FY16 half-year financial results and performance improvement plan. 19 November 2015

Transcription

1 FY16 half-year financial results and performance improvement plan 19 November 2015

2 Agenda Introduction - where we are today Financial results Business performance and current trading Performance improvement plan Lindsley Ruth Sally Adams Sally Adams Lindsley Ruth 2

3 Introduction - where we are today Lindsley Ruth 3

4 Results overview Overall these are a disappointing set of financial results Past investment has not delivered a step-up in revenue growth UK and Asia Pacific continue to underperform Gross margin decline of 1.7% points Local cost growth Headline PBT down 12%, adjusted for FX But some bright spots 13% revenue growth in Continental Europe Resilience and swift action on costs at Allied (North America) ecommerce growth of 8% Flat process costs Interim dividend maintained Focused on driving improved performance 4

5 Where we are today Attractive fundamentals Large, fragmented and growing market Substantial customer base Broad supplier portfolio Fast growing ecommerce sales Profitable private label business Strong balance sheet Key opportunities Increase customer focus Drive accountability Simplify - operate for less challenges to be addressed Customer service levels Complex organisation Local accountability Returns on capex Gross margin declines Improve dividend cover Improve financial returns 5

6 Why has the global strategy failed to improve performance? Failed to recognise customer needs are local Centralisation led to increased costs and insufficient local accountability Capital investment didn t improve basic customer experience Perfect storm on foreign exchange Dynamic competitive environment 6

7 The challenges are within our control Significant opportunity to improve customer/ supplier experience Improve execution Excel at the basics Differentiate with industrial and electronics knowledge and expertise A simpler, more accountable organisation Simplify decision making Increase focus on RS Private Label Align KPIs and incentivisation Operate for less Initial annualised savings of 25m Rebase, fix and grow Asia Pacific More discipline on capex Identify more savings with further simplification 7

8 Plan in a nutshell Best customer and supplier experience Accountable and responsive organisation Operate for less Superior results for customers, suppliers and shareholders 8

9 Financial results Sally Adams 9

10 Basis of preparation Unless otherwise stated: Figures have been prepared using International Financial Reporting Standards Changes in sales are adjusted for currency movements and for the number of trading days ( underlying sales growth/decline ) Changes in profit, cash flow, debt and share related measures such as earnings per share are, unless otherwise stated, at reported exchange rates Key performance measures such as return on sales use headline profit figures Sign conventions: % changes in sales and costs are disclosed as positive if improving profit and negative if reducing profit In H a net charge of 11.4m was reported for items excluded from headline profit before tax net income of 18.1m was reported for items excluded from headline profit before tax. We have restated our half-year results for H1 2015, following a revision to the accounting treatment on rebates from vendors which are included in gross margin from a cash to an accruals basis. This has no material impact on full-year results, but does result in an earlier recognition of 1.6m of rebates in H

11 Profit and loss account m H H (1) Change Sales % (2) Gross margin (%) 43.3% 45.0% (1.7)% pts Headline operating costs (237.5) (235.6) (3.0)% (2) Headline operating profit (18.8)% (3) Headline operating margin (%) 5.4% 6.7% (1.3)% pts Headline PBT (19.7)% (3) (1) Restated due to revised accounting treatment on vendor rebates (2) Adjusted for currency; sales also adjusted for trading days (3) Adverse currency movements decreased headline PBT by c. 3m Headline PBT down by 12%, adjusted for FX 11

12 Group headline profit before tax movement Underlying Change (1) 2% (12)% 0% 0% 39.0m 31.3m International contribution growth offset by FX and UK decline H Fx International UK Processes Interest H (1) Adjusted for currency movements 12

13 Gross margin Underlying Change 0.1% (0.4)% (1.0)% (0.4)% 45.0% 43.3% FX accounted for large part of gross margin decline H Geographic mix Product mix Currency movements Price & discounts H

14 Operating costs Change (1) 1.0% 0.6% 1.3% 0.1% 3.0% 235.6m 237.5m Flat process costs and 4% growth in local costs at constant FX H Fx Inflation Offer one offs Variable Other H (1) Adjusted for currency movements 14

15 Reported PBT H H (1) Change Headline PBT (19.7)% Pension credit 20.0 Write-down/reorganisation costs (11.4) (1.9) Reported PBT (65.1)% Headline effective tax rate (%) 27% 28% 1% pt Per share amounts: Headline earnings 5.2p 6.3p (17.5)% Interim dividend 5.0p 5.0p - (1) Restated due to revised accounting treatment on vendor rebates 11.4m exceptional write down impacts reported PBT 15

16 Cash flow m H H Profit before tax Depreciation and amortisation Exceptional items 11.4 (18.1) Working capital (11.3) (3.1) Finance expenses (net) Other non-cash movements Operating cash flow Interest paid (net) (2.5) (2.6) Tax paid (9.8) (11.7) Net capital expenditure (14.3) (17.3) Reported free cash flow Add back: reorganisation cash flows Headline free cash flow H1 creditor outflow and slight worsening in debtor days FY16 capex guidance reduced from 35m to around 30m Expect higher than normal weighting of cash flow to H2 16

17 Funding position Successful refinancing Strong financial metrics 171.5m multi-currency five-year facility signed in August 2014 expiring in August 2019 $185m US Private Placement notes $100m signed in June 2015 maturing in June 2020 $85m maturing in m of our facilities were undrawn at 30 September 2015 EBITA to interest cover of 19.3x (covenant >3x) Net debt to EBITDA of 1.6x (covenant <3.25x) Strong balance sheet maintained 17

18 Business performance 18

19 Continental Europe (34% Group sales) (1) Underlying H H growth (2) Sales 215.0m 213.3m 12.6% Contribution 44.0m 47.3m 6.5% Contribution margin 20.5% 22.2% (1) Restated due to revised accounting for vendor rebates (2) Adjusted for currency; sales also adjusted for trading days Double-digit revenue growth All markets contribute to strong performance ecommerce growth of 14%, 71% of revenues Higher Offer costs and lower margin hold back contribution growth Rise in Offer costs is driven in part by higher volumes but also one-off impacts of 1.5m H1 underlying contribution up 6.5% to 44.0m Strong double-digit revenue trends 19

20 North America (26% Group sales) H H Underlying growth (1) Sales 159.9m 146.5m 0.1% Contribution 20.9m 19.6m (1.9)% Contribution margin 13.1% 13.4% (1) Adjusted for currency; sales also adjusted for trading days Allied continues to maintain market share in a tough market environment ecommerce growth of 3%, 41% of revenues Allied has taken early action to cut costs We expect a 2.5m saving benefit this financial year and anticipated annualised savings of c. 3.5m H1 contribution declined 1.9% to 20.9m Right-sizing cost base given slower revenue environment 20

21 UK (28% Group sales) (1) Underlying H H growth (2) Sales 178.1m 180.1m (1.1)% Contribution 43.8m 49.8m (12.0)% Contribution margin 24.6% 27.6% (1) Restated following revised accounting treatment for Vendor Rebates (2) Sales adjusted for trading days Revenue declines of 1% Key focus areas back in growth Corporate accounts Tools and consumables ecommerce growth of 4%, 66% of revenues Contribution declined 12% to 43.8m due to lower gross margins and investment in sales and marketing New UK Country Manager, Mike England, recently joined New leadership appointed 21

22 Asia Pacific (12% Group sales) (1) Underlying H H growth (2) Sales 73.5m 76.5m 0.0% Contribution 3.6m 4.9m (18.2)% Contribution margin 4.9% 6.4% (1) Restated following revised accounting treatment of vendor rebates (2) Adjusted for currency; sales also adjusted for trading days A disappointing performance, reflecting: Weak Chinese macro A need to improve customer service in the region ecommerce growth of 10%, 51% of revenues Australasia flat; single-digit declines in Japan/China; SEA in growth Contribution down 18.2% to 3.6m as gross margin declines more than offset efficiency wins Performance unacceptable - need for a fresh approach 22

23 Current trading Underlying sales growth (1) Q Q H October Continental Europe 13% 13% 13% 10% North America 3% (3)% 0% (3)% Asia Pacific 0% 0% 0% 5% International 7% 4% 6% 5% UK (1)% (1)% (1)% (2)% Group 5% 3% 4% 3% (1) Underlying sales growth, adjusted for currency and trading days European strength off-setting weakness elsewhere 23

24 Summary Strong performances in some areas Double-digit European revenue growth North American resilience Attractive ecommerce growth But also challenges we need to address Sluggish revenue trends in UK and Asia Pacific Regional costs outpacing revenue growth Gross margin declines Focusing on driving improved performance 24

25 Performance improvement plan Lindsley Ruth 25

26 Contents 01 The market opportunity 02 Excel at the basics 03 Doing it all whilst keeping it simple 04 Operating for less 05 Implementation and measuring success 26

27 The market opportunity 27

28 The market remains large and fragmented Large, fragmented with GDP plus growth Ease of doing business remains key differentiator Players with focused customer offerings see strong growth Digital is fastest growing channel Suppliers demanding more customer insight The opportunity remains significant 28

29 Two large and distinct market opportunities globally Industrial > 250bn Customer types Maintenance engineers Machine and panel builders Buyers Primary product categories Automation and Control Electrical, Test and Measurement Tools and Consumables Needs Easy to do business with Standard next day delivery Industry/sector focus Dedicated sales for large corporates One stop shop for indirect procurement Innovative procurement solutions Electronics > 30bn Customer types Electronic design engineers Buyers Primary product categories Semiconductors Interconnect, Passives and Electromechanical Needs Easy to do business with Planned delivery, 1-3 days standard Traceability and appropriate packaging Broad range and new technologies Applications-led support Enhanced design tools and support Basic requirements similar but value add differs 29

30 Execute a value proposition to win the customer Get the basics right (ease, service, range) Excel at the basics = Superior customer and supplier experience = Stronger sales growth and stable gross margins Differentiate Knowledge and sector specific expertise/solutions A clear and concise customer offering for Industrial and Electronics 30

31 Excel at the basics 31

32 We have room to improve the basics Industrial Electronics EMEA APAC Americas EMEA APAC Americas Easy to do business with Speed of delivery Faultless delivery to promise Breadth of range and availability Competitive advantage Neutral Competitive disadvantage Internal assessment validated with customer view from TRiM and VOC Current service levels vary significantly by region/end market 32

33 Asia Pacific Rebase, fix and grow Net Promoter Score by Region UK Continental Europe APAC Emerging Markets USA Customer focus Simplify Reliable service everywhere Local stock for local markets Stock what customers will buy Reduce and realign range 100,000 locally stocked products Operate for less Web only presence in Japan Close office and warehouse in Singapore Consolidate offices in China 33

34 Best-in-class execution Ease Address real-time customer/supplier issues Add basic capabilities e.g. scheduled orders Improve search and online journey Service reliability More automation Voice picking Proactive communications Range and availability Local range realignment Increased availability Pruning the long tail Adding key suppliers 34

35 FY11 vs FY10 FY12 vs FY11 FY13 vs FY12 FY14 vs FY13 FY15 vs FY14 FY16 vs FY15 Driving a superior online experience Website and search key to improve Ease rating Early results from our work are encouraging Accelerating the pace of change 1. Search delivery 2. Search filtering 3. Site usability 4. Product content 5. Speed of site YOY online sales increase ( m) Reallocate resource to focus on existing website Increase resource (4 agile teams vs 1 today) working on search and site usability Medium-term development of new website Further promotion of DesignSpark community Digital taking the next step on the digital journey 35

36 Doing it all whilst keeping it simple 36

37 Regional hub reporting structure N. Europe S. Europe C. Europe Americas APAC & Emerging Markets We will publish restated regional figures with year-end update 37

38 Accountability starts at the top New leadership team appointments Klaus Göldenbot President RS Industrial January 2001 Scott McLendon President Allied July 2007 Chris Page President RS Electronics January 2009 Kurt Colehower President RS Private Label June 2015 Alex von Schirmeister Chief Innovation Officer November 2015 Mikael Malm Chief Supply Chain Officer November 2015 Regional appointments Mike England UK Country Manager November

39 Driving accountability throughout the organisation Simple regional structure Local P&L accountability Bring decision making closer to the customer Match appropriate cost models to profit opportunity Allocation of central overhead leading to healthy system of check and balance Driving cultural change Strengthened leadership team Driving culture of empowerment and accountability Internal KPIs aligned to customer metrics and financial performance Change incentivisation: higher mix of variable pay and more challenging targets 39

40 UK putting the plan into action UK background Business mix Higher mix of Industrial/Tool and Consumables Private Label 22% of sales Corporate accounts 20% of sales Customer experience Good at basics Limited innovation in recent years UK market leader but Revenue in decline since 2013 Competitors with focused strategies seeing faster growth Three priorities Best customer experience Excel at the basics Differentiate: sector specialisation, corporate focus Accountability Right leadership Mike England Change incentive structures Drive Private Label Operate for less Initial savings identified Leverage cost base across regional hub Identify further savings 40

41 Aug 13 Sep 13 Oct 13 Nov 13 Dec 13 Jan 14 Feb 14 Mar 14 Apr 14 May 14 Jun 14 Jul 14 Aug 14 Sep 14 Oct 14 Nov 14 Dec 14 Jan 15 Feb 15 Mar 15 Apr 15 May 15 Jun 15 Jul 15 Aug 15 Bringing Private Label back to life Revenue 162m RS sales share 16.0% No of SKUs 38, % RS Private Label vs RS Total 18.0% 17.8% 17.6% 17.4% 17.2% 17.0% 16.8% 16.6% 16.4% 16.2% 16.0% 15.8% 43.3% % of RS Total Active customers 264k Attractive margins New leadership appointed Significant opportunity to reinvigorate growth A significant opportunity for growth Simplification of brand identity and value proposition Global expansion US launch Range expansion 41

42 Gross margins - history Change 0.3% 0.4% 0.8% 1.2% 43.3% 46.0% 2013 Geographic Product Price FX H Gross margins have fallen 2.7% points in the last 30 months since May 2013 Just under half or 1.2% points of this fall is attributable to currency movements The balance breaks down into three buckets geographic mix, product mix and price/discounting While external factors such as currency movements and geographic mix remain outside of our control we can influence price and product mix 42

43 Gross margin there are levers we can pull Medium-term initiatives Selective price increases More effective discounting Align incentives to gross margin Share best practice Control discounts Column discount Customer Tactical Discount discount List price Selling price Grow % of Private Label Prune low margin tail Improve mix Gross margin Smarter purchasing Go direct on semiconductors develop global franchises Incentives based on PPV (purchase price variance) Smart purchasing COGS Cost price Stabilising gross margins 43

44 Operating for less 44

45 Operating for less savings breakdown Q FY17 FY18 Total Targeted savings 6.0m 15.0m 4.0m 25.0m Estimated costs to achieve Labour restructuring charge Costs of exiting APAC facilities c. 20m 5.0m As a result of the reorganisation we are targeting annualised savings of 25 million Well placed to make progress in profits in FY17 despite a weaker outlook for North American industrial markets, global macro headwinds and the impact of near-term disruption particularly in Asia Pacific from executing a restructuring of this scale Work continues to identify further savings: we have initiated a review of warehousing and logistics which will be led by our new Chief Supply Chain Officer, Mikael Malm, who joined the Group in early November Guidance for capex reduced to c.1 x depreciation 45

46 Restructuring charges Restructuring charge breakdown P&L Cash Labour restructuring charge c. 20m c. 20m Cost of exiting facilities 5m 5m Asset write downs (non-cash) Website write down 11.4m - Further asset inventory write-downs 5-6m - Total gross restructuring charge c. 42m c. 25m Impact of disposal (0m) (5m) Estimated charge net of disposals c. 42m c. 20m 46

47 Implementation and measuring success 47

48 Implementation plan Lean organisation Build local P&Ls with full accountability Reduce costs to build lean scalable model Work continues to identify further savings Become best in class Excel at the basics Differentiate via knowledge & expertise Accelerate growth Accelerate growth via both organic and bolt-on opportunities Lean scalable model driving profitable growth and shareholder returns 48

49 Measuring success: KPIs Improve customer experience Revenue growth Net Promoter Score Operate for less Operating profit as % of gross profit Operating cash flow conversion (1) Improve returns Operating margin ROCE Focused on driving an improved performance for customers, suppliers and shareholders (1) Operating profit conversion is operating cash flow as % of operating profit 49

50 Summary We will transform the customer experience with our organisation We will have local P&L accountability We will drive a higher proportion of RS Private Label sales We will target annualised savings of 25m, with 6m in FY16 We will rescale Asia Pacific, fix our issues and develop a profitable base from which to grow Work continues to identify further savings with further simplification of the way we operate The opportunity is huge and we will deliver 50

51 Appendix 51

52 Impact of foreign exchange H m H m Growth reported Growth FX adjusted Continental Europe (7.0)% 6.5% North America % (1.9)% Asia Pacific (26.5)% (18.2)% International contribution (4.6)% 2.2% UK contribution (12.0)% (12.0)% Process costs (78.5) (80.0) 1.9% (0.4)% Operating profit (18.8)% (12.3)% All figures refer to headline measures where relevant 52

53 Differentiate with divisional knowledge and expertise RS Industrial Technical and sector focused sales and online expertise Excellence in procurement, inventory and sourcing solutions with a particular focus on our larger accounts Predictive and preventative service solutions for maintainers Sector-specific range and expertise RS Electronics Research and evaluation support for engineers through design and prototyping Free-to-access design software and community Wide stocked and non-stocked product range Specialist electronics sales teams with technical knowledge Access to production solutions 53