Good morning, everyone, and welcome to this conference call on our proposed acquisition of Distrelec. I'm Simon Pryce, CEO of RS Group, and I'm joined by David Egan, our CFO, and by Pete Malpas, our President of EMEA. We've uploaded this short presentation onto our website, and you'll be able to access it under the investor relations section, which is www.rsgroup.com/investors, or alternatively, contact Lucy or Sophie in the IR function. Moving on to slide three. Hopefully, this demonstrates that Distrelec meets all of RS' acquisition criteria. I think you've probably seen the Venn diagram on the left-hand side of this slide before, but it emphasizes that in assessing acquisitions, we look at three things. We look for a good cultural fit.
It goes without saying that we look for sound risk-adjusted value creation economics, and most importantly, we look for a good strategic fit. Taking each of those blobs in order, and moving anticlockwise, the Distrelec high-performance, customer-first digitally led culture is a very strong fit with ours. As you'll hear from David in a minute, the acquisition economics are very sound. As the table on the right-hand side of this chart demonstrates, Distrelec is a strong fit, ticking three of our four strategic criteria, namely increased product and service solution potential, geographic expansion in some key markets for us, and of course, operational improvement and effectiveness. For us, Distrelec sits right in our strategic sweet spot. Moving on to slide four. Distrelec is therefore an exciting opportunity for us as we continue to execute our growth and value creation strategy.
It's high service and digital. It's focused on industrial and MRO business in continental Europe, and it's of decent scale. Last year, generating EUR 34 million of EBIT on turnover of EUR 270 million. It's been on our target list for some time, and we did look at it when it was first sold out of Dätwyler, but we were busy acquiring and integrating Synovos and Needlers. We did need to improve our own German business, and we were developing our integration capability and all at the same time as managing through COVID. However, we did continue to monitor them and, towards the end of last year, decided that it was the right time to approach them because we saw an opportunity to significantly expand our presence in European markets.
We see that there's a high degree of operational alignment with strong combination potential, of course, this gives us the ability to drive material cost and improvement synergies together with revenue growth opportunities. All of this will accelerate value creation for RS stakeholders. Digging into this in a bit more detail on slide five, Distrelec gives us increased presence in the large and attractive industrial and MRO markets. The European market for industrial and MRO products is significant, growing, and has attractive through-cycle GDP plus growth characteristics. In the high-end service where we play, it's also important to have a local presence and critical mass in key markets, to have that supported by efficient distribution infrastructure. Distrelec significantly accelerates our growth and strengthens our competitive position, therefore in Europe. It increases our DACH and the Scandinavia re-revenues by 40% and 80%, respectively.
It significantly increases our presence in the German market. It gives us critical mass in Switzerland and Sweden and adds scale to our operations in Italy, Benelux, and Eastern Europe. As you can see from the map on the right-hand side, this is all supported by a local presence and complementary infrastructure, which is what is needed in those key European markets that we're pursuing with lots of additional potential. Slide six highlights that strong operational alignment that I referred to between RS and Distrelec. We both generate about 70% of our revenue from the industrial and MRO space. We're both very digitally led, with around 2/3 of our revenue coming from in Distrelec, coming from digital channels. We both have low customer concentration and dependency.
We both have extensive supplier bases, and we both hold wide and long tails of stocked and non-stocked products. Distrelec, like RS, has a really purpose-led culture with great people that we believe will be able to prosper within RS. Distrelec is passionate as we are about being a responsible business and taking advantage of the trends in ESG as a business opportunity, as well as driving good internal and responsible business practices. The two businesses have complementary operational footprint. Distrelec has two distribution centers, one in Switzerland and one in the Netherlands. It has a shared service center like we do in Eastern Europe. There is some overlap from Distrelec's 12 sales offices which serve the 19 countries that they address.
In summary, this is a business, therefore, that we know and understand, and this provides us with much reduced transaction risk, and as I've referred to, that significant combination potential. On slide seven, this demonstrates how all of this translates into strong synergy and opportunity. We see significant cost savings through combining central functions and indirect costs through consolidating carriers and transport and freight routes, improving the efficiency of the combined distribution footprint, and the opportunity to drive significant operational improvement. The combined scale provides increased buying power, which brings associated procurement benefits, but also the potential closer and more strategic relationships you can build with key suppliers.
We also see revenue growth potential through bringing our much broader product range to the Distrelec customer set, introducing RS PRO and our broader services solutions to a larger customer community, and extending our marketing reach to a broader range of existing and potential customers. We've been quite conservative in risk adjusting the scale, cost, and timing of the delivery of these synergies, but the team is targeted on the significant upside to that which we used in building our investment case. All in all, I think this is an exciting one for RS. Now, with that, I'll hand over to David, who will take us through the transaction economics. David?
Thank you, Simon, and good morning, everyone. Please turn to slide eight. The acquisition price of EUR 365 million or GBP 323 million represents an acquisition multiple of under 11 times trailing adjusted EBIT or under 10x trailing adjusted EBITDA. We hope to complete the acquisition in two to thrree months after customary regulatory clearances. We expect to deliver over EUR 15 million of easier-to-realize cost savings. We also expect revenue synergies from the combined business as we drive cross-selling and benefits from greater marketing reach. The acquisition is expected to be accretive to adjusted earnings in the first full year of ownership and comfortably exceed the group cost of capital within three years of ownership. Our balance sheet remains strong.
Post the acquisition, our pro forma net debt to adjusted EBITDA to March 2023 will be circa one times, well within our target leverage range of 1.5-2 times, leaving us with plenty of additional capacity to continue to drive our organic and inorganic growth ambitions. With that, I'll hand you back to Simon to close.
Thanks, David. In summary and in this short presentation, I think we've demonstrated why the acquisition of Distrelec is an exciting opportunity for us. I think on this slide nine, it shows and highlights that this is just a continuation of the RS team's effective execution and delivery of our strategy to become first choice and make amazing happen for a better world through developing our product and service solutions and enhancing our customer experience to drive stickier customer relationships and expand our share of wallet.
This underpins share growth in the large and fragmented industrial and MRO growth markets in which we operate, whilst accelerating digitalization and driving operational excellence, all of which, of course, is supplemented by strategic opportunities and where we have the people, the process, and the financial capacity to deliver them and enhance our already strong organic growth opportunities to accelerate value creation for all of our RS stakeholders. With that, David and I would like to hand it over to, for a short period to allow for any questions on the Distrelec acquisition. With that, over to the moderator.
Thank you. If you would like to ask a question, please press Star followed by one on your telephone keypad. If for any reason you would like to remove that question, please press Star followed by two. Again, to ask a question, please press Star followed by one. As a reminder, if you are using a speakerphone, please remember to pick up your handset before asking your question and please ensure to unmute locally. Our first question today comes from the line of Rory Mckenzie from UBS. Rory, please go ahead. Your line is now open.
Morning all. It's Rory here. Two questions from me first on the synergy potential. Can you, just as a starting point, remind us on the range of margins that you have within Europe? We haven't had the split since 2017, I think. Back then you had Northern Europe at over 19% EBIT margins, but Central Europe at 7%. Secondly, can you talk about how you plan to integrate the two businesses, especially in the kind of DACH region, which is bigger. Are you looking at warehouse consolidation? Do you think that the kind of distribution center footprint will stay the same for each business?
My final question is just, I guess on the kinda timeline and history, and obviously we in public markets are often occurred of Distrelec a couple of times, when it demerged from Dätwyler in 2018 and then when it was acquired again in 2020. At each time I think it was less profitable than it looks now. Were you ever involved with it in the past and why have you decided that now is the right time to step forward? Thank you.
Thanks, Rory. That sounds like three questions or two, so we'll take it as three. David, do you want to start on the nature of the synergies? I'm not sure that we disclose our European margins, but I'll leave you to handle that piece of it.
Sure. Thanks, Rory. In terms of EBIT margins, we don't disclose the individual country margins. I think it's suffice to say though that, the vast, you know, our individual countries, you know, have good EBIT margins, you know, underpinned by strong growth margins and also, you know, sensible cost to serve ratios. The EBIT margin of this business is slightly lower than that of the group margin, but it won't have a material effect on the overall group margin, EBIT margin, as we see it. In terms of the synergies, the synergies are, as we said, are more orientated towards costs. We've said they're going to be more than EUR 15 million, and it will be in bigger buckets such as procurement, distribution, and also some SG&A type costs.
Pete, perhaps you'd like to just expand a little bit on your approach to the integration and the sorts of things in, at the very highest level you think will drive the realization of those.
Yeah. No problem, Simon. Rory, good morning. As Simon articulated at the beginning, one of the key drivers for any acquisition is to drive operational efficiencies, and this is no difference here. You asked the question specifically about the distribution centers, I think, in Europe. As slide seven showed, we see a number of potential opportunities from transportation, freight, and across the whole supply chain capability. You'll be aware that we've made significant investments over the last couple of years in this area in EMEA. I think as we understand this business more closely, we'll be able to look at how do we leverage all of those investments we've made in the last couple of years.
Thanks, Pete. Just Rory on prior interest in timeline. As I said, we have looked at this a couple of times. It has been on our target list. I think AURELIUS have done a good job in, I suppose, fixing and then investing in and growing, Distrelec. I think though we see significantly greater opportunity under our ownership, to drive that growth further and of course, to realize the combination benefits that we've alluded to and referred to both in the presentation and then the things that David and Pete have just talked about. For us, it's the right time to acquire Distrelec, and we see really good opportunity for Distrelec and for RS combined going forward.
Great. Thank you. Thank you.
Thank you. The next question today comes from the line of James Rose from Barclays. Please go ahead. Your line is now open.
Hi, good morning. I've got two, please. Firstly, could you talk about the recent growth track record? Are they taking market share themselves recently? Secondly, when you compare their operations, when you compare their customer value add options versus your own, where are they at? How much work have you got to do to bring them up to your RS standards?
David, do you wanna talk about the growth side of things? We'll hand over to Pete to talk about their operations versus ours and the opportunity or otherwise that we see to accelerate revenue growth.
In very simple terms, their growth has been very similar to that of our EMEA business, in the markets in which we have, you know, common businesses or common business. You know, don't expect, you know, that to change. Won't talk about current trading but certainly historical trading, very similar trends to that of our EMEA business.
Yeah. I think, you know, that is a credit to AURELIUS who have helped support and drive that Distrelec growth, just as we have been investing in driving that growth as well. Very similar sort of profiles there. Pete, opportunity, their operational maturity and the ability for us to pull through and accelerate revenue growth.
James, I think we covered in the earlier presentation, they've got a very broad customer count across the territories in which they operate, and we see a great opportunity there to work with Distrelec to exploit both opportunities. Given the broader product range that is available through RS, there's some cross-selling opportunities, but also significantly through our RS PRO brand, where we see a great opportunity there. Particularly on the services side, they have some service capability, but not as mature as ours at this moment in time. Again, a great opportunity to expand into a new customer base with our existing service offering, sorry.
Thanks, James.
Just to put it into perspective, about 8% of their revenue is services and solutions, so we would see certainly plenty of upside there over time.
Great. Thank you.
Thank you. The next question today comes from the line of Oscar Val from JP Morgan. Please go ahead, Oscar. Your line is now open.
Hi. Good morning, Simon and David. Just two quick ones from my side. The first one is just understanding the supplier relationships. Are there any, I guess exclusive agreements that could have to be re-negotiated or have a change of control clause or any, I guess, desynergies that we should think about? The second one is could you just touch upon how much exposure you have to electronics at Distrelec? Thank you.
Just on supplier relationships, Oscar, no, there are no desynergies around suppliers. There's actually quite the big opportunity around suppliers as we become potentially better partners for certain key suppliers. We see this as a positive, not just for Distrelec customers, but also for Distrelec and RS suppliers. David and Pete, between you, do you wanna talk about electronics?
Sure. Distrelec is largely an MRO industrial player in terms of the on the board exposure that they have. It's high single digits or, you know, 10% or so, with the balance being more of an industrial-natured product sale and customer sale, with the customers then pulling through the on the board products in the same way that they do with RS.
Nothing really to add, Oscar, to what David just said there. I think.
Okay
... RS have done a good job to focus on the MRO customer segment, and that's where their large performances come in recent times.
Yeah. I think a lot of the onboard, particularly electronics that they do, is in support of their customer set, and it's very targeted to the that industrial and MRO customer need. Thanks, Oscar.
Great. Thank you very much.
Thank you. As a reminder, if you would like to ask a question, please press star followed by one on your telephone keypad. The next question today comes from the line of Anvesh Agrawal from Morgan Stanley. Please go ahead, Anvesh. Your line is now open.
Hi, good morning. I got two as well. Apologies if you already talked about it, I was slightly late. On the synergy side, GBP 15 million is the gross number, right? Can you just sort of tell us about the phasing and what are the costs that you expect to achieve it? How should we think about that over the next couple of years? The second is really, I mean, on the last call, I think we talked about some spare capacity in your own distribution centers, and wondering how this M&A could have helped to achieve the fill rate on those distribution centers.
David, do you wanna take synergies and phasing, and I'll just touch on distribution.
With synergies, we've said, you know, more than EUR 15 million, and they're cost synergies. There will be some revenue synergies, so, you know, add a bit on there and that should give you sort of a, you know, a synergy number. In terms of the cost to implement, it's gonna be a bit more than 1one times, somewhere between 1-1.5, so maybe take the middle of the road there. With regards to the phasing, the delivery of the synergies will occur over a three-year period. The cost synergies will be a little bit more front-loaded.
On the distribution infrastructure, we have been investing and consolidating our European and, in fact, our global distribution and infrastructure network. Bringing Distrelec into the RS Group does give us an opportunity to consolidate at the right time some of that distribution infrastructure. It also creates a cost avoidance for us, where actually, in particular in Switzerland, we were probably gonna have to put in a smallish fulfillment center or distribution center, and of course, Distrelec already has a very effective one of those. There are real benefits, Anvesh, from combining the two distribution networks, and from what we can see, there's no duplication and inefficiency over time.
Okay. Thank you.
Thank you. The next question today comes from the line of Henry Carver from Peel Hunt. Henry, please go ahead. Your line is now open.
Thanks. Yeah, morning, guys. Just two quick ones from me. First of all, any ideas around the NPS scores for Distrelec, or at least how they compare to RS? The other thing is just in terms of integration, thoughts around branding. Are you gonna look to convert it to an RS brand in due course or just, you know, how we should look at that? Thanks.
Thanks, Henry. Pete, probably both of those, on customer satisfaction and NPS score, and then views on branding is for you.
Yeah. Thank you. Henry, let's take the NPS question first of all. Yeah, I'm gonna talk both a little bit about internal and external. From an external perspective, you know, Distrelec have been very focused on that whole customer experience and digitizing to become best in class, use their terminology there. All of the research we've done, all of the assessments we've looked at, their customer satisfaction level is extremely high, at least comparable to our own. We're very comfortable there from a customer perspective. When we look internally, looking at both their internal customers and employees, we've equally got a very high engagement score and satisfaction level. I think both externally and internally, things look very good.
From a brand perspective, initially, you know, there's value in the brands which Distrelec trade under. They will be part of the group. They will retain their brands, but as part of the RS Group. Over a period of time, we'll assess what that looks like as we get more integrated into the business. No immediate change, but we'll keep you posted on that.
Thanks, Henry.
Very clear. Thanks, guys. Cheers.
Thank you. There are no additional questions waiting at the moment, I'd like to pass the conference back over to Simon Pryce for any closing remarks. Please go ahead.
Okay. That brings the close the, this presentation on Distrelec, and we look forward to seeing you soon, certainly in six to eight weeks' time. Thanks very much.