2020 Predictions: What Manufacturers Need to Know
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Electrocomponents PLC is getting closer to where Lindsley Ruth wants the company to be when he joined as group CEO nearly 18 months ago. Last week, the electronics components distributor announced financial results that appear to justify a recent management overhaul, product realignment and other strategic reorganization actions initiated in mid-2015. Analysts, shareholders and other investors have so far been supportive of the company’s decision and generally agree it is on an upswing and outperforming many of its competitors in the U.K.
The company is looking to jack up the game with additional growth initiatives that may require even more drastic actions in the distribution market. After sitting on the sideline as bigger rivals snapped up competitors across the electronics industry, Electrocomponents is exploring acquisition opportunities for bolt-on-businesses that would help increase its offerings and strengthen services to the design engineering community, Ruth said, during an interview at the end of July.
Any acquisitions this year would be the first by Electrocomponents in more than 17 years. The company in its earlier years grew both organically and via acquisitions but it abruptly withdrew around 1999 from the M&A market, leaving bigger rivals to lead the components distribution industry’s consolidation. Avnet, for example, recently agreed to buy Premier Farnell, a British distributor serving the high-end segment of the market. Ruth believes Electrocomponents could grow even faster by selectively adding on complimentary enterprises in its sector.
Lindsley Ruth, Group CEO, Electrocomponents PLC
“You’ve got to make M&A a part of your growth strategy to avoid missing opportunities,” Ruth said in the July interview. “But you also need to have people with the expertise in place to make an acquisition successful.”
The company’s more recent reorganization activities may have given it the desired edge in terms of the financial and human resources needed to power growth through the next decade. Last Thursday, Electrocomponents announced better than expected fiscal 2017 first half sales and net income, sparking a surge in its stock price on the London Stock Exchange. The company’s market value rose more than 11 percent after the pre-announcement of first half results, adding to gains made since Ruth joined the company in April, 2015.
The boost came on reports the distributor was anticipating a sharp jump in pre-tax first half profits, to £54 million, up from £31.3 million in the year-ago period. Revenue also improved across the company’s regional operations, including in North America where sales turned positive in the fiscal second quarter, reversing a decline of 2 percent in the first quarter.
“We now expect underlying sales growth of around 2 percent in the first half, with a stronger performance in Q2 driven by a return to growth in North America in the quarter and better trading trends in Asia Pacific,” the company said in the statement. “Northern and Southern Europe have also continued to see good growth across the period, which has offset some softness in Central Europe.”
There were other bright spots for Electrocomponents during the fiscal first half. RS Pro, the company’s newly revitalized branded products division, performed strongly during the reporting period with sales rising 7 percent and contributing to the enterprise’s companywide margin improvement. Additionally, the company made more gains in its cost-cutting program and said it expects savings of “at least £15 million” during the fiscal year.
“FY17 consensus for Electrocomponents currently sits at £93.8 million. Assuming a broadly even first half/second half split, reflecting the phasing of cost savings and slightly tougher comps in second half, this could drive earnings upgrade of circa 15 percent to £108 million,” said analysts at Stifel & Co., in a research report. “Our BUY case is predicated on management action delivering a substantial improvement in operational performance.”
Ruth and his management team have spent more than one year laying the foundation for what they expect to be a resurgent Electrocomponents and while the early results seem promising there is more work ahead as the competitive environment heats up. Since joining the company Ruth has brought in a diverse management team, curbed expenses, renewed the mandate of RS Pro and added to an already robust investment in digital operations and outreach. The goal is to improve upon the company’s ability to serve high-end engineering customers with a wide range of digital offerings, he said.
“The second big area we are moving into aside from the branded products is the digital market,” Ruth said. “We came from the catalog background and shifted to the web. We’ve added social media and content filtering. In the high-service distribution market you need to offer the digital experience to have a broader reach across all markets.”
While the uncertainty in the larger market remains problematic with the outlook for 2017 and beyond murky Ruth said he believes Electrocomponents has placed itself in a good position to weather any industry turbulence. With sales finally stabilizing and margins improving the company should be able to tap additional growth opportunities through acquisitions, he said.
“We are certainly ahead of where we wanted to be,” Ruth added. “Our margins have stabilized and even improved. We are doing well, we continue to bring in good leaders and we have set the house in order. We are building a theme for the future but our approach will not change; we want to keep making it easy for suppliers and customers to do business with us and if an acquisition makes sense we’ll do it.”
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