RS : Acquisition of Risoul (TRANSCRIPT)

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RS Group plc Acquisition of Risoul

Lucy Sharma:

Good afternoon and good morning. This is Lucy Sharma, Investor Relations for RS Group PLC, formerly Electrocomponents, and I am joined on this call by Lindsley Ruth, our CEO, and David Egan, our CFO. Earlier today, we announced an agreement to acquire Risoul. Please find on the investor relations section of our website, rsgroup.com, a short presentation on Risoul and the opportunity this brings RS, which we will talk through before we answer your questions. So over to you, Lindsley.

Lindsley Ruth:

Thank you, Lucy, and thank you to everyone for joining this call today. I'm coming to you from Texas. I'm heading to Mexico to Risoul in a few hours for the next two days. Let me start -- if you can see the slide deck on our website, if you have copies of it, I'm going to start with slide three, which talks about the acquisition of Risoul, how much we're paying, the fit, et cetera.

Before I do that, I just want to address for those because -- we haven't done an acquisition of this size in a while, so this might be a rather long call for some of you. So I just want to hit up front now as to why now? And let me start by saying we've been working on this opportunity for four years. So Filipe Risoul founded the company 47 years ago. It wasn't something he had thought about transacting. This was something we unlocked. We've been building and nurturing the relationship with Filipe and his family for the last four years. They're nearly 50 years old. It's a phenomenal company. We're really excited about this company. Now let me first start by saying industrial distribution in the Americas fundamentally hasn't changed in the last 30 years. We see this as an opportunity to combine our capabilities with Risoul's capabilities to fundamentally change distribution and make it much more sufficient. And I'll touch more on that.

I also want to say, why now? Well, automation and controls is one of the fastest growing categories we have as more factories become automated. If you look at the [unintelligible] opportunities in Mexico, they are significant. If you look at the resiliency of this market, it's quite high. We've been taking share in this area, and Rockwell is the most profitable automation and control in the world. So, if we move on, and I'll touch on some of these aspects through the presentation, but why now? Well, family run business. We believe we've got a good evaluation pre-synergies, as well as post-synergies, that we'll talk through today. We're really excited about the business. The management team is being retained. They've got a very strong culture. It's a good financial, cultural fit. So if we move to slide three, this is the largest industrial distributor in Mexico. They are the leading industrial and automation products and service solutions provider in Latin America. It is a good, strategic, cultural and financial fit. In terms of the price we paid, its $275 million, which is equivalent to £228 million. And we are delighted to welcome Risoul into the group. 550 really highly skilled, trained employees. Low turnover. We expect to generate significant shareholder value through cross selling synergies, because we can bring our private labeled products into their business. We can bring adjacent products into the business that are synergistic to Rockwell. We can develop their digital capabilities, which they don't have a lot on that front today, and we can leverage their execution and expertise. So we see a lot of cross selling synergy opportunity as we move forward. And I'll tell you this, acquiring

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Risoul, we expected it to be an accretive to adjusted EPS in the first full year of ownership, and to exceed our group cost of capital within the first three years.

So if you move to the next slide if you're following the slides, if not, I'll cover it. On slide four, it talks about the reputation of Risoul in Mexico. They are a highly regarded distributor in Mexico, not only by the Mexican market, but also by Rockwell, which is 70 percent of the business. They are family run. It was started by Filipe Risoul. His son-in-law is the CEO of the company now. His son-in-law has been with the company, [unintelligible], for 18 years. Very impressed with Gerardo. He fits into the culture of our company. He represents everything that we see in an amazing leader. He's got humility, he's got passion, he's got trust of his people. They have a strong and experienced management team that are all staying with the company, which is really important. We spent a lot of time in the last 12 to 18 months with their management team building that relationship. Not only in Mexico, but bringing them to Texas and working closely with them.

Risoul is the largest authorized Rockwell automation distributor in Mexico and also Latin America, and they are ranked number 10 globally. They've got the right to distribute Rockwell's products in five areas of primary responsibility. So, Rockwell calls their franchise agreements our APRs, which are areas of primary responsibility. So they've got the rights to distribute it in five areas in Mexico, which are the main industrial areas. They recently added an APR in Spain too, because Rockwell would like to take the Latin America model that's really technically driven to Europe to expand and grow their market shares. So they've recently added Spain. You have to understand that they do, Rockwell accounts for 70 percent of Risoul's revenue. Very important supplier to Risoul. We have renewed the APR. So those typically last three to five years, so we not at risk of losing that. I had a call with Rockwell this week, and over the last 18 months, I've worked closely with Rockwell at all levels. So 18 months ago, I flew to meet with the CEO and Chair, Blake Moret in Milwaukee. We worked closely with the executives across the board. What I'm really impressed with about Rockwell, not only the most profitable A and C automation and control manufacturer, but they're shifting to a solution sell. So they're moving from a product to a solution sell, which is exactly what we're doing as a company too. So our paths mirror each other. I think they've got a very impressive leadership team across the board, and we want to enhance their model. So the things we're doing, that we've been working on behind the scenes, from digital predictive maintenance, our products, our industrial -- how we can put that together with Rockwell to have one plus one equal three. So, really important for us.

The remainder, they've got plenty of other major brands beyond Rockwell, which are detailed in the appendix of this presentation. In terms of just raw numbers, at the end of their fiscal year September, 2021, the business generated $166 million in revenue and $19 million of EBITs. They do come with distribution and storage capabilities throughout Mexico as well as delivering their own product, and they generate seven percent or their revenue from services, which I'll talk more about, because I think there's a lot of exciting opportunities for us as we move into services with this acquisition.

So, slide five. On slide five, we talk about how Risoul fits into our growth strategy. This is what we've talked about before, right? We want to expand our value added services and solutions offered. Does it do that? Yes, check it. They've got control panel repair capability, build

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capability. We will enhance their services as we move forward. We'll have more available services, more digital capabilities, more maintenance capabilities. It also extends our product adjacencies. So it makes us a very important customer to Rockwell, but also expands into other products like wire and cable. And expands into Mexico, where prior to this acquisition, we only did $20 million in Mexico. And we talked about it being a very important market, certainly from a near shoring perspective. So it goes expand our geographic coverage as well.

So we talked about acquisitions. We talked about solutions, products, and geographic expansion. We hit all three in this acquisition. Now, next we talk about is it a good cultural fit? Is it a good financial fit? Is it a good strategic fit? And the answer to those three questions is yes. So we have walked away from a number of acquisitions, or discussions, over the last couple of years, because we didn't think it was a good cultural fit or financial fit or strategic fit. This checks all three boxes on that front as well. So, do the acquisition economics stack up? Absolutely. Return on investment is critical. We look to beat our cost of capital comfortably within three years. And there's also some ESG considerations across all work streams in our analysis, so we are -- if it's Mexico, you know, we need to focus on a mission in other areas. They do a great job of education and working with universities, providing support of universities. So I think they do more than most companies in Mexico, but we certainly will focus on ESG as we move forward with Risoul.

On slide six, slide six we really outline how aligned we are as a culture. So just to focus a little bit more on that, Risoul like RS has a huge focus on health and wellbeing. Training, driving innovation -- Gerardo actually even has -- he set up a studio to record podcasts to his people around the regions. They've got over 250 specialists with strong technical expertise, so they work closely with universities as well. They understand their products, their customers, their suppliers and their needs incredibly well. They do provide product and service solution options with their offer, which I'm going to go through some of the offerings. I talked about control panel building and repair, but they also give technical training for their customers on Rockwell products. They have the control board and panel assembly as I referenced, air conditioning, maintenance, specialist, tool repair, smart network infrastructure. They do have limited digital capabilities, as I touched on, but we will help them develop a transactional website, help them with content, and we'll do that from our Americas business, which they will be reporting into. So with that, we believe that with the website, we'll be able to expand the number of customers that we service in Mexico, and we'll provide revenue opportunity for complimentary products, including our own brand, private label, RS PRO.

Slide seven, if you're following along on the slides, if you don't, you can look at it later, but it just goes to the management team. And Gerardo, as I said, has been with the company for 18 years, working throughout the business in all areas. He's the CEO. He joined in 2004.

Supporting Gerardo is a very strong management team with a wealth of industry expertise, including many years at Rockwell. So deep understanding of Rockwell; great relationships with the Rockwell team in Latin America. They really understand the products and the solutions quite well. They are highly focused on their people. And through the pandemic, I think they did a phenomenal job of supporting their people, working virtually where they had to, at protecting the health and well-being and mental well-being of their employees. And they've got highly engaged employees. Their engagement score is 85 percent and they've got top scores and

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leadership performance. So it's really -- it's a dynamic environment, but it's an environment where when you walk in and you get the feel that this is a special culture and they really care for their people and care for the relationships with customers and suppliers and their stakeholders.

So strong cultural overlap between Risoul and our RS, which is critical to us delivering the synergies that we expect. So we're very excited and I'm excited to tell you their management team has agreed to stay. We've got plans in place, so really excited. It's a high performance team and that aligns with our purpose led culture.

So turning to the next slide, which is slide eight. And I'll take a breather here for you to catch up. Slide Eight. Risoul provides a significant opportunity to sell to accelerate our growth ambitions in Latin America. So this is not the end; this is the beginning. So we're only getting started in Latin America. We see it as a huge market opportunity. Certainly Mexico, the nearshore in opportunity. Today, as I mentioned earlier, we've got about 20 million in revenue in Mexico under our other ally. And the automation and control market in Mexico, we've got valued at about 1.4 billion and that's a number from a report -- that's a number from 2019 that was reported with an 8.5 percent CAGR forecast over the next 10 years from 2019. So it's a region that's going to continue to grow. If you were to fly down there and look just around the border at all the building that's taking place today, whether it's automotive or other industries, there's quite a bit happening in Mexico. So we're very, very bullish on the Mexican economy over the next few years. So certainly the benefit of, as I said, near shoring owing to the globalization and a greater focus on improving sustainability through reducing distances, products travel, because it's not very far from Monterrey where these guys are headquartered. And that's a really important manufacturing region today across to the Texas border into the U.S. to be able to distribute products throughout the Americas without bringing in across from say China.

Mexico also by the way, has a young population. I was surprised by this with a median age of 28 which supports future growth. And I think the country is witnessing -- and when you go there you see it you feel it -- a rapid adoption of factory optimization, automation and digitization coupled with the implementation of industry for auto and an expanding manufacturing sector.

So quite exciting from that perspective.

If you go to Slide nine, we detail the significant growth opportunity that Risoul provides within -

• that Risoul provides within the RS group revenue synergies and margin development. So combining our presence in Mexico, which we will do, is going to make a huge difference from a customer standpoint. If you take our range of complementary products, including our own brand, and put it with what they have, we'll be able to drive an increase average order value and increase market share with our customers and increase revenue at hopefully a higher profit level as we move forward. And introducing some of Risoul's service solutions offer into RS America will be good as well, including some of their control panel building capabilities, repair capabilities.

So for us, they provide a stronger platform for growth through really five key areas, developing digital capabilities to widen the customer base and broaden our product range, sales collaboration across Risoul and the RS and our integrated supply business, which we can't we can't leave out

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here because there's great opportunity for integrated supply within the Mexican market as well. Expanding the RS group products and service solutions offer and expanding the Rockwell relationship further, which is really important, I think is -- I'm really, really focused on building this into a significant relationship globally as we move forward. And including Risoul's recent expansion into Spain, really helps strengthen that Rockwell relationship and improving our execution capabilities to drive efficiencies. So in short, on this slide, I'd just say we're very excited about the growth opportunity that Risoul brings to our RS.

So with that, I'm now going to hand over to David to talk to you through the financials.

David Egan:

Good morning. Good afternoon, everyone. So slide 10 details the financials. The acquisition [inaudible] $75 million, £28 million is on a cash free debt basis. The deal is subject to customary closing conditions in Mexico, and we hope to complete by the end of November 2022. Consideration will be funded from RS' [inaudible] with the acquisition multiple equating to circa 12 times adjusted EBIT [inaudible] 22. So that's on a 12 month trading basis. The multiple falls to single digit [inaudible] history net synergies. We see significant revenue synergies from cross-selling [inaudible] operational efficiencies and the acquisition is expected to be accretive to adjusted earnings in the first full year of ownership. And our return on investment exceeded the RS group cost of capital within three years of [inaudible]. Risoul's adjusted operating profit margin is slightly above that reported at RS for the year ended [inaudible] two. And due to some global supply challenges, there is an increased order book [inaudible] at this point in time, which should unwind over the next 12 to 18 months.

[inaudible] sheet remains very strong following the acquisition. Our pro forma net debt to adjusted EBITDA [inaudible] is under 0.8 times providing the capacity to support our growth ambitions as we [inaudible].

And with that, I'll hand you back to Lindsley.

Lindsley Ruth:

Alright. Thank you, David. Let me just summarize on the last slide. We remain focused on generating sustainable shareholder returns. And David and I and Lucy just finished an investor roadshow where we met with several of you on this call. Lots of questions on dividends in the U.K., on buybacks in the U.S. And hopefully we've signaled that, you know, we still have a lot of opportunity to invest in organically to drive organic growth. And for us, you know, we're -- we are not looking to pay a low price for poorly performing businesses. We're looking to pay a fair price for well-performing businesses. And that's exactly what we have here. And so why now? The opportunity presented itself. We unlocked the opportunity; we've been working on a long time. Critical supplier in Rockwell and very profitable business in Risoul and gives us that geographical solutions and product expansion. It's a business we've known, as I said, for four years, and we're strategically, culturally aligned. So we do have quite a few of these that we're talking to. It takes time, especially for family run businesses, to be able to build that trust and that relationship, because we're taking over something special from them and we want to maintain the same level of discipline and care for employees that these families have and employees for many years.