From the CFO: Performance in a challenging environment

Our Chief Financial Officer, Kate Ringrose , provides a Financial Review following the release of our FY24 Annual Report earlier this month.

Revenue

Group revenue decreased by 1% to £2,942 million. Like-for-like revenue declined 8% after adjusting for the £282 million contribution from acquisitions, £57 million from adverse exchange rate movements and a negative impact of £24 million from fewer trading days. Trading performance was affected by the challenging macroeconomic environment and the unwinding of our post-pandemic trading tailwinds.

RS benefited from strong post-pandemic trading that boosted our financial performance in 2021/22 and 2022/23 due to excellent product availability when global supply chains were constrained, enhancing our revenue and profit over the two-year period. We estimate this benefit contributed c. £95 million of revenue during 2022/23 which has since unwound as global supply chain issues eased and our customers reduced their high inventory levels, reducing our like-for-like revenue by c. 3% during 2023/24. The unwind of the tailwinds is most evident in electronics and A&C categories and through the reduction in the number of one-off, low-value and transitory customers.

Customer numbers were flat at 1.1 million but on a like-for-like basis decreased by 0.1 million, the majority of which were one-off, low-value customers that we attracted during the post-pandemic trading and have now returned to their normal procurement channels. Larger corporate and key account customer numbers were stable. Our average order value (AOV) (excluding RS Integrated Supply’s pass-through sales orders) grew marginally to £257 from £255. This reflected Risoul’s higher AOV, a small increase in EMEA, and a reduction in Americas which was impacted by customer destocking.

Our industrial product and service solutions ranges, which account for 81% of Group revenue, decreased by 4% like-for-like. This was a function of a weak A&C product category (42% of Group revenue), where performance is most correlated with the electronics cycle, offsetting growth in all other categories as the post-pandemic trading tailwinds, especially in Americas, unwound. The macroeconomic environment was challenging as illustrated by the deteriorating Purchasing Manager Index (PMI) and industrial production f igures across our main markets.

Our electronics product and service solutions range accounts for 18% of Group revenue. Like-for-like electronics revenue decreased by 22% reflecting the tough comparatives in the prior period due to the very strong performance over the last two years and the unwind of price inflation.

Digital, accounting for 61% of Group revenue, performed slightly ahead of the Group overall with a like-for-like revenue decline of 6%. The flat like-for-like performance from eProcurement and purchasing manager, which drives product pull through and customer loyalty, demonstrates the benefit of targeting higher lifetime value customers. Web revenue decreased by 9% on a like-for-like basis, reflecting less traffic from more transitory customers.

RS PRO, our main own-brand product range, accounts for 13% of Group revenue and grew by 3% like-for-like as the brand extended its product breadth by c. 8,000 and focused its end-to-end sales and marketing in the regions. It also benefited from the rebadging of our safety solutions own brands to RS PRO. Our competitively priced offer continues to gain traction as a quality alternative to branded ranges with quality assurance qualifications, in-house design and testing facilities.

Service solutions revenue, associated with 24% of our Group revenue, increased by 3% like-for-like. This is mainly due to a 2% like-for-like increase in procurement solutions and, in addition, 6% growth in RS Integrated Supply like-for-like revenue reflecting additional contract wins and ongoing strong customer retention.

Gross margin

Group gross margin decreased 2.3 percentage points to 43.0%, of which 1.2 percentage points was a function of the dilutive impact from our recent acquisitions due to their lower digital and own-brand product participation compared to the rest of the Group. Like-for-like gross margin decreased 1.1 percentage points as post-pandemic trading benefits reversed and inflation gains unwound, especially within electronics products. There was an additional inventory impairment for slow moving product within OKdo.

Gross profit fell by 11% on a like-for-like basis. The combined effect of the post-pandemic trading benefit in like-for-like revenue and short-term gross margin improvement led to c. £70 million benefit to our gross profit in 2022/23 which reduced our like-for-like gross profit by c. 5% during 2023/24.

Operating costs

Operating costs, including regional and central costs, increased by 2%. Excluding the impact of acquisitions, the benefit of currency movements, amortisation and impairment of acquired intangibles and acquisition-related items, adjusted operating costs reduced by 6% like-for-like with lower variable supply chain costs and annual incentive accruals more than offsetting salary cost increases and inflation in rates and utilities.

A large proportion of our operating costs relates to our people. We awarded a mid-single digit pay increase across the Group which included an above average increase for our non-management employees in most markets in recognition of the greater impact of inflationary pressures. Given our financial performance during 2023/24, our annual incentive accruals and share-based payments reduced and there was no repeat of the £10 million ad hoc cost-of-living payments made in the prior year, equating to a £47 million total reduction. We anticipate 2024/25 to include improved employee annual incentives.

We continue to invest in our processes, systems and infrastructure to both support growth and efficiency. We invested £24 million during the year and will continue to improve our digital and commercial capabilities, customer experience and data analytics. We are also simplifying our technology platform to support standardised processes. We expect to invest an incremental £15 million, a total of c. £40 million during 2024/25, as we continue to widen our differential with our competitors. There was an additional £5 million of costs relating to technology impairments.

The capital investment we have made in recent years in our supply chain network and regional DC expansions in Fort Worth, US and Bad Hersfeld, Germany, continue to see improved operational efficiency and reduced cost to serve. Our freight costs in continental Europe (excluding Distrelec) have reduced due to lower volumes and optimised inventory sourcing and stocking.

We are taking action to manage our operating costs more effectively. In November 2023 we identified over £30 million of annualised savings. We delivered £9 million of savings during the year, with £8 million of associated costs incurred and a further £5 million of integration costs for the Distrelec acquisitions. During 2024/25 we expect to spend a further c. £13 million to deliver further in-year benefits of c. £22 million.

Central costs (Group strategic investment, Board, Group Finance and Group Professional Services and People costs) decreased by £11 million to £49 million. This is largely because of lower share-based payments and annual incentive costs highlighted earlier. We are reassessing the definition of central costs and will limit it to Group Head Office activity which will result in some of our central costs being attributed to the regions in 2024/25.

Adjusted operating costs as a percentage of revenue increased by 0.5 percentage points to 32.4% (2022/23: 31.9%). Excluding the impact of acquisition integration costs, impairments and restructuring costs, adjusted operating costs as a percentage of revenue would have been 31.8%. Adjusted operating profit conversion is 5.0 percentage points lower at 24.7%.

Operating profit

Operating profit decreased by 27% to £280 million. Excluding the impact of acquisitions and the adverse impact of currency movements, adjusted operating profit saw a like-for-like decrease of 25%. We estimate that 2022/23 operating profit benefited by c. £60 million from the post-pandemic trading tailwinds which unwound during 2023/24 contributing c. 14% of the like-for-like adjusted operating profit decrease. This is c. £25 million higher than reported at the first half results (November 2023) as we estimate there was also a gross margin benefit across our total Group revenue from price inflation. Adjusted operating profit margin declined by 2.9 percentage points to 10.6%.

Items excluded from adjusted profit

To improve the comparability of information between reporting periods and between businesses with similar assets that were internally generated, we exclude certain items from adjusted profit measures. The items excluded are described below (see Note 3 on pages 135 to 138 for definitions and reconciliations of adjusted measures).

Amortisation and impairment of acquired intangibles

Amortisation of acquired intangibles was £27 million (2022/23 amortisation and impairment of acquired intangibles: £17 million) and relates to the intangible assets arising from acquisitions.

Acquisition-related items

Acquisition-related items of £5 million are predominantly transaction costs which are directly attributable to the acquisition of Distrelec.

Net finance costs

Net finance costs were £32 million, up from £12 million mainly due to the impact of increased net debt resulting from the acquisitions of Distrelec and Risoul and higher interest rates. At 31 March 2024, 26% of the Group’s gross borrowings excluding lease liabilities (2022/23: 49%) were at fixed rates, with surplus cash deposited at variable rates.

Profit before tax

Profit before tax declined 33% to £249 million. Adjusted profit before tax was down 28% to £281 million, 30% on a like-for-like basis.

Taxation

The Group’s income tax charge was £65 million (2022/23: £87 million). The adjusted income tax charge, which excludes acquisition-related tax items and the impact of tax relief on items excluded from adjusted profit before tax, was £73 million (2022/23: £91 million), resulting in an effective tax rate of 26.1% on adjusted profit before tax (2022/23: 23.2%). This reflected the change in the UK tax rate from 19% to 25% effective from 1 April 2023. Going forward we expect the 2024/25 effective tax rate on adjusted profit before tax to be c. 26%.

Earnings per share

Earnings per share declined by 36% to 38.8p. Adjusting for items excluded from adjusted profit and associated income tax effects, adjusted earnings per share of 43.8p declined 34% on a like-for-like basis.

Cash flow

Lower EBITDA (earnings before interest, tax, depreciation and amortisation) was compounded by a substantial outflow in payables of £82 million. This decrease in payables was due to high balances at March 2023 relating to 2022/23’s increase in inventory, and lower accruals due to the slowdown in the business and lower annual incentive accruals at March 2024. As a result, cash generated from operations was £301 million (2022/23: £413 million) with a 10.1 percentage point fall in adjusted operating cash flow conversion to 81.9%.

Net capital expenditure increased from £46 million to £52 million as we continued to invest in optimising our distribution sites, implementing new product management systems, augmenting digital commerce capabilities and strengthening our technology platforms.

Capital expenditure remained at 1.3 times depreciation in line with our typical maintenance capital expenditure levels of 1.0 – 1.5 times depreciation. We anticipate capital expenditure in 2024/25 to be c. £50 million including planned spend to deliver our 2030 ESG action plan such as continuing to decarbonise our regional DC in Beauvais, France, and starting at Bad Hersfeld, Germany, and Fort Worth, US. We anticipate a further c. £7 million of depreciation charges in 2024/25 relating to the capital expenditure on our product and delivery information systems.

Net interest paid increased by £18 million to £31 million due to increased net debt resulting from the acquisitions of Distrelec and Risoul and higher interest rates.

Income tax paid fell to £73 million reflecting lower taxable profit, timing differences and utilisation of losses.

Adjusted free cash flow fell to £151 million following the decrease in operating profit and the unwind of elevated payables from March 2023 as a consequence of large inventory orders during 2022/23.

Working capital

Trade and other receivables have increased by £9 million to £701 million, with the acquisition of Distrelec increasing receivables by £27 million. As the fall in revenue is partly related to the reduction in one-off, low value customers it has a smaller effect on receivables as these customers typically transact using credits cards or with shorter payment terms.

Gross inventories were £725 million, an increase of £65 million with the acquisition of Distrelec accounting for £52 million and the remainder in continental Europe as we continue to add inventory into our extended regional DC in Bad Hersfeld, Germany. Our inventory levels increased in the first half due to the easing of global supply chain issues resulting in the improvement in performance of suppliers fulfilling new orders and the receipt of inventory previously on long lead times. As expected, this unwound in the second half due to our actions to reduce inventory levels in response to declining volumes and, as a result, our inventory turn was flat at 2.6 times year on year. Inventory provisions have increased by £25 million to £69 million, due to the continued sales slowdown pushing inventory into excess, particularly of electronics products where minimum order quantities are high and single-board computing products which are slow moving.

Overall trade and other payables decreased to £603 million from £659 million with the acquisition of Distrelec increasing payables by £36 million. The overall reduction reflects the timing of payments for inventories with high balances outstanding at March 2023 relating to 2022/23’s increase in inventory plus the slowdown in the business this year reducing accruals, including those for annual incentives.

Net debt

Our net debt has increased to £418 million from £113 million with the acquisition of Distrelec increasing net debt by £333 million. The acquisition was in part funded by a new three-year term loan of €150 million and drawing down part of our £400 million SLL facility. The SLL, term loan and the private placement loan notes form our committed debt facilities of £685 million, of which £245 million was undrawn at the year end. In October 2023, our request to take up one of the one-year term extensions to the SLL was approved by the lenders and so this facility now matures in October 2028, with a further one-year extension option and a lender option accordion of up to a further £100 million remaining.

The Group’s financial metrics remain strong, with net debt to adjusted EBITDA of 1.1x and EBITA to interest of 10.5x, leaving significant headroom for the Group’s banking covenants of net debt to adjusted EBITDA less than 3.25 times and EBITA to interest greater than 3 times.

ROCE

ROCE is the adjusted operating profit for the 12 months ended 31 March 2024 expressed as a percentage of the monthly average capital employed (net assets excluding net debt and retirement benefit obligations). ROCE was 17.4% compared to 30.8% last year, due to the impact of acquisitions (5.1 percentage points) and the decline in adjusted operating profit (8.7 percentage points), partly offset by a decrease in monthly average capital employed (0.4 percentage points).

Retirement benefit obligations

Retirement benefit net obligations of the Group’s defined benefit schemes were £26 million compared to £36 million at 31 March 2023. The UK defined benefit scheme (our largest scheme) had a net obligation of £16 million under International Accounting Standard 19 ‘Employee Benefits’, being the present value of the agreed future deficit contributions agreed following the March 2022 triennial funding valuation and payable to September 2025.

Dividend

The Board intends to continue to pursue a progressive dividend policy whilst remaining committed to a healthy dividend cover over time by driving improved results and stronger cash flow. The Board proposes to maintain the final dividend at 13.7p per share. This will be paid on 19 July 2024 to shareholders on the register on 14 June 2024. As a result, the total proposed dividend for 2023/24 will be 22.0p per share, representing an increase of 5% over the 2022/23 full-year dividend. Adjusted earnings dividend cover for 2023/24 is 2.0 times.

Foreign exchange risk

The Group does not hedge translation exposure on the income statements of overseas subsidiaries. Based on the mix of non-sterling denominated revenue and adjusted operating profit, a one cent movement in the euro would impact annual adjusted profit before tax by £2.0 million and a one cent movement in the US dollar would impact annual adjusted profit before tax by £0.7 million.

The Group is also exposed to foreign currency transactional risk because most operating companies have some level of payables in currencies other than their functional currency. Some operating companies also have receivables in currencies other than their functional currency. On their behalf, Group Treasury maintains three to seven months hedging against freely tradable currencies to smooth the impact of fluctuations in currency. For Risoul, hedges can extend out to 11 months for US dollar trading projections. The Group’s largest exposures related to euros and US dollars.