Electrocomponents PLC

LSE:ECM

Earnings Call Transcript

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to the Electrocomponents Trading Update Call. [Operator Instructions] I must advise you the conference is being recorded today. Now I'd like to hand the conference over to your speaker today, David Egan. Please go ahead.

[David John Egan, CFO & Director]

Thank you very much, and good morning, everyone. I'm David Egan, Chief Financial Officer of Electrocomponents plc. As many of you know, Lindsley has been living back in Texas for the past few months. And given it's currently 2 a.m. in the morning there, I will be hosting this morning's call with you. This trading statement covers Q1 of our financial year to March 2021. Overall, we remain pleased at how resilient our business has proven to be during the COVID challenges. We swiftly moved from crisis mode back to business as usual, albeit with new norms. However, that all being said, we are still closely monitoring the evolving crisis and ensuring we continue to balance the needs of all of our stakeholders. Our people continue to do an outstanding job, and our top priority remains to ensure their health and safety. Over the past few weeks, we have begun to cautiously reopen some of our offices. However, we are looking at this on a market-by-market basis, adhering to the local guidelines and ensuring we have all the necessary protective equipment and social distancing measures in place to keep our people safe. We continue to focus on providing our customers and suppliers a reliable service. All of our distribution centers remain operational, and our global distribution network, digital leadership and highly committed teams mean we continue to be able to support customers and suppliers across the globe. Our group NPS customer satisfaction score is at an all-time high in quarter 1, which is testament to the great work our people have done supporting our customers throughout this crisis. We also remain highly focused on supporting our own communities and playing our part in the fight versus COVID-19. We have continued to run our 3D printing farms and have helped 20,000 face shields get to frontline health care workers across the globe. We remain in a financially strong position with a healthy balance sheet. We have seen good levels of cash generation during Q1, increased our liquidity level and continue to robustly stress test our business. We remain confident we have adequate liquidity even under a range of demanding scenarios. And finally, we are highly focused on ensuring we seize opportunities and come out of this crisis stronger with enhanced market shares, increased efficiency and well-positioned to continue to create value for shareholders. So moving to our first quarter performance. We're pleased at how the business has performed in the quarter. Q1 group revenue declined by 11% on a like-for-like basis, which we believe overall is an outperformance versus the market. We have continued to drive share gains. It also represents an improvement from the 14% decline we announced for the first 8 weeks of the year. We exited the quarter with June down around 7%. The key driver for this has been a recovery in trends in EMEA, and I will cover this in a bit more detail shortly. Digital declined to 12% in Q1, an underperformance versus the group, although the month of June decline was 7%, which was in line with group total revenue performance. While website revenue declined broadly in line with group revenue during the quarter, we saw a temporary underperformance in eProcurement and purchasing manager revenues, driven by lower growth with some larger corporate accounts during the period. We're seeing good growth in both website visits and new B2B and B2C customers during the quarter, although the growth in B2C customers has led to a modest reduction in conversion ratios. RS Pro, our private label brand, continued to outperform the group, with a revenue decline of 3% on a like-for-like basis in quarter 1. And it was very pleasing to see RS Pro return to positive growth in group, in June, with strong growth in back-to-work kits. Let's take a look at our regions. Firstly, EMEA, which accounts for around 64% of revenue, saw like-for-like revenue decline of 13% for the quarter. EMEA has seen trends improve across the quarter. This impact has been most pronounced in Southern Europe, which saw the most severe lockdown and declines in April, but has also seen the most improvement as restrictions have lifted. However, all 3 key subregions saw some recovery across the quarter and EMEA exited the quarter in line with the group performance in June. We're highly focused on expanding choice and building out our value-added solutions offer in the region, and this and our digital offer is clearly helping us to continue to take market share. The Americas business, which accounts for around 26% of revenue, declined to 9% on a like-for-like basis for the quarter. While our business in the Americas initially held up relatively resiliently, we saw more volatility during May, and we've seen June decline at a similar rate to that of May. We have commenced commissioning of our expanded distribution center in Texas, which also provides enhanced business continuity options given COVID-19 restrictions within that state. The situation with regards to COVID-19 in the Americas differs on a state-by-state basis, with the Northeast beginning to see lockdowns easing and, as such, demand levels improving, whilst rising infection rates in the Southwest means we are seeing lockdowns resuming in some areas. Our regional headquarters and DC are both based in Texas, where the situation remains quite difficult at present. We're encouraging all office-based workers to work from home. We remain designated as a critical industry in the Americas. And as such, our DC remains open and operating with enhanced safety protocols in place. We're fortunate with the expansion of the DC -- we have a lot of space -- so we can effectively run the enlarged warehouse as 2 separate operations running on 2 separate rotors which reduces the risk of infections. Our people's safety remains a key priority, and we continue to monitor situation in the Americas extremely closely. Finally, Asia Pacific, which accounts for around 10% of revenue, saw a 4% like-for-like revenue decline in Q1. We saw some disruptions to deliveries in Southeast Asia, which impacted the last week of May. However, June for the region has seen an improved trend, modestly down for the month. We continue to see growth in Greater China and Australia. However, this has been offset with weakness in Japan and Southeast Asia, where lockdowns remain restrictive. Now moving on to gross margin, cost and cash. Gross margin remains a key focus, and we continue to take actions to maintain and, where possible, improve our gross margin over time. Our ultimate aim, however, is to grow our business and drive towards a mid-teen operating profit margin. We're making good progress on work to further simplify our operating model which we expect to further drive significant savings in the medium term, and we'll provide you with more details on this work at our half year results in November. We continue to strengthen our balance sheet and take actions to conserve cash. As mentioned at our final results on the second of June, we signed an additional contingency facility of GBP 100 million with our relationship banks. This takes our total committed facilities to over GBP 450 million of which around GBP 290 million remains undrawn. We continue to closely monitor cash collection. I'm pleased to say to date, we've not seen any significant adverse impact from COVID-19 on receivables collections. Finally, given the current operating environment remains uncertain, we're accelerating initiatives to drive scale and efficiency to ensure we come out of this crisis stronger. We're making good progress on initiatives to accelerate performance in digital, value-added solutions and to expand our range. Digital remains a focus and the introduction of new buying technologies and the launch of our new RS-responsive website in September will help accelerate performance. We're making good progress with our RS Plus project and are progressing towards piloting this new service with customers in EMEA. Our newly expanded distribution center in the Americas has now come online, and we're working to build out our range in this market. And then finally, our German DC expansion continues to progress, and we're on track to complete this project in the late summer, early autumn of next year. We remain highly confident in our strategy and believe we remain well-positioned to drive further market share gains, increased efficiencies and long-term value creation for our shareholders. And with that, I'll hand you back to the operator and happy to take question and answer.

[Operator]

[Operator Instructions] So your first question comes from the line of Sam Bland from JP Morgan.

[Samuel James Bland, Research Analyst]

I had 2 questions. Firstly, as usual, you should have seen as a -- maybe a potential source of share gains in this environment, but I guess the revenue trends there have not been that dissimilar from the group average. I just wonder maybe some more detail on there on it. Do you think you're gaining share? Is it from digital? Or maybe also is it because actually it's more from a lack of physical stores versus competition rather than higher digital presence? And the second one is on cost savings. I think from your statement said there's been some progress on cost savings. At the full year results, you said the drop-through might be around 35% on any revenue declines. Do you think we could see anything materially better than that 35%?

[David John Egan, CFO & Director]

Can I just check the first question. Was that in a specific -- was it a specific region or just generally, sorry?

[Samuel James Bland, Research Analyst]

I think group out, group thing.

[David John Egan, CFO & Director]

Okay. Got it. So just on the cost side, yes, we did sort of indicate that the drop-through was around the mid-30s pre mitigation. As we also highlighted, more -- about half of our operating cost is labor-related, so we will be updating you as part of our November results with regards to how we are going to reposition the group with regards to our operating model, which will be more people-related. In terms of the nonpeople, we've certainly taken actions to mitigate some of our cost activities, whether they be discretionary cost or, equally, just looking at more efficiencies in terms of our supply chain. So look, we are very hopeful that we can certainly deliver an improved drop-through from the -- from what we indicated, but we'll provide greater detail and clarity in November. In terms of share gains, I think as we said in the statement where we've seen more pronounced share gains in the EMEA region. I think it's sort of one -- one is sort of just in terms of the markets that we serve. Two is the digital capability that we have. Three is the product and the expansion of the product range that we have and availability. And so I think it's sort of -- it's a whole series of factors that we would say have been the key drivers of that customer -- sorry, of that market share gain. And I think sort of the last one is really then just around value-added services and locking people in as well and providing that continuity of supply. I think the fortunate thing for us is that we don't have a lot of -- or we haven't -- we don't have branch networks, and I think that has certainly also played a positive contributor to the share gains that we've seen across the group.

[Operator]

Our next question comes from the line of Rory McKenzie from UBS.

[Rory Edward McKenzie, European Support Services Analyst]

I wanted to ask about the customer trends maybe behind the revenue numbers. So firstly, how have your active customer numbers trended by region? And I think you talked about seeing more retail kind of B2C customers before -- all about kind of larger B2B accounts? And then secondly, do you have any metrics on how maybe share of wallet is evolving? I guess the larger corporate customers aren't spending at the moment, so that probably impacts the mix. But could we think about you emerging from this with the larger share of spend at those key accounts?

[David John Egan, CFO & Director]

Thanks, Rory. So in terms of cost trends, we've seen growth in our customer numbers overall. We've seen growth in terms of both our B2B and also B2C customers across the group. And that has been -- that has been experienced in all of the regions in which we operate, more pronounced within EMEA, but certainly we've seen growth in all of these 2 segments and also the 3 key regions that we operate in across the world. I think sort of the growth in new customers has been driven by the range of products and also the availability and the fact that we've remained open is what we would put it down to and then very good customer service. In terms of how customers have bought from us, we have -- we certainly believe that we've taken a greater share of existing customer's wallet, whilst at the same time increased new customer numbers to the group. And we see that as a positive as customers are looking for certain things and they sort of find that we actually have those available and in stock. And also then part of their rationale is to minimize the number of suppliers that they have within their portfolio. And so we've seen this certainly as a positive and becoming -- ultimately becoming their first choice is where we want to get to. But we certainly have seen a good trend in terms of both share of wallet and new customer growth, which has been driving the revenue numbers for us during the quarter.

[Operator]

[Operator Instructions] Our next question comes from the line of Henry Carver.

[Henry Carver, Analyst]

Just a quick one on the dividend now. I mean, clearly, financially, you look pretty -- in very good shape. We hopefully have seen how bad it can get out there. What was the sort of thinking in the boardroom around what would basically trigger you reintroducing, getting back to paying dividend?

[David John Egan, CFO & Director]

Henry, yes, as we announced at the prelims, we deferred the dividend decision. We had 3 choices at that point. One was to pay. One was to defer. One was to cancel. We chose to defer. We said we would revisit it at our interim results. And the Board -- that is what we will do. We haven't as yet discussed specifically the dividend at the Board meetings. What is important for us is, obviously, cash, what is important in terms of the future and the forecast and ensuring that there isn't going to be a severe downturn in the future. So we will revisit that in the next couple of months and certainly provide very clear clarity as part of our interim results.

[Operator]

[Operator Instructions] Next question comes from the line of David Brockton.

[David Brockton, Research Analyst]

I just had a question around the website visit. I know it was the full year you flagged they're up close to double digit. I just -- and you commented that, that continued through the quarter. Are you still seeing elevated levels of website visits? And I just wonder if you can just sort of link into conversion rates and whether you intend to try to improve these, given that there's been a sort of, I guess, consumers looking for PPE? And if you were to strip out the key corporate customers, are you seeing any accelerated trends towards online?

[David John Egan, CFO & Director]

Yes, David, the website visits have certainly increased and have pretty much been maintained throughout the quarter. Again, a combination of both B2B but also B2C customers coming on through the website. So initially, quite a lot of that growth was being driven by people searching for specific products, for example, health and safety PPE-type products. But I think sort of beyond that now, I think there is greater availability of those types of products across multiple sources. And I think now the trends, in terms of website visits, are more sort of linked to our core business. For us, going forward, we certainly see this as a core strength in terms of our digital capability and really expect this to be one of those levers that we will continue to pull as customers come through the online channels, have a great experience, have availability of the product that can then be shipped same day for delivery next day across most of our territories within the group. So I think sort of, as we called out at the prelims, the quality of the type of customer was not necessarily the right type of customer in some instances, but I think a lot of those trends are now starting to diminish and we're now focused on the better or the real type of customers for our type of business as in B2B.

[Operator]

Our next question comes from the line of Nigel Kumar.

[Rajesh Kumar, Analyst]

It's Rajesh Kumar from HSBC. Just on your end market, you gave us some color. Have you tried to analyze which sort of industry are your revenues exposed to, i.e., which in -- what proportion of revenue comes from manufacturing? How much from health care? Is there any good data or understanding on that exposure? And if there is, then have we seen any different trends in terms of digital versus direct behavior of these segments?

[David John Egan, CFO & Director]

Sure. Rajesh, I think we are exposed to many, many different end markets. And I think that has certainly been a core strength of us during the challenges around COVID and also economic downturn. So we've seen some industries that have seen declines that we have exposure to. So things like automotive, a little bit around oil and gas. We've seen some industries that have continued to perform in the ordinary course, for example, utilities. And then we've seen some industries that have seen a very positive uptick in terms of demand, for example, pharmaceutical or food, food and beverage. For us, we are more orientated towards manufacturing. I think specifically towards -- when you talk about digital we haven't really seen, other than the eProcurement, which is more about larger corporate-type customers, where we did see some declines in their eProcurement usage of existing customers during the first couple of months of the quarter. But we've certainly seen strengthened demand for our eProcurement opportunities with regards to new customers. So I don't think there's a real trend or a negative trend that we're experiencing. I just think that our exposure to the multiple end markets has sort of been very good for us during these somewhat challenging times. And I think then as we go forward, our capabilities around digital eProcurement will actually be positive and good progress for us to continue to grow that position going forward.

[Rajesh Kumar, Analyst]

Understood. So just in terms of thinking about life after COVID, have you thought of shifting your product portfolio or SKUs more towards defensive industry exposure, so towards health care. Or would you need to go the inorganic route if you wanted to build a position like that?

[David John Egan, CFO & Director]

I think pre-Covid, we were always looking at the end markets in which we served. And so again, do we want to go pure defensive? No, not necessarily. I think the broad brush, broad range of end markets and customer types are really important for our business. But we certainly have -- there is a slight emphasis on some particular segments, for example, food and beverage. That is a category and a segment that is very attractive to us. It's also one that we believe that we can -- that we can be good in. So I think it is -- I think, putting COVID to one side, I think there was a strategy in place, COVID has just created a few bumps in the road in terms of being able to execute and deliver on it. But I think post COVID, we'll continue on our strategy in terms of some specifically focused end markets but equally, at the same time, having a broad range of end markets for us is also important.

[Rajesh Kumar, Analyst]

Great. And just this one on -- a lot of about distributors or high-volume distributors have talked about a bit of tailwind from stocking up by the customers. They have also flagged segments like safety as and -- where they've seen a significant step-up. So within your mix, I appreciate you called out Raspberry Pi has been very strong. But are other products like safety or customers stocking up, other one-offs offsetting some of the weakness which, when we are modeling for next year, we need to think about?

[David John Egan, CFO & Director]

Sure. Look, I think our view is that during quarter 1, we have not seen any sort of windfall benefit on the top line with regards to sort of larger one-off-type purchases from customers. We are not sort of big into safety. It is a category, but it's not sort of something that we're big into. And as a consequence, we haven't sort of seen those big one-off benefits flow through versus some other competitors. In terms of the customer buying patterns, we haven't really seen any material change to buying patterns or stocking, destocking through the supply chain as a consequence during quarter 1. So for us, we would say quarter 1 is pretty normalized revenue numbers.

[Rajesh Kumar, Analyst]

That's great. So in your order sizes, you can see that there has not been an abnormal spike in terms of what people would order, they suddenly started ordering more or -- and that is why you are more comfortable, they have no stocking or by...

[David John Egan, CFO & Director]

Average it. Yes. Average order value has increased slightly, but it's not materially different from where we were at -- in FY '20.

[Rajesh Kumar, Analyst]

And you would expect that in a shrinking market once you get it. Fairly enough.

[Operator]

Taking no further questions at this time. Please continue, sir.

[David John Egan, CFO & Director]

Okay. Well, thank you very much for your time this morning. May I wish you all a good day, and stay safe. Thank you, everyone. Bye-bye.

[Operator]

Okay. That concludes the conference for today. Stay safe, everyone.