From the CEO: Significant Operational Progress

Simon Pryce , CEO of RS Group, provides a review of FY24 following the release of our annual report earlier this month.

RS remains a leading, global MRO distributor with real competitive advantage given our technical specialism, broad product range and digitally enabled offer.

2023/24 was a challenging year. Markets were difficult with weak global industrial demand, change from peak to trough electronics cycle and geopolitical tension impacting confidence just as supply constraints began to ease.

In addition, a deeper analysis of our performance in 2021/22 and 2022/23 identified that RS was a major beneficiary of unusual post-pandemic trading tailwinds, particularly in electronics.

At a time of pent-up demand and supply chain challenges, our strong inventory investment, supplier relationships and long-tail product offering allowed us to provide industry-leading product availability. As a result, we saw significant revenue growth, in part as core customers increased their order quantities to address concerns over market availability and in part through sales of scarce parts to resellers and one-off transitory customers.

This was at a time when supplier and therefore product price inflation, particularly on long-tail products, resulted in short-term gross margin improvement. We are making material improvements to our performance management systems to improve transparency and identify such trading dynamics better in the future.

We estimate that the 2022/23 benefit of these tailwinds was c. ￡95 million revenue and c. ￡6 million of operating profit (higher than previously reported as it now includes uplift from gross margin benefit as well as revenue). Towards the end of 2022/23 and throughout 2023/24 these tailwinds began to dissipate, with average order values returning to previous levels and supply chains normalising. This resulted in less demand from resellers and transient customers, general destocking and the unwinding of inflation-related benefits.

This more difficult trading environment highlighted the importance of more focus and alignment, better prioritisation and execution, greater agility and more operational rigour across the RS Group. Thanks to the exceptional efforts of our passionate and committed people, we made good progress in addressing these issues whilst reducing our cost base and we are particularly pleased with the strategic acceleration our recent acquisitions are delivering.

As a result, and despite a challenging macroeconomic environment, 2023/24 was also a year of significant strategic and operational progress for RS.

Our 2023/24 financial performance

During 2023/24 our revenue reflected the change in the electronics cycle and unwind of associated post-pandemic trading tailwinds as well as softness in industrial production. Our level of organic investment and our operating cost base had grown over the last two years to meet inflated post-pandemic demand and had limited immediate flexibility to reduce significantly as this demand reduced. This had a significant impact on the Group’s operating profit margin in 2023/24. We partially addressed this by taking cost reduction actions in the functions and regions, accelerating the integration of Distrelec and reducing discretionary spend. This also included the write down of underperforming software and inventory investments.

Our business in EMEA delivered a robust performance. We delivered a 5% decline in like-for-like revenue, due to the overall market weakness, specifically in the electronics category and within those markets where we sell a higher-than-average proportion of on-board electronics such as Germany, together with the unwind of c. ￡35 million of revenue from post-pandemic trading tailwinds. The growth accelerators of digital, service solutions and RS PRO (our main own brand) outperformed the region. Like-for-like operating profit declined 9%.

When excluding restructuring, write-offs and integration costs of the acquisition of Distrelec, it declined 3% benefiting from in year cost action. EMEA remains our most developed business and one where we see significant benefit from effective and more progressed implementation of our strategy.

After a compound annual growth rate (CAGR) of 19% over the previous two years, our like-for-like revenue in Americas declined by 13%. This region has high exposure to A&C and other products correlated to the electronics cycle, as well as a higher proportion of original equipment manufacturers. Both are factors in increasing Americas’ sensitivity to the rapid turn in the electronics cycle. The estimated revenue gain in 2022/23 from post-pandemic trading was c. ￡50 million. Americas continues to focus on expanding both share of wallet and the industry verticals that it supports leveraging the Group’s capability and investment in digital channels, expanding service solutions and accelerating RS PRO sales.

Profitability in Asia Pacific reduced significantly with a reduction in sales volumes combined with a 6.5 percentage point decline in gross margin. Nearly half of the decline is attributed to the unwind in the post-pandemic tailwinds which elevated prices, and the remainder due to its high electronics exposure notably in Japan and China. Australia and New Zealand delivered growth while South East Asia significantly outperformed the region.

Asia Pacific continues to be a developing region for RS where in many countries we are building critical mass as their industrial base develops through the rollout of a more differentiated offer, focused on industrial and service solutions, to drive volumes and operational leverage.

Significant strategic and operational work during 2023/24

During the year we made good progress in addressing the issues highlighted by the change in trading environment. These actions are improving the underlying quality of our business to support the Group’s significant growth opportunity and to ensure we are better placed to benefit as markets improve. We are focused on driving operational effectiveness and execution, improving operating leverage and investing in our strategic growth accelerators.

Bringing more focus to the Group’s strategy RS has a clear identity – we are a differentiated distributor of product and service solutions. During the year, we brought clarity to the Group strategy, reduced complexity and created alignment around key strategic actions:

• We are customer focused and will deliver greater value by meeting the maintenance, repair and operations needs, often technically complex and low volume, of high lifetime value industrial customers.
• We are product experts, providing automation and control, electrical and other technically differentiated product solutions as part of a broad but curated product range with high availability.
• Our solutions deepen customer relationships through selected scalable service solutions that generate core product pull through.
• Our customer experience is digitally enabled and is becoming increasingly customised.
• We drive operational excellence to deliver efficient and well-invested physical, digital and process infrastructure, sustainably and with great people.

We have developed and aligned actions across the Group to deliver this strategy better.

1. Driving operational effectiveness

Following a review of the way we operate, we took a number of tangible actions during the year to reduce complexity and improve effectiveness and efficiency, putting in place the capabilities to deliver our multi-year strategic action plan.

We enhanced our senior leadership experience and capability by streamlining our senior management team into an empowered leadership ExCo. This committee is chaired by the CEO and is comprised of the CFO, the Chief People Officer (CPO), the Chief Information Officer, the Chief of Corporate Services and Company Secretary and our three Regional Presidents.

Effective from 1 April 2024, we also created three new roles to lead our growth accelerators of Customer Experience, Product and Supply Chain, and Solutions and Services. We strengthened our functional capability through strong external CFO and CPO appointments and made internal appointments into growth accelerator roles. This team is already driving needed changes in our strong culture, aligning the organisation behind a clear purpose, strategy and new set of corporate values “We are one team. We deliver brilliantly. We do the right thing. We make every day better.”

This ExCo reflects our simplified operating model that empowers teams closest to the supplier and customer to make rapid and effective decisions within clear guidelines. This model is designed to drive sustainable growth by clarifying accountabilities and supporting local decision making, providing support for our growth accelerators underpinned by cost efficient enabler functions (people, technology, finance and corporate services).

Already we are making quicker decisions and making positive progress. This includes treating our electronics offering as a strategic product category, not a separate business, and shifting our single board computing and internet of things (IoT) solutions proposition (OKdo) away from consumers to our core industrial customer base.

Importantly, we also enhanced our performance management process to improve visibility, accountability, agility and to drive better operational and functional delivery.

2. Improving operating leverage

We are a well invested distribution business spanning 35 countries globally with considerable physical, digital and process infrastructure. However, we see significant opportunities to improve our productivity and operating leverage through the better coordination across, and utilisation of, our physical infrastructure and standardising our systems and processes where there is no value in differentiation. This includes consolidating and upgrading our technology and digital platforms and greater harmonisation across our administrative processes.

We are already improving the operational performance of our physical infrastructure. In 2023/24, we increased the efficiency of our regional distribution centre (DC) in Germany through upgrading and tuning our warehouse management system and removing waste utilising our continuous improvement toolbox. We closed a small local fulfilment centre (FC) in Newport, UK absorbing product into our Nuneaton and Corby facilities. We began upgrading our warehouse management system in the UK and we opened an expanded FC in Spain, as well as three small, customer FCs operated by third party providers in Malaysia, Philippines and New Zealand.

We continue to simplify and upgrade our technology infrastructure. During the year we migrated the majority of our datacentres to the cloud, improved our digital procurement capabilities, began converging our Microsoft estate and designed a high-level roadmap to modernise and harmonise key processes and systems.

During the year, and in response to the challenging trading environment, we also identified and commenced sustainable cost reduction actions, including accelerating the integration of Distrelec. Together, these actions will deliver in excess of ￡30 million of annualised cost savings (with ￡9 million delivered in 2023/24 and additional c. ￡22 million in 2024/25). During the year there was ￡13 million of costs associated with the reduction and Distrelec integration.

We have identified significant further cost and efficiency benefits which we will pursue over time. These will be realised through standardising a number of back office support processes, better leveraging our functional expertise across the Group and more effective management of our cost to serve and sales channels.

3. Growth accelerators

We also continued to invest in our growth accelerators that will drive increased customers and share of wallet:

• Customer experience: During the year we made selective investments in our digital capabilities to enhance the customer experience, embedding AI powered search capability in our websites to 27 markets, launching a new transactional website in Latin America, introducing an integrated customer relationship management tool and customised web pages for specific industry verticals.
• Product and supply chain: Within product we are developing a more relevant RS PRO offer in Americas, deepening our offer with technical specialist brands and expanding our Better World sustainable range (now c. 30,000 products available globally). In supply chain we are investing in better inventory management, including a new digital product management system in Americas, and product adoption systems to improve product ingestion, order tracking and delivery accuracy.
• Solutions and services: We continue to expand our service solutions portfolio, rolling out supplier and digitally enabled procurement solutions across Europe and America, focusing on services that pull through product revenue and generate customer loyalty. We expanded this offer further throughout EMEA and invested in experienced sales teams in Americas. Within RS Integrated Supply we are standardising our service provision across the UK and US to deliver profitability and scalability.

We see the opportunity to accelerate value creation by investing further in our technology platform to personalise our digital customer experience, utilise better our customer database and manage our product and service solutions offer more cost effectively. This is the main focus of the additional c. ￡15 million of organic investment planned in both 2024/25 and 2025/26.

Acquisitions that accelerate our strategy

The large, fragmented markets in which we operate provide significant opportunity for consolidation. We create value from bolt-on acquisitions through being price disciplined and by targeting high quality businesses that increase our presence in key markets, strengthen our product specialisation, expand our solutions and services portfolio and / or create the opportunity to accelerate operating leverage.

In June 2023, we completed the acquisition of Distrelec, a strong fit with RS in EMEA. The acquisition delivers increased revenue in Germany, Scandinavia and Switzerland where it also adds a local fulfilment centre that is complementary to our existing European footprint. Distrelec’s proposition is closely aligned to RS and we will operate through one set of physical, digital and process infrastructure. We are accelerating our initial integration plans with our expected cost savings already exceeding those anticipated when we made the initial acquisition. Therefore, despite weaker trading in 2023/24, in line with RS’s relevant European markets, we expect to at least cover our cost of capital by the third year with the longer-term benefits of the acquisition remaining very exciting.

Risoul, which we acquired in January 2023, has outperformed our expectations reflecting strong market conditions in Mexico and Risoul’s specialist technical service offer. We are beginning to realise the significant synergy opportunities from the combination as we introduce RS’s digital capabilities and own-brand products into Risoul and use the Risoul service approach to enhance our service offering across our Americas region.

We continue to have an active pipeline of acquisition opportunities and after the year end acquired Trident Australia Pty Ltd (Trident) for c. ￡8 million. Trident is a specialist MRO distribution and service partner for the energy and natural resource industry in Western Australia. It adds to our Australian presence by increasing RS’s access to the energy and natural resources sector with associated customer and product synergies and provides distribution infrastructure and service capacity in Western Australia.

For a Better World

We continued to make good progress towards our 2030 ESG action plan by improving sustainability in our operations, packaging and logistics and collaborating with our suppliers to offer our customers more sustainable product and service solution choices to operate more responsibly.

This year, we received validation of our Scope 1, 2 and 3 carbon reduction targets from the Science Based Targets initiative. We are progressing well towards these, having reduced our direct carbon emissions by 61% since our 2019/20 baseline excluding acquisitions completed in 2022/23 and 2023/24.

We were again recognised with a Platinum EcoVadis rating, which is used by many of our customers and suppliers to make ESG-based procurement decisions and select business partners.

Exciting long-term potential

We have a distinct competitive advantage at RS as the critical link between some of the world’s leading suppliers of industrial products and a diverse customer base that want to purchase in small volumes and demand high service levels. We have a global presence and scale, a strong digital platform and distribution infrastructure and increasingly have a solutions and service orientation that drives customer loyalty and share of wallet growth.

The strength of our offer can be seen in our outperformance over time. RS has delivered 6% revenue CAGR over the last five years excluding all acquisitions completed 2018/19 onwards. This is stronger than the growth rate of industrial production over the same period.

Our outperformance in EMEA, even with a difficult market, indicates the strength of our proposition. We have focused action plans in place to accelerate deployment of our differentiated offer into our operations in Americas and Asia Pacific which supports our longer-term growth opportunity.

We operate within attractive and highly fragmented industrial MRO markets which demonstrate good through-cycle growth and we continue to invest to extend our record of industrial production outperformance. We are pursuing significant opportunities to improve our operating leverage and the efficiency of our physical, digital and process infrastructure. We also have a strong balance sheet and generate good cash flow which we will continue to deploy if we see the opportunity for accelerated value creation.

With improved focus and a clear action plan, supported by targeted investments to enhance our capability, RS is well positioned to deliver on its growth potential and first choice outcomes for all stakeholders over the longer term.