RS : Trading Update (TRANSCRIPT)

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RS-Group-Q3-Trading-Update

Operator:

Good morning or good afternoon. Welcome to the RS Group, PLC Q3 Trading Update. My name is Adam and I'll be your operative for today. If you'd like to ask a question at the Q&A portion of today's call, please press star one on your telephone keypad if you've joined us by the phone or if you've joined by the webcast, please use the Q&A option towards the top right of the page. I would now hand over to David Egan to begin. So David, please go ahead when you are ready.

David Egan:

Thank you, Adam. And good morning. I'm David Egan, acting Chief Executive Officer and also Chief Financial Officer of RS Group. I'm joined on this call by members of our senior management team [inaudible] available to take questions at the end of this update. Welcome to our Q3 trading update to 31 December 2022. This quarter, we have continued to deliver further market share gains with our core industrial customer base. Our people are the greatest [inaudible] and they continue to be brilliant. I, alongside the senior management team, thank everyone for their ongoing hard work.

In December, Lindsley Ruth stepped down as Chief Executive Officer of RS Group, and we will miss his humor, knowledge, and industry experience. I would like to personally thank Lindsley for all that he did for RS, our people, our stakeholders, and for me. Thank you, Lindsley. But Lindsley has left the greatest legacy at RS, a great team and a purpose led culture. Our people are empowered to continue [inaudible] as we accelerate our profitable growth opportunities on our journey to greatness. Our regional model has increased accountability and responsibility throughout the group, allowing our teams to utilize their local, industry, customer and supplier knowledge to [inaudible] appropriate proposition. RS is in a strong position with passionate people who see significant growth opportunities. And last week we welcomed Risoul to the group. We're really excited about the opportunities Risoul opens for us and I look forward [inaudible] on Risoul's progress in coming updates as our teams in the Americas have started working closely together already.

Now moving on to our overview of our continued outperformance in quarter three. Like for like revenue, revenue increased by 8 percent. Industrial products, which accounts for circa

77 percent of aggregate revenue, remains strong, delivering 15 percent growth, including low single digit volume growth. We continue to gain market share within this area, as evidenced by conversations with our suppliers, industrial production data and peer reports. Electronics revenue fell by 4 percent during quarter three, reflecting the slowing market with industrial and electronics outperforming more consumer related electronics. Revenue from single- board computing products, which account for less than 2 percent of group revenue and is sold largely within OKdo almost halved due to lack of supply.

We are moving our electronics range closer to our industrial customer's needs. We are well placed to provide electronic expertise and solutions for our core industrial customers base, as their businesses become more automated, digitized, and connected. Our main own-brand product range RS PRO revenue by 19 percent, driven by enhanced brand recognition, phone product launches, such as our energy efficiency range, and better marketing tools that have driven greater conversion rates. Web revenue rose 9 percent like-to-like with digital accounting and 64 percent of overall growth revenue.

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Our average order value from loyal customers is growing again, reflecting the strength of our proposition. We continue to pivot our proposition and service towards higher value customers. However, we are also developing a more cost effective service, such as using central sales teams or increased automation to provide a more profitable buffer to both lower spending customers. RS Integrated Supply is delivering strong growth, reflecting increasing demand for our service as businesses look to consolidate spending through trusted suppliers with transparent pricing.

In Americas, our integrated supply business is targeting -- is trading above target, giving growth and new business and from our existing accounts. And in EMEA we are seeing improved trading within our core client base as they continue to recover from the pandemic and ensuring supply shortages which have been holding back their businesses.

Moving now onto our regions. EMEA, which account for 61 percent of group revenue grew like-for-like revenues by 12 percent, outperforming our industrial peers. We've enhanced our strategic supplier relationships, enabling us to broaden our product range and offer. We've increased our focus on our corporate and key customer base - our core areas of profitability. We've developed our service solutions propositions further with strong growth in our paid for services offered.

Our strongest performing area is the U.K. and Ireland, accounting for roughly 40 percent of the region's revenue. This is where our go-to market strategy is the most developed and we have a lower proportion of electronics revenue and therefore less impacted by the slowing market and product shortages. Revenue in the DACH region, which is Germany, Austria and Switzerland, despite having above average electronics participation delivered revenue growth marginally ahead of the group as a whole. The strength versus the underlying market reflects the investments we have made to our commercial and operating model. Service levels are improving as the increasing utilization upgraded and expanded distribution centre in Germany is resulting in more accurate delivery performance.

For the Americas, which accounts for 31 percent of growth revenue. Like-for-like growth was 6 percent, against very strong comparatives of 37 percent last year. Our revenue per day remains strong and we continue to drive our transformation within the region from a supplier of components to an industrial solutions provider with improvements in our focus areas of growth in our B2B customer base and increased average order value within our key and corporate customers due to improved sales force initiatives. Improvement in our digital offer due to more targeted sales campaigns and greater collaboration across business functions. Better availability due to the increased capacity at our Fort Worth distribution center, investment into our product offer. We continue to invest to support future growth, especially after generating over 40 percent revenue growth over the last 18 months.

We have a strong team in the Americas, excited about our growth opportunities, widening our product range, developing our service solutions offer, expanding our reach into Latin America with the acquisition of Risoul, growing our customer base and developing our margin further improving our cash returns. We are annualizing over 1 billion U.S. dollars of revenue and can see how our proposition is gaining traction.

Okay, now for Asia-Pacific, which accounts for 9 percent of group revenue. Like for like revenue fell by 8 percent. Our revenue performance continues to be affected by several factors that we've talked about before. The slower electronics market, which is 35 percent of

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the region's revenue. Lack of single-board computing product due to a global chip shortage. This is a lower margin product, that knocked six percentage points off the region's revenue growth rate during the quarter. Tough comparatives and the more challenging backdrop in China with COVID lockdown, difficult economic conditions, and the chip export ban.

Although China is less than 2 percent of our group revenue, it accounts for circa 15 percent into Pacific's regional revenue. We continue to adjust our offering in Asia Pacific concentrating on where we have a differentiated offer versus the competition to drive profitable growth. We are developing our industrial products offer, which grew 10 percent. We're taking market share. We're operating a more commercial proposition and strategy, concentrating our efforts on more profitable revenue opportunities, generating a strong margin and adding to our service solutions offer, such as the acquisition of domnick-hunter last year.

Across the group price inflation at the group level continues to be low double digits, but we are starting to see early signs of this easing. We have still been delivering volume growth within our industrial product range, but volume declines within electronics reflect a more cyclical and slowing market. Our gross margin continues to benefit from margin optimization work includes pricing and discount model. Plus the inflationary pressures, especially within labor have continued but this has been largely offset by strong cost control and operating leverage.

Meanwhile, we continue to invest in our operating model to support the growth opportunities that we see. We are managing our inventory closely and increased our inventory turn from the 2.4 times reported in the first half as our purchases have concentrated on faster turning product categories, and customer web searches. There has been some improvement in global supply chain lead times and our inventory availability has also improved. This, combined with enhanced customer support in delivery information, led to an improvement in our Net Promoter score across the group. We continued to remain very cash generative.

But looking forward, given our performance and strong cost control year to date, we expect our full year adjusted profit before tax be towards the top end of current consensus estimate for FY 23. We continue to be mindful of a more challenging backdrop and have contingency planning and cost mitigation in place with all markets ready to respond, if necessary, to protect our profit.

Despite the environment, this is an exciting time for RS group to really drive profitable market share. We have a team of passionate people whose specialist expertise and a why not mindset. We have a business that's benefited from significant investment over recent years, especially in operation, digital, product, and service solutions for people. We've established a strong strategic vision with focus on making our customers lives easier. We're running a more commercial regional operating model, focusing on where we can add more value. We're providing innovative solutions with increased accountability and agility. And most importantly, we have a purpose led culture. We've proved that despite all the challenges of the last few years, we can outperform our industrial peers while still investing in our future. Additionally, we are continuing to look at ways to accelerate our growth through inorganic opportunities and on maintaining our strong investment discipline. Very excited about the opportunity Risoul brings to drive stronger revenue growth within the Americas, especially with the move toward onshoring being seen in the region.

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Next month our business in the Americas, Allied becomes RS, providing even greater cohesion and consistent brand recognition across the group. We remain confident in the strength of our people and differentiated proposition to turn challenges into opportunities, to drive further market share and generate stronger revenue and high quality profitable growth. As an acting CEO, I will ensure we continue to look after the heart of RS group. That's been our people and our purpose led culture.

With that, I'd like to hand you back to Adam and invite your questions. Please type your questions in the message box on the webcast or dial into the audio conference call and ask your questions directly. Adam, back to you.

Operator:

Thanks, David. As a reminder, if you would like to ask a question today, that's star one on your telephone keypad, if you've joined us by the phone. If you've joined us by the webcast, please use the Q&A option to the top right of the screen. When preparing to ask your question, please ensure your headset is fully plugged in and unmuted locally. Our first question today comes from Sylvia Barker of JP Morgan. Sylvia, please go ahead. Your line is open.

Sylvia Barker:

Thank you. Hi. Morning, everyone. Just to confirm on the overall volumes, first of all. So you're saying the price is still low double digits? When you say low single digits in industrial implies low double digits in electronics. So overall, that will be down slightly -- down low single digits for the group? If you can just confirm. Secondly, the U.K. and Ireland electronics seems to have grown well in the quarter. If you maybe give us an idea of that growth rate and you say that the split of customers is different in the U.K. from the rest of the business within electronics and still more industrial oriented. Could you give us any quantification of those splits perhaps in the U.K. versus other regions? And then finally on China and what impact that had on Asia Pacific in the quarter and obviously now. Thank you.

David Egan:

Sure. So let me kick off and then I'll hand some of these over to our team. So in terms of volume, our overall volume growth was eight percent for the quarter. We saw low double digit price for the quarter. For industrial we saw 15 percent growth and, again, low double digit. So again real volume being delivered in industrial. And we saw volume contraction in electronics at the group level. It does vary by region, but that's how it stacks at the group level. So industrial, 77 percent of the group saw volume growth. Electronics, which is 23 percent of the group, saw some volume contraction.

In terms of U.K. and Ireland. I'll hand over to Pete Malpas who was our president of the EMEA region. But overall, I would just say to start with that U.K. and Ireland business certainly did perform very well. It was ahead of the group average in the quarter in terms of their overall growth and their performance. I will let Pete just handle now in terms of how we've done it. Pete.

Pete Malpas:

Good morning, David. Good morning, everybody. Yes. So thank you very much for the question. As David has highlighted, the U.K. and Ireland business has performed overall above the average and performed well. I think that's really due to the maturity of the strategy

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in the U.K. and Ireland. That's where we have the greatest maturity, particularly in our range of value added solutions and areas that are really resonating with the customers. The question was specifically around electronics. I think it's fair to say that the electronics share within the U.K. and Ireland is one of the lower market shares in electronics, but the electronics offer in the U.K. and Ireland is much more aligned to our industrial MRO type customer. So a little less on the semiconductors and passives, which are slightly more volatile but more aligned to the industrial products. And I think that's what's making the big difference for us in the U.K. and Ireland.

David Egan:

Thank you, Pete. And then finally, Sylvia, your question on China. Just remind you that China, for us is 2 percent for the group, 15 percent for the region. It has been relatively tough going in China. I'm just going to hand over to Sean Fredericks, our president for Asia- Pacific, to give you a little bit of color going on in China. Sean.

Sean Fredericks:

Yeah. Thanks, David. Yeah. So China for the quarter saw a contraction of 25 percent. Now it's, you know, for various factors, but December was the most impacted at 40 percent contraction. That was the peak of the COVID cases that we [inaudible]. So we at one point, we had maybe 70 percent of our workforce COVID positive during month of December, and that's tapering down now. Obviously, China reopening is something positive to look forward to. However, we have Chinese New Year starting 21st of January and many companies have opted to take -- to start that holiday period a week or two early. So we expect in January to be not many working days, but we are hoping for a bit of a bounce back come February. Now, the 25 percent in China, pretty much all of that was on the electronics' side. So their impact of the electronics contraction was the chip export ban that was put in through the Biden administration, which realistically, for the six weeks from the start to where we are now, has almost shut down that industry. And then we were exposed in several big companies and customers with that. So, yeah, it's -- the COVID situation is by far the most impacted area for us. But we are hoping that that stopped easing outgoing into the last couple of months of the Q4.

[talking simultaneously]

David Egan:

I think there's one final build on Asia-Pacific. You know look, China is challenging, but we're still seeing good performances in Southeast Asia, in Australia, New Zealand. You know China -- Japan is against tougher comps. We're moving our businesses there into more industrial space. And you know Sean and the team are very much focused on the profitable customers, more profitable customers and still delivering double digit operating margins within that part of the world. So, overall, you know yes there's been challenges, but still a very important part of our proposition going forward.

Sylvia Barker:

Thanks very much.

David Egan:

Adam.

Operator: