Delivering on a promise made six months ago, Electrocomponents PLC has announced a series of cost-control and reorganization actions aimed at restoring growth at the components distributor and revitalizing its operations across the globe. The measures range from previously announced new management appointments to the closure of some facilities in Asia and the realignment of priorities to refocus on customers and regional accountability.
Over the next year, the company expects to lower expenses by £25 million ($38 million) with the first reduction showing up in the final quarter of its current fiscal year. Initially, though, Electrocomponents will take a £42 million charge in connection with the reorganization, including £20 million for labor costs. The reorganization actions are in response to continuing poor financial performance at the company, Electrocomponents said in a statement announcing results for the fiscal 2016 first half ended Sept. 30.
Sales rose slightly during the reporting period, to £626.5 million, from £616.4 million, in the year-ago comparable period. The company said its sales were impacted by the strong dollar and would have been £13 million higher if exchange rates had remained unchanged. It reported double-digit growth in Europe, a slide in North American sales, which fell 3 percent in the second quarter, reversing a similar upswing in the first quarter of the fiscal year. Electrocomponents’ Asia-Pacific sales fell approximately 4 percent, due to “a weaker economic backdrop in China but also reflecting a need to improve customer service in the region,” the company said in its statement.
Electrocomponents said profits were hurt by the strong dollar but noted gross margins also came under pressure, declining 1.7 percentage points and contributing to the overall weak performance. Reported profits in the recently ended fiscal first half tumbled to £13.7 million, versus £42.2 million, in the first half of fiscal 2015. Higher distribution and marketing expenses combined with the impact of negative currency exchange rates as well as a £11.4 million, non-cash asset write down helped to reduce profits.
The U.K.-based global distributor has been struggling to improve its financial performance for a while and in April tapped Lindsley Ruth, a former senior executive at Canada’s Future Electronics Inc., as group CEO. After assuming office in April, Ruth promised to unveil a comprehensive reorganization and sales growth program for the company this month. In a statement, the company described its latest performance as “disappointing” and outlined actions being implemented to cut costs, boost margins and improve sales growth. These actions are in addition to the slate of new executives recently recruited by Ruth to complement existing officers. (See: Electrocomponents’ Ruth: ‘The Team is in Place’).
“These results demonstrate why it is important we make changes to the way we operate,” the company said in its published statement. “We have initiated a major performance improvement plan that will lead to significant cost savings in the current financial year and beyond.”
Company executives said they have identified 3 areas they expect to focus on over the next year to improve operating performance. These include becoming better focused on customers, initiating accountability at country and regional levels and instituting a simplified operating model that assures better group interaction with suppliers and customers. Electrocomponents is also turning its focus to boosting sales at its RS Private Label business, a unit that typically sells products with higher margins, according to executives. It recently appointed industry veteran and former Arrow Electronics executive Kurt Colehower to head the group.
“We have initiated a plan to make Electrocomponents a more efficient and responsive organization. The reorganization of the Group is based on three core principles that lie at the heart of successful distribution businesses: customer focus, accountability and simplicity,” Ruth said in a statement. “We have taken firm action on costs, appointed new management and made some tough decisions on IT. We have a clear plan, strong financial position and an energized leadership team that are determined to deliver a sustained improvement in financial performance and the opportunity is huge.”
As part of its operational review and cost-reduction efforts, Electrocomponents said it has halted work on a redesign of its website. This resulted in a termination of the existing contract with the service provider and a non-cash charge of £11.4 million to write-down capitalized investment costs, the company said.
The top 9 reorganization actions outlined in the statement by Electrocomponents and the associated goals are:
- Focus the Organization to Drive an Improved Customer and Supplier Experience: We will place more focus on becoming easier to do business with, speeding up execution and ensuring an improved delivery to promise.
- Reprioritize Digital Development to Drive Faster Change – We are reallocating resources from the new website development to make immediate and tactical changes to our existing website to drive faster improvements in search, usability and content. We will prioritize investment in digital expertise to drive more traffic to the website via SEO and social media.
- Introduce a Differentiated, more Focused Service Offer for Industrial and Electronics Customers – We will build leading divisional capabilities in industrial and electronics to improve customer service and provide more differentiated solutions for customers and suppliers in these end markets. Specialization will not only lead to a more targeted and value added offering for customers but also allow us to share more insight and build stronger relationships with our supplier base.
- Drive Accountability throughout the Organization – The group will operate with local profit and loss accountability allowing us to decide the appropriate operating model for each country depending on the profit opportunity. This structure will also bring decision making over areas such as range, marketing and price closer to the customer. Finally, local P&L [profit and loss] accountability will provide a healthy check and balance over central overheads, which should drive a leaner and more efficient organization.
- Drive a Higher Proportion of Private Label Sales, to Improve Gross Margin Mix – RS Private Label is our highest gross margin business but historic lack of focus has impacted recent performance; RS Private Label share has reduced as a proportion of RS sales from 18 percent in 2011 to 16 percent today. We plan to reverse this trend and grow the proportion of our sales that are private label, which will have a positive impact on gross margin mix. We have appointed a new leader to drive private label sales. He will be accountable for driving faster growth in private label, expanding our range and launching our products into new markets such as North America.
- Realign Key Performance Indicators (KPIs) and Review Incentive Structures – We have realigned KPIs and are reviewing incentive schemes to drive a culture of empowerment with accountability throughout our organization and bring a higher mix of variable pay into incentive structures.
- Simplify, Operate for Less – The group needs to address its cost base particularly overhead costs. As a result of the new simpler organization structure, we have identified anticipated annualized initial cost savings of £25 million. We expect to see a saving of £6m in the final quarter of this financial year, subject to the relevant workforce consultation process. The bulk of the balance of the savings will fall in 2017.
- Asia Pacific Rescaled to Drive Profitable Base for Future Growth – Current financial performance in Asia Pacific is unacceptable and we need to take action to streamline our operations in Asia Pacific and fix the basics so we can grow profitably. We are closing our office and warehouse in Singapore, consolidating offices in China and moving to a pilot web-based operation in Japan.
- A more Disciplined Approach to Future Capital Investment – Part of operating for less is making sure we use our capital effectively and take tough decisions around the allocation of our capital. We have decided to halt our new website development and to end the relationship with our existing provider. We will determine the optimal approach to our website development under the leadership of our new Chief Innovation Officer, Alex von Schirmeister. In the meantime, we have reallocated IT resources from the new website development project to drive faster and more immediate change to our existing website.