 percent of group revenue, and it grew like for like revenue by 15 percent in the quarter. Germany remains strong driven by our ongoing investment in improvement to the commercial and operating model, which is focusing on people development, improved digital capabilities, and product range expansion. All in line with our overall group strategy. The benefit from bringing more products straight into our German distribution center for our European business is in the early stages of ramp up. U.K. and Ireland, which accounts for roughly 40 percent of the region's revenue, delivered solid volume growth, resulting from a greater focus on higher value B2B customers in digital revenue growth and price optimization, supporting revenue growth and gross margin gains. France is focused on improving the customer experience through targeted sales campaigns to drive increased digital and own brand participation. The Americas, which accounts for circa 30 percent of group revenue delivered 19 percent like for like growth in the quarter.

Our customer base is an industrial bias with our strong growth being delivered across the board in terms of industry, vertical and location. Our digital participation has grown driven by core web, reflecting our ongoing investment, focused campaigns, and greater sales engagement. Our strong availability which has supported our outperformance reflects the increased capacity at our distribution center. The market dropped backdrop remain favorable, although customer behavior has become a little more irregular, suggesting a little more uncertainty within the market, although we remain confident as we look forward. Our acquisition of resources remains on track, and we anticipate subject to review by the Mexican competition authorities that it will be completed by late November. And then finally, Asia Pacific, which is circa 10 percent of group revenue, and grew 6 percent like for like in the quarter, our growth was affected by constrained supply of single board computing, particularly Raspberry Pi sold within our customer consumer brand, OKDO. This is a lower gross margin product and we've managed our costs appropriately. Excluding OKDO a revenue growth in Asia Pacific for the quarter was 14 percent. Additionally, we saw a slowdown in the electronics market against a strong comparative theory. This is primarily within Japan. And this has a higher participation rate within Asia Pacific versus other parts of our group.

However, the key fundamentals of operating a more commercial strategy in the region are unchanged. We are improving our industrial product offer which is delivering strong market share growth and we're focusing our efforts where we can drive greater value and returns to deliver operating profit margin improvements. Our acquisition of Domnick Hunter in Thailand is performing well, and we're already working on some joint pitches. So, across the group inflation continues to be a key feature. We saw price inflation continue at around low double digits in the quarter. This has been driven and supported by cost increases both at the product and Opex level, which are not abating given ongoing energy and labor pressures. The remainder of our 15 percent like for like revenue growth has been delivered from brand volume.

We have successfully passed through product cost inflation while keeping our value proposition competitive. We've delivered gross margin improvements through our margin optimization work, a tighter discounting policy and more focused buying commitments. Often inflationary pressures, especially within labor have continued, but this has been offset by strong cost control and positive operating leverage. Our transactional currency pressures are minimal, with most of our products,

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Ramer [spelled phonetically] and Asia Pacific bought in pounds or euros, our Americas business is largely sourced locally in dollars. We've continued to invest in our operating model to support the growth opportunities we see and all of this as part of our journey to greatness plan.

On the cash side, we've tightened up our inventory management further, our sales and inventory teams have been more targeted with our marketing campaigns. We're investing in products that are higher turning and where we see customer demand. And we're working closely with our suppliers to ensure flexibility within our purchase orders. Our availability to customers has improved due to deliberate interventions our teams have made. However, there is still little improvement in supplier lead times and overall supplier performance. We remain a very cash generative business. So, looking forward, given our strong trading performance year to date, we expect our full year revenue and adjusted profit before tax to be slightly ahead of current consensus estimates for FY 23. We do expect there to be a greater first half waiting than historically delivered. While we are expecting slower economic growth in the second half, we have contingency planning and cost mitigations in place with all markets ready to respond, if appropriate, to protect our profit. Despite the environment, we remain confident in driving further market share gains to generate stronger revenue and higher quality profitable growth.

With that, I'll hand you back to Lindsley.

Lindsley Ruth:

Thank you, David. You know, people constantly ask us why do we think we're gaining market share? Why are we growing? And I'll tell you that I think it's the strength of our people. It's our culture and it's our differentiated offers, standing products and solutions focused. And I think our investment over recent years has changed our group model. We're more focused on providing what our industrial customers want. We have less exposure to more cyclical electronics market and less, you know, I think we're less exposed to a potential recession too, given the strength of what we're doing overall as a company. There's significantly greater revenue from service solutions and digital and we have more data and insight than most of our peers. And today, we've got greater regional and business accountability and responsibility.

When I joined this company, we had no regional P&Ls, and David put it in place. And now we have it. And you know what? People lived through it. And you know, we are people come first, but people drive profit, which helps us make a difference for the planet overall, which is our triple bottom line -- people, planet, profit. Most importantly, we've got a different mindset and culture today. And I couldn't be more proud of the people we have in this company. So, I'm not going anywhere. That means we're more proactive, agile, and a commercial group. We've demonstrated over the last few years our resilience, while still investing in our future, with capital discipline, based on David looking at it on a daily basis [laughs]. So, despite the more challenging economic backdrop, which involves supply chain shortages, wage inflation, all the things that you all know about, we're concentrating on what we can control -- our proposition, our service and being a partner to all our stakeholders. We will, however, continue to invest organically and inorganically as part of our journey to greatness, which is to capitalize on the significant market share opportunity, given that

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we have less than 1 percent of the market that we see and turn our challenges into opportunities. So, taking those headwinds and turning them into tailwinds. This will drive stronger revenue and high-quality profitable growth.

And with that, I'd like to invite your questions.

Male Speaker:

Thank you. If you would like to ask a question, please press star followed by one on your telephone keypad. If for any reason you would like to remove that question, please press star followed by two. Again, to ask a question, please press star followed by one. As a reminder, if you are using a speakerphone, please remember to pick up your handset before asking your question. The first question today comes from the line of Rory McKenzie from UBS. So, please go ahead. Your line is now open.

Rory McKenzie:

Good morning, all. It's Rory here. Hope everyone's well. Just two for me, please. With price inflation still running in low double digits, as you said, that means you know real growth has slowed to low single digits having been high single digits last quarter and double digits before that. You still talk about share gains, so does that suggest your end markets are now you know, kind of flat to declining? And then can you talk about the makeup of that kind of real underlying 3 percent to 4 percent growth in terms of number of customers or growth in wallet share? And then secondly, on the outlook for the price inflation, often there's a lot going on, you've got a huge range of products, but can you talk about how your supplier product availability is changing? And when you might expect that price inflation to start to stabilize? Thank you.

Lindsley Ruth:

Yeah, so just on product availability, you know, the industry in general still has a number of shortages. And we've got great supplier relationships, so that's helping us get product, and availability drives margin in this business. So, I don't see that, Rory, I don't see that changing in the next six to nine months. You know, I think, you know, we're still in this market with higher, you know, extended lead times, et cetera. David can do this. He can take the inflation.

David Egan:

Sure. So, Rory, in terms of the reported growth, we said reported growth at 15 percent for the quarter. We did experience some unavailability of OKDO, Raspberry Pi. If you strip out Raspberry Pi, the growth in the quarter was 18 percent. And again, split by region that's 17 in Amia, 20 in the Americas, and 14 in Asia Pacific. So, our overall growth, you know, we sort of, I guess sort of, you know, 3-4-5 percent within the marketplaces. Our focus has been very much on driving profitable growth with the right customers, as opposed to just driving top line that's not necessarily value attributing. So, we have seen customer numbers relatively stable, but the quality of the customer

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across the group has continued to improve. The average order value has continued to improve and average order frequency has also continued to improve. From an end market perspective, it depends on the country, but overall, we would say that there is still modest growth within the end markets, but we continue to outperform that. And that is what the exception of electronics where there is a little bit of a slowing in electronics that we've seen during the back end of quarter two. And that's more a little bit more focused on semies and passives at this point in time. So overall, we would say we're continuing to outperform, we continue to take market share, but we're very much focused on quality of customers, share of wallet, and overall profitable growth.

Rory McKenzie:

Thanks, that's really helpful. Maybe just one follow up on, given Lindsley made the comment that, you know, availability drives margin. And right now, your availability is better than peers and others in this constrained market. Obviously, you're pointing towards your gross margins still being mightily up in H1. Do you think that represents that increasing mix of quality customers? Or is that a short-term phenomenon, given the relative availability you're offering your clients, if that makes sense?

Lindsley Ruth:

No, I think it's long term, I think, you know -- look, in our business, we have an average order value that's just over £200, you can keep your prices up. And so, we are, you know, going through planning for the future right now. And we want to keep our prices high. And you can't look at what's happening online, you got to focus on in terms of competitors, you got to focus on how you can drive the highest margin, and not discount, and make sure you're getting the highest price you can get for the value of your service. That all comes down to service. You know, Rory, if you have the best service, people don't care about the price. So, you know, and I'm not saying that we're not gouging customers. We have a reasonable price for the service that we give. So, I don't expect that margin to come down.

Rory McKenzie:

[unintelligible]. Thanks very much.

David Egan:

So, just one build. And we have seen our availability improve, our on time to promise has improved over the first half of the year, which we're pleased about. And the consequence of that is we've also then seen our net promoter score, which is our key customer metric, that is also starting to begin to trend in the right direction as well. So, again, it's all linked back to availability service, and then charging the right price for the value that we're delivering to the customers.

Male Speaker: